[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
PRESERVING AND STRENGTHENING SOCIAL SECURITY
=======================================================================
HEARING
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
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2
WITNESSES
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
PRESERVING AND STRENGTHENING SOCIAL SECURITY
----------
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:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
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.
BACKGROUND:
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.''
FOCUS OF THE HEARING:
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.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Thursday,
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.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1
format, typed in single space and may not exceed a total of 10 pages
including attachments. Witnesses are advised that the Committee will
rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
*** NOTICE--CHANGE IN TIME & WITNESS ***
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
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
Members.
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
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 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
problems.
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
money.
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
do.
[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
car.
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
problems.
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
problems?
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
Security.
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
scrapped.
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
keep.
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
seniority.
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
right.
STATEMENT OF HON. JACK KEMP, CODIRECTOR, EMPOWER AMERICA;
FORMER SECRETARY, HOUSING AND URBAN DEVELOPMENT; AND FORMER
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
there.
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
property.
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
lifetime.
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
mentioned.
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
comment.
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;''
and
(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
comes.
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
benefits.
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
it.
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
Century.
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
prosperity.
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
prosperity?
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
themselves.
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
hoax.
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
Markets.
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.
Conclusion
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
chance.
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.
STATEMENT OF REV. JESSE L. JACKSON, SR., FOUNDER AND PRESIDENT,
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
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 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
save.
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
Security
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
earner.
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
Director
2030 Center
Norman Hill
President
A. Philip Randolph Institute
John Rother
Director of Legislation and Public Policy
AARP
Steve Kest
Executive Director
ACORN
John J. Sweeney
President
AFL-CIO
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
President
American Federation of State County and Municipal Employees
Sandra Feldman
President
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
President
American Postal Workers Union
Robert Kuttner
Co-Editor
American Prospect
Amy Isaacs
National Director
Americans for Democratic Action
Harriet Barlow
Director
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
President
Calvert Social Investment Foundation
Roger Hickey
Co-Director
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
President
Center for Policy Alternatives
Leslie R. Wolfe
President
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
President
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
President
Commonwealth Institute
Morton Bahr
President
Communication Workers of America
Jerome Grossman
Chairman
Council for a Livable World
David Langer
President
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
President
Economic Policy Institute
Ken Cook
President
Environmental Working Group
Michael McCloskey
Environmentalist
Ron Pollack
Executive Director
Families USA Foundation
Eleanor Smeal
President
Feminist Majority
Tom Schlesinger
Executive Director
Financial Markets Center
Sumner Rosen
Director
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
President
Friends of the Earth
Roger Wilkins
George Mason University
Amitai Etzioni
Communitarian Network
George Washington University
Peter Edelman
Professor
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
Professor
Harvard University
Jack O'Connell
Executive Director
Health & Welfare Council of Long Island
Arcadio Vazquez
President
Hispanic Senior Action Council
Mimi Abramovitz
Professor of Social Policy
Hunter School of Social Work
Heidi Hartmann
Director
Institute for Women's Policy Research
Suleika Cabrera Drinane
Executive Director
Institute for the Puerto Rican/Hispanic Elderly, Inc.
Clavin Fields
Director
Institute of Gerontology, UDC
Timothy Smith
Executive Director
Interfaith Center on Corporate Responsibility
Thomas Buffenbarger
International President
International Association of Machinists
Stephen Viederman
President
Jessie Smith Noyes Foundation
Bert Seidman
Vice-President & Washington Rep.
Jewish Labor Committee
Fred Azcarate
Director
Jobs with Justice
Rev. Peter Laarman
Senior Minister
Judson Memorial Church
Justin Dart
Co-founder
Justice for All
Peter D. Kinder
President
Kinder, Lydenberg, Domini & Co.
Brent Wilkes
National Executive Director
League of United Latin American Citizens
John Mueller
Economist
Lehrman Bell Mueller Cannon
Rev. Robert L. Pierce
Former Executive Director
Long Island Council of Churches
Rev. Russell Siler
Director
Lutheran Office for Governmental Affairs, ELCA
Elisa Maria Sanchez
President
MANA, A National Latina Organization
Peter Diamond
Professor of Economics
MIT
Richard Medley
Medley Global Advisors, L.L.C.
Jackie Kendall
Executive Director
Midwest Academy
Heather Booth
Midwest Academy, Founder
Julian Bond
Board Chair
NAACP
Kweisi Mfume
President & CEO
NAACP
Kathy Thornton RSM
National Coordinator
NETWORK: National Catholic Social Justice Lobby
Robert Ball
Founding Chair
National Academy of Social Insurance
Robert G. Gaw
President
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
President
National Caucus and Center on Black Aged
Susan Bianchi-Sand
Executive Director
National Committee on Pay Equity
Chair
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
President
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
Chair
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
President
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
President
National Urban League
Nancy Duff Campbell
Co-President
National Women's Law Center
Steve Gorin
President
New Hampshire Citizen Alliance
Anthony Wright
Program Director
New Jersey Citizen Action
Sen. Fred R. Harris
State Chair
New Mexico Democratic Party
Stanley Sheinbaum
Publisher
New Perspectives Quarterly
Barney Olmsted and Suzanne Smith
Co-Directors
New Ways to Work
Eleanor Litwak
President
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
President
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
Preamble
Mark Weisbrot
Research Director
Preamble Center
Herb Gunther
Executive Director
Public Media Center
Jesse L. Jackson
President
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
President
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
Professor
Syracuse University
Paul Marchand
Director of Government Affairs
The Arc
Chair
Consortium for Citizens with Disabilities
Richard Leone
President
The Century Foundation
Vivien Labaton
Co-Director
Third Wave Foundation
Tom McCormack
Title II Community-AIDS National Network
Joseph White
School of Health and Tropical Medicine
Tulane University
Jay Mazur
President
UNITE!
Stephen P. Yokich
President
United Auto Workers
Pat Conover
Office for Church in Society
United Church of Christ
Douglas H. Dority
President
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
President
United States Student Association
George Becker
President
United Steelworkers of America
Chuck Collins
Co-Director
United for a Fair Economy
Robert Pollin
Prof. of Economics
University of Mass-Amherst
Eugene Feingold
Professor Emeritus
University of Michigan
Martha Byam
Instructor
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
President
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)
President
Women Legislators' Lobby
Anna Rhee
Executive Secretary for Public Policy
Women's Division, United Methodist Church
Peter Barnes
Co-Founder
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
save.
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
views.
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
night.
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
save.
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
program.
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
itself.
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
together.
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
investment.
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
deterrent.
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
to----
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
Security----
Mr. Thomas. That's outrageous.
Mr. Rangel. I apologize if I have offended anybody. Who's
speaking?
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
overwhelmingly.
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
retirees.
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.
Watkins.
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
race.
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
million.
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
morning.
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
poverty.
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
investment.
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
time.
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
questioning.
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
President?
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
fall.
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
capital.
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
heard.
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
time.
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
today.
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
growth.
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
money.
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
loss.
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
Kemp.
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
incentive.
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
bad----
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
today.
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
option?
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
debate.
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
rich.
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
market.
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.
Also----
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
retirement.
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
decisions.
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
appetite----
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
exciting.
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
have.
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
record.
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
and----
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.
Doggett.
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.
Munnell.
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.
STATEMENT OF ALICIA H. MUNNELL, PETER F. DRUCKER PROFESSOR OF
MANAGEMENT SCIENCES, BOSTON COLLEGE CARROLL SCHOOL OF
MANAGEMENT
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
Security.
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
program.
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
proposal.
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
managers.
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-
tuning.
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
filled.
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
benefits.
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
accounts.
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.
References
Advisory Council on Social Security. 1997. Report of the 1994-1996
Advisory Council on Social Security (Washington: Government Printing
Office).
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-
65.
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
market.
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
clarify.
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
retire.
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
expect.
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
there?
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
progress?
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
surplus.
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
401(k).
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
beneficiaries.
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
women.
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
benefits.
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
Security.
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
consider.
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
consider.
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
times.
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,
Inc.
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
recession.
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
indignity.
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
disabled.
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.
Conclusion
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
Sources
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
affordability.
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
below.
``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.
[GRAPHIC] [TIFF OMITTED] T5995.001
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
accounts.
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
accounts.
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
country.
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
return.
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
transfers.
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
Project
Synopsis.
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
retirement.
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,
either.)
This Two-Track approach to PRA's effectively answers the
key objections that have been raised against PRA's by their
critics.
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
program.
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
funds.
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
forecast.
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
155%.
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
market.
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
solvency.
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
done.
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
average.
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
come.
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
Politically
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
come.
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.
Co-sponsors:
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
Resolution
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
Background
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
(WEP).
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
women:
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
women.
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
responsibilities.
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
future.
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
reforms.
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
college.
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.