[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]




                               before the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                            JANUARY 21, 1999


                              Serial 106-4


         Printed for the use of the Committee on Ways and Means


                      U.S. GOVERNMENT PRINTING OFFICE
 55-995 CC                   WASHINGTON : 1999
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

                      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        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
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
RON LEWIS, Kentucky

                     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



Advisories announcing the hearing................................     2


Empower America, Hon. Jack Kemp..................................    10
Munnell, Alicia H., Boston College Carroll School of Management..    64
Rainbow/PUSH Coalition, Rev. Jesse L. Jackson, Sr................    22

                       SUBMISSIONS FOR THE RECORD

Americans for Democratic Action, Inc., Jim Jontz, statement......    86
Chen, Yung-Ping, Gerontology Institute, University of 
  Massachusetts, Boston, statement and attachments...............    89
Coalition on Urban Renewal & Education (CURE), Star Parker, 
  statement......................................................    92
Collaborative Democracy Project, Annapolis, MD, Steven H. 
  Johnson, statement.............................................    96
Coyne, Hon. William J., a Representative in Congress from the 
  State of Pennsylvania..........................................     9
DeLauro, Hon. Rosa L., a Representative in Congress from the 
  State of Connecticut, statement................................   103
Green, Joseph G., Toronto, Ontario, Canada, statement............   104
Institute for Women's Policy Research, and Working Group on 
  Social Security, National Council of Women's Organizations, 
  Heidi Hartmann, joint statement................................   105
National Center for Policy Analysis, Dallas, TX, John C. Goodman, 
  statement......................................................   107
Stark, Hon. Fortney Pete, a Representative in Congress from the 
  State of California, statement.................................     8



                       THURSDAY, JANUARY 21, 1999

                          House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to call, at 10:10 a.m., in room 
1100, Longworth House Office Building, Hon. Bill Archer 
(Chairman of the Committee) presiding.
    [The advisories announcing the hearing follow:]



FOR IMMEDIATE RELEASE                          CONTACT: (202) 225-1721
January 12, 1999
No. FC-2

                      Archer Announces Hearing on

              Preserving and Strengthening 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 
preserving and strengthening Social Security. The hearing will take 
place on Thursday, January 21, 1999, in the main Committee hearing 
room, 1100 Longworth House Office Building, beginning at 9:00 a.m.
    Oral testimony at this hearing will be from invited witnesses only. 
Witnesses will include former Committee Member and Social Security 
Subcommittee Ranking Democrat Barbara B. Kennelly. Appearing together 
will be former Member of Congress, former Secretary of the Department 
of Housing and Urban Development, and Vice Presidential nominee Jack 
Kemp, and the Reverend Jesse L. Jackson, Sr., President and Chief 
Executive Officer of the Rainbow/PUSH Coalition, Inc. 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.


    America's Social Security program has had great success in 
alleviating poverty and boosting the incomes of millions of workers and 
families affected by retirement, death, and disability. In the years 
ahead, the program faces a funding shortfall due to long-term 
demographic changes. The 1998 Social Security Trustees' report notes 
that spending will exceed tax revenues in the year 2013; by year 2032, 
the Trust Funds will be exhausted and the program will be able to meet 
less than 75 percent of its obligations.
    In anticipation of these challenges, several reform proposals have 
been introduced in Congress. Beginning with the 1998 State of the Union 
Address, the President stressed his intention to save any budget 
surpluses to secure a stronger future for Social Security. The 
President has since hosted a number of regional forums and convened a 
White House Conference on Social Security on December 8-9, 1998, at 
which he called for bipartisan cooperation to achieve needed reforms.
    In announcing the hearing, Chairman Archer stated: ``As the 106th 
Congress convenes, we must work together with the President to preserve 
and strengthen our Social Security system for all Americans. I look 
forward to hearing from Jesse Jackson, Jack Kemp, and Barbara Kennelly. 
Their extensive experience and thoughtful perspectives will 
immeasurably aid the Committee in our deliberations over the future of 
Social Security.''


    The hearing will focus on major issues raised by Social Security 
reform proposals, including: whether change is needed and the prospect 
of continuing the current Social Security program without fundamental 
reform, whether workers should be permitted to establish personal 
savings accounts, and whether the Federal Government should invest a 
portion of the Trust Funds in private stocks and bonds.


    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, 
February 4, 1999, 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.


    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 
    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 
    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.


                *** NOTICE--CHANGE IN TIME & WITNESS ***



FOR IMMEDIATE RELEASE                     CONTACT: (202) 225-1721
January 15, 1999
No. FC-2-Revised

                      Time and Witness Change for
                         Full Committee Hearing
                     on Thursday, January 21, 1999,
             on Preserving and Strengthening Social Security

    Congressman Bill Archer (R-TX), Chairman of the Committee on Ways 
and Means, today announced that the full Committee hearing on 
preserving and strengthening Social Security, previously scheduled for 
Thursday, January 21, 1999, at 9:00 a.m., in the main Committee hearing 
room, 1100 Longworth House Office Building, will begin instead at 10:00 
a.m. The Honorable Barbara B. Kennelly will not be appearing as a 
witness. Alicia Munnell, Peter F. Drucker Chair in Management Sciences, 
Boston College, will be an additional witness.
    All other details for the hearing remain the same. (See full 
Committee press release No. FC-2, dated January 12, 1999.)


    Chairman Archer. The hearing will come to order. The Chair 
would invite guests and staff to please take seats so that we 
can commence.
    Yesterday we found that we were not able to recognize all 
of the junior Members, and I hope that we can get through the 
hearing today by accommodating them, as well as the senior 
    Mr. Rangel. Mr. Chairman.
    Chairman Archer. Mr. Rangel.
    Mr. Rangel. We might allow the Members that did not have 
the opportunity to question to have priority and just set aside 
the seniority system in this one instance to give them an 
opportunity to question first.
    Chairman Archer. I thank the gentleman for his comments 
because the Chair would like to do exactly that. Without 
unanimous consent, however, the rules do not permit it, so the 
Chair would ask unanimous consent that Members who were unable 
to question yesterday be the first to be recognized today.
    Without objection, so ordered.
    Good morning and welcome. I have called today's hearing 
because I believe in the power of ideas. I especially believe 
in the power of ideas that transcend generations and 
    To save Social Security, our Nation must take into account 
the security and well-being of our grandchildren as well as our 
grandparents, including my own 95-year-old mother who still 
lives by herself and drives her own car and is a great blessing 
to her son.
    Thanks to Social Security, poverty among seniors has become 
rare, but now we face new challenges. To assure that Social 
Security is there for tomorrow's seniors, we need to take the 
best Republican ideas, the best Democratic ideas, the best 
Independent ideas, the best ideas of the entire Nation and put 
them together and build a lasting solution to Social Security's 
    In doing so, we face a question. When it comes to Social 
Security, is the role of government simply to redistribute 
existing wealth or to foster conditions that enable everyone to 
make more wealth? Should the government solve problems and 
protect people from adversity or should the government help 
people equip themselves to solve their own problems?
    I personally want hardworking Americans to be able to enjoy 
the fruits and the benefits of their labor. I want to create a 
growing circle of winners in America. I want women who live 
longer than men to know that their retirement needs will be 
addressed and protected.
    By focusing on opportunity instead of redistribution, we 
can fully protect today's seniors while giving a boost to baby 
boomers, generation Xers and women so they too can retire in 
comfort and security. We must carry out our work in an 
inclusive manner, remembering that we are all in this together.
    There is an income gap in America, and it should be 
reduced. But what is the most effective way to do it? Do we 
narrow the gap by taking away from those who have, denying the 
fruits of the labor to those who work harder, or do we create 
opportunity so others can have more? I personally say lift 
people up, let's not tear people down.
    A nationwide bipartisan survey of adults conducted by the 
Luntz Research and Siegel & Associates for Oppenheimer Funds 
will be released later today and the results are sobering. Two-
thirds of all Americans under 50 believe it is more likely that 
a pro wrestler will be elected President than believe they will 
collect all the Social Security money that they are entitled 
to. Half of all Americans believe a thousand dollar bet on the 
upcoming Super Bowl will give them a better return on their 
money than the taxes they pay into the Social Security system.
    Before I close, let me tell you about Regina Jennings who 
for 15 years mopped floors and dusted classrooms at West 
Virginia University in Morgantown, West Virginia. Regina earned 
only $10,000 a year as a custodian and yet she drives a GMC 
Jimmy. She also just donated $93,000 to the university's law 
school, $93,000. How did she do that? Well, for 23 years she 
rented a piece of property that she had inherited and she 
invested her rental income along with her salary. She said I 
didn't make a lot of money but what I did make I kept. I paid 
myself first; I saved before I paid others in spending my 
    That is what happens when you combine the power of ideas 
with the creation of opportunity. I believe that left to their 
own devices with low taxes, less government interference and 
more freedom, there is nothing that the American people cannot 
    [The opening statement follows:]

Opening Statement of Hon. Bill Archer, a Representative in Congress 
from the State of Texas

    Good morning.
    I have called today's hearing for a simple reason. I 
believe in the power of ideas.
    I especially believe in the power of ideas that transcend 
generations and partisanship. To save Social Security, our 
nation must take into account the security and well-being of 
our grandchildren, as well as our grandparents, including my 
95-year old mother who lives in Houston and still drives her 
    Social Security was founded by visionaries like Franklin 
Roosevelt who vowed to protect seniors from spending their last 
years in poverty. It worked.
    Thanks to Social Security, poverty among seniors has become 
rare. But now we face new challenges.
    To assure that Social Security is there for tomorrow's 
seniors, we need to take the best Republican ideas, the best 
Democrat ideas, and everyone else's good ideas, put them 
together and build a lasting solution to Social Security's 
    In doing so, we will face a question.
    When it comes to Social Security, is the role of government 
simply to redistribute existing wealth, or to foster conditions 
that enable everyone to make more wealth? Should the government 
solve problems and protect people from adversity, or should the 
government help people equip themselves to solve their own 
    I want hardworking Americans to be able to enjoy the 
fruits, the benefits of their labor. I want to create a growing 
circle of winners in America. I want women who live longer than 
men to know their retirement needs will be protected. By 
focusing on opportunity instead of redistribution, we can fully 
protect today's seniors while giving a boost to baby boomers, 
generation Xers, and women so they too can retire in comfort 
and security.
    We must carry out our work in an inclusive manner, 
remembering we are all in this together. There is an income gap 
in America and it should be reduced. But what's the most 
effective way to do it? Do we narrow the gap by taking away 
from those who have, or do we create opportunity so others can 
have more? I say lift people up. Let's not tear people down.
    A nationwide, bipartisan survey of adults conducted by 
Luntz Research and Siegel & Associates for Oppenheimer Funds 
will be released later today, and the results are sobering.
    Two-thirds of all Americans under age 50 actually believe 
it's more likely that a pro-wrestler will be elected President 
than believe they will collect all the Social Security money 
they're entitled to.
    Half of all Americans believe a $1000 bet on the upcoming 
Superbowl will give them a better return on their money than 
the taxes they pay into the Social Security system.
    Before I close, let me tell you about Regina Jennings, who 
for fifteen years mopped floors and dusted classrooms at West 
Virginia University in Morgantown, West Virginia. Regina earned 
$10,000 a year as a custodian and she drives a GMC Jimmy.
    She also just donated $93,000 to the university's law 
school. $93,000! How did she do it?
    Well, for the last 23 years she rented a piece of property 
she had inherited. She invested her rental income along with 
her salary.
    ``I didn't make a lot of money,'' she said, ``but what I 
did make, I kept.''
     That is what happens when you combine the power of ideas 
with the creation of opportunity.
    I believe that left to their own devices, with low taxes, 
less government interference, and more freedom, there is 
nothing the American people cannot do.
    With that, let me welcome our two guests: Jesse Jackson and 
Jack Kemp. You both believe in the power of ideas. While you 
may offer differing views on how to save Social Security, I 
believe you agree with me that we can solve this problem if we 
work together to put principles before politics and ideas 
before ambition.


    With that, let me welcome our two guests, Jesse Jackson and 
Jack Kemp. Both of you believe in the power of ideas. While you 
may have differing ideas, you both want to save Social 
Security, and I believe that you agree with me that we can 
solve this problem if we work together to put principles before 
politics and ideas before ambition. And I yield for any 
statement that he might like to make to the Ranking Minority 
Member, Mr. Rangel.
    Mr. Rangel. Thank you, Mr. Chairman. I have to take a deep 
breath because I am so moved by your initiative to bring about 
a bipartisan flavor to our study of what we must do with Social 
    I am glad we have Jack Kemp here. Nobody has put a more 
compassionate face on the Republican Party than my dear friend 
and former colleague, Jack Kemp. The people that find 
themselves in public housing have never received more support 
than when you served as the Secretary of HUD and found the time 
to go into every county and every community to give hope to the 
people. There is no question in my mind that preserving Social 
Security and having health care for our senior citizens is a 
top priority for you.
    Reverend Jackson, you have given so much not only to 
fulfilling the dream of your dear friend, the late Martin 
Luther King, but to make that dream a reality for us and 
generations and generations to come.
    Your concept was treating inner cities and rural areas with 
the same priority that we do developing countries. It was 
moving to hear our President share that vision with you. You 
have worked so hard to give to Americans the same opportunities 
we give to other people, to encourage investment, to educate 
the people, to give them disposable income and let them also be 
consumers and our trading partners.
    Both of you have so much in common that the only question 
that remains is how we can really break down the polarization 
that unfortunately remains in Congress and how this Committee 
can get on with the people's work to shore up Social Security.
    We have been asking the President, for God's sake, don't 
just talk about Social Security; give us a plan, give us a 
framework, give us something to work with. Well, the President 
has done just that. He says, Let us take the surplus, reduce 
our national debt, and repair Social Security.
    The best time to repair a leaking roof is when the sun is 
shining. We have the surplus. Let's get on with it.
    The President has said, Let's take a small part of Social 
Security investments and have the government invest in the 
private market. Some say shame . . . Everyone believes that 
will be terrible and so does Greenspan.
    So, put it aside. Let's not dwell on that. Let us talk 
about the something we agree with, and that is saving Social 
Security, saving the Medicare Trust Fund. And let's talk about 
a tax cut. After all, it is not our money; it is the people's 
money. But if we all agree that Social Security should be 
preserved first, let's concentrate on those positive things.
    Reverend Jackson, you have done a great service for the 
President of the United States in providing counsel to him and 
his family during a time of need. Do the same thing for 
Chairman Archer and me. Do it for the Republican Party and the 
Democrats, because come the year 2000, the voters won't care 
whether it is Republican or Democrats. They want to know, what 
did the Congress do. Let us be able to say we have saved Social 
Security. We saved Medicare. We fought on how to give an 
equitable tax cut, but we did the best we could.
    Thank you, Mr. Chairman.
    Chairman Archer. Without objection, all Members will be 
able to include written statements in the record at this time.
    Mr. Rangel. I would like to include Congressman Stark's 
statement in the record.
    [The opening statement of Mr. Stark follows:]

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

    Mr. Chairman, I agree with those who claim we need a Social 
Security system that suits the needs of workers in the 21st 
century. However, the current system has provided quality 
retirement, disability and spousal benefits for over sixty 
years. The change in demographics prompts us to address long-
term solvency issues but the underlying system shouldn't be 
    Social Security is a social insurance program. It provides 
a guaranteed retirement benefit for seniors as well as 
protecting those who encounter unforeseen tragedies such as the 
untimely death or disability of the primary wage earner from a 
life of poverty. Plans to privatize Social Security will hurt 
minorities, low-income workers, women and the disabled. 
Privatization will dismantle the social insurance program 
Americans have come to rely on. American workers will be forced 
from the protection of collective responsibility to the 
uncharted waters of individual risk.
    Privatization would gouge Social Security's Trust Fund, 
diverting needed payroll taxes and creating large cuts in 
Social Security's guaranteed benefits. The lofty idea posed by 
those who wish to privatize Social Security is that individual 
accounts will replace the retirement benefits part of Social 
Security for some individuals, depending on how the stock 
market performs and how savvy the risk-taker. SEC Commissioner, 
Arthur Levitt tells us that less than 50 percent of all 
Americans know the difference between a stock and a bond. Yet, 
some members of Congress are willing to throw America's 
retirement funds into the hands of uneducated investors. You 
can bet that the Wall Street investor will come out ahead in 
that equation.
    The part that privatizing proponents do not tell us is that 
individual accounts cannot make up for the loss of Social 
Security disability or survivor benefits. Workers who become 
disabled well before retirement age, or spouses and dependents 
of workers who die well before retirement age will be left out 
in the cold. Individual accounts will not be able to subsidize 
the reduction in disability and survivor benefits when the GOP 
neglects to shore-up the current Social Security system in 
favor of a privatization scheme.
    Social Security has a highly progressive benefit formula. 
Workers with relatively low earnings receive a much higher 
proportion of their wages as a retirement benefit than high-
wage earners do. As a result, low-wage workers get back their 
payroll tax contributions in substantially fewer years than 
high-wage earners do. If retirement pensions were proportional 
to earnings or payroll tax payments, benefits for low earners 
would fall by over 25 percent. Poverty among the elderly, 
disabled, and survivors would increase. Welfare expenditures 
would rise. And many young and middle-aged workers would have 
to support parents, siblings, and other relatives who now 
manage independently because of the Social Security income 
benefits they receive.
    This is of particular importance to minorities. Since 
African Americans and Hispanic Americans make up a 
disproportionately large share of low-wage workers (and a 
disproportionately small share of highly paid workers), the 
Social Security benefits they receive tend to return their 
payroll tax contribution in fewer years than is true, on 
average, for non-minorities.
    Nine percent of all couples age 65 and older rely on Social 
Security for their entire income. Twenty-three percent of 
Hispanic couples do. In addition, Hispanics live an average of 
3 years longer than the average American does. Those with a 
longer life span receive more monthly benefit checks, adjusted 
for inflation, from Social Security. Since Hispanics have a 
longer life expectancy, have lower wages and fewer covered 
years of employment, they benefit greatly from the Social 
Security system.
    In contrast, the individual account plan imperils them to a 
greater risk for retirement. Hispanics could face a greater-
than-average risk both of having their accounts run out of 
funds before they die and of losing a substantial amount of the 
purchasing power of the funds in their accounts to inflation as 
the years pass.
    The current benefit rules of the Social Security system 
favor not only low earners but also survivors, spouses, and 
divorcees who have no or limited earnings.
    Women's Social Security benefits are lower than men's 
benefits, due to their lower earning levels. Women earn only 70 
cents to every dollar men earn for similar work. Women tend to 
be out of the workforce more often, and to hold part-time jobs, 
particularly during childbearing years. This results in lower 
Social Security benefits for women than men. Privatization only 
exacerbates the pension disparity.
    More men (56.5%) than women (48%) have pensions. On 
average, men's pension funds are twice the size of women's 
pension funds. Women also make more conservative investments 
when they invest their retirement savings themselves. Women, 
ages 51 to 61, invest a lower percentage of their total assets 
in stocks, mutual funds, and investment trusts than men had. 
These assets are riskier, but have higher yields than others, 
such as certificates of deposits, savings accounts, or 
government bonds. On average, the ratio of riskier assets to 
total assets held by men was 8 percentage points higher than 
the same ratio for women. With very conservative investments, 
the investment return may not be adequate to see many women 
through their retirement years.
    A completely privatized system cannot offer these 
additional forms of protection needed by minorities, women and 
the disabled. It would have to be supplemented with a separate 
government program that provided extra benefits to vulnerable 
groups. The Social Security program integrates retirement 
pensions and social assistance. By placing the social 
assistance program in a separate program, you remove one of the 
essential elements attributed for its success. The social 
assistance program could come to be regarded as welfare; a 
category of government spending that has had little sustained 
political support in the United States.
    This is a formula for disaster. Individual accounts and 
privatization are the tools for destroying the Social Security 
system. The American worker has come to expect the peace of 
mind that Social Security provides. Congress must not allow 
privatization advocates to dismantle the cornerstone of 
Americans' retirement.


    Chairman Archer. Without objection, any written statement 
by any Member will be included in the record at this point.
    [The opening statement of Mr. Coyne follows:]

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

    As we evaluate the various proposals to change Social 
Security and work to guarantee its long-term solvency, our 
first priority should be to keep the promises that we have made 
to millions of American workers and retirees. 96 percent of 
American workers participate in the Social Security system. 
Social Security provides retirement security, but it also 
protects workers and their families from poverty if they die or 
are disabled before retirement.
    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 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.
    Therefore, our first priority must be to maintain the 
solvency of the Social Security Trust Fund so we can pay all 
the benefits we promised to workers. Before we consider any 
other use for the surplus, we must be confident that the Trust 
Fund and its cash reserves are sufficient. Therefore, I support 
the President's proposal to shore up Social Security's reserves 
first, before using the budget surplus for anything else.
    During the 106th Congress, our Committee will consider a 
number of ideas to improve retirement income for senior 
citizens. I strongly support this important goal, but I also 
believe we should be careful not to make new promises that we 
cannot keep. The surpluses are temporary, and any changes or 
additions we make will become permanent obligations.
    I applaud the President for wanting to reduce poverty among 
elderly women, particularly widows. During last year's 
Oversight Subcommittee hearings on pensions, representatives of 
the Heinz Foundation told us that elderly women are much more 
likely to depend on Social Security for all of their income, 
and much less likely to have private pensions. I hope to be 
able to work with the Administration and Members of both 
parties to enact meaningful pension reforms that will give 
women, minorities, and low-wage workers greater long-term 
retirement security.
    I look forward to hearing from today's witnesses and to 
moving ahead on a range of retirement security issues on a 
bipartisan basis. But I hope that the members of this Committee 
will move cautiously, doing nothing to undermine Social 
Security's successes and not making any promises we cannot 


    Chairman Archer. The Chair welcomes both Jack Kemp and 
Reverend Jackson to the meeting this morning. We are honored 
and pleased to have you here and we welcome your ideas. And so 
for the moment, we will be happy to listen to you, and I am 
sure that the Members will want to inquire in turn after you 
have completed your statements.
    Reverend Jackson, would you be kind enough to lead off.
    Reverend Jackson. Jack is older than I am. He has more 
    Mr. Kemp. I would be happy to lead off if you want.
    Chairman Archer. The Chair has no preference between the 
two of you, so----
    Mr. Kemp. Well, I hope the Chair leans a little to the 

                       MEMBER OF CONGRESS

    Mr. Kemp. I want to thank you, Mr. Chairman, and all your 
colleagues on this prestigious committee for having Jack Kemp 
and Jesse Jackson side by side talking about what you alluded 
to in your opening comments, and that Charlie Rangel, my friend 
and distinguished Ranking Minority Member, alluded to as well: 
Saving Social Security and Medicare, cutting taxes, making the 
economy grow.
    But, Charlie, you left out one other commonality between 
Jackson and Kemp. We were both quarterbacks. I was a 
quarterback at Occidental College when he was a quarterback at 
North Carolina A&T along with several of my Buffalo Bills and 
San Diego Charger teammates. As quarterbacks, both of us have a 
vision of America that is audacious.
    I was pleased and privileged to be with Charlie and Jesse 
at the Wall Street Project last Friday, the 70th birthday of 
Rev. Martin Luther King. I quoted Dr. King, who more than 30 
years ago said that he had an abiding faith in America and an 
audacious faith in mankind.
    I think we all share Dr. King's abiding faith in America 
here on the eve of a new century, a new millennium; and we have 
an audacious, hopefully, faith in mankind that we can come up 
with solutions that reach across the aisle, that reach across 
generations--as you talked about, Bill, Mr. Chairman. It is 
tough to call you Mr. Chairman after serving 18 years with you 
in the Minority.
    Mr. Rangel. I know the feeling.
    Mr. Kemp. Don't eat into my time, Rangel.
    You mentioned--Bill, you mentioned a woman in Morgantown, 
West Virginia, at West Virginia University. Regina. I didn't 
catch her last name. I would briefly tell the story of Annie 
Shriver, a woman according to the New York Times who passed 
away not long ago and left $22 million to Yeshiva University. 
Yeshiva is a great university. I have nothing against leaving 
your estate to Yeshiva or Notre Dame or Occidental, where I 
went, but her story is fascinating.
    In 1946 she was a waitress according to the New York Times, 
and she had $4,000 after taxes because you can't do anything 
until you pay your taxes. And she lived in New York City, 
Charlie. She invested in three stocks, circa 1946, Merck, Coca-
Cola, and IBM. The $4,000 grew to $22 million.
    The power of compounded rates of return is the most 
powerful force on Earth to create wealth, to give people access 
to capital, to establish a shareholders' society, and I want to 
make sure that you know why she's my woman of the year. She is 
my woman of the year because she said to the New York Times 
when they asked her, ``Why didn't you sell Merck, Coca-Cola, 
and IBM over the generations that you held onto it?'' And she 
said, ``Capital gains taxes were too high.''
    In other words, the tax system was biased toward holding 
onto the asset, using the asset as collateral, leveraging it 
against a loan, writing off interest on the debt on your taxes, 
but keeping the capital locked up. So a young black, Hispanic, 
Anglo male or female never got his or her access to capital, 
and I suggest that is the single biggest problem in the country 
with poor folks. I don't care whether it is Black Enterprise 
magazine, Kweisi Mfume or Jesse Jackson talking about building 
bridges to rural America, building bridges to urban America--
how can we do it with a Tax Code that punishes the sale of an 
asset and rewards consumption and debt?
    So my testimony is for the record, Mr. Chairman, we need to 
personalize Social Security. The President should be 
congratulated for touching the third rail, as are you. This 
debate is long overdue. Ideas, when their time has come, can 
rule the world, and the time has come to allow a working man or 
woman to take advantage of a compounded rate of return, to put 
initially 2, 3, 4 percentage points into a Roth IRA, an 
individual personal account.
    The President said the government should do it. I agree 
with Chairman Greenspan. I don't want the government investing 
for me. I have got nothing against the government doing things 
it ought to be doing, but I am totally opposed as I hope this 
Committee will be to having the government making decisions 
between Microsoft and Netscape, between big tobacco and big 
gaming interests. It won't work. It is not a high enough rate 
of return.
    Why don't we take the moment and suggest that every worker 
in America should end up like Regina or Annie Shriver and take 
advantage of the fact that since Franklin Roosevelt started 
Social Security--what, 1937--the rate of return on Social 
Security is 1.4, 1.5 percent. The rate of return on the S&P 500 
has been 7.9, 8.5 percent. Every worker in America, in the AFL-
CIO from Buffalo, New York, would be a billionaire by the time 
they are in their late forties.
    Let's take this moment, Mr. Chairman, and allow the 
American people to be empowered instead of empowering the 
government. Let's enrich the workers, not enrich the 
government. Let's make sure we have a rate of growth that can 
sustain Medicare and Social Security. A 1-percent higher rate 
of growth over 40 years does more to save Social Security than 
all the fixes that I have seen and all the legislative 
proposals to give tax credits there and development banks 
    We don't need tax credits in the Code. There are too many 
of them. Reduce the rates. Let's go back to a 28-percent rate. 
Let's get rid of the capital gains tax. Let's expand Roth IRAs. 
You want to increase savings: Lift the lid on Roth IRAs. They 
are flowing for middle America and low-income America and 
working America. In fact, it has fueled this Dow Jones at 9200, 
9300 and this NASDAQ at all-time records.
    I disagree with Chairman Greenspan. The stock market is not 
irrational. People want the rate of return that Regina got and 
Annie Shriver got, and I look forward to working with this 
Committee on behalf of empowering the working men and women and 
the poor of America, whether they live in Harlem or South 
Central Los Angeles.
    Thank you very much, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Jack Kemp, Codirector, Empower America; Former 
Secretary, Housing and Urban Development; and Former Member of Congress

    Chairman Archer, Congressman Rangel, and members of the 
Committee, thank you for inviting me to testify today as we 
commence this important debate on the structure and role of 
Social Security in the 21st century.
    Imagine an America early in the next century where every 
working man and woman is empowered with an ownership stake in 
the economy. An America where the ladder of opportunity reaches 
not only the boundless heights but also extends all the way 
down to the bottom so that families who begin with nothing can 
get a leg up onto the rungs of the ladder and eventually climb 
all the way to the top. In other words, imagine America not 
just as a constitutional republic, but as a vibrant shareholder 
democracy where everyone not only has a vote but also owns 
    This past Friday, it was a pleasure to be with Jesse 
Jackson at a conference sponsored by the Wall Street Project 
discussing how to make capitalism work for everyone. Jesse made 
the point that we have many bridges to move capital overseas--
the Export-Import Bank, OPIC, and so forth--but no bridges to 
get capital into our own inner cities and rural areas. With all 
due respect, we don't need an OPIC for our urban and rural 
areas; we need tax rate reductions, tax reform, and personal 
retirement accounts. We have an incredible opportunity to put 
Social Security to work transforming the labor of every man and 
woman in America into capital.
    Instead of forcing workers to put 12.4 percent of their 
wages and salaries into a government-run, pay-as-you-go 
retirement plan, which leaves them dependent on government for 
their retirement, why not give them the opportunity to divert 
most of their payroll tax payments into their own personal 
retirement accounts? Why not seize this opportunity to create 
an America where capital is abundant and each and every one of 
our citizens has a shot at the American Dream?
    The American Dream is not confined to one class or one 
color or even one nation. It is the most powerful force for 
economic growth, wealth creation, and emancipation in human 
history. I believe that with the right policies, we can look 
forward to the promise that poverty as a permanent condition 
can be overcome not in the distant future but during our 
    So, how do we save and strengthen Social Security? How do 
we encourage not just retirement security but retirement 
prosperity? How do we create this new shareholder democracy?
    Let me be clear about something right at the outset. 
Economic growth is the key to the long-term health of Social 
Security and Medicare. And economic growth is essential for us 
to make the transition to the new shareholder democracy I have 
    It's simple. Without higher economic growth than is 
currently projected, we cannot save Social Security and 
Medicare, and we cannot transform our nation's retirement 
system into one of opportunity and wealth accumulation.
    That is why, above all else, we need a bold growth agenda--
not a laundry list of legislative proposals, tax credits, and 
development banks.
    We need tax reform, and we need to empower people to save 
and accumulate wealth.
    Unfortunately, what we are seeing in Washington right now 
is a failure of both the left and the right. When I think of 
ambitious leadership for America, I think of big ideas, not big 
government. I think of policies that empower people to get 
rich, not enrich the government.
    It appears in many ways that the era of big government is 
back. I say this with sadness. I was heartbroken that President 
Clinton, in his State of the Union address Tuesday night, 
failed to call the American people or the Congress to action. 
He failed to lay out an agenda that could capitalize on all the 
opportunities that lie before our nation. Instead he offered a 
laundry list of tax credits and new spending proposals.
    But today we are discussing Social Security, and there was 
plenty in the president's State of the Union on which to 
    What makes President Clinton's proposals on Social Security 
so frustrating is that it is clear he understands, and even 
acknowledged, two of the fundamentals of this debate:
    (1) private markets have proven over 200 years to offer 
much higher real rates of return than government ``markets;'' 
    (2) incentives drive decision making.
    But what is so frustrating is that the president misapplies 
his insights. He would rely more on private markets to enrich 
government, not individuals, and he would use the power of 
incentives to perversely shape people's behavior to his liking, 
instead of giving them more choices.
    The president's plan rests on two central tenets--debt 
reduction and government investment--both of which will 
actually harm Social Security. And his ill-conceived plan to 
subsidize worker saving through what he calls USA accounts 
misses the point entirely. We don't need to subsidize saving. 
We already found out with Roth IRAs that if you give workers a 
chance, and an opportunity, they are more than anxious to save 
on their own without any inducement from the federal 
government. Further, these USA accounts appear to be highly 
targeted and restrictive, only allowing certain Americans who 
fall into the right category to participate. We need equal tax 
treatment for everyone, not more class warfare.
    While most of the president's ideas are relatively small 
when measured against the greatness of America, all the 
president's ideas mean bigger spending, artificially high 
taxes, and a perpetuation of a nanny state that micromanages 
our lives. And none of them go to the core objective I am here 
to talk about here today: economic growth as a means to 
distribute capital and expand opportunity.
    The one ``big idea'' the president did offer--an absolutely 
terrible idea--must be shot down immediately. With his 
suggestion that the government invest the wages of hard-working 
American men and women, the president has proposed something 
antithetical to everything we believe in. This proposal also 
belies what is happening all over the world as country after 
country moves away from state ownership. The president has 
instead proposed a leveraged buyout of corporate America.
    I know this committee can do much better than debt 
reduction, nationalization of the Trust Fund, and highly 
restrictive and targeted USA accounts.

                         Entrepreneurs of Ideas

    The Ways and Means Committee has a difficult job ahead of 
it. A debate over the future of the single largest federal 
program--a program that affects virtually every American--will 
surely be challenging. But as we have seen throughout American 
history, humble men and women who are committed to doing great 
things for their country and their countrymen find ways to 
achieve the progress that is the hallmark of our nation. And I 
would venture to say that you and your colleagues in the full 
House and in the Senate will do the same.
    Here are the ideas that I hope members will consider as we 
begin this debate:

                       A Good Start for the 106th

    I understand that Majority Leader Armey has reserved H.R. 1 
for President Clinton's legislative plan to reform Social 
Security. The Majority Leader's offer is significant because it 
shows the American people how important this issue is to the 
Members of this House, and it gives the president and the 
Congress a real opportunity to begin work on this issue in an 
environment of good will. Congress shouldn't wait, however, to 
lay out its own optimistic plan for the American people.

                         A Guarantee to Seniors

    In my opinion, Congress should use H.R. 2 to take immediate 
action. In my mind, H.R. 2 should guarantee every penny of the 
Social Security benefits promised to every current retiree and 
to every person currently receiving Social Security disability 
payments. This legislation would pass overwhelmingly, and it 
would advance the debate in a number of ways.
    First, guaranteeing benefits to current retirees is the 
right thing to do. It would immunize retirees from suffering 
any harm during the reform process.
    Millions of Americans have planned their retirements 
assuming full Social Security benefits. Others are dependent on 
the program because they are disabled. They have put their 
trust in you. Yet, the United States Supreme Court ruled in 
Flemming v. Nestor (363 U.S. 603) that senior citizens have no 
legal right to their Social Security benefits. Congress may 
reduce benefits, or even take them away completely any time it 
desires. Listen to what the Court said:

          ``The noncontractual interest of an employee covered by the 
        Act cannot be soundly analogized to that of the holder of an 
        annuity, whose rights to benefits are based on his contractual 
        premium payments.''
          ``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 and which Congress probably had in mind when it 
        expressly reserved the right to alter, amend or repeal any 
        provision of the Act.''
          ``Termination of Appellee's benefits . . . does not amount to 
        punishing him without a trial. . .''

    Is it any wonder that many senior citizens view Social 
Security ``reform'' as a euphemism for ``cutting benefits,'' 
and look forward to Congress's taking up this issue with a 
sense of dread?
    Before embarking on a process to restructure Social 
Security for the 21st Century, I believe it is imperative that 
Congress give some peace of mind to retirees here in the 20th 
Century. In my opinion, Congress should protect seniors' Social 
Security benefits by converting the moral, but legally 
unenforceable, promise into an ironclad legal contract. A 
simple congressional resolution--even if signed by the 
president--stating Congress's intent to hold current retirees 
harmless under any reform plan will not suffice. Even though 
such a resolution might make it more difficult politically for 
the current Congress to reduce benefits, it would have no 
greater legal effect than the law already on the books.
    The easiest and most straightforward way to convert today's 
Social Security promise into a legally binding Social Security 
contract would be to replace that promise with a tax-free, 
inflation-adjusted, annuity backed by the full faith and credit 
of the United States government, just like the bonds Uncle Sam 
sells to private investors, or the pension benefits the federal 
government provides to federal employees. These non-taxable 
annuities should give Social Security beneficiaries inviolate 
property rights to their annuity benefits and all promised 
cost-of-living increases, which could be defended in the courts 
if necessary. Such a bill would guarantee current retirees that 
they would receive every penny of the benefits they have been 
promised and that no one could take those benefits away.
    Second, giving current retirees a legal guarantee against 
their benefits being cut would also make it much more likely 
that real reform could begin this year. Not only would this 
guarantee eliminate senior citizens' opposition to designing a 
new Social Security for younger workers, it would transform a 
large share of them into outright proponents of reform for the 
sake of their children and grandchildren.
    A guarantee to seniors would eliminate much of the politics 
and demagoguery that we otherwise can expect to arise during 
congressional deliberations on how to fix Social Security. 
Indeed, the demagoguery already has begun. Just two weeks ago, 
I heard one distinguished Member of the House minority on C-
Span's Washington Journal accuse a member of the majority of 
wanting to abolish Social Security. In the next breath he told 
tens of millions of viewers across America that he was going to 
make sure that Democrats protected seniors against any 
Republican attempt to dismantle Social Security. Scare tactics 
have no place in this debate. I call on Members of the minority 
to stop scaring America's old people before they poison the 
well on Social Security the way they did on Medicare in 1995. 
Instead, enact H.R. 2 as I have laid it out here, and let's get 
on with the business of designing a new Social Security 
retirement system for the 21st Century.

        Economic Growth Is the Key to ``Fixing'' Social Security

    The medium-term and long-term actuarial outlook for Social 
Security is bleak. The Committee is familiar with the details. 
The Social Security actuaries project that in 2013, Social 
Security payroll tax revenue will be insufficient to cover all 
benefits. By mid-21st-Century, the actuaries project that the 
combined employer/employee payroll tax rate of 12.4 percent 
(6.2 percent each) will cover only about 71 percent of promised 
benefits and would have to rise to about 17.5 percent in order 
to pay all promised benefits. By 2075, the actuaries project 
that the combined payroll tax rate would have to rise to about 
18.5 percent to cover promised benefits.

The Demographic Problem.

    The Committee also is familiar with one of the primary 
reasons for this situation. Demographics are turning against 
Social Security's unfunded, pay-as-you-go, tax-and-transfer 
scheme in which today's workers pay for the retirement of 
yesterday's labor force and must rely on the tax payments of 
future workers to support their own retirement when the time 
    At the beginning of the Social Security program in 1937, 
there were 42 workers paying 2 percent of their first $3,000 of 
wages in taxes to fund the Social Security benefits of one 
retiree. Today, the are only 3.3 workers paying taxes to 
support each retiree, and Congress has increased Social 
Security benefits to the point that those 3.3 workers must pay 
12.4 percent of their first $68,400 of wages to support one 
retiree. By 2030, according to the actuaries' intermediate 
economic assumptions, there will be only two workers per 
retiree, and they will have to pay 16.6 percent on the first 
$276,500 of wages and salaries in order to fund Social Security 
    Clearly, one key to fixing Social Security for the long run 
is getting to the point where workers fully fund as much of 
their own retirement as possible during their working years so 
that the only portion of retirement income paid by government 
on a pay-as-you-go basis is whatever safety-net Congress 
determines is necessary. In this regard, the major challenge 
facing the country in moving from a pay-as-you-go system to a 
fully funded system is how to allow workers to contribute 
sufficiently to their own retirement while they continue to pay 
taxes sufficient to fund the Social Security benefits of those 
retirees who were unable to fund their own retirement during 
their working years because every penny of their Social 
Security payroll taxes was required to support the pay-as-you-
go system. This constitutes the so-called ``transition 
problem'' about which I will have more to say below.

The Slow-Growth Problem.

    Beyond demographics, the even more important reason for 
Social Security's bleak outlook is the fact that the economy is 
not expected to continue performing as well as it has to date 
since the end of World War II. Since Social Security is funded 
by a payroll tax, only robust economic growth--specifically 
high employment levels and rising real wages--can ensure that 
revenues keep flowing into the program.
    We have enjoyed almost uninterrupted economic growth for 
about 16 years now thanks to the turn around in tax and 
economic policy ushered in by Ronald Reagan. And while the 
1990s will be known for general prosperity, we must remember 
that a bipartisan tax hike and credit crunch in 1990 followed 
on by another tax increase in 1993 have worked to hold economic 
growth below potential during this decade. In spite of stronger 
economic performance during the past several years, overall, we 
remain in the midst of the slowest economic recovery and 
expansion since the Great Depression, and official economic 
forecasts do not show any significant turn-around.
    We still place too many burdens on our economy that prevent 
it from reaching its potential. Thankfully, Alan Greenspan's 
inspired effort at the Federal Reserve to eliminate inflation, 
and the contributions of America's high-tech revolutionaries in 
the marketplace to boost productivity, have combined to make it 
possible for the economy to overcome the continued drag placed 
on it by the tax system and unnecessary government regulations.
    The actuaries project that the long-run growth potential of 
the American economy will decline by about one-third from its 
performance level throughout the post-war era. Since the end of 
World War II, gross domestic product (GDP) has risen 3.2 
percent a year on average after taking inflation into account. 
The actuaries assume that during the next decade, the economy 
will not grow faster than 2.0 percent on an inflation-adjusted 
basis and that thereafter annual real economic growth will not 
rise above 1.5 percent for the next 65 years.
    Surely, we can do better--we must. The retirement security 
of the baby boom generation and of their children depends on 
    I asked Empower America's chief economist, Dr. Lawrence 
Hunter, to estimate what portion of Social Security's financial 
problems derive from this projected decline in economic growth. 
The results of his analysis are noteworthy. Dr. Hunter found 
that a return to the same level of economic performance 
experienced between the end of World War II and 1990 would 
generate growth of real wages in covered employment roughly one 
percentage point a year above the rates assumed by the 
actuaries in their intermediate Alternative II scenario, which 
would put real wage growth at roughly 2.0 percent a year. Under 
these assumptions, the long-term payroll tax revenue shortfall 
would be reduced by almost two-thirds--from an anticipated 5.5 
percent of taxable payroll in 2070 to 1.9 percent.
    Any solution to the Social Security problem, therefore, 
simply must start with raising long-run real economic growth at 
least back up to it post-war norm of 3.2 percent a year in 
order to raise payroll tax revenue without raising payroll tax 
rates or increasing the wage base.

The Tax Code Problem.

    Much of the Social Security debate has and will continue to 
revolve around the relationship between Social Security and 
taxes. These two issues are indeed intertwined, but not in the 
way that most Americans have been led to believe.
    It is a paradoxical truth that the current tax code, which 
the president and his party--and all too often members of my 
own party--seek to perpetuate in the name of ``saving Social 
Security,'' is actually one of the primary factors undermining 
Social Security.
    The president's slogan last year--``reserve every penny of 
the surplus for Social Security''--regrettably premised the 
entire budget debate of 1998 on a false assumption, i.e., on 
the supposed competition between cutting tax rates and ``saving 
Social Security.'' Americans were told that cutting tax rates 
would reduce the surplus, and that reducing the surplus would 
hurt Social Security. Nothing could be further from the truth. 
This untruth, unfortunately, has been repeated so often that 
people have come to believe it unthinkingly.
    The notion that we can't afford to cut taxes because it 
would weaken Social Security has achieved the status of 
conventional wisdom among many even in my own party. It is 
simply wrong, and it is hurting the economy. Far from 
strengthening Social Security, the hoarding of surpluses in 
Washington is stimulating more federal spending. Although the 
president's slogan scared Republicans out of cutting taxes last 
year, he and Members of both parties in Congress eagerly joined 
in spending about a quarter of the surplus last year.
    As a general rule, surpluses always should be returned to 
the taxpayers: they are simply one representation of 
artificially high taxes, an overcharge to taxpayers who have 
already fulfilled their obligation to fund essential government 
operations. If we ever needed proof that government cannot be 
trusted with surpluses, last year's experience demonstrated 
beyond a shadow of a doubt that unless Congress returns 
surpluses to taxpayers, they will be spent.
    If the surplus is not returned to taxpayers, it can only be 
spent on government programs or used to reduce the total 
government debt. Surpluses can't be used to help Social 
Security in any way, shape or fashion.
    Last year, Congress made the fatal mistake of giving the 
public the impression that it thought cutting tax rates and 
saving Social Security were incompatible, or at least in 
significant competition with one another, requiring major 
tradeoffs. In my opinion, Republicans compounded this false 
perception by pretending along with Bill Clinton that hoarding 
budget surpluses in Washington and using them to retire federal 
debt somehow strengthened Social Security.
    Far from being in competition with Social Security reform, 
tax rate reductions and the eventual overhaul of the entire tax 
code are vitally important to the financial health of our 
Social Security system. You can't do one without the other. The 
current tax code is burdensome and inefficient. The economic 
damage done by its high tax rates and multiple taxation of 
capital income more than offset any possible economic benefit 
derived from running budget surpluses and retiring debt. A 
reasonable estimate of the inefficiency of the current tax code 
is that for each additional dollar in revenue raised through 
the tax code, the burden of extracting the higher revenue from 
the private economy retards the growth of output by about 
$1.50. Running budget surpluses to retire federal debt with the 
hope of strengthening Social Security is like taking two steps 
forward and three steps back. The longer such a policy 
persists, the further behind Social Security will fall.
    John Maynard Keynes said that during peacetime, tax rates 
should not exceed 25 percent. Today, many working class people 
face marginal tax rates of more than 30 percent and too many 
middle class people confront marginal tax rates above 50 
percent. Last year, federal taxes took more than 20 percent of 
GDP, an all-time peacetime high, exceeded only during the 
height of World War II. We punish wealth accumulation with the 
strangest tax on the books: the capital gains tax. And we still 
hold back many inner-city Americans with schools that are 
grossly inadequate and with Soviet-style regulations that 
discourage new enterprises.
    Don't forget, the ultimate source of improved 
productivity--and, therefore, economic growth--is always human 
ingenuity, not balanced budgets or government ``investment,'' 
but human ingenuity. And when we tax people, we tax their 
ingenuity. We tax their incentive to work hard and to invent 
and to save and to succeed.
    We all want a dynamic and growing economy. But many in 
Washington seem to have forgotten exactly how the federal 
government keeps a thumb on the scales against long-term 
prosperity with ill-conceived policies. They seem to have 
forgotten the lesson of the 1920s, 1960s, and 1980s: The best 
thing the government can do to foster economic growth is to 
remove its thumb from the scales. That was Ronald Reagan's 
economic model. It is the American people who do the work and 
who grow the economy, and the best thing Washington can do to 
assist them is to simply get high tax rates and excessive 
regulations out of their way.
    Ronald Reagan's key insight was that there is a 
complimentary, dynamic relationship between expanding the 
economic pie and raising more revenues for government. As long 
as we persist in the fictions of static analysis, we will 
remain paralyzed, unable either to cut tax rates or use part of 
the surpluses to create private investment accounts to save 
Social Security for today's workers. That is why I strenuously 
oppose any plan to phase in tax rate reductions over 10 years--
a ridiculously long time--contingent upon the emergence of a 
so-called ``on-budget'' surplus. The distinction between 
``Social Security surpluses'' and ``on-budget (non Social 
Security) surpluses'' is nothing but a budgetary artifice. It 
has been concocted to pretend that surplus revenues cannot be 
returned to taxpayers because they are required to pay 
fictitious interest into a fictitious trust fund. Instead of 
pretending that the fictitious Social Security Trust Fund 
precludes tax rate reductions, I propose that we convert the 
Trust Fund into real assets and distribute them back to the 
people who have been paying the Social Security overcharge 
since 1983. I will discuss this idea in greater depth below.
    Only robust, long-term economic growth can generate 
sufficient revenues to guarantee promised benefits to retirees, 
maintain the federal safety net, and facilitate a transition to 
a new, fully funded, market-based system. And bold tax rate 
reductions, and eventually a complete overhaul of the tax code, 
will be required to generate robust growth over the long haul.
    That is why I propose a major, across-the-board tax rate 
reduction on capital and labor income as a fundamental 
component of any Social Security reform.
    That is why in 1999, as its first step to ``save'' Social 
Security, Congress should cut tax rates deeply, across the 
board, for every taxpayer. Specifically:
     The top marginal income tax rate should be brought 
back down to at most 28 percent, where it was when Ronald 
Reagan left office, and the 15 percent bracket should be cut by 
one third to 10 percent.
     The capital gains tax rate also should be cut in 
half, to 10 percent, if not eliminated altogether.
     Also, eliminate the income restrictions and remove 
the contribution limits that apply to Roth IRAs. Why on earth 
should Congress restrict any worker from contributing as much 
as he or she wants to their Roth IRAs when the so-called 
``revenue loss'' is minimal even under the static revenue 
estimating methods used at the Joint Committee on Taxation 
(JCT) and the Congressional Budget Office (CBO)?
     Repeal the Social Security earnings test that 
drives senior citizens that want to work out of the labor 
force; and at least repeal the 1993 increase in the tax on 
Social Security benefits. I would go further and urge you to 
fundamentally overhaul the tax treatment of Social Security 
benefits to eliminate the severe marginal tax rate penalties 
imposed by the current method.
     Finally, eliminate the death tax altogether. It 
actually loses revenue and is completely at odds with the kind 
of retirement security system we seek to build for the 21st 
    Beyond these actions, I believe we should set the ambitious 
goal of overhauling the entire tax code within the next few 
years. It must be simpler. It must be fairer. And it can no 
longer be used as a tool to punish. It must instead be 
transformed from a bureaucratic tool of social engineering into 
a fountainhead of opportunity and growth.
    We must not shrink from bold action when bold action is 
called for. Remember John F. Kennedy's words?

          ``It is a paradoxical truth that tax rates are too high today 
        and tax revenues are too low, and the soundest way to raise the 
        revenues in the long run is to cut the rates now. . . The 
        purpose of cutting taxes now is not to incur a budget deficit, 
        but to achieve the more prosperous, expanding economy which can 
        bring a budget surplus.''

                    Creating a Shareholder Democracy

    While stronger economic growth could realistically solve 
about two-thirds of the Social Security problem, growth alone 
is not enough. The demographic problem is so great that even a 
restoration of post-war growth rates would only delay for a 
decade--until 2022 or thereabouts--the time when Social 
Security payroll tax revenues cease to cover all benefits. But 
that decade's worth of breathing room is vital. That's why in 
order to make up for the rest of the projected shortfall in 
Social Security we also need to begin this year to allow 
workers to direct a substantial portion of their payroll taxes 
into personal investment accounts similar to Roth IRAs.
    There is a second reason why we must begin the transition 
to investment-based private funding for retirement. Even if it 
were possible to maintain the pay-as-you-go, tax-and-transfer 
New Deal structure of Social Security, why would workers want 
to? Certainly, the pay-as-you-go tax-and-transfer system is not 
required for the government to maintain an adequate retirement 
safety net for all Americans.
    Even if we could solve all of Social Security's financial 
problems without dramatically changing its structure, we would 
still be left with a system that pays benefits too small to 
justify the high FICA tax rate. That is, even if we right the 
program's financials, Social Security still fails on the rate-
of-return question. The fundamental truth is that not even 
higher economic growth will make Social Security an acceptable 
deal in terms of the rate of return to the taxpayer.
    Because of its high-tax/low-rate-of-return structure, the 
current system denies many citizens, especially lower-income 
Americans, the opportunity to invest, accumulate real wealth, 
and achieve not just retirement security but retirement 
    Moving towards a privately controlled investment-based 
system could go a long way towards erasing the class divisions 
that still divide us in these otherwise prosperous times.
    Middle-aged taxpayers send 12.4 percent of their wages to 
Washington in exchange for Social Security benefits equaling a 
1 or 2 percent real rate of return. Today's young workers do 
even worse, with some actually paying more into the system than 
what the government promises to pay back during their senior 
years. This means that for certain demographics--like young, 
single black males--the government mandates an investment with 
a negative real rate of return.
    Consider the following facts reported in a recent Heritage 
Foundation report:
     Currently, Social Security's inflation-adjusted 
rate of return is only 1.23 percent for an average household 
(assumes two, 30-year-old earners with children in which each 
parent made just under $26,000 in 1966). Such a couple would 
pay (including employer share of tax) a total of about $320,000 
in Social Security taxes over their lifetime. They can expect 
to receive benefits of about $450,000 in 1997 dollars before 
applicable taxes when they retire at age 67.
     Had this couple placed that same amount into a 
conservative tax-deferred IRA investment such as a mutual fund 
invested half in Treasury-bills and half in equities, they 
could expect a real, inflation-adjusted rate of return equal to 
5 percent. Their total pay-out would be $975,000.
     The rate of return for minorities is actually 
negative because of lower life expectancy. For example, single 
black males born after 1959 will get back only about 88 cents 
for every dollar paid in payroll taxes.
    That's not just bad economics, it's immoral. It points out 
the real reason to privatize Social Security: Today, Social 
Security usurps individual freedom and initiative, fosters 
dependence on government, provides unnecessarily small 
retirement benefits (although more than the program can afford) 
and yields workers an unacceptably and unnecessarily low rate 
of return.
    Personal accounts have an added advantage in that they 
comprise real assets that can be passed on, in tact, to spouses 
and eventually to other loved ones--unlike the current system 
in which a widowed spouse under 60 receives a one-time death-
benefit payment of $255 and a reduced monthly benefit. This 
feature is just one more positive factor in building a system 
that is good for families, not just good for the economy.
    A new, fully funded system would also eliminate the 
possibility of future actuarial imbalances brought about by 
demographic aberrations, like the baby boom, that are inherent 
in any tax-and-transfer program. When every American owns real 
assets, demographics become irrelevant.
    As an aside, there is another important point to be made. 
Personal retirement accounts, contrary to the statements of 
some privatization backers, will only have a positive, dynamic 
impact on economic growth if we couple this reform with the 
other prerequisites for strong growth: a simple, low-rate tax 
code, a regulatory structure more friendly to entrepreneurial 
activity, and of course sound money. One need only look to 
Japan--where the saving rate is incredibly high but investment 
opportunities with attractive after-tax rates of return are 
scarce--to understand why. There must be opportunities to put 
this newfound capital to good use in a marketplace free from 
unneeded restraints. Otherwise, the newly available flow of 
capital will simply bid down the rate of return it can fetch in 
the market. That's why restructuring Social Security, cutting 
tax rates and eventually overhauling the federal tax code are 
so inextricably connected.
    As significant as increasing retirement income and 
stabilizing Social Security's financials are, we cannot fail to 
appreciate how dramatically personal retirement accounts will 
change America's cultural and socioeconomic landscapes.
    I can't think of a better way to directly move capital from 
Wall Street to Main Street, and from the government to the 
people, than to allow each worker to become a saver, an owner, 
and indeed, a capitalist--with personal retirement accounts.
    If we don't change Social Security, we are locking many of 
our urban and minority citizens in an economic cage. The FICA 
tax, which for many is more oppressive than the income tax, 
prevents them from breaking free. If we insist on the status 
quo, we are telling them that our highest goal is to promise 
them a pitifully small return because we don't want to subject 
them to the risks of the American economy. All the while, these 
urban and minority citizens are watching from the sidelines as 
their fellow Americans get rich.
    It is estimated that almost half of all Americans, about 
125 million, now own stock in publicly traded corporations, 
either directly or through pension funds. These investors have 
greatly benefited during the stock market's extended bull run. 
But what about those for whom the payroll tax is an effective 
prohibition on saving and investing? What about those who have 
not been able to participate in our nation's broader 
    The Great Emancipator Abraham Lincoln said:

          ``I take it that it is best for all to leave each man free to 
        acquire property as fast as he can. Some will get wealthy. I 
        don't believe in a law to prevent a man from getting rich; it 
        would do more harm than good. So while we do not propose any 
        war upon capital, we do wish to allow the humblest man an equal 
        chance to get rich with everybody else. When one starts poor, 
        as most do in the race of life, free society is such that he 
        knows he can better his condition; he knows that there is no 
        fixed condition of labor for his whole life. I am not ashamed 
        to confess that twenty-five years ago I was a hired laborer, 
        mauling rails, at work on a flatboat--just what might happen to 
        any poor man's son. I want every man to have a chance.''

    Unfortunately, today's Social Security system locks capital 
away from lower-income men and women. Today's system keeps them 
from getting rich. We should adopt Lincoln's philosophy and 
emancipate people from poverty by freeing up capital.
    Remember, benefits build dependence; assets build hope.
    When I was HUD Secretary, I always talked about how 
important ownership is. When people own their homes, as opposed 
to renting subsidized public housing units, they take care of 
their investment. And they take better care of the 
neighborhood, too.
    In the same manner, if every American owned stock, if they 
had a stake in the broader American economy, each of them would 
demand policies from their government that encourage 
opportunity and growth. This is the virtuous cycle at work.
    We may decide to start small by allowing workers to 
dedicate just a few percentage points of the payroll tax to 
these personal accounts. But I envision a day in the not too 
distant future where individuals may voluntarily dedicate every 
dollar of his or her payroll-tax contribution to their personal 
retirement account, and to private life and disability 
insurance policies.
    Reason should calm any fears we might have about making 
some of these changes that, admittedly, are substantial. No one 
is suggesting, certainly not I, that we dismantle the Social 
Security safety net for those who truly need it. We would still 
provide a basic federal retirement benefit to the neediest 
Americans, but we would do so without mandating that every 
other citizen receive benefits in the same inefficient manner. 
We would still provide every worker a basic retirement-income 
guarantee. The wealth generated by these and other growth-
oriented policies, along with the new federal guarantee I 
mentioned, will allow us to take care of the truly dependent 
and indigent, and anyone else who for one reason or another is 
unable to save enough during their working years to provide 
themselves an adequate retirement income.

                         Principles for Reform

    During the past few years, there has been an outpouring of 
research on how to go about privatizing Social Security. Each 
plan offers some insight on what to do and what to avoid. I 
don't come today armed with a specific plan right down to time 
tables and benefit schedules. Instead, I would like to offer 
some general observations and suggest some guiding principles 
by which to design a process of reform and to evaluate the 
various plans that will come before you.

Beware of Grand Schemes.

    First, I would say beware of grand schemes. Given recent 
political history, I am wary of grandiose national plans that 
purport to sweep away all our problems with one large, swift 
brush of the broom.
    We shouldn't pretend that we know, or can figure out, how 
to plan each and every American's retirement. Nor should we 
labor under the delusion that it is possible to correct the 
serious problems of a program that makes up a quarter of the 
federal budget with one master blueprint. We should not pretend 
that we can ensure the books will balance over the next 75 
years with a single piece of legislation. And we shouldn't try. 
What we need to do is make the correct directional choices that 
point us along the right path and that give millions of working 
Americans the incentive and opportunity to build wealth for 
    Once Americans understand the journey on which we have 
embarked, they will approve, applaud, and vote for more.
    I believe that Social Security plans that propose detailed, 
50-year, ``down-to-the-dollar'' programs for revolutionizing 
our retirement system may suffer from some of the same 
deficiencies and meet the same fate as the national health plan 
idea. Especially troubling is the proclivity of some plans to 
require people to make huge, life-altering decisions about 
their retirement future based on inadequate information. For a 
reform plan to be successful, it must allow for people to make 
many small incremental choices throughout their working 
careers, giving them the ability to adjust their course 
frequently and even to change directions dramatically as their 
circumstances change. We must avoid locking individuals into a 
straight-jacket in order to make the plan's 75-year financials 
add up on paper. Anyone who has ever written a business plan 
knows exactly what I am talking about.

Make the Social Security Trust Fund Real and Privatize It.

    Second, Congress must break out of the prison created by 
the fictitious Social Security Trust Fund. It is not real. 
There are no real assets in the Trust Fund and the annual 
``interest'' accrued in the Trust Fund is not real either. Both 
are nothing more than accounting conventions that allow the 
federal government to keep track of how much of future Social 
Security benefits Congress has pledged to pay for out of the 
general fund of the United States. The fact that the Trust Fund 
``goes broke'' in 2032 simply means that Congress has not 
pledged enough general revenues to cover all benefits promised. 
We could wipe the Trust Fund from the books tomorrow and 
absolutely nothing real would change.
    Not only does the fictitious Trust Fund confuse and mislead 
people, it is being used to thwart privatization and across-
the-board tax cuts by those who would keep tax rates high and 
``fix'' Social Security by raising taxes and cutting benefits.
    Therefore, I propose that Congress:
     transform the ``special issue'' federal bonds held 
in the Trust Fund (i.e., the general fund's IOUs) into real 
assets by converting them into marketable, long-term, federal 
zero-coupon bonds with maturity dates beyond 2013; and then
     privatize the Trust Fund assets by distributing 
the bonds into the private retirement accounts of the taxpayers 
and retirees who paid in the excess Social Security payroll 
taxes since 1983; requiring that
     any withdrawals of proceeds from their sale or 
redemption reduce the individual's Social Security benefits 
dollar for dollar.

Do Not Raise Taxes or Tamper with Social Security's Benefit 
Guarantee to Pay Transition Costs.

    Finally, the proposal to transform the Social Security IOUs 
into real assets and distribute them to overcharged taxpayers 
illustrates a very important principle that I believe Congress 
should observe in dealing with the so-called transition 
problem. Under no circumstances raise taxes or reduce the 
amount of retirement income currently promised by Social 
Security to pay for these costs.
    The reason not to worry about transition costs is simple 
and doesn't require complex calculations and mathematical 
simulations to justify. We believe Social Security should be 
privatized because in the long run everyone can get a better 
rate of return on their retirement contributions in private 
accounts. In other words, all else equal, future retirement 
benefits will be higher under a privatized system than under 
the current tax-and-transfer program. This higher income will 
lessen the burden on Social Security while enabling the federal 
government to maintain a retirement income guarantee. Also, I 
have already suggested that we commit ourselves to pay every 
penny of benefits promised to current retirees. Therefore, we 
should not shrink from guaranteeing every current worker a 
retirement income no less than they would be entitled to under 
the current program.
    There is no need to reduce the retirement-income guarantee 
that workers are currently promised by Social Security. In a 
nutshell, we should plan explicitly to cover ``transition 
costs'' out of the general fund of the U.S. Treasury. To the 
maximum extent possible we should rely on the higher revenues 
generated by faster economic growth, controlling the growth of 
spending, and borrowing the remainder. I can think of no more 
justified purpose for federal borrowing than to cover the cost 
of transition from the current tax-and-transfer Social Security 
system to a new privately controlled investment-based system 
for the 21st Century.

             Misinformation and Counterproductive Proposals

    As I indicated earlier, it is widely reported that the only 
possible solution to Social Security's problems involves some 
combination of tax increases and benefit cuts--a version I 
might add of an earlier misconception about the federal budget 
deficit, which also was proven wrong by events. Remember when 
it was widely held that the overall federal budget deficit was 
so large that it would require huge tax increases and spending 
cuts to eliminate it?
    Instead, Congress cut taxes and spending continued to rise. 
The budget was balanced and surpluses emerged because the 
economy grew faster and Congress simply stopped increasing 
spending faster than the economy was growing.
    The situation with Social Security is similar. I have 
described two strategies above--cutting tax rates to increase 
long-term economic growth and allowing workers to begin 
investing in personal retirement accounts--that eliminate the 
need for these painful ``remedies.''
    Both of the generally accepted fixes, in fact, will only 
exacerbate the key problems with the current system.
    We should resist any efforts to increase the Social 
Security payroll tax rate, the taxable earnings level for 
workers, or the taxable benefits level for retirees. The 
problem with today's Social Security system is that the 
government asks too much from workers and gives back too little 
in return. In other words, given the near-zero real rate of 
return today's young adults can expect from Social Security's 
current structure, payroll taxes are already much too high. Tax 
increases would reduce these already paltry returns, while 
doing little to shore up the system.
    For example, eliminating the earnings cap for workers as 
some have suggested would increase the top federal marginal tax 
rate from 41 percent to 47.2 percent, and over 53 percent if 
the employer's contribution is taken into account. This isn't 
tinkering with the system--this is a tax increase of monstrous 
proportions, sure to hurt the overall economy and Social 
Security in the process.
    We should also resist additional payroll tax rate hikes 
whether they are proposed as a way to bring more revenues into 
a cash-strapped, tax-and-transfer system or as some sort of new 
mandatory savings requirement. And increasing taxes on current 
retirees' Social Security benefits is quite simply a cruel 
    Payroll taxes are already too high, and retirement benefits 
are already too low. Let's not do anything to make these 
problems worse.
    Finally, the primary reason the actuaries project abysmally 
low economic growth is the projected decline in labor force 
growth. One way to mitigate this expected decline is to allow 
senior citizens that desire to work to remain in the labor 
force longer. As Americans live longer and healthier, as 
America's population ages and the proportion of people in the 
16 to 65 age groups declines, and as high technology continues 
to revolutionize work, the demand for older, more experienced 
workers will rise. In fact, successful mobilization of older 
workers will be essential to maintaining an adequate workforce 
that will keep the economy performing at its peak capacity. 
Congress should do everything possible to remove artificial 
barriers, such as the Earnings Test and taxes on Social 
Security benefits to allow senior citizens to continue working 
as long as they desire. We should also continue traditional 
American immigration policies that encourage talented and 
motivated people from all over the world to come to our shores 
and contribute to the building of our nation.

Reject Federal Government Investment in Private Debt and Equity 

    As I mentioned at the outset, the president wants to let 
the federal government invest part of payroll tax revenues in 
private debt and equity markets. This is an absolutely terrible 
idea. Giving greater control over people's lives and U.S. firms 
to the federal government by making Washington a part owner in 
numerous publicly traded companies would be dangerous and 
entirely counterproductive. We should empower people to get 
rich, not the federal government. Government investing of the 
Trust Fund in private markets is a big-government power-grab, 
and the idea should be shot down before it ever leaves the 
ground. If you have any doubt that this is a pernicious idea, 
simply reflect back on the Clinton administration's earlier 
proposals to mobilize private pension funds for social 
investment, so-called Economically Targeted Investments (ETIs). 
I shudder to think what this administration would do if it ever 
got its hands on companies' stock directly.


    As we approach the new millennium, let us not ``propose any 
war upon capital.'' Instead let us ``allow the humblest man and 
equal chance to get rich with everybody else.''
    I, like Lincoln, want every man--and every woman--to have a 
    To this end, therefore, I urge Congress to:
     adopt policies that encourage sustained economic 
growth, including broad-based across-the-board tax rate 
reductions and eventually a complete overhaul of the federal 
tax code;
     guarantee the Social Security benefits of current 
retirees with a tax-free, inflation-adjusted annuity backed by 
the full faith and credit of the United States government;
     immediately allow young and middle-aged workers to 
begin dedicating a significant share (at least 3 percentage 
points) of their FICA contribution into personal retirement 
accounts, and increase that percentage as quickly as possible;
     convert the Social Security Trust Fund IOUs into 
real assets (marketable federal bonds) and distribute them back 
to overcharged taxpayers; and
     reject counterproductive tax increases, benefit 
cuts and schemes to get the federal government into the 
investment business.
    These are the types of directional choices we should make 
at the outset that will get us off to a flying start yet still 
allow us the flexibility to make mid-course corrections in the 
coming years.
    Thank you, Mr. Chairman. I would be pleased to take 
questions from the Committee.


    Chairman Archer. Thank you. Thank you, Congressman Kemp, 
Secretary Kemp, my friend Jack.
    Mr. Kemp. Former.
    Chairman Archer. Reverend Jackson, we are pleased to have 
you before the Committee today. We will be very happy to hear 
your ideas.

                     RAINBOW/PUSH COALITION

    Reverend Jackson. Thank you, sir. Chairman Archer, 
Congressman Rangel, distinguished representatives, ex-
quarterback evangelist Jack Kemp, let me express my 
appreciation for the opportunity to speak with you today about 
the fundamental issue of Social Security. I am here not as an 
actuary or an accountant, but as an American concerned about 
defending Social Security, which is so vital to working and 
poor families.
    I do not provide a partisan policy prescription from the 
left or the right, but offer the common concerns of the moral 
    Let me speak briefly about three major topics: The 
importance of Social Security, what it means to save Social 
Security, and a perspective on the President's reform proposals 
outlined Tuesday evening.
    Social Security is vital to American families. Legislators, 
the affluent, those with unions enjoy pensions for retirement, 
but many Americans do not. For them, Social Security is the 
difference between decency and despair. Two-thirds of all old 
Americans rely on Social Security for half or more of their 
income. Thirty percent of the elderly get virtually all of 
their income, which accounts for 90 percent or more, from 
Social Security.
    Social Security is America's most successful poverty 
program. Without it, more than half of all those over 65 would 
live in poverty.
    Social Security is America's most vital workers' benefit. 
With it, working people can enjoy retirement without terror. 
This guarantee grows more important as pensions grow more rare. 
It grows more important as the stagnating wages witnessed over 
the last 2 decades make it harder and harder for families to 
    Social Security is America's most vigorous family program. 
With it, families are protected not just in retirement, but in 
tragedy, sudden death, disability or disaster. Its benefits go 
to workers, to spouses, to children.
    The contrasts with all the recommendations for private 
accounts are stark and clear. Social Security provides family 
based benefits for spouses and children, literally widows and 
orphans. Private accounts offer no such guarantee. Social 
Security provides support for the families of those who are 
disabled through no fault of their own. Private accounts offer 
no such guarantee.
    Those who stand for family values should join us in the 
fight to save Social Security. There is no more important 
program for families, for traditional families in which one 
parent stays home with the children, for families in which both 
parents work, for families struck by sudden tragedy. Every 
program to privatize or partially privatize Social Security, by 
definition, turns the program away from supporting families and 
toward individual risk.
    Having challenged Conservatives to join us, I was gratified 
to see that Gary Bauer, former head of the Family Research 
Council and now potential Republican presidential aspirant, has 
issued a ringing defense of Social Security and critique of the 
``perils of privatization.'' As he states, The very structure 
of Social Security upholds intact marriage, a father's 
responsibilities and a mother's sacrifice. As a Conservative, 
he warns against those who appear to ``treasure change more 
than stability by gambling away the solid past on an economic 
future based on abstract economic theories.'' This is not about 
left or right, but the moral center, about right and wrong, 
safe and high risk.
    Social Security is particularly important to people of 
color and women. Three of four older African-American and 
Latino households rely on Social Security for half or more of 
their retirement income. People of color are less likely to 
have savings income or receive a pension, and they are more 
likely to need Social Security's survivors and disability 
benefits. Every major proposal to privatize Social Security 
would also make deep cuts in guaranteed benefits, raise the 
retirement age, and slash disability benefits; all of these 
would be hardest on those who rely most on Social Security, 
especially people of color.
    Similarly, Social Security provides women--particularly the 
divorced, widows or those never married--with the bulk of their 
retirement income. Women are also less likely to have decent 
pensions or adequate savings. And they benefit from Social 
Security's progressive payout for low-income workers, its 
family protections against disability or death. Since women 
tend to live longer, they benefit even more from Social 
Security's guarantee of a benefit, protected against inflation 
that lasts until you die.
    What does save mean? As political leaders, you know how 
popular Social Security is. That is, virtually every candidate 
for Congress in the last election pledged to save Social 
Security. In Washington, of course, common words sometimes have 
uncommon meanings. What do we mean by save?
    Last month I joined with leaders from all corners of our 
society--women's and civil rights groups, churches, unions, 
small businesses, young people--in the New Century Alliance for 
Social Security. The alliance came together over a set of 
principles about what save means. I append them to my testimony 
and recommend them to you as a guide for your work.
    [The following was subsequently received:]

A Statement of Principles for a New Century Alliance for Social 

    Social Security is vital to millions of Americans. For over 
sixty years Social Security's retirement, disability and 
survivors benefits have kept generations of people out of 
poverty and provided a secure base for middle class retirement. 
Most Americans will depend upon its portable, progressive and 
guaranteed retirement benefits and its social insurance 
protections to provide at least half of their income. We must 
all work to ensure that Americans of all ages will continue to 
be protected by Social Security from serious loss of income 
because of old age, disability or the death of a family's wage 
    Congress and the President should work to strengthen the 
finances of Social Security for future generations. 
``Privatization'' proposals to shift a portion of Social 
Security taxes to private investment accounts would inevitably 
require large cuts in Social Security's defined benefits and 
make retirement income overly dependent on the risks of the 
stock and bond markets.
    We join together to insist that Social Security's central 
role in family income protection must not be compromised, and 
we endorse the following principles for Social Security reform:
     Social Security's benefit structure should remain 
universal and portable, guaranteeing monthly benefits that 
provide a decent income and are adjusted to keep up with 
inflation for as long as you live.
     Social Security must continue to provide risk-free 
disability insurance protection for workers and their 
dependents. It must also continue to provide survivors 
insurance for spouses and children of deceased workers, as well 
as continuing to provide benefits for those adults with severe 
disabilities who are dependents or survivors of their parents. 
These crucial insurance functions must continue without harmful 
benefit reductions.
     Beneficiaries who earned higher wages during their 
worklife should continue to receive benefits related to their 
earnings history, and Social Security should continue to 
replace a larger share of low-income workers' past earnings as 
a protection against poverty.
     We must take care that the impact of changes in 
the Social Security system not fall disproportionately on lower 
income groups, or on those whose worklife has been physically 
demanding. Any changes should not make the financing of Social 
Security any less progressive.
     Many privatization proposals finance the cost of 
private accounts partly by increasing the retirement age. 
Raising the age at which people can collect benefits is the 
equivalent of a benefit cut, with especially onerous impacts on 
those in physically challenging jobs or on groups with lower 
life expectancy.
     Basic benefit protections for women -who have 
lower lifetime earnings and more workforce absences because of 
care giving for children, parents or spouses -should be 
preserved and strengthened.
     While Social Security should continue as the 
foundation of our social insurance and retirement system, we 
also need new policies to encourage employers to provide good 
pensions and to spur private savings. But this should be done 
in addition to, rather than at the expense of, the existing 
Social Security benefit structure.
     Private accounts should not be substituted for 
Social Security's current defined benefits. Diversion of Social 
Security tax revenues to pay for private investment accounts 
makes the projected long term Social Security financing 
problems more severe, forcing deep benefit cuts, such as large 
increases in the retirement age, and weakens the system's 
ability to follow the principles above. Social Security 
benefits should not be subject to market fluctuations.
     We should save Social Security first, instead of 
using budget surpluses to pay for tax cuts.


New Century Alliance for Social Security

Hans Riemer
2030 Center

Norman Hill
A. Philip Randolph Institute

John Rother
Director of Legislation and Public Policy

Steve Kest
Executive Director

John J. Sweeney

Norman Lear
Act III Communications

Mike Farrell
Actor, Producer

Edith Fierst
Advisory Council on Social Security, 1994-96

Janice Weinman
Executive Director
American Association of University Women

Bobby L. Harnage, Sr.
National President
American Federation of Government Employees

Gerald W. McEntee
American Federation of State County and Municipal Employees

Sandra Feldman
American Federation of Teachers

Richard Foltin
Legislative Director and Counsel
American Jewish Committee

Joni Fritz
Executive Director
American Network of Community Options and Resources

Moe Biller
American Postal Workers Union

Robert Kuttner
American Prospect

Amy Isaacs
National Director
Americans for Democratic Action

Harriet Barlow
Blue Mountain Center

Alicia Munnell
former member, Clinton Council of Economic Advisers
Boston College

John B. Williamson
Professor of Sociology
Boston College

Robert Reich
former Secretary of Labor
Brandeis University

James H. Schulz
Prof. of Economics & Kirstein Prof. of Aging Policy
Brandeis University

John G. Guffey
Calvert Social Investment Foundation

Roger Hickey
Campaign/Institute for America's Future

Sharon Daly
Vice President for Social Policy
Catholic Charities USA

Msgr. George Higgins
Catholic University of America

Alan W. Houseman
Executive Director
Center for Law & Social Policy

Linda Tarr-Whelan
Center for Policy Alternatives

Leslie R. Wolfe
Center for Women's Policy Studies

Rev. James E. Hug, SJ
Executive Director
Center of Concern

Robert Greenstein
Executive Director
Center on Budget and Policy Priorities

Wendell Primus
former Deputy Assistant Secretary for Human Services Policy
Center on Budget and Policy Priorities

David Liederman
Executive Director
Child Welfare League of America

Marian Wright Edelman
Children's Defense Fund

Kay Hollestelle
Executive Director
Children's Foundation

Ann K. Delorey
Legislative Director
Church Women United

Richard Kirsch
Executive Director
Citizen Action of New York

Alisa Gravitz
Executive Director
Co-op America

Gloria Johnson
National President
Coalition of Labor Union Women

Stuart Campbell
Executive Director
Coalition on Human Needs

Charles Knight
Commonwealth Institute

Morton Bahr
Communication Workers of America

Jerome Grossman
Council for a Livable World

David Langer
David Langer Co. Actuaries

Kelly Young
Executive Director
Democrats 2000

Amy L. Domini
Managing Principal
Domini Social Investments

Thomas J. Downey
former Member of Congress (NY)
Downey Chandler, Inc.

Jeff Faux
Economic Policy Institute

Ken Cook
Environmental Working Group

Michael McCloskey

Ron Pollack
Executive Director
Families USA Foundation

Eleanor Smeal
Feminist Majority

Tom Schlesinger
Executive Director
Financial Markets Center

Sumner Rosen
Five Boroughs Institute

Msgr. Charles Fahey
Third Age Center
Fordham University

Ruth Messinger
Former Manhattan Borough President

Berkley Bedell
Former Member of Congress (IA)

Ned Stowe
Legislative Secretary
Friends Committee On National Legislation

Brent Blackwelder
Friends of the Earth

Roger Wilkins
George Mason University

Amitai Etzioni
Communitarian Network
George Washington University

Peter Edelman
Georgetown Law Center

Tim Fuller
Executive Director
Gray Panthers

Rabbi Michael Feinberg
Executive Director
Greater NY Labor-Religion Coalition

Elaine Bernard
Director, Trade Union Program
Harvard University

James Medoff
Professor of Economics
Harvard University

Michael Sandel
Professor of Government
Harvard University

Juliet Schor
Senior Lecturer
Harvard University

Theda Skocpol
Professor of Government and Sociology
Harvard University

William Julius Wilson
Harvard University

Jack O'Connell
Executive Director
Health & Welfare Council of Long Island

Arcadio Vazquez
Hispanic Senior Action Council

Mimi Abramovitz
Professor of Social Policy
Hunter School of Social Work

Heidi Hartmann
Institute for Women's Policy Research

Suleika Cabrera Drinane
Executive Director
Institute for the Puerto Rican/Hispanic Elderly, Inc.

Clavin Fields
Institute of Gerontology, UDC

Timothy Smith
Executive Director
Interfaith Center on Corporate Responsibility

Thomas Buffenbarger
International President
International Association of Machinists

Stephen Viederman
Jessie Smith Noyes Foundation

Bert Seidman
Vice-President & Washington Rep.
Jewish Labor Committee

Fred Azcarate
Jobs with Justice

Rev. Peter Laarman
Senior Minister
Judson Memorial Church

Justin Dart
Justice for All

Peter D. Kinder
Kinder, Lydenberg, Domini & Co.

Brent Wilkes
National Executive Director
League of United Latin American Citizens

John Mueller
Lehrman Bell Mueller Cannon

Rev. Robert L. Pierce
Former Executive Director
Long Island Council of Churches

Rev. Russell Siler
Lutheran Office for Governmental Affairs, ELCA

Elisa Maria Sanchez
MANA, A National Latina Organization

Peter Diamond
Professor of Economics

Richard Medley
Medley Global Advisors, L.L.C.

Jackie Kendall
Executive Director
Midwest Academy

Heather Booth
Midwest Academy, Founder

Julian Bond
Board Chair

Kweisi Mfume
President & CEO

Kathy Thornton RSM
National Coordinator
NETWORK: National Catholic Social Justice Lobby

Robert Ball
Founding Chair
National Academy of Social Insurance

Robert G. Gaw
National Association for Social Responsible Organizations

Jean Daniel
Policy Director
National Association of Area Agencies on Aging

Toby Weismiller
Director of Professional Development and Advocacy
National Association of Social Workers

Samuel Simmons
National Caucus and Center on Black Aged

Susan Bianchi-Sand
Executive Director
National Committee on Pay Equity
National Council of Women's Organizations

Max Richtman
Executive Vice President
National Committee to Preserve Social Security and Medicare

Rev. Dr. Joan Brown Campbell
General Secretary
National Council of Churches of Christ, USA

Raul Yzaguirre
National Council of La Raza

Dr. Jane Smith
President & CEO
National Council of Negro Women

Steve Protulis
Executive Director
National Council of Senior Citizens

Michael Beattie
Founder and Executive Director
National Council of Students with Disabilities

Daniel Fisher
Executive Director
National Empowerment Center

Gertrude S. Goldberg
National Jobs for All Coalition

Curtis W. Ramsey-Lucas
Director of Legislative Advocacy
National Ministries, American Baptist Churches USA

Loretta Putnam
Program Specialist
National Multiple Sclerosis Society

Patricia Ireland
National Organization for Women

Bente E. Cooney
Director of Public Policy
National Osteoporosis Foundation

Patricia M. Smith
National Parent Network on Disabilities

Donna Lenhoff
General Counsel
National Partnership for Women and Families

Dr. C. Delores Tucker
National Chair and Founder
National Political Congress of Black Women

Burton D. Fretz
Executive Director
National Senior Citizens Law Center

Hugh Price
National Urban League

Nancy Duff Campbell
National Women's Law Center

Steve Gorin
New Hampshire Citizen Alliance

Anthony Wright
Program Director
New Jersey Citizen Action

Sen. Fred R. Harris
State Chair
New Mexico Democratic Party

Stanley Sheinbaum
New Perspectives Quarterly

Barney Olmsted and Suzanne Smith
New Ways to Work

Eleanor Litwak
New York State Council of Senior Citizens

Edward Wolff
Professor of Economics
New York University

Marc Caplan
Northeast Action

Rev. Robert J. Wilde
President of Board
Northside Common Ministries

Robert Wages
Oil, Chemical and Atomic Workers

Deborah Briceland-Betts
Executive Director
Older Women's League

Charles Sheketoff
Executive Director
Oregon Center for Public Policy

Karen Ferguson
Executive Director
Pension Rights Center

Mike Lux
Senior Vice-President for Political Action
People for the American Way

Dean Baker

Mark Weisbrot
Research Director
Preamble Center

Herb Gunther
Executive Director
Public Media Center

Jesse L. Jackson
Rainbow/PUSH Coalition

Mark J. Pelavin
Associate Director
Religious Action Center of Reform Judaism

Sheara Cohen
Rural Organizing Project

Philip Harvey
Associate Professor
Rutgers School of Law

Andrew Stern
Service Employees International Union

Robert Myers
Retired Chief Actuary
Social Security Administration

Martin Carnoy
Professor of Educ. & Economics
Stanford University

Dr. Joel Blau
School of Social Welfare
State University of New York

Eric Kingson
Syracuse University

Paul Marchand
Director of Government Affairs
The Arc
Consortium for Citizens with Disabilities

Richard Leone
The Century Foundation

Vivien Labaton
Third Wave Foundation

Tom McCormack
Title II Community-AIDS National Network

Joseph White
School of Health and Tropical Medicine
Tulane University

Jay Mazur

Stephen P. Yokich
United Auto Workers

Pat Conover
Office for Church in Society
United Church of Christ

Douglas H. Dority
United Food and Commercial Workers

Jane Hull Harvey
General Board of Church and Society
United Methodist Church

Bishop Felton Edwin May
Washington Episcopal Office
United Methodist Church

Anthony Samu
United States Student Association

George Becker
United Steelworkers of America

Chuck Collins
United for a Fair Economy

Robert Pollin
Prof. of Economics
University of Mass-Amherst

Eugene Feingold
Professor Emeritus
University of Michigan

Martha Byam
University of New Hampshire

Teresa Ghilarducci
Economics Department
University of Notre Dame

Arlene Stein
Sociology Department
University of Oregon

James K. Galbraith
Professor of Economics
University of Texas

Ray Marshall
former Secretary of Labor
University of Texas

Nelson Lichtenstein
Professor of History
University of Virginia

Donald E. Wightman
Utility Workers Union of America

Susan Shaer
Executive Director
WAND--Women's Action for New Direction

Merton C. Bernstein
Coles Professor of Law, Emeritus
Washington Univ. in St. Louis

Doug Fraser
Former President, UAW
Wayne State University

Larry Marx
Executive Director
Wisconsin Citizen Action

Rep. Nan Grogan Orrock (GA)
Women Legislators' Lobby

Anna Rhee
Executive Secretary for Public Policy
Women's Division, United Methodist Church

Peter Barnes
Working Assets

Deborah Kaplan
Executive Director
World Institute on Disability

Michael Panetta
Executive Director
X-PAC: The Political Action Committee for Generation X

Theodore R. Marmor
Professor of Public Policy and Political Science
Yale School of Management


    Reverend Jackson. The principles are clear. Social Security 
should remain a program of shared security, not one of 
individual risk. Its benefits should remain universal and 
portable with the guarantee of a decent income, protected 
against inflation for as long as you live. It must continue to 
provide disability insurance protection to workers and 
survivors insurance for widows and orphans. Its financing and 
its payout should not put more burdens upon those who earn 
less. We reject raising the retirement age.
    We recommend saving Social Security first, rather than 
using budget surpluses for tax cuts. Saving Social Security 
would prohibit substituting private risk accounts for Social 
Security's defined benefits.
    In this day of polling and positioning, there are those who 
believe that you can fool most people most of the time. But 
those of us who joined the Alliance for Social Security want to 
put all on notice. Americans have a very clear idea of what 
Social Security is and what it means to save it. We 
respectfully suggest those who trample the idea may find 
themselves more personally involved with Social Security than 
ever due to their early retirement.
    Last, the President's proposals. The President's proposals 
provide a sound basis for reform. As he said, the best way to 
keep Social Security solid is not to make drastic cuts in 
benefits, not to raise payroll taxes, and not to drain 
resources from Social Security in the name of saving it. He 
would save Social Security first, using the bulk of hoped-for 
budget surpluses to bolster the current Social Security system. 
He would keep the system of shared security intact, not 
tampering with the retirement age or its benefits structure. If 
any money is left after Social Security and Medicare are saved, 
he would create separate private accounts, offering middle- and 
low-income workers a matching incentive for the money they 
    While the details of the USA accounts remain to be seen, as 
long as they remain an additional program to spur saving, not a 
rakeoff of Social Security, they do no violence.
    Last, the President will also invest some of the Social 
Security Trust Fund into stocks in a manner protected from 
political influence. I personally question much of the 
exaggerated expectations of increased return from investing 
stocks over time. I agree with Secretary Rubin and Federal 
Chair Greenspan that whatever returns may end up awash with the 
declining demand for bonds, but government investment of a 
small portion of the trust fund, essentially what every State 
does now, is not that much of a risk.
    A final word on the coming debate, one thing you should 
know: America will participate in the debate over Social 
Security, the groups associated with the New Century Alliance 
are already scheduling townhall meetings across the country. 
AFL-CIO President John Sweeney has promised to launch the 
largest mobilization our churches and our Nation has ever seen.
    The things you can do to help: First, make certain that all 
voices are heard, for example, the one-third of Social Security 
is for people with disabilities. This Committee should ensure 
that the GAO or Congressional Research Service examines 
publicly how each reform proposal will impact upon those with 
disabilities. Their representatives should be given star 
billing. The same is true for widows or for the 4 million 
children who usually are not counted.
    Second, since the impact on workers and retirees is the 
most important measure of reform, I recommend that a 
beneficiary impact statement be prepared for every reform 
proposal by the Social Security Administration. The document 
should examine the hypothetical benefits and costs to workers, 
children, and survivors. People should have an opportunity to 
review it; the stakes are far too high for a back-room, last-
minute deal.
    You have a historic covenant to fulfill. The promises of 
Social Security should not be abandoned. The promise to Social 
Security should not be violated. Its future must be secured not 
by radical experimentation or dismantling, but by sensible 
steps and sound judgment.
    I look forward to working with you in this effort, Mr. 
Chairman. Thank you very much.
    Chairman Archer. Thank you, Reverend Jackson.
    We are today beginning the process of listening to diverse 
    Reverend Jackson. Thank you.
    [The prepared statement follows:]

Statement of Rev. Jesse L. Jackson, Sr., Founder and President, 
Rainbow/PUSH Coalition

    Chairman Archer, minority leader Rangel, distinguished 
representatives, colleagues.
    Let me express my appreciation for the opportunity to speak 
with you today about the fundamental issue of Social Security.
    I am here not as an actuary or an accountant, but as an 
American concerned about defending Social Security which is so 
vital to working and poor American families. I do not provide a 
partisan policy prescription from the left or the right, but 
offer the common concerns of the moral center. Let me speak 
briefly about three major topics--the importance of Social 
Security, what it means to Save Social Security, and a 
perspective on the president's reform proposals outlined last 

                   I. The Promise of Social Security

    Social Security is vital to American families. Legislators, 
the affluent, those with unions enjoy pensions for retirement, 
but many Americans do not. For them, Social Security is the 
difference between decency and despair. Two-thirds of all older 
Americans rely on Social Security for half or more of their 
income. Some 30% get virtually all of their income--90% or 
more--from Social Security.
    Social Security is America's most successful poverty 
program. Without it, more than half of all those over 65 would 
live in poverty. Instead, our parents are now more protected 
against destitution than our children are.
    Social Security is America's most vital workers' benefit. 
With it, working people can enjoy retirement without terror. 
This guarantee grows more important as pensions grow more rare. 
It grows more important as the stagnating wages witnessed over 
the last two decades make it harder and harder for families to 
    Social Security is America's most vigorous family program. 
With it, families are protected not just in retirement, but in 
tragedy--sudden death, disability or disaster. Its benefits go 
to workers, to spouses, to children.
    The contrast with all recommendations for private accounts 
are stark and clear. Social Security provides family based 
benefits for spouses and children, literally widows and 
orphans. Private accounts offer no such guarantee. It provides 
support for the families of those who are disabled through no 
fault of their own. Private accounts offer no such guarantee.
    Those who stand for family values should join us in the 
fight to save Social Security. There is no more important 
program for families--for traditional families in which one 
parent stays home with the children, for families in which both 
parents work, for families struck by sudden tragedy. Every 
program to privatize or partially privatize Social Security by 
definition turns the program away from supporting families and 
towards individual risk.
    Having challenged conservatives to join us, I was gratified 
to see that Gary Bauer, former head of the Family Research 
Council and now potential Republican presidential aspirant, has 
issued a ringing defense of Social Security and critique of the 
``perils of privatization.'' As he states, ``the very structure 
of Social Security upholds intact marriage, a father's 
responsibilities and a mother's sacrifice.'' As a conservative, 
he warns against those who appear to ``treasure change more 
than stability by gambling away the solid past on an economic 
future based on abstract economic theories.'' This is not about 
left or right, but about the moral center.
    Social Security is particularly important to people of 
color and women. Three of four older African American and 
Latino households rely on Social Security for half or more of 
their retirement income. People of color are less likely to 
have savings income or receive a pension, and they are more 
likely to need Social Security's survivor and disability 
benefits. Every major proposals to privatize Social Security 
would also make deep cuts in guaranteed benefits, raise the 
retirement age and slash disability benefits--all of these 
would be hardest on those who rely most on Social Security, 
especially people of color.
    Similarly Social Security provides women--particularly the 
divorced, widowed or never married--with the bulk of their 
retirement income. Women are also less likely to have decent 
pensions or adequate savings. And they benefit from Social 
Security'' progressive pay out for lower income workers, its 
family protections against disability or death. Since women 
tend to live longer, they benefit even more from Social 
Security's guarantee of a benefit, protected against inflation 
that lasts until you die.

                      II. What does ``Save'' Mean?

    As political leaders, you know how popular Social Security 
is. That is virtually every candidate for congress in the last 
election pledged to ``save Social Security.'' In Washington, of 
course, common words sometimes have can have uncommon meanings 
so the question is what does ``save'' mean?
    Last month, I joined with leaders from all corners of our 
society--from women's and civil rights groups, churches, 
unions, small businesses, young people--in the National 
Alliance to Save Social Security. The Alliance came together 
over a set of principles about what ``save'' means. I append 
them to my testimony, and recommend them to you as a guide to 
your work.
    The principles are clear. Social Security should remain a 
program of shared security, not one of individual risk. Its 
benefits should remain universal and portable, with a guarantee 
of a decent income, protected against inflation for as long as 
you live. It must continue to provide disability insurance 
protection to workers, and survivors insurance for widows and 
orphans. Its financing and its pay out should not put more 
burdens upon those who earn less.
    We reject raising the retirement age. We recommend saving 
Social Security first, rather than using budget surpluses for 
tax cuts. Saving Social Security would prohibit substituting 
private risk accounts for Social Security's defined benefits.
    In this day of polling and positioning, there are those who 
believe that you can fool most people most of the time. But 
those of us who joined the National Alliance to Save Social 
Security want to put all on notice.
    Americans have a very clear idea of what Social Security 
is. And of what it means to save it. We respectfully suggest 
that those who trample that idea may find themselves more 
personally involved with Social Security than ever, due to 
their early retirement.

                     III. The President's proposals

    The President's proposals provide a sound basis for reform. 
He would save Social Security first, using the bulk of hoped 
for budget surpluses to bolster the current Social Security 
system. He would keep the system of shared security intact--not 
tampering with the retirement age, or its benefits structure. 
If any money is left after Social Security and Medicare are 
saved, he would create separate private, offering middle and 
low income workers a matching incentive for the money they 
saved. While the details of the USA accounts remain to be seen, 
as long as they remain an additional program to spur saving, 
not a rake off of Social Security, they do no violence to the 
    The president would also invest some of the Social Security 
trust fund into stocks in a manner protected from political 
influence. I personally question the much exaggerated 
expectations of increased return from investing in stocks over 
time. I agree with Treasury Secretary Bob Rubin and Fed Chair 
Alan Greenspan that whatever returns may end up a wash with the 
declining demand for bonds. But government investment of a 
small portion of the trust fund--essentially what every state 
now does with public pension funds--retains the structure of 
shared security. It does not turn the program into one of 
individual risk.
    So I am happy to lend my support to the thrust of the 
president's plan, while waiting to see the details.
    In all of this, a central concern must be economic growth 
and increasing wages. Sustaining a full employment economy is 
the largest, best, most sensible basis upon which to save 
Social Security. Already recent growth in jobs, wages and the 
economy has made a dramatic difference in bolstering Social 
Security's strength.

                 IV. A Final Word on The Coming Debate

    One thing you should know. Americans will participate in 
the debate over Social Security. The groups associated with the 
National Alliance are already scheduling town meetings across 
the country. AFL-CIO President John Sweeney has promised to 
launch the largest mobilization in AFL-CIO history. Rainbow/
PUSH is working to insure that churches, community groups and 
the media follow this reform effort. What you choose to do will 
receive significant scrutiny.
    There are things you could do to help. First, make certain 
that all voices are heard. For example, one third of Social 
Security is for people with disabilities. This committee should 
insure that the GAO or Congressional Research Service examines 
publicly how each reform proposal will impact people with 
disabilities. Their representatives should be given star 
billing. The same is true for widows or for the four million 
children who usually are not counted.
    Second, since the impact on workers and retirees is the 
most important measure of reform, I strongly recommend that a 
Beneficiary Impact Statement be prepared for every reform 
proposal by the Social Security Administration. The document 
should examine the hypothetical benefits and costs to workers, 
children, and survivors. People should have an opportunity to 
review it. The stakes are far too high for a back room, last 
minute deal.
    You have an historic covenant to fulfill. The promises of 
Social Security should not be abandoned; the promise to Social 
Security should not be violated. Its future must be secured, 
not by radical experimentation or dismantling, but by sensible 
steps and sound judgment. I look forward to working with you in 
this effort.


    Chairman Archer. And we welcome the views of all Americans 
as we work through one of the most important issues that face 
all of us.
    At the outset, I believe I can speak for the Republican 
Majority in saying that we will accept the President's offer 
and commit to reserve 62 percent of the surplus until we have 
saved Social Security and work together within that framework.
    Reverend Jackson. Mr. Chairman, is that Social Security and 
Medicare both, combined?
    Chairman Archer. Sixty-two percent was the President's 
figure for Social Security alone.
    Reverend Jackson. Do you add the additional 13 percent or 
so to Medicare?
    Chairman Archer. We are only dealing today with Social 
Security. We are awaiting the Medicare Commission's 
recommendations, which will be on a bipartisan basis before us 
in a short period of time. But today we are going to focus on 
Social Security, and if we can, I would like to limit the 
discussion today because that is a broad enough topic in 
    Reverend Jackson. Yes, sir.
    Chairman Archer. Also, the Chair believes, and I hope that 
the rest of the Americans agree on both sides that we do not 
intend, while we are talking about Social Security, to 
undertake any changes in disability, but that we will be 
reviewing the Disability Program as a separate item to be 
certain that the people who are disabled are protected, as you 
have said in your statement, Reverend Jackson. So we are in 
agreement that that is a No. 1 priority for us to be sure that 
those on disability--those who are disabled are protected.
    Now, having said that, if I may, let me--Reverend Jackson, 
ask a question or two of you.
    You have supported the President's proposal to invest 
Social Security Trust Fund moneys in the private marketplace.
    Reverend Jackson. A limited amount.
    Chairman Archer. I understand.
    Reverend Jackson. But that is important to state.
    Chairman Archer. I understand. The President's proposal is 
to, I believe, put about $700 billion out of the Social 
Security Trust Fund into the private marketplace. As one of the 
President's counselors, as Congressman Rangel mentioned 
earlier, would you advise President Clinton that any government 
investment decisions be influenced in part or in any way by so-
called corporate responsibilities, or should investment 
decisions be based solely on how to get the highest return?
    Reverend Jackson. Well, we run--always run a high risk. We 
separate morality from our money interests. We made the right 
decision. We took the risk, even of lives to protect our 
integrity from Nazi Germany. It was the right thing to do.
    We did the right thing when we chose to disinvest from 
apartheid South Africa because its values devalue our moral 
authority as its partner. But thanks be to God, Nazi Germany 
and apartheid are behind now. Those two critical glaring issues 
are behind us now, so there is always in the American promise 
some sense of morality and money and security interest coming 
    We could never divorce our money interests from our moral 
interests and our commitment to human rights. Without that, we 
lose our moral authority in the world.
    Chairman Archer. I appreciate your answer. Correct me if I 
am wrong, but my understanding is that you would advise the 
President to consider corporate responsibilities as a factor in 
determining which corporations would receive the government 
    Reverend Jackson. Because that is the law. Corp's that 
receive government support, whether it is through tax break or 
contracts, have an obligation to honor the law, the law of 
inclusion of all Americans; and inclusion leads to growth. It 
is both the law, morally right, and an economic stimulus, so 
why should we ever invest in an arrangement that does not honor 
the standard of law which is inclusion of all Americans? And 
any company that receives our tax benefits or our stimulus that 
does not honor that law, it by definition is in conflict with 
our government's policy.
    Chairman Archer. Would you favor having government 
investment decisions be influenced in part or in any way on a 
company's hiring practices or spending practices?
    Reverend Jackson. Repeat that again. I am sorry.
    Chairman Archer. I said, would you favor having the 
government's investment decisions of the Social Security Trust 
Fund moneys be influenced in part or in any way by the hiring 
practices of the corporation to receive the investment or the 
spending policies of the corporation?
    Reverend Jackson. We should always invest in companies that 
honor the law less we be illegal. And if the company does not 
have an American hiring policy which is inclusive of all 
Americans, that company is illegal. It should not get 
investments--not stimulus, not tax breaks, not contracts--
because it is un-American and it is illegal. So why should we 
be complicitous with an illegal arrangement?
    Chairman Archer. What about areas that are not illegal 
technically under the law?
    Let me give you an example. Would you advise the President 
one way or another as to investing in tobacco companies? 
Tobacco is a legal product. Would you advise the President 
whether or not to invest in tobacco companies?
    Reverend Jackson. I certainly would, but again, that is my 
personal opinion. In the end, that type of situation would be 
influenced by the Secretary of the Treasury, I would suppose, 
and his Council of Economic Advisers. But he is there in this 
tension between a company whose product is illegal, but whose 
unintended consequence is to run up our medical bills and to be 
a stimulus to funeral directors.
    Chairman Archer. So you think that should be a 
consideration as to the investment policies?
    Reverend Jackson. I cannot imagine America ever again, our 
government ever again making the decision in foreign policy 
that includes human rights or domestic--one that excludes 
domestic rights. It is a matter of corporations honoring the 
American standard of law.
    Now, the law is inclusion, by the way, which leads to 
growth. It is both doing well and doing good at the same time.
    Mr. Kemp. Mr. Chairman, could I just make a comment about 
this debate?
    Chairman Archer. Please.
    Mr. Kemp. That is the problem with the President's 
proposal. It is that reason that Chairman Greenspan suggested 
yesterday that this is a dangerous path down which he doesn't 
believe we would want to go or should go.
    I went to the Web site of the U.S. Justice Department 
Antitrust Division yesterday. There are 340 cases on their Web 
site of so-called ``alleged antitrust violation'' from 
companies as wide-ranged as Cisco to Microsoft to Visa Card. 
Are you going to, a priori, rule out the investment in any 
company under attack by the U.S. Government?
    You mentioned tobacco. I mentioned gaming. You could 
mention apartheid, and many in this room supported the 
disinvestment in the apartheid regime. But there are issues of 
great complexity that some people will think are moral, others 
immoral. So I would say, Mr. Chairman, you are exactly right in 
raising these questions, and we should not go down that path. 
It should be personalized.
    That is the beauty of a free choice for the American 
worker. The risk will be taken out of it because we can 
guarantee the benefits of each and every retiree. On average, 
over the last 70 years, the rate of return has been three, 
four, five times higher in basic conservative equities and 
bonds. We can still give young working men and women an 
opportunity to get this rate of return by investing rather than 
putting it into a government system. This system is 
antithetical to what we have learned in Eastern Europe and the 
Third World.
    Reverend Jackson. There is the assumption that all American 
companies aren't willing to comply with the law. And the law of 
inclusion of all Americans, excluding none, that includes all 
of our talents, all of our productive energy, all of our 
capacity to be hired by end consumers, those laws lead to 
economic growth. When there is a growth, everybody is a winner.
    No one wins when we have exclusive practices in 
corporations that limit market, limit money, limit growth, and 
I must say to you that baseball was a great game before Jackie 
Robinson. When they extended the tent, it got better, it grew. 
Basketball was a great game before Bill Russell and Michael 
Jordan. It got better.
    The NBA was--we put lots in basketball. WNBA comes out of 
title IX because you cannot give all the money now to men's 
athletics. You have to give half to women so young girls can 
get scholarships, and then they go to college, and women's 
coaches, women's gymnasium, WNBA, women in commercials. Now you 
have to buy your son and your daughter a basketball.
    That didn't hurt NBA. We see that the value of the law, and 
often companies would rather remain exclusive and limited than 
to grow.
    I think the government has no higher double duty than to 
make laws and to enforce them. When the laws of inclusion are 
enforced, they will always lead to economic growth. So who's 
against growth?
    Chairman Archer. Reverend Jackson, let me ask you about 
companies that are within the law.
    Would you advise the President not to invest or to invest 
in gun manufacturers?
    Reverend Jackson. I would. Again, that is my personal 
choice. That is not the judgment he will ultimately make, of 
course. I think he should not invest in the--in gun 
manufacturers and shouldn't address--shouldn't invest in liquor 
companies and shouldn't invest in tobacco companies, but those 
are my own moral values. Those are my own views, because I see 
the consequences of those corporations.
    But that would be my recommendation. Again, do not 
exaggerate my influence on him when he makes the final judgment 
of that latitude.
    Chairman Archer. I am aware of that.
    Finally, I assume from what you said that if the Federal 
Government is either suing a company, as they are, for example, 
Microsoft, although it has not been proved that the government 
is correct, should the government then deny an investment in 
any company that is being sued by the government?
    Reverend Jackson. I would think that a suit is not a 
conviction. That is a matter of judgment and timing. We should 
not be so flighty that we assume that you choose a newsroom 
over a courtroom and that we suspend due process and 
deliberations. I would think that most of the major companies 
would want government investment or securities or implied 
securities would tend to honor the law. It could very well be a 
stimulus to meet government standards because you stand to gain 
more by being on good terms with our government than not being. 
And so I would see that the--the challenge, the access to more 
capital would be a stimulus for companies as opposed to a 
    Chairman Archer. I thank both of you for your comments, and 
I appreciate the responses; and I yield to Mr.--I recognize Mr. 
Rangel for inquiry.
    Mr. Rangel. Thank you, Mr. Chairman. Let's take advantage 
of what we have agreed on. You said that you can speak for the 
majority of Republicans and say that we will dedicate 
approximately 62 percent of the surplus and repairing and 
shoring up Social Security--and I am not going to hold you to 
the percentages; the President has recommended that--but I 
certainly speak for the Democrats in saying that is one heck of 
a great beginning. Now we find ourselves with some dispute as 
    Chairman Archer. Will the gentleman yield?
    I said we would be pleased to reserve 62 percent of the 
surplus until Social Security has been saved.
    Mr. Rangel. You reserve it, and we want to work with you to 
make certain that that is reserved for Social Security. This 
disagreement as to whether some percentage should be invested 
by the government in securities, we can put that aside. That is 
something in serious dispute; I don't think it is going to be 
resolved. But the American people want the Social Security 
system to be shored up.
    Other governments, State governments, they invest more. If 
you object to Federal Government investments in equities, OK. 
Let's see what we can work out, whether we can work it out.
    You also suggested that this is not the day to deal with 
Medicare. OK. But that implies you want to deal with it. If you 
suggest that that is going to be important, let me then join 
with you and say, let's put tax cuts on the table, too. So 
maybe down the line, without the cameras, we can save Social 
Security, Medicare, tax cuts; and let's get there somehow.
    Reverend Jackson, you testified under a terrible 
disadvantage because this--since we lost the Majority--as 
relates to the Tax Code, this Committee has gone colorblind. 
The questions of morality and fairness involving minorities 
that historically have been denied opportunities, especially in 
the FCC, cannot be addressed. We cannot make those 
determinations because as soon as I became Ranking, the 
Committee lost its ability to distinguish between colors. But 
we will deal with that.
    Jack Kemp----
    Mr. Kemp. I would like to answer that question for you.
    Mr. Rangel. No, no, no.
    Mr. Kemp. Why not?
    Mr. Rangel. You are not the Chairman. Hey, I have to live 
with the rules out of here. And not only that, the Chairman is 
not only philosophically colorblind, but he has difficulty 
distinguishing colors physically. So I can't challenge any of 
these things.
    Let's move on. I accept it, at least for now.
    Of the 12.4 percent that beneficiaries donate to Social 
    Mr. Thomas. That's outrageous.
    Mr. Rangel. I apologize if I have offended anybody. Who's 
    Mr. Thomas. I just tell the gentleman we have two very 
distinguished individuals in front of us who look at the 
economy slightly differently, and I would really be interested 
in exploring their views although I know your views are 
important in terms of how you believe the Chairman or the 
Majority operates. But that is going to be a 2-year process and 
we won't have these gentlemen for 2 years.
    Mr. Rangel. If you were mumbling something that implied 
that I said something that embarrassed the Chairman, I 
apologize to him. But if you think that you have to lecture me 
on how I inquire of witnesses, then you have to wait to be able 
to do that.
    Mr. Thomas. I agree with the gentleman on the former, and I 
did not intend the latter.
    Mr. Rangel. Let me say this. You would like for the 
individual beneficiary to be able to exercise his or her own 
judgment with regard to direct investment and take advantage of 
the higher yield in the market; is that correct?
    Mr. Kemp. Yes, sir.
    Mr. Rangel. You do recognize that most studies would 
clearly indicate that if you withdraw that money from the pool 
of benefits, that you dramatically reduce--and they say by up 
to one-third--the benefits to the beneficiary. Of course, you 
would say, yes. Look at the greater return they would get if we 
would invest even larger amounts in the private market.
    I have just two questions: One, what guarantees would you 
give the beneficiary that she or he would have the same 
benefits as the investors in IBM and Coca-Cola and Merck, since 
only now are we expecting tremendous returns in the market? 
Sometimes we don't do that well. And second, who gives guidance 
to the individual beneficiary in terms of which stocks he or 
she should invest in?
    Mr. Kemp. I think I understand the question, Mr. Rangel. 
Unfortunately, given the brevity of our appearance, I wasn't 
able to go through the whole testimony. But I did suggest that 
before we even talk about personalized retirement accounts or 
distributing the trust fund assets to individuals, I suggested 
that Congress take the immediate action to guarantee every 
penny of Social Security benefits promised to every current 
retiree and to every person currently receiving disability 
under Social Security. The legislation, I think, would pass 
    The easiest way to do this is to make the Social Security 
promise into a legally binding Social Security contract with 
the American people, to replace that promise with a tax-free 
inflation-adjusted annuity, backed by the full faith and credit 
of the U.S. Government, just like the government does when it 
sells bonds to private investors. That would be first.
    Mr. Rangel. Who manages this for the individual?
    Mr. Kemp. That is a guarantee. That is just like a 
government bond. But you asked me about taking the risk out of 
the current retirees. That would take the risk out.
    Mr. Rangel. I didn't say current. I am talking about future 
    Mr. Kemp. Well, you cannot, and this is a point I tried to 
make, albeit briefly, you cannot save Social Security or 
Medicare; you just can't, without a growing, expanding economy.
    So the first order of business is to think, at large, how 
do we reform our Tax Code? How do we bring down the high rates 
of taxation that are preventing the economy from growing fast 
enough to give us the revenue in the next century that we are 
getting currently? We are looking at a surplus of $1 trillion. 
Without a growing economy, there would be no surplus.
    Mr. Rangel. God bless the ever-growing economy. I am 
talking about the beneficiary's return on that private 
investment. That is not guaranteed. The market can't guarantee 
a yield.
    Mr. Kemp. Charlie, if the risk of investing over 20, 30, 
40, 50 years, is better in government bonds, as opposed to what 
municipalities are doing, such as in the California State 
Teachers Union; 80 percent of which is invested in equities and 
bonds. I am sure we could design a system that would give the 
working men and women of America a distinctly higher rate of 
return on their payroll taxes and the revenues from these 
hardworking taxes.
    Mr. Rangel. OK, you work on that so that I can yield to 
what you are talking about, because if California hasn't 
decided to do it that way, and the States haven't decided, we 
will take a look at that.
    Mr. Kemp. Well, every municipality and every pension plan 
is invested in equity and bonds. Why can't we do it at the 
Federal level?
    Mr. Rangel. We will do it. Who gives guidance to the 
beneficiaries in terms of how to undertake these investments?
    Mr. Kemp. The same way you do it at the municipal level and 
the State level.
    Mr. Rangel. We don't do it.
    Mr. Kemp. I don't have to be the architect of the new 
system, I just have to give you a vision of how much better we 
could do. I noticed Mr. Greenspan said yesterday that there was 
a poll suggesting that young people have lost faith in Social 
Security. This is not just because of what the Chairman has 
stated, but primarily because they see a higher rate of return 
from investing and personalizing Social Security than by 
leaving it in government T-bills.
    Mr. Rangel. Let me thank both of you. I think you have done 
what the President has done, and that is to give us a 
framework. Now we have the responsibility to come together as 
Republicans and Democrats to come up with something that saves 
the Social Security system.
    Chairman Archer. The gentleman's time has expired. Under 
the unanimous consent agreement, the Chair recognizes Mr. 
    Mr. Watkins. Thank you, Mr. Chairman, and to members of the 
panel, I welcome you and we are honored you are here.
    Mr. Chairman, it is a great honor to be a junior Member on 
this side of the aisle. I believe in the power of ideas, I 
really do. I think that the ingenuity, the innovation, the free 
enterprise, releasing people's abilities has been the American 
way and we have to continue to leave that freedom there.
    I also believe strongly in the power of compound interest. 
Like a lot of parents, I know my son sometimes gets in the rut 
of spending, spending, spending. Maybe sometimes the government 
is that way, too. I kept looking for ways to get my son 
motivated about saving, saving, saving. I would leave little 
articles out around his room. I left one on the power of 
compounding interest that totally turned his attitude around 
about trying to make sure he puts some back into savings. There 
is no question today he realizes that he will have retirement 
because of his savings.
    Last week, the Chairman and some of us were in Chile. In 
reviewing the Chilean program I was very impressed with what I 
call the personalized security account--I think maybe you could 
call it a personal savings account. A personalized security 
account where over 90-some odd percent of the people that are 
in it; they have a choice, they can stay in the system they are 
in if they are in it already, or they have a chance to move in 
that direction of where they can start investing in a 
personalized way, not a government, but in a personalized way. 
After having been a person who has gone through a couple of 
IPOs, I realize the shareholders become the owners. You have to 
consider shareholders all the time.
    The question I wanted to ask is this: Have you studied the 
program that has been in effect in Chile? And give me your 
thoughts on that. I was impressed with what they are doing.
    Mr. Kemp. Well, may I say to my friend from Oklahoma, I 
have looked fairly carefully at the Chilean personalized 
savings accounts, or personalized retirement accounts. 
According to Jose Pinera of the Cato Institute, every working 
man and woman carries around in his or her pocket a little 
personal card with the rate of return that they are getting on 
investments in the Chilean stock market.
    There is a risk, as there always is under any system. If we 
don't devote our attention to making this economy as expansive 
and prosperous in the next century as we have tried to do, in 
my opinion, since Ronald Reagan became President, and now with 
this President who has had a very good run, it seems to me we 
are going to miss the greatest opportunity to create the 
conditions where this discussion can go forward.
    But with the Chilean experiment, they are doing it in Great 
Britain, they are doing it in the Scandinavian countries, they 
are doing it in several Third World countries. It seems to me 
the greatest democracy in the world can figure out a way to 
create a stakeholder society where all people, of color or not 
of color, have a stake in the American dream and a shot to that 
ladder of opportunity that we all want to make more equal.
    I just want to say to my friend Charlie Rangel, there is no 
one in this Congress who has spent more time thinking about how 
to get capital into urban and rural America more than me. I 
think if you look at the experiment that Mr. Lincoln started 
and was prevented from doing, he wanted to create ownership 
opportunities, giving every man, every woman, every family, a 
chance to own a piece of land, from Oklahoma to Illinois under 
the Homestead Act.
    We should be thinking of that in urban and rural America, 
whether it is Appalachia, as Jesse and I talked about last 
Friday, or urban Harlem. So, in my opinion, we can look at 
Chile, we can look at some of these other experiments, and I 
believe we can do it better.
    Reverend Jackson. Mr. Congressman, I suppose on this matter 
that I am more conservative than Jack Kemp. He wants to deal 
with the risk for the people at risk; I want to guarantee 
security for those at risk, and protect Social Security first. 
If it ain't broke, don't fix it; expand it. That is why save 
Social Security first is a priority in my mind.
    The second concern I have, you are always fighting to save 
the poor, but I am concerned about how to keep poor people from 
remaining permanently poor. There is a way to break that cycle 
too. But often you hear the word ``minority'' and you 
immediately think of racial minority. The minority are those 
that have high concentrations of wealth. That is the minority. 
For the wealthy minority, there is no roof.
    For the middle class, there is a sinking downsizing, 
outsourcing, anxious feeling. For the poor, there is no floor, 
except Social Security. So there is the tension, and it is 
vertical more than it is horizontal and class more than it is 
    Therefore, the recommendation we made which the President 
addressed the other night was the idea of looking at the 
underserved markets in America, with underutilized talent and 
untapped capital. There is no Third World market, no Eastern 
European market, no Asian market, with as much money as, as 
close as, as secure as, with as much potential as underserved 
American markets.
    So, why can't we see building a bridge from Wall Street to 
Appalachia; not just Wall Street to Washington; Wall Street to 
Appalachia, Wall Street to rural Oklahoma, Wall Street to rural 
Texas, as we stimulate more growth by including more Americans?
    Just last, here is an idea about OPIC, the Overseas Private 
Investment Corporation. Please hear this. I think the more we 
grow, the more options all of us have. Some years ago when Mr. 
Rostenkowski sat where Chairman Archer sits now, he went to 
Poland and came back, Congressman Archer. He tried to call back 
to Washington about 7 hours. He couldn't get through because 
the infrastructure was down, the lines were fractured and 
broken, the ports were broken. He put together something for 
Poland, $240 million, 40-year loans, three-quarters of 1 
percent, first payment due in 10 years; for Hungary, $40 
    We used incentives for investment, a combination of tax 
cuts, long-term low-interest loans, OPIC, Export-Import Bank 
and development bank. It was good for Poland because they could 
begin to develop goods for us and we could expand to a 
developing market. Everybody was a winner.
    We have for Indonesia and Southeast Asia such incentives on 
the front side, and IMF, the International Monetary Fund, as a 
hedge against risk on the back side. We don't have that for 
Appalachia, we don't have it for Oklahoma, we don't have it for 
the Ozarks.
    So part of my question about growth is how to deal with 
those areas of America where there is brokenness and 
infrastructural crisis, to provide incentives, whether they are 
a tax break, investment, or different terms. Let us include all 
of America in the big tent of America's growth and prosperity, 
that which we would not only save Social Security for the 
seniors, we would in fact give them more practical options.
    Chairman Archer. The gentleman's time has expired. I am not 
sure that the Chair asked unanimous consent that the full 
written statements of both witnesses be included in the record, 
but I do so now, without objection.
    The Chair would encourage the witnesses, if possible, to 
try to limit their responses to how we solve Social Security, 
because we have a lot of Members here. We are not going to be 
able to get around to letting all of them inquire unless we do 
try to limit it to the Social Security issue.
    Mr. Hayworth.
    Mr. Hayworth. Mr. Chairman, I thank you for the time. Mr. 
Secretary Kemp, Reverend Jackson, thank you very much, it is a 
privilege to have dueling quarterbacks here. For purposes of 
full disclosure, and as the attorneys might say, there is a 
preponderance of physical evidence to indicate that at one time 
I was an offensive lineman, although in my college days it 
should also be noted I was recruited as right tackle, but ended 
up left out.
    Mr. Chairman, I would also rise to a point of personal 
privilege, because I am just so pleased that joining us in the 
audience today is a young man who attends Desert Mountain High 
School in Scottsdale, Arizona, Michael Lacorey. Given the time 
difference, his classmates are now in first period, so he is 
getting a very different type of field trip today.
    Michael, would you stand, please? I would like everybody to 
welcome you today. Michael, thank you very much for being here. 
He is a student leader and very active in Teenage Republicans. 
He is nice enough to reciprocate a visit, as I was visiting his 
school a couple of weeks ago, and he now joins us here this 
    One of the questions that came up in our minitownhall at 
Desert Mountain High School a few weeks ago had to do with 
Social Security. As has been relayed by Members on both sides 
of the aisle on this panel, the fear not only among baby 
boomers, but those that follow, is that what they pay in will 
not be there.
    Because the individual accounts as proposed by the 
President don't begin until after Social Security is, 
``saved,'' depending on how long this takes, baby boomers and 
even those of Michael's generation would possibly get no 
significant benefit from controlling their own funds. Would you 
agree with that assessment?
    Mr. Kemp. I really agree. The young man that you just 
introduced, or one of my 12 grandchildren, is going to get a 
lower rate of return. Given the demographics of the country, 80 
million people turn 51 in the next 15 years. In the next 15 
years, 79 to 80 million people will be turning into their 
fifties. So the demographics are working against us, at least 
if you look at it statistically.
    Second, the actuaries of Social Security have pointed out 
that the growth of the economy is going to slip from the 3 to 4 
percent range to the 1 to 2 percent range by the time Mr. 
Lacorey is retired. If we don't have an economy that is back to 
the post-World War II average of 3.3 or 3.5 percent, I would 
say to the gentleman from Arizona, either you have to raise 
payroll taxes or raise the age for retirement.
    I don't favor either. That is why as Johnny-one-note here, 
I continue talking about how important growth is to finding 
solutions, both to the issue of civility as well as to the 
issue that we care so much about. In my opinion, just debating 
Social Security without debating the size of the pie is going 
to be a serious mistake, because it is going to put us into a 
zero sum discussion.
    I just want to quote from my statement. The actuaries right 
now are suggesting that the real rate of economic growth for 
the next 65 years, how they know, I don't know, but it is down 
to 1.5 percent. If it is 1.5 percent, that young man who just 
was introduced is going to either face much higher payroll 
taxes to the length of his lifetime, or they are going to raise 
the retirement age, neither of which I would support nor would 
you, J.D.
    Reverend Jackson. Mr. Hayworth, I submit that Jack Kemp, my 
friend, is a super insurance salesman. I am not. I do not keep 
an actuarial chart.
    Mr. Kemp. That is praise from Caesar.
    Reverend Jackson. It is that. But I submit this to you; 
that if we include this young man in America's growth and 
prosperity, by choosing for him incentives for school on the 
front side and not jails on the back side, that is fundamental 
to our growth. We cannot keep growing with 2 million Americans 
in jail, most of them under age 30. That is a big piece of our 
future too.
    Most of our States, Congressman, every city I visit, there 
are at least two new buildings; a new ballpark and a new jail, 
first-class jails and second-class schools. They will impact 
upon our ability to handle Social Security.
    So I guess my real point simply is this: That now that we 
have a surplus, let's prioritize using the portion that 
Chairman Archer seems to agree upon. Let's save Social Security 
first, then deal with these more exotic, more risky ideas.
    Mr. Hayworth. I see the time has expired, Mr. Chairman. 
Accordingly, I would yield my time and thank the Chair and 
thank the gentlemen.
    Mr. Archer. The gentleman has no more time to yield.
    Mrs. Thurman.
    Mrs. Thurman. Thank you, Mr. Chairman. Thank you for both 
of you distinguished gentlemen being here today. We certainly 
can say this has been an exciting game here today.
    Mr. Kemp, in reading the testimony that you didn't get a 
chance to go all the way through, you do make some observations 
and some definitions, one of which has already been talked 
about, but I would like some clarification on it, because you 
talk about guaranteed benefits to current and near-term 
retirees. I am not sure how far that goes out.
    In the second place, which I am not sure that I understand 
this, on point 3 you mention that you could take these 3 
percentage points of their FICA contribution and increase the 
maximum percentage workers can voluntarily invest as quickly as 
possible until all retirement benefits as well as survivors and 
disability benefits can be funded out of personal accounts, if 
the worker so chooses. I don't know what happens if he or she 
does not choose that.
    But third, I think there is an issue here that some of us 
have seen in poll after poll. Not-for-profits, government 
entities, have all suggested that any kind of privatizing 
individual accounts really does hurt women, in particular, 
because of their workplace habits. For one, they probably work 
11 years less, they generally stay at one job for about 4.7 
years, so they never have the opportunity to invest in any kind 
of program at that point; they receive 74 percent on a dollar 
compared to their male counterpart; and they live longer.
    So in your personal accounts, what suggestions or what 
conclusions have you come to that would in fact make up for 
those differences for women in the workplace? How do we address 
this, because those will be and have been the people in 
    Mr. Kemp. Yes. That is a terrific question, and one that 
many men and women of good will are wrestling with today.
    I would make the generic point, the general point at least, 
that women would get a higher rate of return on their money 
than they get from working. Sixty-five percent of all of the 
American women with children are in the work force. We want 
them to have higher real wages. I would suggest that the tax on 
them is a burden. It is a burden on everybody. I don't favor 
little tax credits, with all due respect. We have too many in 
the Code right now. The Tax Code has become too confusing. Give 
families a chance to take $2,000 after taxes in a tax-free 
account for the life of their investments. I think that is the 
best thing you guys have done, is transform the Roth IRA. If 
you expanded Roth IRAs now and allowed women to do the same 
thing, the possibilities would be insurmountable.
    Mrs. Thurman. Mr. Secretary, if I could interrupt for a 
second to engage in this, there is also shown, because women do 
have, for example, the Roth IRAs, they would be the first ones 
to have to pull that out in case of emergency for families, for 
education. So while you may expand that, you still have not 
addressed the idea that that would not be available for the 
woman when she retires, because that might have been used 
earlier on for that.
    Mr. Kemp. The problem you talk about though, with all due 
respect to the gentlewoman's question, is a problem across the 
board. That is a problem right now in Social Security. There is 
no guarantee of anything along those lines. Under Social 
Security she can't pull it out immediately for any problem.
    Mrs. Thurman. But she has the safety net.
    Mr. Kemp. That is the point that I made. She could take the 
money out of her Roth IRA tax free. Name a better deal for a 
working woman than to be able to put $2,000 away, circa 1998 or 
1999, and then for some emergency or some reason later on, be 
able to pull it out without any tax consequence.
    Mrs. Thurman. But we are not talking about in their working 
years. We are talking about when they retire. We are talking 
about their safety net when they retire.
    Mr. Kemp. If they choose to take a safety net over the 
possibility of that compounded rate of return that Regina in 
West Virginia or Annie Schriver in New York City received, I 
would suggest people should be allowed the freedom of choice. 
They should be empowered, not government. My problem with 
having the government invest money, is that it would not invest 
in Mr. Lacorey, it would enrich the U.S. Government.
    We don't need a bigger government, with all due respect. We 
need bigger people, bigger opportunities, a bigger ladder that 
reaches down into the levels of poverty that you talked about 
and gives them access to capital. Without capital, you can't 
get rich.
    Reverend Jackson. I think that some of this antigovernment 
rhetoric from credible people undercuts the government's 
authority and discounts its valuable role.
    Most people, if you just ask ``the people,'' they would 
chose a Lotto over Social Security. They don't know any better. 
The poorest county in Georgia has the highest amount of Lotto 
    So the fact they are choosing Lotto, the people, over the 
market, makes them big, but not wise. The fact that they would 
use credit cards as a substitute for money is a choice, but it 
is stupid.
    So we have got to make sense. We are leaders, and all this 
kind of antigovernment has a way of discounting, to me, what 
the government does. It is the foundation upon which other 
options, which other options emanate. The government has a role 
in providing basics. I tell you, GM would not make cars if they 
did not make roads. There is a dynamic interplay, and don't 
downplay government's role in protecting and preserving that 
which is basic and common to all of us.
    Mr. Kemp. I will do that, if you don't downplay the 
intelligence of low-income people who want a better life for 
themselves and their families. It is outrageous to say that 
poor people are dumb and don't know how to invest their money. 
Buying a Lotto ticket may be someone's desire to get out of the 
poverty in which they have been enmeshed. There's a better way 
to do it, and that is to allow them the freedom to take their 
payroll tax, which is now at 12.4 percent for Social Security 
and another 2 percent for Medicare, and get a better rate of 
return. We don't try to privatize public housing.
    Chairman Archer. With all due respect, the gentlewoman's 
time has expired.
    Reverend Jackson. I say to play a Lotto over a bull market 
is dumb.
    Mr. Kemp. It is dumb.
    Reverend Jackson. Thank you.
    Mr. Kemp. But they don't have a chance to invest in the 
market because we don't give them a chance.
    Chairman Archer. The Chair would encourage the gentlemen to 
continue their discussion after the hearing.
    Mr. Kemp. In the Cloakroom. It is going to go on a long 
    Mr. Weller. Thank you, Mr. Chairman. I also want to express 
gratitude for your bottom-up approach today in questioning, 
giving those of us at bottom the opportunity to begin in 
    I also want to salute our two witnesses today. Of course, 
Secretary Kemp, representing the Chicago area, I just want to 
salute you, because it is your leadership when you were HUD 
Secretary that is now producing results with the changes that 
have come about in the CHA, and I want to thank you for that.
    Reverend Jackson, of course, I grew up watching your 
leadership over the years. I also, as you know, share the south 
side of Chicago and the south suburbs with your son, Jesse, and 
I just want you to know he is an articulate, energetic partner, 
and I enjoy working with him on many, many projects. I am very 
proud of him, as your family is.
    Social Security, of course, is an important issue for every 
working American, and from a selfish standpoint, I suppose, 
when I think of Social Security, I think of my own mom and dad, 
how they have worked hard to get into the middle class. They 
have worked hard all their lives. Fortunately they are healthy.
    I think of a lot of widows that have come to town meetings 
and I have sat down with and talked about how important Social 
Security is for them and sometimes how Social Security has 
shortchanged them.
    I also want to salute President Clinton and Chairman 
Archer. I think they have given us a tremendous opportunity for 
a bipartisan effort to really save Social Security. There has 
been a lot of rhetoric about saving Social Security, but I 
think President Clinton and Chairman Archer have given us, as 
Mr. Rangel says, the opportunity to build a framework to save 
Social Security, not just for today's seniors, people like my 
mom and dad, but for every working American, particularly like, 
as J.D. pointed out, the young man in the back of the room who 
is just going to probably be entering the work force.
    I was pretty proud last year, this Committee and the House 
of Representatives made a commitment, and, of course, we passed 
out of the House of Representatives a plan that made a 
commitment to give back the surplus of surplus tax revenue to 
the people, by setting aside 90 percent of surplus tax revenue 
to save Social Security and giving back the remaining 10 
percent in tax relief, of course, working to eliminate the 
working tax penalty for the majority of those that suffer.
    Now the President in his speech this week says we only need 
60 percent of the surplus to save Social Security, and he 
proposes spending the rest on new spending initiatives. I 
thought with my opportunity to ask questions, I would focus on 
one of the President's ideas, which is a big one, and that is 
where the President proposes taking 25 percent of Social 
Security Trust Funds and investing them in private business.
    Reverend Jackson, you have been an advocate of using 
leverage of stock ownership to achieve various goals. In fact, 
in Ebony magazine, the February issue, you are quoted as 
saying, ``Just as you vote with a ballot in a political 
election, you vote with shares of stock in this arena.''
    They also point out you say stock ownership is a great 
opportunity to have a say, not to quote ``great opportunity,'' 
but you say, ``to have a say in who corporate chief executive 
officers hire, fire and promote, the type of work environment 
they encourage, and where corporate money is invested.
    Now, both you and Secretary Kemp in the past have expressed 
a desire to serve in the Oval Office, and I am going to just 
propose a hypothetical situation. I know some have speculated 
you may have an interest in that job again.
    Reverend Jackson. It will be vacant soon.
    Mr. Weller. It could be, in about 2 years.
    Reverend Jackson. Two years, that is right.
    Mr. Weller. Of course, Reverend, say you were in the Oval 
Office, and for the last couple years the Federal Government 
had been investing 25 percent of the Social Security Trust Fund 
in shares of corporate stock in the private sector. What type 
of opportunity, and particularly the leverage in your agenda as 
President, would this give you in working with corporate 
America to pursue some of the goals that you would pursue as 
    Reverend Jackson. Clearly if you are willing to take the 
market risk that we see in the bull markets, some outstanding 
numbers, we don't know how long those numbers will last, I am 
not willing to do to a Social Security safety net what I would 
do to other moneys. That is where I come down on the 
conservative side of that. That is why his idea of 4 percent, 
even Rubin, who is relatively conservative, would say that is 
worth the risk, because it is even lower than what we do in 
States already, and that is where I have that sense of tension.
    If I were in the White House as the President of the 
country today, I would come down on the conservative side of 
use the surplus to save Social Security first, and then 
exercise my other options.
    Mr. Weller. But, Reverend, you said, and you were quoted in 
Ebony magazine as saying that stock ownership gives you an 
opportunity to have a say in how corporate business is managed. 
Do you believe you could use that leverage as a way of pursuing 
an agenda?
    Reverend Jackson. Well, as an individual, pursuing more 
stock for more individual wealth does not put upon me any 
obligation to secure people unable to secure themselves. The 
pursuit of private individual risk and wealth does not take 
into account my obligation to 4 million children, for example, 
or to disabled seniors, for example.
    So my reference to leveraging stock to open up corporate 
boardrooms, to move from sharecropper to shareholder and make 
these companies more accountable because of our consumer power, 
that approach is quite different. That is almost bottom up. As 
President I would be looking top down, and I say to you that 
just as I would be willing to use some tax cuts or incentives 
to remove the roof for the creative, for the creative and 
entrepreneur and risk takers, let the sky be the limit. But for 
the less able, there must be a floor beneath which none of them 
    Chairman Archer. The gentleman's time has expired.
    Mr. Kemp. Could I just take 1 minute to agree with that 
floor under the rich?
    Chairman Archer. Jack, we are not going to be able to get 
around to all the Members. I have an obligation to try to let 
the Members inquire.
    Mr. Kemp. It should not go unsaid, though, that all of us 
who are talking about personal savings and retirement accounts 
favor guaranteeing the safety net under which people shouldn't 
be allowed to fall. But I want to reiterate what Jennifer Dunn 
said the other night on television; the surplus was not created 
by President Clinton, any more than it was created by Ronald 
Reagan or George Bush. It was created by the American people. 
It is their money. Give it back to them.
    Chairman Archer. Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman.
    It is great to have you gentleman here. Thank you for 
giving us your time.
    I want to talk just briefly about the politics of Social 
Security and then the policy. My colleague from Illinois 
mentioned, a year ago, in the State of the Union Address, the 
President said we should save every dime of the surplus for 
Social Security. In response to that, this Committee pushed 
through a proposal to set aside 90 percent of the proposed 
surplus, and it was passed primarily along party lines. In 
fact, we were vilified on the floor of the House of 
Representatives across the street that we were raiding the 
trust fund for trying to set aside 90 percent and then let the 
American people keep a little bit of what they earned.
    I think we have already seen in this hearing this morning 
how easy it is for politics to rear its head. Hopefully, in the 
words of former President Ford, I think the challenges before 
us, where he said that we should take this third rail, Mr. 
Kemp, as you mentioned, this third rail of politics and rebuild 
tracks of reform, and I think, as he said, that our conscience 
demands what our children deserve, and, God willing, we will 
disappoint neither.
    Let's talk about the policy. Reverend Jackson, I couldn't 
agree more with you in your testimony. This has been the most 
successful antipoverty government program that we could 
conceive, and were it not for the demographic realities that we 
have, that is an aging population, Mr. Kemp, as you mentioned, 
and a smaller work force coming up behind, we probably wouldn't 
have to talk about significant structural changes. Yet, even 
with the successful program, there are inequities.
    The gentlelady from Washington State has been so eloquent 
on this--that women on average leave the work force for about 
11 years to devote to family, and, as a result of that, they 
play catchup. As the gentlewoman also points out, women live 
longer than men. I personally would like to explore some 
legislative corrections to that, but I am not sure that we can 
do that, we can change that inequity.
    Mr. Kemp. The Reverend can.
    Mr. Hulshof. The other way the system is unfair, Reverend 
Jackson, as you know, is that the life expectancy for an 
African-American male is in the low sixties. So here is a young 
man who has worked his entire life paying into the Social 
Security system, and yet, at the time of retirement, on 
average, isn't able to get out of the system anything close to 
what he has put in. So I think that as we try to fashion some 
solutions, I hope that we can be good enough and courageous 
enough to put the politics aside.
    With that, Mr. Kemp, here is my question: With your 
outstanding career here in Washington, 18 years, you are 
undoubtedly familiar with the Thrift Savings Plan that Federal 
workers have. Essentially, and for those who are not familiar 
with that plan, it allows workers to invest up to 10 percent of 
workers' salaries with a corresponding government match in 
stocks and bonds and T-bills.
    Now, if this were a town meeting in the Ninth District of 
Missouri, here is the question I get: Let's take a normal 
family in my district, perhaps a family farm, a couple that 
still is in good health and still active in the family farm, 
don't own a computer in their household, and who may be 
uncomfortable--and this goes to Mr. Rangel's question--may be 
uncomfortable, it is not that they are uneducated, but maybe 
just not comfortable with opening up the pages of the Wall 
Street Journal and trying to decide or decipher or even decide, 
make a decision, on how those moneys should be invested.
    Could we not move to some plan like a thrift savings plan 
that would still allow choice; that is, that we could direct 
certain investments?
    Mr. Kemp. The answer is demonstrably yes. That does go to 
the heart of not only your question, but several other 
questions today. What we should be thinking about is 
democratizing this capitalist system. The way to do it is to 
give people access to capital. The only thing a poor person has 
is his or her labor. This idea allows you to convert labor into 
    It is not class warfare. On the contrary, it would be a 
rising tide that could lift every boat. And where there is a 
boat sunk, I have been reminded, that is where the government 
does come in and provide a floor below which, people should not 
be allowed to sink further. That would be a government 
guarantee of that net.
    But let's give people a better rate of return. I think a 
thrift savings plan or an individual Roth IRA would be a far 
better way to do it.
    Mr. Hulshof. Mr. Jackson.
    Reverend Jackson. Government should not impose a roof and 
limit creativity. It offers a safe foundation, which is our 
launching pad. That is why I believe in choice schools. I think 
all schools should be choice and all children chosen. That is 
the American dream, to include all at the basic level and leave 
none behind. You can go from a log cabin to White House, but 
you must at least have guaranteed logs, something basic. That 
is why I am very sensitive to putting at risk Social Security 
in exotic ideas.
    I like the idea. And politics is not a bad thing. There are 
good politics, and there are decisive politics. How can 
anything you do not be political? But are your politics driven 
by something moral or something messy? One sense within us, 
vanity, asks the question, is it popular? That is a brand of 
politics. Another brand of politics asks, will it work? Can I 
get over? Another brand of politics asks, is it right? Politics 
at its best--while you help that lady and man in Missouri, 
politics at its best don't follow opinion polls, they mold 
opinion, if they have an opinion and have convictions.
    I say we can do for the average American what they cannot 
do for themselves, create a structure that protects them, that 
they tend to agree. There is consent and agreement that Social 
Security is fundamentally a sound idea. So let's fix that, and 
let's expand that, but don't put that at risk.
    Chairman Archer. The gentleman's time has expired.
    Mr. Tanner.
    Mr. Tanner. Thank you very much, Mr. Chairman. I want to, 
with your permission, continue on a theme from Chairman 
Greenspan's remarks yesterday when he said let the surplus run 
was his priority or his preference in this matter regarding the 
surplus, projected surplus, in saving Social Security, in 
``saving it first'' and all the other rhetoric that we have 
    Both of you gentlemen are leaders in the marketplace of 
public opinion, and we appreciate you being here. I guess there 
are probably 435 different ideas as to what to do with the 
projected surplus in the House, from giving it back in the form 
of tax cuts of some sort to saving Social Security first, more 
military spending, a lot of things, targeted tax programs of 
some kind. There is no shortage of ideas.
    The one thing that has struck me has been the lack of the 
words ``the Federal debt'' mentioned here. I understand we have 
privately placed Federal debt of over $3 trillion.
    Now, where I come from, it is considered poor form if you 
owe someone some money, and you come into money, as they say, 
and you don't pay your debt.
    I consider this $3.5 trillion private placed--there is 
more, but it is publicly accounting, interagency, Social 
Security Trust Fund, earned interest from the Treasury and so 
forth. But this privately held debt, it seems to me, is a debt 
that we owe our children and grandchildren.
    You heard a lot about that back when we were running these 
deficits in the late seventies, eighties, some Democratic 
administrations, some Republican, some Democratic Senate, some 
Republican Senate, some Democratic House--most Democratic 
House. But anyway, I don't think either party comes to this 
with clean hands, as they say in a court of equity.
    How would you rank, because it is going to get into the 
marketplace of public opinion as to what to do with this 
projected surplus, how would you rank paying off at least the 
privately placed debt of this country as it relates to some of 
these other programs and tax cuts and so forth?
    With that, Mr. Chairman, I will yield the balance of my 
    Chairman Archer. Can the Chair ask of his friend, Mr. 
Tanner, what is the connection to Social Security?
    Mr. Tanner. Well, Mr. Chairman, I think the projected 
surplus as it relates to either a tax cut or spending or saving 
Social Security first, all of those things have to do with 
money and demographics. If we pay down debt, there are some, 
including Chairman Greenspan, who said that is in effect saving 
Social Security first.
    Mr. Kemp. That is what I understood Chairman Greenspan to 
say. I don't often disagree with the Chairman, but I do on this 
one. The only way retiring debt can help save Social Security 
is if it increases the level of economic growth in the country.
    I want to say it again: If you look at the Social Security 
actuaries, they predict the economy going into 1.3-percent 
growth for the next 65 years. That is a greater threat to 
Social Security than the demographics, albeit both of them 
impact the negative side of Social Security. That is why people 
say it won't be there when you retire.
    So what will get the economy growing? If retiring debt 
would do it, I would be in favor of it. Unfortunately, it 
doesn't. It won't. So I favor lowering the tax rate on capital 
gains, expanding Roth IRAs, taking its rate back to 28, where 
it was in 1987 and doing some things to make sure that our 
economy grows in the next century as well as it has from the 
fourth quarter of 1982 until today.
    We can have a golden age if we do it right. We can also 
give low-income people access to property ownership and 
capital. I submit that doing so would do more for people of 
color than to put them into a government trust fund that forces 
them to get a 1.3, 1.4-percent rate of return, as is being done 
    Reverend Jackson. I am amazed that Congressman Kemp is 
obsessed with fixing what is working.
    Mr. Kemp. What is working?
    Reverend Jackson. The economy is working, and it is 
growing. Reducing the debt obviously gives us more strength. It 
helps our surplus. And with that surplus, many of the other 
intended concerns that you raised, for example, because we have 
a surplus, we can now speak of investing in Social Security. 
Because we have it, we can now speak of refurbishing rural and 
urban schools, which may be an alternative to more rural and 
urban jails. Because we have a surplus. Part of this comes by 
growth on the one hand, but clearly the debt is no asset to 
    Mr. Kemp. The answer to debt is growth and reducing debt as 
a percentage of the pie. We grew out of World War II's debt. 
The deficit in 1946 was 50 percent of GNP, 50 percent of GNP! 
The only reason we could have a Marshall plan is that somebody 
suggested we should invest in war-torn Europe, war-torn Japan.
    Mr. Tanner. Mr. Secretary, would both of you gentlemen 
agree that the payment of debt will free forever some of the 
200-plus billion dollars a year we are paying in interest that 
could then be used for some of these programs that you suggest? 
As you both probably know, one of the third or fourth items in 
the budget is interest. That is gone. That is money we are 
paying interest on forever if we don't begin to somehow reduce 
the debt.
    I understand what you are saying, but it seems to me----
    Reverend Jackson. You are right. I think Congressman Kemp 
doesn't understand what you are saying. Say that one more time. 
Reducing the debt does what?
    Mr. Tanner. It relieves one from paying interest next year 
to the extent the principle has been retired, which frees 
    Reverend Jackson. We have a shared understanding.
    Mr. Kemp. I totally understand. I have a mortgage. Do you 
have a mortgage, Congressman?
    Mr. Tanner. I have two, one here and one in Tennessee.
    Mr. Kemp. And you pay it off in regular installments. I 
favor debt for highways, I favor debt for aircraft carriers, I 
favor debt for schools. I don't favor debt for food stamps or 
welfare or current expenditures.
    The answer to debt is a bigger pie. We are reducing the 
debt by rolling it over, paying it off, and keeping our economy 
on a growth track. It is doing well today, but I tell you, my 
friend, Reverend Jackson, the actuaries of Social Security are 
scaring the American people by coming to the conclusion that if 
our economy slips to 1.3-percent growth over the next 65 years, 
the retirement will not be there for them. That is what I am 
talking about. I hope you will understand that.
    Chairman Archer. The gentleman's time has expired.
    Mr. McInnis.
    Mr. McInnis. Thank you, Mr. Chairman.
    The first point, on the President's speech the other night, 
I thought it was well delivered, but I thought it was full of 
fluff, and I would like you to follow me through.
    I have a question for both of you, first of all for 
Reverend Jackson, but then I am going to also ask a question of 
Congressman Kemp to answer.
    But before I ask either of you to answer, the President's 
plan--follow me through with this--the President's plan says no 
cuts in benefits, that sounds good; no payroll tax increase, I 
certainly agree; no tampering with retirement age, and no 
tampering with not just a cut in benefits, but no tampering 
with the benefit structure.
    Now, you have to contrast that with the financial realities 
that we are dealing with. First, we have an increase in 
lifespan. Since Social Security was conceived, we now average 
13 to 16--I forget the exact number--13 or 16 more years in 
lifespan. No adjustment has ever been made for the increase in 
lifespan. In fact, it has probably gone the other way.
    Second of all, the current retirees, the people currently 
on the system, on average, take out much more than they have 
put into the system.
    Third, the ratio of retirees to workers takes a dramatic 
jump in the very near future. Now, that is not a wash, it is a 
    Reverend Jackson, from what I understand from your comments 
and the President's comments, you would pay for these dynamic 
opposites, you will pay for them with the surplus. In my 
opinion, the surplus is a temporary supplement upon which you 
pick up these long-term commitments. These are long-term 
commitments, extending lifespan, more retirees and workers and 
so on. So you have the temporary benefit of the surplus.
    The question then to you is, what happens when the surplus 
dissolves or if the economy slows down? Then how do you meet 
those commitments?
    Then the question for Congressman Kemp. I completely agree 
with your personal choice, and I think that is a big difference 
between the Republican and the Democratic philosophy. The 
Democratic philosophy, as reflected by the President the other 
day, is let the government go out and become a massive 
stockholder in the market. I can't think of anything more 
disruptive to the market or more disruptive to the concept of 
capitalism than letting the government become the majority 
stockholder in corporations.
    They tried it in Colorado by letting the government become 
the majority landowner in Colorado, and then political 
correctness begins to dictate what ought to happen with that 
land instead of what is the best use of that land. So I 
completely agree with you.
    But I do have one slight concern with your comments, and 
that is that we should not consider--you didn't say you 
shouldn't consider--but you said you don't think we should 
adjust the age eligibility.
    My kids are 18 years old. They are just now entering the 
workplace. They are not all 18, but one of them is 18. If their 
lifespan is going to be 20 years longer--because not only of 
the increase in lifespan, but we are also finding people living 
into their eighties and nineties now are healthier during that 
period of time than they were--I am sure my son will say, Hey, 
I would like to work until I am in my eighties. It is very 
likely. The generation behind him is very likely to go into 
their hundreds.
    Why shouldn't we have some kind of proportion or expansion 
or extension of the eligibility of the age eligibility for 
Social Security? You could do it in such a way that your most 
immediate adjustment would be minimal, maybe add a week a year 
for those closest to it, but those 40 years out from it, which 
would be likely, because of the increased lifespan, why not 
increase that?
    So, first to Reverend Jackson, and then to Congressman 
    Reverend Jackson. Let me say this: The reason I am quick to 
defend government roles and responsibilities, Congressman 
Rangel, government at its worst supports slavery; government at 
its best supports emancipation.
    In some sense, we look at 1932, to buy a house you had to 
put up 50 percent with a 3- to 5-year mortgage. And the 
government brought in something called Freddie Mac and Fannie 
Mae. With an implied government guarantee, you get 30-year 
mortgages. That is government. Without government, we wouldn't 
have public accommodations. My high school senior class could 
not take a picture on the State lawn in South Carolina. Dogs 
could. Government came to our rescue. Without government, all 
of us would not have the right to vote. Without government, 
most of us could not use a public hospital.
    Mr. McInnis. With all due respect, Reverend----
    Reverend Jackson. All I am saying is government has a place 
in this. The President didn't say massive, he said 4 percent, 
and less than many States, which put 10 percent.
    Mr. McInnis. With due respect, my question to you is not 
the philosophy which you have expressed earlier, not that I 
necessarily disagree with all of it, though a portion of it.
    Reverend Jackson. Which portion of it?
    Mr. McInnis. My question specifically, Reverend, was what 
happens when the surplus expires? How are you going to meet the 
commitments that you have spoken of?
    Reverend Jackson. The only way, it seems to me----
    Chairman Archer. Unfortunately, there is not adequate time 
for the gentleman to get a response. Perhaps Reverend Jackson 
or Congressman Kemp will submit in writing a response.
    [No response had been received at the time of printing.]
    Reverend Jackson. There is a respectful tension here. I can 
only say that for your 18-year-old kid, if he is educated and 
becomes a productive worker, he will be a part of growth which 
helps the surplus. If he, in fact, does not have that education 
and goes to jail for the rest of his life, he will cost us, 
rather than contribute to us. Therefore, you cannot separate 
our growth and assets from what happens to our youth in the 
formative years of their lives.
    Chairman Archer. The gentleman's time has expired.
    Mr. Foley.
    Mr. Foley. Thank you very much, Mr. Chairman.
    Let me state that as a Republican Member from the Sixteenth 
District of Florida, with the seventh largest Medicare-Social 
Security population in America, what we have heard today 
underscores why it is a dangerous idea for Washington to invest 
and control Social Security Funds in the private market. So I 
would underscore the words of our Chairman, Chairman Archer, 
no, no, no, 1,000 times no.
    In the Sun Sentinel today, an editorial said: ``Political 
pressure for the Federal Government to invest in favored 
industries or to disinvest in industries that are deemed 
politically incorrect would be too great for financial managers 
to resist.''
    Let me ask Mr. Kemp, and first Mr. Jackson, since Mr. 
Greenspan and Mr. Rubin have both advocated against this idea, 
can you give us any illumination of where President Clinton 
brought this idea forward--who suggested it?
    Reverend Jackson. I do not know. I think that there is 
obviously a lot of pressure in this bull market to get some of 
that money for the government. I am sure that is a temptation. 
That is why I think that the 4 percent is such a modest number 
as opposed to some big number.
    But in the end, even Rubin went along with it because he 
thinks that margin is not threatening. But I would tend to come 
down more on the side of keeping Social Security secure and 
using the front part of that surplus to keep it that way.
    But I never separate keeping Social Security secure from 
the growth that makes the surplus, allows us to invest in 
Social Security. You cannot have growth without what--some 
people think it is politically challenging or politically 
incorrect if a company is not willing to use the minds of all 
Americans, all the American markets and all the American 
talent. Then it is not only politically incorrect, it is 
morally incorrect, and it is also inefficient in the run.
    Mr. Kemp. Of course we want corporate America to be 
inclusionary. Does it have a long way to go? Absolutely. But 
let's don't forget how far it has come. Their answer to your 
question, Mr. Congressman, the President wisely, I think, at 
least has touched that third rail that we talked about today. 
He has made two very important considerations that go to the 
heart of his proposal: A, Private markets do better than 
government bonds. Anybody want to debate it? He suggests that 
we need to invest in markets. So give him credit for it. I do. 
Where he goes wrong is wanting the government, rather than 
individuals to do the investing.
    B, He suggests that incentives drive decisions. He has, 
bless his heart, tax credits for every conceivable idea under 
the sun. He has tax credits for steel companies that are being 
competed against by Japan and Russia. He has tax credits for 
the ozone, tax credits for global warming, tax credits to have 
babies, tax credits to send them to college, tax credits for 
working women to stay home after school.
    But there is a problem with that: It takes the Code and 
engineers it to where we end up making people jump through our 
hoops in order to get what they deserve. Jennifer Dunn talked 
about that. It is their own money. Cut the rate. Allow the 
payroll tax rate to come down. Allow the people to have the 
choice to put their payroll taxes into investments that yield 
the type of a market return that the President has suggested he 
wants to do with the trust fund.
    And I agree with Jesse to that extent, we want growth. But 
I want to say that I don't care who is President, left or 
right. It is not left or right. It is that no power should be 
entrusted to any government to enrich itself at the expense of 
the American taxpayer.
    Mr. Foley. Let me ask you this, because a far better 
option, as stated by the Sun Sentinel again, would be to 
earmark a portion of Social Security taxes to accounts 
conservatively managed through the private sector, as is being 
done in Britain and other countries.
    You like tax cuts. Most of us do. Would you agree to a tax 
cut that ties the proceeds of that tax cut directly to an 
earmarked account?
    Mr. Kemp. No, no. Absolutely not. Absolutely not. There is 
too much social engineering. I don't like it from the left, I 
don't like it from the right. Bring down the rates. Expand 
IRAs. Eliminate the capital gains tax and eliminate the estate 
tax. There is too much engineering from Washington, DC.
    Reverend Jackson. Cutting taxes would not incentivize 
investment in Appalachia.
    Mr. Kemp. Oh, yes, it would. What is an empowerment zone 
then, with all due respect?
    Reverend Jackson. Mr. Congressman----
    Mr. Kemp. It is a tax incentive.
    Reverend Jackson. An empowerment zone without an incentive 
for investment is a hoax.
    Mr. Kemp. I just suggested an empowerment zone is an 
    Reverend Jackson. An empowerment zone without a formula for 
incentivized development is a hood without a motor. We don't 
offer to Eastern Europe and Southeast Asia an empowerment zone. 
We offer them an economic stimulus package that includes 
incentive tax cuts; long-term, low-interest loans; Export-
Import Bank; the IMF. America deserves no less than that.
    Chairman Archer. The gentleman's time has expired.
    Mr. Kemp. Don't do to America what we have done to the 
Third World, put the IMF on them.
    Chairman Archer. The gentleman's time has expired.
    Mr. Matsui.
    Mr. Matsui. Mr. Chairman, thank you very much.
    Jack, if you could give me a hint of what is on your mind, 
I will frame my question to be able to let you answer it. You 
are really doing a good job on this today, I have to say.
    Let me make one observation, because Reverend Jackson made 
an observation about investments by individuals who perhaps are 
low-income and perhaps don't have investment experience or 
background, and you came back and you said, What do you think, 
that the American people are dumb? You know, they are not dumb.
    Mr. Kemp. They are not.
    Mr. Matsui. Let me just make my observation. You can 
comment any way you want. Reverend Jackson wasn't suggesting 
these people are dumb. No one is suggesting these people are 
dumb. We are saying there is an experience issue, there is the 
inability perhaps to find the right people to help them manage 
their funds. They have very little income, and perhaps the 
financial managers that some high-powered folks like you and I 
and people go to would not want to take care of somebody who 
may only want to invest $15 a month in the market. So there is 
that problem.
    You mentioned Britain. The British have suffered, you are 
undoubtedly aware, but there is going to be literally billions 
of dollars that are going to be paid by insurance companies to 
bail out some of these investment firms that have mismanaged 
investments and perhaps committed fraud and deceived people. 
Arthur Levitt is very concerned about this at the SEC. He has 
done an analysis of 10 studies on Wall Street. Even Wall Street 
managers are concerned about this, because it would damage 
their reputation as well.
    I know that 30 or 35 percent of the American people are in 
the market right now, including you and myself, and we will 
really be able to do this well, and we probably will get a 
greater return. The real issue, however, is how do we make sure 
that you don't create a disabusive system for those 65, 70 
percent who aren't in the market? I really need to hear that.
    Second, if I can just make one other observation, there was 
a good article in today's New York Times, and I would really 
ask Members to look at it. It is written by Teresa Tritch, 
senior editor of Money magazine. She says the reason that 
private investment looks so much better than government bonds, 
and I agree with that, is because they base it on an actuarial 
factual situation in which somebody puts money in, and they 
allow the returns to accumulate, and there is no churning. So 
there is no 20-percent fee or overhead cost, nor any of these 
kinds of things. Obviously as an individual, many people may 
churn, if you talk about self-interest, and that is what makes 
markets run, money managers are going to want churning, because 
that is how they make their commissions and fees. So we need to 
really address that issue.
    I want to see us move quickly in this area--spring or early 
summer. But we have got to address this issue.
    Let me let you both answer the second part of my question, 
and if I may, ask you to address the issue Reverend Jackson 
raised in his opening remarks about the disabled, survivors 
benefits for widows and widowers and obviously minor children 
or children under 18.
    The Chairman said he was going to address that issue, and I 
am happy to hear that, but what we need to know, one, is 
whether that is going to be an entitlement program or subject 
to annual appropriations. We need to know whether it is going 
to be the same level of benefits. We need to also know how we 
are going to pay for it. Because of all of the funds we are 
talking about, the whole Social Security system, one out of 
every three dollars goes into those various areas. In other 
words, it is not all for retirement. And so that is a large sum 
of money. We need to really address this--perhaps both of you 
can address that.
    Mr. Kemp. I would say the answer to that question is 
guarantee it. The government should guarantee that.
    Mr. Matsui. I love that, and I don't mean to interrupt you, 
but you did say we are going to guarantee so nobody really 
loses any money. The real danger in what you are saying is that 
you might as well take major risk in your investments. You are 
going to be guaranteed----
    Mr. Kemp. Bob, let me answer that question real quick.
    I am not suggesting nor do I think that any man or woman on 
the panel or anybody who believes as I do that we ought to give 
people better rates of return. I believe they should be 
investing in LTCM, long-term capital management.
    Mr. Matsui. If you guarantee they won't lose, that is what 
they are going to do.
    Mr. Kemp. With all due respect, the Thrift Savings Plan the 
government now runs is a good example of how the government can 
provide more continuity, more assurances and a better rate of 
return. We are not talking here about LTCM. We are not talking 
about hedge funds. We are not talking about investing in yen 
and deutsche marks or euros I should say.
    Mr. Matsui. Can you answer my question about how you 
protect these folks and things of that nature? I really need to 
hear that from you.
    Mr. Kemp. I am sorry?
    Mr. Matsui. How do you protect these folks from what 
happened in Britain? How do you make sure that the people who 
invest $20 a month get the right kind of investment advice? Is 
there any----
    Mr. Kemp. The same way we do in the Thrift Savings Plan 
that is now run by the government except it allows more choice 
for the individual working woman or man.
    Mr. Matsui. You don't want the government involved in this, 
it is my understanding, because we can put all kinds of 
conditions on this stuff.
    Mr. Kemp. I trust the American people----
    Mr. Matsui. Please. We may want to say you can't invest in 
    Mr. Kemp. I know there is a certain amount of frustration 
because there is not enough time, and I respect the time that 
everybody has.
    Mr. Matsui. I would appreciate hearing from you.
    Mr. Kemp. I have suggested a range, a plethora of choices 
that is higher than T-bills and lower than LTCM trying to 
leverage at 100 percent to the dollar.
    Mr. Matsui. You have got to answer that question, Jack. 
Because if you want private investments, you have got to answer 
that question.
    Mr. Kemp. I can pick, you can pick, the government can 
pick. They can have, as they do in a thrift savings plan, a 
range of mutual fund investments that would allow for a higher 
rate of return. You could take the Russell 2000 or the----
    Mr. Matsui. You have got to do better than that.
    Chairman Archer. The gentleman's time has expired.
    The question is a very good question, and there are likely 
answers to it that are valid answers. I would refer the 
gentleman to the Chilean experience, which is now 19 years old, 
where a secretary making $16,000 a year currently will retire 
at age 60 with $200,000 in her account and can purchase an 
annuity which will pay her for the rest of her life 100 percent 
of what she earned in the last year that she worked. And 
without getting into the details because we don't have time for 
that, the Chilean system does have certain protections that are 
in their system.
    Mr. Crane.
    Mr. Crane. Thank you, Mr. Chairman; and I want to express 
appreciation to Reverend Jackson and to Jack for being here 
    Reverend Jackson, I want to remind you and Jack that when 
you go back to when Bismarck started this kind of a retirement 
program, he set that 65 age limit for benefits, and the average 
lifespan was about 52. So, obviously, one of the ways we can 
resolve this is to say you don't get your benefits until you 
are 85 or 90; and we have eliminated any of the insecurity 
anyone feels right now.
    In that connection, though, there is something we probably 
should have done in the thirties and that is to index the 
benefit age so that, as the average lifespan keeps ratcheting 
up, it is indexed, and you are put off yet another year and 
another year before you get your benefits.
    But the other alternative that has been tossed out there is 
tax increases. Would you favor a tax increase?
    Reverend Jackson. I wouldn't.
    Mr. Crane. You would not?
    Reverend Jackson. No. I am not quite sure where you are 
going, but one thing I know is that many African-Americans and 
Latinos tend not to live to 65. And raising that limit won't 
make them live any longer, and that is not an answer to that 
situation. People live longer when they have stronger 
foundations of education and opportunities and balanced diets. 
That is what makes people live longer, bottom up, not top down.
    Mr. Crane. Well, there apparently is some discussion as to 
the reduction in our infant mortality rate having an impact on 
what that average lifespan is; and I haven't seen all the 
figures on that.
    But one of the things that is interesting is our next 
witness who has indicated that if you just raised taxes 1.1 
percent on individuals and 1.1 percent on your employer, that 
that would guarantee the solvency of the program for at least 
another 75 years. But you would not favor considering that 
    Reverend Jackson. No. I am not inclined to consider any 
other tax raise without a radical reassessment of how the high 
tax raise would be spent. I think that would be a death blow to 
the Social Security debate to inject into this raising taxes as 
a form of salvation. I think that is a death knell to the whole 
    Mr. Crane. Very good. I am glad to hear that.
    Now, I have just received a Heritage Foundation study, and 
the thing that is interesting is that they have the breakdown 
of the investment of Social Security taxes into a portfolio 
composed of Treasury bonds for the average working American. 
And then they have the portfolio composed of 50 percent 
Treasury bonds and 50 percent large business equities. And the 
thing that is interesting is the latter are almost double. I 
mean, the totals, dollar figures, are almost double what the 
existing totals are when invested exclusively in Treasury 
bonds. So are you leaning in that direction of making the 
investments go beyond the Treasury bonds and considering large 
business equities?
    Reverend Jackson. You know, I am not familiar enough with 
that to answer that question.
    Mr. Crane. Notwithstanding those figures?
    Reverend Jackson. Notwithstanding those figures. Because 
some of the figures I need a better context to have a grip on 
to be safe to make a public statement on it.
    Mr. Crane. How about you, Jack?
    Mr. Kemp. Well, everyone would want a mix in their 
portfolio. My argument is not so much that it wouldn't be 
better to invest in equities, because it would over time. But 
my argument is that it shouldn't be used to enrich government. 
It should be used to enrich and empower working men and women 
and families giving them more choice and a higher rate of 
return. So I favor allowing them to do so either through the 
government Thrift Savings Plan or into Roth IRAs.
    I am a big fan of Roth IRAs. I didn't invent it. Bill Roth 
did. But if you expand it and lift the lid then a lot more 
people will put money in, savings will rise and the growth of 
the economy will be better, particularly if you bring the 
capital gains rate down. It should be eliminated. Stupid tax. 
Not a tax on the rich. It is a tax on the poor who want to get 
    Eleanor Holmes Norton, our colleague from the District of 
Columbia who is on the Democratic side of the aisle, wants to 
eliminate it altogether to help the District of Columbia. If it 
will help the District of Columbia why won't it help Motown, 
Chitown, Overton, South Central L.A., every town in America and 
rural Appalachia as well?
    Chairman Archer. The gentleman's time has expired.
    Mr. Shaw.
    Mr. Shaw. Thank you. Thank you, Mr. Chairman.
    Chairman Archer. Would the gentleman suspend for just a 
moment? The Chair would like to inquire of the two witnesses 
what the confines of their schedule are today and how much 
longer they can comfortably be with us?
    Reverend Jackson, did you have--can you stay for a 
significant additional time with us?
    Reverend Jackson. I need to go, but I am so glad to be 
here. I just change everything to be around you.
    Chairman Archer. You are willing to stay on for some 
additional time?
    Reverend Jackson. Yes.
    Chairman Archer. Jack, what about you?
    Mr. Kemp. My wife and I are leaving for a ski trip 
vacation, but----
    Chairman Archer. How much longer can you----
    Mr. Kemp. Until 12:30, quarter to 1--1 o'clock.
    Reverend Jackson. 12:30, please.
    Chairman Archer. That is good. That gives us some timeframe 
to work in, and we will be prepared to excuse you at 12:30.
    Mr. Shaw.
    Mr. Shaw. Thank you, Mr. Chairman.
    I want to redirect our attention back to where you started 
this hearing, and that is the question of looking back at the 
possibility of government investment, direct investment.
    Reverend Jackson, you very eloquently expressed the 
question of morality and its connection with proper investment 
by the Federal Government. I can see this filtering down into 
much debate within the House and the Senate as to what we 
should and should not invest in. To give you an example, in 
some areas, to invest in a company that is strip mining might 
be a terrible thing to invest in. Or investing in a company 
that stores nuclear waste or that runs nuclear plants can be a 
problem. It can be a huge political problem. Or to have 
invested in a company innocently enough where the chief chief 
executive officer gets indicted can be a terrible problem and 
can result actually in a political scandal for those in charge 
of the government and running the government even though they 
had absolutely nothing to do with it.
    Also, I have heard people say, Well, why don't we invest in 
index funds? You would have to sanitize those index funds to be 
sure you weren't investing in something that is offensive to 
some part of the population.
    Unfortunately, morality is in the eyes of the beholder. For 
many of the American people, investing in tobacco companies is 
a bad thing, but for someone who smokes, they may not see 
anything in the world wrong with that. So this really puts us 
on the horns of a dilemma.
    And I think that when you start getting into this, you are 
almost putting a Good Housekeeping Seal of Approval on certain 
companies and then blacklisting other companies, which I think 
could create a real big problem and a dilemma inside the 
    I am glad you brought this up, because I think this is 
something that Congress really has to look at. And I think as 
we go forward and as my Subcommittee on Social Security has 
hearings on the President's plan, I would want to get into that 
and see what effect this could have on the market.
    Reverend Jackson. I think that raises the point that we 
could have argued why not invest in the Marshall plan.
    But the board, if you will, were credible eminent persons, 
those making that decision, which is where I thought 
Congressman Rangel was going. Those who would make those 
decisions must be credible persons because you have to have--it 
would never be riskproof or be flawless, but clearly it should 
be a stimulus to companies to qualify for the royal American 
investment. That should be a stimulus.
    So I do not see that as being a deterrent. Because I think 
if a company wants to be in good favor with our government, if 
both morally right and it is efficient, then I think it is an 
economic stimulus.
    Mr. Shaw. We in the Subcommittee, Bob Matsui and I, the 
Ranking Democratic Member on that Subcommittee, at this point 
have asked Congressional Research to compose a list of all the 
alternatives that we have. And I can tell you that some of them 
are pretty bleak, and some of them will automatically be off 
the table.
    The two right now that I think are at the bottom of the 
score list which I don't see any support for is raising the 
taxes, the President has come out against that, and certainly 
on our side of the aisle we are against that. You have 
indicated that you are against that, and I am sure both of our 
witnesses are against that.
    Reverend Jackson. I will tell you what I am working on with 
Congressman Kemp, if I might say.
    Mr. Shaw. Let me finish. I am going to draw a red light in 
just 1 minute and have to stop.
    Nobody in the Congress that I am aware of is in any way in 
favor of tampering with its existing benefits. We have to 
preserve those. We are not going to steal from our grandmothers 
and grandpas, our mothers and our fathers in order to solve the 
problem. They are already in the system; and, as far as I am 
concerned, they have a sacred contract. Although it is not 
legally contractual, it is certainly morally contractual with 
the Congress, not to change that.
    But we are going to have some tough decisions to make, but 
it becomes very clear to me in this hearing that part of the 
solution is looking toward the private sector, looking toward 
investment in equities. The question is how to get there.
    Now I am impressed with your comment with regard to the 
Lotto. Obviously, we are going to have to put restraints on the 
system so people can't take that money and throw it in the 
Lotto or can't give it to their brother-in-law to invest in 
some cockamamy stock. Even though we do have faith in the 
people, we have to put certain constraints on it so they are 
going forward with a responsible plan preparing for their own 
    Chairman Archer. The gentleman's time has expired.
    Let's see.
    Mr. Houghton.
    Mr. Houghton. This is such a far different hearing than I 
ever would have expected. We are talking about anticipating 15 
years out a crisis. Unusual. We are talking about a surplus. 
Never had it before. We are talking about dissembling the 
unified budget. And we are talking about what Albert Einstein 
said was the most powerful form of energy in the universe, 
which is compounding interest. I wonder whether we are not 90 
percent of the way there because we are talking about the 
things we all hoped we could talk about but never been able to.
    So now the issue really is, where does the money go and who 
invests it? Now, if I get the money, I have to choose somebody, 
because I am unable to know where to invest this money. I have 
to choose somebody to do it. Now, do I choose a government 
agency? Do I choose a nongovernment agency?
    And let me pose this question to you. Suppose you had a 
rotating series of financial managers, and that would be maybe 
Bear Stearns and Charles Schwab and Goldman Sachs and Paine 
Webber, and then it would rotate the next quarter or the next 
half? What difference does it make whether that money goes to 
the government to put into those people's hands which 
ultimately go to the individual or whether I as an individual 
make that decision?
    Mr. Kemp. Can I take a shot at that?
    Are you asking what the difference is? Do you mean between 
the government investing and personal investment?
    Mr. Houghton. Not the government investing. The government 
asking a rotating group of private investors to make those 
    Mr. Kemp. I was talking about the revenues going into 
government or going to mom and pop and to people. I don't think 
there is any question, is there? Wouldn't we want the 
individual working men and women to get that power of 
compounded rates of return? The government is in the business 
of redistributing wealth.
    Mr. Houghton. The people are going to get that money. They 
are going to get the result of that money. The question is, who 
does the investing?
    Mr. Kemp. Well, I would much rather have Bear Stearns and 
Schwab and Fidelity and the mutual funds you alluded to or 
money managers you alluded to doing that on behalf of the 
working people of America rather than allowing the enrichment 
to go to government. Because government has an insatiable 
    Mr. Houghton. The enrichment is not going to go to the 
government. The enrichment is going to go to the individual 
person. So the question is election.
    Mr. Kemp. How is it if the government invests the money 
even with private investors or money managers that the money 
gets to the people? How is it?
    Mr. Houghton. The ultimate end of the investment is to have 
a risk fund alongside the Social Security Fund, OK? So that--
the whole purpose is not to keep the money in the government in 
the unified budget. The whole purpose is to give it to the 
individual. And you are using the private system and also the 
compounding concept to do that.
    So I ask you, if the Federal Government decides to appoint 
a group of private investors rather than me deciding who those 
private investors are, I may get the money anyway.
    Mr. Kemp. How so? Under Social Security?
    Mr. Houghton. Absolutely. Social Security and also this 
risk fund.
    Mr. Kemp. I just make an a priori case that the government 
can't do it or distribute it as well as the private sector can 
distribute it if the people have the right to property rights. 
It is a property right. When you give it back to the people, 
they have an individual property right. And I want to make an 
argument that a property right is a human right. It is a civil 
right. It is a legal right.
    Mr. Houghton. How do you feel about that, Dr. Jackson?
    Reverend Jackson. You see, the case I want to make is an 
addendum. When we mention these companies, there is a whole 
body of women and minority handling some money who may be 
creative enough but who may not qualify enough to be in the 
elite circle. I would be concerned about who, in fact, would be 
doing the distributing.
    The point I keep trying to make is the assumption of Social 
Security is to protect those people who need a safety net. If 
we expand the tent to include more people in their formative 
years, there will be more focus on the roof than on the net.
    We are paying a terrific price now for not adjusting our 
system to include marginalized America. That is why I say a 
bridge from Wall Street to Appalachia, a bridge from Wall 
Street to Harlem or a bridge from Wall Street to East Los 
Angeles. If we expand the tent of inclusion, there are more 
people educated, more people working, more productive, more 
high-volume consumers, more economic growth. And when there is 
growth, everybody is a winner.
    I do not want to accept the assumption it would somehow 
take care of those who are locked out. I say, let those in who 
are locked out, and they can help better take care of 
themselves and the government than the government taking care 
of them.
    Chairman Archer. The gentleman's time has expired.
    Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman.
    Welcome to both witnesses and thank you for your testimony.
    Reverend Jackson, you had talked in your testimony about 
possibly mandating a beneficiary impact statement, and I was 
just wondering if you could let us know why you find that 
necessary and how you think it would work?
    Reverend Jackson. Because there is so--as we were just 
reminded, some are projecting on the surplus we never had 
before and the future that is not yet. So we need some 
reasonable projection context to make intelligent decisions. 
With each of these ideas must come some benefit impact study of 
the cost benefit of a given idea. That is my point.
    Mr. Coyne. Thank you very much.
    Chairman Archer. Ms. Dunn.
    Ms. Dunn. Thank you very much, Mr. Chairman.
    Thank you, gentlemen, for sticking around. It is really a 
treat for us to hear your points of view on some of these 
issues that are so important to us.
    I think the very exciting thing for me as we move into an 
indepth discussion on Social Security is the fact that we seem 
to have reached critical mass on this issue and, for me, that 
is very hopeful. In the legislative process, we know that 
compromise is imperative, but still to be able to talk about 
these issues and know that folks out there are saying the time 
has come, we really need some change, to me that is very 
    But it also puts a great task before us, and so as I think 
about this issue, I am sort of with Mrs. Thurman on some of it 
because I am a single mom and I worry a lot about retirement. I 
am really very, very worried about retirement, worried about 
putting enough money aside, worried about getting into a job 
where you can afford to put some money aside for retirement, 
worried about the safety net, very concerned about wanting this 
system updated. And so I think, in terms of what we have to 
watch, to remember the women in this.
    And I would say as we move into this discussion we ought 
to, first of all, say we will keep our commitment to the senior 
citizens out there who are depending on Social Security as part 
of their retirement income. It is very important that we 
reassure everybody that that is first and foremost in our 
minds. But the system is 60 years old, and it needs to be 
remodeled, and it needs to be brought up to date.
    So what do we do as we go into this great opportunity to 
revise it?
    First of all, it seems to me we have to keep in place the 
safety net. And women particularly as I talk with them want to 
know that we are not saying it is an either/or proposition. We 
are not saying you have your own private investment account, 
which I certainly would like to have as part of the system, or 
you have the safety net of the current Social Security. You 
keep the benefits at their current amount out of Social 
Security but also provide some options.
    So Jack Kemp has talked about the difference in the amount 
of return we get with the current system, maybe 2 percent a 
year. That is not enough of a return compared to what you can 
get out of the private--the markets or private investments, 7 
to 8 percent return is vitally important. I think we have to 
work that into things.
    And so my third point would be, how am I and other people 
under this system allowed to make Social Security more secure? 
And that is where I see the combination coming together. 
Current Social Security benefits but you also have the option 
to invest in something.
    Now, I am working as part of the government elected by my 
constituents but paid by the House of Representatives; and for 
me the thrift savings account is an option. So the thrift 
savings account is really what I am looking at for the major 
part of my retirement, and I like to know that it is connected 
to me directly, that if something were to happen to me, as 
happens to some people in this life, they don't live into the 
retirement years, those dollars are still my dollars that I 
could leave to my heirs, and that is a very good feeling that I 
    I also like the thrift savings account because I have the 
right to choose which of several different management teams are 
going to invest in several different accounts for me; and I 
think that is vitally important so I like that, too.
    But I guess what I would like to ask you both to consider, 
are there other elements of this that we should add in? For 
example, we talked about women who step away from the work 
force for a number of years to take care of their children, 
take care of their aging parents, wives who 70 percent of the 
time outlive their husbands so are retired for many more years 
on many fewer dollars. Should we be promoting catchup IRAs, for 
example, for those women who step away? What is it we can do to 
allow particularly women to make their Social Security more 
secure? And I ask each of you to respond to that.
    Mr. Kemp. Well, this goes back to the question that was 
asked earlier and I answered earlier. Basically, the question 
was about, how can you help women? How can you help women and 
men? How can you help workers who are female? Let them get a 
higher rate of return on their payroll tax. I am sorry I can't 
come up with anything more sophisticated. Allow them to put it 
into a Roth Ira or Thrift Savings Plan. Let them take advantage 
of this.
    I can tell you, since leaving Congress I have assured my 
retirement and the college education of all 12 grandchildren 
because we cut tax rates in 1981 and you guys cut the capital 
gains tax just a couple of years ago. Frankly, we have got a 
rising stock market. We have got to get the growth of the 
economy to such where we can take this debate to the next 
level. That is what the surplus does. It allows us to debate 
things we could never debate before.
    Now we are debating what to do with the surplus. I am 
suggesting that we give it back to the working men and women of 
America and allow them to get a better rate of return. Please 
don't let this administration or the next administration or any 
administration get a hold of corporate business in America. 
That would be----
    Reverend Jackson. Jack Kemp can now educate all of his 
grandchildren because there are no longer caps on speaking 
fees. It has nothing to do with what we are discussing, for the 
    Chairman Archer. The gentlelady's time has expired, and we 
are at 12:30, and the Chair is extremely grateful to both of 
you for spending this time with us today. I think all of us 
have benefited by this diversity of ideas and exchange of views 
    Mr. Kemp. We compliment the Chair for bringing these 
hearings to the American people.
    Reverend Jackson. Thank you.
    Chairman Archer. The Chair wishes you both well.
    Reverend Jackson. Thank you very much.
    Mr. Kemp. Mr. Matsui and Mr. Rangel and Mr. Coyne and Mr. 
    Chairman Archer. The next witness and the last witness for 
today is Alicia Munnell--Dr. Munnell, the Peter Drucker Chair 
of Management Sciences from Boston College. Welcome, Ms. 
    And the Chairman of the Social Security Subcommittee will 
preside over the balance of the hearing today.
    Mr. Shaw.
    Mr. Shaw [presiding]. Ms. Munnell, you may proceed.


    Ms. Munnell. Thank you, Mr. Chairman.
    I am a professor at Boston College currently, but I was 
also Assistant Secretary of the Treasury for Economic Policy 
and a Member of the President's Council of Economic Advisers. I 
am delighted to have the opportunity to appear before you today 
to discuss proposals to preserve and strengthen Social 
    In my view, the best way to ensure that all Americans have 
a basic adequate retirement income is to maintain the current 
Social Security Program. That is, maintain a system where 
benefits are based on lifetime earnings, not move toward a 
system of personal accounts. And it is for that reason that I 
applaud the President's proposals that he described in the 
State of the Union.
    Let me very briefly explain why I think the President is on 
the right track and in turn respond to the three questions that 
you raised in the notice for this hearing.
    The first question you asked was, does Social Security have 
to be restructured; and the answer is no. Social Security is 
not facing a crisis. It is facing a long-run, projected deficit 
that is manageable. It can be fixed within the current 
framework of the existing programs. Much of the shortfall can 
be eliminated with the President's proposals and other 
proposals that not only raise money and cut benefits in an 
appropriate way but also are good policy.
    Second, do we need to replace or should we replace part of 
the Social Security's current defined benefit plan with 
personal security accounts? I think the answer to that is no, 
and that is where the President has come out after considering 
whether or not he should cut back on Social Security defined 
benefits and replace them with individual accounts.
    The individual accounts are risky. They are costly, and 
they could hurt women and the disabled. The whole point of 
having a Social Security system is to provide workers with a 
predictable retirement benefit. Social Security benefits are 
very modest. The average worker who retired last year at the 
age of 62 received a monthly benefit of $780 a month. That is 
less than $9,400 a year. This modest benefit should be an 
amount that people can count on and to which they can add 
income from private pensions and other savings. It cannot 
depend on the individual's independent decisions on stock--
picking stocks in a volatile stock market.
    Another risk with personal savings accounts is that they 
are unlikely to be kept until retirement. As in the case of 
IRAs and 401(k) plans, people will insist on some access to 
their accounts in order to cover emergencies and other 
important expenses. No matter how good the case for withdrawals 
prior to retirement might be, those withdrawals will mean 
inadequate retirement income.
    A third risk with a personal savings account is people may 
outlive their savings. In contrast, Social Security provides 
retirees with inflation-indexed annuities so that it guarantees 
benefits keep pace with inflation so long as a person lives.
    Personal savings accounts are also likely to be very 
expensive to administer. We can talk about that later, if you 
would like, but the estimates are that they could well equal a 
20-percent cut in benefit.
    Disabled workers are likely to receive sharply lower 
benefits under most proposals for personal savings accounts. 
The reason is that these proposals generally involve a cutback 
in Social Security benefits that are made up from a payment 
from accumulated assets. But if you become disabled midlife, 
you don't have enough time to accumulate enough assets. 
Therefore, persons with disabilities would be put at risk.
    Finally, women and low-income people generally have the 
most to lose from moving from the current system to a system of 
personal savings accounts. To the extent that personal accounts 
are substituted for Social Security, they would lose the 
progressive benefit formula. They would lose some spouses' and 
widows' benefits. They would lose the guarantee of inflation-
indexed annuities.
    Instead of personal savings accounts we should do as the 
President suggested. We should increase national saving and 
diversify investments within the context of the current 
    We know how to build up reserves at the Federal level. They 
do it at the State level, and we know how to invest in equities 
without having the government in the business of picking 
winners and losers. Nobody wants that. That is not a sensible 
    We can invest in a broad index through an independent 
investment board and delegate all voting rights down to 
independent fund managers.
    There is no reason, in short, to move toward a system of 
personal savings accounts. We can increase national saving and 
improve returns within the context of the existing program.
    Social Security's current defined benefit arrangement is 
the best way to ensure basic retirement protection. We should 
stick with it. We should modify the financing. We shouldn't 
change the program fundamentally.
    Thank you.
    [The prepared statement follows:]

Statement of Alicia H. Munnell, Peter F. Drucker Professor of 
Management Sciences, Boston College Carroll School of Management

    Mr. Chairman and Members of the Committee, I am delighted 
to have the opportunity to appear before you today to discuss 
proposals to preserve and strengthen Social Security. In my 
view, the best way to ensure that all Americans have an 
adequate basic retirement income is to maintain the current 
Social Security program, which pays benefits based on lifetime 
earnings, and not to move toward a system of personal savings 
accounts. Let me provide a brief summary of the reasoning 
behind that conclusion and, in the process, answer the three 
questions you raised in the notice for this hearing.
    I. Social Security is not facing a crisis and does not need 
major reform. The projected increase in Social Security 
spending due to the aging of the population is neither enormous 
nor unprecedented.
     The cost of the program is projected to rise by 2 
percent of GDP. Budget changes equal to 2 percent of GDP are 
not uncommon; defense spending increased by 5 percent of GDP at 
the start of the cold war and declined by 2 percent between 
1991 and 1998. The financing shortfall is manageable and does 
not require radical change in the program.
     Much of the projected shortfall can be eliminated 
with good policy options. For example, extending coverage to 
new state and local workers, increasing the maximum taxable 
earnings base, and reflecting corrections to the CPI in the 
COLA are all consistent with the goals of the program and will 
help close the financing gap. Investing the trust funds in 
private stocks and bonds will increase the return on fund 
reserves and close much of the remaining gap.
    II. Replacing all or part of Social Security's current 
defined benefit plan with personal savings accounts is risky, 
costly, and will hurt the disabled and women.
     The whole point of having a Social Security system 
is to provide workers with a predictable retirement benefit. 
Social Security benefits are quite modest; the average worker 
retiring at age 62 last year got $780 per month. That modest 
benefit should be an amount that people can count on and to 
which they can add income from private pensions and other 
sources. It should not depend on investment decisions in a 
volatile stock market.
     Another risk with personal savings accounts is 
that they are unlikely to be kept until retirement. As in the 
case of IRAs and 401(k) plans people will insist on access to 
their accounts in order to cover emergencies or to meet 
expenses. No matter how good the case for withdrawals prior to 
retirement might be, those withdrawals will mean inadequate 
retirement income.
     A third risk with personal savings accounts is 
that people may outlive their savings. In contrast, Social 
Security provides retirees with inflation indexed annuities, so 
that it guarantees benefits that keep pace with inflation for 
as long as a person lives.
     Personal savings accounts are likely to be 
expensive to administer. Studies show that administrative costs 
could well equal a 20-percent cut in benefits. Data from the 
U.K. and Chile, countries that have adopted personal saving 
accounts, suggest that the costs could be even higher. 
Annuitizing individual accumulations in the private market 
reduces benefits by another 10 percent. Social Security keeps 
administrative costs low by pooling investments, and low 
administrative costs ensure a higher net return to workers.
     Disabled workers are likely to receive sharply 
lower benefits with personal savings accounts. They will not 
have time to build up adequate reserves under a system of 
personal saving accounts. In contrast, Social Security provides 
full benefits for disabled workers.
     Finally, women have the most to lose from moving 
to a system of personal savings accounts. To the extent that 
personal accounts are substituted for Social Security, they 
would lose the progressive benefit formula that provides 
proportionately higher benefits for low earners than for high 
earners; women are more likely to be low earners. They would 
lose spouses' and widows' benefits, which help support women 
who spend time out of the labor force taking care of their 
families. They would lose the guarantee of inflation indexed 
monthly benefits for life, which is particularly valuable to 
women who on average live longer than men. Personal savings 
accounts would put these protections at risk.
    III. Instead of personal savings accounts, we can increase 
national savings and broaden investment options for workers--
changes that have been used to justify personal savings 
accounts--within the structure of the current program.
     The federal government can accumulate reserves. 
The non-Social-Security portion of the budget is headed for 
balance in 2002, probably sooner. We can keep it there and 
build up reserves in the Social Security trust funds. The 
states do it for their pension funds; the federal government 
should be able to do it for its major retirement system.
     Investing a portion of the Social Security trust 
funds in private stocks and bonds is both desirable and 
feasible. We know how to prevent interference in private sector 
activity: set up an independent investment board, invest in a 
broad index, and delegate voting rights to independent fund 
    In short, there is no reason to move toward a system of 
personal savings accounts; we can increase national saving and 
improve returns within the context of the existing Social 
Security program. Social Security's current defined benefit 
arrangement, where benefits are based on lifetime earnings, is 
the best way to provide basic retirement income. Social 
Security has served us well for nearly sixty years; let's 
modernize its financing but keep its benefit structure in 
place. Social Security is not broken; it just needs fine-

          I. Social Security is Not Facing a Financing Crisis

    Social Security is not facing a financial crisis. Rather, 
the current projections show a financing gap in the long run 
unless remedial action is taken, as it almost certainly will 
be. According to the Trustees' 1998 Report (intermediate 
assumptions), between now and 2013 the Social Security system 
will bring in more tax revenues than it pays out. From 2013 to 
2021, adding interest on trust fund assets to tax receipts 
produces enough revenues to cover benefit payments. After 2021, 
annual income will fall short of annual benefit payments, but 
the government can meet the benefit commitments by drawing down 
trust fund assets until the funds are exhausted in 2032. It is 
important to remember that the exhaustion of the trust funds 
does not mean the program ends in 2032, and nothing is left. 
Even if no tax or benefit changes were made, current payroll 
tax rates and benefit taxation would provide enough money to 
cover roughly 75 percent of benefits thereafter. It is this 
long-run gap between 75 and 100 percent that needs to be 
    Over the next 75 years, Social Security's long-run deficit 
is projected to equal 2.19 percent of covered payroll earnings. 
That figure means that if the payroll tax rate were raised 
immediately by 2.19 percentage points--roughly 1.1 percentage 
point each for the employee and the employer--the government 
would be able to pay the current package of benefits for 
everyone who reaches retirement age at least through 2075. 
While such a tax increase is neither necessary nor desirable, 
it provides a useful way to gauge the size of the problem.
    It is also useful to look at the program as a percent of 
GDP. The cost of the program is projected to rise from 4.6 
percent of GDP today to 6.8 percent of GDP in 2030, where it is 
projected to remain. This increase is due primarily to the 
aging of the population. A 2-percent-of-GDP increase in Social 
Security costs is significant, but hardly qualifies as a 
``demographic time bomb.''
    Although Social Security's financing problems are 
manageable and do not require radical changes in the system, 
two considerations are receiving more attention today than in 
1983 when Congress last passed major financing legislation. The 
first is the so-called ``money's worth'' issue. Unlike earlier 
generations that received large benefits relative to the taxes 
they paid, today's workers can expect to receive relatively low 
returns on their payroll tax contributions. Since raising taxes 
or reducing benefits will only worsen returns, almost all 
reform plans involve trying to increase returns through equity 
investment in one form or another. The second factor 
influencing the Social Security reform debate is increasing 
concern about our low levels of national saving. This concern 
along with the desire to avoid high pay-as-you-go tax rates in 
the future has led to considerable interest in some prefunding.
    Almost all proposals to restore financial balance to Social 
Security respond to concerns about rate of return and national 
saving. Both proposals to maintain Social Security's existing 
defined benefit plan and proposals to institute personal saving 
accounts involve a substantial accumulation of assets. 
Similarly, most proposals provide that those covered by Social 
Security should have access to the higher returns associated 
with equity investment either through investments in personal 
savings accounts or through broadening the investment options 
available to the trust funds. Because it is possible to have 
equivalent amounts of funding in the Social Security program 
and in a system of personal savings accounts and because equity 
investment is possible in either scenario, the question comes 
down to which arrangement is better for people's basic 
retirement income.

II. Personal Savings Accounts are Risky, Costly, and Hurt the Disabled 
                               and Women

    Here the economics are clear: the current Social Security 
program, where benefits are based on lifetime earnings, is the 
best way to provide the basic retirement pension. Personal 
savings accounts are risky, costly, and likely to hurt the 
disabled and women.

Personal Savings Accounts Are Risky.

    Personal savings accounts expose workers to three risks: 
market risk, the risk of using their savings before retirement, 
and the risk of outliving their resources.
    With personal savings accounts, individuals' basic benefits 
would depend, at least in part, on their investment decisions. 
What stocks did they buy? When did they buy them? When did they 
sell? Uncertain outcomes may be perfectly appropriate for 
supplementary retirement benefits, but not for the basic 
guarantee. Herb Stein, Chairman of the Council of Economic 
Advisers under President Nixon, summarized the argument best.

          ``If there is no social interest in the income people have at 
        retirement, there is no justification for the Social Security 
        tax. If there is such an interest, there is a need for policies 
        that will assure that the intended amount of income is always 
        forthcoming. It is not sufficient to say that some people who 
        are very smart or very lucky in the management of their funds 
        will have high incomes and those who are not will have low 
        incomes and that everything averages out.''

    Retirement income that depends on one's skills as an 
investor is not consistent with the goals of a mandatory Social 
Security program. Remember that Social Security is the major 
source of income for two-thirds of the 65-and-over population 
and virtually the only source for the poorest 30 percent. The 
dollar amounts are not very large: the benefit for a low-wage 
worker who retired at age 62 in 1998 was only $473 per month or 
$5676 per year and for a worker with a history of average wages 
was $780 per month or $9360 per year. Does it really make sense 
to put these dollar amounts at risk?
    Personal saving accounts also create a very real political 
risk that account holders would pressure Congress for access to 
these accounts, albeit for worthy purposes such as medical 
expenses, education, or home purchase. Although most plans 
prohibit such withdrawals, our experience with existing IRAs 
and 401(k)s suggests that holding the line is unlikely. To the 
extent that Congress acquiesces and allows early access--no 
matter how worthy the purpose--retirees will end up with 
inadequate retirement income.
    Another risk is that individuals stand a good chance of 
outliving their savings, unless the money accumulated in their 
personal savings accounts is transformed into annuities. But 
few people purchase private annuities and costs are high in the 
private annuity market. The reason for the high costs is 
adverse selection: people who think that they will live for a 
long time purchase annuities, whereas those with, say, a 
serious illness keep their cash. Private insurers have to raise 
premiums to address the adverse selection problem, and this 
makes the purchase of annuities very expensive for the average 
person. Moreover, the private annuity market would have a hard 
time providing inflation adjusted benefits. In contrast, by 
keeping participants together and forcing them to convert their 
funds into annuities, Social Security avoids adverse selection 
and is in a good position to provide inflation-adjusted 

Personal Savings Accounts Would Be Costly.

    In addition to making the basic retirement benefit 
dependent on one's investment skills, personal savings accounts 
would be costly. The 1994-96 Social Security Advisory Council 
estimates that the administrative costs for an IRA-type 
individual account would amount to 100 basis points per year. A 
100-basis point annual charge sounds benign, but estimates by 
Peter Diamond of MIT show that it would reduce total 
accumulations by roughly 20 percent over a 40-year work life. 
That means benefits would be 20 percent lower than they would 
have been in the absence of the transaction costs. Moreover, 
while the 100-basis-point estimate includes the cost of 
marketing, tracking, and maintaining the account, it does not 
include brokerage fees. If the individual does not select an 
index fund, then transaction costs may be twice as high. 
Indeed, costs actually experienced in the United Kingdom, which 
has a system of personal saving accounts, have been 
considerably higher than the Advisory Council estimate. 
Finally, because these transaction costs involve a large flat 
charge per account, they will be considerably more burdensome 
for low-income participants than for those with higher incomes.
    In addition to costs, a recent study by the Employee 
Benefit Research Institute (EBRI) has raised real questions 
about the ability, in anything like the near term, to 
administer a system of personal savings accounts in a 
satisfactory way. Unlike the current Social Security program 
that deals with the reporting of wage credits, a system of 
personal accounts would involve the transfer of real money. It 
is only reasonable that participants would care about every 
dollar, and therefore employer errors in account names and 
numbers that arise under the current program would create 
enormous public relations problems under a system of individual 

Personal Savings Accounts Would Hurt the Disabled and Women.

    Most proposals that move toward personal savings accounts 
involve a cut in benefits for disabled workers. These proposals 
typically involve a reduction in Social Security benefit levels 
for both disabled and retirees that, in theory, will be made up 
through the accumulations in their personal savings accounts. 
Thus, projections for the various reform proposals generally 
show that the combined payment from the personal saving account 
and the reduced Social Security program equals the benefit 
currently promised under Social Security for the average 
retiree. Unlike retirees, however, disabled workers will not 
have time before their disability to build up any significant 
reserves in their personal saving account to finance a full 
supplementary benefit. As a result, disabled workers are likely 
to experience a substantial reduction in benefits.
    For different reasons, personal savings accounts would also 
likely hurt women and low-earners generally. Although Social 
Security's benefit rules are gender-neutral, they are 
particularly helpful for women. First, the progressive benefit 
formula provides proportionately higher benefits for low 
earners than for high earners, and women are more likely to be 
low earners. Second, for women who spend their careers taking 
care of their families, Social Security provides retirement 
benefits equal to 50 percent of their husbands' benefits. 
Divorced homemakers (married least 10 years) can also get these 
benefits. Third, for older women whose husbands die, Social 
Security provides widows' benefits equal to 100 percent of 
their husbands' benefits. This is important because women tend 
to outlive their husbands. Fourth, if children are getting 
survivors' benefits, younger widows who stay home to care for 
them also receive benefits.
    Even with more women in the labor force, these family 
benefits remain important. In 1996 the majority (63 percent) of 
women beneficiaries aged 62 and older were receiving wives' or 
widows' benefits; 37 percent had no earnings history and were 
entitled only as a wife or widow, and 26 percent had a higher 
benefit as a wife or widow than as an earner.
    In addition to a progressive benefit structure and family 
benefits, Social Security has two other features that help 
women. First, Social Security pays monthly benefits for life, 
which is particularly valuable to women who on average live 
longer than men. Second, Social Security adjusts benefits 
annually for changes in the cost of living to protect their 
buying power against inflation. This protection matters more 
for women than for men because women live longer.
    All the protections of the current program would be put at 
risk if reform moved toward personal savings accounts. First, 
unless special provisions were enacted, a woman's retirement 
benefit would depend--at least in part--on her contributions 
into her personal account and the earnings on those 
contributions. Because women tend to have lower wages and less 
time in the labor force, their contributions and earnings 
would, on average, produce low retirement benefits. Second, 
many of the family benefits currently provided by Social 
Security would likely be cut back. Third, with individual 
accounts the money is not automatically converted to a lifetime 
annuity or protected against inflation. If people get their 
money back in a lump sum, they could use it up before they die 
and leave nothing for their widow. This risk is compounded by 
the absence of inflation protection. In short, the present 
Social Security system offers a range of protections that are 
of great importance to women and are not duplicated by any of 
the proposals to privatize the system.
    What then is the best approach?

    III. Fund Social Security and Invest in Private Stocks and Bonds

    The alternative to personal savings accounts is to accumulate 
reserves in the Social Security trust funds and invest part of those 
reserves in private stocks and bonds. This approach offers many of the 
advantages of personal saving accounts without the risks and costs. It 
has the potential to increase national saving and offers participants 
the higher risk/higher returns associated with equity investment. But, 
unlike personal saving accounts, a partially funded Social Security 
program with equity investments ensures predictable retirement incomes 
by maintaining a defined benefit structure that enables the system to 
spread risks across the population and over generations. In addition, 
pooling investments keeps transaction and reporting costs to a minimum, 
producing higher net returns than personal saving accounts.

Accumulating Reserves.

    Would it really be possible for the federal government to 
accumulate reserves? A key requirement for success is separating Social 
Security completely from the rest of the budget. To date, increasing 
saving through accumulations in the Social Security trust funds has 
produced ambiguous results. Critics contend that the existence of 
Social Security surpluses encourages either taxes to be lower or non-
Social-Security spending to be higher than it would have been 
otherwise. Although little evidence exists to support this contention, 
a unified budget and large deficits have blurred the picture to date. 
But the fiscal outlook is changing; the unified budget is in surplus 
and the Congressional Budget Office projects that the non-Social-
Security portion of the budget will be balanced by 2002, if not sooner.
    Revising the presentation of government accounts to separate Social 
Security completely from the rest of the budget also would clarify the 
extent to which the system is adding to national capital accumulation. 
Technically, the Social Security Amendments of 1983 already have placed 
the Social Security trust funds ``off-budget.'' This legislation 
reversed the reliance on the concept of the unified budget first used 
by Lyndon Johnson in FY1969. The difficulty is that, while Social 
Security is exempt from most enforcement procedures, budget targets are 
always stated in terms of the unified budget and the budget numbers 
reported by the Administration, Congress, and the press always include 
the balances in the trust funds. Thus, separating Social Security from 
the rest of the budget requires changing culture more than changing 
legal requirements.
    Is it realistic to evaluate the budget without Social Security? 
Comparisons of the federal government with the states are always 
tricky, but states have been successful in this endeavor. They 
accumulate reserves to fund their pension obligations but generally 
present their budgets excluding the retirement systems. Their non-
retirement budget balance has remained positive, while annual surpluses 
in their retirement funds have been hovering recently around 1 percent 
of GDP. Thus, states are clearly adding to national saving through the 
accumulation of pension reserves. With a commitment to balance the non-
Social-Security portion of the budget, the same should be achievable at 
the federal level.

Investing in Equities.

    Equity investment for Social Security is also a feasible option, 
and a partially funded Social Security program with private stocks and 
bonds is the realistic alternative to personal saving accounts. 
Everyone involved in the debate recognizes that having the federal 
government in the business of picking winners and losers and voting on 
corporate proposals is undesirable. Thus, it is essential to establish 
mechanisms to ensure that the government does not interfere in private 
sector decisions, and we know how to do that.
    For example, trust fund equity investments would be indexed to a 
broad market average, and the goal of investment neutrality be 
established in law. An expert investment board, similar to the Federal 
Retirement Thrift Investment Board that administers the Thrift Savings 
Plan for federal employees, would be responsible for selecting a broad 
market index, such as the Russell 3000 or the Wilshire 5000, for trust 
fund investments. This board would also be responsible for choosing, 
through competitive bidding, several portfolio managers to manage the 
accounts, and for monitoring the performance of these managers. To 
ensure that government ownership does not disrupt corporate governance, 
the investment board would be required to delegate voting on proxy 
issues to the individual portfolio managers. Caps on the holdings in 
any individual company can be introduced to ensure that Social Security 
does not disrupt financial markets. Moreover, the investment in stocks 
would occur gradually over a 10- or 15-year period.
    Even though equity investment by Social Security would not disrupt 
the markets, some critics still worry that it could have a substantial 
effect on relative rates of return, perhaps driving up government 
borrowing costs. The portfolio restructuring would be expected to have 
some effect on relative returns. The equity premium would decline to 
reflect the increased efficiency of risk bearing in the economy. Some 
movement would also be expected in interest rates. One study that has 
estimated the effect on relative returns concluded that the shift to 
equities in the trust funds would lower the equity premium by 10 basis 
points and raise the interest on Treasury securities by roughly the 
same amount (Bohn 1998). With current levels of federal debt, this 
increase in Treasury rates should have a relatively small effect on the 
federal budget. As the economy grows and the debt declines, the effect 
should be negligible.
    While Social Security investment in equities is unlikely to disrupt 
financial markets or cause major shifts in rates of return, many people 
are concerned that Social Security investment in equities could lead to 
government interference with the allocation of capital in the economy 
and with corporate activity.
    In the Social Security debate, both supporters and opponents of 
trust fund investment in equities point to the performance of public 
pension funds to argue their case. Supporters cite the success of 
federal plans, particularly the federal Thrift Savings Plan (TSP). The 
TSP has established a highly efficient stock index fund and has steered 
clear of any issues of social investing. TSP designers insulated 
investment decisions by setting up an independent investment board, 
narrowing investment choices, and requiring strict fiduciary duties. 
The TSP also operates in a political culture of noninterference. Its 
creators made clear from the beginning that economic, not social or 
political, goals were to be the sole purpose of the investment board. 
The TSP has perpetuated this norm by refusing to yield to early 
pressure to invest in ``economically targeted investments'' or to avoid 
companies doing business in South Africa or Northern Ireland. It has 
avoided government interference with private corporations by pushing 
proxy decisions down to independent portfolio managers.
    Opponents of trust fund investment in equities point to state and 
local pension funds. They contend that state and local pensions often 
undertake investments that achieve political or social goals, divest 
stocks to demonstrate that they do not support some perceived immoral 
or unethical behavior, and interfere with corporate activity by voting 
proxies and other activities. Opponents charge that if the investment 
options are broadened at the federal level, Congress is likely to use 
trust fund money for similar unproductive activities.
    My view is that the social investing activity of state and local 
pension plans has been grossly exaggerated, and that any such activity 
would be even less likely to occur at the federal level. For example, 
using a very comprehensive definition, a 1993 study for Goldman Sachs 
reported that economically targeted investment totaled less than 2 
percent of total state and local pension fund holdings. Similarly, most 
of the divestiture activity, which centered on firms doing business in 
South Africa, ended in 1994. Proxy voting activities would not occur at 
all in the case of Social Security, since all advocates support the 
notion of delegating voting to the independent pension fund managers.
    In short, a partially funded defined benefit plan with equity 
investment is feasible and can do everything that privatized accounts 
can do but at lower costs, thus yielding higher net returns. A recent 
GAO report did not identify any insurmountable hurdles with direct 
trust fund investment in equities. Canada should provide some good 
information about the feasibility of this type of equity investment 
since is in the process of setting up a board that will oversee the 
investment of its Social Security trust funds in equities.

                             IV. Conclusion

    Let me conclude. Most plans being discussed today involve 
both prefunding and equity investment. In economic terms, the 
goals of prefunding and broadening the portfolio can be 
achieved either within the context of Social Security's defined 
benefit program or in personal saving accounts. The question 
becomes which is the best benefit structure for people's basic 
retirement income. Here the economics are clear. A defined 
benefit plan allows for better risk spreading, lower costs, and 
better protection for disabled workers and women than personal 
saving accounts.
    Once balance is restored to the existing program, it is 
possible to consider changes that would improve the likelihood 
that future retirees will have adequate incomes. One option is 
to introduce voluntary supplemental personal saving accounts 
coordinated with Social Security for those who would like to 
set aside more money. Thus, the debate is not about whether 
personal saving accounts are good or bad in general. With 
people assured basic retirement protection, personal saving 
accounts may be a perfectly reasonable addition. What opponents 
of personal saving accounts object to in the context of Social 
Security reform is cutting back on existing basic Social 
Security benefits and replacing those benefits with a risky and 
costly alternative which leaves a lot of people behind. 
Introducing personal saving accounts as an add-on to Social 
Security is a good idea; substituting personal saving accounts 
for existing Social Security benefits, which needlessly 
undermines long-standing basic protections, is a bad idea.


    Advisory Council on Social Security. 1997. Report of the 1994-1996 
Advisory Council on Social Security (Washington: Government Printing 
    Bohn, Henning. 1998. ``Social Security Reform and Financial Markets 
``Social Security Reform and Financial Markets,'' in Steven Sass and 
Robert Triest eds. Social Security Reform: Links to Saving, Investment, 
and Growth (Boston, MA: Federal Reserve Bank of Boston).
    Diamond, Peter A.. 1997. ``Macroeconomic Aspects of Social Security 
Reform,'' Brookings Papers on Economic Activity, 2.
    Diamond, Peter A..1998. ``Economics of Social Security Reform: An 
Overview,'' in A. Douglas Arnold, Michael Graetz, and Alicia H. Munnell 
eds. Framing the Social Security Debate: Values, Politics and Economics 
(Washington, D.C.: National Academy of Social Insurance and the 
Brookings Institution).
    Employee Benefits Research Institute. 1998. ``Beyond Ideology: Are 
Individual Social Security Accounts Feasible?'' EBRI-ERF Policy Forum, 
December 2.
    Hammond, P. Brett and Mark J. Warshawsky, ``Investing in Social 
Security Funds in Stocks,'' Benefits Quarterly, Third Quarter 1997, 52-
    Munnell, Alicia H. and Pierluigi Balduzzi. 1998. ``Investing the 
Trust Funds in Equities'' (Washington, D.C.: Public Policy Institute, 
American Association of Retired Persons).
    Stein, Herbert. 1997. ``Social Security and the Single Investor'' 
Wall Street Journal (February 5,1997)
    United States General Accounting Office. 1998. Social Security 
Investing: Implications of Government Stock Investing for the Trust 
Fund, the Federal Budget, and the Economy (Washington, D.C.: Government 
Printing Office)


    Mr. Shaw. Thank you, Dr. Munnell.
    A couple of questions.
    As I understand your testimony, you are in support of the 
President's position with regard to direct investment. You are 
against the individual accounts, and you stated your three 
reasons as to your opposition.
    With regard to the President's position and direct 
investment in the private sector by the Federal Government, how 
do you counter, or do you agree with, the argument that 
Reverend Jackson made as to the morality of investments? I 
think you talk about index funds. How would you sanitize them 
to be sure there is nothing in there that is offensive to any 
part of the population, and who would decide what is offensive 
to a certain part of the population? This is a very, very 
difficult question which I think has really been left 
unanswered at this point.
    Ms. Munnell. I agree with you, Mr. Chairman. Those are 
really important issues, and I also think that the proposal was 
not described in the best possible way. Nobody is advocating--
nobody, not the administration, not any supporter--is 
advocating the government investing in equities.
    The way the proposal should have been framed is to change 
the management of current Social Security reserves. And the way 
the management would be changed is to hand it over to an 
independent board very like the Federal Reserve Board; and that 
board would pick a very broad index of equities, such as the 
Wilshire 5000 or Russell 3000 or whatever, that reflects the 
entire cross-section of American industry. That board would 
then give the money to independent pension fund managers, the 
same managers that manage private pension fund money. These 
private pension fund managers would mingle the government money 
with their private money, and they would invest as instructed 
to follow this index.
    In terms of the other thing that makes business very 
nervous, which is the prospect of the government voting proxies 
and interfering with corporate governance and other issues, the 
proposals all involve delegating the proxy voting down to these 
individual pension fund managers. They do it now for State and 
local funds and for private pensions. They have fiduciary 
responsibility to earn the maximum return, so they are not 
going to be fooling around.
    Mr. Shaw. So you do not believe that the Congress would 
come forward and put investment guidelines based upon morality 
as we may individually see it here in the Congress, but not 
necessarily in the other world. Whatever we develop is going to 
be a product of legislative edict. There is no question about 
that. So what would prevent the Congress from putting 
guidelines into the investment provision which are largely more 
political than practical as far as good investment practices 
are concerned? As I understand your testimony, you are saying 
the Congress wouldn't do it, but as I understand what Reverend 
Jackson's testimony was is that we need to put moral restraints 
on investment.
    Let me go to another point, because I don't want to prolong 
this since this has already gone on very long. Onto the three 
points that you talk about as far as private investment is 
concerned on individual investment accounts.
    One, you talk about the question of fluctuation of the 
market. Obviously, that can be a problem. But there could be 
guarantees put in which would negate that problem.
    The other is early withdrawal. I would think that if we did 
go that route as far as our Social Security legislation, that 
we would prohibit early withdrawal and would put guidelines on 
it that would keep that from happening. Otherwise, you would 
end up with a large number of people facing a crisis, taking 
out of their individual retirement account or even borrowing 
against it and then would hit hard times and have nothing then 
when they reached retirement.
    I missed your third point. What was it?
    Ms. Munnell. I am concerned about women and low-income 
people generally in the sense that----
    Mr. Shaw. That is something that we are going to have to be 
facing and we will be taking a close look at during the 
deliberations of the Subcommittee on Social Security.
    Mr. Rangel.
    Mr. Rangel. Thank you, Mr. Chairman.
    You know, if we are going to guarantee investment and 
guarantee that the beneficiaries not have their benefits cut, I 
think you have got a winner with me. I don't see how you can do 
all these things. Just like Mr. Matsui said, if you are going 
to let people go in and take high risks and know they are going 
to be guaranteed, it will be difficult. I don't know what 
regulations we are going to have.
    But I tell you this. If you are saying that if you carve 
out a piece of the contribution and put that into the private 
sector and find a way not to reduce present benefits for the 
future and not to lose the returns on the investment, that 
sounds like something I wish I had a long time ago.
    Mr. Shaw. If the gentleman would yield to me. I am not 
suggesting that we have a program that would allow high-risk 
investment. There would be restraints put on the type of 
investments that would be made, and they would have managers of 
the account which would in some way be somewhat certified. So I 
think that you are going into----
    Mr. Rangel. If you have those restrictions, why can't the 
government then have the same restrictions and go into the 
marketplace--as the President recommended--and, therefore, not 
have undue influence.
    Chairman Shaw. Let me also be very clear on this, if you 
would indulge me for a moment.
    I am not at this point prepared to endorse any plan. I am 
just simply trying to respond to the objections and concerns 
that our witnesses have so that we can continue the hearing 
process so then we, our Subcommittee with Mr. Matsui, can then 
get together and draw up a plan that is fair and it would 
answer many of the concerns that we have. But at this point I 
want to be very, very clear I am not endorsing any plan, nor am 
I taking anything off the table.
    Mr. Rangel. Well, I want to join with you in that effort, 
because I think that is the way the entire Committee should go.
    And, Dr. Munnell, we appreciate the contribution you have 
made based on your experience as Assistant Secretary of the 
Treasury. You have raised a lot of problems that this Committee 
can resolve if we have the will. And I want to thank you for 
your contribution because we have had a great diversity of 
ideas from the witnesses, but once we make a commitment that we 
are going to take care of this system first and then move onto 
Medicare and then move onto tax cuts, we have come a long way. 
The question is, how do we find that mix? And we thank you for 
your support and your testimony.
    And I want to thank you, Mr. Chairman.
    Mr. Shaw. Thank you, Mr. Rangel.
    Mr. Houghton.
    Mr. Houghton. Thank you very much.
    I see us on the verge of something really very important 
because, at the moment, money comes into the Social Security 
system, that money is put into special Social Security Treasury 
bonds, then is spent. Under the new system, the way we 
comprehend it now, it will go under the Social Security system. 
Part of the money will be invested in Social Security bonds but 
will be kept there, not spent, and then another portion of that 
money will go into private investment. So really we are talking 
about who invests that money.
    Ms. Munnell. Exactly.
    Mr. Houghton. You talk about Herb Stein here in your paper 
saying that the Social Security system ought to be an amount of 
money which is always forthcoming. You will have that----
    Ms. Munnell. Right.
    Mr. Houghton [continuing]. If nothing is changed.
    Ms. Munnell. Right.
    Mr. Houghton. Forget about the private market. Because you 
will be separating that unified budget, and those moneys will 
go in and start accumulating their own increases through the 
compounding effect.
    Ms. Munnell. But the benefits would continue to be based on 
people's lifetime earnings, not on what happens to the stock 
    Mr. Houghton. Exactly. Exactly. However, if somebody--and 
this is a question. If somebody invests in a private fund or 
the government does it through whatever means, through a 
consortium of individual investors, whatever it is, they will 
be looking periodically. You will have a book on the Chilean 
system, I will have a book and I will look at your book to see 
who is making the most money and who is accumulating what for 
themselves or their children or their mothers or their fathers 
and things like that.
    Now, why isn't it possible to not only have government 
investors but also me as an individual have a personal 
retirement account so I can make that decision? If I am unsure 
about my ability to invest, if I am unsure about what money 
will come back to me, I can put it with the government, but if 
I want to take a risk or I see I can make more money, why isn't 
it a good idea to have that option?
    Ms. Munnell. I think the key debate here is the extent to 
which you want to cut back on promised Social Security benefits 
and substitute individual investing decisions for that. And I 
think that is what the administration has been considering for 
a year, and they have come down on the side of not cutting back 
on Social Security. And I think the reason is that Social 
Security benefits are so modest that, for the average 
individual, you just do not want to put some of that money at 
risk. And if you leave it up to individuals, whether they want 
to opt out of the system or not, what is going to happen is the 
high-income individuals are going to opt out of the system and 
start investing on their own, and that is going to undermine 
the financing of the system going forward.
    Could I just take the opportunity to make one analytical 
point? This is not a personal judgment. This is just a point 
that all economists agree on. But it came up this morning again 
and again and again, and it just seems very important to 
    Congressman Kemp suggested that if we just started sending 
our payroll taxes to Fidelity or State Street instead of 
sending them to the Treasury that we could all start earning 7 
percent instead of the 2 percent we get under Social Security. 
That is just analytically wrong. It is true that we will get a 
higher return on that little bit of account that we have at 
Fidelity, but we are not going to shut down the existing 
retirement system. We are going to continue to pay benefits for 
those people who are already retired and to those who will 
    And what we have to subtract from the higher returns we get 
on the individual accounts is the cost that we are going to 
have to pay to keep the benefit promises to those people who 
are currently receiving benefits and about to receive benefits. 
So just diverting money away from the Social Security system 
doesn't solve the problem because we have this unfunded 
liability that we are going to have to pay off. So it is not 
correct to say, just redirect our money; we will be fine.
    Mr. Houghton. Just to reclaim my time.
    Ms. Munnell. I am sorry.
    Mr. Houghton. I wonder, in terms of the totality, the 
arithmetic here, whether you will be doing that because you 
will be taking the dollar that comes into the system and you 
will be dividing it, but the process, even if you only take 80 
percent of that dollar or 80 cents, that amount will be 
compounding and that will be creating far more wealth in the 
system just on its own. So you have an opportunity to do 
something with the other.
    Ms. Munnell. I think that investing in equities within the 
current structure is a very good idea because you will get a 
higher return which means you won't have to raise taxes as much 
or cut benefits as much in the future and people will get a 
higher return on their Social Security benefits.
    I am very skeptical, sir, about saying let people not send 
their money into the Social Security Program. Let them send it 
into individual accounts. I think that is a different game, and 
I think it is full of risks.
    Mr. Houghton. Thank you.
    Mr. Shaw. Mr. Matsui.
    Mr. Matsui. Thank you very much, Mr. Chairman.
    I would like to thank you very much, Dr. Munnell, for being 
here today. I know you came in from Boston, and we appreciate 
it. Even though the hour is a little late, I hope this doesn't 
disrupt your schedule.
    Ms. Munnell. I understand. Thank you.
    Mr. Matsui. You have had a great deal of experience as a 
Member of the Council of Economic Advisers and other areas of 
the government and, obviously, with your role now as a Peter 
Drucker Professor in Boston. Could you perhaps discuss with all 
of us the public pension programs?
    We have CALPERS, P-E-R-S, in California and a number of 
others. My understanding, if you add up all of these public 
pension investments throughout the United States, that equals 
about 10 percent of the current stock market, the equity 
market, and do you find that there is interference by the 
political system in these various jurisdictions with investment 
patterns? And perhaps you can just kind of give us a point of 
view on that.
    Ms. Munnell. Actually, I am doing a study right now looking 
at what is happening at the State and local level. I had done 
an earlier study in the eighties, and there was a lot of hanky 
panky going on at that time that could make one cautious. So it 
seemed appropriate to go back and look again.
    Basically, you have three things that happen that could 
fall under the heading of social investing.
    One, you target specific investments that are seen to have 
collateral benefits; and at the State and local level, this 
involves targeting instate investment.
    The second thing is what Reverend Jackson was talking about 
this morning, saying you have to get rid of companies doing 
business in South Africa or tobacco stocks or something else.
    And the third thing is that you vote the proxies in a way 
that interferes with corporate decisionmaking.
    Let me just tell you, one, in terms of the targeting, there 
is very, very little of that going on at the State and local 
level now. A study that was done for Goldman Sachs in 1993, and 
they were trying to show there was a market there for Goldman 
Sachs services, so I think it is a very comprehensive survey. 
This survey showed there was less than 2 percent of State and 
local pension fund assets involved in targeted investments.
    I have done some empirical work just recently to see if 
those plans that undertook this kind of targeting sacrifice 
returns at all. They did not. But I think the most important 
point is that there is much less going on than you would 
    The second thing, in terms of divestiture, that ended 
pretty much with the end of apartheid in South Africa. But even 
in the case of South Africa there was a compromise in adopting 
the ``Sullivan principles'' rather than actually selling. There 
is some discussion about tobacco, but there is just not a lot 
of divestiture activity.
    And the third component, this voting proxies like the 
California pension system does, that just would not happen at 
all at the Federal level because the proxy voting would be 
delegated down to the independent fund managers. I think 
personally you could avoid all this activity. We have--the 
Thrift Savings Plan, which has the government in the position 
of appointing a board that hires the managers to invest the 
funds, have avoided all this type of social activity.
    Now, just to go back to Reverend Jackson's comment. 
Everybody has a different job to do here. His job is to draw 
attention to the moral issues in society. The labor union's job 
is to draw attention to firms that are not prolabor. It is the 
job of health advocates to rail against the tobacco companies. 
But it would be the job of Congress to set up a board that is 
insulated from that type of pressure, and you have done it with 
the Federal Reserve Board. You have done it with the Federal 
Thrift Savings Plan.
    It can be done. I don't think this is really a big deal, 
and I don't really think that the risks are great here at all, 
with all due respect to Chairman Greenspan.
    Mr. Matsui. I would like to just follow up on that as well, 
because both Bob Reischauer and Bob Ball, both of them experts 
in the area of social policies, Social Security and, obviously, 
health care, have come up with a plan that they feel would in 
fact insulate the fund managers from the political system. 
Could you comment on that?
    Ms. Munnell. Yes. I think you are absolutely correct. They 
have done just that--modeled it on the Thrift Savings Plan and 
the Federal Reserve Board so Congress appoints a board with 
long and staggered terms. The responsibility of that board is 
to select an index. They take the money. They do not do 
anything with the money themselves. They give it to individual 
pension fund managers, and they give the pension fund managers 
the voting rights, and it is managed just like private pension 
fund money and other moneys that the private pension fund 
managers have.
    So we have really gotten ourselves off on the wrong foot 
here in terms of talking about government investment in 
equities. No one is proposing that. That is not what the 
President is proposing. He is saying that the government would 
hand over the management of these funds to private-sector 
management, but it would be kept in one big pool rather than in 
individual accounts.
    Mr. Matsui. If I could just follow up on this, because one 
of the big concerns in the seventies and early eighties was the 
fact that labor unions were in control of many of the private 
pension programs in the United States. And everybody was--not 
everybody but many people were concerned about labor unions 
using its dominance and affecting corporate America, and I 
didn't see any of that happen because the prudent person test 
obviously came into play. These fund managers had to make sure 
they got the highest return for their investment. Obviously, 
even the employees wanted to make sure they got a high rate of 
return--they made sure their pensions were protected, and 
perhaps in conclusion you can comment on that.
    I want to thank you very much for your testimony.
    Ms. Munnell. I think even those people who support targeted 
investment, and I am not one of them, always start with saying 
that the investment has to earn a market return for a given 
level of risk and then let's look for some collateral benefits. 
But the whole culture has changed. No one is out there thinking 
that they can sacrifice return for social considerations.
    Mr. Matsui. Thank you very much.
    Mr. Shaw. Mr. Coyne.
    Mr. Coyne. Thank you, Mr. Chairman.
    Dr. Munnell, you spoke about the larger investment, that 
the President has proposed having private investment firms 
invest that money, and there has been some concern expressed 
about that idea relative to dictating those investments or 
guiding where those investments go. And then we have the USA 
accounts that the President has proposed as well. Couldn't one 
make the same argument about the USA accounts--that part of 
that will be government money and that if Congress was of a 
mind to, it could say that you shouldn't invest any of that 
money into politically incorrect companies. Is there an analogy 
    Ms. Munnell. Yes, there is a total analogy. To the extent 
that the government is actually in the position of selecting--
through a board selecting the index fund, even if afterward the 
index fund is divided up so that people have their individual 
names on them, the same issues arise. And so if you are 
concerned about one, you should be concerned about the other. I 
am not concerned; I think the protections can be built in.
    Mr. Coyne. For both.
    Ms. Munnell. For both.
    Mr. Coyne. Thank you.
    Mr. Shaw. If I could just follow up on that for just one 
moment, that last question with regard to USA accounts. Is the 
President's proposal based upon Federal control of those 
accounts as it would be in the other? You have got some details 
that we don't have.
    Ms. Munnell. Sorry, Mr. Shaw. No, I think that this is 
still a very vague proposal. But to the extent that they go the 
route, that it involves all the money coming into the 
government and then the government delegating the investment 
management down. Somebody is going to have to decide which 
index fund, stock index fund, which bond index fund.
    Mr. Shaw. USA accounts would have the same control as the 
investment accounts in Social Security or is this work in 
    Ms. Munnell. Work in progress.
    Mr. Shaw. Fine. Thank you.
    Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    Dr. Munnell, would those USA accounts still be part of a 
unified budget and then under the unified budget structure, 
could those funds then be used to cover deficit spending?
    Ms. Munnell. My understanding, and this is, as we just 
agreed, it is a work in progress, is that the expenditures that 
are involved in putting the initial amount into the individual 
accounts plus the match that the government would make would be 
expenditures under the unified budget.
    Mr. Collins. So, therefore, they could be used as the 
current--under the current structure of the unified budget 
where we have the positive cash flow in the trust funds, it 
could be used to offset deficit spending.
    Ms. Munnell. This is an expenditure. It would reduce the 
    Mr. Collins. I caution my colleagues, too, about comparing 
several thousand State, local or other type pension funds as 
having 10 percent of the combined control of the market versus 
4 percent from one voice, which would be the Federal 
Government, because that one voice of 4 percent rings a lot 
louder than combined efforts of several thousand of 10 percent.
    I had a few comments I wanted to make to the previous 
panel, but they are gone, so I hope you will bear with me to 
make them to you. It might take me a couple extra minutes, Mr. 
Chairman. I talk a little bit on the southern side.
    Dr. Munnell, I enjoy talking about Social Security, maybe a 
little different from some of my other colleagues, because 
Social Security is my old age pension. It is also the old age 
pension of my wife. I turned down the congressional pension 
and, by turning that down, I am denied access to the thrift 
plan, so I don't have either of those. Nor does my small 
business have any type of retirement plan, including the 
    As I look at Social Security though, I see three age 
groups. The current beneficiaries, I see no change for current 
beneficiaries. I see very little, if any, change there would be 
under an option for the next generation or my generation of 
    But then I see the third group, the generations behind us. 
That is where the focus really needs to be, if you are going to 
talk about a retirement system, as well as a safety net system.
    We have three forms of insurance today that are government 
controlled: Social Security, socialized insurance; disability 
insurance; and health insurance, or Medicare.
    In the area of the Social Security insurance, I believe we 
can work toward a division of those dollars that would actually 
allow an individual to have an option for part of those funds 
to be invested either in the market or all into an interest-
bearing account.
    The other half, or other part, not a division of half, but 
the other part would continue to sustain a social insurance 
plan. That is your safety net. That is for income for those who 
may have had some event in their life that jeopardized their 
retirement income. Their disability would continue as it is. We 
probably are going to have to do some reforming in that area, 
and we do have some reforms in mind that would continue to 
assist those that have some happenstance in their life that 
puts them at disadvantage.
    Medicare, as Chairman Greenspan suggested yesterday, that 
is our greatest challenge facing us as far as insurance. Today 
we have a budget with a positive cash flow. I shy away from the 
word ``surplus.'' But until we resolve the Social Security 
issue, I really think that that cash flow, the positive portion 
of it coming in through the payroll tax, should be set aside. I 
also think the interest accruing on those funds now invested in 
government securities should too be set aside. In other words, 
we are disassembling the unified budget.
    The purpose of this is to build confidence in the people. I 
have held several townhall meetings, and I love to talk about 
Social Security, but I can talk until I am blue in the face. I 
can show all of the slides, all of the presentation, all the 
prior want, but when I am finished the first question I ask is 
is it true that you, Congress, you all have robbed the Social 
Security Trust Fund and spent the money?
    We have to build the confidence of the people to begin with 
to get anywhere with this issue.
    If there is a positive cash flow after we do this, then we 
really have a surplus. Much of the surplus then would be in the 
area of general funds, and we should look at tax relief. When 
you look back at the 1997 tax relief bill that was enacted 
without a positive cash flow, it had real positive effects on 
those insurance programs that we are talking about, and reforms 
that took place, other than the tax bill, were the welfare 
reforms, the Medicare reform, we corrected some spending habits 
of the taxpayers' money. And when we did those things, the 
positive effect it had on the trust funds were, the report 
prior to those activities by the Trustees of the Social 
Security Fund was all of the reserve resources would deplete 
themselves by the year 2029. The most recent report has upped 
that now to 2032. So those efforts have had a positive effect.
    So I think, too, we need to look forward to how we can 
enhance the economy more so with some specific tax relief, as 
Chairman Greenspan alluded to yesterday.
    But truthfully, the debate has just begun on this issue. As 
Mr. Holden says, that is 90 percent of the effort. I just hope 
that this debate will continue with all sincerity, and not 
become politicized. Trust. We must have trust in ourselves, we 
must have trust among those who are beneficiaries today, future 
beneficiaries, and the Congress and the administration, or we 
get nowhere with this issue.
    I thank you for your endurance.
    Mr. Shaw. Thank you, Mr. Collins. I think we all at this 
point can associate ourselves with your remarks and, hopefully, 
it will come to fruition.
    Mrs. Thurman.
    Mrs. Thurman. Thank you, Mr. Chairman. Dr. Munnell, first 
of all, for the viewing audience out there still and the 
cameras, one of the things I would like you to do is tell us 
where you work and who you are with, so that there is no belief 
that you are here with the President's plan, this is something 
you are just looking at.
    Ms. Munnell. I am Peter F. Drucker Professor of Management 
Sciences at Boston College, and I can quite honestly say for 
the past year I have been very concerned about what the 
administration was going to come out with, and I was not a 
participant in that debate, since I left the administration 
more than 1\1/2\ years ago. But I am very pleased with how they 
have come down on these issues.
    Mrs. Thurman. I think that is important for people to know, 
because it is almost like you are having to answer the 
questions for the USAs without having much knowledge, other 
than what the rest of us know.
    Second, I would like to say during the discussion, and this 
kind of goes back to trust and everything that has been kind of 
talked about here, there was other research done, and 
particularly it is called the 2030 Center Social Security poll, 
and I just kind of want people to know that I think there is 
more of a concern out there, or at least more of a feeling, 
that this could be around. One of the things it says is 
Americans believe in Social Security. Fully 73 percent say that 
Social Security can work for young people when they retire if 
Congress will strengthen that system's finances.
    So to this kind of doldrum out there that says this is 
awful, we are never going to have it, I don't think that is 
true, and I think that is why this debate becomes important.
    Third, and this goes to the women's issues, I think, I 
would like you to discuss with us the Social Security system as 
we know it today and the positive effects that it has for 
    Somehow I am getting this feeling that we are kind of 
drifting off, that the system we have doesn't work and it is 
not going to work. So if you could just, please, talk a little 
bit about what are the positives of the system and why are we 
arguing so strongly at any changes that will be made, that we 
are only strengthening what is already available.
    Ms. Munnell. The current system is extremely important for 
women. It takes into account two factors that characterize 
women. Unfortunately, they on average earn less than men, and 
then, I guess fortunately, they live longer than men.
    Mrs. Thurman. Fortunately.
    Ms. Munnell. Which is a good thing. In terms of what women 
gain from the current system: It has a progressive benefit 
formula. That means it provides proportionately higher benefits 
for low-income earners than for high earners, and women tend to 
be on average low earners. Women tend to spend a lot of time 
out of the labor force taking care of their families, and for 
those women who don't have an earnings record of their own, 
they provide spouse's benefits, and then the system provides 
widow's benefits when the husband dies, and the usual pattern 
is for the woman to outlive the husband.
    Factors that benefit women because they live longer are 
that the benefit payments are in the form of an annuity. That 
is your guaranteed monthly amount, no matter how long you live. 
And also the benefits are indexed for inflation, and that is a 
provision that is much more important the longer you live, 
because the longer inflation goes on, the more it erodes your 
    So these are guarantees. These are in the law. These are 
provisions that protect women, and to the extent we change the 
current system, that is, we divvy it up and make it two parts, 
one of individual accounts and the other the current system, we 
lose those protections.
    Mrs. Thurman. Then on top of that we have the situation of 
disabilities. If somebody were to be injured and hurt we have 
some provisions in there to help them. The woman who might lose 
her spouse and has children, young children, we have provisions 
to provide for the family.
    So when we then go into this next discussion of these 
special accounts, private investments, whatever, then where our 
real concern is really comes down to the demographics you just 
suggested, could be actually things that work against them.
    Ms. Munnell. I think that individual accounts put 
protections that women and low-income people generally receive 
under the current program at risk.
    Mrs. Thurman. The next question is, and this is the one 
that in every plan that we are looking at is this kind of 
carve-out situation, where we take money away. What do you see 
as the effects if we do nothing but take 3 percent of this 
payroll tax and move it over? What happens to Social Security 
in these kinds of situations as we know it today?
    Ms. Munnell. The current gap in the Social Security Program 
is roughly 2 percentage points of payroll. So you start 2 
percentage points in the hole. If you then say I am going to 
take 3 percentage points off the taxes currently in place and 
send that to an individual account, you have made your hole 5 
percent. If you are going to have your Social Security part of 
your program balance, that means you have got to cut back 
benefits to make it fit inside that very much smaller fraction.
    Mrs. Thurman. Could you say that again?
    Ms. Munnell. If you give 3 percent away to individual 
accounts, you have to cut back benefits in the current Social 
Security Program to make it fit within the lower revenues that 
you have on hand. That means you cut back on the guaranteed 
protections, and then you do something else, you allow people 
to take risks with the rest of it. But the basic program has to 
be cut back.
    Mrs. Thurman. OK. Thank you.
    Mr. Shaw. Mr. Hulshof.
    Mr. Hulshof. Thank you, Mr. Chairman. First of all, thank 
you for your patience, Dr. Munnell, for being here. To follow 
up on my friend from Florida as far as some of the things that 
we have not been discussing, and, Mr. Chairman, one of the 
things that has not yet been discussed are other retirement 
systems. There are certain segments of our population who have 
chosen to establish their own retirement systems.
    For instance, in the State of Missouri, our teachers 
association has opted out of the Social Security system because 
they prefer to have their own. The rail industry is important 
in my particular part of Missouri, and the Railroad Retirement 
System is something that is separate and apart from Social 
    Mr. Chairman, I would, as the newly elevated Chairman of 
our Committee, I would hope we could in our Subcommittee have 
hearings about these folks? Because the majority of constituent 
contacts I have had from these retirees is they don't want to 
be forced into Social Security. So I think there is another 
component there, other constituencies there we need to 
    The other thing, and the gentleman from Georgia mentioned 
this, and he is exactly right, again I alluded earlier with our 
other panel, were this a town meeting in the Ninth District of 
Missouri, the first question that I get is, or the comment that 
I get is that we don't yet have a surplus because we continue 
at least for purposes of discussion of a surplus, we continue 
to include Social Security Trust Fund excess receipts in that 
unified surplus. So I think that is the first issue that we 
must address, we as policymakers.
    Now, Dr. Munnell, your testimony extols some of the dangers 
of privatization and, not to sound Clintonesque, I think it 
depends on your definition of privatization. I don't think 
anybody, certainly in this body on this Committee, I have not 
yet seen any plan suggesting full privatization.
    But I put this question to you, because we have had some 
discussions, and you were a spectator to earlier discussions 
about the Thrift Savings Plan. Once again, this is something 
that we enjoy, something that other Federal workers enjoy, that 
you enjoy, you are pointing at yourself, that allows workers to 
invest up to 10 percent of salary, and then those funds then 
are matched, an employer matched by stocks, bonds and T-bills.
    Is that privatization? Does that fit within your 
definition? Or is this something that we might explore, that 
is, a change in the structure of the Social Security system, 
including something like a thrift savings plan that you are 
familiar with?
    Ms. Munnell. There is an array of proposals, and if we go 
back to the Advisory Council, it had a proposal that kept the 
system exactly where it is, and that is sort of where the 
President came down.
    There was something called the Gramlich proposal, for Ned 
Gramlich, who is currently a Governor on the Federal Reserve 
Board, that seems to be what you are talking about. Under the 
Gramlich proposal, you basically raise the new taxes of 1.6 
percent, and you send the money into the government. The 
government would then pick a series of index funds for stocks, 
for bonds, for fixed income, and you could choose where you 
were going to put this additional 1.6 percent. That is very 
much like the thrift plan.
    Then there was a more extreme proposal, which is personal 
savings accounts, you basically took 5 percentage points of the 
current tax and put it any place that you wanted.
    My concern with the centrist or compromise proposal, is it 
is a slippery slope; that people are going to, especially high-
income people, are going to make this comparison of how well 
they are doing in Social Security and how well they are doing 
in their supplementary plan. And if that were a fair 
comparison, then the conclusion they came to would be 
legitimate. But the comparison is biased, because Social 
Security is left with the burden of paying off this unfunded 
liability, it is left currently with the burden of investing 
only in bonds, it is left with the burden of doing some income 
redistribution. So you are really making a false comparison 
when you are looking at how well you are doing in Social 
Security and how well you are doing in these individual 
accounts. Nevertheless, I am concerned that that visual is 
going to make people want to have more and more and more and 
more of individual accounts, and you will undermine this 
collective arrangement that has served this Nation so well.
    Mr. Hulshof. I see the red light just came on. As a final 
comment, I could not agree more that certainly encouraging 
savings in the private sector is something else we need to 
    Ms. Munnell. Yes.
    Mr. Hulshof. Line 8 of my 1040 that I just got in the mail 
says interest income, and right now our tax policy certainly 
punishes thriftiness in the sense that the IRS continues to 
take some of our savings. So I agree with you on that.
    Mr. Chairman, with that, I yield back.
    Mr. Shaw. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman. Thank you so much not 
only for your comments here but for your written statement. 
Over these last 2 days we have had a rather amazing contrast 
regarding the best approach to our current happy economic 
    Mr. Kemp, who you heard this morning, voiced the oft stated 
Republican view that if we will just cut taxes enough, everyone 
will live happily ever after. On the other hand, Alan 
Greenspan, who spoke to us yesterday and has been an advocate 
of some tax cuts in the past, repeatedly, with questions coming 
from both sides of this Committee, and unequivocally rejected 
the idea of even growth-oriented tax cuts at this time in favor 
of what he said would be best for our economy, and that is to 
let the Federal surpluses build, to address some of these 
issues like retirement security.
    I am wondering from your perspective where you come down, 
between the Kemp approach and the Alan Greenspan approach?
    Ms. Munnell. I have never thought of myself between Kemp 
and Alan Greenspan.
    Mr. Doggett. I shouldn't think you would.
    Ms. Munnell. It is a very complicated issue. Mr. Collins 
actually brought up the fundamental thing that everyone is 
going to have to decide on when dealing with the Social 
Security issue. Whether you use the framework of the unified 
budget or whether you separate Social Security from the rest of 
the budget, and my personal preference, not one that Congress 
is using and not one that the President is using, is actually 
to take Social Security out of the budget and to have its 
accounting separate.
    So the way I would approach it would be to fix up the 
Social Security system, get more money in there, make the cuts 
that you have to make. It has to be balanced, so that you 
restore balance and confidence in that system.
    Then you look at the rest of the budget. I am not in favor 
of spending every dollar in the rest of the budget on the 
elderly. We have got a lot of priorities going forward. Just 
roughly speaking, once you have taken care of Social Security, 
for the rest of it, I would give half of it in a tax cut, and 
then the other I would use for priorities such as Medicare, 
education, low-income programs, Defense, anything else that 
needs to be done.
    So I think that there are two really hard decisions, what 
do you do with Social Security, and then how do you allocate 
the budget generally going forward?
    You can see what is going on now. There is great concern 
that the surpluses are going to be all given away in tax cuts. 
That would definitely be undesirable. So there is a great 
desire to allocate them all on spending initiatives, so that 
the number becomes zero.
    But if the pressure for massive tax cuts could die down, 
then I think it would be possible to think of doing this in a 
way that meets an array of needs.
    Mr. Doggett. Regarding your comments earlier concerning 
keeping the benefit promises that we have already made, I have 
seen estimates that reach up to I think $8 trillion in terms of 
the amount of benefits that people have already paid for in the 
system. I don't think even Mr. Kemp or some of those who want 
to reject the Social Security system that we have had for the 
last six decades propose to deny people the benefits that they 
have already paid into the system.
    Assuming that you stand by that $8 trillion in accumulated 
benefits, what impact is that likely going to have on a totally 
privatized system?
    Ms. Munnell. I think that is such an important point, and I 
tried to make it before, because some people make it sound as 
if this is a very simple thing. Instead of sending your payroll 
taxes to the Treasury, you just send them to Fidelity, and, lo 
and behold, you become rich.
    The problem is the one you bring up, that we have promised 
$8 trillion of benefits, and we are going to have to get the 
money to pay for that somehow. When you take how much it costs 
to raise that money to pay those benefits, and subtract that 
from your great return at Fidelity or State Street, you are 
pretty much back where we are now. So there is no easy, quick 
way out of this. We can think of some investing to improve 
returns, but it is not a simple thing of just redirecting your 
payroll tax money.
    Mr. Doggett. In addition to taking that $8 trillion of 
accumulated benefits, there is the disability and survivors 
side of OASDI. Is there an estimate of how much it would take 
to provide comparable disability and survivors benefits if we 
split that out?
    Ms. Munnell. My understanding, I guess I am not sure. Can I 
get a response to you?
    Mr. Doggett. It is a substantial amount, is it not? It is a 
very substantial amount to provide disability and survivors 
coverage for everyone who has it in America today, and a 
benefit that many people forget as they focus on Social 
Security as only a retirement system.
    Ms. Munnell. True.
    Mr. Doggett. I would welcome your follow-up information. 
Thank you very much. Thank you, Mr. Chairman.
    [The following was subsequently received:]

    The net present values of future promises for October 1, 
1999 are $7.997 trillion for Old-age and Survivors Insurance 
and $722 billion for Disability Insurance, making a total of 
$8.719 trillion. (These projections are attested to by Joe 
Faber, Actuary, Social Security Administration).


    Mr. Shaw. Thank you, Dr. Munnell. You made a very good 
point which is going to haunt our Subcommittee and Full 
Committee: If we do come up with a solution, what do we do with 
the transition? There is going to be a great deal of pain and 
problem in that. I would like to recall Chairman Greenspan's 
testimony from yesterday for the record, which wasn't that far 
from you except in one area. He said the best thing to do with 
the surplus is to pay off the accumulated debt; the second best 
thing to do would be a tax cut. He said spending was a 
nonstarter. So on the latter, you have pointed out a difference 
with Chairman Greenspan as to that area.
    I want to thank the Members for staying. I want to thank 
you, Dr. Munnell, for staying with us as long as you have, the 
first panel, Mr. Kemp and Reverend Jackson, for being with us. 
We certainly have gotten some contrasting views this morning. 
Thank you much.
    The Committee is adjourned.
    [Whereupon, at 1:22 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

Statement of Jim Jontz, President, Americans for Democratic Action, 

    Chairman Archer, Members of the Ways and Means Committee, 
thank you for allowing me to submit testimony on Social 
Security. I am Jim Jontz, President of Americans for Democratic 
Action, the nation's premier liberal, multi-issue public policy 
organization. Founded in 1947, ADA is dedicated to promoting 
economic and social justice in America.
    Since its enactment in 1935, Social Security has been the 
most successful engine for social justice in America. Its cash 
benefits are essential to the economic security of millions of 
America's elderly, disabled, and surviving minors and widows.
    Almost two-thirds of retirees depend on Social Security for 
more than half their total income. Without Social Security, 
about half of all retirees would fall below official poverty 
levels.\1\ Whereas 35 percent of the elderly lived in poverty 
in 1959--twice the rate for all other Americans--today less 
than 12 percent of all elderly live in poverty--somewhat lower 
than the rate for other adults. Today, less than half of 
American workers have private pensions, and that proportion is 
declining. Only 13 percent of women have private pensions. 
Social Security, therefore, is more than ever the bedrock of 
security in old age.
    \1\ Henry J. Aaron and Robert D. Reischauer, Countdown to Reform, 
the Brookings Institution, 1998.

               Is Social Security In Danger of Collapse?

    Alarmists have raised the specter of doom for Social 
Security. The Social Security Trustees have, indeed, projected 
that if no action is taken, based on certain economic 
assumptions, the Social Security Trust Fund will run out of 
money around the year 2032. Under this worst-case scenario, 
income from contributions of current workers at that time would 
cover only 75 percent of benefits owed to retirees. For the 75 
years after 2032 income from the fund will be only 2 percent 
short of what is needed, so modest steps, rather than drastic, 
dangerous ones, are called for.
    The worst-case scenario, however, is seriously misleading. 
While we do not quarrel with the Trustees' desire to make their 
projections extremely conservative in order to ensure that 
prudent steps can be considered in a timely manner, we have 
reason to think the projections are wrong. They assumed that 
future growth of the U.S. Gross Domestic Product, adjusted for 
inflation, would average only 1.5 percent from 1997 to 2029, 
whereas the GDP's current growth rate is 3.8 percent. The 
growth rate from 1960 to 1974 averaged 4.1 percent; from 1975 
to 1996 it was 2.7 percent--a period that included a prolonged 
    While we do not suggest that today's growth rate will 
continue forever, a realistic projection would be 2.4 
percent.\2\ We think that wiser government fiscal and 
investment policies that I will not dwell on here are important 
to improve on that growth rate, which in turn could greatly 
strengthen the Social Security program and take care of our 
aging population.
    \2\ Estimate provided by James K. Galbraith, Professor of 
Economics, University of Texas at Austin.

               Which Proposals Endanger Social Security?

1) Cutting Benefits.

    All proposals that would cut benefits are unjust, unwise, 
and self-defeating. They are unjust because they would harm 
those elderly who could least afford lower benefits, persons 
who count on Social Security to pay for food, the rent or 
property taxes and fuel, and other necessities. Cuts would 
reduce to poverty levels persons who have contributed to their 
own future security. Cuts are unwise and self-defeating because 
relegating the elderly, survivors and disabled to below poverty 
levels would only transfer the burden of providing for them 
from Social Security to welfare programs. Social Security was 
designed so all workers would contribute, but benefits would 
tilt in favor of lower-paid wage earners to prevent this very 

2) Limiting COLAs.

    Tinkering further with the Cost of Living Adjustment would 
be a mistake. Enactment of the COLA in 1972 has saved millions 
of Social Security recipients from poverty. Many more Americans 
these days survive to age 65 than did when the first 
beneficiaries retired, and those who survive to 65 are living 
longer (see tables 1 and 2). Although benefits are still very 
low compared to many private pensions and annuities, most of 
these private schemes lack COLAs. Without COLAs, a benefit that 
is barely adequate at retirement age of 65 becomes an unlivable 
pittance, even with low levels of inflation, by age 85. Again, 
failure to allow benefits to keep up with inflation would throw 
the elderly onto SSI rolls. Inflation protection is essential 
to security for the remainder of one's life.

                      Life Expectancy by Age Cohort
                                                    Percent Survive From
                                                        Age 21 to 65
                   Year turn 65                    ---------------------
                                                       Men       Women
1940..............................................         54         61
1990..............................................         72         77
2030 (est.).......................................         80         89

          Average Years of Remaining Life Expectancy at age 65
                                                       Men       Women
1940..............................................         13         15
1990..............................................         15         20
2030 (est.).......................................         17         22
Source: Social Security Administration

3) Privatization

    All privatization schemes create intolerable risks, 
threatening the future of the elderly, survivors, and the 
     First, they would take the ``security'' out of 
Social Security. Privatization schemes are rooted in several 
false assumptions: that the stock market will always go up; 
that an average rise in the stock market would bring benefit to 
everyone; that we're all capable of being shrewd investors; and 
that we can divert Social Security contributions from the Trust 
Fund to individual accounts and still pay for current retirees.
    If the stock market happens to be in a slump when an 
individual dies, becomes disabled, or retires, that family 
would be out of luck. It would matter little that on average 
the stock market does well. Some will do well; others will not. 
Many would be left in poverty, with a paltry basic benefit and 
a skimpy retirement account. Moreover, not all of us know how 
to invest. Even the most experienced investors can and do 
suffer great losses or become victims of poor management, 
changing market conditions, and scams. For the wealthy, these 
ups and downs of the market are simply unpleasant experiences. 
For 80 percent of the population, these contingencies would be 
calamities if they occurred at the time of retirement. To place 
the average retiree at such risk is irresponsible. Finally, if 
some contributions are diverted from the Trust Fund to private 
accounts, not enough money will remain to pay benefits of 
retirees on a pay-as-you-go basis in the transition to 
privatization. Fulfilling our commitment to them would require 
substantial additional government borrowing or higher taxes.
     Second, individual accounts would also be far more 
costly to administer than Social Security. The grant would 
incur additional expenses by sending money into millions of 
individual accounts, and needing to keeping tabs on whether the 
funds are in fact saved for retirement. Despite its complexity 
(dealing with more than 6 million employers, tens of millions 
of beneficiaries, and more than 100 million taxpayers) Social 
Security costs less than one percent of benefits. No private 
plan comes close to this low overhead.
    The cost to employers of the current system is relatively 
low, dealing only with the federal government. Costs would 
surely increase were they required to deal with multiple 
financial institutions.
    Further, the Social Security Administration's under-one-
percent cost contrasts sharply with the fee small investors 
would pay to brokerage firms and financial institutions to 
handle their accounts. The fee would necessarily take a 
disproportionate amount from smaller accounts, eating into the 
return. In fact, in Chile and Great Britain, where private 
accounts have been tried, the rate of return is between one and 
two percent (lower than the Trust Fund currently receives from 
Treasury bills), once administrative fees are taken into 
account. \3\
    \3\ Dean Baker, economist with the Economic Policy Institute, The 
Washington Post, December 23, 1998.
     Third, individual accounts are critically risky 
for the disabled and survivors. Social Security is much more 
than a retirement program; it is insurance against premature 
death and disability. A wage earner can die or become disabled 
any day. Even if the wage earner has been one of the lucky or 
skillful investors, when he or she dies or becomes disabled, 
the private account might not have had time to accumulate 
enough to live on. Thus the guaranteed Social Security benefit, 
complete with inflation protection is essential to survival 
with dignity.
     Fourth, there is no guarantee that private 
accounts, no matter how well invested, will provide income for 
life. If a person decides to convert an account into an annuity 
at the time of retirement, it will cost about 20 percent of the 
investment and will lack inflation protection. What starts as 
an adequate income will diminish over the years.

                    What Positive Steps Can We Take?

    Several options are available that are equitable and do not 
entail untoward risk to individuals. Following are some choices 
to be weighed and from which a selection can be made.
     As the President has proposed, up to 25 percent of 
the Trust Fund could be invested by the federal government in a 
relatively safe broad index fund.\4\ Appropriate steps can be 
taken to insulate such a fund from politics. The politics-free 
management of government employees' Thrift ``C Fund'' provides 
one model that proves it can be done. Because these index funds 
have a good earnings record over many years, they could be a 
solid investment. The President's proposal avoids the pitfalls 
of private accounts. It ensures that the risk of the vagaries 
of the market is shared, rather than borne by the individual--
an approach appropriate to a social insurance program. The 
proposal is not without some risk, however.
    \4\ The budget surplus today consists of Social Security 
contributions. We find it more useful to view public investment of 
these funds in terms of a portion of the Trust Fund, rather than the 
budget surplus.
     Consistent with equity principles, we could raise 
the amount of the wage base that is subject to the Social 
Security contribution by the worker and employer. The base for 
the payroll deduction can be raised to $100,000. Wages 
exceeding that amount would be untaxed, and all income from 
sources other than wages would remain untouched--still leaving 
better-to-do individuals in a favored status.
     Coverage could be extended to the 3.7 million 
state and local government employees whose positions are not 
yet covered by Social Security. Adding these workers as new 
employees are hired would strengthen the system and benefit 
these workers.
     The wage-base could be computed using average 
indexed wages over 38 years, rather than the current 35. This 
option must be analyzed carefully, however, to ensure that it 
does not unfairly disadvantage women who have remained at home 
for several years to take care of young children.
     Most important, we must adopt policies that will 
ensure continued high economic growth. If we were to maintain 
the current 3.8 percent rate of GDP growth, any Social Security 
funding shortfall would disappear. While continuation of this 
high rate is unlikely without changed economic policies, even a 
lower figure would largely eradicate any Social Security 
deficiency. A progressive economic program would include low 
interest rates, substantially increased investment in 
education, child care, health insurance, industrial and high-
tech research, and sorely needed infrastructure.


    Private accounts are no ``fix.'' For average Americans, 
they're tickets to a train wreck. Each and every month, for six 
decades, in peace and war, in prosperity and recession, Social 
Security has provided cash benefits on schedule. The program is 
sound in concept, essential, fair and well run, providing real 
economic security. Benefits are inflation-proof for life. The 
present defined-benefit form and structure can and must be 
preserved for baby boomers, our children and grandchildren.


Statement of Yung-Ping Chen, Gerontology Institute, University of 
Massachusetts, Boston

    Mr. Chairman and Members of the Committee: My name is Yung-
Ping Chen. I am the Frank J. Manning Eminent Scholar's Chair in 
Gerontology at the University of Massachusetts Boston. My 
academic and professional experience in the field of Social 
Security financing and economics of aging includes serving as 
member of the technical panel of actuaries and economists of 
the 1979 Advisory Council on Social Security, and as consultant 
on retirement income to both the 1971 and 1981 White House 
Conferences on Aging, as well as faculty appointments at 
several colleges and universities. I am a fellow in the 
Gerontological Society of America and a founding member of the 
National Academy of Social Insurance. The views I express here, 
however, are those of my own and do not necessarily represent 
the positions of any organization with which I am affiliated.
    In summary, while I agree that we must preserve and 
strengthen Social Security, we must also strengthen private 
pensions and individual savings so that more future retirees 
could derive more meaningful supplements to Social Security. 
Therefore, I am proposing a method to create a pension 
supplement account for every worker covered under Social 
Security without imposing additional taxes or contributions--by 
diverting part of the FICA tax rate.
    In what follows, I first point out the need to strike a 
better balance between Social Security and other sources of 
income, including some comments on the President's approach in 
this regard. I then present a plan to universalize pension 
supplement accounts for Social Security participants, as it 
restores the 75-year solvency to the program.

  Need for A Better Balance between Social Security and Other Income 

    Many Social Security reform plans exist, but few would 
change our retirement income policy in a way that would achieve 
a better balance between Social Security and other sources of 
income. Among the current elderly, far too few have much income 
from sources other than Social Security (Chart 1). Looking 
toward the future, we can anticipate subsequent problems 
because many of today's workers lack pension coverage and their 
savings are meager. In short, if we do not strengthen all these 
sources of income for future retirees, we would be perpetuating 
the current condition, which in my opinion is undesirable, a 
condition in which too many elderly are relying too heavily on 
Social Security. Moreover, this condition is likely to put 
pressure on Social Security to raise benefits in the future, 
further threatening the financial health of the program. 
Mandating pensions or mandating savings would be possible 
solutions, but it is quite likely that many low-wage workers 
and small businesses simply could not afford, or would not be 
willing, to comply.

                   Chart 1. Shares of income by quintiles of total income of the elderly, 1996
                          Source                             Lowest     Second     Third      Fourth    Highest
Social Security..........................................        81%      1 80%        66%        47%        21%
Pensions*................................................          3          7         15         24         21
Asset Income.............................................          3          6          9         15         25
Earnings.................................................          1          3          7         12         31
Public assistance........................................         11          2          1         **         **
Other income.............................................          1          2          3          2          2
    Total................................................        100        100        100        100        100
Notes: *Includes private pensions and annuities, government employee pensions, Railroad Retirement, and IRA,
  Keogh, and 401(k) plan payments. Excluding government employee pensions, this source accounts for only 10% of
  total income of the elderly as a group. Statistics by quintiles are not available, however.
**Less than 0.5%.
Percents may not sum to 100 due to rounding.
Source: Social Security Administration (1998), Income of the Aged Chartbook, 1996, SSA Publication No. 13-11727,
  May, p. 16.

    In his State of the Union address on January 19, 1999, the 
President proposed allocating $2.8 trillion, or 62% of the 
projected budget surpluses over the next 15 years, to Social 
Security. One quarter of that amount, about $700 billion, would 
be invested in stocks for higher returns.
    In addition, about $500 billion, or 11% of the projected 
surpluses, would be used to fund ``universal savings 
accounts,'' modeled after 401(k) plans, separate from Social 
Security. It is an incentive plan for low-and middle-income 
workers to save and invest more. The government would match 
deposits by each individual based on income. According to a 
news story by Richard W. Stevenson (New York Times, January 20, 
1999, p. A19), administration officials envisioned a plan under 
which a worker earning $40,000 a year would get a $100 grant to 
start an account, and then could deposit up to $600 a year. At 
that income level, the government might match 50 cents on every 
dollar deposited, or up to $300 a year. At the end of the year, 
the worker would have $1,000 in the account, $400 of which from 
the government. According to another news story, by Bob Davis, 
Greg Hill, and Greg Ip (Wall Street Journal, January 20, 1999, 
p. A8), a lower-percentage match or none at all would be 
available for high-income workers.
    The President is to be commended for recognizing the need 
for a better balance between Social Security and other sources 
of retirement income, as well as the need to shore up Social 
Security's long-range solvency. However, his plan falls short 
for the following reasons. One, without investing the trust 
funds in stocks, the solvency date would be pushed out only to 
2049, from 2032. Even with trust fund investment in stocks, the 
solvency date would be pushed out only to 2055, short of the 
long-range solvency date by 20 years. Even assuming 
Congressional authorization for central investing by Social 
Security, other measures to increase revenue or reduce benefits 
would be necessary to restore 75-year solvency. Moreover, the 
incentive approach to 401(k)-type of accounts may help, but it 
would still encounter the problems of willingness and 
    The key to creating pension coverage in the short term lies 
in overcoming the problems of willpower and affordability. And 
the key to restoring long-range solvency is to change a number 
of program variables affecting income and outgo under Social 
Security. My proposal provides these two keys, as described 

        ``Social Security Plus Pension Supplement (SS-PS) Plan''

    What I propose is called ``Social Security Plus Pension 
Supplement'' or SS-PS Plan. This plan would divide the current 
Social Security program in two: a defined-benefit social 
insurance component, like the one we have now, and a defined-
contribution pension supplement account, which would be new. 
The social insurance benefit would preserve the traditional 
old-age, survivors and disability (OASDI) protections, to be 
funded on a pay-as-you-go (PAYGO) basis using 10.8 percentage 
points of the current FICA for the next two dozen years. The 
pension supplement account would be funded by 1.6 percentage 
points carved out of the current FICA tax without additional 
taxes or contributions. Such financing is feasible because we 
do not need these funds to pay benefits during the next couple 
of decades or so. The current FICA rate of 12.4% would remain.
    Because the carve-out would be using Social Security 
surpluses, which have already been borrowed by the Treasury, 
implementing the carve-out immediately would complicate 
Treasury funding operations. For that reason, we should wait 
until the non-Social Security budget is also in surplus. Non-
Social Security budget surpluses are estimated to occur in a 
few years. I therefore urge you to recommend that Congress pass 
legislation now for carrying out the SS-PS plan later.
    As shown in Chart 2, this plan would remove the unfunded 
liabilities under the current Social Security program, keep the 
progressive benefit formula that protects low-income and 
disabled persons, cut the FICA tax rate in order to create 
pension supplement accounts, repeal the earnings test, and set 
moderate PAYGO rates over the next 75 years. To complement the 
PAYGO rates in shoring up the long-range financing, this plan 
also incorporates several provisions common to other plans, 
such as gradually increasing the retirement age, moderately 
raising the wage cap, covering state and local new hires, 
extending the benefit computation years, and taxing Social 
Security benefits like other pensions.


Pension Accounts Mandatory Now but Voluntary Later

    A unique feature of this plan is that the pension 
supplement accounts would be mandatory now but voluntary in the 
future. In 2023--when the FICA needs to return to 12.4 
percent--pension supplement accounts will no longer be 
required. At that point, it is likely that workers who have had 
favorable experiences with these accounts would continue to 
contribute to them. Other people would follow suit. If 
experiences have been unfavorable for most people, then there 
is no reason to mandate them. If the experiences turn out to be 
mixed, as seems likely, it would be sensible to allow 
individuals to choose whether or not to continue their 

Pension Accounts As An Experiment

    I propose that the pension supplement accounts be 
established on a time-limited basis (e.g., during the next two 
decades or so), as an experiment or a demonstration project, 
akin to the medical savings account in the Kassebaum-Kennedy 
bill (Health Insurance Portability and Accountability Act of 
1996). The experiment would yield much data on these accounts, 
such as the investment behavior and preferences of people by 
key demographic and economic variables (e.g., age, sex, and 
wage/salary), among other things. Such empirical ``laboratory'' 
data would serve as a useful guide in setting future policy.

Concern with Retirement Income Safety

    The proposed experiment raises a legitimate question about 
the safety of retirement income. What if a person with this 
account loses everything he or she put into it during the 
demonstration period? Because Social Security benefit is a 
guarantee and receipt from the pension supplement accounts is 
added to that guarantee, people still will be assured of their 
Social Security benefits even if they lose everything in these 

Modeled after the Federal Thrift Savings Plan

    Other concerns about such accounts also exist. Many fear 
that unwise and unlucky investment decisions, or lack of 
investment knowledge, would make these accounts an uncertain 
source of income. Others object to the administrative costs 
that may greatly diminish the returns of small accounts. 
Avoiding such problems, these accounts could be held and 
managed by a central authority with a limited number of 
investment options for account holders, patterned after the 
federal Thrift Savings Plan. Such a model would have the added 
advantage of avoiding fraudulent sales practices encountered by 
some individuals investing on their own.

Responsible Pay-As-You-Go

    Another distinguishing feature of this plan is the use of 
pay-as-you-go (PAYGO) method to finance Social Security. Some 
disapprove on the ground that future tax rates would be 
exorbitant. However, PAYGO will not entail high tax rates if 
the growth in benefits is moderated as under this plan. 
Moreover, using PAYGO, this plan will not involve sizable trust 
fund investments, so concerns about political interference in 
investment decisions and about government influence over 
corporate governance would become moot. Moot also will be 
controversies about the use of budget surplus and about whether 
the trust fund is real or illusory.
    In conclusion, I have proposed a way to create pension 
supplement accounts without imposing additional taxes or 
contributions on workers or their employers. I also propose to 
finance the traditional Social Security on a responsible pay-
as-you-go basis. My plan is designed to strike a better balance 
between Social Security and pensions. It would restore long-
range solvency to Social Security while offering the 
possibility for improving the rates of returns for future 
beneficiaries. This plan can combine the best of both public 
and private approaches: the financial guarantees that only a 
public social security system can provide, coupled with an 
opportunity to achieve the higher investment returns offered in 
the private market.


Statement of Star Parker, President, Coalition on Urban Renewal & 
Education (CURE)

    My name is Star Parker and I am the president of CURE, the 
Coalition on Urban Renewal and Education. Thank you for 
allowing us to submit this statement for The Congressional 
Record about the negative affects of the current social 
security payroll tax on Black Americans and other low-income 
workers. CURE is a 501(c)(3) non-profit education and research 
foundation, which provides information on how social policies 
impact America's inner cities and the poor.
    As a former welfare mother, I understand first hand the 
devastating affects of government dependency. Since the 
inception of CURE in 1995, we have sponsored a national 
campaign to promote personal responsibility and self-
sufficiency called: ``From Entitlement to Empowerment.'' We 
conduct workshops in housing projects for women leaving 
welfare, inner city roundtables for pastors and faith-based 
leaders, and lectures at colleges and churches across the 
    Our concern with the current social security system is that 
it immobilizes massive numbers of poor people to move from 
entitlement to empowerment. Black Americans and the working 
poor fair miserably under the current payroll tax system yet, 
these individuals can achieve real wealth under a private, 
personal retirement plan.
    According to Health, United States, 1998, published by the 
Department of Health and Human Services, blacks and lower-
income people live shorter lives than whites and higher-income 
people. Because Social Security is essentially an annuity 
payment for those who live past age 65, the program 
shortchanges people with shorter life spans. Social Security 
pays the most to those that live the longest. Thus, old white 
women gain at the expense of young black males. On a lifetime 
basis, Social Security creates a perverse wealth transfer form 
blacks to whites of as much as $10,000.
    Social Security was not designed to be a poverty insurance 
plan or the chief source of retirement income for Americans. 
Social Security was established to provide a safety net, 
keeping the elderly from being trapped and dying in a state of 
poverty. The current system has failed in its attempt to lift 
Black Americans out of poverty because Social Security is 
perceived as retirement savings, not a tax on wages. Statistics 
and census data show that roughly one-third of elderly African 
Americans live below the poverty level. Overall, 11 percent of 
all elderly Americans and 19 percent of all widows have become 
victims to poverty due to the perceived safety net extended 
through Social Security. As is, the present Social Security tax 
abandons the low-wage worker, thus hitting blacks the hardest. 
Many financial planners have publicly expressed their belief 
that for a retiree to maintain his or her current standard of 
living, a retiree needs between 60 and 85 percent of pre-
retirement income. Many studies have shown that low-wage 
workers receive approximately 58 percent of pre-retirement 
income through Social Security benefits.
    An African American male in his mid-twenties, with an 
annual income of $12,862, in 1996, can expect a return of less 
than 88 cents for every dollar he invested in Social Security, 
as noted in a study by from The Heritage Foundation. This means 
that for every dollar he is taxed to pay into the Government's 
Social Security plan, his tax has a negative -1.2% rate of 
return. This negative rate of return, in 1997 dollars, 
translates into $13,377 of cash losses paid by both the 
employee and employer. A black male under age 38 who stays in 
the current system until retirement age will lose $160,000 in a 
lifetime's worth of income.
    Black females also experience a low rate of return from 
Social Security. A single black mother, 21 years old, who in 
1996 had an annual income of just under $19,000, realizes an 
actual rate of return of only 1.2 percent. If this same black 
female invested her current social security taxes into a 
private retirement plan similar to an Individual Retirement 
Account (IRA), she could realize as much as 4.5% rate of 
    The fact that the current Social Security tax system does 
not take into consideration life expectancy rates is another 
strike against African Americans. The average life expectancy 
for black males by 2000, is 64.8 years, down from 65.4 in 1995. 
With the retirement age at 65 and rising, few black males will 
live to receive any payment from years of contributions. At the 
going rate, few African American males will live to retirement. 
Life expectancy for African Americans has not increased in 15 
years. Current census data shows that Forty percent of black 
males die between the ages of 55 and 75. Only 349 out of 1,000 
black men will reach their 75th birthday. Comparably, 712 out 
of 1,000 white females celebrate their 75th birthday, more than 
twice the number of African American males.
    Although poverty rates have decreased dramatically across 
the country, in 1992, 12.9 percent of those in poverty were 
over the age of 65, compared to 11.7 percent of individuals 18 
to 65 years of age. Today poverty rates remain higher for those 
over the age of 65 than those aged 18 to 65.
    The number of Black Americans between the ages of 65 and 74 
who receive Social Security benefits and live below the poverty 
line is 25.1 percent and 37.3 percent live below 125 percent of 
the poverty line. For white Americans, 8.8 percent live below 
the poverty line and 16.3 percent live 125 percent below the 
poverty level.
    In the State of the Union address on Tuesday, January 19, 
1999, President Clinton called for expanding the government's 
monopoly over retirement savings for the average American 
workers, by creating Universal Savings Accounts (USA). Not only 
would this proposal have a crippling affect on the free market 
system, but it also will insure more poverty for blacks and 
other low-income workers upon retirement. If USA accounts are 
established, only people with money left over after household 
expenses and taxes can take advantage of them. Far too many 
blacks and other low-income workers are living paycheck to 
paycheck, and would therefore be unable to invest in this USA 
option. Only 33 percent of older black households have any 
saving at all.
    Yet, the bottom 20 percent in economic status use Social 
Security for 81 percent of their post-age 65 income. The 
working poor are just not financially able to pay additional 
payroll taxes into yet another government-run entitlement 
program. We need real empowerment, real reform.
    Instead of President Clinton proposing to levy more payroll 
taxes against low income workers, real social security reform 
should allow all working Americans to invest in personal, 
private retirement accounts, similar to an Individual 
Retirement Account (IRA) or a 401(k). Instead of this panel 
looking to save the current system, it would better to allow 
all workers to transfer their retirement investments into 
personalized, private accounts.
    Privatization of the Social Security system is the only 
answer in solving this crisis. Social Security payroll taxes 
can be replaced with a mandatory retirement savings account, 
which would be invested in mutual funds, stocks, bonds, and 
other wealth accumulation plans.
    Requiring individuals to pay into a personal retirement 
account similar to a 401(k) or an Individual Retirement Account 
(IRA) would offer higher returns and greater benefits for 
retirement security income. Personal retirement accounts offer 
each individual an opportunity to own his or her account and be 
able to pass on their assets to family members. Privatization 
would offer low-wage workers and minorities an opportunity to 
acquire personal property, something many low-income workers 
rarely experience in their lifetime.
    The United States Supreme Court ruled in the 1960 case 
Fleming v. Nestor, individuals do not have a right to any 
Social Security contributions paid into the system. Politicians 
can, at any time, cut or eliminate Social Security benefits. 
Social Security is not an insurance program. It is nothing more 
than a tax paid into the United States Treasury. The benefits 
received by retirees upon retirement are nothing more than a 
long-waited tax refund, often compensate at a negative rate of 
return. Social Security works in the same respect as someone 
who has a large amount of their income withheld from their 
paychecks and, after reporting their income for the year with 
the Internal Revenue Service (IRS), receives a tax refund from 
the U.S. Treasury. The problem with this scenario is that the 
U.S. Treasury is allowed to accumulate and hold a high 
percentage of the workers income all year, and then return 
overpayments with no interest. Under a private retirement 
savings plan, a worker could deposit the social security 
portion of taxes higher interest retirement savings account.
    Low-wage workers would have the opportunity to accumulate 
real wealth and assets under a privatized retirement savings 
plan. Like high wage earners, these workers would have the 
opportunity to participate in inheritance transfers through 
private retirement investments. The overall economy would also 
greatly benefit by this increase in savings and investments as 
a result of low wage earners participating in private 
retirement accounts.
    Personal retirement accounts offer individuals an 
opportunity to receive higher retirement benefits. Low wage 
earners could realize significant investment returns form 
Personal Retirement Accounts (PRAs). Upon retirement, these 
workers would have a higher monthly benefit, as much as three 
times as that provided by Social Security today.
    As noted in a study by the Cato Institute, if a 28-year-old 
worker with an annual income of $13,500 invested his payroll 
taxes in a personal retirement account, through his lifetime, 
he would accumulate $290,628 by age 67. This would be possible, 
assuming he invested in a personal retirement account which 
consisted of a mixed fund of 50 percent bonds and 50 percent 
stocks and received returns of 4 percent and 7.5 percent, 
respectively. Upon retirement, he would be able to purchase an 
annuity, which would provide monthly payments of $2,292, nearly 
three times the benefit currently promised by Social Security.
    Personal retirement accounts would greatly benefit the 
individual, the community and the nation's economy. As 
economist Martin Feldstein noted personal retirement accounts 
would help the Gross Domestic Product (GDP) increase five 
percent, permanently. Additionally, the net value to the 
economy would be a gain between $10 trillion and $20 trillion. 
These macro-economic effects would benefit poor neighborhoods 
by creating new business within these communities and providing 
additional jobs at these business establishments.
    Critics of privatization argue that the poor are not 
educated enough to make wise investment decisions and 
privatization is risky and gambles with their retirement 
security. But the fact of the matter is that Social Security 
has become the largest government program in existence. The 65-
year-old retirement tax program originally designed to be a 
government-run old-age pension program has since become a bad 
investment for Americans.
    For more than four decades, payroll taxes have increased 17 
times, forcing Americans across the country to invest in a 
system which provides very little, if any, financial return. 
Social Security was the largest federal expenditures in 1995, 
totaling $334 billion or nearly 22 percent of total federal 
spending of $1.53 trillion. The current Social Security system 
does not provide Americans with secured income during their 
retirement years; and in fact, Social Security has been proven 
to be a worse investment for African Americans and the poor.
    Privatization of Social Security will benefit all 
Americans, including blacks and the poor. Privatization will 
provide an opportunity for low-wage workers to achieve the 
American dream, acquire investment capital and ownership of 
private property. Privatization of Social Security will provide 
blacks and other low wage workers with actual retirement 
security income, and equity accumulation for inheritance 
    The Social Security system has evolved into another means 
of levying a tax on American citizens. Social Security 
contributions are not paid into an insurance program, but to 
the U.S. Treasury. The stated goal of Social Security was to 
provide a safety net to prevent the elderly from being trapped 
in a state of poverty, yet has been proven to be simply an 
additional payroll tax with low if any rate of returns.
    The current Social Security tax has financially harmed 
African Americans especially those entering into retirement or 
already retired. The Government's retirement system yields 
negative rates of return for blacks and other low wage earners. 
Africans Americans and the poor are paying into a system that 
does not allow them to accumulate wealth to be passed on to 
their heirs.
    African Americans need to invest in a system which would 
allow an opportunity to invest in not just their retirement 
future, but the future of their spouse and children. The 
current system does not allow that option. A retirement plan, 
which encourages individual savings, will provide Americans 
with real retirement income and security. Replacing the current 
Social Security payroll tax with a system of personal savings 
accounts would increase America's savings and benefit the 
economy as a whole.
    Private retirement accounts will provide individuals an 
opportunity to accumulate wealth and pass it on to their heirs 
at death. Additionally, private retirement accounts will assist 
those retirees in purchasing their dream home or establishing a 
small business. The economy overall would profit from personal 
retirement accounts through increased savings and investment 
and the creation of more jobs.
    Privatization of Social Security would provide the poor 
with an opportunity to be self-sufficient and enjoy a more 
prosperous retirement than that allowed by the current system. 
Social Security privatization will offer blacks and the poor 
the opportunity to accumulate real wealth, participate in the 
U.S. economy and pass on an inheritance to their heirs. The 
current system prevents them from doing such. The current 
system is out-dated and only hampers low-income wealth 
accumulation. Social Security provides nothing more than a 
``retirement tax refund'' to its current beneficiaries.
    Instead of levying additionally taxes against the poor and 
low-income workers to save the current social security system, 
real retirement security will be provided through a privatized 
retirement saving plan. Real retirement security through 
Personal Retirement Accounts (PRA's) would allow low-income 
workers the opportunity to enjoy their retirement, as opposed 
to struggling while waiting for that ``first of the month 
check.'' PRA's will allow low wage retirees the opportunity to 
leave an inheritance for their grandchildren, as opposed to 
being a financial drain on their children. Social Security 
Privatization provides retirement options and these financial 
independence opportunities.
    If Social Security payroll taxes went directly into 
personal retirement accounts, every working American would have 
money to save and invest, including the working poor. If these 
individuals and families were allowed to invest their current 
payroll taxes into private, personal retirement accounts, they 
would accumulate real wealth: wealth for a financially secure 
retirement, and the ability to leave a financial portfolio to 
their heirs.
    Proverbs says that a good man leaves an inheritance for his 
grandchildren. Privatizing Social Security will allow ALL 
Americans--not just the rich--but poor, hard working 
Americans--to flourish in financial independence and to tap 
into the American economic dream. CURE is standing today in 
support of Social Security Privatization.


Statement of Steven H. Johnson, Director, Collaborative Democracy 


    The Two-Track Savings Solution achieves permanent and 
lasting solvency for Social Security, while protecting long-run 
benefit levels and avoiding an increase in the 12.4% payroll 
tax. The Two-Track Savings Solution accumulates two pools of 
capital, one in Personal Retirement Accounts, one in the Social 
Security Trust Fund. A creative approach to the structuring of 
PRA's eliminates issues of longevity risk, market risk, and 
high fees. A creative system for managing Trust Fund 
investments disposes of the government meddling issue. A modest 
Federal Budget subsidy is used to get the Two-Track Solution 
rolling, then terminated once it's no longer needed. On 
balance, the Two-Track Savings Solution outperforms all other 
proposed solutions.

         Clarifying the Goal--A Solution that ``Funds the Gap''

    An effective solution for Social Security should be defined 
as one that protects retiree benefits, avoids stiff increases 
in the payroll tax, and achieves lasting solvency. These three 
objectives cannot simultaneously be achieved so long as Social 
Security continues to be financed almost wholly on a pay-as-
you-go basis. In a pay-as-you-go system, with a progressively 
aging population, one of those three objectives must inevitably 
be sacrificed.
    On the other hand, it is possible to achieve all three 
objectives simultaneously if a different approach is taken, if 
pay-as-you-go financing is augmented with a strong saving and 
investment program. No, it's not possible for Social Security 
to be fully funded, in the same sense that many pension 
programs are fully funded, with retiree benefits paid 
exclusively by earnings on capital. There simply isn't enough 
financial capital in the American economy for Social Security 
to be fully funded.
    What can be funded, however, is ``the gap,'' the spread 
between Social Security expenditures and Social Security 
receipts. Social Security expenditures, the benefits going to 
retirees, are projected to hit 19% of taxable payroll in 
decades to come. Social Security receipts, meanwhile, are set 
to remain at 12.4% of taxable payroll. This is quite a gap, yet 
most of it can be funded effectively within the limits of the 
American economy's capital base. An effective Social Security 
solution is one that accumulates enough capital so that the 
earnings from capital are sufficient to ``fund the gap.'' Once 
the gap is funded, all three objectives are achievable. Payroll 
taxes can be held at a reasonable level, retiree benefits can 
be protected, and Social Security's solvency can be assured.
    The Two-Track Savings Solution does exactly this. It funds 
the gap and achieves all three of these key objectives. How? By 
combining the strongest features of the conservatives' approach 
with the strongest features of the liberals' approach. By 
combining a Personal Retirement Account savings track with a 
Trust Fund savings track.

                Track One--Personal Retirement Accounts

    The Two-Track Solution begins by establishing a system of 
Personal Retirement Accounts, managed by employee-selected Fund 
Managers, for the purpose of accumulating employee-owned assets 
that cannot be touched except in the event of death or 
retirement. Over time, PRA capital contributes mightily to the 
task of funding the gap.
    The Two-Track Savings Solution makes several important 
adjustments to the PRA concept. On retirement, new retirees are 
not asked to make their PRA savings stretch to cover the rest 
of their lives. Nor are they told that, thanks to the funds 
they've accumulated in their PRA's, their basic Social Security 
benefits will be reduced for the entire period of their 
    Instead, the Two-Track Solution reduces Social Security 
benefits for the first ten years of retirement only. And it 
encourages new retirees to convert their PRA assets into fixed 
ten-year annuities, rather than lifetime annuities. In the 
eleventh year, once an individual's PRA-financed annuity 
expires, Social Security benefit payments kick in at their full 
earned level.
    The ten-year PRA approach is a sensible solution to what is 
otherwise a vexing dilemma. No one, at retirement, knows 
exactly how much longer they're going to live. Draw down your 
savings too fast, and you risk going broke in the later years 
of your retirement. Draw down your savings too slowly, and you 
risk dying before you've taken full advantage of the money 
you've saved. The Two-Track Solution does away with this 
dilemma. Retirees get the full benefit of their PRA savings 
during the first few years of retirement, while they're also 
assured that Social Security will be there for them in the 
latter years of their retirement.
    In other words, the Two-Track Solution uses an investment 
approach to help in financing retirement's early years, then 
switches to an insurance approach for financing retirement's 
later years.
    To assure average market returns for all employees, the 
Two-Track Savings Solution encourages all employees to place 
their PRA assets in index funds.
    Then, to protect employees against market risk, the Two 
Track Savings Solution operates according to the following 
rule: Regardless of what's happening in the stock market at the 
time you retire, your Social Security benefit payment, when 
combined with ninety percent of your PRA annuity, will add up 
to the full Social Security benefit you would be receiving, if 
there were no PRA program in force.
    Suppose that your earned Social Security benefit, at 
retirement, is calculated to be $1000 a month. If you retire 
when the market is doing well, and draw an annuity from your 
PRA of $600 a month, Social Security would pay you $460 a 
month. [90% of your PRA $600 is $540. $1000 minus $540 yields 
your Social Security payment of $460.] You'd be receiving a 
total of $1060 a month.
    If, on the other hand, you retire when the market is doing 
poorly, and you draw an annuity from your PRA of only $300 a 
month, then Social Security will pay you $730 a month. [90% of 
your PRA $300 is $270. $1000 minus $270 yields your Social 
Security payment of $730.] You'd be receiving a total of $1030 
a month. In the eleventh year of your retirement, and 
thereafter, you'd receive $1000 a month, prior to any 
adjustment for inflation.
    Note the ten percent PRA incentive that's built in. Social 
Security counts only ninety percent of your annuity in figuring 
out your benefit check, not one hundred percent. This is 
analogous to Feldstein's suggested PRA incentive.
    The PRA component of the Two-Track Solution avoids, 
however, the moral hazard that appears to be associated with 
Feldstein's proposal. In Feldstein's proposal, the dumber the 
investor, the greater the protection. Someone who blew almost 
every cent of his PRA savings on bad investments, and who 
retired with a monthly annuity of only one dollar, would under 
Feldstein's plan see his regular Social Security benefit docked 
by only 75 cents.
    The Two-Track Solution does, however, place limits on the 
amount of protection offered. If some individuals elect not to 
invest in index funds, and then reach retirement with less 
money than they would have accumulated as index fund investors, 
they will not thereby be entitled to a corresponding increase 
in their Social Security benefits. Their Social Security 
benefit checks, for the first ten years, will be keyed only to 
the amount of money they would have been receiving, had they 
been index fund investors. If they fall short, through their 
own misjudgment, Social Security will not make them whole. (If 
they come out ahead, Social Security will not penalize them, 
    This Two-Track approach to PRA's effectively answers the 
key objections that have been raised against PRA's by their 
    Key Issue--Longevity Risk. Longevity risk is a very real 
issue when PRA's are meant to cover all the years of a person's 
retirement. When a PRA is meant to finance only the first ten 
years of a person's retirement, though, the issue of longevity 
risk essentially evaporates.
    Key Issue--Market Risk. Market risk is a significant issue 
if Social Security makes no allowance for the fact that people 
retiring in different years are sure to face very different 
investment outcomes. When Social Security does make allowance 
for this, as proposed, the issue of market risk also goes away.
    Key Issue--High Management Fees. Any employee who places 
his or her PRA with a typical stock-picking mutual fund can 
expect to pay high management fees, one percent of assets, 
perhaps one and a half percent of assets. These fees can eat up 
a substantial portion of a person's assets over the years. But 
employees who direct their Fund Managers to invest their PRA 
assets in index funds will pay much less. Fees currently 
charged on index fund accounts are already as low as two-tenths 
of one percent of assets. Once Social Security's bargaining 
power is brought to bear, such fees will almost certainly fall 
to one-tenth of one percent, or less. By steering almost all 
employee investments toward index funds, the Two-Track Solution 
essentially eliminates the issue of high management fees.
    Key Issue--the Redistributive Character of Today's Social 
Security Program. Many critics of PRA's have voiced concern 
about the adverse impact of PRA's on lower income participants. 
In the Two-Track Solution, the redistributive nature of the 
Social Security program is fully preserved.
    Key Issue--the Camel's Nose of Full Privatization. What 
about the ``camel's nose under the tent'' concern voiced by 
some liberals? One must be blunt. Liberal critics haven't done 
their math. Even if the Democrats and Republicans alike sought 
to privatize all of Social Security, they wouldn't be able to 
do it. Is there any scenario under which the nation could 
tolerate having PRA's acquire more than a third of the entire 
stock market? No. Of course not. Establish a one-third stock 
market ownership ceiling for PRA's, then, and it's simply 
impossible for an all-out privatization strategy to replace 
more than about a quarter of the entire Social Security 
    Liberals should stop worrying themselves about the camel's 
nose under the tent. The camel is really quite tiny. It's much 
too small to run away with the tent.

                Track Two--Trust Fund Equity Investments

    In the Two-Track Savings Solution, the second savings track 
accumulates an additional pool of capital in the Social 
Security Trust Fund. Just as the Track One capital pool 
accumulated in PRA's helps in financing the first ten years of 
each individual's retirement, the Track Two capital pool 
accumulated in the Trust Fund helps in financing the later 
years of each person's retirement.
    The Two-Track Solution authorizes the Trust Fund to invest 
in stocks as well as bonds. If stock market conditions are 
favorable, the Two-Track Solution authorizes the Trust Fund to 
invest as much as sixty percent of its assets in stocks, forty 
percent in bonds.
    The point, of course, is to create a permanent pool of 
capital, whose earnings can make a strong contribution to the 
task of funding the gap. The larger its pool of capital, of 
course, the more effective the Trust Fund will be in funding 
the gap.
    The Two-Track Savings Solution adopts a unique approach to 
the issue of how this pool of capital should be managed. All of 
the Trust Fund's securities would be farmed out to the same 
group of firms that are functioning as Fund Managers for 
employee PRA's. The securities would be allocated to these 
firms in proportion to the rate at which employees have 
selected them to serve as their Fund Managers.
    In other words, if two percent of all employees have 
selected Merrill Lynch as their PRA Fund Manager, two percent 
of all Trust Fund assets would be placed with Merrill Lynch. If 
one percent have selected Charles Schwab, one percent of all 
Trust Fund assets would also be placed with Charles Schwab. And 
so on.
    All Trust Fund stocks would, by law, be invested in very 
broad index funds, much broader than the S&P 500. 
Responsibility for voting those stocks would be divided among 
all the firms serving as Fund Managers.
    As the PRA program unfolds, it is likely that at least a 
hundred different firms would get into the business of managing 
PRA's. Given the multitude of mutual funds in today's market, 
the total number of firms handling PRA's might ultimately 
number in the hundreds, perhaps even in the thousands. From a 
corporate governance standpoint, the end result is clearly 
positive. Responsibility for voting the Trust Fund's stocks 
would be very widely dispersed. Under the Two-Track Solution, 
corporate executives would wind up having much the same 
relationship with their stockholders as they do today.
    As a result of this arrangement, the Two-Track Savings 
Solution effectively addresses the key concern that is 
triggered whenever the notion of allowing the Trust Fund to 
invest in stocks is raised, the issue of stock ownership 
becoming highly concentrated in the Social Security Trust Fund.
    In a one-track investment environment, this is a difficult 
problem to resolve. Leading supporters of a Trust Fund 
investment strategy have suggested the appointment of a Federal 
Reserve-like investment management board. This board would 
appoint a small number of independent Fund Managers to handle 
the Trust Fund's stocks, and those managers would be required 
to keep Social Security's stocks safely invested in broad index 
    Such a proposal might turn out to be workable. But it is 
not a program that inspires confidence. And, like the sword of 
Damocles, the threat of Congressional tampering would hang 
perpetually over the stock market.
    The Two-Track Solution provides the nation with the 
opportunity to use a significantly less risky strategy for 
managing Trust Fund assets. Dispersing the management of Trust 
Fund assets among hundreds of employee-selected Fund Managers 
insulates those assets from the threat of Congressional 
tampering much more effectively. Tens of millions of PRA-owning 
employees will serve as a powerful buffer, creating a perpetual 
barrier against meddling that no Congress would dare to breach. 
It's something of a happy surprise that the best way to harness 
the Trust Fund's capacity for funding the gap is to combine a 
track two Trust Fund investment strategy with a parallel track 
one PRA investment strategy.

                   Key Issue--Real Returns on Stocks

    When asked about future returns on stock investors, most 
forecasters will say, as though it were a mantra, ``We've had 
seven percent return on stocks for the last seventy years. 
There's no reason we can't have seven percent return on stocks 
for the next seventy years.''
    One should think long and hard before accepting this 
assertion at face value. In fact, a more reasoned reading of 
the historic data argues strongly for a more conservative 
    We must begin by taking a closer look at the 7% number. 
First of all, it refers only to the S&P 500, not to the entire 
market. It's unlikely that the market as a whole performed to 
the same level as the S&P 500.
    Second, the S&P's seven percent growth rate is much less 
dependent on price growth than people realize, much more 
dependent on reinvested dividends. Real price appreciation for 
S&P 500 stocks averaged only 2.3% over the past seven decades. 
It was the dividend reinvestment rate of 4.6% that did two-
thirds of the work in delivering seven percent returns. That's 
right. From a 7% return perspective, two-thirds of the heavy 
lifting was done by reinvested dividends.
    The prudent forecaster has to look carefully at both of 
these elements. Will long-run price appreciation rates rise, 
stay the same, or fall? Will long-run dividend reinvestment 
rates rise, stay the same, or fall?
    Will price appreciation rise, stay the same, or fall? We've 
had quite a run-up in stock prices over the past decade and a 
half. Total market capitalization, relative to GDP, has risen 
to astonishing levels. The Market Capitalization-to-GDP Ratio 
has risen from 45% in the mid-eighties to 155% in the late 
nineties. Nearly a full generation of brokers and investors has 
come of age in an environment where the market every year has 
grown faster than the GDP.
    Such a trend is not sustainable. Common sense tells us 
that, over the long run, the total value of the stock market is 
ultimately going to grow at roughly the same rate as the GDP. 
After all, the key elements of market value--corporate 
revenues, corporate earnings, and corporate dividends--are all 
nested within GDP. As corporate America grows, GDP grows. And 
so does the stock market. Stock market growth can't outrun GDP 
growth forever.
    [When investors do act on the belief that stock prices will 
always grow faster than GDP, as they seem to be doing now, the 
market eventually turns into a vast Ponzi swindle, with this 
year's suckers turning a fast profit only if next year's 
suckers buy in at even sillier prices.]
    It is also worth noting, as Wharton's Jeremy Siegel has 
pointed out, that individual stock indexes, such as the S&P 
500, won't grow quite as fast as the growth rate of the entire 
market. When new firms are listed, the market grows, but an 
index fund does not. When new shares are sold by an existing 
firm, the total size of the market grows, while index funds 
remain the same size. Over the past seventy years, GDP grew at 
an inflation-adjusted rate of 3.3% a year. Stock prices in the 
S&P 500 grew at an inflation-adjusted rate of only 2.3% a year. 
There's a natural lag between the GDP growth rate and long-term 
index fund growth.
    In the future, slowing population growth rates will ripple 
through the economy in ways likely to slow down the long-term 
GDP growth rate. A lower population growth rate implies fewer 
new workers and fewer new customers coming of age each year. 
It's doubtful that the economy can sustain a GDP growth rate of 
3.3% should the nation's population growth rate slow down 
markedly. Given these circumstances, a prudent forecaster would 
probably pick 2% annual growth in real stock prices, not 2.3%, 
as a sensible estimate for the decades ahead.
    Will the dividend reinvestment potential rise, stay the 
same, or fall? Is it reasonable to expect the S&P 500's 
historic dividend reinvestment rate of 4.6% to hold, for the 
stock market as a whole, in the decades ahead?
    Simply on the face of it, one ought to say no. As a general 
rule, one wouldn't expect dividend payout rates for the market 
as a whole to be as strong as the dividend payout rates for 
those market-leading firms that are listed on the S&P 500.
    One also has to look at the historic averages. The Market 
Capitalization-to-GDP Ratio averaged roughly 65% over the past 
seven decades. Over the same time period, corporate dividend 
payouts averaged roughly 2.5% of GDP. What impact did this have 
upon the dividend reinvestment potential? The dividend 
reinvestment potential, i.e., the dividend yield, is simply the 
dollar value of the dividend divided by the dollar value of the 
stock. For the economy as a whole, dividends equaling 2.5% of 
GDP, divided by stock values equaling 65% of GDP, implied a 
market-wide dividend yield, or dividend reinvestment potential, 
that was just a shade under 4%, slightly lower than the 
historic dividend yield for firms listed in the S&P 500.
    Now consider what's happening to these key variables today. 
The dividend payout rate hasn't changed much. Corporate 
dividends are still running about 2.5% of GDP. On the other 
hand, the Market Cap-to-GDP ratio has skyrocketed. At current 
stock prices, the Market Cap-to-GDP ratio is running about 
    As a result, the market's dividend yield, or dividend 
reinvestment potential, has taken a hammering. It's now in the 
one and a half percent range.
    On a slightly positive note, sophisticated investors now 
see share repurchasing playing much the same role as dividends. 
Corporations that repurchase shares do so as a way of getting 
capital back into the hands of their shareholders. Since 
receipts from the sale of shares back to the corporation are 
taxed to the investor as capital gains, while dividends are 
taxed as ordinary income, many investors have come to prefer 
share repurchasing. Though dividend yields are now quite low, 
share repurchasing does make up a small part of the gap.
    A rational forecaster probably would not expect Market Cap-
to-GDP Ratios in the 155% range to be sustained indefinitely. 
Given time, a more rational regime of stock prices is sure to 
return. On the other hand, 65% Market Cap-to-GDP Ratios may 
never be seen again. What's the right level of market 
capitalization to predict for the future? No one can say for 
sure. An average Market Cap-to-GDP Ratio of 100% is probably a 
prudent forecast, somewhat higher than the market's historic 
average, well below today's unsustainable levels.
    In other words, with a Market Cap-to-GDP Ratio of 100%, 
tomorrow's dividend reinvestment potential, with share 
repurchase results thrown in, is likely to recover slightly 
from its current lows. On the other hand, dividend yields as 
high as 4.6% will be little more than a distant memory. A 
dividend yield forecast of 3% is somewhat more prudent for the 
decades ahead.
    Tomorrow's real return rate. The responsible forecaster 
looks separately at each element, and then combines them. Real 
price growth averaging 2% a year. Dividend yields--i.e., 
dividend reinvestment potential--averaging 3%. When these two 
estimates are combined, the suggested long-run return for 
stocks comes in at roughly 5% a year.
    Needless to say, this point is extremely important in the 
Social Security reform debate. Most of the proposals offered to 
date have placed their bets on a 7% return rate for stocks. 
This is regrettable, and involves significant overpromising. 
Social Security proposals based on long run stock returns of 
seven percent are almost sure to disappoint.
    Key Issue--Investment Timing. When should PRA's begin 
investing in the stock market? When should the Trust Fund begin 
investing in the stock market? Given the stock market's 
currently overpriced condition, caution seems advisable. Hardly 
anyone would encourage Social Security to buy high and sell 
low. Fund Managers would be well advised to stay away from the 
stock market until overall stock prices have returned to a 
somewhat more rational level.
    The following guidelines are suggested: Whenever the Market 
Cap-to-GDP Ratio exceeds 130%, Social Security's Fund Managers 
ought not invest any new money into the stock market. Whenever 
the Market Cap-to-GDP Ratio hovers between 100% and 130%, 
Social Security's Fund Managers should invest cautiously in 
stock index funds. Whenever the Market Cap-to-GDP Ratio dips 
below 100%, Social Security Fund Managers should be free to 
invest heavily in the market.
    Over the long run, Social Security's Fund Managers ought to 
seek a sixty/forty mix between stocks and bonds. In the short 
run, though, given the market's currently overpriced state, a 
zero/one hundred mix between stocks and bonds is a more 
appropriate target.

                         The Numbers Make Sense

    To implement the Two-Track Savings Solution, the following 
steps are recommended.
    1. Establish a system of PRA's (Personal Retirement 
Accounts). Set the payroll tax rate for PRA's at 1.5%, split 
evenly between the employee and the employer.
    2. Set the remaining payroll tax rate at 10.9%, half from 
the employee, half from the employer. This keeps the overall 
payroll tax at 12.4%.
    3. Subsidize Social Security from the general funds of the 
Federal Government in an amount equaling 0.9% of taxable 
payroll. Begin the subsidy in the year 2000. Terminate it at 
the end of 2032. (In the year 2000, 0.9% of taxable payroll 
will be about $34 billion.) The federal subsidy serves two 
purposes: A) It builds a strong and permanent Trust Fund; B) It 
covers any shortfalls associated with the early years of PRA's, 
before they're fully funded.
    4. End the practice of diverting a portion of the income 
taxes collected from Social Security beneficiaries to Medicare. 
Return to Social Security all income taxes collected from 
retirees on their Social Security benefits.
    5. On a phased-in basis, raise Social Security's taxable 
income ceiling to a point that expands the total size of the 
Taxable Payroll pool by six percent. Do not raise benefits 
accordingly for high income participants.
    6. Gradually trim Social Security's overall benefit 
schedule, so that total benefits six decades from now are 
between nine and ten percent less than they would otherwise 
have been. Perhaps the fairest method for doing this is to 
adjust the formula that ties new benefits to career earnings, 
so that the growth rate in benefits for new retirees doesn't 
rise quite as quickly as the growth in total wages.
    7. Adjust the benefit calculation rules for the first ten 
years of a person's retirement, so that they'll be coordinated 
with Social Security's PRA program. For all those who keep 
their PRA stock assets invested in stock market index funds, 
establish the following rule: Ninety percent of a retiree's 
monthly PRA-financed annuity, plus the retiree's check from 
Social Security, will equal the normal Social Security benefit 
that would be paid to the retiree, were there no PRA's. This 
rule keeps everyone whole, regardless of the state of the 
market at the time they retire. It also builds in a small 
incentive for participating in the PRA program.
    Corollary: An employee who does not invest in stock market 
index funds, but who selects a different investment strategy, 
will on retirement draw Social Security benefits identical to 
those he or she would be receiving, had that same employee 
invested their PRA 1.5% in an index fund.
    8. Once stock prices return to more reasonable levels, 
authorize each Fund Manager handling Social Security assets to 
invest sixty percent of Trust Fund assets in broad stock market 
index funds, forty percent in bonds. Authorize Fund Managers to 
invest PRA assets similarly, sixty percent in broad stock 
market index funds, forty percent in bonds.
    Stock Market Implications. In developing Two-Track Savings 
Solution, the guiding rule has been that Social Security-driven 
stock acquisition (PRA's and Trust Fund combined) ought to be 
held to less than a third of all stocks listed on the stock 
    Is such a cap too high? Or too low? Consider the following 
factors. Stock market size: The stock market really isn't quite 
as big as people think it is. Social Security's cash needs are 
really quite massive, relative to the whole stock market. The 
extent of Social Security coverage: Social Security provides 
virtually all Americans with retirement benefits. Growth in the 
retiree population: People over 65 are expected to grow from 
12% of the whole population to 23%. Funding the gap: A 
substantial pool of capital is needed to fund the gap, to 
protect benefits, avoid payroll tax increases, and ensure 
    Given these considerations, it will be an extraordinary 
accomplishment to hold Social Security's ownership share to 
less than a third of the total stock market. Yet it can be 
    To begin with, it is assumed that total stock market 
capitalization will be worth about 100% of GDP over the long 
run, well below today's highs, yet exceeding the historic 
    As the Two-Track Solution matures, my Solvency Spreadsheet 
indicates that Social Security's Trust Fund will in time 
acquire assets equaling 27% of GDP, while PRA's ultimately 
accumulate assets equaling 20% of GDP. With a 60/40 split 
between stocks and bond, this implies Social Security-related 
stock holdings eventually equaling about 28% of GDP, and bond 
holdings equaling about 19% of GDP.
    If such an accumulation of stocks were held and voted as a 
single chunk of capital, its effects would be overpowering. On 
the other hand, the stocks that add up to the 28% total will be 
owned, in part, by tens of millions of Americans. They'll be 
managed and voted by literally hundreds of different Fund 
Managers. They'll be held in very broad index funds. In other 
words, the Two-Track Savings Solution actually produces a 
highly decentralized program of stock ownership and control.

                    Comparisons With Other Proposals

    The Two-Track Solution compares favorably with all existing 
proposals for saving Social Security.
    Plans That Let GDP Solve It. According to some, strong GDP 
growth will reduce or eliminate Social Security's insolvency 
crisis. The anticipated gap won't materialize. Even if these 
high growth optimists are correct, it's still not a bad idea to 
have the Two-Track Savings Solution in force. Then, if the 
optimists do turn out to be right and high GDP growth rates do 
reduce the pressure on Social Security, these twin pools of 
capital will enable Social Security to pay stronger benefits, 
or to reduce the payroll tax, or both. On the other hand, if 
the high growth optimists are wrong, and the gap does 
materialize after all, the Two-Track Savings Solution is still 
there to offer the protection that's needed. In either case, 
the Two-Track Savings Solution is a smart course of action.
    Two Percent Plans. ``It's a two percent problem,'' some 
have said, referring to the claim that Social Security is out 
of ``actuarial balance'' by only two percent of taxable 
payroll. This view reflects a deep error in judgment. 
``Actuarial balance'' is not a fancy name for solvency, and the 
attainment of actuarial balance comes nowhere close to assuring 
solvency. The Two-Track Savings Solution doesn't limit itself 
to restoring actuarial balance, as the ``two percent'' 
proposals try to do. The Two-Track Solution truly produces 
genuine solvency. Under the Two-Track Solution, Social 
Security's twin pools of capital will be just as strong in 2075 
as in 2050, just as capable of ``funding the gap'' at the end 
of the century as they are in the middle of the century.
    The Ball-Aaron-Reischauer Strategy. Proposals offered by 
former Commissioner Ball and by Brookings' experts Aaron and 
Reischauer lean heavily on allowing the Trust Fund to invest in 
the stock market. They also offer a number of additional tweaks 
designed to restore actuarial balance. Their suggested 
methodology for insulating Trust Fund stocks from the threat of 
Congressional meddling isn't nearly as strong as the method 
proposed in the Two Track Solution. And the single pool of 
capital they'd create doesn't go nearly as far to ``fund the 
gap'' as the twin pools of capital called for in the Two-Track 
Savings Solution.
    The Clinton Plan. President Clinton's current proposal 
might be described as Ball-Aaron-Reischauer Lite. It expands 
the Trust Fund quite modestly in the short term, but fails 
utterly in the task of ``funding the gap'' over the long term. 
President Clinton's current proposal pushes out the Social 
Security insolvency date by a meager two decades. In contrast, 
the Two-Track Savings Solution does in fact deliver long-term 
solvency. Under the Two-Track solution, Social Security's 
financial condition will be strong enough to fund the gap 
between expenditures and receipts for decades and decades to 
    The NCRP Plan. The Breaux-Gregg-Kolbe-Stenholm proposal 
achieves long-term solvency, but does so at the cost of 
imposing steep benefit cuts on future generations of retirees. 
According to the Social Security actuaries who've priced out 
the NCRP plan, retiree benefits in the year 2075 will be cut by 
45%. Proceeds from NCRP-suggested thrift accounts won't make up 
more than half the difference, at best, leaving a net cut in 
total benefits of twenty to twenty-five percent. In the Two-
Track Solution, by comparison, the ultimate benefit level is 
2075 is reduced by not more than ten percent.
    The Moynihan-Kerrey Plan. The Moynihan-Kerrey plan also 
achieves long-term solvency, but only at the cost of raising 
the combined thrift account-plus-payroll tax rate to 15.4% in 
decades to come. By comparison, the Two Track Savings Solution 
keeps the payroll tax at 12.4% in the out-years, and does this 
without requiring a permanent federal subsidy.
    The Feldstein Plan. One serious weakness in the Feldstein 
plan is that it requires a permanent Federal Budget subsidy, in 
the form of tax credits that offset employee PRA contributions. 
Such credits become a never-ending drain on the Federal Budget. 
The federal budget subsidy called for by the Two-Track Solution 
is more modest than Feldstein's, lasts only for three decades, 
and then terminates completely.
    A second weakness in the Feldstein plan is its moral hazard 
problem. As mentioned, the poorer the investment strategy 
picked by an employee, the more fully the individual would be 
protected by Social Security. In the Two-Track Savings 
Solution, only those who invest prudently are fully protected. 
Those who invest incautiously receive no extra protection.
    Full Privatization Plans. Proposals offered in the House 
and Senate by Gramm, Domenici, Sanford, and Porter, as well as 
the proposal offered by Sam Beard, push toward the total 
privatization of Social Security. Even if any of these 
proposals were to command majority support within the Congress, 
none could be implemented in the real world. For such proposals 
to live up to their rosy promises, future retirees would have 
to accumulate nearly all the stocks and bonds available in the 
American economy. As a practical matter, a full privatization 
strategy is totally unworkable.

Conclusion--The Two-Track Savings Solution Works Both Economically and 

    The Two-Track Savings Solution is significantly superior to 
all other proposals. It works economically for the nation as a 
whole, because it's based on realistic economic principles. It 
doesn't fund the total cost of Social Security, but it does 
fund the anticipated gap between future expenditures and future 
receipts. It delivers long-run solvency. It holds the line on 
payroll taxes. It avoids the creation of a permanent Federal 
subsidy. It does not assume 7% real returns on stocks, ad 
infinitum, because such returns are quite unlikely. And its 
benefit cuts are quite modest, amounting, in the end, to a 
slowing in the rate of benefit growth.
    The Two-Track Savings Solution creatively avoids the design 
flaws inherent in today's one-track options. It avoids the 
longevity risk, market risk, and high management fee risks 
associated with earlier approaches to establishing PRA's. And 
it neatly disposes of the stock market control concerns that 
are triggered by the Ball-Aaron-Reischauer proposal for 
managing Trust Fund stock investments.
    The Two-Track Savings Solution works from a liberal 
perspective. It fully retains the redistributive features of 
today's Social Security system. And it fully protects 
everyone--retirees, survivors, and the disabled.
    The Two-Track Savings Solution also works from a 
conservative perspective. It effectively harnesses the power of 
compound interest to reduce the long-run costs of the Social 
Security program. Compared with any realistic alternative, the 
Two-Track Solution significantly improves the amount of value 
received for each dollar spent.
    The Two-Track Solution is more than the sum of its one-
track elements. It protects retiree benefits. It holds the line 
on the payroll tax. It funds the gap and achieves lasting 
solvency. It is an intelligent compromise that meets the core 
concerns of Republicans and Democrats alike. The Two-Track 
Savings Solution is a creative and robust answer that will save 
Social Security, and keep it affordable, for generations to 


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

    On February 2, I will introduce a resolution recognizing 
the importance of Social Security, one of our nation's greatest 
success stories, to women. As the President pointed out in his 
State of the Union speech, although they make up roughly half 
of America's population, women 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.
    Any changes to the Social Security system must be 
thoroughly researched and carefully considered to maintain 
Social Security's guarantee of financial stability in old age. 
As we begin to debate Social Security reform, Congress and the 
President must be committed to ensuring that any reform 
proposal protects the financial security of women in their 
later years. My resolution recognizes the unique obstacles in 
ensuring their retirement, survivor and disability security, 
and the essential role that Social Security plays in 
guaranteeing inflation-protected financial stability for women 
throughout their golden years. The bill calls on the Congress 
and the President to take these factors into account when 
weighing proposals to reform the Social Security system.
    I am proud to have 84 of my colleagues join me in co-
sponsoring this important piece of legislation. A copy of my 
resolution is attached for your reference.


    Gephardt, Matsui, Stark, Thurman, Pelosi, Lowey, Morella, 
C. Maloney, McDermott, Coyne, Neal, Levin, C. Brown, Olver, 
Sanders, Filner, Meek, Capps, Gejdenson, Serrano, Millender-
McDonald, Meehan, Rivers, Kucinich, Clayton, G. Miller, Norton, 
Kaptur, Frost, Markey, Hinchey, Ford, McKinney, Roybal-Allard, 
Stupak, Lee, Delahunt, Green, Jackson-Lee, Allen, Velazquez, 
Woolsey, Slaughter, Bentsen, Bishop, Danner, Mink, Barrett, 
Kildee, Frank, Lofgren, Pomeroy, C. McCarthy, Nadler, Pallone, 
Oberstar, K. McCarthy, Wynn, Wexler, Vento, S. Brown, J. 
Maloney, B. Thompson, Tierney, Sherman, Brady, Sandlin, Dixon, 
Manzullo, Hooley, Goode, John Lewis, Romero-Barcelo, 
Kilpatrick, Hinojosa, Schakowsky, Eshoo, Abercrombie, 
Napolitano, Lantos, Berman, B. Hill, Filner, Crowley



    Recognizing the unique effects the proposals to reform 
Social Security may have on women.
    Whereas the Social Security benefit structure is of 
particular importance to low earning wives and widows with 63 
percent of women beneficiaries aged 62 or older receiving 
wife's or widow's benefits;
    Whereas three-quarters of unmarried and widowed elderly 
women rely on Social Security for over half of their income;
    Whereas without Social Security benefits, the elderly 
poverty rate among women would have been 52.2 percent and among 
widows would have been 60.6 percent;
    Whereas women tend to live longer and tend to have lower 
lifetime earnings than men do;
    Whereas women spend an average of 11.5 years out of their 
careers to care for their families, and are more likely to work 
part-time than full-time; and
    Whereas during these years in the workforce, women earn an 
average of 70 cents for every dollar men earn: Now therefore, 
be it
    Resolved, That the House of Representatives recognizes the 
unique obstacles that women face in ensuring retirement 
security and survivor and disability security and the essential 
role that Social Security plays in guaranteeing inflation-
protected financial stability for women throughout their entire 
old age, and it is the sense of the House of Representatives 
that the Congress and the President should take these factors 
into account when considering proposals to reform the Social 
Security system.


Statement of Joseph G. Green, Toronto, Ontario, Canada

                       WEP Modification Proposal


    Historically, years ago, government employees in the US, (local, 
state and federal) could not belong to the Social Security System and 
also be part of a government pension plan. Since government pensions 
then were higher, most employees elected to join the appropriate 
government plan and not social security. As of 1984, Congress mandated 
that ALL workers must belong to the Social Security System.
    However, Congress realized that these civil servants would retire, 
having paid in only the minimum of 40 quarters or a little more, but at 
a much higher social security rate than those pensioners who had joined 
the system 20 or more years before (but contributed when the rate was 
much less). Therefore, beginning in 1984 and thereafter, the pensioners 
with a non-covered pension would in effect get their full non-covered 
pensions plus much higher social security benefits than would those 
workers who had contributed to social security for many more years 
before 1984, when maximum was less than half of today's $1,326 (as of 
Jan. 1997).
    Thus, pensioners retiring in the 1990s and thereafter, with a full 
non-covered pension, would enjoy a proportionately larger social 
security benefit than those who had contributed for many more years but 
had contributed less.
    To adjust this situation, when Congress amended the Social Security 
Act in 1983, it wrote into the statue a provision to offset this 
unintentional oversight for those with a SUBSTANTIAL non-covered 
pension. This provision is known as The Windfall Elimination Provision 

The Statute

    Provision 113-WEP of the 1983 Social Security Amendments PL98-21, 
stipulates that a pensioner entitled to social security benefits and 
also having a non-covered pension (all foreign pensions are obviously 
non-covered by social security) will have $50 deducted from his/her 
monthly social security benefit for every $100 he/she receives from the 
non-covered pension. The law further states that those whose social 
security computation falls under the WEP cannot lose more than half of 
their entitled social security benefit. This law went into effect as of 
January, 1986. Anyone drawing social security benefits prior to that 
date is not affected.

The Practical Application for Overseas Pensioners

    Congress never even considered American pensioners and how WEP 
would affect them if they are living overseas and are entitled to 
social security and get also a small or partial foreign pension. We 
abroad are adversely affected TWICE!.
    In the first place, our social security was frozen when we elected 
to leave the United States and relocated abroad at a time when social 
security monthly benefits were less than half of what they became in 
the 1990s. For example, in 1973, maximum social security benefits were 
only $550 per month. As of Jan. 1997, the maximum Social Security 
benefit is $1,326. American pensioners abroad entitled to a small or 
partial foreign pension, have their already frozen social security 
benefit of $550 or less further reduced up to half as a result of 
applying the WEP. Thus, anyone falling under the WEP in the United 
States enjoys a full non-covered pension of a $1,000 or more monthly, 
and even at maximum, can only lose up to half of today's maximum of 
$1,326 when applying the WEP formula. However, the overseas pensioner 
who winds up with a modest foreign pension of as little as $200-400 
monthly has his/her frozen social security benefit of 20 or more years 
ago further reduced, up to half, netting him or her only a few hundred 
dollars per month.
    This is a gross inequity and needs modification. In the first 
place, many overseas pensioners have paid into the Social Security 
system for many years. When they relocated abroad, they were certain 
that upon retirement their full social security due them would be 
guaranteed. Secondly, the Windfall Elimination Provision was only 
intended for those with a SUBSTANTIAL, non-covered pension. In today's 
economy. getting $400-600 of a monthly non-covered pension cannot be 
considered as being substantial. For many, their meagre foreign 
pension, together with their low, frozen social security is their only 
means of income. Having their entitled social security cut in half 
because they also are entitled to a modest, or partial non-covered 
pension causes an unfair hardship. This also places the overseas 
pensioner in an unequal situation relative to his fellow pensioner 
residing within the United States, falling under the WEP.

Modification Sought

    To correct this inequity, Congress is petitioned to modify the 
Windfall Elimination Provision as follows:
    l) Anyone whose non-covered pension is $600 or less shall be exempt 
from the Windfall Elimination Provision.
    2) Anyone whose non-covered pension is between $600-$1,200 shall 
have his/her first $400 exempt before applying the WEP formula.
    3) Anyone whose non-covered pension is $1,200 or above shall have 
his/her monthly social security benefits fully computed in accordance 
with the WEP provision.
    This proposal would greatly ease the inequity that now exists 
between pensioners residing at home or abroad. At the same time it 
would retain the spirit of the law; namely reducing the social security 
benefits of only those who have a SUBSTANTIAL non-covered pension, in 
addition to a substantial benefit from social security.


Statement of Heidi Hartmann, Economist, Ph.D., President and Director, 
Institute for Women's Policy Research, and Chair, Working Group on 
Social Security, National Council of Women's Organizations

    I would like to share with the Committee on Ways and Means 
my analysis of proposed reforms and suggestions for Social 
Security changes that would benefit women. This summary is 
based on the statement I submitted to the White House 
Conference on Social Security, held on December 8. I have also 
briefly addressed the proposal the President put forth in his 
State of the Union speech on January 19. Following my statement 
and a fact sheet from the Institute for Women's Policy Research 
is the statement of the working group on Social Security of the 
National Council of Women's Organizations.

                   Social Security is a Women's Issue

    Sixty percent of Social Security recipients are women. 
Women are not a side issue in the debate over how best to 
finance the current system and whether to replace it partially 
or totally with a system of individualized private accounts or 
to add-on subsidized voluntary savings accounts. Women are 
central to the debate. Women's views on financing and benefits 
are critical to the President's and Congress's ability to pass 
legislation changing Social Security in 1999 or any other year.

  Why Individual Private Accounts or a Substitute for Social Security 
                          Won't Work for Women

    Women are extremely skeptical that steering payroll taxes 
into individual private accounts will work for them to provide 
sufficient security in retirement. Women have lower earnings 
and live longer than men on average; therefore they have to 
stretch a smaller income over more years. They save less and 
have much less access to employment pensions. The security of 
Social Security as it's presently configured--the life-time 
guaranteed benefits, the higher returns for lower earning 
workers, the cost of living adjustments, and the spousal 
benefits (including benefits for widows and divorced women)--is 
critical to women. None of the privatization plans put forward 
provide all these assurances to women.
    Moreover, any transition to a system of pre-paid retirement 
benefits (saving while working to pay for retirement later) 
while the current pay-as-you-go system is still in place 
(today's workers pay for today's retirees' benefits), requires 
the transition generations to pay for two systems at once. This 
either requires more taxes or other sources of revenue to 
support both plans or requires that benefits be reduced for the 
existing plan. This double payment will be particularly 
disadvantageous to women, since they earn less and have less 
with which to make the payments. The benefit cuts will affect 
women disproportionately as well, since they are more dependent 
on Social Security benefits than are men and since more women 
than men are in or near poverty even with the current benefit 
levels. A mandatory ``carve out'' plan that uses a portion of 
the payroll tax to create a parallel structure of private 
individual savings accounts alongside the current insurance-
based system is expensive and unnecessarily complicates the 
Social Security system.

                        The President's Proposal

    The Universal Savings Accounts proposed by the President 
have the advantage of not requiring that Social Security funds 
be diverted to private accounts. Rather the new accounts are to 
be entirely voluntary, funded by individuals' savings and 
matched by tax credits (funded by the budget surplus) using a 
progressive formula (lower income savers get larger matches). 
Because of the matching funds, many individuals will prefer to 
save in these new vehicles than in the many existing 
alternatives. These individual savings accounts still raise 
several issues that need to be addressed:
     the administrative costs of having many small 
individual accounts may be high;
     the ownership of the accounts for married and 
divorced couples must be addressed;
     the future funding of the credits, when the budget 
does not have a surplus, is a serious fiscal issue.
    The President also proposes to transfer the bulk of the 
surplus to the Social Security Trust Fund and to allow a small 
portion of it to be invested in equities. These two strategies 
ensure the solvency of the system for an additional 20 years, 
to 2055 approximately.
    Both insurance-based systems like our current Social 
Security system and savings-based systems are valid forms of 
facing risk and financing retirement. Most families use both 
insurance and savings to protect against risks and provide for 
``rainy days.'' The President's proposal seeks to strengthen 
both types of protection.

       How to Reform Social Security to Better Meet Women's Needs

    Despite the many protections in Social Security that meet 
women's needs, there are still ways in which the system's 
rules, which are gender-neutral on their face, disadvantage 
     using 35 years of earnings to calculate benefits, 
when far fewer women than men have that many years of paid 
work--proposals to increase the number of years of earnings 
used will disadvantage women further;
     not providing earnings credits for years taken 
away from paid work to provide family care;
     inequities between one- and two-earner couples 
such that, for couples with the same total pre-retirement 
income, those who shared the responsibility for earning more 
equitably have lower retirement benefits from Social Security 
than more traditional families in which the husband worked for 
pay substantially more than the wife;
     a drop of between 33 percent and 50 percent in the 
surviving spouse's Social Security benefits relative to the 
couple's benefits when both were alive, even though research 
shows the surviving spouse needs all but 20 percent of the 
couple's previous income to maintain the same standard of 
living; the surviving spouse is most typically a woman and the 
drop in benefits is largest when she worked enough to 
contribute substantially to the family income.
     the application of the ``earnings test'' (which 
requires benefit reductions when retirees earn more than the 
allowed amount) indiscriminately, regardless of how much prior 
work history the retiree has; some women who began work late 
may wish to keep working as long as they can to increase their 
future Social Security benefits (the President proposes to 
eliminate the earnings test entirely);
     the application of the ``pension offset'' rule 
indiscriminately, regardless of the size of the government 
pension and Social Security payments received; many female 
retired civil servants have small government pensions and small 
Social Security payments, yet Social Security payments are 
reduced accordingly. This gender-neutral rule affects women 
more adversely than men because women's benefits are likely to 
be much smaller because of life-time low earnings; the loss of 
even these small benefits hurts them disproportionately. Also 
private pensions are not required to be offset against Social 
Security; men are more likely to hold private pensions than are 
    Few reform proposals on the table address any of these 
issues that affect the size of the benefits women receive. 
Improving women's benefits is critical to reducing poverty 
among elderly women. Women over 65 are nearly twice as likely 
to be poor as men over 65 (13 percent vs. 7 percent), even 
though without Social Security women's poverty rate would be 
exceptionally high, 52 percent. Older unmarried women are even 
poorer, with a poverty rate of 22 percent. Social Security has 
worked well for women, but it could work even better.


Statement of Dr. John C. Goodman, President, National Center for Policy 
Analysis, Dallas, TX

    Under our present pay-as-you-go system of financing elderly 
entitlements, taxes collected today are used to pay benefits to 
today's retirees. Each generation of retirees depends on the 
government to provide Social Security and health care benefits 
by taxing the next generation. But in the United States, as in 
most other developed countries, the number of taxpaying workers 
for every retiree is falling and is expected to continue 
falling. When the first Social Security payment was made in 
1940, there were 42 workers for every retiree. Today there are 
about 3.3 workers for every retiree. By the middle of the next 
century, the ratio is expected to fall to about 1.5 to 2 
workers for every retiree. This means that each worker will be 
supporting two-thirds of the cost of an elderly person in 
addition to all other taxes and all other family 
     Given current demographics, the tax burden for workers 
will continue to rise indefinitely into the future. As a 
result, our pay-as-you-go approach to elderly entitlements is 
on a collision course with reality.
     The trustees of the Social Security and Medicare funds 
issue annual reports that include assumptions and projections 
for the next 75 years. There are three sets of assumptions: 
``intermediate,'' ``low cost'' (optimistic) and ``high cost'' 
(pessimistic). Although we are encouraged to assume that the 
forecast based on intermediate assumptions is the most likely, 
many students of Social Security and Medicare believe that the 
pessimistic projection more closely reflects our recent 
experience. The National Center for Policy Analysis has 
calculated what both the intermediate and pessimistic 
assumptions mean in terms of the taxable payrolls of the 
     Spending on Social Security currently takes about 11.5 
percent of the nation's taxable payroll. Although Medicare Part 
A is also funded from the payroll tax, the federal subsidy for 
Medicare Part B is funded from general revenues. However, if 
both parts of Medicare are expressed as a percent of taxable 
payroll, they take about 5.5 percent.
     By the year 2045, when today's 21-year-old college student 
will be eligible for Social Security, 17.42 percent of employee 
earnings--about 50 percent more than at present--will be needed 
to pay Social Security benefits, according to the intermediate 
forecast. We will need almost 30 percent of earnings to pay 
Social Security plus Medicare Part A and the government's share 
of Medicare Part B.
     Using the pessimistic assumptions, we find that, by the 
time today's college students retire, the Social Security tax 
burden will be almost twice its current level--more than 22 
percent of taxable payroll. Almost 46 percent of the entire 
taxable payroll will be required just to fund Social Security 
and Medicare benefits already promised the elderly under 
current law.
     In addition to Medicare, the government also pays medical 
bills of the elderly through Medicaid (for the poor), the 
Veterans Administration system and other programs. When this 
additional spending is taken into consideration, under the 
intermediate assumptions more than one-third of the income of 
workers will be needed to pay retirement benefits to today's 
college students. Under the pessimistic assumptions, the amount 
will be more than 55 percent!
     Reformers tend to fall into two camps: those who want to 
preserve the current system's chain-letter structure and patch 
its defects, and those who want to reform the system in a 
fundamental way. The underlying strategy of proposals for 
patchwork reform is to cut benefits, raise taxes or both. 
However, almost every patchwork reform idea has severe 
drawbacks. Some countries have already chosen more fundamental 
     Britain allows employers and individual workers to 
opt out of the second tier of the state pension system.
     Australia requires workers to contribute to 
privately managed retirement savings plans.
     Chile requires workers to save for their own 
retirement by making regular deposits to private pension 
accounts, similar to our Individual Retirement Accounts. These 
accounts are managed for the individuals by private investment 
management companies.
     The Chilean system has been copied to one degree 
or another in Argentina, Bolivia, Colombia, El Salvador, Hong 
Kong, Mexico, Peru and Uruguay, and it will soon be implemented 
in Ecuador and Costa Rica.
     Singapore requires employees and employers to 
contribute jointly to individual investment accounts, which may 
be used not only for retirement income but also to pay medical 
expenses, make the down payment on a home or send a child to 
     These systems are fully funded, and each generation 
provides for its own retirement. They avert the long-term 
financial crisis inherent in the chain-letter approach of pay-
as-you-go systems. The reformed systems also encourage saving, 
which in turn generates higher economic growth.
     We have an opportunity today to reform our elderly 
entitlements policies, to put them on a fully funded basis and 
to provide for a transition period during which the existing 
unfunded liability can be eliminated. If we wait, or if we take 
half-way measures to try to patch the current unsustainable 
system, we will be sowing seeds for future hardship for both 
young and old.