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



 
             IMPACTS OF THE CURRENT SOCIAL SECURITY SYSTEM

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

                                HEARINGS

                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION

                               __________

                      FEBRUARY 2, 3, AND 10, 1999

                               __________

                              Serial 106-8

                               __________

         Printed for the use of the Committee on Ways and Means



                                


                      U.S. GOVERNMENT PRINTING OFFICE
 57-366 CC                   WASHINGTON : 1999



                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        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

                                 ______

                    Subcommittee on Social Security

                  E. CLAY SHAW, Jr., Florida, Chairman

SAM JOHNSON, Texas                   ROBERT T. MATSUI, California
MAC COLLINS, Georgia                 SANDER M. LEVIN, Michigan
ROB PORTMAN, Ohio                    JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               LLOYD DOGGETT, Texas
JERRY WELLER, Illinois               BENJAMIN L. CARDIN, Maryland
KENNY HULSHOF, Missouri
JIM McCRERY, Louisiana


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

                               __________

                            TODAY'S CHILDREN

                            FEBRUARY 2, 1999

                                                                   Page

Advisory of January 26, 1999, announcing the hearing.............     2

                               WITNESSES

Aaron, Henry J., Brookings Institution...........................    31
Anderson Financial Services:
    Richard K. Anderson, Sr......................................     5
    Richard K. Anderson, Jr......................................     8
Brown, Tyra, Howard University...................................    10
Steuerle, C. Eugene, Urban Institute.............................    38
Tax Foundation, J.D. Foster......................................    25
2030 Center, Liz Kramer..........................................    12
                               __________

                         PROTECTIONS FOR WOMEN

                            FEBRUARY 3, 1999

Advisory of January 27, 1999, announcing the hearing.............    62

                               WITNESSES

U.S. General Accounting Office, Barbara D. Bovbjerg, Associate 
  Director, Income Security Issues, Health, Education, and Human 
  Services Division; accompanied by Francis Mulvey, Assistant 
  Director, Income Security Issues, Health, Education, and Human 
  Services Division..............................................    66

                                 ______

Alliance for Worker Retirement Security, Sharon F. Canner........   102
American Association of University Women, Marilyn T. Leist.......   106
Independent Women's Forum, Amy M. Holmes.........................    91
Lassus Wherley & Associates, P.C., Diahann W. Lassus.............    83
National Association of Manufacturers, Sharon F. Canner..........   102
National Association of Women Business Owners, Diahann W. Lassus.    83
National Women's Law Center, Joan Entmacher......................    94
OWL, Edna Coleman................................................    89

                       SUBMISSIONS FOR THE RECORD

DeLauro, Hon. Rosa, a Representative in Congress from the State 
  of Connecticut, statement......................................   119
Gerontological Society of America, Taskforce on Older Women 
  Project, Lou Glasse, Carroll Estes, and Timothy Smeeding, 
  statement and attachments......................................   120
Institute for Women's Policy Research, Heidi Hartmann, joint 
  statement......................................................   125
Maloney, Hon. Carolyn B., a Representative in Congress from the 
  State of New York, statement...................................   127
National Association of Commissions for Women, Silver Spring, MD, 
  Diana Zuckerman, statement.....................................   128
National Association of Manufacturers, statement.................   130
National Council of Women's Organizations, Heidi Hartmann, joint 
  statement......................................................   125
                               __________

  REDUCING POVERTY AND PROTECTING MINORITIES, SURVIVING FAMILIES, AND 
                     INDIVIDUALS WITH DISABILITIES

                           FEBRUARY 10, 1999

Advisory of February 3, 1999, announcing the hearing.............   134

                               WITNESSES

U.S. General Accounting Office, Cynthia M. Fagnoni, Director, 
  Income Security Issues, Health, Education, and Human Services 
  Division; accompanied by Francis Mulvey, Assistant Director, 
  Income Security Issues, Health, Education, and Human Services 
  Division.......................................................   137

                                 ______

ARC of the United States, Marty Ford.............................   259
Beach, William W., Heritage Foundation...........................   181
Burkhauser, Richard V., Cornell University.......................   267
Center on Budget Policy Priorities, Kilolo Kijakazi..............   167
Consortium for Citizens with Disabilities, Marty Ford............   259
Hispanic Business Roundtable, Robert Garcia de Posada............   157
International Association of Psychosocial Rehabilitation 
  Services, Ruth Hughes..........................................   264
National Council of La Raza, Eric Rodriguez......................   173
National Urban League, William E. Spriggs........................   160
UNUM Life Insurance Company of America, Patricia M. Owens........   255

                       SUBMISSION FOR THE RECORD

National Federation of the Blind, Baltimore, MD, Kristen Cox, 
  statement......................................................   284



                            TODAY'S CHILDREN

                              ----------                              


                       TUESDAY, FEBRUARY 2, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 3:07 p.m., in 
room 1100, Longworth House Office Building, Hon. E. Clay Shaw, 
Jr. (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

FOR IMMEDIATE RELEASE                       CONTACT: (202) 225-9263
January 26, 1999
No. SS-1

                    Shaw Announces Hearing Series on
               Impacts of Current Social Security System

    Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on 
Social Security of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a hearing series on impacts of the 
current Social Security system. The first hearing day in this series 
will focus on the impact of the current system on today's children as 
they take their place in the workforce and ultimately collect 
retirement benefits. The first hearing day will take place on Tuesday, 
February 2, 1999, in the main Committee hearing room, 1100 Longworth 
House Office Building, beginning at 3:00 p.m. Subsequent hearing days 
will be announced separately.
      
    Oral testimony at the first hearing day on impacts on children will 
be heard from invited witnesses only. Witnesses will include program 
scholars, policy experts, and other informed citizens. 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.
      
    Other hearing days are expected to focus on improving current 
protections for women, reducing poverty and protecting minorities and 
low-wage workers, and ensuring protections for survivors and 
individuals with disabilities. Further details will be released in 
subsequent announcements.
      

BACKGROUND:

      
    Despite its remarkable success in combating poverty among the 
elderly, Social Security faces increasing hurdles in paying promised 
benefits in the coming years. As Social Security's Trustees stated in 
their April 1998 report, ``Beginning with the year 2013, the tax income 
projected under present law is expected to be insufficient to cover 
program expenditures.'' By the year 2032, when the Trust Funds are 
projected to be depleted, tax collections will cover only 72 percent of 
benefit obligations. If changes are delayed until the year 2032, 
payroll tax hikes of 45 percent or benefit cuts of 25 percent or more 
would be required to maintain solvency. The burden could fall on 
younger workers, including today's children, who could face payroll tax 
increases or benefit reductions. Other undesirable effects on this 
group could include higher interest rates, fewer opportunities for 
savings, and lower returns on investments. Similar effects could also 
result from the transition to a reformed Social Security system.
      
    In announcing the hearing, Chairman Shaw stated: ``We need to 
examine closely how reforming the Social Security system affects not 
only current workers and retirees, but also our children and 
grandchildren. Leaving them a Social Security program that offers a 
lifetime of high taxes and low benefits is an unacceptable heritage. We 
must find a better way.''

FOCUS OF THE HEARING:

      
    The first hearing day will focus on how today's children are 
expected to fare under the current Social Security system. Witnesses 
are expected to discuss taxes and interest rates that today's children 
may face as adults, including trends on rising taxes as a share of 
personal income. In addition, witnesses will discuss benefits today's 
and tomorrow's children can expect when they retire, and the 
implications of high taxes and low savings for Social Security reform.
      

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, Tuesday, 
February 16, 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 Subcommittee on Social Security office, room B-316 
Rayburn House Office Building, by close of business the day before the 
hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

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

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

                                


    Chairman Shaw. The Chair will call the hearing to order. I 
am sure that the other Members will be filing in shortly, as we 
are just coming back into town today from over a week off.
    I would like to welcome everyone to the first of our 
Subcommittee hearings on the impact of Social Security and 
possible solutions to its solvency crisis. We have had other 
meetings of the Full Committee, but this is the first meeting 
that we have of the Subcommittee.
    I want to add a special welcome to our new Members, 
including the new Ranking Member, Bob Matsui. I might say, too, 
that I am new to this Subcommittee this year.
    Some might wonder why our first topic is the impact the 
retirement program has on children. So let me begin with a 
brief quote. ``We now know that the Social Security Trust Fund 
is fine for another few decades. But if it gets in trouble and 
we don't deal with it, then it not only affects the generation 
of the baby boomers and whether they will have enough to live 
on when they retire, it raises a question of whether they will 
have enough to live on by unfairly burdening their children's 
ability to raise their grandchildren. That would be 
unconscionable.''
    Bill Clinton spoke these words almost 1 year ago. But the 
same could be said by every parent or grandparent. None of us 
wants to leave a harder life for our children, but that is the 
bitter prospect we face unless changes are made in Social 
Security. I would add also Medicare.
    Consider the following: According to the 1998 Social 
Security Trustees' Report, by 2040--that is the year 2040--
Social Security costs will rise to 18 percent of taxable 
payroll, a 63-percent increase over current benefit costs. That 
is just to pay the retirement costs of today's 25-year-olds, as 
well as junior baby boomers. By the time young Richard 
Anderson, who you will hear from later today, by the time he 
retires in 2060 or so, the youngest baby boomer will then be 
about 96 years old. If you want to feel old, that will do it. 
Will be 96. Yet Richard's children will have to surrender even 
more Social Security tax to support him unless action is taken 
soon.
    So we know two things. This problem is serious, and it will 
not go away after the baby boomers have passed on. That, ladies 
and gentlemen, may be the good news. If economic growth rates 
worsen or, as everybody my age hopes, that life expectancy 
increases, our children and grandchildren will have to 
sacrifice even more. In fact, Richard and his classmates could 
spend their working years surrendering between 20 and 30 cents 
out of every dollar they make to support their parents' and 
their grandparents' retirement.
    Add in Medicare and they could be paying 30 to 45 percent 
out of every dollar just in payroll taxes. That is before State 
and Federal income taxes. As the President said, that would be 
unconscionable. Everybody knows that would be unconscionable.
    So let me say this at the outset: In reforming our Nation's 
Social Security system, we will protect current recipients and 
older workers. In the process, though, we must not saddle our 
children with huge liabilities. We must find a way both to keep 
our pledges to current retirees and to provide our children, 
our grandchildren, and the children of tomorrow with an even 
brighter future.
    With that in mind, I welcome all of our guests here today 
to begin this journey that we will travel together in trying to 
solve what I consider to be the Nation's number one problem.
    Is there anyone on the Minority side that cares to make an 
opening statement?
    Mr. Levin. Mr. Chairman, I think Mr. Matsui wanted to do 
so. I believe he will be here fairly soon. So I would like if 
you would leave open the ability for him to participate, to 
give an opening statement when he arrives.
    Chairman Shaw. Yes. I held opening the meeting for about 8 
or 9 minutes, hopeful that he would be here, because I think 
this is important. I know Bob considers this to be very 
important. Certainly we will welcome any statement that he may 
wish to make.
    Our first panel includes Richard K. Anderson, Sr. He is 
president of the Anderson Financial Services in Brooklyn, New 
York. Richard Anderson, Jr., vice president, Anderson Financial 
Services, Brooklyn, New York. I might say, Mr. Anderson, Jr., 
as far as we can tell in searching the records and 
Congressional Research Service, you are the youngest person 
ever to testify before the U.S. Congress.
    Mr. Anderson, Jr. Yes, I am.
    Chairman Shaw. Tyra Brown, who is a student at the College 
of Arts and Science at Howard University, here in Washington; 
and Liz Kramer, the policy associate of 2030 Center.
    Welcome to all of you. Mr. Anderson, Sr., if you would 
proceed. We have the written statement of the witnesses, which 
will be made a part of the record. We will welcome all of our 
guests to testify or proceed as they see fit.
    Mr. Anderson.

  STATEMENT OF RICHARD K. ANDERSON, SR., PRESIDENT, ANDERSON 
             FINANCIAL SERVICES, BROOKLYN, NEW YORK

    Mr. Anderson, Sr. Thank you. Good afternoon, Mr. Chairman 
and distinguished Members of the House Subcommittee on Social 
Security. My name is Richard K. Anderson, Sr. I am the 
president of Anderson Financial Services in Brooklyn, New York. 
I am a graduate of Medgar Evers College of the City University 
of New York. I am currently on the faculty of the School of 
Continuing Education, where I teach personal financial planning 
basics and mutual fund investment. I am also the producer and 
host of Anderson's Biz Kids, a local public television show 
which showcases teenage money managers and entrepreneurs, as 
well as a frequent guest speaker at the New York Stock Exchange 
Teacher-to-Teacher Workshops.
    Professionally, I am a member of the Institute of Certified 
Financial Planners, the American Society for Training and 
Development, the World Futures Society. I am also a trustee of 
the Securities Industry Foundation for Economic Education.
    I am here to tell you today that when it comes to savings 
and investment education, the Nation's 50 million-plus youth 
grades K-12 have been largely ignored. They have been ignored 
primarily because many parents and society still believe the 
old notion that children should not have to worry about 
anything but school, playing, and just being young. 
Consequently, by the time our youth are old enough to take an 
interest in savings and investment, it is already too late. 
Many of them never catch up and live their entire lives 
thinking somehow, when the time comes, something called Social 
Security will take care of them.
    A nationwide survey was conducted by a Lewis Mandell, 
Ph.D., an economist and researcher. He looked at 12th-graders' 
level of knowledge within four areas: income, money management, 
savings, and investment and spending. The survey results 
underscore the serious concerns about young people's ability to 
make educated financial decisions once they are out on their 
own. I find this alarming because it will most certainly 
translate the same condition into adulthood.
    Let me pose this question: Who will take care of the 
financially illiterate in their old age? There is serious 
concern about whether the current system of Social Security 
will still be around for our children. Therefore, we must 
realize that financial security at retirement doesn't just 
happen. It takes planning, commitment, and, yes, money.
    Let me share some facts with you. At the beginning of the 
century in the 1900s, half of all Americans died before the age 
of 50. Life expectancy for men in the 1900s was 46 years old, 
and 48 for women. By 1935, when the Social Security Act was 
conceived, life expectancy for men had risen to 60 years, and 
for women, 63. In 1945, there were only 771,000 retirees 
collecting Social Security. In 1946, only half of Americans 
could expect to live to age 67. In 1999, more than 50 percent 
of Americans will survive the age of 74. There are currently 
more than 35 million people collecting Social Security.
    As you can see by these statistics, when Social Security 
was first conceived, most potential recipients were expected to 
be conveniently dead and buried before their Social Security 
ever kicked in. Few Americans imagined that the program would 
be asked to support millions of older people. Based on current 
projections, there will be 76 million people on Social Security 
by the year 2045, when my son Richard only turns 51.
    Yes, people are living longer lives, which means they also 
are spending more time in retirement. A man who retires at age 
65 today can expect to spend at a minimum 18 years in 
retirement. A woman who retires at age 65 today can spend 23 
years in retirement. Those are just averages. Those are the 
current statistics. Who knows what the life expectancy will be 
in my son's lifetime and your children? They may routinely live 
to 100 and well past 100. Scientists are already projecting 
longer lives due to better technology and medical advances. As 
a result, our children may live half their lives in retirement. 
Let's face it, retirement has become an expensive process. The 
longer the retirement, the more expensive it becomes.
    What can we do to address this looming crisis? The answer 
obviously is that people must begin to plan their retirements 
better and earlier. Education of our young about the necessity 
of planning for retirement must also begin at an early age. I 
don't know about you, but it is saddens me to know that less 
than half of all Americans have put aside money specifically 
for retirement. In 1993, of those who had 401(k) coverage 
available, one-third did not even participate.
    American workers in general have a very limited degree of 
knowledge regarding retirement planning and saving. Because of 
this lack of knowledge and lack of planning, most Americans are 
not aware that Social Security accounts for about 38 percent at 
best of the average retiree's preretirement income. The rest 
must come from other sources. Unless we begin to educate the 
next generation early about the value of investing and saving, 
those other sources will never materialize.
    The crisis is upon us, and only a concerted and committed 
effort to educate our Nation, especially our youth, about 
savings and investing can avert a potential disaster. 
Therefore, I urge this Subcommittee to seriously consider 
making the introduction of savings and investment education a 
part of every school curriculum.
    Thank you very much, Mr. Chairman.
    [The prepared statement follows:]

Statement of Richard K. Anderson, Sr., President, Anderson Financial 
Services, Brooklyn, New York

    Good Afternoon Mr. Chairman and Distinguished Members of 
the House Subcommittee on Social Security.
    My name is Richard K. Anderson, Sr. I am President of 
Anderson Financial Services in Brooklyn, New York. I am a 
graduate of Medgar Evers College of The City University of New 
York and I am currently on the faculty of the School of 
Continuing Education where I teach Personal Financial Planning 
Basics and Mutual Fund Investing Basics. I am the producer and 
host of ``Anderson's Biz Kids,'' a public television show which 
showcases teenage money managers and entrepreneurs as well as a 
frequent guest speaker at the New York Stock Exchange Teacher 
Workshops. Professionally, I am a member of the Institute of 
Certified Financial Planners, the American Society for Training 
and Development and the World Future Society. I am also a 
trustee of the Securities Industry Foundation for Economic 
Education.
    I am here to tell you today that when it comes to saving 
and investment education, the nation's 50 million plus youth in 
grades K-12, have been largely ignored. They have been ignored 
primarily because many parents and society still believe the 
old notion that children should not have to worry about 
anything but school, playing and being young. Consequently, by 
the time our youth are old enough to take an interest in 
savings and investment, it is already too late. Many of them 
never catch up and live their entire lives thinking that 
somehow, when the time comes, something called social security 
will take care of them.
    A nationwide survey conducted by Lewis Mandell, Phd., an 
economist and researcher, looked at 12th graders' level of 
knowledge within four areas: income, money management, savings 
and investment and spending. The survey results underscore 
serious concerns about young people's ability to make educated 
financial decisions once they are out on their own. I find this 
alarming because it will most certainly translate into the same 
condition in adulthood.
    Let me pose this question, who will take care of the 
financially illiterate in their old age? There is serious 
concern about whether the current system of social security 
will still be around for our children. Therefore, we must 
realize that financial security at retirement, doesn't just 
happen. It takes planning, commitment, and yes, money.
    Let me share some facts with you ...
    At the beginning of the century in the 1900's, half of all 
Americans died before the age of 50. The life expectancy for 
men was 46 years. For women, 48 years.
    By 1935, when the Social Security Act was conceived, the 
life expectancy for men had risen to 60 years. For women, it 
was 63.
    In 1945, there were only 771,000 retirees collecting social 
security. In 1946, only half of Americans could expect to live 
to age 67. In 1999, more than 50% of Americans will survive 
through the age of 74 and there are currently more than 35 
million people collecting social security.
    As you can see by these statistics, when Social Security 
was conceived, most potential recipients were expected to be 
conveniently dead and buried before their social security ever 
kicked-in. Few Americans imagined that the program would be 
asked to support millions of older people. Based on current 
projections, there will be 76 million people on social security 
by the year 2045 when my son, Richard, turns 51.
    Yes, people are living longer lives, which means that they 
are also spending more time in retirement. A man who retires at 
age 65 can expect to live to at least 83 years old. That means 
that he will be spending, minimally, 18 years in retirement. A 
woman who retires at age 65 can expect to live to at least 88 
years old. That means that she will be spending at least 23 
years in retirement. Those are the current statistics. Who 
knows what the life expectancy will be in Richard's lifetime or 
your children's. They may routinely live to be 100 or well past 
100. Scientists are already projecting longer lives due to 
better technology and medical advances. As a result, our 
children may live half their lives in retirement. Let's face 
it, retirement has become an expensive process and the longer 
the retirement, the more expensive it becomes.
    What can we do to address this looming crisis? The answer, 
obviously, is that people must begin to plan their retirements 
better and earlier. Education of our young about the necessity 
of planning for retirement must also begin at an earlier age. I 
don't know about you, but it saddens me to know that less than 
half of all Americans have put aside money specifically for 
retirement. In 1993, of those who had 401(k) coverage 
available, one third did not participate. America's workers, in 
general, have a very limited degree of knowledge regarding 
retirement planning and saving. Because of this lack of 
knowledge and lack of planning, most Americans are not aware 
that social security accounts for about 38% at best, of the 
average retiree's pre-retirement income. The rest must come 
from other sources. Unless we begin to educate the next 
generation early about the value of investing and saving, those 
other sources will never materialize.
    The crisis is upon us and only a concerted and committed 
effort to educate the nation, especially our youth, about 
saving and investing can avert a disaster. Therefore, I urge 
this committee to seriously consider making the introduction of 
saving and investment education a part of every school 
curriculum. Thank you Mr. Chairman.
      

                                


    Chairman Shaw. Thank you, Mr. Anderson.
    I am going to recognize Mr. Anderson, Jr. Then we are going 
to have to break for vote. There are two votes that will be on 
the floor. But then we will return as quickly as possible.
    Mr. Anderson, Jr.

STATEMENT OF RICHARD K. ANDERSON, JR., VICE PRESIDENT, ANDERSON 
             FINANCIAL SERVICES, BROOKLYN, NEW YORK

    Mr. Anderson, Jr. Good afternoon, Mr. Chairman, and 
distinguished Members of the House Subcommittee on Social 
Security. My name is Richard K. Anderson, Jr. I am 6 years old. 
I want to thank you for inviting me to speak today on children 
and Social Security.
    Some of you may be wondering why I am here today. You 
probably think at my age I don't have to worry about Social 
Security or retirement for a very long time. My father has 
taught me that you are never too young to begin to think about 
your future. On April 2, 1998, I became the youngest person 
ever to ring the bell and open the New York Stock Exchange. In 
May 1998, I appeared on CNBC. In July, I was on the Jay Leno 
Show.
    When I was much younger, about 3 years old, my father would 
punish me for bad behavior by making me watch CNBC. Like any 
child, I wanted to watch my favorite cartoons. Now I am happy 
that my father punished me that way because now I know about 
the Dow Jones Industrials, stocks, mutual funds, and my dad's 
favorite subject, what makes a good company.
    I know as a 6-year-old that it is important to save and 
invest at an early age. If you want to retire, you must save 
and invest. If you don't, you might have to work all your life. 
No one wants that.
    It is important for all children to learn about investing 
in the S&P 500 and the Dow Jones. I know every company in the 
Dow Jones Industrials, what they produce, their competition, 
and most of the S&P 500. One day, I plan to have my own 
Richard's Kids Industrial Average. It would be just like the 
Dow Jones Industrial Average with 30 blue chip stocks like 
McDonald's, Caterpillar, Microsoft, Campbell Soup, Nike, Intel, 
and others. If I can make this dream come true, I will never 
have to worry about Social Security when I am old.
    For all the children who think they are too young, hey, 
look at me. Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Richard K. Anderson, Jr., Vice President, Anderson 
Financial Services, Brooklyn, New York

    My name is Richard K. Anderson, Jr. I am 6 years old and I 
want to thank you for inviting me to speak today on children 
and social security.
    Some of you may be wondering why I am here today. You 
probably think that at my age, I don't have to worry about 
social security or retirement for a very long time. My father 
has taught me that you are never too young to begin to think 
about your future.
    On April 2, 1998, I became the youngest person ever to ring 
the bell and open the New York Stock Exchange, In May, 1998, I 
appeared on CNBC and in July, I was on the Jay Leno Show.
    When I was much younger, about 3 years old, my father would 
punish me for bad behavior by making me watch CNBC. Like any 
child I wanted to watch my favorite cartoons. Now, I am happy 
that my father punished me that way because now I know about 
the Dow Jones Industrials, stocks, mutual funds, and my Dad's 
favorite subject, what makes a good company.
    I know as a six-year-old that it is important to save and 
invest at an early age. If you want to retire, you must save 
and invest. If you don't, you might have to work all your life. 
No one wants that.
    It is important for all children to learn about investing 
in the S and P 500 and the Dow Jones. I know every company in 
the Dow Jones Industrial, what they produce, their competition 
and most of the S and P 500. One day, I plan to have my own 
``Richard's Kids Industrial Average.'' It would be like the Dow 
Jones Industrial Average with 30 blue chip stocks like: 
McDonalds, Caterpillar, Microsoft, Campbell Soup, Nike, Intel, 
and others. If I can make this dream come true, I will never 
have to worry about social security when I am old.
    For all the children who think they are too young, hey, 
look at me!
    Thank you Mr. Chairman.
      

                                


    Chairman Shaw. Richard, I thank you. As I said, we are 
going to have to break. As I had mentioned in some of my 
opening remarks, you not only are the youngest ever to open to 
the stock exchange, ring the bell at the stock exchange, but 
you are also the youngest ever to appear before Congress. I 
compliment your father for not punishing you by making you 
watch CSPAN.
    We will now recess just long enough for the next votes. 
Then we shall return.
    [Recess.]
    Chairman Shaw. We will resume the hearing. They held that 
first vote, as it was the first vote of the day, so they held 
it open longer than we anticipated.
    Ms. Brown.

      STATEMENT OF TYRA BROWN, STUDENT, HOWARD UNIVERSITY

    Ms. Brown. Thank you, Mr. Chairman. I would like to thank 
the Subcommittee for inviting me here today to speak about the 
need to protect our Social Security system. It is a program 
that has touched my life and the lives of millions of other 
young people like myself.
    My name is Tyra Brown. I am from Oklahoma City, Oklahoma. I 
am currently a junior at Howard University here in Washington, 
DC. In school, I am studying psychology, and I volunteer at a 
Head Start center, tutoring preschool children who are 
struggling with literacy skills and social development. After I 
earn my bachelor's degree from Howard, I plan to go on to 
graduate school and become a psychologist.
    I enjoy working with children who need a helping hand. I 
believe that as an American family, we need to do what we can 
to help each other out. That is why I think Social Security is 
so important. It was there for me, and I want it to be there in 
the future.
    Most people think of Social Security as a retirement 
program, and it is. But what a lot of people don't know is that 
Social Security also helps out millions of people like myself 
who are not retired. When I was 15, I experienced a terrible 
loss. My mother, who worked very hard to provide for me, passed 
away due to heart failure. My grandmother became my legal 
guardian and we received Social Security Survivor's Insurance 
to help us with expenses. It wasn't easy, but Social Security 
truly helped. We could count on that income to be there every 
month. Without it, we couldn't have made it.
    When my mom was alive, she made a middle-class income and 
paid into the Social Security system, just like everyone else. 
She wasn't able to get her retirement benefits, but what she 
did get through Social Security Survivor's Insurance was my 
security after she died.
    Mr. Chairman, I am not alone. There are millions of other 
survivors out there who count on Social Security every month. 
Now as I am beginning to think about my own future, I think 
about that guarantee. When I pay my Social Security taxes, I am 
not thinking about the best plan to get rich. I am thinking 
about the best plan for my economic security. I want to be sure 
that it will be there for my retirement or in case of any 
tragic circumstance, guaranteed.
    I know that Social Security needs to be strengthened, and I 
know that there has to be a way to do it that preserves that 
vital guarantee. When I watched the President's State of the 
Union Address, I was glad to hear him say clearly that we must 
protect Social Security's guarantee. We constantly hear that 
Social Security won't be there for people my age when we need 
it. Well, it was there for me. I want to do my part to make 
sure it will be there in the future.
    That is why I am here today, Mr. Chairman, to share my 
story and the stories of millions of other young people like 
myself who come from average families and who have dealt with 
extraordinary circumstances. As the Subcommittee considers 
reforms to the system, I respectfully encourage you to support 
the core values of Social Security, and work to make the 
program stronger. It is a system which we all contribute to and 
which we all benefit from, guaranteed.
    Thank you.
    [The prepared statement follows:]

Statement of Tyra Brown, Student, Howard University

    Thank you Mr. Chairman. I would like to thank the Committee 
for inviting me here today to speak about the need to protect 
our Social Security system. It is a program that has touched my 
life and the lives of millions of other young people like 
myself.
    My name is Tyra Brown. I'm from Oklahoma City, Oklahoma, 
and am currently a Junior at Howard University here in 
Washington, DC.
    In school, I am studying psychology and I volunteer in a 
Headstart Center tutoring pre-school children who are 
struggling with literacy skills and social development. After I 
earn my Bachelor's degree from Howard, I plan to go on to 
graduate school and become a psychologist.
    I enjoy working with children who need a helping hand, and 
I believe that as an American family, we all need to do what we 
can to help each other out. That is why I think that Social 
Security is so important. It was there for me, and I want it to 
be there in the future.
    Most people think of Social Security as a retirement 
program-and it is. But what a lot of people don't know, is that 
Social Security also helps out millions of people, like myself, 
who are not retired.
    When I was 15, I experienced a terrible loss. My mother, 
who worked hard to provide for me, passed away because of heart 
failure. My grandmother became my legal guardian and we 
received Social Security's survivors' benefits to help us with 
expenses. It wasn't easy, but Social Security really helped. We 
could count on that income to be there every month, and without 
it, we couldn't have made it.
    When my mom was alive, she made a middle class income and 
paid into the Social Security system just like everyone else. 
She wasn't able to get her retirement benefits. But what she 
did get, through Social Security's survivor's insurance, was my 
security after she died.
    And, Mr. Chairman, I am not alone--there are millions of 
other survivors out there, who count on Social Security every 
month.
    Now, as I am beginning to think about my own future, I 
think about that guarantee. When I pay my Social Security 
taxes, I'm not thinking about the best plan to get rich. I'm 
thinking about the best plan for my economic security. I want 
to be sure that it will be there for my retirement or in case 
of a tragic circumstance-guaranteed. I know that Social 
Security needs to be strengthened, and I know that there has to 
be a way to do it that preserves that vital guarantee.
    When I saw the President's State of the Union address, I 
was glad to hear him say clearly that we must protect Social 
Security's guarantee. We constantly hear that Social Security 
won't be there for people my age when we need it. Well, Mr. 
Chairman, it was there for me and I want to do my part to make 
sure it will be there in the future.
    That is why I am here today, Mr. Chairman, to share my 
story and the stories of millions of other young people, like 
myself, who come from average families, and who have dealt with 
extraordinary circumstances. As the committee considers reforms 
to the system, I encourage you to support the core values of 
Social Security, and work to make the program stronger. It is a 
system to which we all contribute, and from which we all 
benefit. Guaranteed.
      

                                


    Chairman Shaw. Thank you, Ms. Brown.
    Ms. Kramer.

     STATEMENT OF LIZ KRAMER, POLICY ASSOCIATE, 2030 CENTER

    Ms. Kramer. Thank you, Mr. Chairman. My name is Liz Kramer. 
I am honored to be here today speaking on behalf of the 2030 
Center, a public policy organization for young adults. I am 24 
and I share all of your views, that we must act now to 
strengthen Social Security for future generations.
    Mr. Chairman, my generation is a pretty skeptical bunch. A 
lot has been made of the fact that young people do not think 
Social Security is going to be there for them. You ought to be 
equally skeptical, however, that we can be persuaded to scrap 
the system and gamble on an untested alternative. Even though 
young people are suspicious about politicians doing the right 
thing, we want Social Security to be there for us, and we are 
looking to our Representatives in Congress to keep that 
promise.
    Last summer, the 2030 Center conducted a national poll of 
18- to 34-year-olds. Not surprisingly, we found that very few 
young people expect Social Security to pay them their full 
benefits. More importantly, however, nearly nine in ten of the 
young people we polled said that Social Security should pay 
them their full benefits. We also asked young people what they 
think about the viability of the current system. Very few young 
people think that Social Security cannot work for them the way 
it worked for previous generations, and needs to be replaced. 
On the contrary, about 70 percent of the young adults we spoke 
with think Social Security can work for young people when they 
retire if Congress will strengthen the system's finances. These 
numbers are strongly at odds with the picture often painted of 
a generation ready to scrap the Social Security system.
    Let me provide a few reasons why I think that Social 
Security is so important to young adults. First and foremost, 
Social Security is important to us because we love our 
grandparents, and we see how important Social Security has been 
to our families. We are glad that fewer of our grandparents are 
consigned to poverty than in the past. We want our parents to 
have that same financial security.
    However, Social Security is not just for our grandparents. 
Nearly one-third of all Social Security beneficiaries are not 
retired. As Tyra Brown has just illustrated, Social Security 
provides crucial benefits for young people who have lost a 
parent or whose parent has become disabled. As we get older, 
these benefits protect our spouses and our children. Social 
Security has been incredibly successful in ensuring that young 
people who have had life-changing tragedies have a way to get 
back on track.
    Social Security is also important for young people because 
it offers some financial security in a rapidly changing 
economy. While our parents were able to rely on pensions, along 
with their savings and Social Security, we face a very 
different situation. Mr. Chairman, pensions are disappearing 
for people my age. Pension coverage for young workers aged 24 
or less has fallen by one-third since 1972, according to the 
Department of Labor. Less than half of all workers under the 
age of 30 have any pension at all. In addition, wages have been 
declining for young people since the early seventies, offering 
less opportunity to save.
    The jobs of the future do not seem to promise any 
improvement. For example, the government projects that the 
occupation with the most growth in the next decade will not be 
web designers or investment bankers, but retail cashiers. I can 
tell you that my friends who ring up your books or your clothes 
do not have good pensions and do not have high wages. These 
workers cannot afford to have their only guaranteed retirement 
income cut out from under them. That is why Congress should 
focus on strengthening, and not replacing, the Social Security 
Program.
    Now I recognize that Social Security needs some adjustment. 
In considering proposals to do that, I urge Members of this 
Subcommittee not to jeopardize the aspects of the program that 
are critical for young people. We want our benefits guaranteed. 
We want provisions if we become disabled. We want our children 
to be provided for if we should die young. We want adequate 
benefit levels so that old age is not synonymous with poverty. 
We want the checks to keep coming, even if we should live to 
see our 100th birthday.
    President Clinton has put forward a proposal that can 
maintain these important benefits, and I applaud that. On the 
other hand, proposals to privatize Social Security can not meet 
these important needs for younger generations. Not only do 
privatization plans cut our benefits and increase the age at 
which we could retire, but they also saddle us with the burden 
of a huge transition cost.
    America can do better than that. In a time of record 
economic growth, with surpluses building by the day, I ask 
Congress to safeguard my generation's economic future. Now is 
not the time to jeopardize our economic security with a risky 
and costly imitation of Social Security. Now is the time to 
strengthen Social Security for my generation and for the 
generations to come.
    Thank you.
    [The prepared statement follows:]

Statement of Liz Kramer, Policy Associate, 2030 Center

    Thank you, Mr. Chairman. My name is Liz Kramer, and I am 
here today speaking on behalf of the 2030 Center, a public 
policy organization for young adults. I am 24, and I share your 
view that we must act now to strengthen Social Security for 
future generations.
    Mr. Chairman, my generation is a pretty skeptical bunch. A 
lot has been made of the fact that young people do not think 
that Social Security is going to be there for them. You ought 
to be equally skeptical, however, that we can be persuaded to 
scrap the system and gamble on an untested alternative.
    Even though young people are suspicious about politicians 
doing the right thing, we want Social Security to be there for 
us, and we are looking to our representatives in Congress to 
keep that promise.
    Last summer, the 2030 Center conducted a national poll of 
18-34 year olds. Not surprisingly, we found that very few young 
people expect Social Security to pay them full benefits. More 
importantly, however, nearly nine in ten say that Social 
Security should pay them full benefits.
    We also asked young adults what they think about the 
viability of the current system. Very few young people, we 
learned, think that Social Security ``cannot work for them the 
way it worked for previous generations, and needs to be 
replaced.'' On the contrary, about seventy percent of young 
adults think Social Security ``can work for young people when 
they retire if Congress will strengthen the system's 
finances.''
    These numbers are strongly at odds with the picture often 
painted of young people ready to scrap the Social Security 
system. Let me provide a few reasons why I think that Social 
Security is so important to young adults.
    First and foremost, Social Security is important to us 
because we love our grandparents, and we see how important 
Social Security has been to our families. We are glad that 
fewer of our grandparents are consigned to poverty than in the 
past. And we want our parents to have that same financial 
security.
    Social Security, however, is not just for our grandparents. 
Nearly one third of all Social Security beneficiaries are not 
retired. Social Security provides crucial benefits for young 
people who have lost a parent, or whose parent has become 
disabled. As we get older, these benefits protect our spouses 
and our children. Social Security has been incredibly 
successful in ensuring that young people who have had life-
changing tragedies have a way to get back on track.
    Social Security is also important for young people because 
it offers some financial security in a rapidly changing 
economy. While our parents were able to rely on pensions along 
with their savings and Social Security, we face a different 
situation.
    Mr. Chairman, pensions are disappearing for people my age. 
Pension coverage for young workers age 24 or less has fallen by 
one-third since 1972, according to the Department of Labor. And 
less than half of workers under the age of 30 have any pension 
at all.
    In addition, wages have been declining for young people 
since the early 70s, offering less opportunity to save.
    The jobs of the future do not seem to promise any 
improvement. For example, the government projects that the 
occupation with the most growth in the next decade will not be 
web-designers or investment bankers, but retail cashiers. I can 
tell you, my friends who ring up your books and your clothes do 
not have good pensions or high wages.
    These workers cannot afford to have their only guaranteed 
retirement income cut out from under them. That is why Congress 
should focus on strengthening, not replacing, Social Security.
    Now, I recognize that Social Security needs some 
adjustment. In considering proposals to do that, I urge members 
of this committee not to jeopardize the aspects of the program 
that are critical for young people. We want provisions if we 
become disabled. We want our children to be provided for if we 
die young. We want adequate benefit levels, so that old age is 
not synonymous with poverty. We want the checks to keep coming 
even if we live to see our 100th birthday.
    President Clinton has put forward a proposal that can 
maintain these important benefits, and I applaud that. On the 
other hand, proposals such as privatization cannot meet these 
important needs for younger generations. Not only do 
privatization plans cut our benefits and increase the age at 
which we can retire, but also they saddle us with the burden of 
a huge transition cost.
    America can do better than that. In a time of record 
economic growth, with surpluses building by the day, we ask 
Congress to address our economic future by bolstering the Trust 
Funds. Now is not the time to jeopardize our economic security 
with a risky and costly imitation of Social Security. Now is 
the time to strengthen Social Security for our generation and 
for generations to come.
    Thank you.
      

                                


AMERICANS VIEW SOCIAL SECURITY REFORM

FACTSHEET

    For years, pollsters have been measuring public reaction to 
a simple proposition: ``allow individuals to invest a portion 
of their payroll taxes for retirement.'' Most people say 
``yes'' to the offer.
    Pollsters also have been measuring public confidence in the 
future of Social Security. Historically, confidence declines 
the more Social Security is discussed in public debate. Today, 
public confidence is low--particularly for younger workers.
    While the lack of confidence means, more often than not, 
``fix Social Security,'' the public's favorable initial 
response to ``individual accounts'' must be taken seriously. We 
have long believed, however, that these measures described 
above are extremely shallow and unreliable for policy makers.
    In order meaningfully to evaluate support for policy 
alternatives such as privatization, respondents must also be 
provided with information about the trade-offs of diverting 
revenues from Social Security in order to fund individual 
accounts--namely, steep reductions in guaranteed benefits.
    In our groundbreaking research project, we have taken this 
step forward in order to provide a more rigorous analysis and 
move debate down a more responsible path.
    Among the key findings from our research:
     Americans want Social Security to be there for 
them. Though only 20 percent of Americans expect to receive 
benefits at current levels when they reach retirement, fully 90 
percent say that the system should pay them such benefits.
     Americans believe in Social Security. Fully 73 
percent say that Social Security ``can work for young people 
when they retire if Congress will strengthen the system's 
finances,'' while only 24 percent say that ``the Social 
Security system cannot work for young people the way it worked 
for previous generations, and it needs to be replaced.''
     Younger and older Americans share similar views on 
Social Security reform. The poll included an oversample of 
young adults age 18-34. The survey shows no significant 
differences in opinion across generations, except for a more 
marked lack of confidence among younger generations. Both 
younger and older Americans agree that Social Security should 
be strengthened and agree on major reform proposals.
     Americans oppose benefit cuts more than they 
support individual accounts. Americans are initially attracted 
to the idea of individual retirement accounts, but reject 
privatization when they consider the benefit cuts necessary to 
enact even ``modest'' privatization plans.
    We tested a privatization plan originally proposed by the 
National Commission on Retirement Policy, called the 21st 
Century Retirement Act, and introduced in the House by 
Representatives Kolbe and Stenholm as H.R. 4256, and in the 
Senate by Senators Gregg and Breaux as S. 2313. (Not 
surprisingly, the sponsors have mounted an aggressive and 
groundless attack on our poll.)
    In addition to providing workers about one-sixth (two 
percentage points) of their payroll taxes to invest for their 
retirement, the 21st Century Retirement plan included a series 
of benefit reductions (required by the individual account 
``carve-out'').
    In isolation, key elements of the 21st Century approach are 
overwhelming rejected:
     78 % oppose raising the retirement age to 70 (as 
reported in the New York Times; the 21st Century plan would, in 
fact, raise it to 72.5 eventually);
     87 % oppose reducing the average guaranteed 
monthly benefits for future retirees by about 30% (the 
reduction was calculated by the Congressional Research 
Service);
     63 % oppose reducing the annual cost-of living 
increase below inflation (their plan would reduce the COLA 
below the anticipated BLS changes to the CPI).
    When presented as a package that includes the individual 
account as well as the trade-offs--only 31 percent support the 
21st Century privatization approach. ``Strong opposition''--
which I think you will agree is a critical element of any 
political battle--also rises sharply when the full 21st Century 
plan is considered.
     Americans support a plan that would maintain 
benefits by investing the Trust Fund like a private pension and 
raising the payroll tax ``cap.'' This proposal is both 
supported more, and generates less opposition than, 
privatization plans. It is important to keep in mind that the 
reason this plan generates support (we find 58 percent support) 
probably is that it does not include significant benefit cuts--
different approaches to solvency with the same result would 
likely be supported just as much or perhaps more.
    The American people, the poll finds, favor the concept of 
individual accounts most strongly when it is posed as a 
voluntary add-on to Social Security--not as a mandatory carve-
out.

    This is a Peter Hart Research Associates national survey. 
The survey was conducted by telephone from July 6 to 13, 1998, 
among a national sample of 1,090 adults, including an 
oversample of young adults age 18 to 34. See the full poll and 
report at www.2030.org or call the 2030 Center at 202-822-6526.
      

                                


    Chairman Shaw. Thank you.
    Mr. Hulshof, do you have any questions?
    Mr. Hulshof. I do. Thank you, Mr. Chairman.
    Ms. Kramer, let me, first of all, start by saying that just 
as your generation--and I'm paraphrasing your testimony--just 
as your generation is a pretty skeptical bunch, there are those 
of us on this Subcommittee that are also fairly skeptical when 
it comes to scrapping the present system. I think everybody on 
either side of the dais here agrees that Social Security has 
been a very successful program.
    But a couple of things I wanted to ask you about in 
particular on the second page of your testimony regarding 
things that your group wants. One of those things you list is 
adequate benefit levels. I thought I read recently that a 
worker your age, and you mentioned you are 24 years of age, 
that as you join the work force, that you would have to live to 
about 90 to 91 years of age before you actually get out of the 
Social Security system what you actually pay into it. Is that 
what you mean when you say that you want adequate benefit 
levels? Or is there a way that we can maybe make that a little 
more fairer, so that you can maybe get more out of the system 
than what you are putting in?
    Ms. Kramer. When I mentioned adequate benefit levels I mean 
keeping benefits at around the same level they are today, and 
keeping them up with the cost of living. I think that providing 
a guaranteed benefit is much more important than looking at the 
exact amount that's returned.
    Mr. Hulshof. I would like to ask Mr. Anderson, Jr., a 
question. You mentioned that in your earlier years that you 
used to be punished by watching or having to watch, was it 
MSNBC?
    Mr. Anderson, Jr. CNBC.
    Mr. Hulshof. What is it that pop makes you watch now to 
punish you?
    Mr. Anderson, Jr. Well, I still watch CNBC, but sometimes I 
can watch cartoons. But when I get home, with my father I'll 
watch CNBC for the rest of the day.
    Mr. Hulshof. A more serious question for you. How did you 
learn or was it difficult to learn how the stock market worked?
    Mr. Anderson, Jr. No, it wasn't that difficult.
    Mr. Hulshof. What about some of your classmates? I suspect 
that you have a unique knowledge about the stock market that 
other students your age--what do you tell your classmates or 
playmates? Do they ask you questions? Do they ask for stock 
tips? Do they show an interest as you show an interest in the 
stock market?
    Mr. Anderson, Jr. No.
    Mr. Hulshof. You said that you wanted to start your own 
investment company someday. Is that right?
    Mr. Anderson, Jr. No. It's one day I plan to have my own 
Richard's Kids Industrial Average, with 30 blue chip stocks.
    Mr. Hulshof. I see. Let me ask a question of Mr. Anderson, 
Sr. How is it that your son has shown such a propensity? Was it 
extra guidance from you or is it just something he picked up on 
his own?
    Mr. Anderson, Sr. Introduction at an early age. If we 
expose our children at a very early age, you will be surprised. 
They will make us proud. I just happened to expose Richard to 
the New York Stock Exchange and stock markets and mutual funds 
and those things. The same thing I think probably would have 
happened if I would have exposed him to scientific things or 
art, or any of those things. I think if you introduce the 
children at an early age to any discipline, they won't be 
frightened by it; they won't be afraid of it. We introduce our 
children to a lot of things. They watch a lot of cartoons. 
Sometimes I think that if we have a balance, they will just 
surprise us, as Richard continues to surprise me.
    You know, people will talk about how is it that--it must be 
a lot of work working with a child who is gifted. The first 
thing I say is that, you know, my son has been exposed at any 
early age. Any child that is exposed at an early age will be 
able to do the same things that Richard is doing. The financial 
world is a language. If they learn it at an early age, they 
will understand it. They will make it their own. We have that 
opportunity.
    I think that, again, in our public education system there 
is a lot of concern, obviously, reading, writing, arithmetic, 
public speaking, but because of longevity, just think--I mean, 
who would have ever thought that people 1 day might routinely 
live to 110 or 120 years old? That has changed the dynamics of 
how we should look at education, and what should be part of the 
core curriculum forever. We know that, but it is important that 
our children understand money management as quickly as 
possible.
    The Social Security system was a very nice system when we 
didn't have that many people receiving benefits and we had so 
many people paying into the program. But as we know now, we are 
going to have a lot of people living for a very long time. We 
are going to have less people paying into the program. We are 
going to have to do something. Part of that, obviously, is that 
all of us will have to make a conscious effort to make sure 
people, young people especially, understand at the earliest 
possible age that they are going to be responsible for most of 
their financial future.
    Mr. Hulshof. Thank you, Mr. Chairman.
    Chairman Shaw.
    Mr. Matsui.
    Mr. Matsui. Thank you very much, Mr. Chairman.
    Mr. Anderson, I want to ask you, Mr. Anderson, Sr. And by 
the way, I want to thank Ms. Kramer and Ms. Brown and Mr. 
Anderson, Jr. I have read your testimony and I have heard your 
testimony. I am not quite sure what you are trying to say. I 
know you want individual investments, but are you saying take 
the 12.4 percent, half out of the individual, half out of 
payroll, and let the individual do what he or she needs to do 
in terms of investing? What is your proposal?
    Mr. Anderson, Sr. Let me start with this premise. Some of 
us in----
    Mr. Matsui. I just want to know what your proposal is, so I 
can get a better understanding of it.
    Mr. Anderson, Sr. My proposal is that part of the current 
money paid into Social Security should remain with the 
individual for self-directed investment.
    Mr. Matsui. If I may just ask, what percentage? What are we 
talking about? Your 12.4? Or do you have--maybe you are talking 
more generically. Is that what it is?
    Mr. Anderson, Sr. Yes, generically. I am not sure of the 
percentage.
    Mr. Matsui. OK.
    Mr. Anderson, Sr. But what I am quite sure of is I 
personally don't think that we should pass that off to the 
government.
    Mr. Matsui. No, I understand. I understand that problem. I 
just want to know what your proposal is. We are in agreement 
about the need to make some major adjustments to the system 
because of the demographic changes going on in the country. I 
just want to know what your proposal is.
    So you are here today basically to say generically you 
think that the individual worker should have the right to 
invest part of that 12.4 percent?
    Mr. Anderson, Sr. Yes.
    Mr. Matsui. But you haven't defined what percentage that 
might be?
    Mr. Anderson, Sr. Not at all. Not at all. I mean it could 
be, I mean just to throw out an arbitrary number, it would be 
50 percent.
    Mr. Matsui. Fifty percent. Now let me ask you, assuming 
that one-third of all benefits paid or demographically we're 
assuming in the future will be on disability payments and 
survivor's benefits, one-third of all benefits paid, now what 
do you want to do with that? I want to know how you would 
handle Ms. Brown and her situation. Which I want to tell you, 
Ms. Brown, I really have a great deal of admiration and respect 
for you because you have gone through tragedy, obviously, 
losing your mother at a very early age, somebody who sounds 
like a very wonderful person, and being where you are today and 
the enthusiasm you have. I just want to thank you for your 
testimony as well as all the other witnesses that have 
testified, because I think you are going to be somebody that is 
going to make it big in the future. If you are ever looking for 
a job, there's a few of us that may be interested in you.
    But perhaps you, Mr. Anderson, could give us a little hand 
here. How would you propose to deal with--because that's a big 
part of Social Security, disability payments and, obviously, 
survivor's benefits. How do you propose to deal with that?
    Mr. Anderson, Sr. Let me say that is a--you know, 
obviously, that is a very complicated issue.
    Mr. Matsui. It's not too complicated. It's just that these 
payments are paid out out of the Social Security Trust Fund. I 
just want to know how you would deal with it, because there's a 
lot of folks that are in that situation and may not have the 
savings that perhaps you have for your son, should that 
misfortune fall on your family.
    Mr. Anderson, Sr. Let me say I am not arguing that we do 
away with Social Security altogether, not at all. I mean there 
are certain parts of Social Security that----
    Mr. Matsui. Do you think there should be a safety net for 
people?
    Mr. Anderson, Sr. Oh, absolutely.
    Mr. Matsui. And do you think it should be defined so 
everybody kind of has an understanding of what that safety net 
really is? I mean----
    Mr. Anderson, Sr. There should be a safety net in regard to 
those, certainly in regard to disability and some of the other 
programs within Social Security. I think what I am trying to 
say in regard to the retirement issue, those benefits that are 
paid out strictly for retirement, that based on the current 
returns on some of that money, we're just not going to be able 
to meet the retirement needs of young people in the future.
    Mr. Matsui. We understand that. We understand that. 
Everybody is in agreement that there is a problem that has to 
be dealt with. I agree with you on that. I am just trying to 
find a way to do it. I need from you something a little more 
specific. You are here as a witness before the U.S. Congress. 
Two weeks ago we had Jesse Jackson and Jack Kemp. They didn't 
add a lot to the debate. Now we have you and your son and two 
others. We have got to get into the meat of this issue. We are 
running out of time. We just can't have this really kind of 
good feelings about this stuff here. We know what the problem 
is. But now we need solutions so we can start negotiating.
    The President has come out with his proposal. Now do you 
think because you are in the investment banking business, do 
you think that reducing the $3.7 trillion Federal debt is 
important? Does that help unleash private sector investments in 
capital investment? Is that a good idea? Of course it is, 
right? I mean you know that.
    Mr. Anderson, Sr. I mean, obviously, if you reduce the 
debt, it works out across the board, hopefully.
    Mr. Matsui. Don't you think though that reducing that debt 
from $3.7 trillion to $1.2 trillion is a good idea over the 
next 15 or 20 years?
    Mr. Anderson, Sr. Absolutely. Absolutely.
    Mr. Matsui. You think that's important?
    Mr. Anderson, Sr. It is important.
    Mr. Matsui. Because what does that do? That helps the 
economy by unleashing money into the economy for private sector 
investment.
    Mr. Anderson, Sr. It certainly does.
    Mr. Matsui. OK. Well, thank you. I appreciate your 
testimony. I appreciate everybody's testimony today.
    Chairman Shaw. I might say to Mr. Anderson that Mr. 
Greenspan agrees with you in regard to that.
    Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman. I'll be brief.
    Mr. Anderson, Sr., I just want to compliment you on being 
able to make your son watch CNBC when he was punished. I have 
got a 5-year-old and a 3-year-old. I could sit them in front of 
the television and turn it on, but I couldn't make them watch 
it I don't think. So you have my compliments. Maybe I could 
talk to you later about a method to get them to do what I say 
when I am punishing them like that.
    I have enjoyed the testimony of everybody. While it's true 
that no specifics were given by any of the witnesses with 
respect to how we solve the long-term problems, keep a 
guaranteed benefit, and keep the disability portion and the 
survivor's portion and all those things, I think it is 
refreshing to know that there are people, young and very young, 
who are concerned about the Social Security system and want to 
see us make a responsible effort to ensure that it's there for 
future generations.
    So unlike Mr. Matsui, I want to thank all of you for adding 
to the debate and making sure that we old guys up here in 
Congress understand that it is an imperative to do something 
now for the survival of Social Security. So thank you for your 
testimony.
    Mr. Matsui. If the gentleman, since he mentioned my name, 
would just yield?
    Mr. McCrery. I would be glad to yield.
    Mr. Matsui. I appreciated their testimony. I think I 
thanked everybody about three or four times. I just want to get 
into some of the meat. We need to know pretty soon, if the 
gentleman will just let me complete----
    Mr. McCrery. If I may reclaim my time, we'll have plenty of 
time with other witnesses to get into the specifics. The next 
panel, for example, probably has some more specific ideas. But 
I appreciate these witnesses.
    Mr. Matsui. I am just waiting for the President to come up 
with his--I mean the President has come up----
    Mr. McCrery. Yes. I am waiting for the President, too, to 
come with some specifics.
    Mr. Matsui. I am waiting for you to come up with your 
proposal now.
    Mr. McCrery. The President has given us very few specifics, 
which is part of the problem. So I wish that you would urge the 
President to do just that, just as you have urged these 
witnesses that were kind enough to come and spend some time 
with us today.
    Chairman Shaw. I would like to remind my Ranking Member 
that we have given very wide latitude on invitations by the 
Minority. Two of the members of this panel have been invited by 
the Minority.
    Mr. Matsui. As I said to the gentleman, we appreciate their 
testimony. It's just that eventually we are going to have to 
start making some decisions. The President has come up with 
this proposal. We need now to hear from you folks.
    Mr. McCrery. The President's proposal is just to dump more 
money into it.
    Mr. Matsui. Well, I hope you come up with something then 
that has a little pain. Then we can start talking about that, 
Mr. McCrery.
    Chairman Shaw. I would suggest that I believe that this 
President is going to come up with something a little more 
definitive than what we have gotten. I look forward to working 
with him.
    Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman. Thank all of you for 
being here.
    Ms. Kramer, I wanted to just ask you a couple questions. 
First, I think your testimony and the work of 2030 really does 
demonstrate the fallacy of the myth that young people of your 
generation don't care about seniors and don't care about Social 
Security. The polling data you have certainly demonstrate how 
wrong this notion is that young people are too selfish to care 
about the rest of society and that everybody ought to just have 
to fend for themselves, instead of a meaningful retirement 
security program that's available to the least in terms of 
economic capability in our society to retire with dignity. So, 
I appreciate your presentation, and thought you perhaps might 
want to comment if 2030 and you have developed any position on 
the specifics of what President Clinton has set forth in his 
State of the Union Address concerning the future of Social 
Security and the best approach for addressing the problems that 
we face.
    Ms. Kramer. Yes. We have thought about the President's 
proposal and have talked since the State of the Union. We are 
very happy to see that he did not propose to raise taxes. Nor 
did he propose benefit cuts. But he came up with a very 
fiscally sound proposal to ensure that the great majority of 
our budget surplus goes to strengthen the Social Security 
system.
    We like the idea of the USA accounts being totally on top 
of and separate from Social Security, so that we can maintain 
the integrity of the program and encourage savings through 
different avenues.
    Mr. Doggett. Thank you. I yield back.
    Chairman Shaw. The gentleman from California.
    Mr. Becerra. Thank you, Mr. Chairman. In fact, Mr. 
Chairman, let me first thank you for letting me participate 
since I am not an official Member of the Subcommittee. I do 
appreciate that you allow me to take a few minutes of the time. 
I won't take up the 5 minutes because I know we want to move 
onto the other panel as well.
    Let me thank the witnesses for their testimony; I 
appreciate their comments.
    If I could ask first Ms. Kramer, because I know that folks 
at 2030 Center have done a lot of work on this issue. Is it 
your sense that the younger generation, the Generation Xers, as 
they are called, have this embedded belief that Social Security 
will not be there, or is it one of those things that if off the 
cuff they are asked the question what's more likely, the 
Martians to be on Earth or Social Security to survive, that 
it's more a quick reaction? Do you sense that younger folks 
really believe that Social Security is not available or will 
not be available for them into the future?
    Ms. Kramer. My sense is that younger people in general are 
losing faith in government, and that it is much broader than 
just Social Security. So, yes, when you ask them, do they 
believe more in UFOs or do they believe that they will get 
their full Social Security benefits, they are likely to tell 
you that it's more about UFOs.
    But like I tried to emphasize in my testimony, it doesn't 
mean that they don't want Social Security to be there for them. 
They think these programs have been very successful, Social 
Security and Medicare, and they want them to remain there. They 
are just concerned about the whole political process and what 
can come out of that.
    Mr. Becerra. If I could ask Mr. Anderson, Sr., a question. 
Perhaps Mr. Anderson, Jr., as well can respond. I think one of 
the things that Mr. Matsui was beginning to ask you, I'm not 
sure if you were able to really get into it too much, was the 
question of the current Social Security contributions that are 
made by employees that totals 12.4 percent, the contribution by 
the employee and equal contribution by the employer.
    If you were to take some of that money and use it to 
construct these private accounts where individuals can invest 
privately, you would have a gap. The 12.4-percent contribution 
to Social Security would now be less, whatever percentage you 
decide it would be. If a good portion of that--and Mr. Matsui 
mentioned that a third of it--of the Social Security dollars 
that we expend every year, goes to things like disabled or 
survivors of a Social Security recipient who has expired, how 
would you make up the difference? If you knew that the sum to 
make up the difference were in the trillions, do you have any 
suggestions on where we would try to seek the moneys to either 
fill the gap, or would we just reduce the benefits either to 
surviving spouses and children or to the disabled, or just cut 
across the board for recipients of Social Security?
    Mr. Anderson, Sr. First, I don't propose that we reduce for 
those who in fact are in need in those programs that you just 
mentioned. Not at all. But I think that in regard to the 
dollars that are provided solely for retirement, not the need 
dollars. We're talking about solely for retirement. I believe 
that there is a better way to get at that, and where there will 
be some savings from that. I am not sure exactly what the 
numbers are, but currently if we look at the returns on the 
money that is being paid into Social Security, it's very low.
    Mr. Becerra. Are you supportive of the idea of creating 
these private accounts that each individual would have without 
undermining any of the contributions currently made into the 
Social Security now, but still allow people to hold these 
private accounts?
    Mr. Anderson, Sr. Oh, absolutely. Absolutely, because, 
obviously, we can get a better return.
    Mr. Becerra. Are you familiar with the proposal the 
President came out with, what he is calling his USA, universal 
savings account?
    Mr. Anderson, Jr. Yes.
    Mr. Anderson, Sr. Let me say this, though: I mean, 
obviously, some might argue that I might have an interest in 
self-directed accounts, so to speak, versus the government 
investing the money themselves. But I think I just find some 
difficulty in trying to figure out like what companies would 
the government invest in? I have a hard time trying to figure 
that out.
    Mr. Becerra. Remember, this isn't the money that the 
government would collectively invest for Social Security. It 
would be your own individual account. The universal savings 
account would be money you have in your pocket.
    Mr. Anderson, Sr. OK. OK, I'm sorry.
    Mr. Becerra. I promised the Chairman I would not use the 
entire 5 minutes of my time, so I want to keep to that. So I 
want to go ahead and yield back the time.
    Mr. Anderson, Sr. OK.
    Mr. Becerra. But thank you very much, all of you, for your 
comments.
    Chairman Shaw. Thank you.
    Ms. Kramer, I wanted to ask you a couple of questions. I 
have done some quick math, which may be wrong. I believe you 
said you were 24 years old.
    Ms. Kramer. Congressman, can I ask you to speak up? I am 
deaf in one ear. I am having a hard time.
    Chairman Shaw. I'm sorry. I did some quick math here. I 
think if I remember your testimony correctly and my math is 
correct, by the time young Richard retires, at that time if the 
retirement age were 67, I believe you would be 84 years old. He 
would be paying 30 to 45 cents out of every dollar that he made 
in his final years of employment simply to maintain the 
benefits for your generation. I think all of us up here on the 
panel, or at least most of us, will be long gone and forgotten 
by the time that happens. But we cannot afford to allow that to 
happen. If we don't do something within the next year or so, 
the longer we wait, the tougher it is going to get.
    Now in questioning, I think by Mr. Doggett, you answered 
with regard to the President's plan, you mentioned the question 
of commitment of the surplus and not raising the taxes, but 
then not decreasing any of the benefits. You did not, however, 
comment on the question of investment of some of the surplus 
into the stock market, into equities. Do you have an opinion on 
that?
    Ms. Kramer. Surely. I'm trying to think back to what you 
said in the beginning. I think that when you were talking 
about----
    Chairman Shaw. My question is only as to Federal investment 
into the stock market. That is my question.
    Ms. Kramer. But you prefaced by saying that when I am 86 
and Richard retires that----
    Chairman Shaw. I am not holding you to the math.
    Ms. Kramer. It could be up to 30 percent. I would just like 
to say, obviously, we want to find ways to strengthen Social 
Security without just increasing taxes.
    Chairman Shaw. That is what we all want.
    Ms. Kramer. So the investment of a small part of the trust 
fund, finding a way to invest it like a pension, I think that 
that's an idea that is very worth looking into. I think there's 
a lot of responsible models for how to invest a large portion 
of money like that, like a pension, have it be very independent 
from Congress, from decisionmakers, and that that's a great way 
to start looking at increasing the revenue without having to 
simply increase taxes.
    Chairman Shaw. Now the reason you would favor that, I 
suppose, is because there would continue to be Federal 
guarantees of the payments, even if the stock market went down 
and the surplus should be somewhat decreased because of the 
fluctuation of the stock market. Is that correct?
    Ms. Kramer. I wouldn't say that's the reason why I support 
it, but I do think that there should continue to be guaranteed 
benefits. I mean I think that----
    Chairman Shaw. I am not committing the Subcommittee and any 
of the Members up here, including myself, to any particular 
program. But there has been a great deal of discussion with 
regard to individual savings accounts by the wage earner as 
opposed to direct investment by the Federal Government. The 
point has been made that they wanted to keep the politics out 
of it. We don't want to get into a situation where the Federal 
Government is giving the stamp of approval of some stocks and 
yet not on others. The critics of the individual investments 
program, however, are concerned about the fluctuation of the 
markets and what happens to somebody that retires when the 
markets are low. Those are things that are genuine 
considerations.
    Would your thought with regard to them be any different if 
the Congress were to put into the law particular guarantees as 
to the return? So that a downward turn in the market would not 
necessarily be prejudicial to the wage earner who happens to 
reach the retirement in a down market? Have I made myself 
clear?
    Ms. Kramer. Yes. I think I have some idea of what proposal 
you are referring to. I have seen a proposal that includes 
ideas like that.
    I think the main concept here is we want to maintain the 
integrity of the program. Any time you are replacing some of 
what we now consider Social Security with these individual 
accounts that do rely on the stock market, we are going to have 
problems. Are we going to take our whole budget surplus from 
now until eternity? I think it sounds like a risky program, and 
I want to maintain Social Security.
    Chairman Shaw. Well, how do you distinguish that from the 
Federal Government investing? Are we smarter than other 
investors that would be out there? How do you distinguish that? 
That's what I want to know. As long as you had some guarantee 
of returns, I am having difficulty seeing why it's safer for 
the Federal Government to invest it than individual retirement 
accounts, which are set up with very specific restrictions and 
guaranteed by the Federal Government.
    Ms. Kramer. The Federal Government has a lot more money 
than an individual investor, right? So if I invest my own 
money, and when I retire all of a sudden the stock market is 
down, it's just my loss. But the government has a huge amount 
of money to invest, where it can weather the ebbs and flows of 
the market, I think, much better.
    Chairman Shaw. But if these investments were required to be 
made into these giant pools, large pools, such as index funds, 
would you have any problem with that?
    Ms. Kramer. I would. I don't want to see the Social 
Security system replaced with a system that relies on the ups 
and downs of the market, and puts individuals at risk.
    Chairman Shaw. OK. Whether the Federal Government invests 
it or whether the individuals invest it, it is still going to 
have the ups and downs, and this is something that's got to be 
of concern to those of us charged with drafting the 
legislation.
    Ms. Brown, I was very much impressed with your testimony, 
particularly your phrase that you used in the first sentence. 
That is, you refer to it as ``our'' Social Security system, 
meaning that your generation, you generally look at a senior 
that says that. I think that that is very commendable.
    I want to thank this panel.
    Mr. Cardin. Mr. Chairman, could I just make a brief 
comment?
    Chairman Shaw. Oh, Ben, I'm sorry. I'll recognize you. You 
weren't here.
    Mr. Cardin. I wasn't here. I just came back. Let me thank 
you.
    I just really wanted to make an observation to the panel as 
a result of your inquiries. That is, it is very helpful to us 
to hear from younger people as to how you view the Social 
Security system of the future. I just wanted to applaud our 
Chairman for starting the hearings of our Subcommittee with the 
people who are going to be most impacted by the changes that we 
make or how we deal with Social Security.
    It is interesting that if I have a townhall meeting in my 
district, it is mainly seniors who come and listen to Social 
Security, when it is the younger generation that is going to be 
most impacted.
    Ms. Kramer, I was very impressed by your observations. It 
is clear to me that the best thing that we can do for young 
people today is to pay down the debt. Under one of the 
President's suggestions, by transferring the surplus into the 
Social Security Trust Fund, we are going to be reducing the 
amount of public debt held by the private sector. This is the 
best thing that we can do for young Mr. Anderson here when he 
retires, is to have less debt outstanding.
    The second thing, I think this was the point that you were 
making, Mr. Chairman, is that Social Security is supposed to be 
part of your income security when you retire. All of you have 
retirement options now available through your employment that 
we did not have when we entered the work force 30 or 40 years 
ago. One of the suggestions that is being made as a friendly 
suggestion is to make it easier for individuals to put more 
away for their retirement. I think that is a win-win situation 
if we also shore up Social Security at the same time.
    So I don't think we should be looking at it as a hostile 
situation, whether you have to have accounts. It can be in a 
way that we strengthen Social Security, strengthen private 
retirement and reduce the debt. Then I think young Mr. Anderson 
is going to be in the best possible position when he retires. I 
think that is how we are trying to put this together, the 
President and the framework that he laid out for Social 
Security.
    Thank you, Mr. Chairman.
    Chairman Shaw. Thank you for your contribution.
    I want to thank the entire panel for being here. I think 
that you have certainly spoken well, and have added quite a bit 
to the discussion that will be ongoing for another couple of 
months for sure. Thank you very much.
    I would like to invite the second panel to the witness 
table. We have Dr. J.D. Foster, who is executive director and 
chief economist of the Tax Foundation. Dr. Henry Aaron, who is 
a senior fellow, Economics Studies Program at the Brookings 
Institution, and C. Eugene Steuerle. I hope I am pronouncing 
that correct, Dr. Steuerle, who is a senior fellow at the Urban 
Institute.
    Mr. Anderson, you made history today. Congratulations. 
Thanks for being with us.
    Mr. Anderson, Jr. Thank you.
    Chairman Shaw. Gentlemen, we have each of your written 
statements, which will be made a part of the record. We would 
invite you to summarize as you see fit.
    Dr. Foster.

 STATEMENT OF J.D. FOSTER, PH.D., EXECUTIVE DIRECTOR AND CHIEF 
                   ECONOMIST, TAX FOUNDATION

    Mr. Foster. Thank you, Mr. Chairman. I am J.D. Foster, the 
executive director and chief economist of the Tax Foundation. 
Mr. Chairman, I offer the following prediction: Some years from 
now, after Social Security reform has been enacted, the kinks 
have been worked out, and the American people have come to 
understand it, we are going to have one question on our mind 
above all others: What took us so long? Once we understand its 
consequences for our children and for America's workers, we 
must ask ourselves why it took us so long to get to this point 
where we are discussing Social Security reform.
    Even if the system were actuarially sound, reform along the 
lines, what I call personalization, would still be the right 
thing to do. Of course we are at this point, not because 
personalization itself is the right thing to do, but because 
the trust fund will run dry--rather soon, actuarially speaking.
    Now some will tell you all you have to do is raise taxes. 
Now that's a fine solution. The only trouble is that it 
punishes today's children, tomorrow's workers. Some will tell 
you just keep taxes high and subsidize the system with income 
taxes. Such a system will forestall the fiscal calamity, but it 
keeps taxes high. If that is the only way to do it, well, so be 
it. But there is a better way. Let people keep some of their 
own payroll taxes. That is the basic choice we face: big 
government as Big Brother or individual ownership, individual 
liberty. The question is, where do you put your faith?
    Troubled trust funds is one reason for reform. A second 
reason is that Social Security's pension aspect yields retirees 
a terrible rate of return when compared to the returns 
available in the private marketplace. Of course, there are no 
guarantees these historical returns will persist into the 
future, but the historical evidence is strong enough, the 
future is bright enough, that the burden of proof, I believe, 
should clearly fall on those who believe the returns will not 
persist.
    Another reason for reform is that the payroll tax has 
crowded out the ability of many Americans to save for 
retirement in any other way. Let me just give you some numbers. 
These are intended to be suggestive. Consider a family, two 
parents, a child, total wage income of $50,000. That family 
pays $3,280 in payroll taxes alone. That's the individual 
portion, not the individual and employer. As detailed in my 
written testimony, the family's total tax burden could well 
exceed $11,000.
    After taxes, then, the family has about $3,200 a month of 
disposable income. So let's see how they might allocate these 
funds. Housing costs, including utilities, may be $700. A car 
payment, $400. At $15-a-day per person, you are talking about 
$1,350 in food expenses. Other household expenses like clothes, 
gas for the car, toys and books for the child, maybe another 
$300 a month. Those total regular expenses, $2,700. Leaving the 
family with about $500 for other expenses and saving.
    The family might like to save this $500, save it for 
retirement, pass it onto their children. But first they have to 
face the big items that show up every month like car insurance, 
car repairs, a new dishwasher, kid's braces, medical and dental 
deductibles, Christmas presents, and college expenses. The 
point is, once the family gets done paying its taxes and paying 
its bills, there isn't a lot of money left to save.
    If you look at the family's tax cost, the number that has 
to jump out at you is the payroll tax, that $3,280. In effect, 
the forced contributions of the payroll tax are crowding out 
the private saving the family might otherwise achieve. Since 
Social Security effectively precludes the family from saving 
adequately on its own, it must yield a good return, which it 
does not, and it must be assured, which it is not.
    Finally, reform offers America's workers a bigger piece of 
our bright future. Our companies are among the most competitive 
in the world. Our institutions are strong. Our economy is a 
veritable job machine. This means over the coming years, 
investors are going to receive hundreds of billions of dollars 
in interest, dividends, and capital gains. Who are these lucky 
people? They are the savers and the inheritors. Anyone can get 
a piece of this action by saving and investing prudently. But 
if you don't save and you don't inherit a chunk of capital from 
Aunt Bessie's estate, you are left out of the money.
    Unfortunately, America's workers don't get much of this new 
wealth. Their saving is crowded out by taxes, as I mentioned. 
Without saving, they have no claim on this economic future. 
Under real reform, some portion of the current payroll tax 
would be divided, directed into personal security accounts, or 
PSAs, at a bank or brokerage house. Individuals would invest 
their money in real assets like corporate bonds and equities.
    Giving individuals ownership and control of their 
retirement income is frightening to some analysts and some 
individuals. Some analysts just don't believe people are smart 
enough to be entrusted with their own money. Because many 
Americans do, in fact, save little or nothing at all, they are 
themselves concerned about the safety of their investments and 
their ability to invest prudently.
    Comprehensive reform would address these concerns. For 
example, PSA owners would be required to diversify their 
investments, and could not invest in obviously high risk and 
speculative investments. With such safeguards in place, suppose 
every wage-earner is investing in the private sector through 
private security accounts. What happens? Much of the hundreds 
of billions of dollars in interest, dividends, and capital 
gains our economy will produce in the coming years, that would 
otherwise go to the wealthy, will go to the working men and 
women of America. Low- and middle-income workers would get a 
bigger piece of the action because through saving and investing 
their payroll taxes, they would own much of corporate America.
    In conclusion, Mr. Chairman, I believe we should have 
abandoned the current Social Security structure long ago. It 
condemns workers to an abysmally low rate of return on their 
contributions. These taxes are so high, particularly the 
payroll tax, that workers have little extra income to save and 
invest more wisely.
    As a pension system, Social Security guarantees workers a 
minimum benefit, and then virtually condemns them to no better. 
Real reform would break these bonds. When Social Security is 
personalized, the American worker will see his wealth grow over 
time. He will see manifested in his personal security account 
balance the advance of his economic status, and so enjoy the 
dignity and security of owning wealth.
    Thank you, sir.
    [The prepared statement follows:]

Statement of J.D. Foster, Ph.D., Executive Director and Chief 
Economist, Tax Foundation

    Mr. Chairman, as an economist I am professionally compelled 
to make a prediction. And so I offer this prediction with more 
than the usual amount of confidence:

        Five years from now, after Congress enacts and the President 
        signs Social Security reform, after the kinks have been worked 
        out and the American people have had a chance to see how it 
        works, the question on everyone's mind will be--what took us so 
        long?

    We are now finally debating Social Security reform in earnest with 
the justified expectation that reform will soon happen. We are at this 
point because, as is now widely recognized, the Social Security Trust 
Fund is predicted to run dry in a time frame which actuarially speaking 
is rather soon. The pending exhaustion of the Trust Fund is both bad 
news and good news. It is bad news because of its implications for 
fiscal policy; it is good news because it forces action.
    However, once we look at reform and see its consequences for the 
soundness and security of our national pension system and for the 
future tax burden on America's workers, we must truly ask ourselves why 
it took so long to consider these reforms. Even if Social Security was 
sound for as far as the actuaries could calculate, personalization 
would still be the best way to go.
    True Social Security reform centers on the idea of individuals 
investing some portion of their payroll taxes in the private market. 
For many Americans, this is a novel idea. For diehard defenders of the 
status quo, the proposition is anathema. For millions of people in many 
countries, it is already working. As is now well known, Chile 
personalized its public pension system 18 years ago. Since then, 
Argentina, Colombia, Uruguay, Bolivia, Mexico, and El Salvador have 
followed suit in Latin America alone.
    As John Goodman, President of the National Center for Policy 
Analysis has pointed out, ``If the current trend continues, every 
country south of the border---with the possible exception of Cuba--will 
have privatized their pension programs long before Congress can agree 
on how to save our own.''
    I think John is too pessimistic. I believe the Congress and the 
President, working together, can get this done in the near future. 
Nevertheless, it is curious that the leader of the free world, the 
light on the hill drawing nations to democracy, personal freedom, and 
the superiority of private markets, should lag so far behind in turning 
Americans' pensions back to Americans.

                           Reasons for Reform

    The most common reason given for Social Security reform is 
that the Trust Funds are projected to run dry some time around 
the year 2030. In fact, the trouble will begin much sooner when 
payroll tax receipts begin to fall short of current benefit 
payments. At that time, either taxes will be raised or spending 
cut to prevent Social Security from driving the consolidated 
budget back into the deficit from which we have just recently 
escaped.
    Of course, there are those who will tell you the Trust Fund 
won't be bankrupt. There are those who will tell you this is 
not a ``crisis'' and, indeed, it is a subjective matter whether 
to apply that term. There are those who will tell you all you 
need do to solve the problem is raise the payroll tax rate 2 or 
4 or 6 percentage points and the problem goes away. They are 
correct, of course. Similarly, for that matter all we need do 
is cut back benefits 20 or 40 percent to match receipts.
    While these are surely simple solutions and they would 
work, the ease with which they are offered should in no way be 
confused with the enormous political difficulties and 
implications that would ensue if we actually tried to follow 
them. If you believe that a big increase in the payroll tax 
would be acceptable, or if you believe that a big cut in 
benefits would be acceptable, then there really is no issue. If 
these ``solutions'' are not acceptable, then we should put away 
simplistic notions and get serious.
    A second reason for reform, and one just as compelling, is 
that the pension aspect of Social Security yields retirees a 
terrible rate of return. Depending on one's wage history the 
estimates I have seen run from a minus 1 percent real return to 
a plus 2 percent return. When compared to long-term returns 
that we see in the private markets of 7 or 8 percent, this is 
simply unconscionable. Of course, there are no guarantees that 
these historical returns will persist into the future. But the 
historical evidence is strong enough, and the future bright 
enough, that the burden of proof should clearly fall on those 
who claim they will not.
    I would like to suggest to you two additional reasons why 
Social Security reform is imperative. The first is that the 
Social Security payroll tax has crowded out the ability of many 
Americans to save for retirement in any other way. Let me give 
you a simple example.
    Consider a family, two adults and one child, with total 
wages and salary income of $50,000. Suppose the family has no 
other income. Their payroll taxes will be about $3,820, not 
counting the employer's share. Their federal income tax after 
the $400 per child tax credit, and assuming they take the 
standard deduction, is about $4,800. In addition, they pay 
state and local taxes. If they live in Virginia, their state 
income tax will be about $1,800. Suppose their other cash 
taxes--sales, property, various government fees--total $500 a 
year. After taxes, this family has about $39,040 in disposable 
income. (Note that these are cash taxes and cash wages. The 
employer's share of the payroll taxes and the family's share of 
the corporate tax burden have not been included.)


------------------------------------------------------------------------

------------------------------------------------------------------------
Total Income............................  ..............         $50,000
Payroll Taxes...........................         $ 3,820
Federal Income Tax......................         $ 4,820
Virginia Income Tax.....................         $ 1,820
Other Taxes.............................           $ 500
                                         ----------------
Total Taxes.............................  ..............         $10,960
                                                         ---------------
Disposable Income.......................  ..............         $39,040
------------------------------------------------------------------------


    Now let's see how the family might spend this money, which 
totals about $3,250 a month, keeping in mind these figures are 
just suggestive. Housing costs, including utilities whether 
renting or owning, might be around $700 monthly. The family is 
likely to have a car payment of around $400. At $15.00 per 
person per day, the family's food budget for the month would be 
$1,350. Other household expenses, like clothes, gas for the 
car, an occasional dinner out with friends, books and toys for 
the child, etc. would be at least $300 a month. Thus, total 
regular monthly expenses would be about $2,950, leaving the 
family with about $300 for other expenses and saving.



------------------------------------------------------------------------

------------------------------------------------------------------------
Monthly Income..........................  ..............          $3,250
Housing Costs...........................           $ 700
Car.....................................           $ 400
Food....................................          $1,350
Other Household.........................           $ 300
                                         ----------------
Total Monthly expenses..................  ..............          $2,750
                                                         ---------------
Remaining Monthly Income................  ..............           $ 500
------------------------------------------------------------------------


    The family might like to save this amount. But first it 
must deal with the extraordinary items that seem to come up 
from time to time and yet every month, such as car insurance, 
life insurance, car repairs, the child's braces, medical 
deductibles and co-payments, dental deductibles and co-
payments, Christmas presents, and college expenses. In short, 
once the family pays its taxes and its regular bills, there is 
little left for saving.
    Looking at all the tax costs the family faces, clearly the 
largest is the federal income tax burden at $4,820. The second 
largest are the payroll taxes. The payroll taxes are 
particularly important because most of them are supposed to be 
funding the parents' retirement income through Social Security. 
In effect, the forced contributions of the payroll tax are 
crowding out the private saving the family might otherwise 
achieve. Since Social Security effectively precludes the family 
from saving adequately on its own, it is imperative that Social 
Security yield a good return, which it does not, and that it be 
assured, which it currently is not.
    Possibly the most important reason for reforming Social 
Security is to ensure that America's workers get a bigger piece 
of America's bright future. While we have our problems, 
America's future is undeniably bright. Our companies are among 
the most competitive in the world. Our institutions are strong. 
Our economy is a veritable job machine that appears able to 
adjust to changes in world economic conditions fairly easily.
    All these good omens mean that over the next 10, 20, 30, 40 
years shareholders and bondholders will receive hundreds of 
billions of dollars in dividends, interest, and capital gains. 
Who are these lucky people? They are the people who have 
wealth--people who save or who have inherited the savings of 
their parents and grandparents. The wonderful thing is that 
anyone can get a piece of this action by saving and investing 
prudently. Unfortunately, if you don't save and you don't 
inherit a chunk of capital from Aunt Bessie's estate, you're 
left out of the money. In short, the wealthy will get this 
wealth. The old saw is true--it takes money to make money.
    President Clinton recognized this when he stated in support 
of his Universal Savings Accounts, which would be in addition 
to Social Security reform, ``I want every American to have a 
savings account and have a part of this country's wealth.''
    Unfortunately, as things now stand, America's workers are 
unlikely to reap much of this new wealth. There are two reasons 
for this. The first is that they cannot save a great deal on 
their own because their saving potential is largely crowded out 
by taxes, particularly Social Security taxes as described 
above. Without saving, they have no financial claim on this 
future wealth. The second reason is that their Social Security 
contributions are not invested in the private sector, and so 
their Social Security contributions have no claim on this 
future wealth, either.
    Today's payroll tax receipts cover current benefits and the 
excess pays for other government spending or to buy back 
government debt. None of the payroll tax receipts collected 
today are invested in real assets to pay future benefits. Under 
real Social Security reform, initially two or three percentage 
points of the current 12.6 percent payroll tax would be 
directed into an account at a regulated financial service 
company such as a bank or brokerage house. These accounts are 
sometimes called ``Personal Security Accounts,'' PSA's. 
Individuals would invest their PSA money in real assets like 
corporate equities, corporate bonds, government bonds, and 
money-market instruments. In effect, workers' payroll tax 
``contributions'' would build a real pension as opposed to 
contributing to other government spending priorities.
    By way of background, let me review just a few numbers, 
starting with $787 billion and $2.6 trillion. The Congressional 
Budget Office projects a total surplus over the next ten years 
of $2.6 trillion. Of that, $787 billion is in non-Social 
Security accounts, $1.8 trillion is in Social Security 
receipts. In other words, on average over the ten-year period, 
the federal government will receive $180 billion in payroll 
taxes a year over what is needed to pay benefits. Average 
employment over their period will be about 150 million persons. 
If the entire Social Security surplus is returned to the worker 
to invest in his or her PSA, the average worker would invest 
about $1,200 a year, of about $100 a month. Over a thirty-year 
working life, that would provide total savings of over $117,000 
at an average return of 8 percent assuming a 2 percent annual 
administration cost. At a withdrawal rate of $20,000, this 
modest PSA alone would fund almost 6 years of retirement 
income.



------------------------------------------------------------------------

------------------------------------------------------------------------
Average Excess Social Security Receipts.................    $180 Billion
Average Workforce.......................................     150 Million
Annual PSA Investment...................................          $1,200
Total PSA Value at Retirement @8%.......................        $141,000
Number of Years of Retirement Funded @ $20,000/year                   10
 Annual Withdrawal......................................
------------------------------------------------------------------------

    Giving individuals ownership and control of more of their 
retirement income is frightening to some. Because many 
Americans save little or nothing at all, they are unaccustomed 
to the process of investing and so they are concerned about the 
safety of their investments and their own ability to invest 
prudently. Even workers who save through employer-provided 
pensions rely on the pension managers to make the relevant 
decisions.
    Comprehensive Social Security reform would include a long 
list of safeguards to address these concerns. For example, PSA 
owners could not make premature withdrawals from their 
accounts. PSA owners would be required to diversify their 
investments. They would not be permitted, for example, to make 
investments in obviously high-risk and speculative instruments 
like derivatives and options, nor could they invest most of 
their PSA funds in any one company or industry. And the 
financial institutions that maintain the PSA accounts would be 
subject to strict regulation, similar to those on deposit 
taking banks today. The government may even set up a special 
agency to invest PSA savings held in individual accounts solely 
in government bonds for individuals who so desire.
    For those concerned about the level of retirement benefits 
both current and promised, I suspect reform would leave the 
existing benefit structure unchanged. In effect, reform would 
change the source of the benefit from taxes on workers to real 
assets controlled by the retiree, but it would not change the 
level of benefits.
    With these safeguards in place, suppose everyone with wage 
and salary income is saving and investing in the private sector 
through Private Security Accounts. What happens? Much of the 
hundreds of billions of dollars in interest, dividends, and 
capital gains that would otherwise have gone to the wealthy 
would now go to the working men and women of America. Social 
Security reform would transfer some of the bounty of America's 
future from the wealthy to workers. Low- and middle-income 
workers would get a bigger piece of the action, a bigger piece 
of America's bright future. But this would not happen through 
confiscation of wealth and income through high tax rates. It 
would happen because, through saving and investing their 
payroll taxes, working Americans would own more of America and 
would have a legitimate claim on the economic gains in 
America's future.
    We should have abandoned the current Social Security 
structure long ago. The current system condemns payroll 
taxpayers to an abysmally low rate of return on their 
investment, generally far below that paid even by Treasury 
bonds. And, because the payroll tax is so high, particularly 
when added to federal and state income taxes, workers have 
little extra income to save and invest more wisely.
    As a pension system Social Security guarantees workers a 
minimum benefit, and then virtually condemns them to doing no 
better. Real reform would break this cycle. And the more fully 
reform returns payroll taxes to the workers to invest on their 
own behalf, the more completely the cycle would be broken. When 
Social Security is personalized, the American worker will see 
his wealth grow over time. He will see manifested in his own 
Personal Security Account the advance of his economic status 
and the dignity and security of owning wealth.
      

                                


    Chairman Shaw. Dr. Aaron.

     STATEMENT OF HENRY J. AARON, SENIOR FELLOW, BROOKINGS 
                          INSTITUTION

    Mr. Aaron. Thank you very much. Let me begin by saying I 
think there is an important lesson to be learned from the 
testimony of Richard Anderson, Jr., and Sr.; it is very 
important to start early in educating children on the 
importance of saving and investing. Wait until you are 40 years 
old to start saving, and it's really too late to be able to 
build an adequate nest egg by retirement without saving a 
larger fraction of your income than most mortal human beings 
are going to do.
    But I think there is another lesson in his example. I was 
reminded of the 6-year-old and 7-year-old musical prodigies who 
dazzle us with their skills. It would be nice if we could infer 
from such performances that all 6- and 7- or even 26- and 27-
year-olds could be similarly skilled and able at their craft. 
We recognize that prodigies are unusual. We pay money to hear 
them perform, but we don't dream that everybody can emulate 
them.
    In fact, fully one-third of people age 52 to 65 have not 
even thought about retirement planning, according to the most 
recently available survey evidence--one-third of people on the 
eve of retirement. There may be a day in the future when people 
will be as skilled as Richard Anderson is. That is not the 
world that we yet live in.
    Mr. Shaw, you stated in your opening remarks a very 
important truth. With the increasing numbers of retirees, the 
cost of supporting them is going to increase. I want to make 
two additional statements about that. The first is that 
privatizing Social Security does exactly nothing whatsoever to 
reduce those costs. The only way to get ready for those costs 
or to reduce them, aside from cutting the living standards that 
the elderly and the disabled will enjoy in the future, is to 
encourage economic growth. The only way Social Security can do 
that is to boost the national saving rate. Regrettably, the 
most recent statistics indicate household saving is currently 
zero.
    It is against that background I think that the debate we 
are now seeing begin should be viewed. We face a once-in-a-
generation opportunity to shape economic policy. The advent of 
budget surpluses that nobody, absolutely nobody, anticipated 2 
years ago gives us that opportunity. I say in my statement that 
credit for those surpluses should be widely shared between 
Members of both parties in Congress and the last two 
presidents, Bush and Clinton. This is not a matter for partisan 
bragging.
    We also should recognize we have been extraordinarily 
lucky. The booming economy has performed better than anyone 
expected, and the stock market certainly does seem exuberant, 
if not overly so.
    Now listening to the State of the Union Address, it would 
have been easy to miss what I think is the core truth about it. 
The President presented a rather abstemious program to the 
American public. You have to be a bit of a budgetary detective 
because the rhetoric sounded like it was a Christmas tree, with 
something for almost everybody under the sun. But the fact of 
the matter is, that the President was saying that he thought it 
was inadvisable to have large tax cuts or large expenditure 
increases, and that the great bulk of projected surpluses 
should be saved. I think the goal of increasing national saving 
is one that most Members of Congress on both sides of the aisle 
would share.
    He proposed to do that in three different ways, by 
allocating a portion of the surplus to Social Security, a 
portion to Medicare, and a portion to the newly created USA 
accounts. I believe all three elements of the program deserve 
your support and would help significantly with boosting 
national saving, thereby facilitating added investment and 
economic growth, and preparing us for those costs of supporting 
the baby boomers to which you drew attention, Mr. Shaw, and 
which I believe are inescapable, to support an increasing 
number of elderly in the population.
    I think it is important that we understand the critical and 
stark choice we face. The President has called for what I will 
call a save-the-surplus approach. And there are many in both 
parties who are proposing what I would call the cut-taxes-and-
or-boost-government-spending approach to handling that surplus. 
As far as national choices on economic issues are concerned, it 
just doesn't get more fundamental than that. I hope that 
Members of Congress and the administration can come to an 
agreement this year. If they do not, I believe that we have a 
prelude of what the year 2000 Presidential campaign is going to 
be fought around.
    Thank you very much.
    [The prepared statement follows:]
Statement of Henry J. Aaron,\1\ Senior Fellow, Brookings Institution

    The President's State of the Union Address summons the 
American people to a debate of enormous national significance. 
That address does something that State of the Union addresses 
do all to rarely--it poses a once-in-a-generation choice for 
the nation on what should be done with the surprising and quite 
extraordinary budgetary windfall generated by America's booming 
economy and stock market.
---------------------------------------------------------------------------
    \1\ Senior Fellow, The Brookings Institution. The views expressed 
here do not necessarily represent those of the staff, officers, or 
trustees of The Brookings Institution.
---------------------------------------------------------------------------
    Let me be clear that I think credit for the achievement of 
these surpluses should be broadly shared. President Bush did a 
major part with the deficit reduction program of 1990, as did 
the Democratic Congress that enacted that program. President 
Clinton made a major contribution with his deficit reduction 
program of 1993. And the Republican majority in Congress 
deserves a large share of the credit for pushing a larger and 
more aggressive program of deficit reduction in 1995 than the 
administration initially endorsed. These efforts would have 
fallen short, however, had not revenues gushed forth as the 
American economy turned in a performance that virtually no 
economist, certainly none in OMB or CBO, anticipated. The 
achievement of unemployment rates consistently below 5 percent 
was a dream few dared to entertain, and the stock market now 
surely deserves to be described as exuberant, even if some may 
still feel it is not overly so. So, there is credit enough for 
all to share.
    We are so numbed by large numbers that the significance of 
prospective surpluses of $4.8 trillion during the next fifteen 
years is hard to appreciate. Under current policy, debt in the 
hands of the public will fall by more than three-quarters 
measured as a share of GDP over the next decade. The prospect 
of huge surpluses for a nation whose public sector has been 
hemorrhaging red ink for the last quarter century is quite 
intoxicating. To be sure, a run of really bad economic fortune 
could end these hopes. But prospects are so good that a 
recession of less-than-major proportions is unlikely entirely 
to erase these surpluses.
    Viewers of President Clinton's State of the Union Address 
may not have noticed that he presented a rather abstemious 
program. One has to be a bit of a budgetary detective to 
discover this fact, because the president seemed to portray a 
Christmas tree of goodies for every conceivable group. In fact, 
he called on the nation to save most of the budget surpluses 
that loom in our nation's economic future.
    Virtually every elected official--Republican and 
Democratic--agrees that the United States should save more than 
it now does. And they also understand that federal budget 
surpluses add to national saving. Surpluses enable the federal 
government to buy back bonds held by the public. Those 
purchases, in turn, release funds for investment in buildings, 
equipment, and inventories. And more investment means increased 
economic growth. 
    Unfortunately, everyone also agrees that budget surpluses 
produce Congressional fiscal incontinence. Republicans, and not 
a few Democrats, ache to cut taxes. Democrats, and not a few 
Republicans, have lengthy lists of government spending programs 
they would like to fatten up. While Republican and Democratic 
tax cuts tend to flow into different pockets and Republican and 
Democratic spending priorities tend to favor different groups, 
the prospect of large budget surpluses has a remarkable 
capacity to produce coalitions large enough to both cut tax 
cuts and boost spending. The result, most observers fear, is 
that budget surpluses would evaporate and national saving would 
remain depressed. 
    The remarkable feature of the program President Clinton 
announced in his 1999 State of the Union Address is that it 
would simultaneously increase national saving, raise economic 
growth, and improve the financial condition of the two largest 
and most popular government programs, Social Security and 
Medicare. Here is how. 
    The largest component is the transfer of bonds to Social 
Security and Medicare, the two largest and most popular 
domestic programs of the federal government. This transfer 
would total about $3.5 billion over the next fifteen years, an 
amount equal to more than three-quarters of the projected 
unified budget surpluses.\2\ Part of these transfers is a 
straight budgetary operation. But an additional part can be 
understood only as a debt transaction. The unfunded liabilities 
of Social Security and Medicare arose because early 
beneficiaries under both programs received benefits far larger 
than the taxes paid on their behalf could justify. Taxes levied 
on later workers went to support these benefits and are 
therefore not in the Trust Funds to support current and future 
benefit obligations. Unless Congress decides to walk away from 
those obligations--and I have not heard any member of Congress 
or of the Administration propose to do so--someone must meet 
this unfunded liability. Under current law, the cost of paying 
those benefits would fall on the payroll tax (if benefits are 
maintained) or on future benefits (if payroll taxes are not 
increased). 
---------------------------------------------------------------------------
    \2\ Some critics of the President's plan allege that he has engaged 
in double counting. I believe that this charge is bogus for reasons 
explained in Appendix 1 to this testimony.
---------------------------------------------------------------------------
    The president proposes to deposit government bonds to 
defray part of this unfunded liability, thereby putting a call 
on future general revenues--personal and corporation income 
taxes--to pay for this unfunded liability. In short, his plan 
would distribute the cost of paying this unfunded liability 
more progressively than would current law. One may agree with 
this shift or oppose it. But the key point, is that the cost of 
paying off the unfunded liability is inescapable. The question 
is not whether we pay it, but who pays it.
    The president's plan would take us about half way to 
closing the projected long-term deficit in Social Security and 
would extend the financial viability of Medicare hospital 
benefits for several years. Although benefits under neither 
Social Security nor Medicare are particularly generous, 
revenues and accumulated reserves are smaller than promised 
benefits.\3\ The transfer of bonds now to Social Security and 
Medicare would offset about half of the resulting gap. A modest 
menu of additional steps could close the rest of the gap.
---------------------------------------------------------------------------
    \3\ Many people allege that the Social Security Trust Funds are not 
real assets because they have been invested in government bonds. This 
position rests on fundamental confusions, as explained in Appendix 2 to 
this testimony
---------------------------------------------------------------------------
    Under the president's plan, about $500 billion would go to 
help create new USA savings accounts for American workers and 
to match individual contributions to these accounts. USA 
accounts could be of particular value to low and moderate wage 
workers most of whom now save almost nothing voluntarily. In 
addition to providing a nest egg for retirement, such accounts 
could support the purchase of a first home, help pay for the 
college education of children, defray the costs of a major 
illness, or underwrite the start of a small business. 
    The common characteristic of all three of these measures is 
that they would not support current consumption. Instead, they 
entail saving, which will support investment today and 
consumption in the future.
    The president's program also would allocate an amount equal 
to approximately 12 percent of projected budget surpluses for 
tax cuts or for increases in so-called ``discretionary'' 
spending of the federal government, including national defense 
and domestic activities. Only this piece of the program would 
boost current individual or collective consumption. 
    The contrast between the president's program and that of 
the ``cut taxes or boost government spending'' advocates could 
not be more stark. Poised at the portal of a new millennium, 
the United States government has at its disposal resources of 
almost unimaginable size beyond those it expected to have 
available. Should the nation spend those resources now or save 
them? If it saves them, should it do so in a way that will 
boost national production for ourselves and our children and 
helps support basic pensions and health care for decades? These 
questions are fundamental and large. It is hard to imagine 
questions better suited to resolution by the electorate of a 
mature democracy. If not settled this year, they well merit 
center stage in the year 2000 presidential election.
      

                                


Appendix 1

The Phony Issue of Double-Counting \4\

    The president's budget proposal announced in his State of 
the Union Address has provoked a good deal of confusion about 
how the numbers fit together. Some people are criticizing the 
plan for allegedly ``double counting'' the Social Security 
surpluses. The purpose of this note is to explain how the 
president's proposal would work from an accounting perspective. 
The message is simple: the double-counting issue is bogus. The 
president's address outlined a bold plan that stands in 
striking contrast to alternative proposals that would use 
projected budget surpluses to justify large tax cuts or 
spending increases. Faced with a once-in-a-generation choice 
about how to spend large and unanticipated surpluses, the 
nation should confront the big issue ``save the surplus or 
spend it'' and not get mired in accounting pettifoggery.
---------------------------------------------------------------------------
    \4\ Forthcoming in Tax Notes
---------------------------------------------------------------------------
    My explanation is built around four tables. The first lays 
out the president's program in the terms he presented it. The 
second shows how some can treat it as double counting. The 
third shows the effect of the president's plan on debt 
obligations and debt holdings from various perspectives. The 
fourth recasts the president's plan in terms of the unified 
budget with an important change in budget rules and shows that 
the charge of double counting is based on confusion. 

                           Initial Situation 

    Because I do not have access to the specific numbers in the 
budget forecast, I illustrate the accounting for the proposal 
with a hypothetical initial situation. I assume that the budget 
faces a projected unified budget surplus of 150, consisting of 
a surplus in Social Security of 100, and a surplus in other 
operations of government (``on-budget'') of 50.



------------------------------------------------------------------------
                                                              Initial
                                                              Balance
------------------------------------------------------------------------
Social Security.........................................           + 100
On-budget...............................................            + 50
    Unified Budget......................................           + 150
------------------------------------------------------------------------

                         The President's Plan 

    To keep the numbers whole, I assume that the president 
proposes to allocate 90 to Social Security, 22 to Medicare, and 
38 to other purposes (including tax cuts, USA accounts, 
defense, and non-defense discretionary programs). These amounts 
happen to be equal to 60 percent of the unified budget surplus 
for Social Security, approximately 15 percent for Medicare, and 
approximately 25 percent for other purposes. These numbers 
correspond approximately to the proportions the president 
presented in his State of the Union address. As with the 
president's proposal, however, the appropriations for these 
purposes would be stated as hard numbers, not as fractions of 
the projected unified budget surplus.
    Table 1 shows the budget accounting for these transactions. 
Note that the term ``unified budget'' does not appear in table 
1. I have omitted it because I believe that the budget 
initiative of the president implicitly adopts a budget 
framework, used by some but not all Republicans in 1998 to 
motivate tax cuts, but the president employs that framework to 
motivate a quite different policy. In 1998, CBO projections 
indicated that the unified budget would be in surplus over the 
succeeding decade, but that virtually all of that surplus would 
be accounted for by Social Security surpluses. That is, the 
cumulative ``on budget'' surplus over the succeeding decade was 
essentially zero. Nonetheless, the Republicans claimed that 
projected ``surpluses'' justified a tax cut.

                     Table 1-1: The president's plan
------------------------------------------------------------------------

------------------------------------------------------------------------
On-budget surplus............         50    Allocation to
Social Security surplus......        100     Social                 90
                                             Security (set
                                             at 60 percent
                                             of Balance).
                                            Allocation to
                                             Medicare (set
                                             at 15 percent
                                             of Balance).
                                            Available for
                                             other uses
                                             (tax cuts, USA
                                             accounts,
                                             defense, non-
                                             defense
                                             discretionary.

Balance available for various        150    Total uses of          150
 uses.                                       funds.
------------------------------------------------------------------------


    The president seems to be saying: ``OK. If you want to 
treat the unified budget surplus as up for grabs, so will I. 
But I shall allocate it for my purposes, not yours.'' One 
should keep in mind also that the president, as well as many 
Republicans, have made much of their success in ``balancing the 
budget.'' But this claim makes sense only if ``the budget'' 
refers to the unified budget, as the ``on-budget'' accounts--
that is, the unified budget less Social Security--remain in 
deficit. To treat only projected ``on-budget'' surpluses as 
available for saving Social Security or any other purpose would 
mean admitting that these ``on-budget'' surpluses have not yet 
been realized.

                            Reconciliation 

    This approach has led to the charge by some budget analysts 
that the president is double counting the Social Security 
Surplus. Table 2, ``reconciliation'' table, indicates how one 
might reach this conclusion. The Social Security surplus of 100 
appears twice: once by itself and once as part of the unified 
budget surplus. The president could well respond that it was 
the Republicans who began this approach by claiming that Social 
Security surpluses justified tax cuts, even when the ``on-
budget'' accounts were projected in 1998 to have no surpluses 
until 2005. As indicated below, however, there is a more 
fundamental answer.


                        Table 1-2: Reconciliation
------------------------------------------------------------------------
           Sources                                Uses
------------------------------------------------------------------------
Unified budget surplus.......        150    Additions to           190
                                             Social
                                             Security
                                             reserves.
Social Security surplus......        100    Additions to            22
                                             Medicare               38
                                             reserves.
                                            Available for
                                             other uses.
Total........................        250    Total..........        250
------------------------------------------------------------------------


                           Debt Transactions

    Table 3 shows the changes in debt and asset holdings 
arising from the president's proposal. It reveals that debt in 
the hands of the public falls by the amount of the unified 
budget surplus less uses of funds for purposes other than 
adding to Social Security and Medicare reserves, while debt 
obligations of the Treasury (which are subject to the debt 
limit) actually increase. 

                              Table 1-3: Debt Reconciliation under President's Plan
----------------------------------------------------------------------------------------------------------------
                                                                                         Government
                                                                          --------------------------------------
                                                                 Public           Trust Funds          Treasury
                                                              Holdings of --------------------------     Debt
                                                               Government     Social                 Obligations
                                                                  Debt       Security     Medicare   (subject to
                                                                             Reserves     Reserves   debt limit)
----------------------------------------------------------------------------------------------------------------
Initial Social Security Surplus (100).......................        - 100        + 100
Transfer to Medicare (22)...................................  ...........  ...........         + 22         + 22
Transfer to Social Security (90)............................  ...........         + 90  ...........         + 90
On-budget surplus (50, less 38).............................         - 12         - 12
Total.......................................................        - 112        + 190         + 22         +100
----------------------------------------------------------------------------------------------------------------

    This increase in debt owed by the Treasury does not 
correspond to an actual growth of government debt, if one takes 
benefit commitments under Medicare (part A) and Social Security 
as given. From this perspective, the federal government has a 
``shadow'' debt, in addition to the official debt, equal to the 
difference between a) the present value of promised Medicare 
(part A) and Social Security benefits and b) the present value 
of payroll taxes expected at current rates. President Clinton's 
proposal replaces a part of this implicit debt with explicit 
government debt deposited with the Trust Funds of these two 
programs. The president's plan reduces the projected long-term 
deficit in these two programs. If the president had wished, he 
could have proposed closing the deficit in these two programs 
entirely by depositing newly created Treasury obligations in 
the Trust Funds--that is, he could have replaced implicit debt 
entirely with explicit debt. Instead, he declared that 
additional steps are necessary--presumably benefit cuts or tax 
increases--are necessary to close the projected long-term 
deficit entirely and invited members of Congress to join him in 
fashioning such changes. 

                  A Modified Unified Budget Framework 

    To see why the charge of double-counting is bogus, one need 
only translate the president's program into the traditional 
framework of the unified budget. 
    Under the modified unified budget rules, the transfers of 
bonds from the Treasury to Medicare and Social Security would 
count as ``on-budget'' outlays but not as income to either 
program (hence the deposits are put in parentheses in Table 4). 
These transfers, along with the increase in discretionary 
spending, fully exhaust the budget surplus. This change in 
rules is essential for achievement of the president's stated 
purpose of reserving the surplus to increase national saving. 
Under the old rules, the receipts to the Medicare and Social 
Security Trust Funds would count as receipts, leaving a unified 
budget surplus of 112. This sum would be available for tax cuts 
or increased spending, both of which would boost national 
consumption, not saving. And if taxes were cut or spending 
increased by this amount, the federal government would not 
repurchase any debt from the public. But it is these 
repurchases that free resources for investment.

    Table 1-4: A Unified Budget Accounting of the President's Program
------------------------------------------------------------------------

------------------------------------------------------------------------
``On-budget'' Accounts -- initial situation...        + 50
    New discretionary spending................        - 38
    Transfers to..............................
        Social Security.......................        - 90
        Medicare..............................        - 22
    Medicare -- transfers from Treasury.......  ...........      (+ 22)
    Subtotal -- On-budget.....................       - 100
Social Security -- initial situation..........       + 100
    Transfer from Treasury....................  ...........      (+ 90)
    Subtotal -- Social Security...............       + 100
        Grand total -- Unified Budget.........         + 0
------------------------------------------------------------------------


    Casting the President's program in terms of a modified 
unified budget does not in any way change the substance of the 
program. Afficionados of traditional unified budget accounting 
may wish that the president had presented his program in that 
form. To have done so would have defeated the objectives of the 
program. The modified unified budget framework preserves the 
substance of the program. The key point is that one should not 
allow the form of the presentation to divert one from the 
substance of the program, which is where debate should focus. 
Confronted with truly enormous projected surpluses, 
unprecedented since the indexation of the personal income tax, 
should the nation cut taxes or boost spending, two ways of 
increasing current consumption? Or should the nation save these 
surpluses to help reduce the deficits of the two largest and 
most popular programs of the federal government, Social 
Security and Medicare? This choice is a big issue that should 
be settled by the electorate in a mature democracy. Legitimate 
disagreements are possible on the future role of social 
insurance and on the importance of boosting national saving and 
economic growth relative to supporting current consumption, 
private and public. But the nation should confront these 
issues, not spend its time on a petty and misplaced concern 
about double-counting.
      

                                


Appendix 2

Are the Social Security Trust Funds ``Meaningless''?

    To see why the assertion that the Trust Fund is meaningless 
is false, it will be helpful to look at the actual 
expenditures, revenues, and net asset position of Social 
Security and the rest of the federal government for fiscal year 
1999, as projected by CBO in August 1998. These are shown in 
the upper half of table 1. The bottom of half of table 1 
presents business and pension operations of a hypothetical 
corporation. The numerical values of this corporation's 
operations happen to be the same as those for Social Security, 
but the report is silent on whether the company is reporting in 
dollars, cents, or some other unit of currency.

                     Table 2-1: Operations of Social Security and a Hypothetical Corporation
                                               billions of dollars
----------------------------------------------------------------------------------------------------------------
                                                                                                     Cumulative
                                                                                                       Balance
                                                             Outlays      Revenues     Difference   [Surplus (+)
                                                                                                    or Debt (-)]
----------------------------------------------------------------------------------------------------------------
Social Security
    Other Operations....................................         1,396         1,359           -37        -4,508
    Social Security.....................................           325           442          +117          +853
        Total...........................................         1,721         1,801           +80        -3,655
Private Corporation
    Corporate activities................................         1,396         1,359           -37        -4,508
    Pension.............................................           325           442        +117 D          +853
        Total...........................................         1,721         1,801           +80         -3655
----------------------------------------------------------------------------------------------------------------


    In both cases, it surely seems that a pension fund exists, 
with a value of 853. Are there circumstances under which one 
could say that this appearance is misleading?
    First, one might say: ``well, if the pension fund holds 
only company bonds, it does not have a secure reserve.'' With 
respect to a private corporation, that statement would be true, 
as corporations can fail. With respect to the United States 
government, that statement is false. The United States 
government cannot fail. The Social Security Fund reserves are 
rock solid.
    Second, one might note that the Social Security trust fund 
can sell bonds only to the Treasury and that such sales require 
tax increases, spending cuts, or added borrowing from the 
public by the Treasury. That situation arises simply because 
the Social Security Trust Funds are prohibited from selling 
bonds to the public. It would be equally true if the Trust Fund 
held corporate bonds or common stocks. It would be equally true 
of a private company if its pension plan could sell assets only 
to the parent company. In that event, the corporation would 
have to raise revenues, cut expenses, or increase borrowing 
whenever the pension fund liquidated assets. The similar effect 
of Trust Fund bond sales on the U.S. Treasury has nothing to do 
with the fact that the Trust Funds hold only government bonds. 
If the Trust Funds could sell government bonds, corporate 
bonds, or common stocks on the open market, no such responses 
by the Treasury would result.
    Third, while the Trust Funds have succeeded in adding to 
Social Security reserves, they may have failed in adding to 
national saving, if they caused government to run larger 
deficits or smaller surpluses on the rest of it activities. In 
short, unwise fiscal policy outside Social Security may have 
prevented the accumulation of Social Security reserves from 
increasing national saving.\5\ If this unfortunate event 
occurred, however, the reason is not that Social Security 
reserves were invested in government bonds, but because of 
imprudent fiscal policy on activities of government other than 
Social Security. The reform in budget accounting and in 
Congressional budget rules that I described above would go some 
way to reduce this risk.
---------------------------------------------------------------------------
    \5\ A similar risk exists with individual accounts or any other 
form of mandatory private saving. Individuals are free to reduce other 
forms of saving or to incur additional debt--for example, by running up 
credit card balances or failing to pay off home mortgages. This problem 
is greater with individual accounts than with Social Security because 
the form of individual accounts so closely resembles other private 
saving.
---------------------------------------------------------------------------
    In summary: Social Security holds real reserves that can be 
sold to meet benefit obligations. Its income could be higher if 
it were free to invest as other pension fiduciaries are 
expected to invest. And it is illogical to deny the reality of 
those assets because fiscal policy outside Social Security was 
mismanaged for most of the last twenty years.
      

                                


    Chairman Shaw. Dr. Steuerle, and I hope I am pronouncing 
your name correctly.

STATEMENT OF C. EUGENE STEUERLE, SENIOR FELLOW, URBAN INSTITUTE

    Mr. Steuerle. That is correct, Chairman Shaw. In the 
question-and-answer session for the last set of speakers, 
several questions came up with respect to details of reform. 
Let me indicate that I would be most happy to work with this 
Subcommittee, as I have in the past on details of reform. I was 
original organizer and coordinator of the Treasury's tax-reform 
effort in 1984, which led to the Tax Reform Act of 1986. More 
recently I worked with the National Commission on Retirement 
Policy, which was a bipartisan commission, chaired by 
Representatives Kolbe and Stenholm as well as Senators Breaux 
and Gregg, to design a reform package. I was instrumental in 
that package in pushing for a minimum benefit that would help 
the poor elderly even more than they are helped under the 
current law, but also in addressing the issue of the 
extraordinary number of years of retirement support that it 
provided.
    I also supported increasing the retirement age. I have also 
suggested in the past the idea of a match plan, not too 
dissimilar from what the President has proposed, although I am 
interested in viewing Social Security taxes as one way of 
paying for that match. So I would be most happy to work with 
the Subcommittee on different ways of trying to reach some 
bipartisan consensus.
    Now if I were to put that in perspective, I must first 
address the issues that we were asked to testify on today, and 
that is why I care so much about the Social Security reform in 
terms of its impact upon today's children.
    As a member of the baby boom generation--the leading edge--
I grew up with individuals who, whether conservative or 
liberal, considered themselves idealists when it came to the 
role of Federal Government. Today that cohort has come to full 
power, whether in business or in Congress or as members of the 
labor force. It is somewhat ironic, I find, that the legacy 
that baby boomers would now bequeath is one where almost the 
sole purpose of the Federal Government would be to care for 
their consumption needs in retirement. I do not believe that 
this legacy is intended, yet it would come about in the current 
law, under the President's proposals, and under many of the 
Republican and Democratic budget alternatives now being 
considered by Congress. It is largely the consequence of laws 
written decades ago that are determining almost all the 
spending priorities of future generations as well as of this 
Congress.
    Let me use a few examples to convey the types of changes 
that are under way. Using today's prices, an average-income 
couple retiring on Social Security received about $100,000 in 
lifetime Social Security benefits about 1960. A typical couple 
retiring today would receive about $500,000 in Social Security 
and Medicare benefits, about equal amounts of each, if they 
were to head to an insurance company and ask to buy that 
package today. Whereas when the baby boomers retire, that 
package approaches $750,000. And, yes, under current law the 
package would exceed $1 million in constant dollars in terms of 
the benefits promised as we move out into the future.
    As another example, out of every dollar in cash wages, the 
government already requires workers to pay about 15 cents in 
Social Security taxes plus several cents in other taxes to 
support elderly and disability programs alone. In the future, 
that rate of tax could as much as double. Now one reason for 
these rising costs, and I emphasize rising costs, is that 
Social Security and Medicare dictate that successive 
generations should receive higher levels of real benefits than 
all previous generations.
    Another reason is that people are living longer and 
spending more years in retirement, almost a decade more than 
when Social Security first began paying benefits. Today 
individuals claim an entitlement to retire on Social Security 
for about one-third of their adult lives. Within a few decades, 
close to one-third of the adult population would be receiving 
Social Security benefits. Add to that the numbers of people on 
other assistance programs and you have a substantial, almost a 
majority of the population, that would be largely dependent 
upon government and upon the taxes of the children to support 
them. Of course our children would need to support their own 
families as well.
    Now the basic sources of these budgetary problems that I 
emphasize is a very high real growth rate built into programs. 
It is not the level of benefits that are currently being paid. 
It is the growth rate in these programs. Never before in our 
history have so many commitments and so much growth been 
scheduled in our laws literally for an eternity. Our laws now 
assert to our children that we know better today how to spend 
all of the revenues they have 10, 50, 100, even 200 years from 
today. Imagine, by the way, if at the time the Constitution was 
ratified that our Founding Fathers had put into the law 
provisions and promises on how to spend the revenues the 
government would collect today. When the Nation has 
dramatically increased its financial obligations in the past--
through wars, the Louisiana Purchase, assistance to workers and 
the unemployed in the Depression--if you think about it, the 
accompanying budgetary commitments were always temporary in 
nature no matter how large their initial impact. It is the 
permanence of these new obligations that is so different and so 
inappropriate.
    There are those who would argue that the automatic growth 
in programs doesn't matter. The plea is made that while we 
establish them we can get rid of them. What is wrong with 
making promises that might not be met, promises upon which the 
Congress would have to renege. Well, one problem is that of 
flexibility. New needs which must be funded out of new 
legislation are put at a dramatic disadvantage relative to old 
needs already prefunded out of old legislation.
    In summary, we have only begun our journey toward a 
domestic policy in which our children are allowed some choice 
as to what their government will do to meet their needs and 
those of their children. Getting our budget into surplus after 
years of large deficits has been a positive development. 
However, obliging the children of today to pay almost all their 
future Federal taxes as transfers to support the consumption of 
their parents is a recipe neither for citizen-led government 
nor for economic growth.
    Thank you.
    [The prepared statement follows:]

Statement of C. Eugene Steuerle, Senior Fellow, Urban Institute

    Mr. Chairman and Members of the Subcommittee:
    As a member of the baby boom generation, I grew up with 
individuals who, whether conservative or liberal, considered 
themselves idealists when it came to the role of the federal 
government. They might have disagreed over optimal size of 
government or degree of taxation, but they did believe that 
government should serve its citizens well and should promote 
civil rights, defend against totalitarianism, and provide 
opportunity, especially to the poor. Today this cohort has come 
into full power as members of the labor force, of business, and 
of Congress itself. It is ironic that the legacy that baby 
boomers would now bequeath is one where almost the sole purpose 
of the federal government would be to care for their 
consumption needs in retirement.
    I do not believe this legacy was intended. Yet it would 
come about under current law, under the President's proposals, 
and under many of the Republican and Democratic budget 
alternatives now being considered in Congress. It is largely 
the consequence of laws written decades ago that are 
determining almost all the spending priorities of future 
generations. The greatest difficulty with today's budget policy 
is not whether either the surplus or revenues are too large or 
too small, but that the law itself would deny to posterity both 
the right and the privilege to decide for itself the priorities 
and needs facing the nation.
    Let me use a few examples to convey the changes that are 
underway:
     Using today's prices, an average-income couple 
retiring in 1960 received about $100,000 in lifetime Social 
Security benefits. A typical couple retiring today would 
receive about $\1/2\ million in Social Security and Medicare 
benefits (about equal amounts of each). Average-income baby 
boomer couples, on the other hand, would receive around $\3/4\ 
million, and those who come later are scheduled as much as $1 
million (in today's dollars).
     If the number of workers per beneficiary drop from 
more than 3-to-1 to less than 2-to-1, as scheduled, the 
children of baby boomers would be required to finance many of 
these increases in benefits through taxes on their earnings 
from work. Out of every dollar in cash wages, the government 
already requires workers to pay 15 cents in Social Security 
tax, plus several cents in other taxes, to support elderly and 
disability programs alone. In the future that rate of tax could 
as much as double. This extraction of more and more out of each 
wage dollar has been taking place for a long time now; its pace 
merely increases once the baby boomers begin to retire.
     One reason for these rising costs is that Social 
Security and Medicare dictate the successive generations should 
receive higher levels of real benefits than all previous 
generations. For example, baby boomers are told that, 
regardless of other needs of the population, they are entitled 
to receive higher levels of real benefits from their children 
than they, the baby boomers, transferred to their parents--that 
this is an entitlement.
     Another reason that Social Security and other 
retirement programs take ever larger percentages of national 
income is that people are living longer and spending more years 
in retirement--almost a decade more than Social Security 
retirees in the early years of the program. Today individuals 
claim an entitlement to retire on Social Security for about 
one-third of their adult lives. More years of retirement also 
reduce the number of taxpayers for both Social Security and 
other purposes, thus raising tax rates on those still working.
     Within a few decades, close to one-third of the 
adult population will be receiving Social Security benefits. 
Add to those numbers the unemployed or unemployable, or those 
on other assistance programs, and a substantial portion of the 
adult population will be largely--in many cases, primarily--
dependent upon the children of today to support them through 
their tax dollars. Of course, our children will need to support 
their own families, as well, but the share of the budget 
available to meet the educational, environmental, health 
research, urban, justice and other needs of our children and 
grandchildren would be drastically reduced (see figure).

      Eternal Commitments of Program Growth for an Unknown Future

    The basic sources of these budgetary problems are the very 
high, real, growth rates built into programs. EVEN if we save 
all of the currently projected surpluses--something not even 
the President is proposing--and even if projected deficits were 
zero forever, we would not have gained control of our budget. 
That is, even if we could avoid the threat of mounting public 
debt in the future, there would still be no fiscal slack--
resources to be allocated according to current, rather than 
past, perceptions of needs. Never before in the history of our 
nation have so many commitments and so much growth been 
scheduled in our laws literally for an eternity. Our laws now 
assert to our children--indeed to all future generations--that 
we know better today how to spend ALL of the revenues they will 
have 10, 50, 100, or 200 years from today. By way of 
comparison, imagine if at the time the Constitution was first 
ratified our ancestors had put into law provisions and promises 
for how to spend all the revenues that the government collected 
today.
    Never before have dead and retired policy-makers so 
dominated officials elected today. And never before has so much 
of policy bypassed the traditional set of breaks applied 
through normal democratic decision-making. When the nation has 
dramatically increased its financial obligations in the past--
through wars, such enormous land acquisitions as the Louisiana 
Purchase, assistance to workers and the unemployed in 
depressions--the accompanying budgetary commitments were 
temporary no matter how large their initial impact. It is the 
permanence of our newer obligations that is so different and so 
inappropriate. It makes no more sense to commit today almost 
all of the future economic resources that will be available to 
government than it would be to decide today where to station 
all of our troops for the next century.
    How did we reach this state of affairs? The answer involves 
several factors. First, societal expectations were built around 
a higher rate of growth in the 3rd quarter of the 20th century 
than in the last couple of decades. Second, rapid growth in 
domestic spending as a percent of gross domestic product was 
also made possible through peace dividends and reductions in 
defense spending. Indeed, most of the domestic spending growth 
over this nation's entire history took place under Presidents 
Nixon, Eisenhower, Bush, and Truman, who presided over the 
spending of Vietnam, Korea, Cold War, and World War II peace 
dividends.
    But the drying up of peace dividends and slower rates of 
growth still do not explain our fiscal straightjacket. Even if 
the slower economic growth environment of the post-1973 period 
continues into the future, government revenues per capita, 
after adjusting for inflation, will still double within another 
half century, perhaps sooner if we are lucky and engage in good 
economic policy. Under normal circumstances, this increase of 
more than one trillion dollars in annual revenues (in today's 
dollars) would yield significant fiscal slack, projections of 
surpluses under current law, and new choices for our children 
and grandchildren.
    Given this revenue growth, the only way one can explain the 
fiscal straightjacket is that past policy makers essentially 
spent more than all of that growth by building more and more 
automatic growth into public spending programs. It would be one 
thing if they merely bought too many goods and services in a 
current year. Instead, they bought larger and larger levels of 
goods and services for decades and decades to come.
    Two areas have dominated the built-in growth picture in the 
United States and other industrial nations: health care and 
retirement security (see table). The demand for health care is 
virtually unlimited if we have no incentives to care about 
costs when we go to the doctor or the hospital, or when we buy 
insurance. Not that the costs aren't borne, they are simply 
shifted to other insurance buyers and taxpayers. Although most 
policy makers and individuals define a thousand or two thousand 
dollars of health expenses as catastrophic, average household 
expenses on all heath care goods and services is now around 
$12,000. Again, that's the average. Most government insurance--
and, until recently, most private insurance--hid these costs. 
This insurance has yet to impose adequate incentives, or, 
alternatively, constraints on prices and utilization to slow 
down the extraordinary growth in health costs--including growth 
in payments to doctors and other health care providers.
    Social Security and other retirement payments by 
government, in turn, have grown faster than the economy largely 
because of improvements in health and longevity. For a typical 
couple retiring today, Social Security benefits for the longer 
living of the two will last about 25 years. Those years of 
support would constantly increase under current law Thus, the 
cost of the program to workers has risen significantly because 
there are so many more years of benefits and fewer years of 
taxpaying.
    These longevity cost increases are added to programs 
already scheduled to grow significantly, because annual 
benefits to new retirees are indexed to grow as fast as average 
wages in the economy. This indexing system not only protects 
retirees against inflation--a worthy goal, in my view--but also 
promises each successive generation a higher standard of 
living. If benefits were held to a much more modest rate of 
growth, it could much more easily finance the retirement of the 
baby boomers.
    In effect, Social Security and Medicare have been designed 
for almost their entire history and for future decades and 
centuries to grow faster than the economy. Moreover, more 
economic growth doesn't solve this problem because if the 
economy grows faster, then so, too, do these programs. Yet it 
is impossible for any program to grow faster than the economy 
forever. Hence the perennial pressure on the budget.
    A political consequence of so much built-in growth is that 
it takes ownership of government away from current voters and 
their elected representatives. This debate is sometimes framed 
in the language of mandatory or entitlement spending. In the 
early 1960s, over \2/3\rds of spending was discretionary; today 
it is less than \1/3\rd and the fraction has been declining 
under both Republican and Democratic budget proposals alike.
    Proposals that depend upon the continuation of this type of 
decline in discretionary spending to continue, as would both 
the President's budget and many Congressional alternatives, 
simply has no theoretical or empirical justification. One can 
assume it only through a mechanical calculation that has no 
relationship to foreign threats, educational opportunities, 
transportation demands, the needs of the impaired and disabled, 
or other future domestic concerns.

         An Uneven Playing Field for the Setting of Priorities

    There are those who would argue that automatic growth in 
programs doesn't matter. The plea made is that, well, we 
established them, we can get rid of them as well. What's wrong 
with making excessive promises or committing the wealth of 
future generations as long as we can renege along the way?
    Backing up a crystal ball predetermination of future needs 
with the force of the state is not costless. Extra costs arise 
inevitably because of the uneven playing field among programs, 
between entitlement (including entitlement to permanent tax 
breaks) and discretionary spending, and among entitlements with 
different built-in growth rates. The impact of the vast 
differences in the way these types of spending are currently 
treated can hardly be overestimated. To restrain the automatic 
growth of entitlement spending requires what is really a super 
majority--the combination of a simple majority in the House, a 
simple majority in the Senate, plus the President's support 
(i.e., no presidential veto), or, alternatively, the 
combination of two-thirds majorities in both Houses. A super 
majority is now required to expand discretionary spending--that 
is, for our children to set their own priorities. Thus, new 
needs, which must be funded out of new legislation, are put at 
a dramatic disadvantage relative to old needs, already 
prefunded out of old legislation. This has been and continues 
to be a practical recipe for stultifying the responsiveness of 
government to change.

                                Summary

    In summary, we have only begun our journey toward a 
domestic policy in which our children are allowed some choice 
as to what their government will do to meet their needs and 
those of their children. Getting our budget into surplus after 
years of large deficits has been a positive development. 
However, obligating the children of today to pay almost all 
their future federal taxes as transfers to support the 
consumption of their parents is a recipe neither for citizen-
led government nor for economic growth. The size of the deficit 
or surplus has never been more than a symptom of the disease 
from which we suffer, and excessive attention to that number 
has detracted from dealing with the longer-term direction of 
policy.
    Current law still has built into it extraordinary spending 
increases of as much 7 percentage points of GDP in a few 
retirement and health programs within a little over three 
decades--and then even higher shares of GDP in succeeding 
years. It is this type of automatic growth that must be brought 
under control. Our focus must move beyond some narrow deficit 
or surplus target and toward building a government that is more 
responsive to the needs and demands of all ages.

Portions of this testimony are taken from The Government We 
Deserve, by C. Eugene Steuerle, Edward Gramlich, Hugh Heclo, 
and Demetra Nightingale (Washington, DC: Urban Institute Press, 
1998).

Any opinions expressed herein are solely the author's and 
should not be attributed to the Urban Institute, its officers 
or funders.
      

                                


           FOUR PRIMARY SOURCES OF GROWTH IN OLD AGE PROGRAMS

     Perpetual growth in annual benefits for each 
cohort of retirees
     Longer retirement spans
     Lower fertility rates (baby-bust/baby-boom/baby-
bust)
     Unlimited subsidies for health care
    [GRAPHIC] [TIFF OMITTED] T7366.001
    
      

                                


    Chairman Shaw. Thank you. Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman.
    Dr. Aaron, you speak favorably of the President's plan. I 
won't say ``glowingly,'' but favorably of the President's plan, 
and I think the President certainly put forward some positive 
proposals that we can look at and perhaps expand upon. But even 
if we take the President's proposal in toto, and even if all of 
the economic assumptions underlying his proposal are accurate, 
he still only extends the life of the program to 2055. That 
wouldn't take care of my 3-year-old or my 5-year-old. So, I 
mean it is not that great a proposal, is it, if it only--if 
everything works just right--and it only takes us to 2055, we 
are still left with a huge hole, aren't we?
    Mr. Aaron. You know I work for a think tank, I don't have 
to run for election. My colleague at Brookings, Bob Reischauer, 
and I did a book on Social Security reform. We proposed a menu 
more than sufficient to close the deficit for 75 years and to 
fund the program, with some benefit cuts, indefinitely.
    Now we all know there is a kind of game going on right now 
with everybody saying, ``You first,'' with the painful 
suggestions. The Republicans want the President to do it. He 
would like the Republicans to do it. I wish the President had 
included a fuller list, but I say that as somebody who is not 
in the rough-and-tumble political world. He said in his speech 
that he did not propose enough to do the job, and that is true, 
he did not. He called upon Members of Congress to join with the 
administration in fashioning other changes that will go the 
rest of the way. My own view is it doesn't take a whole lot of 
heavy lifting to finish the job, if you buy into the proposal 
that he initially put forward to transfer bonds to the trust 
fund. A variety of measures will get you to full 75-year 
balance and beyond. As I say, I wish he had included them. He 
didn't, but I think the key now is to sit down in good faith--a 
good faith incidentally that I think Members of the 
administration and Congress on both sides of the aisle have 
displayed up until now with respect to this issue. Everybody 
has been coming forward with proposals, they have been 
stressing the need for early action, the need for coming 
together and working jointly on this. And if that spirit can be 
maintained, I think one could build on the President's proposal 
to do the whole job, and you should.
    Mr. McCrery. Well, thank you. I just wanted to let you make 
it clear that you weren't endorsing the President's proposal as 
a fix for Social Security; you just think that some of the 
elements of it are good and we ought to look at those.
    Mr. Aaron. I think the proposal as presented is a large 
step in the right direction and, in particular, by defining the 
choice before the American public as ``consume it now or save 
it for the future,'' he has framed the issue in the correct 
way.
    Mr. McCrery. Well, and obviously we have agreed with that. 
I mean Chairman Archer and others on this Committee and our 
leadership have said we are willing to put 62 percent of the 
expected surplus aside for Social Security.
    Mr. Aaron. He actually puts about 88 or 89 percent aside.
    Mr. McCrery. No, not for Social Security he doesn't.
    Mr. Aaron. No, not for Social Security but for saving.
    Mr. McCrery. Well, part of that is as his USA accounts, 
which is like a tax cut. We are not opposed----
    Mr. Aaron. It is more like a mandatory pension plan, yes?
    Mr. McCrery. Yes, but it is kind of like a tax cut too. We 
kind of like that. So we are not averse to looking at something 
like that as well. As far as Social Security, just Social 
Security, it is only 62 percent. And we are willing to look at 
that. But there are ways other than the President has proposed 
to set that money aside. One does not have to simply buy down 
the debt currently to set that money aside. There are other 
ways to do that, and, I don't know if you saw Dr. Feldstein's 
column today in the Wall Street Journal--I think it was today 
or yesterday, in the last couple of days--but he brings up an 
interesting point about double counting some of the estimated 
surplus the President has proposed to set aside for Social 
Security. At some point you have to pay off those bonds, and 
even if it is 30 years down the road, you have to come up with 
cash at that point to pay off those bonds. So he is you are 
going to have to find the money somewhere in the budget or 
raise taxes to do that and to make sure that money actually 
goes into Social Security.
    Mr. Aaron. I don't know how Professor Feldstein could have 
written that column with a straight face. He has been proposing 
in his plan to use the funds in a way structurally, almost 
identical to the one for which he roundly criticized the 
President. I think there are people who have standing to 
criticize the President's approach, but he is not one of them.
    Mr. McCrery. Well, except that--if I may take issue with 
you just a moment--except that under Professor Feldstein's 
plan, the way he does recoup a large amount of that current 
expenditure is in the outyears people give back part of their 
Social Security benefit in return for getting from their 
individual account. And the President's proposal does not do 
that. The President's proposal does nothing to stanch the 
outflow from Social Security. He just leaves a hole there. So I 
think you might want to read it again and----
    Mr. Aaron. I have read it carefully, and actually Professor 
Feldstein makes Gene Steuerle's problem worse. The reason he 
makes it worse is that his plan increases in pension 
obligations payable in the future, increasing the transfers 
that have to be made to the inactive members of the population 
through pensions. And that would occur at the time when the 
baby boomers are retiring and at the time we face truly 
daunting deficits in Medicare. I am worried about the 
retirement of the baby boomers. I think we may have to trim 
back benefits somewhat, maybe not as much as Gene would like to 
do, but we are going to have to trim back benefits some. The 
last thing in the world you want to do at this point is to 
increase pension commitments.
    Mr. McCrery. Well, it is questions like this that we 
appreciate your input on.
    Chairman Shaw. The time of the gentleman has expired. Mr. 
Matsui.
    Mr. Matsui. Thank you, Mr. Chairman. I was going to ask you 
about Dr. Feldstein's plan, Dr. Aaron. Perhaps you can explain 
how this plan differs from the President's because that is the 
way I saw it as well when we had the White House conference and 
Dr. Feldstein had explained it or tried to explain it. At that 
time it wasn't quite formed. It was pretty obvious to me that 
he was using the tax cut for tax benefits that were really part 
of the Social Security surplus. Perhaps you can go into some, 
not too much, detail, but some detail on that.
    Mr. Aaron. Well, my concern about Professor Feldstein's 
plan comes in two forms. The first is the one I have mentioned. 
With the retirement of the baby boomers there is going to be an 
increasing financial burden on active workers to support 
retirees and the disabled, even under current law. I am very 
concerned about increasing pension obligations in the face of 
that baseline situation.
    The second source of concern is one to which the 
President's program has a partial answer. The Feldstein plan 
would depend for its success on permanent diversions of general 
revenues into pension obligations into the indefinite future. 
The President's plan has such a commitment for 15 years. Let me 
stress, 15 years is long enough. I don't think we can forecast 
accurately 15 years in advance, and events could well change 
within that period of time as they have in the past. But at 
least the commitment is limited.
    I am concerned therefore about the threat to future budgets 
that would arise from the unlimited commitment of general 
revenues that would occur under the Feldstein plan. In 
addition, there are administrative issues that have caused 
Professor Feldstein repeatedly to revise his plan as flaws with 
version N minus one have been called to his attention. I don't 
believe, even now, the administrative problems with the version 
that he has proposed have been fully resolved, but I confess 
there may be a new version later than the last one I saw.
    Mr. Matsui. Dr. Foster, you--talking about private 
accounts--what is the total dollar amount of the unfunded 
liability at this particular time, given current benefits over 
the next generation, 33 years?
    Mr. Foster. I don't know what the figure is. Perhaps one of 
my colleagues would know.
    Mr. Matsui. We have been given a number of about $8 
trillion. Is that number, Dr. Aaron, pretty accurate?
    Mr. Aaron. It turns out the actuaries can calculate these 
numbers in very different ways. Robert Myers, who is widely 
respected on both sides of the aisle, has an article in which 
he presents three estimates of the unfunded liability that 
differ by a ratio of about 4-1 from the highest to the lowest. 
Whenever you are running compound interest out into the 
indefinite future, small differences in method make enormous 
differences in the results. And those were the findings that he 
reported.
    Mr. Matsui. So it could be as high as $8 trillion but as 
low as perhaps, what, $2 to $4----
    Mr. Aaron. Under some methods of calculating it was on the 
order of $3 trillion.
    Mr. Matsui. OK. Maybe I can ask you this question then: If 
you have set up a private-account approach, can you move to a 
kind of a new system? How do you deal with this $3 to $8 
trillion? Perhaps there is a magic way to deal with that?
    Mr. Aaron. There is no magic way, and it is the reason why, 
at present, there is complete agreement among academic 
economists that privatizing Social Security does nothing 
whatsoever to raise the rate of return available to people. And 
let me explain why. It is not rocket science.
    The great bulk of the payroll taxes we now impose go to 
support benefits for current retirees and for those who will 
soon retire. I don't think there is a vote in Congress to pull 
the rug on those benefits. So we are going to have to pay them. 
And those benefits represent the unfunded liability, what we 
are talking about when we are talking about----
    Mr. Matsui. The $3 to $8 trillion?
    Mr. Aaron. Yes. What we are talking about when we look for 
higher rates of return is the investment of the payroll taxes 
that we levy above that base amount, currently about 20 percent 
of the revenues flowing into Social Security. We could invest 
those funds through individual accounts, we could divert them 
now. Of course, then we would have a problem meeting 
obligations in the future, but for the time-being, we could 
invest those funds in individual accounts or we could invest 
them, as the President proposed, through the trust fund, hiring 
private funds managers.
    On the average, in both cases, you are going to earn the 
average rate of return on the asset category. The only 
difference is that individual account management will be more 
costly, and therefore the net return available to support 
pensions when people retire will be smaller if we do it through 
individual accounts than if we do it through a centralized 
system.
    With respect to voluntary saving, I am all with those who 
want to expose people to financial market risk. With respect to 
the basic retirement program designed to assure basic income, I 
would like to see us get a fair return from a diversified 
portfolio in the administratively least costly fashion. And I 
believe the President's plan meets that test.
    Mr. Matsui. May I just ask one more?
    Chairman Shaw. Yes.
    Mr. Matsui. I want to thank the Chairman for giving me this 
one more opportunity here to ask a question. Dr. Aaron, in 
answer to the question posed by Mr. McCrery, you said the 
President starts off and he takes care of the problem until 
2055. And then you said we should get the additional 20 years 
out of it and that is where we can work on a bipartisan basis 
because my understanding of it, and I want to actually 
understand this and you can help me with this. That is where 
the pain will have to come into play. Either you have to raise 
payroll taxes or you have to make some adjustments on benefits. 
Is that a correct analysis of the next 20 years to get to 2075?
    Mr. Aaron. Almost exactly correct. The only qualification, 
and it relieves you a little bit more, is that there are some 
corrections in the Consumer Price Index that have not yet been 
implemented which, when implemented, will have the effect 
modestly of lowering the projected long-term deficit. So the 
problem isn't quite so bad. But CPI correction is not going to 
get you the whole way there, and when it comes right down to 
it, you are going to be talking about the sorts of proposals 
that have been discussed by virtually every plan. They appear 
in the CSIS plan on which Gene worked. They appear on the menu 
that Bob Reischauer and I put together; they appear in the 
three plans discussed by the advisory council. And none of them 
is fun.
    Chairman Shaw. Mr. Steuerle, you did some work regarding 
administrative costs. Do you wish to comment on Dr. Aaron's 
last answer as to the expense of these programs?
    Mr. Steuerle. I don't think there is any doubt that any 
unified organization has lower administrative costs than a 
diversified set of organizations. If we have one auto company, 
it is cheaper than if we have a lot of auto companies in terms 
of administrative costs. My fear is not so much on the 
administrative cost side. I think there are ways to set up 
individual accounts so the difference in cost is fairly 
trivial. Dr. Aaron is correct that there is some minor 
difference.
    What I can try to do, however, is offer a slight amendment 
on the explanation of what the President is proposing in terms 
of savings. The $2.8 trillion that is going into Social 
Security is going in under current law. This proposal doesn't 
change that at all. That is already the initial 62 percent, if 
you want, of the unified surplus. That is already going in. Now 
he claims that the Republicans would try to spend that amount 
as well, and so he is saying that relative to a profligate 
Congress he may be saving more. But relative to the current 
law, there is no saving there. He additionally says, let us put 
a liability in Treasury and an asset in Social Security. So we 
are going to make this transfer of another 62 percent of the 
budget. By some accounting, that is approximately 120 percent 
of the surplus.
    But forget about what the surplus is. The proposal is 
basically saying let us take another $2.8 trillion and let us 
throw that over into Social Security as an obligation of the 
Treasury. What that does, at least in that instance, is 
nothing. At that point, it is just an accounting change, but it 
obligates future income tax payers to support the Social 
Security system on top of what the Social Security taxpayers 
would provide. Now how did the President claim that this would 
still be a benefit? Well, he is claiming that if you do this, 
that this will deter Congress from spending that amount of 
money. And so, therefore, if you look at the graph at the back 
of my testimony, you will see a little part where the net 
interest costs to the government go down even while all these 
Social Security, Medicare and Medicaid costs rise. And so over 
this period of time, you still have all these rising costs, you 
still have a budget that is dominated by Social Security, 
Medicare and Medicaid because the President doesn't propose to 
cut back on any of these. In fact, he proposes several 
expansions in terms of drug benefits and help for the elderly 
poor and some other things. So he doesn't propose to reduce 
those at all, but he does say that if we reduce these interest 
costs over time then there is more money left over that we 
would have otherwise paid in interest cost that we can now 
devote to these programs.
    Chairman Shaw. Mr. Hulshof.
    Mr. Hulshof. Thanks, Mr. Chairman.
    Dr. Aaron, I recognize that in the interest of time that 
you had to confine your remarks, and not able to go into your 
entire testimony. I have been trying to flip through to make 
sure I understood. And first of all I really appreciate your 
use of the term ``fiscal incontinence.'' I would ask your 
permission to use that in my next speech back home when we talk 
about Social Security.
    I do want to talk a little, though, about this discussion 
that we have begun--I am sorry--the discussion we have been 
talking about as far as the unfunded liability. Do you agree 
with the actuarial number of the year 2013 as generally the 
year that the Social Security benefits we pay out are going to 
outpace the Social Security taxes we bring in? Is 2013 the year 
that you would say is the accurate number?
    Mr. Aaron. I say nothing independently. I listen to the 
actuaries, and last year's Trustees' Report had that year.
    Mr. Hulshof. Assuming the year 2013 for the purpose of this 
question, does the President's proposal change that date?
    Mr. Aaron. It probably doesn't change it materially. The 
reason I say probably is that I have yet to see the 
implications of his proposed change in the retirement test, 
which might have some effect on cash flow in the short run.
    Mr. Hulshof. As Mr. Matsui pointed out--and I think even he 
limited it--and most of us consider as we talk about wanting to 
pay full benefits to Social Security then either we (a) cut 
benefits or we raise Social Security payroll taxes----
    Mr. Aaron. Could I qualify my answer to that?
    Mr. Hulshof. Surely.
    Mr. Aaron. It would have an additional effect. I don't know 
whether it would move it by a year or two, or what the story 
would be, but if you can boost the yield on reserves held on 
behalf of Social Security, that wouldn't affect tax revenues, 
which is the way you phrased your question.
    Mr. Hulshof. Right.
    Mr. Aaron. It would affect income flowing into the system. 
So it wouldn't affect--the answer is it wouldn't affect the 
answer to the question you posed.
    Mr. Hulshof. We talk about, do we cut benefits as a choice, 
do we raise the payroll tax? I guess we could continue to 
borrow. Or third, and let me see if I am reading your 
testimony, at least between the lines, that we can improve the 
program by infusing it with more general revenue. Is that 
right? So we are talking income taxes.
    Mr. Aaron. I think Gene and I would agree that the effect 
of the President's proposal is to provide general revenues for 
Social Security in the long run. My explanation for that is 
that early in the life of both Social Security and Medicare we 
paid out benefits vastly larger than taxes people had paid 
could possibly have justified. That generated the unfunded 
liability. We are going to have to pay that unfunded liability 
one way or another. We can ask payroll taxpayers to pay it or 
we can ask income tax payers to pay it. And the President is 
saying that he thinks at least in some measure this was a 
commitment of the Nation the cost of which ought to be borne in 
proportion to income-tax liabilities.
    Mr. Hulshof. If your position is, or if we have this 
general discussion about infusing general revenue, that is 
income taxes, into the Social Security system in the future, 
why not just lift the wage cap? Why not just lift the Social 
Security payroll tax cap at 72.6? That way, and even though you 
are paying more into the system and your benefits that you are 
going to get are higher, why not approach it from that angle 
rather than looking at the income tax?
    Mr. Aaron. I think it is a judgment call. Right now, we 
already have sizable projected budget surpluses. In that 
situation, it is harder I think to call for an immediate tax 
increase, although I expect there are going to be people who 
will call for it. And it may end up being part of a compromise 
package at the end of the day. I don't know.
    But the big question, I think, is the one I defined, I 
think. Do we, in effect, reserve the surplus in some fashion to 
boost national savings or do we spend it? And I interpret the 
President's whole speech as an effort to advance us down the 
road toward saving nearly all of the projected surpluses, 
substantially to boost national saving. It is the funds to 
Medicare, the funds to Social Security, the USA accounts--all 
of those will tend to boost national saving. And that is a big 
question, a big issue. Should we raise taxes some more?
    You can make the case, and some people, mostly among the 
Democrats, argue that we should raise the wage base to restore 
the proportion of earnings covered by the payroll tax. I think 
that is a defensible position. But it would probably be 
embedded in that final tier necessary to get us the remaining 
20 years along with, I suspect, some benefit cuts that might 
have more support from different quarters.
    Mr. Hulshof. Thank you, Mr. Chairman.
    Mr. Steuerle. Mr. Chairman, can I make one addition? I do 
think the point is important that as this Subcommittee 
considers proposals. Let me reiterate what I think both Dr. 
Foster and Dr. Aaron say: none of these proposals is fully 
developed to date. We know that the real work is for people on 
this Committee and this Subcommittee in terms of the drafting. 
There is a distinction in terms of using income tax and general 
revenues to fund a transition to a more permanently stable 
program in proposals that make permanent use of the income tax. 
One of my fears with the President's proposal--because it 
doesn't use any funds for the transition or it doesn't use any 
of the benefits of the USA account to change anything else in 
the system--is that it puts Social Security in permanent 
dependence upon income-tax revenues if you actually divided 
this world into Social Security budget and a non-Social 
Security budget. It is not the only one, by the way. There are 
a lot of proposals out there that leave Social Security in what 
I would call a permanent state of deficit that is only financed 
by constantly having general revenues having to run a surplus.
    Now if we do enough saving up front, some people say that 
is fine. For long run fiscal policy, I think it is a bit 
dangerous. It would be like saying we could have run the 
deficits of the eighties because Teddy Roosevelt put aside a 
lot of National Park land and our wealth is much greater today. 
Now our saving is much greater, so we can now run deficits. I 
think there is a danger with this permanent deficit scenario. 
However, I distinguish between that and proposals that would 
give you some temporary general revenue infusion to try to help 
finance this transition, this unfunded liability that we have 
been talking about.
    Mr. Aaron. What Gene has just said is the reason why I 
think it is important to do the final 20 years of the fix. Then 
you can hold the President, and future Congresses can hold 
future Presidents to this 15-year commitment, and you are done 
with it. If you don't fix it up the rest of the way, then I 
think there is a danger of the outcome that Gene just 
described. I think it would be undesirable. More importantly, 
you know the answer the young lady gave up here when asked 
about what do young people think about Social Security. And she 
said, it is not Social Security, it is the government they are 
suspicious of.
    I think it is vitally important for members of both parties 
in the long run that the American public have confidence that 
you folks know how to do your jobs well. And toward that end, I 
would hope that when Congress is finished with its work, you 
can, from both parties, stand up and say to the American 
public, we fixed Social Security. It is going to take awhile 
for you to really give credence to what we have done, but over 
time you are going to understand we fixed it so that it will be 
there for you. And if you can do that, you will have done, I 
think, a bigger service than saving Social Security, you will 
have restored a measure of faith and understanding that this is 
a democracy in which the elected officials do the people's 
work.
    Chairman Shaw. Dr. Aaron, I can't help but also observe 
with regard to Ms. Kramer that she did say that she showed a 
lack of trust in the government but then she supported the 
program that would have the government doing the investment, 
which I think is of some concern as to how you ward off certain 
attacks upon the type of investments. Anything we do would have 
to have transparency. And who is to say we are not going to get 
a lot of politics in it? What about investing in an oil company 
that does off-shore drilling and have the people in Florida all 
go crazy about it? What about the question of tobacco 
companies? What about the question of corporations that may not 
be politically correct as far as their hiring practices? I mean 
the list goes on and on, and this is the concern of many of us.
    The fact that it is insulated today doesn't mean that you 
are not going to have a bill pass on the floor of the House and 
Senate and signed by the President tomorrow that would prohibit 
any of these investments in some of these areas that are not so 
politically correct. And this is the problem that I see of 
mischief that we would have the Federal Government blacklisting 
investments in certain companies. What about the question of 
accusations, whether they be true or not, as to big 
contributors getting big investments? I mean the thing is just 
loaded with fish hooks, and I think those are some of the 
things that we have to consider in making these things.
    I can see, and I am not one to say that the President's 
plan is dead on arrival--I applaud him for even bringing in the 
private-sector investments into the formula, whether it be by 
direct investment of the Federal Government or individual 
savings accounts or perhaps coming up a hybrid, such as 
investment in large pools. But the question is, how do you 
detach investment in the private sector, detach it from 
political considerations? And that is the big question. If we 
can get over that hurdle, then I think we can start a 
meaningful dialog.
    With that, I will recognize Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. It is great to have 
these great minds of Social Security and savings in general 
before us. I wish we had a few more hours.
    I wanted to ask a few questions about savings rates 
generally. And I know this is not the topic of Social Security, 
but the President has thrown the USA accounts on the table and, 
as Dr. Aaron says, I think there is a consensus among 
economists--right, left, and center--that until we increase our 
personal savings rate net increase, we are not really going to 
be able to solve this problem because that will give the 
economic growth that we will need to sustain ourselves through 
the baby boom years. My concern about the USA account is very 
simple and that is it is going to displace existing savings. My 
focus is on the pension system, particularly the employer-
sponsored pension system. Also on the other leg of the stool, 
the IRAs and so on. I just wondered if all three of you could 
comment briefly on whether you think the USA accounts would 
indeed displace what is going on already and what all of us are 
tying to promote in the 401(k) world and IRA world and so on.
    Dr. Foster, you want to go first?
    Mr. Foster. I don't think there is any question that there 
will be some displacement, and there is also no question that 
if you asked a number of economists who study saving behavior, 
they are going to give you a wide range of estimates of what 
that displacement would be. That doesn't mean that we shouldn't 
go about increasing incentives to save, whether it is USA or 
expansion of IRAs or what have you. There may be some 
displacement of saving one form for another. That also means 
there will be some additional saving, and that is an important 
objective.
    Mr. Portman. My concern is that currently you have, in the 
case of the employer-sponsored plans, of course, an employer 
match that may in fact be lower. I mean if you are a small 
employer and you are struggling to provide this SIMPLE, Savings 
Incentive Match Plan for Employees, plan or 401(k) plan and you 
have got this other option out there, now you are sort of 
saying, gee, I will let the government do it. And from what Dr. 
Steuerle says, we are indeed coming to a point where we are 
talking about general revenues for us--I am at the other end of 
that spectrum on the baby boomers. And the last thing we want 
to do is discourage private investment in savings, whether it 
is the employer match or whether it is the individual saving on 
their own.
    But I understand what you are saying, you could end up with 
slight net increases, but you might have less private-sector 
involvement. There might be ways for the government to make an 
investment. I like it by expanding contribution limits and 
simplifying and putting some new vehicles out there like a Roth 
401(k) and other things. I think that would be a much more 
efficient way for the government to invest rather than putting 
money on a matching basis into account.
    But, Dr. Aaron?
    Mr. Aaron. I think the concern you raise is a real one. 
There are ways of designing the program to minimize the offsets 
which will be there inevitably, as Mr. Foster said. First of 
all, low-income Americans, low earners, just don't save 
voluntarily very much at all. It is not, as Mr. Foster said, 
that they just don't have the resources--they managed to save 
quite nicely from lower-disposable incomes 30 and 40 years ago. 
The problem is that they are bombarded with an array of 
temptations to consume today. We all are. And like all mortal 
people, they succumb to them. Consuming is chic; saving is not.
    One of the great potentials, I think, of the USA account is 
educational exactly along the lines of Mr. Anderson, they can 
show people that you can accumulate even if it occurs slowly, 
that compound interest works on your behalf, that savings gets 
you nearer to achieving some target that you had wanted but 
didn't think you could reach, and therefore you save a little 
more on your own. I think there could be some crowding in as 
well as crowding out through that mechanism, but you have got 
to be careful in the design to avoid having the plan tell 
private companies they can get out of the pension business now. 
I don't think many small employers are going to face the 
temptation because very few of them, as a practical matter, now 
provide this coverage.
    But I think there is an education function if you can focus 
USA accounts and include an educational component with them. I 
would suggest rules that say balances are not just for 
retirement 40 or 30 years from now, but can be used to help 
people buy a first home, to send their kids to college, to help 
them start a business. The wealth-creation ideas that have been 
popular mostly on the Republican side of the aisle have some 
real resonance and could be advanced by the USA accounts.
    Mr. Portman. Just two quick comments. First, I think if it 
is not just for an annuity or just for retirement, I think then 
you get into this issue again that Gene has raised, which is 
that is our crisis now, that is the problem we are trying to 
deal with, and although I understand the need to increase 
savings, and maybe there will be more attractiveness in such an 
account if people could use it for other purposes, but it 
doesn't solve the problem. And the question is, how should the 
government be investing? Is it wise for the government to take 
on the role as you say of the employer?
    Mr. Aaron. Let's face it, under the USA accounts, the 
government is going to be in much the same position that the 
trust fund would be. The accounts are going to be much too 
small for a long period of time to allocate them to private 
funds managers on an individual basis. Administrative costs 
would kill you. You will have to maintain a central fund, at 
least until balances reach some threshold level, at which point 
you could give people the option of moving out into individual 
management. But if you want to have these funds actually 
generate some real saving and not get chewed up in 
administrative costs, the USA account is also going to have to 
start with some kind of central fund.
    Mr. Portman. I know Gene has done some work on this, but 
there are also some other ways to do that through the private 
sector, through a regulated system, that is highly regulated 
but does not have the government investing.
    One other quick point: Many of the same positive 
characteristics you note on a USA account would of course apply 
to a personal savings account with some percentage of payroll 
on a voluntary basis, particularly aimed at lower wage workers 
that Dr. Foster talked about earlier.
    Gene, did you have a comment on that?
    Mr. Steuerle. Mr. Portman, I came to this town around 1974, 
starting at Treasury's Office of Tax Policy, and I don't think 
a year has gone by where we haven't added some new saving 
incentive into the tax system. Today the private saving rate is 
zero. So I think that warns us that we have to be awfully 
careful. And this has been both on the Democratic side and the 
Republican side.
    Mr. Portman. I will also say that one other statistic just 
for those listening which is that the amount of benefits paid 
under the private, employer-sponsored pension system exceeded 
those benefits paid under Social Security. And we give short 
shrift to that, I believe.
    Mr. Steuerle. That is correct. That doesn't mean that we 
don't want to encourage saving and deal with this. What I see 
in both individual-account proposals and in the President's USA 
proposal is a chance to try to extend the Social Security 
debate into the broader debate, which is that we also really 
need to extend saving, and private pension saving. And the 
private pension issue has really not been on the table. We have 
tried it a couple of places--in the NCRP, the National 
Commission on Retirement Policy and a couple of other places--
to put some private pension proposals on the table. But, by and 
large, the private pension reform--reform of a system that is 
really only covering now about 30 or 40 percent of the 
population--hasn't really been on the table. And I see these 
accounts as a possibility of bringing in that debate.
    Let me add, however, having made my earlier comment about 
our ability to manipulate saving, is there are limits on that 
ability because in the private economy people can offset 
whatever we do. They can save less in a different account. A 
lot of the money that went into private pensions over the past 
30 or 40 years has also funded this vast expansion of credit 
cards. So people can borrow on the other end. In a private 
economy, you can't totally control saving. And that brings me 
to one of my greatest fears.
    If you look at what is causing the Social Security problem 
to come to a head, the basic issue is a labor-force problem. It 
is this decline in workers from about 3-1 to 2-1, as long as we 
keep retiring for a third of our adult lives. We think that we 
can rely on a smaller and smaller population to take care of 
Social Security, but there is a limit on how much we can build 
steel mills to offset the decline in steelworkers. If there 
aren't any steelworkers, we can build steel mills until we are 
blue in the face and we are not going to produce much. And so 
my fear is trying to rely entirely on saving proposals. It 
gives this nice idea that, boy, we can really ``grow'' the 
economy, as we love to say. We can grow the economy and solve 
everything and we don't have to make hard choices.
    Yet it is fundamentally a labor-force problem, and the 
saving has to be put into perspective. It is something we want 
to encourage more of. You need to save a lot more if you are 
going to have retirement. We need to fix up our private pension 
system. It would be a lot better in Social Security and other 
congressional bills in which there are future liabilities that 
we put money aside today instead of just making promises for 
the future. That is a pure matter of budget policy, but we 
still have to be very careful about not setting up the system 
so that it depends too much on our hopes as to what we can do 
with saving coming to fruition. We just don't know, so we still 
build a basic system--a basic benefit system, especially for 
low-income people who are not going to get a lot of these 
private savings, no matter what we do. For the bottom 30 
percent of the population, we build a basic system that is 
almost better than current law and then we try to build up much 
more saving in the middle class. Then finally we recognize that 
we have to deal with this labor-force issue.
    Chairman Shaw. I have just one question. This might go down 
as the dumbest question asked today, but I am sensing a common 
thread through this panel, although we seem to be highlighting 
the differences of opinion. I would like each of you to answer 
this starting with Dr. Foster. We have got a wealth of 
education sitting before us at this table. Do you think that 
you three gentlemen could sit down and draft a plan of 
investment in the private sector as part of a Social Security 
bailout plan that would be supported by the President, the 
moderate to conservative Democrats, and the majority of the 
Republicans?
    He will have to make that point to call himself. Dr. 
Foster. You think there would be any possibility of that?
    Mr. Foster. Yes sir, I do. I really don't think----
    Chairman Shaw. Watch out, I may ask you to do it.
    Mr. Foster. I thought about that. That is why I paused. I 
really don't think we are as far apart as sometimes our 
rhetoric tends to lead us. We all agree on what the basic 
problems are. We have got the solutions down to a fairly narrow 
range where it gets down to really one big issue: Is the money 
going to be invested in Social Security per se, in government 
bonds, or are individuals going to control the money? That is 
the central core issue. That is what we have boiled the whole 
thing down to. And as all things, we will probably end up 
compromising on that. So I think we would be able to do so.
    Chairman Shaw. Dr. Aaron.
    Mr. Aaron. I don't think the three of us could agree. But I 
think perhaps one or more of us could design a plan that would 
meet your test of winning approval from the President and the 
majority of Congress. [Laughter.]
    Bob Reischauer and I tried very hard to work through an 
institutional framework that would meet the very legitimate 
concerns you expressed, Mr. Shaw, with respect to investing a 
portion of the trust funds in private stocks. I think if we sat 
down and went through that plan and considered the nature of 
risks under that plan and under a system of individual 
accounts, I believe that I could persuade you and, I think, the 
majority of Members of Congress that it was possible to design 
a set of institutions for such investment that would be a safe 
and as immune--not completely immune--but as immune to 
political interference as would be a system of individual 
accounts.
    Chairman Shaw. Dr. Steuerle.
    Mr. Aaron. Let me just add one more point that I think is 
important to keep in mind. The President's proposal, with 
respect to investing in common stocks, is very, very limited. 
At its maximum, the proportion of stocks outstanding that would 
be held in the name of the trust fund administered by private 
funds managers would be smaller than the current proportion of 
stocks managed by the Fidelity family of funds. We are not here 
quaking over the possible seizure control of the American 
economy by the Fidelity family of funds. Under the President's 
plan, authority would be diversified among a number of private 
funds managers, not government managers but private funds 
managers, much as they are with every family of funds. And the 
total holdings would be very modest. Therefore, I think the 
concerns that undue influence could be exercised would be 
minimal and I believe there are institutional safeguards that 
would present you and your successors with a set of choices 
that would make it most unattractive to vote in favor of the 
bill you described to bar or require investments in a 
particular company.
    Chairman Shaw. Dr. Steuerle.
    Mr. Steuerle. Mr. Shaw, I think the three of us could come 
close. I would say that one of our principal limitations is 
that you and your colleagues are going to have to avoid those 
people who draw lines in the sand. That is our biggest 
obstacle. When I was at the President's White House conference, 
I indicated that some people say we can't have reform unless we 
have individual accounts, and other people who we can't have 
reform without the accounts. So with or without the accounts, 
we can't have reform. Then there are people who say we can't 
have reform if touch benefits at all. And so these lines in the 
sand are working against reform.
    Let me indicate the type of thing we did at the National 
Commission on Retirement Policy. First let me be quite blunt, I 
think other commissions that I have seen around this town have 
been badly set up. When you set up commissions, you stack them, 
and you stack them with people who are willing to compromise 
and reach a solution. And if you put on them people who are 
trying to represent every interest group and not willing to 
compromise, you don't get anywhere. But I am not saying that 
the NCRP commission was perfect.
    There were people on that commission who felt very strongly 
about individual accounts. And so we did add an individual 
account. There are people who don't like it; they fear its long 
arm of political repercussions. But I proposed to deal with the 
other issue that I know people worried about the individual 
accounts, and that is reducing risk, especially for old, poor 
people. What we put on there was a new minimum benefit that I 
am told by the Social Security actuaries--this is a rough 
estimate--increased what is called the primary insurance amount 
for about 10 percent of males and about 50 percent of females. 
Now a lot of those females receive spousal benefits. So that is 
not the number of people who got increases in benefits. And 
there were retirement-age increases in there too. So I don't 
want to imply that everything we did protected some people from 
paying costs. But it shows that if you combine proposals, you 
can do several things simultaneously, like increase individual 
accounts, and help the poor. If your fear of individual 
accounts is adding risk for low-income people, you make other 
changes elsewhere to set up minimum benefits. And it is that 
type of compromise that I think that would allow one to reach a 
final solution. But we can't get there if these lines in the 
sand prevent us from taking any of these steps.
    Chairman Shaw. Well, I haven't detected any lines in the 
sand with regard to the three of you. If you would care to 
pursue, I would like to hear from you. I feel a little better 
about the possibility of coming out of this hearing then I did 
coming into this hearing because of different camps being set 
up that seemed to be inflexible. However, I think that we have 
made some groundwork here today and I appreciate your being 
here.
    Mr. Becerra. Mr. Chairman.
    Chairman Shaw. Yes, sir.
    Mr. Becerra. Could I be allowed to ask a couple of 
questions, Mr. Chairman?
    Chairman Shaw. Just a couple. I am going to go ahead and--
--
    Mr. Becerra. I will limit it to one question. It will be 
very straightforward. I thank the Chairman for the indulgence.
    I know that most of you have expressed some opinions about 
what components could make up a good package for reform of 
Social Security. Mr. Aaron, I have read most of your book and I 
know that you have identified some of those components. Mr. 
Steuerle, I believe a lot of what you have done was the 
principle by which the Stenholm and Kolbe legislation was 
introduced in the last Congress. Dr. Foster, I am not really 
certain whether you have helped pull together a package, but 
would any of you be interested in trying to tell us what would 
be in your package of Social Security reforms to get us to that 
75 years that we need.
    And fortunately, as Dr. Aaron said, you are not politicians 
and you can probably speak publicly. I was wondering what would 
be in your basket of goodies to try to resolve the problem for 
Social Security. Please answer as briefly as possible.
    Mr. Aaron. Well, notwithstanding Mr. Shaw's statement about 
the risks associated with investment in common stocks, I would 
begin with supplementing the President's budgetary transfers 
with proposals to invest a larger proportion of the trust fund 
in common stocks than the President proposed. I think he is 
being exceedingly moderate and very cautious--too cautious to 
my taste. In addition to that, there are a variety of benefit 
cuts that deserve serious consideration. One would be removing 
the hiatus, the break, in the increase in the age at which full 
benefits are paid. That would contribute modestly to closing 
the deficit. Slightly extending the benefit computation period 
would contribute somewhat to closing the deficit. It would also 
work to the disadvantage of women, and to deal with that I 
think it is important for any proposal to include the provision 
to which the President alluded in his speech, an increase in 
benefits payable to surviving spouses. The group among the 
elderly that is most needy are elderly widows. That reform 
could go some way toward meeting that problem. It costs money. 
It would deepen the projected deficit and make the problem a 
little harder to solve, but I think it should be included.
    Reischauer and I also proposed moving the provisions with 
respect to taxation of Social Security benefits to parallel 
with those applied to contributory private pensions, which is 
basically what Social Security is. We saw no reason for having 
differential tax treatment. We did not include, but I know 
there has been much discussion of the item that was mentioned 
before, somewhat increasing the wage base in order to restore 
it to previous levels the proportion of earnings covered by the 
payroll tax. If you did those things, together with what the 
President has proposed, you would overfinance the system. Some 
benefit cuts, some revenue increases, and the system would be 
overfinanced for the next 75 years. What I have described, 
then, is something that you could start with and then carve out 
those provisions that seemed to you objectionable, that you 
didn't really feel you wanted to support. You could still end 
up with a program to correct fully the projected long-term 
deficit.
    The one thing that I would not do, and I think the 
gentlemen on each side of me would do, and the President has 
declared firmly he would oppose, is carve out any portion of 
the payroll tax to support individual accounts. And this gets 
back to a question Mr. Matsui asked in the first panel. Let me 
work the arithmetic briefly.
    Revenues are 13 percent of payroll more or less, benefits 
are 15 percent of payroll more or less. Disability and 
survivors benefits are about a third of benefits, or about 5 
percent of payroll. Let's suppose we maintain those. We don't 
cut disability or survivors benefits. That means we are 
spending 10 percent on retirees benefits, and there is 8 
percent of the payroll tax left over to cover retirement 
benefits. That would mean a 20-percent initial shortfall in the 
retirement program. You could also solve that by cutting 
benefits 20 percent across the board. You could also solve it 
by increasing taxes 25 percent across the board, 25 percent of 
8 gets you to 10. If you take 2 or 3 percent out of the payroll 
tax, you have converted what is a significant problem 
financially into a huge one with respect to the basic Social 
Security program. Chop out 2 or 3 percent from the payroll tax, 
we are looking at 40- or 50-percent cuts on the average in that 
basic retirement program. I think it is for that reason the 
President did draw a line in the sand on carve-outs. I think he 
indicated very clearly he would not support such a plan. I 
think was correct to do so for the reasons I have indicated.
    Chairman Shaw. Mr. McCrery has another question.
    Mr. McCrery. Just following up on that scenario, though, 
Dr. Aaron, at least for the short term, and I am speaking in 
the next 10 to 15 years, we could cover that give-back with the 
surplus quite easily. So you wouldn't actually have to carve 
out any of the 12.4 percent, you would in essence be doing what 
the President proposes and take $700 billion and he wants to 
put it in the stock market, controlled by the government, we 
might want to take that the $700 billion and give a 2-percent 
rebate to individuals to invest in the stock market. So it is 
doable in the short term, over the short term at least. Long 
term, admittedly, you have a problem, just as the President has 
a problem with his proposal.
    Mr. Aaron. It is different though because the President 
returns these funds to Social Security and thereby increases 
the capacity to deliver on assured basic income. If you move 
the funds into a private account, people will be exposed to 
financial market risks and the program that provides assured 
basic income would have to be cut 40 or 50 percent, in the long 
run.
    Mr. McCrery. Well, not necessarily. Not if you tie the 
account back to their Social Security benefits, which we could 
do. But, let me get to my question because you seem to very 
familiar with the President's proposal, Dr. Aaron.
    I think I read that the President's proposal to invest 
about $700 billion of the surplus in the stock market only gets 
us about 5 years of additional solvency in the Social Security 
Trust Fund. Is that right?
    Mr. Aaron. My recollection was five or six.
    Mr. Steuerle. Just to clarify, the Deputy Secretary of 
Treasury recently was in a meeting where he said, ``Well, you 
know, we didn't solve all of the problem. Congress could do 
several things.'' And he listed three or four. He said the last 
one is benefit cuts or tax increases, which he said you 
probably don't want to do, implying those are hard choices. He 
said what you might want to do is increase the percentage of 
the trust funds invested in the stock market and you might want 
to make an even bigger transfer of obligations of Treasury over 
to the trust funds.
    So be careful with the notion that this is a very limited 
risk that is going to be put on the population. The 
administration is already offering to increase that risk. I 
would just like to say that the risk of stocks are there no 
matter what. The question is who bears the risk? And one of my 
concerns, whether it is individual investment or public 
investment, is that we think closely about who bears that risk, 
and that we put the risk on people who, if the stock market 
falls, can bear it. The danger I find in a pure public plan 
where the government invests is the burden it implies for the 
nonelderly, who in many cases are poorer than many of the 
elderly, particularly the young, middle-aged people in their 
late sixties who I really don't think are elderly anymore. If 
we put the risk on young people rather than old people, and if 
the stock market does fall and they must cover those 
liabilities, I think that could be a big mistake.
    Mr. McCrery. Well, that is the point I was going to make. 
Dr. Aaron himself said he would prefer to put a much larger 
percentage of the surplus into the stock market, and the point 
is we are only getting 5 years out of the President's proposal. 
So to really get a lot of work out of that, you would have to 
put a lot more of the surplus into the stock market, and then 
you really do get to the question of to those who have concerns 
about having the government putting money in the stock market 
you are going to really control more than Fidelity does.
    Mr. Aaron. No. If you increase it, it would be more than 
Fidelity. But the point is the President's proposal is less 
than Fidelity.
    Mr. McCrery. Yes, but the point is, how long could we keep 
it at that if indeed it does increase returns to the trust 
fund? Boy, that is an easy way out. Let's do more, and then as 
you do more you increase the risk.
    Mr. Aaron. Well, you know there is an argument in terms of 
just plain justice for doing it. It is a simple argument. You 
and I, if we have a pension plan, we insist that our pension-
fund manager invest in a diversified portfolio. Part of it will 
be in common stocks, part bonds, maybe some real estate. The 
reason is we understand that the combination of risk and return 
is best when you have a diversified portfolio.
    Two-thirds of the Social Security beneficiaries get more 
than half their income from Social Security. Twenty percent get 
100 percent of their income from Social Security. For most 
Americans, the only way to get access to a diversified 
portfolio and enjoy those returns combined with assured basic 
income is through Social Security. So my fundamental reason for 
favoring this approach is that I want my assistant at 
Brookings, who makes a small fraction of what I earn, to have 
access to the same kind of investment diversification that I am 
able to enjoy through other investments. That can happen, I 
believe, safely, with appropriate institutional safeguards 
through Social Security.
    Let me say in that connection, you know the whole system of 
government we live under, starting from the Founding Fathers is 
built on a suspicion of people in places of authority. Our 
Constitution is designed with checks and balances to minimize 
those risks. I think it is vitally important that any system 
that you might design for such investment be replete with 
protections and safeguards preferably that have a demonstrated 
record of success.
    And I believe there are two models that provide such 
assurance. One is the thrift savings plan of the Federal 
Government and the other is the Federal Reserve System, which 
manages something at least as sensitive as these investments, 
namely monetary policy. They have stayed independent of you 
guys. I don't see a stampede on your part, Chairman Shaw, to go 
to the thrift savings plan and tell them where to invest. Nor 
do I see any successful attempt by Members of Congress or the 
President to influence monetary policy. And the reason is we 
have set up those institutions in a way to make the political 
cost to you folks of trying to do that simply insupportable. 
They have worked for decades. They can work in this situation 
as well.
    Mr. McCrery. Thank you, Mr. Chairman. Thank you.
    Chairman Shaw. That will be the last word. I thank you 
again for being here. If you care to spend more time together 
and try to work up something you could agree on or at least 
come up with some type of a draft that you could critique, we 
would appreciate it. Your knowledge is vast in this area, and I 
am very impressed with your testimony.
    Thank you, and we are now adjourned.
    [Whereupon, at 5:48 p.m., the hearing was adjourned.]



                         PROTECTIONS FOR WOMEN

                              ----------                              


                      WEDNESDAY, FEBRUARY 3, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:30 p.m., in 
room 1100, Longworth House Office Building, Hon. E. Clay Shaw, 
Jr. (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

FOR IMMEDIATE RELEASE                      CONTACT: (202) 225-9263
January 27, 1999
No. SS-2

                  Shaw Announces Second Hearing in the
                        Series on Impacts of the
                     Current Social Security System

    Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on 
Social Security of the Committee on Ways and Means, today announced 
that the Subcommittee will hold the second day in a hearing series on 
impacts of the current Social Security system. On this occasion, the 
Subcommittee will examine Social Security protections for women. The 
hearing, which began on Tuesday, February 2, 1999, will be continued on 
Wednesday, February 3, 1999, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 2:30 p.m. Subsequent 
hearing days will be announced separately.
      
    In view of the limited time available to hear witnesses, oral 
testimony will be from invited witnesses only. Witnesses will include 
Social Security experts and representatives of organizations interested 
in women's retirement security. 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:

      
    Working and earnings patterns of women are often interrupted by 
childbearing or care of older relatives. These interruptions afford 
women less opportunity to accumulate pension savings for retirement. As 
a result, many women retire with little or no pensions savings. By the 
mid-nineties, only 18 percent of senior women received pension income, 
with annual benefits of only 40 percent of men's. Moreover, women have 
longer life expectancies than men, and many are economically vulnerable 
during retirement.
      
    This economic vulnerability is partially offset by several features 
of the current Social Security program that are particularly important 
to women. These features include uninterrupted lifetime benefits, cost-
of-living adjustments, progressive benefit formulas, and commitment to 
support spouses and survivors. Although these features provide women 
with important insurance during retirement, many women receive low 
monthly benefits from Social Security because of their relatively 
shorter working careers and lower lifetime earnings. In 1995, women 
received an average monthly benefit $190 lower than men's. Because one 
out of five elderly women rely on Social Security as their only source 
of income during retirement, women are twice as likely to live in 
poverty as men (13 percent versus 7 percent, respectively).
      
    In announcing the second hearing day, Chairman Shaw stated: ``Women 
make great sacrifices for American families at home and in the work 
force every day. Despite these often heroic efforts, many women will be 
forced to live out their retirement years in poverty. We are committed 
to protecting the safety net provided by Social Security for women 
today, and exploring how best to modernize the program to better 
protect women retiring tomorrow.''
      

FOCUS OF THE HEARING:

      
    The second hearing day will focus on how the current Social 
Security program affects women's incomes in retirement, including 
Social Security's success in promoting financial security for women. 
The Subcommittee also will consider witness recommendations for 
improving the retirement security of women.
      

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, Wednesday, 
February 17, 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 Subcommittee on Social Security office, room B-316 
Rayburn House Office Building, by close of business the day before the 
hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

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

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

                                


    Chairman Shaw. OK. We will open this hearing. One in five. 
That is the chance that an unmarried, elderly woman faces of 
living in poverty under the current Social Security system. 
Overall, more than 2.6 million elderly women live in poverty 
after a lifetime of raising a family and increasing numbers 
spent in years in the paid work force themselves. In fact, with 
declining welfare roles in an aging society, within a few 
years, there may be more elderly women living in poverty than 
young mothers on welfare. That is an awful thought. It is a 
horrifying thought.
    It is important to recognize that this level of senior 
poverty exists despite Social Security's many built-in 
protections for women: guaranteed benefits for life, even for 
those with little personal savings; progressive benefit 
formulas that aid women working part time or in low paid 
positions while raising a family or caring for elderly parents; 
spousal and survivor benefits that favor one earner couples and 
widows whose husbands were the primary earner; and inflation 
adjustments that maintained incomes throughout woman's longer 
life expectancies.
    So with the Social Security's looming solvency crisis, our 
country really faces two questions with regard to women's 
retirement security. First, how can we maintain Social 
Security's current protection for women? And second, how can we 
modernize the Social Security system and improve its protection 
for women in the 21st century? This will not be easy, but hard 
problems have never stopped this country before. After all, if 
our grandparents could create our Nation's Social Security 
program in the midst of the Great Depression, surely, in the 
midst of the strongest economy in a generation, we can take the 
steps needed to save it and improve it for the coming 
generation of retirees, and I must underscore here, including 
women.
    I welcome our witnesses today and look forward to their 
answers, especially to my two questions and probably many more 
that I'm sure I and my colleagues will be thinking of.
    Mr. Matsui.
    Mr. Matsui. Thank you very much, Mr. Chairman. I want to 
thank you for holding these hearings. I think this hearing in 
particular is an important one because under our current 
system, which has really been the safety net for many Americans 
over the last 60 years, women are the greatest beneficiaries. 
In fact, women receive about 60 percent of the total Social 
Security benefits, through survivor benefits, disability 
benefits, and also through their own benefits as well.
    So this hearing will underscore the importance of making 
sure that we don't make huge mistakes by changing defined 
benefits that are currently in place at this time. Making sure 
that whatever we do to change the system, we don't increase the 
disparity in the marketplace today between men and women in 
terms of earning capacities. So I think this hearing is 
extremely important to show what the current level of Social 
Security does for women, and second, how we can actually 
improve it to make sure that women are even further protected 
under the future systems that we might develop.
    I want to thank you very much.
    Chairman Shaw. I think this will be a hearing that will be 
very beneficial to us in reforming Social Security.
    [The opening statement of Mr. Weller follows:]

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

    Mr. Chairman, as we continue the important process of 
reforming and saving Social Security for future retirees, I 
commend the Social Security Subcommittee for placing a special 
focus on the retirement issues facing women.
    As the Social Security reform debate progresses, we must 
keep certain important statistics in mind. First, in 1997, 
elderly women were almost twice as likely as elderly men to 
live in poverty. Additionally, the poverty rate for unmarried 
elderly women was 19 percent in 199. This is a crucial 
statistic because 60 percent of elderly women are unmarried. 
Also significant, nearly 30 percent of elderly black and 
Hispanic women lived in poverty in 1997, making Social Security 
especially important to minority, elderly women.
    Of course, these statistics are startling. Women, even more 
than men, have come to rely on the Social Security system for 
financial security in their golden years. Over their lifetimes, 
because of family commitments, many women cannot accumulate 
adequate pension savings. By the mid-1990s, only 18 percent of 
women over the age of 64 received their own pension benefits 
and their pension benefits were less than half of those 
received by men.
    To help women save for their later years, I plan to again 
offer legislation to help improve retirement savings 
opportunities for women and other individuals who opted out of 
the workforce to raise families. These Catch-up IRAs will also 
allow individuals approaching retirement the ability to save 
more for their golden years, and for all savers the ability to 
make additional ``after tax'' contributions to their savings 
plans.
    I hope that we can continue to work together to find Social 
Security reform solutions which protect the special needs of 
women in their retirement years. I applaud Chairman Shaw for 
arranging this subcommittee hearing on such an important topic.
      

                                


    Chairman Shaw. There are two witnesses on the first panel. 
First, from the U.S. General Accounting Office, Barbara 
Bovbjerg. I'm sure you've spent most of your life spelling your 
name.
    Ms. Bovbjerg. Only since I've been married. [Laughter.]
    Chairman Shaw. To the amazement of--what nationality is 
that?
    Ms. Bovbjerg. It's Danish.
    Chairman Shaw. Danish?
    Ms. Bovbjerg. The Americanization is Bovbjerg. Just like 
iceberg.
    Chairman Shaw. Bovbjerg?
    Ms. Bovbjerg. Yes.
    Chairman Shaw. Thank you. For those of you in the audience, 
it is spelled B-O-V-B-J-E-R-G. And for someone like me who very 
often slaughters people's names, you can understand that was 
amazingly close.
    Barbara is the associate director of Income Security 
Issues, in the Health, Education, and Human Services Division, 
and she is accompanied by Francis Mulvey, who is the Assistant 
Director of Income Security Issues, in the Health, Education, 
and Human Services Division. Welcome, and we look forward to 
your testimony. We have your full testimony, which will be made 
a part of the record. You may summarize as you see fit.

 STATEMENT OF BARBARA D. BOVBJERG, ASSOCIATE DIRECTOR, INCOME 
    SECURITY ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES 
   DIVISION, U.S. GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY 
  FRANCIS MULVEY, ASSISTANT DIRECTOR, INCOME SECURITY ISSUES, 
 HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, U.S. GENERAL 
                       ACCOUNTING OFFICE

    Ms. Bovbjerg. Thank you very much, Mr. Chairman. I will try 
to be brief. Mr. Chairman and Members of the Subcommittee, I am 
very pleased to be here today with my colleague, Frank Mulvey, 
to discuss women in Social Security reform. I would like to 
address three aspects of this issue. First, how women fare 
under the current system; second, how proposals for change 
within the current structure of Social Security could affect 
women; and third, how proposals to restructure Social Security 
by creating privately owned individual accounts could affect 
women differently than men. My testimony today is based 
primarily on a report we issued last year to the Subcommittee.
    First, women in the Social Security system as it currently 
stands. Social Security has provided significant income 
protection for the Nation's women. Several features of the 
program are particularly advantageous to women, in part, 
because they live longer than men. The guarantee of lifetime 
benefits, generous spousal benefits, annual cost-of-living 
adjustments, and progressive formulas have protected most women 
from poverty regardless of how long they live. Yet, despite 
these advantages, the average monthly benefit for retired 
workers in December 1997, was about $650 for women, compared to 
$860 for men. This is because Social Security benefit 
calculations are based mainly on a worker's lifetime earnings, 
which on average, are lower for women because they work fewer 
years and they earn less during those years than men do.
    Indeed women's labor force participation rates are lower 
than men's at every age. Women spend more time out of the labor 
force than men, and as a result, report fewer years of 
earnings. This is important because Social Security calculates 
monthly benefits by taking the average of 35 years of earnings. 
Most women don't have 35 years of earnings, and this lowers 
their average benefit. The fact that women earn lower wages 
than men when they do work, also affects their benefit levels. 
Partly this difference is a function of women engaging in more 
part-time work than men, and part-timers are generally paid 
less than full-time workers. But even without that factor, 
median full-time wages for women were less than 75 percent of 
what men earned.
    My second point addresses the potential effect of changes 
that pertain to the Social Security system as it is currently 
structured. Generally changes that reduce current benefits in 
some broad cross-cutting manner would treat all beneficiaries 
equally, but would hurt women disproportionately. And this is 
because as a group, women are more reliant on Social Security 
for their retirement than men are. Hence, reductions in Social 
Security represent a higher percentage loss to their total 
retirement resources than for men. Measures such as reducing 
cost-of-living allowances, among others, would fall into this 
category.
    Other changes would also affect women differently. For 
example, proposals to increase the computation period for 
benefits from 35 years to 38, or even 40 years, would heighten 
the differences that already exist between men's and women's 
benefits. Changes to survivor and spousal benefits, both 
positive and negative, would also disproportionately affect 
women who were the primary recipients of such benefits.
    Now, I would like to turn to my third point, women and 
individual accounts. With individual accounts, the amounts 
individuals receive at retirement would be directly related 
both to the amounts they contributed and to the returns these 
investments earned. As a group, women can be affected in 
several ways. Women, who earn less than men, would contribute 
less to such accounts, and have lower amounts to invest, and so 
could expect less in retirement than men.
    Our work also suggests that women invest more 
conservatively than men and would thus receive lower rates of 
return on their investments. While this means that women would 
not be as exposed to large losses from higher risk investments, 
their potential long-run returns would almost certainly be 
lower than men's. The nature and extent of investor education 
efforts, in combination with a careful design of investment 
options, could help maximize the effectiveness and minimize the 
risk of individual account proposals for women.
    How individual accounts are paid out at retirement would 
also matter greatly to women. Because women as a group live 
longer than men, lump sum distributions would leave some women 
without resources late in life, should they or their spouse 
spend the funds too quickly. Mandatory annuitization would help 
forestall this problem, but under current law would result in 
lower benefits or higher costs for women and for couples, 
again, because of women's longer life expectancies. How the 
proceeds from such accounts are inherited could 
disproportionately affect women as well. But carefully 
structuring the payout features of such accounts could help 
avoid some of these potential problems.
    In conclusion, some elements of reform proposals have a 
potential to affect elderly women adversely. Understanding how 
some women may be affected by such changes will be necessary if 
we are to continue to protect vulnerable members of society.
    That concludes my statement, Mr. Chairman. Dr. Mulvey and I 
are happy to answer any questions you or other Members may 
have.
    [The prepared statement follows:]

Statement of Barbara D. Bovbjerg, Associate Director, Income Security 
Issues, Health, Education, and Human Services Division, U.S. General 
Accounting Office

    Mr. Chairman and Members of the Subcommittee:
    Thank you for inviting me here today to speak about women 
and Social Security. Social Security has had a significant 
positive impact on the nation's elderly. Since 1959, poverty 
rates for the elderly have fallen from 35 percent to 10.5 
percent, thanks largely to this insurance program. 
Nevertheless, some elderly women are at greater risk of living 
in poverty. Women aged 65 and older are especially vulnerable. 
In 1996, 55 percent of older women would have had incomes below 
the poverty line without Social Security.
    My remarks today focus on (1) how women currently fare 
under Social Security, (2) how they might be affected by some 
of the proposed changes in benefits to restore solvency, and 
(3) how women might fare under a system restructured to include 
individual accounts. My testimony is based primarily upon a 
report already issued to the Subcommittee. \1\
---------------------------------------------------------------------------
    \1\ Social Security Reform: Implications for Women's Retirement 
Income (GAO/HEHS-98-42, Dec. 31, 1997).
---------------------------------------------------------------------------
    In summary, women have benefited significantly from the 
Social Security program. Many women who work are advantaged by 
the progressive benefit formula that provides larger relative 
benefits to those with lower lifetime earnings. Women who did 
not work or had low lifetime earnings and who were married 
benefit from the program's spousal and survivor benefit 
provisions. However, women typically receive lower monthly 
benefits than men because benefits are based on earnings and 
the number of years worked. Any across-the-board benefit cuts 
to restore solvency might fall disproportionately on women as a 
group because they rely more heavily on Social Security income 
than men. Other types of reform approaches can have positive or 
negative effects on women depending on how the reforms are 
designed.
    Restructuring Social Security to include individual 
accounts also will likely have different effects on men and 
women. Because women earn less than men, contributions of a 
fixed percentage of earnings would put less into women's 
individual retirement accounts. Available evidence indicates 
that women also tend to invest more conservatively than men, 
and thus would likely earn smaller returns on their accounts, 
although they would bear less risk. In addition, how such 
accounts are structured will be extremely important to women. 
For example, whether individuals will be required to purchase 
annuities with the proceeds of their accounts at retirement and 
how the annuities are priced could affect women quite 
differently from men. How benefits might be distributed to 
divorcees and how accounts are transferred to survivors could 
critically affect the retirement income of some elderly women. 
Understanding the potential consequences of the various reform 
proposals can help ensure that Social Security continues to 
protect vulnerable populations, such as elderly unmarried 
women.

             HOW WOMEN CURRENTLY FARE UNDER SOCIAL SECURITY

    Social Security has provided significant income protection 
for the nation's women. While women, on average, have lower 
earnings than men, the program has several features that are 
advantageous to women. First, unlike lifetime annuities 
purchased from private insurance companies, Social Security 
does not reduce women's benefits to account for the fact that 
they as a group live longer than men. Second, Social Security 
uses a progressive formula to calculate individual benefits, 
which replaces a relatively larger proportion of lifetime 
earnings for people with low earnings than for people with high 
earnings. Because they typically earn less than men, women's 
monthly benefits replace a larger proportion of their earnings. 
The program also provides benefits to retirees' dependents--
such as spouses, ex-spouses, and survivors--and roughly 99 
percent of these benefits go to women.\2\
---------------------------------------------------------------------------
    \2\ In addition, the program also provides benefits for the 
children of retired and deceased workers and for disabled workers and 
their dependents.
---------------------------------------------------------------------------
    Nevertheless, women receive lower Social Security benefits 
than men. In December 1997, the average monthly retired worker 
benefit for women was $662.40 compared to $860.50 for men. This 
is because Social Security benefits are based primarily on a 
worker's lifetime covered earnings, which on average are much 
lower for women.\3\ Although labor market differences between 
men and women have narrowed over time, the Bureau of Labor 
Statistics does not project that they will disappear entirely, 
even in the long term. Thus, women can expect to continue to 
receive lower average monthly benefits than men, although these 
differences are partially offset by the presence of spousal 
benefits.
---------------------------------------------------------------------------
    \3\ Covered earnings are earnings subject to the Social Security 
payroll tax, up to $72,600 for 1999.
---------------------------------------------------------------------------
    Lower lifetime earnings can be traced to two principal 
causes. First, women's labor force participation rates (the 
percentage of the population aged 16 and older who are working 
or actively seeking employment) are lower than men's at every 
age. Women's labor force participation rates have increased 
substantially over the past 35 years, growing from just 38 
percent in 1960 to 60 percent in 1997. At the same time, the 
rate for men fell from 83 percent to 75 percent. Both trends 
have leveled off since the early 1990s. The difference in labor 
force participation has implications for women's Social 
Security benefits relative to men's, since under the current 
rules Social Security calculates monthly benefits on the basis 
of lifetime taxable earnings averaged over a worker's 35 years 
of highest earnings. Because women generally spend more time 
out of the labor force than men (primarily for reasons 
associated with child rearing), they have fewer years of 
taxable earnings; thus, more years with zero earnings are 
included in calculating their benefits. Even if women and men 
had identical annual earnings when they both worked, women's 
shorter time spent in the labor force results in lower average 
lifetime earnings, which in turn leads to lower retirement 
benefits. In 1993, the average 62-year-old man had worked 36 
years, whereas the average 62-year-old woman had worked only 25 
years.\4\ Almost 60 percent of these 62-year-old men had a full 
35 years of covered earnings compared with less than 20 percent 
of women.
---------------------------------------------------------------------------
    \4\ These data include only earnings from 1951 to the year the 
worker reaches age 61.
---------------------------------------------------------------------------
    A second cause of lower lifetime earnings is women's lower 
wage rates. In part, this reflects the fact that women are more 
likely to work part-time, and part-time workers tend to earn 
lower wages than full-time workers. However, even if only year-
round, full-time male and female workers are compared, the 
median earnings for women are still less than 75 percent of 
men's. The gap narrows when differences in education, years of 
work experience, age, and other relevant factors are taken into 
account.

  HOW WOMEN MIGHT BE AFFECTED BY VARIOUS REFORM PROPOSALS WITHIN THE 
                       EXISTING PROGRAM STRUCTURE

    The changes contained in various Social Security reform 
proposals would likely have a disproportionate effect on women. 
Many reform proposals include provisions that would reduce 
current benefit levels, for example, reductions in the cost of-
living adjustment and increases in the normal or early 
retirement ages. Reducing all benefits proportionately would 
hit hardest those who have little retirement income other than 
Social Security. Reducing Social Security benefits by, for 
example, 10 percent would result in a 10-percent reduction in 
total retirement income for those who have no other source of 
income but would cause only a 5-percent reduction for those who 
rely on Social Security for only half their retirement income. 
Women, especially elderly women, are more likely to rely 
heavily, if not entirely, on Social Security. Among Social 
Security beneficiaries aged 65 or older in 1996, about half the 
married couples, two-thirds of the unmarried men, and three-
fourths of the unmarried women (who accounted for almost half 
of the three groups) relied on Social Security for at least 
half their retirement income. One-fourth of the unmarried women 
relied on Social Security for all their retirement income.
    Other changes could exacerbate existing disadvantages for 
some. For example, some proposals would extend the period for 
computing benefits from 35 years to 38 or 40 years. Because 
most women do not have even 35 years with covered earnings, 
increasing the computation period would increase the number of 
years with zero earnings used in calculating their benefits 
and, thus, lower their average benefit. The Social Security 
Administration (SSA) forecasts that fewer than 30 percent of 
women retiring in 2020 will have 38 years of covered earnings, 
compared with almost 60 percent of men. SSA estimates that 
extending the computation period to 38 years would reduce 
women's benefits by 3.9 percent, while extending the period to 
40 years would reduce their benefits by 6.4 percent. The 
comparable impact on men from an extension to 38 or 40 years is 
3.1 percent and 5.2 percent, respectively.\5\
---------------------------------------------------------------------------
    \5\ These percentages are based on a sample of new awards in 1993.
---------------------------------------------------------------------------
    Some reform proposals include a specific provision designed 
to improve the status of survivors, who are predominantly 
widows, but simultaneously reduce spousal benefits that 
generally accrue to women. Under the current system, a retired 
worker's spouse who is not entitled to benefits under her own 
work records will receive a benefit up to 50 percent of her 
husband's benefit and a widow will receive up to 100 percent of 
her deceased husband's benefit. One proposal would reduce the 
spousal benefit from 50 percent to 33 percent of the worker's 
benefit but would increase the survivor's benefit to either 75 
percent of the couple's combined benefit or 100 percent of the 
worker's benefit, whichever is greater. One-earner couples 
would receive reduced lifetime benefits because the spousal 
benefit would be reduced while both the retiree and spouse were 
alive, but the survivor benefit would remain the same as under 
current law. Two-earner couples would lose some benefits while 
both were alive if one spouse was dually entitled,\6\ but the 
survivor would receive higher benefits than under current law.
---------------------------------------------------------------------------
    \6\ A person who is dually entitled receives a retired-worker 
benefit based on his or her own earnings but is entitled to a higher 
spousal or survivor benefit based on the earnings of a current or 
former spouse. The dually entitled beneficiary receives the benefit 
based on his or her own work record plus the difference between that 
benefit and the higher spousal or survivor benefit.
---------------------------------------------------------------------------

HOW WOMEN MIGHT FARE UNDER A SYSTEM RESTRUCTURED TO INCLUDE INDIVIDUAL 
                                ACCOUNTS

    Many reform proposals would fundamentally restructure 
Social Security by creating retirement accounts that would be 
owned and managed by individuals. While such accounts can 
increase benefits for retirees, women on average might not reap 
the same advantages such investment could bring to men. As 
stated earlier, the difference is partly the result of women 
having shorter work histories and lower earning levels which 
suggests they generally will contribute less to these accounts. 
The difference is also partly the result of differences in 
investment behavior.

Women Invest More Conservatively Than Men

    Economists have found evidence suggesting that women 
generally are more risk averse than men in financial 
decisionmaking. Studies indicate that, compared with men, women 
might choose a relatively low risk investment strategy for 
their retirement income accounts that earns them lower rates of 
return. Although proponents argue that individual accounts 
could raise retirement benefits for both sexes, an overly 
conservative investment strategy could leave women with lower 
final account balances than men, even if both make the same 
contributions. Thus, even though women could improve their 
financial situation under a retirement system that included 
individual accounts, the gap between the benefits received by 
men and women could increase.
    In our December 1997 report, we attempted to calculate the 
difference in risk aversion between men and women by looking 
specifically at the differences in how unmarried men and women 
who were nearing retirement age invested their assets. We 
examined unmarried individuals because it was not possible to 
determine who made investment decisions in married households. 
We found that women aged 51 to 61 in 1992 had a lower 
percentage of their total assets in stocks, mutual funds, and 
investment trusts than men did. The returns on these assets are 
more volatile but potentially higher yielding than others, such 
as certificates of deposit, savings accounts, or government 
bonds.\7\ On average, we found that the ratio of riskier assets 
to total assets held by men was 8 percentage points higher than 
the same ratio for women. Other researchers, looking at 
participants in the federal Thrift Savings Plan, have also 
found that women invest less in stocks than men.\8\ Our 
analysis, using different data and focusing on individuals in 
their prime working and saving years, increases the robustness 
of this conclusion. By investing less in these riskier assets, 
women benefit less from the potentially greater rates of return 
that, in the long run, stocks could generate. At the same time, 
however, they are not as exposed to large losses from riskier 
assets. While it is true that in the past U.S. stocks have 
almost always posted higher returns than less risky assets, 
there is no guarantee that they will always do so.
---------------------------------------------------------------------------
    \7\ Total assets included non-housing equity from checking and 
savings accounts, money market funds, certificates of deposit, 
government bonds, Treasury bills, individual retirement accounts, 
KEOGHs, stocks, mutual funds, investment trusts, business equity, 
bonds, bond funds and other assets, and housing equity.
    \8\ Richard P. Hinz, David D. McCarthy, and John A. Turner, ``Are 
Women Conservative Investors? Gender Differences in Participant 
Directed Pension Investments,'' in Positioning Pensions for the Twenty 
First Century, ed. by Michael S. Gordon, Olivia S. Mitchell, and Marc 
M. Twinney (Philadelphia: University of Pennsylvania Press, 1997); 
Vickie L. Bajtelsmit, Alexandra Bernasek, and Nancy A. Jianakoplos, 
``Gender Differences in Pension Investment Allocation Decisions,'' 
Working Papers in Economics and Political Economy, Department of 
Economics, Colorado State University (Oct. 1996); and James M. Poterba 
and David A. Wise, ``Individual Financial Decisions in Retirement 
Saving Plans and the Provision of Resources for Retirement,'' National 
Bureau of Economic Research Working Paper No. 5762 (Sept. 1996).
---------------------------------------------------------------------------
    Some pension specialists believe that information is a 
critical factor in helping individuals make the most of their 
retirement investments. Providing investors with information 
that covers general investment principles and financial 
planning advice might help both women and men to better manage 
their investments and close the gap in the average investment 
returns received by men and women. While employers are not 
legally required to provide this type of information, many have 
done so in the case of 401(k) accounts. It is not clear who 
would provide such information to workers under a restructured 
Social Security system that included mandatory individual 
accounts. The nature and extent of such information and 
education efforts, when combined with the design of related 
investment options, are likely to help maximize the 
effectiveness of, and minimize the risk associated with, 
individual accounts under the Social Security system.
Annuitization Choices Will Affect Retiree's Benefits

    How individual account accumulations are paid out also will 
make a difference in retirement income to many women. Unless 
otherwise specified, workers could choose to receive their 
individual account balances at retirement as a lump-sum 
payment, as some pension plans now allow, to spend as they see 
fit. If retirees and their spouses do not accurately predict 
their remaining life spans and consume their account balances 
too quickly, they may end up with very small incomes late in 
life.
    To preserve retirement income, retirees could be required 
to convert the capital accumulations in their individual 
accounts to a lifetime annuity. However, men and women could 
retire with similar amounts in their individual accounts and 
still end up with very different monthly benefits if they were 
to purchase annuities and if the annuities were based on 
gender-specific life tables.\9\ Insurance companies that sell 
annuities usually take into account women's longer life 
expectancy and either provide a lower monthly benefit to women 
or charge women more for the same level of benefits given to 
men. In the case of employer-provided group annuities, gender-
neutral life tables must be used in the calculation of monthly 
benefits, which ensures equal benefits for men and women with 
the same lifetime earnings.\10\ Requirements to use gender-
neutral life tables involve cross-subsidies between men and 
women.
---------------------------------------------------------------------------
    \9\ An annuity can be single life, for the lifetime of the worker 
only, or joint and survivor, for the lifetime of the annuitant and his 
or her designated survivor.
    \10\ That is, same-aged men and women would receive identical 
annuity benefits for the same price.
---------------------------------------------------------------------------
    Insurance companies also pay lower benefits for a joint and 
survivor annuity that covers both husband and wife than for a 
single life annuity that covers only the worker during his or 
her lifetime--again because the total time in which the 
benefits are expected to be paid is longer. Women are more 
likely to receive the survivor portion of this type of annuity, 
since they are more likely to outlive their husbands. Thus, 
while the total lifetime annuity benefits for men and women may 
be similar, the monthly benefit women receive, either as 
retirees or as survivors, will likely be lower and could result 
in a lower standard of living in retirement.\11\
---------------------------------------------------------------------------
    \11\ Some demographers believe that life expectancy will continue 
to increase in the future, affecting annuity values. However, it is 
unclear whether the gap between the life expectancy of men and women 
will also narrow in the future.
---------------------------------------------------------------------------
    Other groups of women will also need to be considered if 
individual accounts are introduced. Under current Social 
Security provisions, divorced spouses and survivors are 
entitled to receive benefits based on their former spouse's 
complete earnings record if they were married at least 10 
years. Most of those receiving benefits under this provision 
are women. Many individual retirement account proposals do not 
acknowledge divorcees and survivors as having any specific 
claim on the individual accounts of their former spouses. Under 
these proposals, the current automatic provision of these 
benefits would be eliminated. The money in these accounts could 
become a part of the settlement at the time of a divorce, but 
the current benefit guarantee to these benefits might be lost.
    Mandating the purchase of a joint and survivor annuity with 
the individual account balances at retirement will reduce the 
risk that some wives will have little to live on if they 
outlive their husbands. Requiring gender-neutral life tables 
would create cross subsidies between men and women. However, 
doing so could protect retired women against a low living 
standard that would result simply because they usually live 
longer than men. The needs of former spouses will also need to 
be considered in developing individual accounts.

                              CONCLUSIONS

    While the Social Security system has benefited women 
significantly through the spousal benefit and the progressivity 
of the benefit formula, women generally receive lower Social 
Security benefits than men because they work fewer years and 
earn lower wages. These work and earnings characteristics will 
affect the relative changes in average benefits for men and 
women under some reform proposals. In particular, these 
characteristics will work against women should reforms based on 
years with covered earnings be enacted. Because of women's 
longer life expectancy, the creation of mandatory individual 
retirement accounts could also decrease women's benefits 
relative to men's if women continue to invest more 
conservatively than men. Women might also be disadvantaged if 
the accumulations in these accounts are paid as a lump sum 
rather than as a joint and survivor annuity based on gender-
neutral life tables.
    Whether reforms include relatively modest modifications to 
the current system or more major restructurings that could 
include mandatory individual retirement accounts, some elements 
of the reform proposals could adversely affect many elderly 
women. Because elderly women are at risk for living in poverty, 
understanding how various elements of the population will be 
affected by different changes will be necessary if we are to 
protect the most vulnerable members of our society.
    This concludes my prepared statement. I would be happy to 
answer any questions you or other Members of the Subcommittee 
might have.
      

                                


    Chairman Shaw. Dr. Mulvey, you don't have a separate 
testimony.
    Mr. McCrery.
    Mr. McCrery. Ms. Bovbjerg, I am over here. Hello. 
[Laughter.]
    It is an unusual arrangement.
    Would you make some suggestions as to some possible changes 
to the current system that would improve the lot of women. One 
that comes to mind is just simply saying that a woman's or a 
widow's benefit would be based on 30 years in the work force 
instead of 35. Something like that. Some suggestions like that 
you have come across that we can consider.
    Ms. Bovbjerg. Well, there are a number of proposals that 
would have positive effects on women's benefits. As you note, 
there are some that would reduce the number of years of 
earnings on which women's benefits are based. There are some 
that would have the same result as that proposal, that would 
credit women with earnings for years that they do not work, 
that they are taking care of family members. There are others 
that address survivor benefits, of which 99 percent go to 
women. There are a number of proposals that would have this 
effect.
    I think that the difficulty is that most of them cost 
money, and much of the Social Security reform proposals are 
looking to save money. We try to point out the effects that 
certain proposals would have, the differential effects certain 
proposals would have on women. Primarily so that when you are 
looking at a comprehensive proposal, we are all aware of what 
the effects might be on different groups--not only women--of 
different pieces of the proposal. But what's really important 
is to look at the proposal as a whole.
    Mr. McCrery. Yes. And I appreciate that part of your 
testimony. I think you did a good job of raising our antenna to 
the question of how changes or proposed changes would affect 
everybody in the system, and particularly, women.
    One thing that we don't think about enough probably is the 
fact that even though women get on average a higher rate of 
return say on their investment over time, their monthly benefit 
is actually smaller, and it is the monthly benefit that 
provides their standard of living. So, we have to look at both. 
We can't just look at it with a CPA's green eyeshade, and say, 
well, you know, women because they live longer, they get a lot 
more back. We have to look or we should look at what they are 
getting per month and what kind of standard of living that 
provides them. And I think that is one thing you were trying to 
point in your testimony.
    So we appreciate your letting us know of some of the 
pitfalls of trying to put solutions on the aggregate Social 
Security system. I can assure you, we are going to look at how 
it affects women and various individuals as we go through this. 
It is going to be difficult because a lot think that we ought 
to make some changes that will cost money for the system, 
particularly with respect to widows. So it is going to be an 
interesting process. We appreciate your taking the time to do 
some research for us and provide us with some valuable input. 
Thank you.
    Ms. Bovbjerg. Thank you.
    Chairman Shaw. Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman.
    I would like to thank you for your testimony, Ms. Bovbjerg, 
and obviously, Dr. Mulvey, who contributed to the report as 
well. We appreciate it, and it goes a long way to help us 
really get an understanding of what the current law does and 
certainly some of the changes that will be made.
    I want to ask you a question. In 1993, the average 62-year-
old woman worked about 25 years in the work force, compared to 
for a male, 36 years in the work force. And 60 percent of the 
62-year-old men had a full 35 years of covered earnings, while 
only 20 percent of the women counterparts had the full 35 years 
because they worked part time perhaps. I guess the question, if 
you move over to individual account balances using these same 
demographic numbers, and these are the most current that we 
have, does this mean that women would have considerably lower 
account balances? What would really happen to these account 
balances when they are out of the work force, but the 
administrative costs obviously would continue on? Could you 
respond to those two questions, perhaps, either you or Dr. 
Mulvey.
    Ms. Bovbjerg. Let me respond to the earnings and 
contributions one first. Women as a group earn less than men, 
and so would be less well positioned to contribute as much to 
each individual account.
    Mr. Matsui. Right. Not only earn less than 75 percent of 
what men do, with the same skill levels and what not, but also 
length of work time is shorter too.
    Ms. Bovbjerg. Yes.
    Mr. Matsui. Which I also asked in this question.
    Ms. Bovbjerg. But earn less over a working lifetime.
    Mr. Matsui. Right, exactly.
    Ms. Bovbjerg. For reasons of participation in the work 
force and earnings levels.
    Mr. Matsui. Right.
    Ms. Bovbjerg. And so they would, as a group, have less to 
put into individual accounts than men, and would then expect to 
get less out at the end.
    Mr. Matsui. Right.
    Ms. Bovbjerg. I do want to caution that these are average 
figures, and there would be a variation among women. Some women 
would earn a lot, and put a lot into their individual accounts, 
while others would be less able to do so. But on the average 
they are----
    Mr. Matsui. Right. And that is----
    Ms. Bovbjerg [continuing]. Would be less well off.
    Mr. Matsui [continuing]. That is the case now, even under 
the current system.
    Ms. Bovbjerg. Yes, but the current system has progressive 
benefit features.
    Mr. Matsui. Right.
    Ms. Bovbjerg. That help pull up lower earners relative to 
higher earners.
    Mr. Matsui. Anyone else? You want to comment on----
    Ms. Bovbjerg. Well, you had a second question.
    Mr. Matsui [continuing]. The administrative costs for 
those? I guess we don't really know. I mean, since there is no 
system yet.
    Ms. Bovbjerg. We are doing work for this Subcommittee on 
administrative costs and what sorts of implementation 
activities the government would have to engage in, what it 
would cost to set up these accounts, what it would cost to 
administer them, what it would cost to address the payout 
features at the end. And this is something that we will be 
working on with you over the next several months.
    Mr. Matsui. The use of preps, Dr. Mulvey? Did you want to--
--
    Mr. Mulvey. I was going to say there is some concern. Very 
small accounts would be very difficult to administer. They 
would have high administrative costs relative to the size of 
the account. And to the extent women would have the smallest 
accounts, they may be more burdened by administrative costs. 
Also women are likely to be out of the labor force during some 
of their prime earning years, fairly early on in their earning 
years, and so they wouldn't be getting the accumulation and the 
compounding of those contributions. So they would be doubly 
disadvantaged.
    Mr. Matsui. The emphasis on the CPI, Consumer Price Index, 
and the inflation adjustments made I think is an important 
issue which you wouldn't get on an annuity. What I would like 
to know is that because women live longer, and I want to put 
this in real terms, because you gave a kind of a conceptual 
reason why it is important, but rents do continue to go up for 
women, and, obviously, food prices go up. Purchasing power goes 
down if you have static wages or static forms of income. And 
the CPI is an extremely important aspect of the current system. 
So that once a woman retires and receives her benefits, she can 
maintain a level of subsistence, hopefully, outside of poverty?
    Ms. Bovbjerg. Well, it is a significant feature. The 
current Social Security system, and I believe that others have 
pointed out, particularly, Gene Steuerle at the Urban 
Institute, that changes that would reduce the CPI could have 
the affect of reducing the circumstances of the old, which tend 
to be women, because over time, they would lose more to 
inflation. They could, under individual accounts, you could 
purchase an indexed annuity that would go up with inflation, 
but it would cost you more at the outset. It would take more of 
your capital to do that.
    Mr. Matsui. So, from what I understand, and I have just 
done preliminary research, and maybe you can help me, but I 
understand it is quite expensive because it is hard to 
forecast. Am I wrong about that, or do you even have any 
statistics or formula as to how much more the cost might be to 
have a kind of annuity that is indexed with inflation?
    Ms. Bovbjerg. That is exactly something that we are looking 
at for this Subcommittee.
    Mr. Matsui. OK.
    Ms. Bovbjerg. In fact, it is specifically, what are the 
issues for the payouts, and what are the ways you might 
annuitize, and what are some of the things that you would have 
to be concerned about, and that would be one of them. We are 
fairly early on in this work.
    Mr. Matsui. Well, I look forward to working with you, and I 
know the Subcommittee does as well. My time has run out. But I 
want to thank you for your preliminary work, and obviously, we 
look forward to working with you as the report is finalized.
    Chairman Shaw. Mr. Hulshof.
    Mr. Hulshof. Thanks, Mr. Chairman.
    Good afternoon. Ms. Bovbjerg, you mentioned in your 
testimony about the conservative investment attitudes that 
generally, and I know we are talking in generalities, that 
women bring to bear on choosing investments. Is there any 
evidence that maybe this conservative investment behavior would 
actually change over time? For instance, becoming more familiar 
with investing, maybe more comfortable with a little riskier 
investment? Do you have any thoughts on that, Mr. Mulvey.
    Mr. Mulvey. There was a study by one of the consulting 
firms, a pension consulting firm, recently, which held that men 
and women, who both participate in 401(k) plans, both exhibited 
the same kinds of investment behavior. So you didn't find a 
difference when both parties were cognizant. And the problem, 
of course, is that many, many more men participated in these 
accounts than women. So, you would think that with education, 
with training, with experience over time there would be some 
evening out. It is not a gender-based thing. It is more of an 
experienced-based thing. But fewer women have had the exposure 
to investing at this point, but sometime in the future, they 
might have the same advantages from individual investments.
    Mr. Hulshof. I could just tell you, anecdotally, that in 
the Hulshof household, my wife works. I'm very proud of her 
professional career, and I am the more conservative investor of 
the two of us. And so it is interesting, and I think part of 
that is just the comfort level, and my wife is very comfortable 
with taking risks.
    I think later on, we are going to hear a little bit about 
the concept of earnings sharing. Not anticipating testimony 
coming up, but has, GAO, the General Accounting Office, done 
any work regarding the possibility of under our current system, 
the current Social Security Program, of married couples sharing 
the earnings that are posted to each other's earnings record?
    Ms. Bovbjerg. No, we haven't done any work recently on that 
specifically. I am aware that others have done some work on 
this, and I have been aware that the Social Security 
Administration has raised questions about how they would 
administer it, I think because they don't keep track of who is 
married to whom. But now you know the sum total of what I know 
about it.
    Mr. Hulshof. OK. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman. It seems to me that 
to some extent the disparity that you know between men and 
women is simply carrying forward the disparity, the pay 
inequity in the wage structure between men and women in many 
categories doing essentially the same level of work in our 
society. But as to those women who have suffered pay inequity 
and then retire and continue to suffer from retirement 
inequity, about how many women are there, single women in the 
United States who rely on Social Security for 90 percent or 
more of their monthly income?
    Ms. Bovbjerg. I have it here somewhere.
    Mr. Mulvey. I think it is 25 percent currently.
    Mr. Doggett. We are talking about numbers. That is why I am 
asking.
    Mr. Mulvey. Well.
    Ms. Bovbjerg. No, I don't have the individual single ones. 
I will have to get back to you.
    Mr. Doggett. It is millions of women, though?
    Mr. Mulvey. Millions of women.
    Ms. Bovbjerg. I know we have it here somewhere.
    Mr. Doggett. Aren't we talking about millions of elderly 
women?
    Ms. Bovbjerg. Yes.
    Mr. Doggett. Who have nothing other than a Social Security 
check for 90 percent or more of their monthly income?
    Ms. Bovbjerg. Yes.
    [The following was subsequently received:]

    About 5.7 million elderly women rely on Social Security 
benefits for at least 90 percent of their retirement income--
about 1.6 million women in married couples and about 4.1 
million unmarried women. Table 1 provides more detailed 
information on how heavily elderly men and women rely on Social 
Security benefits during retirement.

 Table 1. Importance of Social Security Benefits Relative to Total Retirement Income for Those Aged 65 or Older,
                                       by Marital Status and Gender, 1996.
                                           (Numbers in thousands \1\)
----------------------------------------------------------------------------------------------------------------
                                                                      Married                        Unmarried
                                                                      Couples      Unmarried Men       Women
----------------------------------------------------------------------------------------------------------------
Total Number....................................................           8,835           3,264          10,078
     50 percent or more.........................................           4,683           2,220           7,659
     90 percent or more.........................................           1,590           1,044           4,132
     100 percent................................................             795             653           2,520
 Percent........................................................             100             100             100
     50 percent or more.........................................              53              68              76
     90 percent or more.........................................              18              32              41
     100 percent................................................               9              20              25
----------------------------------------------------------------------------------------------------------------
\1\ Except for totals, the numbers in the upper half of the table are estimated by multiplying column totals by
  the percents in the lower half of the table.
Source: Income of the Population 55 or Older, 1996, SSA Publication No. 13-11871, April 1998, table VI.B.2, page
  104.


      

                                


    Mr. Doggett. We have had a variety of witnesses already 
before the Subcommittee. One claimed that we should have 
abandoned Social Security long ago. Another said maybe we could 
experiment with putting 50 percent or more of Social Security 
into privatized individual accounts. If we should take some of 
those Social Security benefits away from those individuals and 
put them into privatized accounts, that stands to have a rather 
significant impact on the daily life of those women. Does it 
not?
    Ms. Bovbjerg. Well, I think in order for us to evaluate 
that, we would have to look at the entire proposal. I think 
that it is a general point that we have made for women, and I 
think we would make this about any group that is so reliant on 
Social Security, that if you remove part of that benefit 
structure and shift them into something else that does not have 
some of the features that the current Social Security has, they 
could be disproportionately effected on average.
    Mr. Doggett. Do I understand, Mr. Mulvey, from your 
comments about administrative costs being higher for those with 
the least to invest, that if we went to an entirely privatized 
system, that the very women who are at the bottom of the ladder 
with retirement benefits, who may have well been at the bottom 
of the ladder their entire lives during their working time, 
that they will also be at the bottom of the ladder when it 
comes to the administrative costs of an individual retirement 
account?
    Mr. Mulvey. That is true. Their administrative costs will 
be higher relative to the value of the account, making it 
difficult for an annuity provider to find her to be somebody 
you would want to sell an annuity to.
    Mr. Doggett. The less you have to contribute to one of 
these privatized experiments, the more you are going to pay on 
your account?
    Mr. Mulvey. Relatively speaking.
    Ms. Bovbjerg. But it also----
    Mr. Mulvey. It depends on how it is structured.
    Mr. Doggett. And then with reference to that portion of the 
Social Security system that focuses on disability benefits, can 
you explain under these various privatized experiments how it 
is that the Social Security system could continue to deliver 
the disability benefit?
    Ms. Bovbjerg. Well, there are really a variety of proposals 
that have proposed some form of private accounts or individual 
accounts, and many of them essentially leave the Disability 
Insurance Program with the Federal Government. It varies a lot 
on how this is treated. I know that this is something that 
virtually every comprehensive proposal is trying to address.
    Mr. Doggett. Have you done studies or seen studies on what 
the costs of the disability system and of maintaining the 
current level of the disability system would be apart from the 
retirement system?
    Ms. Bovbjerg. Out into the future? We would just use the 
actuarial evaluations of the Social Security system, and I 
don't know myself, what the long-term costs are. I can get back 
to you on that.
    Mr. Doggett. The same question with reference to the cost-
of-living adjustment. Would it be feasible if we are 
experimenting with removing half or less of the existing 
accounts out to these experiments, would it be possible to 
continue the cost-of-living adjustment?
    Ms. Bovbjerg. I think anything is possible. I am thinking 
about which proposals do what, and I think that there is just a 
really wide variety. There are some that I think are being 
considered where you could annuitize to an annuity indexed to 
inflation, and they are on top or part of a Social Security 
system. So I think it is really hard to generalize about that.
    [The following was subsequently received:]

    You requested information about the estimated future 
revenues and expenditures for Social Security's Disability 
Insurance (DI) program. The data in table 2 below are from the 
1998 Trustees' Report and are the latest available. These 
estimates assume that the DI program will continue under its 
current structure. How these estimates might change under 
Social Security reform depends upon the specific nature of the 
reform package.

                  Table 2. Estimated Operations of the DI Trust Fund, Calendar Years 1997-2007
                                              (Amounts in billions)
----------------------------------------------------------------------------------------------------------------
                                                                                                  Fund at End of
                          Calendar Year                               Income       Expenditures        Year
----------------------------------------------------------------------------------------------------------------
1997 (actual)...................................................          $ 60.5          $ 47.0          $ 66.4
1998............................................................            63.8            50.6            79.6
1999............................................................            66.4            53.6            92.4
2000............................................................            73.3            56.9           108.8
2001............................................................            77.2            60.8           125.2
2002............................................................            81.1            65.7           140.6
2003............................................................            85.3            71.0           154.8
2004............................................................            89.7            77.1           167.4
2005............................................................            94.5            83.9           178.0
2006............................................................            99.3            91.2           186.0
2007............................................................           104.5            99.4           191.2
----------------------------------------------------------------------------------------------------------------
Source: 1998 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and
  Disability Insurance Trust Funds, April 28, 1998, table II.F2, page 82.


      

                                


    Mr. Doggett. Thank you.
    Chairman Shaw. Ms. Dunn.
    By the way, I would like to announce that I have a general 
policy that I was going to start enforcing regarding the 
questioning by Ways and Means Members that are not on this 
Subcommittee. But in that we now have two ladies sitting with 
us who are not on this Subcommittee, and that this is very much 
a woman's issue, that I thought it is quite appropriate. I am 
delighted that they are both here, and I certainly invite them 
to participate fully with our Subcommittee.
    Jennifer.
    Ms. Dunn. Thank you, Mr. Chairman. And I appreciate that 
you are an enlightened Chairman. [Laughter.]
    And we appreciate, I am sure, Mrs. Thurman and I, the 
opportunity to question ourselves.
    I have three questions. I wanted to ask first of all, there 
have been some proposals out there to increase widows' 
benefits. We know that at the time that the spouse dies, the 
widow is allowed to claim 100 percent of her husband's Social 
Security, where it had been 150 percent for the couple before 
that time. I am wondering if you know of any suggestions that 
are out there to change this, for example, to change it to 125 
percent to soften the blow of that death?
    Ms. Bovbjerg. Well, I am aware of one that we have looked 
at in the process of producing the testimony today, which would 
change the rules to give the surviving spouse 75 percent of the 
total benefits, hers and her husband's, which would really 
benefit the two-earner couples. You would get 75 percent or 100 
percent, whichever is greater, 100 percent of the husband's 
benefit. I am sorry, I can say that again.
    Ms. Dunn. That is what you do get now if you are a widow. 
You get 100 percent.
    Ms. Bovbjerg. You get 100 percent.
    Ms. Dunn. And so what would be the change?
    Ms. Bovbjerg. What this proposal would do is you could 
either have that or 75 percent of the total of the benefits 
that you would earn on your own and from your deceased 
husband's benefits. So in a two-earner household, if each 
receives $1,000 of Social Security, they would get 75 percent 
of $2,000 rather than----
    Ms. Dunn. That would be good. And is that in your testimony 
here?
    Ms. Bovbjerg. Yes.
    Ms. Dunn. Great, great. I will take a look at that. Thank 
you.
    We know that divorced women who have been married for 10 
years to their former husband, are able to claim at the time he 
starts taking Social Security, 50 percent of his Social 
Security. That intrigued me when I learned about that a few 
months ago. I am wondering, since this law was written 60 years 
ago and a time when most women didn't work, is that becoming 
too much of a burden for the system? I mean do we have these 
multiple divorce situations where you have wives, lots of wives 
claiming 50 percent, or does it go the other way, where 
marriages last for fewer years than 10? And do we need to look 
at change in that portion?
    Ms. Bovbjerg. I don't know the answer to that question. I 
haven't heard that it is a problem. It doesn't mean that it 
isn't, but we will look into that for you.
    Ms. Dunn. And it may not be a problem that is intriguing 
though. I think that is something very little known to most 
women who go through divorces. I think it is one that we need 
to talk more about.
    OK, let me ask you the third question. Working women are 
entitled to benefits that are based on their own working 
careers and their husband's working careers, depending on which 
is larger. Many working women find that they receive little or 
no additional benefits from the fact that they have paid in 
over the long year of their working over what a woman staying 
at home would receive from her husband's benefit. Is there a 
solution out there for that problem now that we have, in this 
new age, we have so many spouses that are working?
    Ms. Bovbjerg. Well, there are a number of proposals out 
there for changing this balance and the benefits among the 
spouses. One of them we just talked about is the survivor 
benefit, which would very clearly accrue to the benefit of two-
earner households. There is discussion of shared earnings 
although it is not quite clear to me exactly how that would 
play out for two-earner households. But there are a number of 
things that are under discussion.
    Ms. Dunn. And are some of those in this report that you 
presented?
    Ms. Bovbjerg. Some, but not many. We can get back to you on 
it.
    Ms. Dunn. So you will do some research?
    Ms. Bovbjerg. Yes.
    Ms. Dunn. Yes, I would appreciate that if you would.
    Let me just make one more comment, Mr. Chairman, if I may, 
since I have a little time left. It seems to me a lot of times 
when we talk about the new proposals on Social Security, we 
talk about an either/or situation. I believe, at least what I 
envision on the personal retirement accounts, that would be a 
portion of the payroll tax that is paid in. And so when you 
talk about women's reticence to take risks, we do support 
risks, I think this system in many cases could still work 
better for a woman than if she were to leave all her savings 
and Social Security. The percentage of return from the stock 
market is greater over the same period of time. I would like to 
have your comments on that. Wouldn't the woman at the end of 
the day be better off if she were able to take 2, 3 percent of 
her payroll tax and invest that in a responsible management 
company that would put it into the stock market?
    Ms. Bovbjerg. It would depend on who she was. It would 
depend on how much she worked, how much she earned. It would 
depend on whether she was going to be reliant on spousal 
benefits in the future from Social Security. It would depend on 
how savvy she was in investing the money. I think we are 
generalizing. We are saying that as a group, women invest more 
conservatively. Some of that is they maybe don't know and they 
don't have as much to invest, so they are unwilling to risk 
what they do have. And as Congressman Hulshof mentioned 
earlier, that varies among families and that could change with 
more education.
    But I think it really does depend on what circumstances 
they find themselves in. You know, do they become disabled 
during that period. And so it is really something that does 
bear, I think, a great deal of scrutiny in looking at the 
different proposals.
    Chairman Shaw. Thank you.
    Mrs. Thurman.
    Mrs. Thurman. Thank you, Mr. Chairman. And being a woman, 
we really appreciate the fact that you are giving us this 
opportunity to look at all of the implications that might come 
about through any kinds of changes. This is really important. I 
share a lot of the same feelings that Ms. Dunn does, and the 
ideas that we need to make sure that there is a safety net 
there for the women in this country. So getting through these 
is pretty important.
    I want to pick up on something that Ms. Dunn talked about, 
but from a different angle. That is on the issue of divorce and 
this 10-year issue. What would happen under individual 
accounts? Do you believe that that same benefit could be 
provided or would that just kind of go away and these women 
would have no coverage at all?
    Ms. Bovbjerg. It would depend on how you structured the 
individual account. One of the things that we talk about in our 
report and in our statement is that, under the current system, 
if you are married 10 years, you have access to your former 
husband's benefit. It is really not clear how that would work 
in individual accounts, unless there were some divorce court 
order. And this is one of the implementation issues that we are 
examining for this Subcommittee.
    Ms. Thurman. So it would have to be through the court 
system maybe making that determination?
    Ms. Bovbjerg. Oh, it doesn't have to be. Only absent other 
law that would say otherwise for disposition of the account. I 
think there are ways to consider dealing with it, but that is 
something that we are still looking at.
    Mrs. Thurman. When you did your report, did you also, you 
talked about the fact that women were less likely to take risk. 
Did you at any time look at the issues that we have heard about 
where women are more likely to be the ones to go into those 
accounts to be used for family emergencies, to buy that home, 
to pay for a medical expense? Did you look at any of those 
concerns where women have been generally the ones that have 
used their accounts in that way if they do happen to have any 
at all?
    Ms. Bovbjerg. We did some work on borrowing from 401(k)s.
    Did we do a gender look?
    Mr. Mulvey. I don't think we looked at gender. I am sure 
that those data are available from that study, but we didn't 
specifically focus on gender. We were looking at if people 
borrowed from 40l(k)s, whether or not they were worse off from 
borrowing even if they paid it back, what would be the cost of 
borrowing in terms of how much less they would have at 
retirement. But we didn't break it down by gender.
    Ms. Thurman. OK. I would appreciate any of that information 
that you could get to us. Thank you.
    Mr. Mulvey. We will do that.
    Ms. Bovbjerg. We will get back to you.
    Chairman Shaw. I was quite shocked by the difference in the 
earning. I mean Social Security, as I understood you said, that 
the average woman's was $660 a month, and the average man's was 
$860 a month. That is an incredible gap, which gives us some 
idea as to the price tag on trying to bring some equity to this 
matter. That is compounded by the problem that we are going to 
be facing to be sure that what we do is constitutional. That 
is, discrimination, gender discrimination.
    So, I think anything we do to try to even it out, we can go 
toward what Mr. McCrery was talking about, maybe boiling it 
down to less years rather than leaving it at 35 years. That 
still would leave us with even a bigger problem because I 
think, unless somebody can come up with some other way of 
figuring it out, that would have to apply to males as well as 
females. So that means that the whole thing would be inflated. 
Am I correct there?
    Have you all given any thoughts or research into what 
Congress could do that would be aimed at trying to bring equity 
as far as the women are concerned, and the implications as to 
sex discrimination from the males?
    Ms. Bovbjerg. Well, we didn't look into the 
constitutional----
    Chairman Shaw. The lawyers always win, by the way.
    Ms. Bovbjerg. Pardon?
    Chairman Shaw. The lawyers always win, no matter which side 
they are on. Have you all looked into that?
    Ms. Bovbjerg. Pardon me?
    Chairman Shaw. How you all looked into how this could be 
fixed without sex discrimination?
    Ms. Bovbjerg. We haven't looked into that per se, but I 
think that I did mention that there are proposals that, I 
believe, would apply to men and women that would credit the 
individual with earnings for years that they spent care giving, 
children or their parents or something. That would have a very 
similar effect to reducing the years of earnings formula to 30 
years or something like that, it would cost money.
    Chairman Shaw. We could certainly do that.
    Ms. Bovbjerg. Pardon?
    Chairman Shaw. Yes, we can do that. And it wouldn't be sex 
discrimination.
    Mr. Mulvey. Yes. The system is gender neutral, but there 
are certain provisions which typically benefit women as opposed 
to men, like the spousal benefit, for example. Most spousal 
benefits go to women, but theoretically, they could be either 
way.
    Chairman Shaw. Do you have any figures to share with us of 
what would happen, say, if you took 2 years prior to leaving 
the work force to have a child, 2 years afterward, and work out 
some type of an average in order to give the stay-at-home mom 
credit for the time they stayed at home taking care of the 
children?
    Ms. Bovbjerg. We haven't looked at that. We would be 
reliant greatly on Social Security actuaries in assigning 
figures to that.
    Chairman Shaw. That could be helpful. And that is an area 
where I think the conservatives and the liberals could come 
together and support in that, because that would certainly do a 
lot to bring equity to the system.
    One other area that I think this Subcommittee should take a 
close look at. Jennifer brought it up and then Karen followed 
up on it at some point, and that is the question of why don't 
we give the courts discrimination in a divorce suit to make 
some decisions with regard to the distribution of Social 
Security? It is a pension system, and pension, private pensions 
are subject to divorce decrees, so why wouldn't the Social 
Security? Do you have any comments on that? I haven't really 
thought it through, but it seems like something this 
Subcommittee should look at.
    Ms. Bovbjerg. Well, I guess that I think that, if you were 
to restructure Social Security and not address the question of 
how to deal with benefits owed to divorced spouses, that that 
would be unfortunate. That it would be better to think about 
these things in advance and consider whether to leave it to the 
divorce courts or whether to have some mechanism set up to do 
something that would be more automatic. I don't have advice for 
you on that, beyond saying that I think we should consider it, 
consider the different options.
    Chairman Shaw. Well, we are looking for a lot of new ideas. 
You certainly have done a good job for us. We appreciate your 
being with us this afternoon. Thank you for your testimony.
    Ms. Bovbjerg. Thank you very much.
    Mr. Mulvey. Thank you.
    Chairman Shaw. The next panel, we have Diahann W. Lassus, 
who is president of the National Association of Women Business 
Owners from Silver Spring, Maryland, and president and coowner 
of Lassus Wherley & Associates. We have Edna Coleman, Social 
Security beneficiary in McLean, Virginia, on behalf of the 
Older Women's League; Amy Holmes, policy analyst, Independent 
Women's Forum; Joan Entmacher, and correct me if I 
mispronounced that, vice president and director of Family 
Economic Security, National Women's Law Center; Sharon F. 
Canner, vice president, Entitlement Policy, National 
Association of Manufacturers, on behalf of Alliance for Worker 
Retirement Security; Marilyn Leist, Middle Atlantic regional 
director of the National Board of Directors, American 
Association of University Women.
    We welcome all of you to this panel. Thank you for taking 
time to be with us. We have your full testimony and we would 
invite you to summarize as you feel comfortable. Thank you.
    Ms. Lassus.

STATEMENT OF DIAHANN W. LASSUS, PRESIDENT, NATIONAL ASSOCIATION 
    OF WOMEN BUSINESS OWNERS, SILVER SPRING, MARYLAND; AND 
 PRESIDENT AND COOWNER, LASSUS WHERLEY & ASSOCIATES, P.C., NEW 
                     PROVIDENCE, NEW JERSEY

    Ms. Lassus. Good afternoon, Mr. Chairman, and Members of 
the Subcommittee. Thank you for the opportunity to appear 
before you today. I am a small business owner with offices in 
New Jersey and Florida. I am also president of the National 
Association of Women Business Owners, known as NAWBO. NAWBO 
represents this country's 8.5 million women businessowners and 
advocates on their behalf. Women businessowners have played a 
leading role in shaping America's future. We employ over 23.8 
million workers in this country, contribute $3.1 trillion in 
annual revenue to the economy. Our businesses are growing at 
twice the rate of small businesses in general. We believe the 
three-legged stool of Social Security, personal savings, and 
public and private pension plans is being increasingly 
threatened, and is in need of new ideas and action to ensure 
that Americans can face a retirement without fear.
    The primary issue we are dealing with today is the fact 
that women who take time away from employment to raise a family 
and take care of others, including parents, have shorter 
working careers and lower lifetime earnings. The lower lifetime 
earnings lead to lower long-term commitments to Social Security 
and to pensions. What can we do that will provide equitable 
benefits to these women in a cost-effective way? There are many 
ways to expand opportunities for women to take control of their 
financial and retirement future. The following are five 
recommendations that NAWBO is making to this Subcommittee.
    My mother was a single parent and spent most of her career 
working in restaurants and retail establishments. She never had 
access to pensions or retirement savings plans. Her basic 
retirement was her Social Security widow's benefit from my 
father, who died at the age of 49. These dollars made a 
difference in the quality of life, but certainly did not 
provide for all of her needs. But my mother would have been the 
first to argue that her Social Security check was not a pension 
check. We know Social Security was never intended to be the 
sole source of income in retirement, and we need to keep that 
point in sight as we continue this discussion.
    The small business community is extremely concerned about 
discussions that involve increasing payroll taxes. We believe 
that increasing taxes has potentially significant negative 
impact on small business, and is to be avoided at all costs. 
Such action would slow down the growth of the sector that has 
continued to grow employment in recent years, as larger 
corporations merge, downsize, and lay off workers. One 
alternative to provide a more equitable retirement benefit is a 
voluntary supplemental Social Security benefit, where 
individuals could choose to pay in additional dollars to 
increase the benefit available to his or her spouse.
    Another approach used by many educational systems allows 
for makeup contributions to pension plans when teachers don't 
contribute for a period of time. Providing women the 
opportunity to make up contributions in the Social Security or 
pension system would provide an option for increasing benefits 
and moving toward a solution to the current discrepancy in 
retirement income.
    We need to expand opportunities to save through other 
pension options. Many people believe that women save less than 
men. In fact, they don't. When given the opportunity, women 
save as much as men do. But women are much more likely to work 
part time, work for a small business, or be homemakers, which 
means they have less access to pension plans.
    According to the Employee Benefit Research Institute's 1998 
small employer retirement survey, there are approximately 23 
million small businesses with fewer than 25 employees. Only 
17.2 percent of these businesses have a pension plan. In the 25 
to 99 employee category, there are approximately 12 million, 
and they have 41.7 percent coverage of pension plans. This 
shows very clearly how significant the issue of pensions in 
small firms is, and the number of employees who currently have 
no pension or retirement plan coverage.
    There are many issues involved. But I will focus on one. 
The high cost per employee of implementing a pension plan for a 
small business. One answer can be found in what we call 
association pension plans. If we can create a larger universe 
such as an association and reduce the cost per person, we can 
increase the utilization of pension plans and thereby help 
women save more.
    Number 4 on our list is increasing or removing the earnings 
cap, which would encourage women and men to work and allow them 
to continue to help themselves and increase their standard of 
living in retirement. And last, in a recent survey, our NAWBO 
members chose privatization of Social Security as an issue they 
believe is critical. NAWBO supports a system that would start 
to transition immediately to provide more viable choices for 
individuals between the current basic benefit system and the 
new retirement system. We favor a carve-out of current 
contributions to begin private investment accounts. We believe 
that these recommendations provide an opportunity to move 
Social Security and women forward. If we focus on increasing 
access to pensions and the opportunity to control one's own 
investments, we can plan for and enjoy a quality retirement.
    Thank you.
    [The prepared statement follows:]

Statement of Diahann W. Lassus, President, National Association of 
Women Business Owners, Silver Spring, Maryland; and President and 
Coowner, Lassus Wherley & Associates, P.C., New Providence, New Jersey

    Good afternoon Mr. Chairman and members of the Committee. 
Thank you for the opportunity to appear before you today to 
discuss ``Social Security protections for women.''
    I am a small business owner with offices in New Jersey and 
Florida and provide services to clients in 15 states. I am also 
president of the National Association of Women Business Owners 
(NAWBO).
    NAWBO represents this country's 8.5 million women business 
owners and advocates on their behalf from our city halls to 
international forums. The National Foundation for Women 
Business Owners (NFWBO), a sister organization, tells us what 
our community looks like with its ongoing, ground breaking 
research. NFWBO's statistics are quoted by the business and 
mainstream media, as well as governments, and even the 
president of the United States. The National Women Business 
Owners Corporation (NWBOC), another sister organization, 
pioneers technology, access, certification and education 
initiatives to enhance competition by women suppliers in the 
government and corporate markets. NWBOC has established the 
first national certification program and created a national 
database of women-owned businesses for procurement 
opportunities with the Federal government and the private 
sector.
    Our organizations have developed the network which will be 
critical to making fundamental change happen. We are the eyes 
and ears of our community which has allowed us to flourish as 
leaders for the community. Our strength is drawn from our 
relationships with our chapters and consortium partners, and 
our partnerships with corporate America. The work of our 
organizations are multi-faceted and covers a broad range of 
advocacy, research, and procurement. We are leaders in 
technology . . . And we are accountable. In essence, through 
our complementary missions, we strive to increase opportunities 
for women business owners to succeed and to continue to 
contribute to a healthier economy.
    Women business owners have played a leading role in shaping 
America's future. We represent virtually every industry in our 
country. We employ over 23.8 million workers, which comprise 
36% of all U.S. firms, and provide employment to 26% of U.S. 
workers.\1\ We contribute $3.1 trillion dollars in annual 
revenues to the U.S. economy.\2\ Women-owned businesses have 
grown in number by 78% since 1987 \3\ including such non-
traditional areas such as construction, wholesale trade, 
transportation, communication, and manufacturing.\4\
---------------------------------------------------------------------------
    \1\ Source: National Foundation for Women Business Owners and U.S. 
Small Business Administration
    \2\ Id.
    \3\ Source: National Foundation for Women Business Owners
    \4\ Id.
---------------------------------------------------------------------------
    Our businesses are growing at twice the rate of small 
businesses as a whole \5\ and have contributed to reducing 
unemployment; making welfare to work successful; creating new 
products, services and ventures; and increasing exports.
---------------------------------------------------------------------------
    \5\ Id.
---------------------------------------------------------------------------
    The ``three-legged stool'' of Social Security, personal 
savings and public and private pension plans is being 
increasingly threatened and is in need of new ideas and action 
to assure that Americans can face a retirement without fear. We 
are faced with a Social Security system that is unsound, a 
rapidly aging population, and unacceptably low rates of 
personal savings. We need significant public policy and social 
responses to these issues now. Almost 30 years ago, visionary 
people like Nobel laureate James Buchanan understood that 
radical reform of the U.S. Social Security system would be 
needed.\6\
---------------------------------------------------------------------------
    \6\ James M. Buchanan, ``Social Insurance in a Growing Economy: A 
Proposal for Radical Reform.'' National Tax Journal, Vol. 21 (December 
1968): 386-95
---------------------------------------------------------------------------
    The primary issue that we are dealing with today is the 
fact that women, who take time away from employment to raise a 
family or to take care of others including parents, have 
shorter working careers and lower lifetime earnings. Lower 
lifetime earnings lead to lower long-term contributions to 
Social Security and pensions and therefore lower benefits in 
retirement. What can we do that will provide equitable benefits 
to these women in a cost effective way?
    The following findings can be found in the results of the 
study ``Not Your Mother's Retirement: Women and Saving in 1998 
published by the American Savings Education Council (ASEC). 
Older and retired women are much more likely to depend on 
Social Security income. Younger women and those with higher 
income and educational levels are more likely to rely on 
employer's pensions or retirement account contributions plus 
personal savings. Many women under age 35 do not expect to rely 
on Social Security as a source of income in retirement because 
they do not believe the system will exist when they will need 
it. Women who are currently working are more likely than those 
who are retired to rely on personal savings including the sale 
of a home or business and other sources of income.\7\
---------------------------------------------------------------------------
    \7\ Not Your Mother's Retirement: Women and Saving in 1998, 1998 
Women's Retirement Confidence Survey, American Savings Education 
Council
---------------------------------------------------------------------------
    Let's explore alternatives for the future to expand 
opportunities for women to take control of their financial and 
retirement future. There are many ways to assist women in 
maintaining their quality of life in retirement. The following 
are NAWBO's recommendations for dealing with this issue:
     Provide for purchase of supplemental Social 
Security benefits based on certain circumstances.
     Provide make-up opportunities within Social 
Security and pensions.
     Expand opportunities to save through other pension 
options.
     Increase or remove the earnings cap.
     Build a new future by providing the opportunity 
for investment through privatization.

1. Provide for purchase of supplemental Social Security benefits based 
                       on certain circumstances.

    My Mother was a single parent who spent most of her career 
working in restaurants and retail establishments. She never had 
access to pensions or retirement savings plans. Her basic 
retirement was her Social Security widow's benefit from my 
Father who died at 49. These dollars made a difference in the 
quality of her life but certainly did not provide for anything 
other than basic food, clothing and utilities. But my Mother 
would have been the first to argue that her Social Security 
check was not a pension check. We know Social Security was 
never intended to be the sole source of income in retirement 
and we need to keep that point in sight as we continue this 
discussion.
    The small business community is extremely concerned about 
discussions that involve increasing payroll taxes. We believe 
that increasing taxes has potentially significant negative 
impact on small business and is to be avoided at all costs. 
Such action would slow down the growth of the sector that has 
continued to grow employment in recent years as corporations in 
the U.S. merge, downsize and lay off workers.
    As a small business owner, my company employs many women 
and a large percentage of them are part-time workers. This is 
true of many small businesses. If our costs were to increase 
significantly in order to provide future Social Security 
benefits, it would, in fact reduce employment opportunities 
today.
    Increasing payroll taxes also creates major problems for 
low income individuals who are already struggling to make ends 
meet. My brother is legally blind and has struggled to make 
ends meet as he earns less than $30,000 per year. His budget is 
very detailed and has no room for error. An increase in payroll 
taxes at any level would have a devastating impact on him.
    There are other alternatives to provide a higher or more 
equitable retirement benefit such as a voluntary supplemental 
Social Security Benefit. Individuals could choose to pay in 
additional dollars to increase the benefit available to his/her 
spouse. This assumes that there would be a ``basic'' benefit 
but individuals could be eligible for additional benefits if 
they chose to ``purchase'' them. This does not increase the 
payroll tax burden on the individual or on the employer.

 2. Provide make-up opportunities within Social Security and pensions.

    The major issue facing women in preparing for retirement is 
the fact that they leave the workforce to have children, and 
therefore, do not have the same opportunity to accumulate a 
higher Social Security or pension benefit. Many education 
systems allow for ``make-up'' contributions to pension plans 
when teachers do not contribute for a period of time. Once they 
begin contributions, they are able to make contributions that 
were not made in the past. Some systems also offer 
opportunities to ``purchase'' pension benefits.
    Providing women the opportunity to make up contributions in 
the Social Security and/or pension system would provide an 
option for increasing benefits and moving toward a solution to 
the current discrepancy in retirement income. This could be 
structured in many different ways. One way would be to take the 
last year worked before leaving the workforce and the first 
year after returning to the workforce and coming up with an 
average. This average could be used to calculate the 
contributions required to make up for the missed years. The 
actual contributions could be spread over a period of ten years 
or could be paid as a lump-sum contribution. There are many 
ways to structure this system to provide more equalized 
benefits for women who have been away from the workforce for 
some period of time. This would be even more effective in a 
system where the individual is able to make these contributions 
to their own individual retirement investment account.

     3. Expand opportunities to save through other pension options.

    Many people believe that women save less than men. In fact, 
women save just as much when they have the opportunity to save. 
But women are more likely to find themselves forced to finance 
their own retirement after divorce or the death of a spouse. 
They also are more likely to spend at least part of their 
working lives as part-time employees or homemakers. This means 
that they often have less access to pension plans at work. And 
women generally live longer than men, increasing their need for 
retirement savings.
    According to the Employee Benefit Research Institute's 1998 
Small Employer Retirement Survey there are approximately 
23,000,000 small businesses with fewer than 25 employees. Only 
17.2% of these businesses have a pension plan. In the 25-99 
employee category there are approximately 12,000,000 with 41.7% 
of these companies offering some type of pension plan. This 
compares to companies with 100 or more employees and 
approximately 79.4% of them offering some level of pension 
coverage. This shows very clearly how significant the issue of 
pensions in small firms is and the number of employees who 
currently have no pension or retirement plan coverage.\8\
---------------------------------------------------------------------------
    \8\ Source: Employee Benefit Research Institute (EBRI) tabulations 
of the 1993 Current Population Survey employee benefits supplement.
---------------------------------------------------------------------------
    There has been much discussion about increasing Social 
Security benefits to women. We would suggest that this is not 
the answer to improving the quality of life for women in 
retirement. The answer lies in providing more and better 
savings vehicles for women. Many women who leave the workplace 
to have children return on a part-time basis and end up working 
for small businesses. One of the reasons these small businesses 
do not provide pension coverage is because of the high cost of 
administering these plans on a per employee basis.
    Increasing the opportunities to invest in pensions and 
other retirement options would significantly improve the long-
term financial health of women. There are many ways to make 
this happen. The first is to decrease the cost per person to 
establish and maintain a pension plan, the second is to provide 
incentives for small business to implement a pension plan, and 
the third is to continue to educate business owners about the 
alternatives they have available to them.
    The U.S. Department of Labor and NAWBO have embarked on an 
education program to inform our members about the SIMPLE plan 
and to encourage them to participate in establishing pension 
plans for their employees. There is legislation pending that 
would provide some incentives for small business to establish 
and fund pension plans for their employees. We need to do more 
to educate our women business owners and we need more 
incentives for business owners to establish pension plans. 
However, after we move forward in beginning to answer those two 
issues, the largest issue still remains. The cost per person 
for small business pension plans is still too high. If small 
businesses could be encouraged to provide plans for women to 
have the opportunity to save, it would significantly improve 
the plight of women in retirement.
    How can we reduce the cost of offering plans within small 
business? The answer can be found in what we call Association 
Pension Plans. If a larger universe such as an association can 
create a specific prototype plan and their members (small 
business owners) can participate at a significantly lower cost 
than is currently available, it would help us increase the 
participation of small business in pension plans. More pensions 
in small business would increase the opportunity for women to 
save. In the current environment, Associations offer individual 
pension plans through primarily insurance and brokerage firms 
today.
    An Association Pension Plan would be structured such that 
if a small company was a member of this plan, any employee 
could participate. There may be a need for a small minimum 
contribution per employee to assure participation. However, if 
reporting requirements are not focused on ``each'' individual 
company ``top-heavy'' rules and other criteria, the cost of 
reporting and tracking would be significantly lower.
    Individual firms would have to give up some flexibility in 
designing the plan for their firm, but the reduction of 
administrative costs per person could be significant with the 
efficiencies gained by having a single administrator. There 
could also be significant savings because of the large dollars 
of pooled assets. Investment management fees could be 
significantly reduced because of the sliding scale used to 
determine fees. There would be more incentive for Associations 
to promote pension set-up and maintenance to their members.
    The critical factor here is that we must find ways to 
reduce the administrative and management costs in order to 
increase the percentage of small businesses that offer pension 
plans. This is a crucial part of solving the problem associated 
with low or no pension benefits for women.

                4. Increase or remove the earnings cap.

    Increasing or removing the earnings cap would encourage 
women to work and would allow them to continue to provide for 
themselves. It would also assure a pool of experienced and 
qualified employees in a labor market that is very tight. This 
single step would go a long way toward decreasing the number of 
women who live below poverty in retirement.
    I have many clients who really want to continue to work but 
are not willing to give up Social Security benefits in order to 
continue to work. This is a tremendous loss of talent in our 
current job market and can, in fact, reduce the standard of 
living for these individuals. There are many individuals who 
are willing and able to work well beyond age 65. They should 
not be penalized for continuing to contribute to our economy 
and for wanting to be self-sufficient.

   5. Build a new future by providing the opportunity for investment 
                         through privatization.

    One of the top issues for 1999 for our members is, in fact, 
Social Security reform. In a recent survey, our members chose 
privatization of Social Security as an issue they believe is 
critical. We believe that in a society where we have more 
opportunities and choices than anywhere else in the world, we 
should have the right to determine how our dollars are 
invested. These dollars should be credited to and available for 
the individual making the contributions, and not for the 
benefit of others.
    NAWBO members believe that the Social Security system can 
not survive in its present form and therefore believe dramatic 
change is inevitable. A privatized Social Security system would 
be essentially a mandatory savings program. The dollars would 
still be deducted from employee's pay and matched by the 
employer. But the dollars would be invested through some type 
of retirement account similar to 401(k) programs and IRAs, with 
investment alternatives.
    It is imperative to move toward a system that allows for 
investment in stocks and bonds and provides an opportunity for 
young people to have a positive return and to have confidence 
that there will be dollars available for them when they retire. 
Such a system and it's proceeds would be invested for workers 
and not used immediately to pay present retirees.
    We support a system that would start to transition 
immediately to provide more viable choices for individuals 
between the current basic benefit system and the new retirement 
account system. The new individual retirement accounts would 
provide an effective vehicle for the make up contributions 
recommended in Item #2.
    There are many economic advantages to converting to a 
retirement account type of system vs. the current pay-as-you-go 
system. The first is it offers a much higher potential 
financial rate of return to young workers, gives individuals 
control over their own retirement, increases workers' ownership 
in American businesses, and the increased flow of funds into 
private capital markets could reduce the cost of capital 
promoting increased capital formation and business creation.
    NAWBO supports the current proposals that recommend either 
a carve-out of current contributions to begin private 
investment accounts or allocating all current contributions to 
start these private accounts. We do not support any proposal 
that includes an increase in payroll taxes.
    NAWBO believes that these proposals provide an opportunity 
to move Social Security and women forward. We believe that if 
we can focus on increasing access to pensions and the 
opportunity to control one's own investments we can plan for 
and enjoy a quality retirement.
      

                                


    Chairman Shaw. Thank you.
    Ms. Coleman.
    Could you pass the microphone over there? Thank you.

STATEMENT OF EDNA COLEMAN, SOCIAL SECURITY BENEFICIARY, MCLEAN, 
                   VIRGINIA, ON BEHALF OF OWL

    Ms. Coleman. Chairman Shaw and Members of the Subcommittee 
on Social Security, I am Edna Coleman. I am here on behalf of 
OWL, the Older Women's League, the only national membership 
organization to focus on important issues for women as they get 
older. I want to thank you for the opportunity to be here 
today. I came because I think I am typical of the millions of 
women who benefit everyday from Social Security. It is 
important that when you decide how to make Social Security 
stronger for the future, you have an idea of the difference 
that this great program has made in people's lives.
    I am 90 years old, and I am a woman, just like more than 70 
percent of the people over 85 who get Social Security. I have 
lived in a retirement apartment in McLean, Virginia, since my 
husband died 18 years ago. He worked for the Animal Rescue 
League caring for animals. During the Second World War, I 
worked at a temporary government job, and worked taking care of 
older sick people thereafter.
    My husband and I had no children, so I am completely 
dependent on my monthly Social Security check, which is well 
under $1,000 a month, for all my day-to-day expenses. I also 
have a small amount in CDs, but they are rapidly being eaten up 
in medical costs. My doctor has told me that I have every kind 
of arthritis there is. I have brittle bones and a heart 
condition, and I have had fourteen operations in the 18 years 
that I have lived in my current apartment.
    I have wonderful medical coverage with my Medicare, 
including some drug coverage. But my doctor says generic drugs 
are wrong for my condition, and I spend more than $1,200 a 
month out of pocket to get my prescriptions filled. For me, 
Social Security and Medicare walk hand in hand. If I didn't 
have a steady Social Security check coming every month, I don't 
know how I would have survived all these years. That check will 
continue to come every month as long as I live. It is a real 
lifeline.
    That is the really great thing about Social Security. It is 
something I can thank my husband for, too. I paid very little 
money into Social Security when I worked. But even though he 
never earned a lot of money, it is his benefits that keep me 
comfortable now. My widow's benefit allows me to live in my own 
place and in comfort, and I appreciate the raise I get every 
year to meet the increased cost of living.
    I have been reading about the changes people want to make 
to Social Security. I don't think it's a good idea to ask 
people like me to put their small Social Security benefits in 
the stock market. I do have my savings in CDs, they are safe 
and earning some money for me. That is my savings. For my 
Social Security, the money I need for rent, food, and other 
day-to-day necessities, I don't want to risk a penny that I 
don't have to.
    I keep hearing about all the baby boomers who will be 
retiring in the next 20 years. A lot of them will be women, and 
many will have lived their lives just like I have. I really 
believe they would want their money safe and secure, and they, 
just like me, will need to know exactly how much money they can 
count on each month. Promises of bigger monthly checks are just 
that, promises. How can you ask women to take that risk? What 
happens when someone lives as long as I do, but she has made 
bad investments? Will women have to make a choice between 
paying rent or getting good health care?
    I really like the President's idea of putting some of the 
surplus into the Social Security Trust Fund. I think that's one 
of the things you can do that will help Social Security 
continue taking care of women without risking their benefits or 
raising their taxes. My husband worked hard to take care of me, 
and through the Social Security, he is still doing so. I think 
about the young women of today having to work hard and take 
care of their children at the same time, and I worry about 
them. I hope they will have the same security in old age that I 
have today.
    Thank you.
    [The prepared statement follows:]

Statement of Edna Coleman, Social Security Beneficiary, McLean, 
Virginia, on behalf of OWL

    Chairman Shaw and Members of the Subcommittee on Social 
Security. I am Edna Coleman, and I am here on behalf of OWL, 
the only national membership organization to focus on important 
issues for women as they get older. I want to thank you for the 
opportunity to be here today.
    I came because I think I am typical of the millions of 
women who benefit every day from Social Security, and it is 
important that when you decide how to make Social Security 
stronger for the future you have an idea of the difference that 
this great program has made in people's lives.
    I am 90 years old, and I am a woman, just like more than 70 
percent of the people over 85 who get Social Security. I have 
lived in a retirement apartment in McLean, Virginia since my 
husband died eighteen years ago. He worked for the Animal 
Rescue League caring for animals. During the Second World War, 
I worked at a temporary government job, and worked taking care 
of elderly sick people. My husband and I had no children, and 
so I am completely dependent on my monthly Social Security 
check, which is well under $1000 a month, for all my day-to-day 
expenses. I also have a small amount of savings, but they are 
rapidly being eaten up in medical costs.
    My doctor has told me that I have every kind of arthritis 
there is. I have brittle bones, and a heart condition, and I 
have had fourteen operations in the eighteen years I have lived 
in my current apartment. I have wonderful medical coverage with 
my Medicare, including some drug coverage. But my doctor says 
generic drugs are not right for my conditions, and I spend 
about $1200 a month out-of-pocket to get my prescriptions 
filled. For me, Social Security and Medicare walk hand in hand.
    If I didn't have a steady Social Security check coming 
every month, I don't know how I would have survived all these 
years. That check will continue to come every month as long as 
I live. It's a real lifeline. That's the really great thing 
about Social Security.
    It's something I can thank my husband for, too. I paid very 
little money into Social Security when I worked, but even 
though he never earned a lot of money, it is his benefit that 
is keeping me comfortable now. My widow's benefit allows me to 
live in my own place, and in comfort, and I appreciate the 
``raise'' I get every year to meet the increased cost of 
things.
    I've been reading about the changes some people want to 
make to Social Security. I don't think it's a good idea to ask 
people like me to put their small Social Security benefits in 
the stock market. I do have my savings in CDs--they're safe, 
and they're earning some money for me. But that's my savings. 
For my Social Security, the money I need for rent, food and 
other daily necessities, I don't want to risk a penny that I 
don't have to.
    I keep hearing about all the baby boomers who will be 
retiring in the next twenty years. A lot of them will be women, 
and many will have lived their lives just like I have. I really 
believe they will want their money safe and secure, and they, 
just like me, will need to know exactly how much money they can 
count on each month. Promises of bigger monthly checks are just 
that--promises. How can you ask women to take that risk? What 
happens when someone lives as long as I do, but she's made bad 
investments? Will women have to make a choice between paying 
rent or getting good health care?
    I really like the President's idea of putting some of the 
surplus into the Social Security Trust Fund. I think it's one 
of the things you can do that will help Social Security 
continue taking care of women without risking their benefits or 
raising their taxes. My husband worked hard to take care of me, 
and through the guarantee of Social Security, he's still doing 
so. I think about the young women of today--having to work hard 
and take care of their children at the same time, and I worry 
about them. I hope they will have the same security in old age 
that I have today.
    Thank you.
      

                                


    Chairman Shaw. Thank you, Ms. Coleman. I wanted just to 
mention one thing. I don't know of anyone, I know the President 
hasn't, and I don't know of anybody in Congress that has 
suggested people receiving the Social Security put money in the 
stock market. I wouldn't think that would be too wise in your 
case.
    Ms. Holmes.

STATEMENT OF AMY M. HOLMES, POLICY ANALYST, INDEPENDENT WOMEN'S 
                             FORUM

    Ms. Holmes. Yes. Mr. Chairman, distinguished Members of the 
Subcommittee, ladies and gentlemen, good afternoon. My name is 
Amy Holmes, and I am a policy analyst with the IWF, Independent 
Women's Forum. It is an honor and a privilege to be invited to 
speak to you today on behalf of myself and the women of IWF.
    The Independent Women's Forum is a nonprofit, nonpartisan 
organization dedicated to research and public education on 
policy issues concerning women. The Independent Women's Forum 
neither solicits nor accepts government funds pursuant to House 
Rule 11, Clause 2G4. I confirm that IWF has at no time received 
any Federal grant, contract, or subcontract.
    The first person ever to receive a Social Security check 
was a woman named Ida Fuller. She ultimately received $20,000 
in benefits over her retirement from the Federal Government. 
Not a bad return on $20 paid in taxes, but what a difference 60 
years makes. Today, you are hearing from a variety of 
perspectives on how to reform the system. I will humbly leave 
the more technical aspects to my colleagues. I come to you as a 
25-year-old woman, keenly aware of the impending Social 
Security crisis and the need to start saving for my retirement 
sooner, rather than later, more rather than less.
    As an African-American, unmarried woman, I can be counted 
in the categories of recipients most dependent on Social 
Security for future retirement income. Which means I have a lot 
to worry about, since when I hit retirement age, there will be 
fewer than two workers to support my benefits as compared to 
8.6 workers in 1955.
    In the meantime, according to conservative estimates from 
Economic 2000, baby boomer Social Security entitlements 
threaten to push my lifetime tax rates up to an unconscionable 
60 to 70 percent. You all know the statistics, and they paint a 
grim picture. Clearly, the time for reform is now, and three-
quarters of American adults agree, according to a recent poll 
conducted for the Associated Press.
    Yet groups that claim to speak for women oppose the reform 
that would truly liberate women from government dependence and 
offer us real choice and ownership of our financial future. 
Instead, groups such as the National Organization for Women, 
downplay Social Security concern as nothing more than ``a 
Chicken Little atmosphere.'' According to a recent statement on 
the NOW Web site, ``The threat our families face is not the 
imminent collapse of Social Security funding, but a possible 
shortfall after 2032.'' Well, even if they are right, and this 
Subcommittee knows well, that the trust fund is filled with 
paper promises, I simply cannot run the risk of waiting until I 
am 57 years old to shore up my retirement option. The Feminist 
Majority warns, that ``having a private account means that we 
bear all the risk of investing.'' The fact of the matter is, we 
bear all the risk of Social Security meltdown with no way to 
hedge against it. According to the 1998 Social Security 
Trustees' Report, if we stay with the status quo, we will 
either have to cut benefits by 25 percent, raise taxes by 50 
percent, cut government spending on other programs or increase 
the Federal debt.
    I guess I am most baffled by the support of these groups 
for government investment in the stock market. Such ill-advised 
investment would give an enormous advantage to large traded 
companies with all of their alleged problems of wage inequities 
and glass ceilings over small businesses. And as we have heard, 
that is precisely where women have made their greatest gain and 
achieved economic success and independence.
    According to the National Foundation of Women Business 
Owners, women own 7.7 million businesses, employing 15.5 
million people in generating a whopping $1.4 trillion in sales. 
You have heard some even better statistics today. Female-owned 
businesses are growing more rapidly than the overall economy, 
and are more likely to remain in business over the past 3 years 
than the average U.S. firm. I would like to believe that is 
because women are more likely to stop and ask for directions. 
It simply doesn't make sense from a woman's point of view to 
tip the scales against female entrepreneurs in favor of Fortune 
500 companies. There is much more to be said on this topic.
    But let me close with this. One hundred and fifty years 
ago, Elizabeth Cady Stanton argued before the New York 
legislature that we are ``persons, native, free-born citizens, 
property holders, taxpayers,'' and that a woman has ``a right 
to the property she inherits and the money she earns.'' How far 
we have strayed from the cause and true liberations, that in 
1999, the possibility of private ownership and control of our 
retirement assets is controversial, that women are painted as 
timid and easily duped, and that the freedom to choose and plan 
for our retirement is better left to the wisdom of government 
officials.
    Reforming Social Security to take into account the 
differences in women's work history, longevity, and poverty 
rates, will take imagination and resolve. Earning sharing where 
spouses split savings in separate accounts, is one such 
solution. Ensuring a safety net for elderly women, like Edna, 
who are most likely to suffer from poverty, must also top any 
reform agenda. But do not be fooled by those who have used our 
differences to thwart honest efforts. Social Security reform is 
a woman's issue now more than ever.
    Thank you.
    [The prepared statement follows:]

Statement of Amy M. Holmes, Policy Analyst, Independent Women's Forum

    Mr. Chairman, distinguished members of the Subcommittee, 
ladies and gentlemen. Good afternoon. My name is Amy Holmes and 
I am a policy analyst for the Independent Women's Forum. It is 
an honor and a privilege to be invited to speak to you today on 
behalf of myself and the women of IWF.
    The Independent Women's Forum is a non-profit, non-partisan 
organization dedicated to research and public education on 
policy issues concerning women. The Independent Women's Forum 
neither solicits, nor accepts government funds. Pursuant to 
House Rule XI, clause 2(g)(4), I confirm that IWF has at no 
time received any federal grant, contract or subcontract.
    The first person ever to receive a Social Security check 
was a woman named Ida Fuller. She ultimately received $20,000 
in benefits over her retirement from the federal government. 
Not a bad return on the $22 she paid in taxes. What a 
difference sixty years makes.
    Today, you are hearing from a variety of perspectives on 
how to reform the system. I will humbly leave the more 
technical analysis to my colleagues. I come to you as a 25 year 
old woman keenly aware of the impending Social Security crisis 
and the need to start saving for my retirement, sooner rather 
than later, more rather than less.
    As an African American, unmarried woman I can be counted in 
those categories of recipients most dependent on Social 
Security for future retirement income. Which means I have a lot 
to worry about, since when I hit retirement age, there will be 
fewer than two workers to support my Social Security benefits 
as compared to 8.6 workers for every beneficiary in 1955. In 
the meantime, according to conservative estimates from Economic 
Security 2000, baby boomers' Social Security entitlements 
threaten to push my lifetime tax rate up to an unconscionable 
sixty to seventy percent. You know the statistics--they paint a 
grim picture. Clearly, the time for bold reform is now. A 
December poll conducted for the Associated Press found that 
three fourths of American adults agree.
    Yet, groups that claim to speak for women oppose these 
reforms that would truly liberate women from government 
dependence, and offer us real choice and ownership of our 
financial futures. Instead, groups such as the National 
Organization for Women downplay Social Security concern as 
nothing more than a ``Chicken Little atmosphere.'' According to 
a recent statement by Patricia Ireland, ``The threat our 
families face is not the imminent collapse in Social Security 
funding, but a possible shortfall after 2032.'' Even if she's 
right, and the Committee knows well that the Trust Fund is 
filled with paper promises, I cannot run the risk of waiting 
until I'm 57 years old to shore up my retirement options.
    The Feminist Majority warns that ``having a private account 
means that [we] bear all the risk of investing.'' The fact of 
the matter is, we bear all of the risk of Social Security 
meltdown with no way to hedge against it. According to the 1998 
Social Security Trustee Report, if we stay with the status quo, 
we will either have to cut benefits by 25%, raise taxes by 50%, 
drastically cut government spending on other programs, or 
increase the federal debt.
    But I am most baffled by the support of these groups for 
government investment in the stock market. Such ill advised 
investment would give an enormous advantage to large traded 
companies, with all of their alleged problems of wage 
inequities and glass ceilings, over small businesses. And 
that's precisely where women have made their greatest gains and 
achieved economic success and independence.
    According to the National Foundation of Women Business 
Owners, women own 7.7 million businesses, employing 15.5 
million people and generating $1.4 trillion in sales. Female 
owned businesses are growing more rapidly than is the overall 
economy and are more likely to have remained in business over 
the past three years than the average U.S. firm. (I like to 
believe it's because women are more likely to stop and ask for 
directions.) It simply doesn't make sense from a woman's point 
of view to tip the scales against female entrepreneurs in favor 
of Fortune 500 companies.
    There is much more to be said on this topic, but let me 
close with this:
    One hundred and fifty years ago, Elizabeth Cady Stanton 
argued before the New York legislature that we are ``persons; 
native, free-born citizens; property-holders, tax-payers'' and 
that a woman has ``a right to the property she inherits and the 
money she earns.'' How far we have strayed from the cause for 
true liberation that in 1999 the possibility of private 
ownership and control of our retirement assets is 
controversial; that women are painted as timid and easily 
duped; and that the freedom to choose and plan for one's 
retirement is better left to the wisdom of government 
officials.
    Reforming Social Security to take into account the 
differences in women's work history, longevity and poverty 
rates will take imagination and resolve. Earnings sharing, 
where spouses split retirement savings in separate accounts, is 
one such solution. Ensuring a safety net for elderly women, who 
are most likely to suffer from poverty, must also top any 
reform agenda. But do not be fooled by those who would use 
these differences to thwart honest efforts. Social Security 
reform is a woman's issue--now more than ever.
      

                                


    Chairman Shaw. Thank you, Ms. Holmes.
    Ms. Entmacher.

   STATEMENT OF JOAN ENTMACHER, VICE PRESIDENT AND DIRECTOR, 
     FAMILY ECONOMIC SECURITY, NATIONAL WOMEN'S LAW CENTER

    Ms. Entmacher. Yes, thank you.
    Chairman Shaw. Am I pronouncing your name correctly?
    Ms. Entmacher. Yes.
    Chairman Shaw. Oh, good. Thank you.
    Ms. Entmacher. Chairman Shaw, and Members of the 
Subcommittee, I am Joan Entmacher, vice president and director 
of Family Economic Security of the National Women's Law Center. 
I thank you for calling this hearing and for highlighting the 
importance of Social Security to women at the very beginning of 
the debate in this Congress. I appreciate the opportunity to 
testify before you today on behalf of the National Women's Law 
Center.
    I am not going to repeat all the facts and figures that 
explain why Social Security's guaranteed, lifetime, inflation-
protected, progressive retirement benefits are especially 
important to women. But I do want to stress one point that is 
especially relevant as Congress considers the future of Social 
Security and proposals for alternative retirement programs. And 
that is that, especially for women, Social Security is much 
more than a worker retirement program. For men, that is what 
Social Security overwhelmingly is.
    In 1997, 82 percent of the adult male recipients of Social 
Security benefits were retired workers. Only 18 percent of 
adult male beneficiaries were disabled workers, spouses, 
surviving spouses, or disabled adult children. In contrast, 
nearly half of adult female beneficiaries, 44 percent, relied 
on Social Security's disability and family protections. And 
these figures do not reflect the additional 4 million children 
who receive benefits because a parent died or became disabled.
    The next point I want to make is that Social Security's 
protections will continue to be important to future generations 
of women. It is true that women are working more and earning 
more than in the past. But don't be misled by the media focus 
on the situation of one subgroup of women, those with college 
education and beyond, who really have made striking gains in 
the last 25 years. That group has made great gains, but that 
experience is not representative of all women.
    In announcing this hearing, you, Mr. Chairman, stated that 
women make great sacrifices for American families at home and 
in the work force every day, and that statement is as true for 
younger women who struggle to balance work and family 
responsibilities, many holding the same kinds of jobs that 
their mothers did, as it is for older women who are more likely 
to be full-time homemakers and care givers. And it means that 
younger women too will be at much greater risk by changes to 
the system that would undermine Social Security's protections.
    The risks to women from proposals that depend on diverting 
payroll taxes to individual accounts, and therefore, requiring 
a reduction in guaranteed benefits, are discussed in my 
statement and a recent report by the Congressional Research 
Service. I will also point out that today's USA Today reports 
that a forthcoming GAO study is purported to find that the 
Texas privatization plan poses the risks that one would expect: 
That lower earners do less well than they would under Social 
Security, that the families of workers who die before 
retirement do less well than under Social Security, that for 
middle-income workers, people who live longer and don't have 
inflation protections do less well than under Social Security. 
And the only people who do better consistently are people who 
earn over $51,000 a year, and those are disproportionately men.
    So, I don't want to talk more about carve-out plans. What I 
do want to talk about briefly is another proposal that is 
getting discussion now, developed by economist Martin 
Feldstein, that promises to retain the current benefits 
structure and provide additional retirement income without 
raising taxes. Sounds too good to be true. Well, unfortunately, 
it is too good to be true, especially for women. There are 
three major problems.
    The first is that the cost of the plan falls 
disproportionately on women. This plan is financed by taking 
all or virtually all of the budget surplus into the foreseeable 
future. That poses particular risks for women whose health care 
cost in old age represent the greater burden. And Edna has 
talked eloquently about that issue today. If all of the surplus 
goes into individual accounts, there is not going to be 
anything left for Medicare or Medicaid, which provides long-
term care for women, not to mention education, child care, and 
other programs that women care about.
    And in the long run, even if we devoted all the projected 
budget surplus to funding the accounts, the actuaries at the 
CBO, Congressional Budget Office, and the Social Security 
Administration say it won't be enough. Ultimately, benefits 
will have to be cut and taxes are going to have to be raised. 
That is not the way to improve benefits and retirement security 
for younger women or men.
    Second, benefits under the Feldstein plan accrued 
disproportionately to high earners, mostly men. And third, the 
Feldstein plan undermines the long-term viability of Social 
Security as a social insurance program.
    In conclusion, I would like to suggest that the President's 
plan, reserving 62 percent of the surplus and investing some 
Social Security reserves the way prudent pension managers would 
with special protections, provides a good framework for 
strengthening the system. There are also ways to improve Social 
Security to reduce poverty among older women, that I discuss in 
my testimony. One is the option of increasing the survivor's 
benefit, which was discussed by the representative from GAO. 
The other is to reduce the nearly 100-percent tax on Social 
Security benefits received by the poorest elderly people, those 
people who receive SSI, Supplemental Security Income, benefits, 
73 percent of whom are women. There is only a $20 disregard for 
Social Security benefits in that program. It was set back in 
1972. It has never been changed. It won't cost the trust fund a 
dime, although, as Chairman Shaw knows, his former Subcommittee 
would have to consider the consequences of that proposal.
    In conclusion, I thank the Chairman and Members of the 
Subcommittee for focusing attention on these crucial issues.
    [The prepared statement follows:]

Statement of Joan Entmacher, Vice President and Director, Family 
Economic Security, National Women's Law Center

    Chairman Shaw and members of the Subcommittee on Social 
Security, I am Joan Entmacher, Vice President and Director of 
Family Economic Security of the National Women's Law Center. I 
thank the Chairman for calling this hearing, and for 
highlighting the importance of Social Security to women at the 
very beginning of the debate in this Congress. I appreciate the 
opportunity to testify before you today.
    The National Women's Law Center is a non-profit 
organization that has been working since 1972 to advance and 
protect women's legal rights. The Center focuses on major 
policy areas of importance to women and their families 
including employment, education, women's health, and family 
economic security, with special attention given to the concerns 
of low-income women and their families. Most relevant to this 
hearing, the Center has worked for more than two decades on 
issues of Social Security and women. It has presented testimony 
on Social Security issues affecting women to Congress, the 
Advisory Council on Social Security, and several task forces of 
the Department of Health and Human Services. The Center served 
on the Technical Committee on Earnings Sharing in Social 
Security and co-authored its report, and served on the 
Congressional Study Group on Women and Retirement for the 
Select Committee on Aging of the House of Representatives, and 
co-authored and presented its Social Security recommendations.

Social Security's guaranteed, lifetime retirement benefits and 
family protections are especially important to women.

    Social Security is important to the economic security of 
all Americans, but it is especially important for women. Women 
are not only a large majority of Social Security recipients 65 
and older--60 percent--but also depend more on Social Security 
income for their basic economic security. Social Security 
accounts for more than half of the total income of widows and 
other women living alone, and is the only source of income for 
25 percent of such women. Even with Social Security, elderly 
women still have a poverty rate nearly twice that of elderly 
men (13.1 percent v. 7 percent in 1997). But without Social 
Security, over half of all elderly women and over 60 percent of 
elderly single women would be living in poverty.
    As Congress considers the future of Social Security, and 
proposals for alternative retirement programs, it is critical 
to remember that, especially for women, Social Security is not 
just a retirement program. In 1997, two-thirds of adult 
recipients of Social Security benefits were retired workers. 
The remaining third were disabled workers, spouses, surviving 
spouses, or disabled adult children. But the distribution of 
men and women between those two categories is very different. 
The overwhelming majority of male adult beneficiaries--82 
percent--were in the retired worker category. In contrast, only 
56 percent of adult female beneficiaries received benefits as 
retired workers. (This 56 percent includes ``dually entitled'' 
women who were eligible for retired worker benefits themselves, 
but received higher benefits as spouses.) Nearly half of adult 
female beneficiaries, 44 percent, relied on Social Security's 
disability and family protections. And these figures are just 
for adult beneficiaries--they do not include the nearly 4 
million children who received benefits because a parent died or 
became disabled.
    The announcement of this hearing correctly notes that 
several features of Social Security are particularly important 
to women. I'll briefly discuss why and how these protections 
are important to women; why they will continue to be important 
for younger women, despite their different work histories; why 
proposals to transform Social Security, in whole or part, to a 
system of individual accounts--including the Feldstein 
proposal--pose inherent risks for women; and finally, I will 
offer some proposals for strengthening and improving the 
current system for women.

The current Social Security system includes several features of 
special importance to women.

     Social Security provides guaranteed, lifetime 
retirement benefits with a cost of living adjustment. This 
provides women, who on average have less pension income, lower 
savings, and a longer life expectancy than men, with a secure, 
basic retirement income, protected against inflation, for as 
long as they live.
     Social Security's progressive benefit formula 
provides women, and others who have worked for low wages, with 
retirement benefits that are a larger percentage of average 
lifetime earnings. For the median female retiree, Social 
Security replaces 54% of average lifetime earnings compared 
with 41% for the median male.
     Spousal and survivor protections are available on 
a gender-neutral basis--but it is overwhelmingly women who rely 
on these family protections. Social Security provides benefits 
to surviving spouses, and to the spouses of retired and 
disabled workers: over 98 percent of the recipients in these 
categories are women. In addition, Social Security allows 
individuals who are entitled to worker benefits on their own, 
and to benefits as a spouse or survivor, to receive the higher 
benefit. Currently, 63 percent of female Social Security 
beneficiaries receive benefits based on their husband's earning 
record; only 1.2 percent of male beneficiaries receive benefits 
based on their wife's earning record.

Social Security's protections will continue to be important to 
future generations of women.

    Women today are working more and earning more than past 
generations of women. But their lifetime earnings, access to 
pensions, and ability to save, will continue to be less than 
men's for the forseeable future. In the past 25 years, some 
subgroups of women--especially those with a college education 
and beyond--have made significant gains in real wages. But many 
women still work in the same kinds of jobs their mothers did, 
and their real wages have been declining or stagnant until very 
recently.
    The wage gap between men and women has narrowed over time, 
but it persists. In 1997, the median annual income for women in 
the labor force full-time, year round was $26,029--just 74 
percent of men's.
    While women's--and especially mothers'--participation in 
the labor force has increased dramatically over the last 50 
years, mothers--especially of young children--are still more 
likely than fathers to work part-time, or be out of the labor 
force. In 1997, 60 percent of mothers with children under 6 
were employed: 42 percent full-time, 18 percent part-time. In 
contrast, 93 percent of fathers of children under 6 were 
employed: 90 percent full-time, 3 percent part-time. Mothers of 
older children are more likely to be in the workforce, and to 
work full-time, than mothers of younger children: in 1997, 74 
percent of mothers of children between 6 and 17 were in the 
labor force, 56 percent full-time, 18 percent part-time. But 91 
percent of fathers of children 6 to 17 were in the labor force: 
88 percent full-time, three percent part-time.
    In addition, women today are much more likely than men, or 
than women of previous generations, to bear the extra economic 
burdens of caring for children alone. Between 1970 and 1997, 
the number of mothers raising children without a spouse in the 
home increased by 175 percent. And the economic problems faced 
by single mothers are great. In 1997, over 80 percent of single 
parent families were headed by women. Their median income, 
$17,256, was 40 percent less than the median income of single 
parent families headed by a man ($28,668). According to the 
latest figures available from the Census Bureau (for 1991), 
over 60 percent of custodial mothers, and over three-fourths of 
poor custodial mothers, received no child support. In 1997, 
collections were made in only 22 percent of the cases in the 
child support enforcement program.
    Women's caregiving responsibilities--and the impact of 
caregiving on women's employment--are not limited to 
childrearing years. A recent survey reported by the National 
Academy on an Aging Society found that women represent nearly 
three-quarters of persons providing informal, uncompensated 
care for people 50 and over. These caregiving responsibilities 
affect their work: 49 percent have had to make changes in their 
schedules, 11 percent have had to take a leave of absence, 7 
percent have had to take a less demanding job, and some have to 
leave the workforce entirely.
    The wage gap and different work patterns mean that women 
still have lower incomes than men of the same age. In the 15-24 
age group, women's median income is 85 percent of men's. In the 
25-34 age group, it drops to 68 percent. In the 35-44 year age 
group, women's income is 57 percent that of men; in the 45-54 
age group, 55 percent; 55-64, 46 percent.
    Although a higher percentage of women in the future will 
receive Social Security benefits on their own earnings record, 
Social Security's family protections still will be more 
important to women than men in the decades ahead. In 2060--when 
today's 6 year olds will be eligible for retirement, assuming 
the normal retirement age is not extended further--the Social 
Security Administration projects that the percentage of women 
receiving benefits based on their own earnings history will 
have increased from 37 to 60 percent. On the other hand, 40 
percent of women still are expected to receive benefits based 
on their husband's earnings history--if that option is still 
available.
    Lower incomes, and especially heavy economic burdens for 
the much higher percentage of women than men that spend time 
raising children alone, means that many women have less ability 
to save for retirement than men. And despite their increasing 
years in paid employment, women will still be less likely than 
men to qualify for pensions. Most working women--about 55 
percent--have jobs in service industries or the retail trade 
where pension coverage is less common than in predominantly 
male manufacturing jobs. And part-time jobs and interrupted 
work histories mean fewer women than men will qualify for 
pensions, even if their employers offer them.
    Women's life expectancy is expected to increase, as is 
men's--but the gap will persist. So the risk of outliving any 
other assets will be continue to be greater for women. And 
because, on average, husbands are older than wives, women in 
the future still face more years living alone, on a reduced 
income, without a spouse to provide informal care.
    In announcing this hearing, Chairman Shaw stated: ``Women 
make great sacrifices for American families at home and in the 
workforce every day.'' That statement is as true for younger 
women who struggle to balance work and family responsibilities, 
and pay a substantial economic price for doing so, as it is for 
older women who were more likely to be full-time homemakers and 
caregivers. And it means that younger women, too, will be at 
much greater risk by any changes to the system that undermine 
Social Security's guaranteed, progressive, inflation-protected 
lifetime retirement benefits and family protections, whether 
through a system of individual accounts or otherwise.

Reducing or undermining Social Security's protections poses 
inherent risks for younger and older women.

    Most individual account proposals would divert a portion of 
payroll taxes away from the Social Security trust fund into 
individual accounts. In exchange for reductions in guaranteed 
benefits, they hold out the possibility that the individual 
account will provide a higher return than Social Security. But 
the odds of this happening are stacked against women.
    In contrast to Social Security's progressive benefit 
formula, benefits from individual accounts are directly related 
to the size of the individual's contribution and the return on 
investment, minus administrative costs. Lower earning workers, 
such as women, have less to invest, and much less that they can 
afford to put at risk. Administrative costs are likely to 
consume a higher portion of their savings. Some sort of a 
``safety net'' for the lowest earners could be devised; 
however, the ``safety net'' benefits that have been suggested 
would be lower than benefits under the current structure for 
most women. And history suggests that safety net benefits would 
be much more politically vulnerable than Social Security's 
integrated, progressive, social insurance approach.
    Proponents of individual accounts have stated that they 
would be ``the property of each investing worker.'' Such 
statements should--and do--give women pause. Would ``investing 
workers'' be required to provide protections for spouses? 
Surviving spouses? Divorced spouses? Children? When individual 
accounts are being portrayed as individual property, are such 
requirements politically feasible? And even if account holders 
were required to make provision for joint and survivor 
annuities, how substantial would these benefits be? Under 
Social Security, the cost of providing benefits for spouses and 
survivors is widely shared. How many workers would save enough 
to provide family protections comparable to Social Security's, 
especially for the families of workers who die or become 
disabled at a relatively early age? If workers are encouraged 
to consider these accounts as individual property, how long 
will it be before Congress permits them to access their 
individual accounts before retirement, as they can their IRAs 
and 401(k)s? What would the consequences be for their basic 
retirement benefits--and their families'?
    Because women are expected to continue to live longer than 
men, they will be especially hard pressed to obtain through the 
market the lifetime protection that Social Security provides. 
Lifetime annuities can be purchased. But converting to an 
annuity--which is done all at once--makes a woman's lifetime 
retirement benefits extremely sensitive to the state of the 
stock market at the time of the conversion. In addition, the 
costs of converting savings to an annuity are high. Economist 
Henry Aaron estimates that overall, 30 to 50% of the savings in 
an IRA or 401(k) individual account converted to an annuity are 
lost to administrative and management fees and the cost of 
conversion. Few private annuities are indexed for inflation. 
And most private annuities--unlike Social Security--base 
monthly payments on gender, providing women with lower lifetime 
benefits even when their investment is equal to men's.

Although the Feldstein plan purports to maintain the current 
benefit structure, it too poses serious risks for women.

    The latest proposal for making individual accounts part of 
Social Security was developed by economist Martin Feldstein. It 
promises to maintain the current benefit structure, and provide 
additional retirement income to most retirees, without raising 
taxes. Sounds too good to be true--it is too good be true, 
especially for women. There are three major problems.
     The costs of the Feldstein plan fall 
disproportionately on women.
    Unlike other individual account proposals, the Feldstein 
plan promises not to reduce guaranteed benefits. But women 
should not depend upon this promise.
    How is this plan to be paid for? In the short run, the 
Feldstein plan is financed by taking all, or virtually all, of 
the projected unified federal budget surplus to finance the 
contributions to individual accounts. That poses particular 
risks for women's retirement security.
    The economic security of older women, to a greater extent 
than older men, depends not only on Social Security, but on 
adequate health care coverage. Compared with men, elderly women 
will spend more years living with a disability, are much more 
likely to need long-term care, and already spend a higher 
proportion of their income on medical costs. The President has 
proposed reserving 15 percent of the unified budget surplus to 
support the Medicare trust fund--that wouldn't be an option if 
the Feldstein plan were adopted. Deeper cuts in health 
benefits, more cost-shifting to beneficiaries, a delay in the 
eligibility age for Medicare: these would be the available 
options, and all hurt women more than men.
    Using all the projected surplus to fund the individual 
accounts proposed by Feldstein has other consequences for 
women. It means that other programs of special importance to 
women, including education and child care, would face budget 
cuts.
    And, in the long run, even projected surpluses will not be 
enough. CBO and Social Security actuaries reject the claim that 
the program will ever be self-financing. In the future, when 
surpluses disappear, sustaining the program will require 
benefit cuts, tax increases, or a lot of deficit spending. This 
is not a way to offer retirement security to younger women--or 
men.
     Benefits under the Feldstein plan accrue 
disproportionately to higher earners--disproportionately men.
    Economists Henry Aaron and Robert Reischauer estimated the 
returns to low and high earners under the Feldstein proposal, 
making the optimistic assumption that low and high earners 
would obtain the same rates of return on their individual 
accounts.

 
----------------------------------------------------------------------------------------------------------------
                                                          Social
                                                         Security   Monthly     Social
                                              Average    Benefit     Income    Security    Total       Overall
                Wage Earner                   Monthly     under       from     Benefit    Pension     Change in
                                              Earnings   Current    Private     After      Income      Pension
                                                         Benefit    Account     Offset                 Income
                                                        Structure
----------------------------------------------------------------------------------------------------------------
Low Earner.................................     $1,000       $560       $240       $380       $620     +$60/+11%
High Earner................................     $5,600     $1,375     $1,340       $370     $1,710     +335/+24%
----------------------------------------------------------------------------------------------------------------
(Source: Center on Budget and Policy Priorities, The Feldstein Social Security Plan, December 15, 1998, Table 1,
  based on Aaron and Reischauer, Countdown to Reform (1998), p. 127)


    As the table shows, the gains for high earners--
disproportionately men--would be five to six times as great as 
the gains for low earners--disproportionately women, and more 
than twice as high in percentage terms.
     The Feldstein plan undermines the long-term 
viability of Social Security as a social insurance program.
    The Feldstein plan is financed by reducing Social Security 
benefits by $3 for every $4 in income provided by the 
individual accounts. This could be viewed as a 75 percent tax. 
The consequence of this approach is--as the table above shows--
that high earners, who contribute more to Social Security, 
would appear to get smaller Social Security benefits, in 
absolute dollar terms, than low earners. It is hard to imagine 
that such a situation could endure for very long. High earners 
would demand a lower tax rate--the right to keep more of 
``their account'' (even though contributions had been financed 
by the budget surplus). If a future Congress responded, then 
the promised benefits to lower income beneficiaries, disabled 
workers and family members would have to be cut--with 
potentially devastating results for women.

Protecting and Improving Women's Economic Security in 
Retirement.

     To protect the economic security of women now and 
in the future, Congress should preserve and strengthen the 
Social Security system.
    The President has made two proposals that are projected to 
extend the solvency of the Trust Fund for an additional 23 
years, to 2055. First, the President has proposed dedicating 62 
percent of the projected budget surplus--about $2.7 trillion 
dollars--to the Social Security Trust fund. Second, the 
President would allow a portion of what are now substantial 
Social Security reserves to be managed more like a prudent 
pension fund would be--by diversifying the investment portfolio 
beyond Treasury bills to include some equities, with special 
protections to assure the independence of investment decision-
making. This would permit the Trust Fund to benefit from the 
projected growth in the stock market over time, without 
exposing individual investors to market risk.
    As the President acknowledged, these proposals do not fully 
resolve Social Security's long term financing issues. But they 
substantially narrow the gap, meaning that smaller adjustments 
in taxes and/or benefit levels will be required to bring the 
system into long term balance. That is especially important to 
women. And as you consider such adjustments, we urge you to 
consider carefully the impact of the proposals on women, and 
other groups that are already disadvantaged. For example, 
reducing the cost of living adjustment below the Consumer Price 
Index would have the greatest impact on people who live 
longer--i.e., women--who already face an increased risk of 
poverty in extreme old age. Raising the payroll tax rate 
imposes a heavier burden on lower wage workers, including 
women. Increasing the number of years used to calculate 
benefits would disadvantage women, because they are more likely 
to spend time out of the work force for caregiving. Raising the 
retirement age further would pose additional hardships for many 
older women. Many women work in physically stressful and 
demanding jobs; a reduction or delay in benefits for women, who 
have less other income, is more of a hardship than for men. And 
while many older women would be able and willing to continue 
working, they face greater discrimination and caregiving 
responsibilities that can interfere with their ability to work. 
There are other, fairer, options this Subcommittee should 
consider to extend the solvency of the Trust Fund, such as 
increasing the amount of earnings subject to the payroll tax 
cap.
     Adjustments can be made within the framework of 
Social Security to reduce poverty among older women.
    Over the years, the Social Security system has evolved to 
provide better protections for all Americans--especially women. 
Initially just a program for worker retirement benefits, family 
benefits were soon added, then benefits for disabled workers 
and their families. The automatic cost of living adjustment 
legislated in 1972, and the 1977 reduction in the duration-of-
marriage requirement for ex-spouses to qualify for benefits 
(from 20 to 10 years) significantly improved the financial 
situation of older women. This Congress can and should make 
changes, within the framework of the existing system, to reduce 
poverty among older women.
    Poverty rates vary greatly among different subgroups of 
women. Poverty rates for married women, who represent 43 
percent of women 65 and over, is less than 5 percent. Poverty 
rates for women living alone, nearly 80 percent of whom are 
widows, are much higher--around 20 percent--and are higher than 
for similarly situated men, though widowed and divorced men 
also experience higher rates of poverty than married men.
    There are several options Congress should consider to 
reduce poverty among the elderly, especially women. The most 
significant would be to increase the survivors' benefit as a 
fraction of the combined income of husband and wife; for 
example, to 75 percent of the combined benefits of husband and 
wife if that is greater than 100 percent of the benefit of 
either.
    The major reason for the increase in poverty at widowhood, 
empirical studies indicate, accounting for 50 percent of the 
difference in poverty rates between married women and widows, 
is the decline in Social Security benefits at widowhood. While 
both the husband and wife are living, they receive two 
benefits: the husband's worker benefit and the wife's benefit, 
either her own earned benefit or 50 percent of the husband's 
benefit, whichever is larger. Upon widowhood, the survivor 
receives the larger of her own benefit or her husband's 
benefit, whichever is larger. For couples in which the wife was 
receiving the 50 percent spousal benefit, this means a 33 
percent drop in Social Security income. For couples receiving 
equal benefits, because they had similar work histories, 
widowhood means a 50 percent drop in Social Security income. 
Increasing the survivor's benefit to 75 percent would benefit 
both groups, but would have its greatest impact on two earner 
couples. Thus, in addition to alleviating poverty among 
surviving spouses, this change would provide greater equity for 
two earner couples.
    Second, Congress should reduce the nearly 100 percent tax 
imposed on the Social Security benefits earned by the poorest 
recipients. The Supplemental Security Income (SSI) program 
(which is separate from the OASDI trust fund) provides a safety 
net for poor elderly, blind, and disabled people. However, in 
calculating eligibility and benefit levels for SSI, only $20/
month of the Social Security benefits they have earned is 
disregarded. The rest of their Social Security benefits simply 
reduces their SSI benefits dollar for dollar: an effective 100 
percent tax on Social Security benefits over $20/month. The $20 
disregard was set back in 1972, and has never been changed. 
Adjusting it for changes in the Consumer Price Index since 1972 
would bring the disregard to $78.50/month. This approach 
effectively targets poor older women: 73 percent of elderly SSI 
recipients are women. It represents no cost to the Social 
Security trust fund, though it does affect the rest of the 
budget.
    In addition, there are various rules that 
disproportionately impact certain groups of women. For example, 
the government pension offset rule, which applies regardless of 
the size of the government pension or Social Security payment, 
disproportionately hurts women who have smaller pensions and 
benefits. The earnings test, applied regardless of prior work 
history, falls especially heavily on older women who return to 
the workforce after many years of caregiving (President Clinton 
has suggested eliminated the earnings test altogether).
    In addition to these adjustments within the Social Security 
System, Congress should:
     Consider ways to help lower income workers save 
for retirement separate from Social Security.
    Social Security represents a secure basic retirement 
benefit, but was not designed to be the sole source of income 
in retirement. In recent years, Congress has created several 
tax-advantaged methods of saving for retirement--but many women 
and other lower income earners have been unable to take 
advantage of them because they have so little disposable 
income.
    The President has proposed using part of the budget surplus 
to create new Universal Savings Accounts separate from Social 
Security. The concept is that a small initial contribution 
would be made by the government for most workers; additional 
voluntary contributions from low-income savers would be matched 
at a higher rate than contributions from higher-income savers.
    The proposal has the potential for increasing retirement 
savings for women and others less likely to have savings, 
without jeopardizing the future of Social Security. However, it 
also raises serious questions.
     How much of the benefit of these expenditures will 
go to lower income people, and how much to higher income 
people? What are the short and long-term budgetary 
implications?
     Will the accounts only be for workers? What 
provision will there be for spouses, divorced spouses, 
survivors and children, and for persons who take time out of 
the workforce for caregiving?
     How will the accounts be managed? Especially for 
small accounts, how will administrative costs be minimized?
    Finally, improving economic security for women in 
retirement involves even more than preserving and improving 
Social Security, preserving and improving Medicare, and 
promoting savings and pensions as sources of retirement income 
for women. It also involves improving economic security for 
women throughout their lives: promoting equal employment and 
educational opportunity, pay equity, higher minimum wages, 
child support enforcement, and assistance with caretaking 
burdens that fall especially heavily on women, including 
expanded child care and family and medical leave.
    In closing, I want to again thank the Chairman, and the 
members of the Subcommittee, for focusing attention on the 
importance of Social Security to women, and on ways this vital 
program can be made even better.
      

                                


    Chairman Shaw. Thank you.
    Ms. Canner.

  STATEMENT OF SHARON F. CANNER, VICE PRESIDENT, ENTITLEMENT 
  POLICY, NATIONAL ASSOCIATION OF MANUFACTURERS, ON BEHALF OF 
            ALLIANCE FOR WORKER RETIREMENT SECURITY

    Ms. Canner. Mr. Chairman, and Members of the Subcommittee 
on Social Security, I am Sharon Canner, vice president of 
Entitlement Policy with NAM, the National Association of 
Manufacturers. Today I am representing AWRS, the Alliance for 
Worker Retirement Security. Thank you for the opportunity to 
testify. The Alliance is a coalition initiated by the NAM. The 
Alliance is dedicated to representing workers in the reform 
debate.
    AWRS is a growing coalition of over 20 organizations, 
including business trade associations representing large and 
small employers, corporate members, and other diverse groups. A 
list of the members and the principals is attached. The 
Alliance is dedicated to reforming the Social Security system 
to ensure an adequate retirement income for all workers and an 
opportunity for them to create personally owned economic wealth 
for personal retirement accounts. At the same time, we must 
maintain a safety net, a progressive, government-guaranteed 
benefits for all workers.
    To set the scene, let me ask you for a moment if you would 
think about a woman who is the single head of household raising 
two children. She works two jobs all of her life, making an 
average of $20,000 a year. She works very hard and contributes 
6.2 percent from her wages to Social Security for 45 years. At 
age 64, she dies. What happens to the thousands of dollars she 
has contributed? It is gone. Nothing is there.
    Had she been living in Galveston, Texas, and I will cite 
that study, if she were a county worker contributing the same 
amount of money in a different kind of system, she would have 
received $350,000 upon her death. This is according to 
testimony that was recently given by Galveston officials. That 
$350,000 would then be passed to her children, which they could 
use to go to school or start a business. If she had lived into 
retirement, she could have gotten an annuity paying $2500 a 
month instead of the $621 average benefit that women 
beneficiaries receive.
    The Social Security system has served us well and kept 
millions of women out of poverty. We must continue the 
insurance function of the system. At the same time, we have to 
modernize it, recognizing the changing demographics and 
changing lifestyles of women today. We have two key challenges, 
however, in this respect. Without changes to the system, 
women's benefits will be cut by over 25 percent. And I should 
say men's as well, given the Social Security deficits that will 
be approaching in 2032. For women living only on Social 
Security and retirement, as 7 million do, the average benefit, 
which is $621, would be less 25 percent. Can she afford that? 
Absolutely not.
    The second challenge we face is that the system favors some 
women and is biased against others. AWRS believes there is a 
way we can solve both problems. We can ensure the financial 
security of elderly women by creating personal retirement 
accounts, and we can construct these accounts with provisions 
and safeguards for women's special needs.
    How does the system favor some women and disadvantage 
others? Well, married women who do not work are nonetheless 
entitled to half of their husband's benefit or retirement even 
if she had never paid into the system. Plus, the retired couple 
could receive 150 percent of the husband's benefit. If either 
of the couple dies, that benefit, of course, drops down to 100 
percent. The system discriminates against millions of married 
women who work outside the home under the dual retirement rule, 
that retired married women are entitled to a benefit larger 
based on their working years, or 50 percent of their husband's 
benefit, whichever is larger. With the personal retirement 
accounts, the same women could contribute to an account which 
they own, which grows as the economy grows, even while they are 
out of the work force raising children or addressing other 
domestic requirements.
    In another example, the current Social Security system as 
we heard, rules, allows a divorced woman to similarly receive 
50 percent of her husband's benefit or retirement, but only if 
that marriage has lasted 10 years. But I think as we know, 
recently statistics show that the median duration of marriages 
that end in divorce is now 7.7 years. Which means that more 
than half of those million divorced women will not get that 50 
percent of their husband's benefit at retirement. Currently, 
this needs to be addressed. Personal retirement accounts with 
earnings sharing would have allowed these women to begin 
sharing in their husband's retirement earnings from day one.
    And I ask you to consider the fact that has been mentioned 
earlier that women need the insurance aspect of Social 
Security, particular low income, and those that are divorced. 
After you consider that the Social Security system is going 
into deficit, and it is certainly a very risky system, we 
believe it would be much less risky for women to be able to set 
aside a part of their FICA tax in personal retirement accounts 
that would be put into index funds and fairly conservative 
investments that would earn them more income over time than 
they would get under the Social Security system, which now 
gives them a return of about 1\1/2\ to 2 percent.
    The above examples point to the problems with the current 
system and the need to help women build retirement income. AWRS 
believes there is a way that we can solve these problems so we 
can ensure the financial security of our elderly women by 
creating personal retirement accounts, and we can construct 
these accounts for the provisions and safeguards for women's 
professional needs.
    Mr. Chairman, we are pleased to work with you toward 
bipartisan reform of Social Security. Thank you for your 
attention.
    [The prepared statement follows:]

Statement of Sharon F. Canner, Vice President, Entitlement Policy, 
National Association of Manufacturers, on behalf of Alliance for Worker 
Retirement Security

    Mr. Chairman and members of the Subcommittee on Social 
Security, I am Sharon Canner, vice president of entitlement 
policy with the National Association of Manufacturers, and I'm 
here representing the Alliance for Worker Retirement Security. 
We appreciate the opportunity to testify today. The Alliance is 
a coalition initiated by the NAM and dedicated to representing 
workers in the reform debate.
    The NAM initiated AWRS because Social Security has been a 
top domestic priority at the NAM for several years. We believe 
that failure to adequately remodel Social Security would 
threaten the economic and retirement security of working men 
and women and American business. Without reform, the unfunded 
obligations of the government will do major harm to economic 
growth and jobs and make it extremely difficult for U.S. 
employers to compete in world markets.
    The AWRS is a growing coalition of more than 20 
organizations including business trade associations 
representing large and small employers, corporate members and 
such diverse groups as United Seniors, Citizens for a Sound 
Economy, Council for Government Reform and many others. The 
AWRS is dedicated to reforming the Social Security system to 
ensure an adequate retirement income for all workers and an 
opportunity for workers to create personal economic wealth--
through Personal Retirement Accounts--while maintaining a 
progressive government-guaranteed benefit for all workers. 
(AWRS members and principles are attached.)
    I'm here today to discuss women as participants in the 
current Social Security system and how women can become more 
financially secure in retirement. Let me begin by giving you an 
example: Think about a woman who is a single head of household, 
raising two children. She works two jobs her whole life making 
an average of $20,000 a year. She works very hard and she and 
her employer each contributes 6.2 percent of her wages to the 
system for 45 years. Unfortunately, at age 64, she dies. What 
happens to the thousands and thousands of dollars she 
contributed? It's gone. Zero. Nothing.
    If she'd been living in Galveston, Texas, as a county 
worker, contributing the same amount of money into a different 
kind of system, she would have received more than $350,000 upon 
her death! This is according to recent testimony given by 
Galveston, Texas, officials at a Senate budget hearing. (The 
actual number is $383,000 at age 65.)
    That $350,000 would be passed on to her children. They 
could have used it to go to school or started a business. If 
she had lived into retirement, she would have been entitled to 
an annuity paying $2,500 a month for life instead of $800 per 
month she would have received from Social Security--and that is 
if Social Security could pay its promises.
     The Social Security system has served us well for over 60 
years and kept millions of women out of poverty. We must 
continue this insurance against poverty with a guaranteed 
minimum benefit. At the same time, we must modernize the 
system, recognizing the changing demographics and the changing 
lifestyles of women.
    The premise of AWRS is this: In spite of huge strides made 
by women in the past few decades, millions of women are still 
not able to achieve financial independence and financial 
security due to low earnings and interrupted work histories.
    It is time that all workers--half of whom are women--be 
given a chance to create real economic wealth, independence, 
and retirement security.
    The Social Security system should be reformed to allow a 
working woman to invest her payroll taxes in government 
regulated funds--that she can see grow over time. The existing 
system, even with it's bias towards some women, is running 
short of money. Women have the most to lose from this 
shortfall, and women have the most to gain from a system of 
Personal Retirement Accounts.

     The Problem and the Solution for Women and Retirement Security

    It is well known that working women earn less than men and 
they take more years away from work while they are raising 
families or tending to other domestic needs. Likewise, women 
live longer than men and are more likely to be poor in 
retirement.
    The Social Security system has helped lift millions of 
women out of poverty. It is critical that we continue to 
provide retirement security for the women in our society, 
especially women who are widowed, either as young mothers or in 
their later years.
    Protecting the retirement needs of women requires that we 
face two key problems: First, we are facing huge revenue 
shortfalls in our existing system. Thus, those who are most 
dependent on Social Security ``insurance'' to keep them from 
falling into poverty--women--are at the greatest risk at this 
moment. Without changes to the system, their benefits will be 
cut more than 25 percent. If you are a woman living only on 
Social Security in retirement--and 7 million elderly people 
do--your average benefit now is $621 a month. Can you afford to 
have that cut by 25 percent? Absolutely not. That is the first 
problem.
    The second problem is that our system favors some women, 
and because of demographic changes, is now biased against 
millions of other women. Any change we make to ensure financial 
security for our elderly must take these changes into account. 
In other words, as we fix the system, we must modernize it in 
order not to harm some women even more.
    AWRS believes that we can solve both problems. We can 
ensure the financial security of our elderly women by creating 
Personal Retirement Accounts and we can construct these 
accounts with provisions and safeguards for women's special 
needs.
    To begin, how does the system favor some women and 
disadvantage others? We all know that the system favors stay-
at-home spouse, nearly all of whom are women. Because we value 
the work of women who stay home to raise a family, she is 
entitled to an additional 50% of her husband's benefits in 
retirement, even though she never paid taxes into the Social 
Security system. Thus, a retired couple receives 150 percent of 
the husband's benefit. When either of the couple dies, the 
benefit drops to 100 percent.
    However, the system discriminates against the millions of 
married women who work outside the home. Under the ``dual 
entitlement rule,'' at retirement these women are entitled to 
the larger benefit based on their working years, or 50 percent 
of their husband's benefit, whichever is larger. And, for a 
majority (about 60-70 percent) of women, the larger benefit is 
the latter. Thus, these women gained nothing by making Social 
Security tax contributions that they wouldn't have had 
otherwise. With Personal Retirement Accounts, the same women 
would contribute to an account that they own and that grows as 
the economy grows, even while they are out of the workforce.
    In another example, the current Social Security rules allow 
a divorced woman to similarly receive 50 percent of her 
husband's benefit at retirement, but only if their marriage 
lasted 10 years. This rule was incorporated because legislators 
assumed that many women would be out of the workforce raising 
children during the early years, and should be compensated for 
those years. But, in the past few decades, we have seen the 
divorce rate skyrocket.
    According to the U.S. Census Bureau, approximately a 
million couples divorce in this country each year, and the 
median duration of those marriages is 7.7 years. Thus, more 
than half of those million divorced women will not be entitled 
to a spousal benefit at retirement. Personal Retirement 
Accounts, with earnings sharing, would have allowed these women 
to begin sharing in their husbands' retirement earnings from 
the first day of their marriages.
    Finally, consider the case of young widows. A woman whose 
husband dies before retirement is entitled to receive a 
benefit, but only if she has young children. If she has no 
children or her children are grown and her husband dies, she 
receives a grand total of $255 to bury him and then she has to 
wait until at least age 60 to receive a benefit.
    I know a woman in New York named Joanne whose husband was a 
self-employed plumber, who paid the entire 12.4 percent payroll 
tax each year. Joanne stayed home to raise their two sons and 
worked a few part-time jobs. When she was 42 years old and her 
husband was 46, he dropped dead of a heart attack. Their 
children were grown and so she is entitled to no benefit from 
his Social Security for another 18 years! But now, at age 47, 
she is still trying to make enough money to get by and not have 
to sell her home.
    If he had been able to put part of his payroll tax in a 
Personal Retirement Account, it would have been part of his 
estate, passing immediately to Joanne. She could have gone to 
school or start her own business or saved with that money. To 
this day, she is still trying to find out from the Social 
Security administration how much her husband contributed to the 
program during his 25 years of work.

                               Conclusion

    To adequately provide for the retirement needs of women, we 
must acknowledge their special situations and assure their 
financial security. Fixing current rules is part of the 
solution. Beyond that, we must seek ways to enhance their 
retirement income. Personal Retirement Accounts are the means 
to do just that.
    The Alliance is dedicated to reforming the Social Security 
system to ensure an adequate retirement income for all workers 
and an opportunity for workers to create personal economic 
wealth--through Personal Retirement Accounts--while maintaining 
a progressive government-guaranteed benefit for all workers. We 
are pleased to work with you and others in Congress toward 
bipartisan reform of Social Security.
      

                                


    Chairman Shaw. Thank you, Ms. Canner.
    Ms. Leist.

    STATEMENT OF MARILYN T. LEIST, MIDDLE ATLANTIC REGIONAL 
DIRECTOR, NATIONAL BOARD OF DIRECTORS, AMERICAN ASSOCIATION OF 
                        UNIVERSITY WOMEN

    Ms. Leist. It is Leist.
    Chairman Shaw. Leist?
    Ms. Leist. Members of the Subcommittee, thank you for 
giving me this opportunity to testify today. My name is Marilyn 
Leist, and I come before you in several capacities. I am here, 
first of all, as a regional director on the National Board of 
the AAUW, American Association of University Women, the oldest 
and largest organization advancing equity for women and girls.
    I am also here from a personal prospective, as a daughter, 
a mother, and a working woman, who cares deeply about 
protecting her family. Social Security is the Nation's foremost 
family protection plan, and I urge this Subcommittee to oppose 
any efforts to undermine protections for women and to support 
the administration's framework for strengthening and preserving 
the system.
    Let me begin by telling you my own personal story. My 83-
year-old mother, Lucy Thomas, worked 35 years as a waitress 
earning less than minimum wage. While at the same time, rearing 
two daughters and caring for my father as he became 
increasingly disabled with rheumatoid arthritis. Also, she 
cared for my grandmother, a farm woman, who had virtually no 
income for many years. As a waitress and a bartender, my mother 
and father barely made enough money to cover their daily living 
expenses. Thus, she does not have a pension, nor does she have 
income generating savings. Mother now depends solely on Social 
Security, $650 a month.
    Although mother is a fiercely independent woman, she moved 
in with me at the age of 71 because she could no longer work 
outside the home to supplement her Social Security income. She 
has macular degeneration, a condition that has reduced her 
vision to shadows. While my financial situation is better than 
my mother's, the cycle is about to repeat itself when my 
husband, who has become increasingly disabled with psoriatic 
arthritis, retires. Just like my mother, I will continue to 
work. Although I have some savings, I was out of the work force 
for 8 years when my daughters were young. And like millions of 
other women, I currently have only a limited pension. I must 
continue to work not only to increase my retirement, but to pay 
for the additional cost of nursing care that may be required 
for my mother and my husband.
    Social Security is my mother's lifeline in retirement. Like 
87 percent of all elderly women, she doesn't have a pension. 
Her Social Security benefits, adjusted for inflation every 
year, are a predictable and secure source of income that she 
knows she can depend on for as long as she lives. This not only 
gives her peace of mind, it gives me peace of mind as well. 
That is why Social Security is so important.
    We all pay into the system to ensure protection for our own 
and other's families. Social Security is a lifesaver for women, 
not only as retirement income, but as protection against so 
many of life's adversities. If we work at home or have low-
income earnings, we can get benefits based on our husband's 
work records. We get widow's benefits and protections in 
divorce. And I can sleep easier knowing that if my daughter, my 
husband, or I, were to become disabled we could get disability 
coverage.
    I've heard that some people think that one would be better 
off if Social Security were replaced in whole or in part by a 
system of individual accounts, where we would have our benefits 
cut in exchange for getting back some of our money to invest on 
our own in the stock market. That just doesn't make sense. What 
would happen if we invested poorly or if we had to retire just 
as the market spiraled down? We would lose out. And who would 
the burden land on? Our families. Now, that would be 
intergenerational inequity. We get all kinds of family 
protections from Social Security because the money is invested 
together, creating a universal insurance pool. If that money is 
put into individual accounts, those family protections would be 
jeopardized. Women would no longer get a widow's or spouse's 
benefit. Disability protections could be derailed, and divorced 
spouses would probably be left out all together.
    I have heard administrative expenses could eat away a good 
portion of our benefits. This would change the system from 
Social Security to social insecurity. I am not an economist, 
but anyone who claims that individual accounts can be set up as 
part of Social Security without raising taxes or reducing 
benefits is not telling the whole story. Those plans will be 
very costly in the long run, and will undermine the integrity 
of Social Security.
    AAUW would only support individual accounts that are kept 
totally separate from Social Security, that are aimed to help 
low- and moderate-wage earners, and that supplement the 
guaranteed benefits of Social Security, not undermine these 
benefits either now or in the future. We must keep in mind that 
Social Security is only one pillar of retirement, and that we 
must work to develop initiatives outside of Social Security to 
increase savings and pensions for women.
    The 150,000 members of the American Association of 
University Women are so concerned about how Congress reforms 
Social Security that the issue is now at the top of our 
priority list. Our members understand that any reform that is 
enacted must keep the present system intact. AAUW does indeed 
look forward to working with the Subcommittee in developing 
proposals on Social Security, which are in the best interest of 
women, and in so doing, are contrite.
    Thank you very much.
    [The prepared statement follows:]

Statement of Marilyn T. Leist, Middle Atlantic Regional Director, 
National Board of Directors, American Association of University Women

    Mr. Chairman, Members of the Committee, thank you for 
giving me this opportunity to testify today. My name is Marilyn 
Leist and I come before you today in many capacities. I am here 
speaking as a Regional Director of the National Board of the 
American Association of University Women, the nation's oldest 
and largest organization advancing equity for women and girls 
in education and in the workplace. I am also here from a 
personal perspective, to speak to you as a daughter, a mother, 
and a working woman who cares deeply about protecting my 
family. Social Security IS this nation's foremost family 
protection plan, and I urge this Committee to oppose any 
efforts to undermine protections for women and to support the 
Administration's framework for strengthening and preserving the 
system.
    Let me begin by telling you my own story. My 83 year old 
mother, Lucy Elizabeth Thomas, worked 35 years as a waitress--
earning less than minimum wage--while at the same time rearing 
two daughters, and caring for both my father, as he became 
increasingly disabled with rheumatoid arthritis, and for my 
grandmother, a farm woman, who had virtually no income for many 
years. Mother now depends solely on Social Security--on $650 a 
month. Although mother is a fiercely independent woman, she 
moved in with me at the age of 71 because she could no longer 
work outside the home to supplement her Social Security income. 
She has macular degeneration, a condition that has reduced her 
vision to shadows.
    As a waitress and a bartender, my mother and father made 
barely enough money to pay for their daily living expenses. 
Thus, she does not have a pension, nor does she have income-
generating savings. Her current income consists of about $8,000 
a year from Social Security--she is one of the nation's elderly 
poor. Of that amount, $1,600 is used for secondary health 
coverage. Last year she paid an additional $1,000 in medical 
costs and another $1,400 for a hearing aid. In the fall, a bout 
with stomach ulcers forced her to pay over $200 for 
prescription drugs. I have purchased most of her clothing and 
paid for her room and board for the past 12 years. For many 
years Mother's identity and subsistence was closely tied to her 
productive function in the work force. Now Social Security is a 
real factor in her ability to survive with some dignity in her 
old age.
    While my financial situation is a little better than my 
mother's, the cycle is about to repeat itself when my husband, 
who is becoming increasingly disabled with psoriatic arthritis, 
retires and requires attention from me, the caregiver. Just 
like my mother, I will be the provider and will not be able to 
stop working. Although I have some savings, I was out of the 
workforce for eight years, like millions of other women, when 
my daughters were young, and currently have only a limited 
pension. I will need to continue to work, not only to continue 
to shore up my retirement base but to pay for the additional 
costs of nursing care that will be required for my mother and 
my husband as they age.
    Social Security is my mother's lifeline in retirement. Like 
87 percent of all elderly women, she doesn't have a pension, 
and what savings she has, she's holding on to in case of an 
emergency. My mother's Social Security benefits, adjusted for 
inflation every year, are a predictable and secure source of 
retirement income she knows she can count on for as long as she 
lives. And this not only gives her peace of mind--it gives me 
peace of mind.
    If this amount were reduced at all, what would she do? My 
own income is already stretched beyond capacity. It's because 
my mother gets a reliable stream of benefits that I can take 
her under my roof. Otherwise it would be a huge financial 
burden. That's why Social Security is so important--we all pay 
into the system to ensure protection for our own and others' 
families. Without a strong, solid Social Security insurance 
system, my mom and millions of other women like her would be 
living in poverty.
    Social Security is a lifesaver for women, not only as 
retirement income but as protection against so many of life's 
adversities. If we work at home, or have low lifetime earnings, 
we can get benefits based on our husbands' work records. We get 
widows' benefits and protections in divorce. And I can sleep 
easier knowing that if my daughter, my husband, or I were to 
become disabled, we could get disability coverage.
    I've heard that some people think that women would be 
better off if Social Security were replaced in whole or in part 
by a system of individual accounts--where we'd have our 
benefits cut in exchange for getting back some of our money to 
invest on our own in the stock market. This just doesn't make 
sense. What would happen if we invested poorly, or if we had to 
retire just as the market spiraled down? We'd lose out. And who 
would the burden land on? Our families. Now that would be 
intergenerational inequity.
    We get all kinds of family protections from Social Security 
because the money is invested together, creating a universal 
insurance pool. If that money is put into individual accounts, 
those family protections would be jeopardized. Women would no 
longer get widow's or spouse's benefits; disability protections 
could be derailed; and divorced spouses would probably be left 
out altogether. I've heard administrative expenses could eat 
away a good portion of our benefits. This would change the 
system from Social Security to social insecurity.
    I am not an economist, but anyone who claims that 
individual accounts can be set up as part of Social Security 
without raising taxes or reducing benefits isn't telling the 
whole story. Those plans will be very costly in the long-run 
and will undermine the integrity of Social Security.
    AAUW would only support individual accounts that are kept 
totally separate from Social Security, that are aimed to help 
low and moderate wage earners, and that supplement the 
guaranteed benefits of Social Security--not undermine these 
benefits either now or in the future. We must keep in mind that 
Social Security is only one pillar of the retirement income 
system and we must work to develop initiatives outside of 
Social Security to increase savings and pensions for women.
    Sometimes when I listen to this debate, I feel I'm in the 
Chicken Little story where everyone's screaming ``The sky is 
falling, the sky is falling.'' But it isn't. There is general 
acknowledgment that Social Security is in sound shape for many 
years to come. Of course, it is important to act now to shore 
up the system for future generations. But we certainly do not 
need to dismantle the system. The Administration has proposed a 
framework which could help solve the funding issues while 
preserving the fundamental protections that are so important to 
women.
    The 150,000 members of the American Association of 
University Women are so concerned about how Congress reforms 
Social Security, that the issue is now a top Association 
priority. Our members understand that any reform that is 
enacted must keep the present system intact. AAUW looks forward 
to working with the Committee in developing proposals on Social 
Security which are in the best interest of women--and, in so 
doing, the country.
    Thank you.
      

                                


    Chairman Shaw. Thank you, Ms. Leist, and I apologize for 
mispronouncing your name.
    Mr. Weller.
    Mr. Weller. Well, thank you, Mr. Chairman.
    It is clear from the presentations made by the panel that 
we have six groups representing women. We have a wide diversity 
of opinion on solution, but I think we all share the common 
goal that we do want to save Social Security, and possibly, if 
we have an opportunity, in a bipartisan way to save Social 
Security for long term and keep it reliable for today's seniors 
that are currently on Social Security, as well as the X and Y 
generation that is just starting to enter the work force.
    There are a couple of points that I think I would like to 
make before I ask a couple of questions, and where we have an 
opportunity, I think, for bipartisanship. I was very pleased 
when the President in his State of the Union speech endorsed an 
initiative as part of the Contract With America, and also has 
been an effort that has been led by our new House Speaker. That 
was the issue to eliminate the earnings limit on Social 
Security. Of course, Speaker Hastert has fought that fight, a 
good fight in the last few years, and we have made some 
progress, but I am pleased to see the President has embraced 
what Speaker Hastert has been pushing for years. So that is a 
bipartisan effort now, and I am pleased about that.
    I am also pleased with what the President said regarding 
reserving 62 percent of the surplus tax revenue we now have 
from the balanced budget, to allocate that for Social Security. 
I might note that last year this Subcommittee, as well as the 
House, approved a plan which would have earmarked 90 percent of 
the surplus tax revenue for saving Social Security. So, at a 
minimum, we should certainly go along with what the President 
suggests, 62 percent.
    The first question I would like to ask, and I would like to 
address to Amy Holmes, if I could. You noted in your testimony 
you are 25 years old, and you are one of those who feels that 
they cannot wait until you are 57 years old, and whether or not 
Social Security is going to be saved. But you talked about the 
need for saving for retirement.
    One of the challenges that I find particularly difficult 
for working women, and I think of my sister, Pat, who had been 
a schoolteacher for some time. She and her husband decided to 
have children, and when the first child was born, she took time 
off from work to be home with the kids. And then when the kids 
were old enough for school, she went back to teaching, and that 
was a choice she made.
    But, as we look at ways of essentially supplementing Social 
Security as well, you know, when Social Security was created it 
was to supplement your retirement and your savings and your 
pension. Many today consider what can we do today to supplement 
Social Security. Regardless, we want to encourage everyone to 
save. And one of the ideas that I have been an advocate of, of 
course, is what I call catch-up IRAs, where say, a working 
woman who took time off to be home with the kids like my 
sister, Pat, would be able to make up missed contributions to 
their IRAs when she returns to work. And I was wondering, is 
that an idea you think would work and do you have any 
suggestions on how we could make it work?
    Ms. Holmes. That certainly is something that we should all 
be considering, particularly when you look at the fact that a 
lot of women do choose to take time out of the work force. In 
fact, a 1992 census study showed that women were eight times 
more likely to take time out of the work force than men. So to 
be able to address this need in women's retirement, I think 
that is a very good idea. Again, earning sharing is another way 
so that women from the get-go are sharing 50 percent of their 
husband's retirement income.
    Mr.Weller. OK. I also have a question for Ms. Lassus. Did I 
pronounce your name correctly? It is Lassus?
    Ms. Lassus. Lassus.
    Mr. Weller. Lassus, excuse me. An issue that I have always 
had a strong interest in the Tax Code is, of course, the issue 
of the marriage tax penalty. Of course, working women tend to 
bear the brunt of it because you have a two-earner married 
couple, and because they filed jointly under our Tax Code, they 
pay higher taxes. Well, there appears from the information that 
I have seen in research that I have, there appears to be 
essentially a marriage penalty in Social Security where a two-
earner couple receives less benefits than a one-earner couple 
with the same income, even though they may have paid more 
taxes. I was wondering what your thoughts and perspective might 
be on that as a businesswoman, and obviously, in a case where 
you and your friends may be in two-earner couples.
    Ms. Lassus. Certainly it is an issue. I think one of the 
things that we have always focused on is the safety net side of 
Social Security, and not really looked at the equity side in 
terms of the two-earner couples. There really needs to be 
something in the equation that allows us to build value. One of 
the ways to do that is through having individual accounts. It 
really provides a more equitable way of being able to build 
those dollars for the two-earner couples.
    Mr. Weller. OK. Well, thank you. I see my time is running 
out, Mr. Chairman. So, thank you very much. I yield back.
    Chairman Shaw. Yes. Mr. Matsui.
    Mr. Matsui. Thank you very much, Mr. Chairman.
    Ms. Entmacher, I would like to ask you some questions 
because you raised the Feldstein plan, and it has gone through 
a number of changes and alterations, but the basic structure is 
the same. I have a CBO study of August 4, 1998, and an update 
of September 17, 1998. It talks about the fact that the 
Feldstein plan would actually reduce national savings, and 
increase the deficit over time. But there is one aspect to the 
Feldstein plan that I am concerned about and that you touched 
on earlier--the disparity in wages. Feldstein proposes that 2 
percent of one's earnings go into this pot or this so-called 
personal investment fund. That means, and correct me if I am 
wrong, but if a person makes $70,000 of annual income, that 
person will receive, well that person's entire work experience, 
$1,400 per year into that fund, 2 percent of $70,000. Whereas 
somebody that makes $20,000 a year would get approximately $400 
a year into that annual fund.
    Now, at the end of the process, Feldstein taxes the 
accounts by 75 percent. It will probably be the highest tax, it 
will almost be confiscatory, but he does tax those benefits up 
to 75 percent. But doesn't that increase the disparity that we 
currently talk about now between men and women because women 
make less than men? Is that a correct analysis of this as a 
general rule?
    Ms. Entmacher. That is absolutely right. In my written 
testimony I include a table that was developed by economist 
Henry Aaron and Robert Reischauer that analyzes precisely the 
point you are making about the difference in returns to high 
earners and low earners under the Feldstein proposal, even 
after you make the tax adjustment that you are talking about. 
And what they find is that high earners, who are 
disproportionately men, would get five to six times as much 
return even after the tax adjustment, as low earners who are 
predominantly women.
    The second concern about trying to recoup some of that tax, 
and the fact that so much more of the surplus that is used for 
these accounts goes to high earners, is that how long are 
people going to sit still for a 75-percent tax rate? Again, if 
you look at the table that is in my testimony, you can see that 
the end result of that tax rate is that high earners who 
contribute more to Social Security actually will get less from 
it than low earners do.
    Right now, we have a system where it is progressive. Low 
earners get a higher percentage of their lifetime earnings, but 
high earners still get more and both groups can live with that. 
Under this system, it is hard to imagine that future Congresses 
aren't going to be lobbied to lower that tax rate.
    The other thing that is likely to happen since this is 
portrayed as an individual account, is that people will want 
access to that account for emergencies, particularly women, as 
the point was made earlier. And just as with IRAs and 401(k)s, 
which were initially designed to be retirement savings 
vehicles, Congress over time will probably let people have 
access to these accounts. The problem is that even with all the 
surplus put into it, the funding, which depends on the 75-
percent tax rate, totally collapses. Then we are in a situation 
either where benefits have to be cut very drastically, taxes 
have to be raised, or we have to start running major deficits 
again. It just doesn't add up.
    Mr. Matsui. If I can ask you a second question as well. Let 
us say that we do have a proposal to carve out 2 or 3 percent 
of the current 12.4 percent. One thing that hasn't been talked 
about is transition cost, the unfunded liability. I understand 
that some say it is up to $8 trillion, but others say it could 
be as low as $3 trillion and perhaps up to $8 trillion, none of 
the proposals would take into consideration how we fund that. 
That is the first question. The question is assuming we have a 
carve-out for low- or moderate-income people, many of whom are 
women, probably predominantly women. Also, I have been hearing 
that at the end of the process up to 20 percent of the total 
fund would be taken out over time in administrative costs.
    Second, what kind of built-in protections could be made to 
make sure that, as we saw in England, we don't have a fraud and 
abuse problem. There has to be some kind of built-in system of 
protecting folks from, you know, the investment counselor who 
may not be quite an investment counselor?
    Ms. Entmacher. Well, let me address those two questions 
separately. The first issue of administrative costs is, of 
course, a much bigger issue for people with small accounts.
    Mr. Matsui. Right.
    Ms. Entmacher. And the small business owners probably know 
that if they tried to arrange a 40l(k) that is a nonprofit plan 
for their employees, those employees may be charged flat 
administrative costs on each account of between $40 and $65. It 
is very common.
    In addition, the various funds that you invest in may take 
a percentage of the money in your account, commonly, 1 to 2 
percent. So, if you consider somebody, let us say a $20,000 a 
year earner who puts 2 percent of their earnings into one of 
these individual accounts, that is $400, let us say they have a 
fabulous year with their investments, 15-percent return, which 
is really, really good. That is $60. If the management fee for 
that account, if the flat fee is $40, most of that gain has 
disappeared. When you add or subtract the 1\1/2\ percent of 
that $460, it drops still further. And obviously, if you do the 
math on a 10-percent return on investment, which is very good, 
the numbers are even more dramatic. So, that is one type of 
administrative cost that is worse for low earners.
    The second type of administrative cost and expense is one 
that is particularly a problem for women. And that is the 
expense of converting a lump sum account. Let us say a woman 
retires with money in her account and she wants to buy an 
annuity. She wants to get in the private market the same kind 
of protection that women get now from Social Security. Well, 
for one thing, the current private market really doesn't give 
her that option. Because in the current private market, 
annuities with inflation protection are virtually unavailable.
    The second problem she encounters in the private market is 
that gender-neutral annuities are virtually unavailable. Most 
private companies that sell annuities discriminate on the basis 
of gender. A man and a woman who walk in with the same pot of 
money, the woman is going to walk out with a lower monthly 
benefit because the company says we expect you to live longer, 
so we have to pay you less each month for our accounts to 
balance. And the costs of that conversion are particularly high 
because the annuity company says if you are coming in to buy an 
annuity, you probably think that you are going to live longer. 
It is a problem of adverse selection. Companies think that the 
people who buy annuities are people whose parents lived to 90 
and beyond. It is a reasonable assumption, but it means that 
there is an extra penalty put on that, so the cost of 
transforming these accounts into the kind of social protections 
that Social Security gives are very high.
    As to the regulation issue that you raised, it is a very 
serious one, it has been a serious problem in Britain, but I 
really don't have any observations on it.
    Mr. Matsui. Ms. Canner, would you like to comment?
    Ms. Canner. If I may, on administrative costs. There have 
been a number of studies that are looking at the administrative 
costs and are looking at experiences in other countries, such 
as Australia, such as Singapore. But looking at this country, 
some actuaries and consulting firms have indicated that because 
there will be so many accounts involved, and we are talking 
about potentially 140 million accounts, there will be such 
competition for this business. Thus, the management and 
administrative costs would come down.
    Social Security, when it began in 1935, had fairly high 
administrative costs. Those have come down over the years, as 
we know. With respect to the very small personal retirement 
accounts, which I think is an issue, there could be some cross-
subsidization from individuals who are putting in a lot more 
money. General revenues could be used for this purpose since it 
is a public good to have the government pay for the 
administrative fee.
    On the last point about individuals who are putting in very 
small amounts into their personal retirement accounts, we could 
vary this. Perhaps, we could allow people at low income to put 
in a little bit more with some subsidization from general 
revenues. This strategy could encourage individuals of low 
income to try to match what the Federal Government puts in. So, 
I think this is doable if we think creatively about personal 
retirement accounts.
    Chairman Shaw. OK.
    Mr. Doggett.
    Mr. Levin.
    Mr. Levin. Thank you. Let me ask you about your written 
testimony that we are all trying to be sure that we learn and 
understand the way the present system works and proposed 
systems would work.
    You say that the system discriminates against millions and 
millions of married women who work outside the home. Now, right 
now as you have described earlier, essentially a spouse who 
stays at home, gets a credit for part of that time because it 
is usually that she gets 50 percent of her husband's benefits. 
So, essentially we have a system which says for the stay-at-
home mom usually, we are going to provide--the system reflects 
the work that was done by her, right? It is essentially the 
system.
    Now you then go on to say that for the person who worked, 
if 50 percent of her husband's benefit is larger, she takes 
that and gets no credit for the Social Security payments that 
were made by her and her employer. In simple terms, that is 
what you are saying, right, and you conclude that that is 
discrimination.
    I am not sure that that is a fair description. What is 
happening is, in a sense, that women who work in part are 
subsidizing, if you want to put it that way, are helping to pay 
for a benefit for the women who do not work. Now, I am not sure 
that is discrimination, number one. Number two, if we go over 
to a system of individual accounts, what happens to the woman 
who doesn't work? She, when she retires, gets nothing under 
that system, right?
    Ms. Canner. We will still maintain a safety net with some 
of the same rules, and improve others.
    Mr. Levin. How would you do that? Who would pay for that 
for future retirees?
    Ms. Canner. Well, we have the insurance system which people 
continue to pay into with their FICA tax into the system to 
support it.
    Mr. Levin. You would maintain--but I don't see how that 
quite works. You, and maybe I don't understand it fully, but if 
you allowed people to use their payroll tax and place it in an 
individual retirement account, that is what the couple would 
get. Are you saying that the spouse who has the individual 
retirement account gets it all, and the spouse who did not work 
gets 50 percent or something or other?
    Ms. Canner. Well, I don't think we differentiate. If you 
have a married couple reaching 65 or 62 and they collect 
benefits, they would get the normal defined benefits that they 
now get under Social Security, which may be adjusted. On top of 
that, they would get the personal retirement accounts. We are 
not going to discriminate if the woman didn't pay into that at 
all. What we are talking about is increasing that overall 
benefit for the married couple and for individuals.
    Mr. Levin. So, under your system, none of the payroll tax 
would be used for personal individual retirement accounts?
    Ms. Canner. No. What we are saying is to take, for example, 
is to take 2 percent of the FICA tax and----
    Mr. Levin. You say 2 percent. You mean 2 percent of what? 
It is more than 2 percent. I mean, it is 2 points of the 
overall payment, whatever that might be at the particular time.
    Ms. Canner. Well, if it is--we have 12.4-percent payroll 
tax.
    Mr. Levin. So, it is 2 which is 6, more or less.
    Ms. Canner. Which is the employer-employee, 2 percent. We 
can do, you know----
    Mr. Levin. Two points, that is 6, more or less.
    Ms. Canner. Yes.
    Mr. Levin. OK. Now, what happens when both retire and the 
wife hasn't worked at all? Under your system, what would they 
get?
    Ms. Canner. The way the rules operate, they would still get 
the defined benefit--and then the personal retirement on top of 
that. It would be an enhanced benefit, so they would have more 
income coming in. It is basically the reason we are doing this 
is because the Social Security system by 2032 is going to be 
able to pay only 75 percent of promised benefits. What do we 
do? We increase taxes, which I don't think it is a choice that 
anybody wants to do. Or do we decrease benefits? None of these 
is a very good choice.
    Mr. Levin. All right, well, I know my time is up, but I am 
not sure it is fair to say that it is discrimination when you 
give the married woman the benefit of half of her spouse's 
income if it is larger than what she worked. There is 
subsidization across--there is a lot of subsidization in Social 
Security. It is a progressive structure, and a piece of the 
progressive structure in a sense is that all of us pay, women 
and men, are paying for a benefit for the spouse who did not 
work. That is because of a decision by our society essentially 
to give credit to the woman who worked in the house and often 
worked more hours than her spouse, but received no payment.
    Ms. Canner. We are not proposing to take away that benefit.
    Mr. Levin. OK.
    Ms. Canner. What we are proposing to do, the great 
preponderance of women who do work and who do not essentially 
get credit for all of the payroll taxes they have paid in 
personally.
    Mr. Levin. OK. Thank you.
    Chairman Shaw. Mr. Tanner.
    Mr. Tanner. Something Ms.----
    Ms. Entmacher. Entmacher.
    Mr. Tanner [continuing]. Entmacher, thank you. What you 
said spurred my question. Assuming from what I understood, 
assuming that a man and a woman have an individual account of 
some sort, and assume they reach age 65 or whatever, and they 
both have the same amount of money in that account, then there 
is a difference in the gender because life expectancy as to 
what they might receive in the private market if they purchased 
an annuity.
    Ms. Entmacher. That is correct. That is what I am saying.
    Mr. Tanner. Do any of you all have that addressed in your 
plans for these individual accounts?
    Ms. Canner.
    Ms. Canner. I think the point was well made that the 
annuity market doesn't really recognize the differences in the 
types of annuities that we might need if we had personal 
retirement accounts. I would submit that we have a very 
creative private sector and that there would be developed 
products out there. We are just really in the beginning of this 
discussion. I acknowledge that there isn't that much out there 
now, but I think that is a good positive step.
    Mr. Tanner. Well, don't you assume that men are going to 
either live longer or women are going to die sooner if you make 
that statement, I mean----
    Ms. Canner. I mean, the problem is----
    Mr. Tanner. Private enterprise is not in the business of, 
as far as I know and I have been in the insurance business, if 
I think you are going to live and statistics prove that you are 
going to live longer than your husband, I am not going to give 
you the same bill on a monthly basis that I am going to give 
him.
    Ms. Canner. You know, there is a----
    Mr. Tanner. I think. Yes?
    Ms. Entmacher. Absolutely. There is no market solution to 
that.
    Mr. Tanner. I mean this is business. This not a social 
agenda. This is just straight business in terms of annuities.
    Ms. Entmacher. I mean Social Security deals with it by 
saying, OK, everyone is in the same pool, we adjust the cost 
across the whole population so that people in retirement get 
equivalent returns. That is possible to do if, through 
legislation, you create a great big insurance pool and share 
those costs. But the private sector would be----
    Mr. Tanner. But that is a social policy not a business 
decision. The other is a business decision, pure and simple.
    Ms. Entmacher. That is right. That is right. And unless 
nondiscrimination is mandated, as it has been for pension funds 
because for employer funds, there is a law against 
discrimination in employment. Employer pension funds have to 
figure out--and people who provide annuities in employer 
pension plans have to figure out--what is the risk of the total 
pool, share that adjustment out so that people get equal 
monthly benefits regardless of gender. It can be done, but you 
have to have a mandate that forces people within this pool to 
deal with it. And in the private market, those solutions just 
won't develop on their own.
    The other thing I wanted to mention about the potential of 
the private market to lower administrative costs which was 
mentioned earlier, is that the reason that Social Security has 
such incredibly low administrative costs, unmatched by any 
pension system in the country, is that it doesn't have to 
manage where people's money goes each month and what choices 
they are making with where they are sending their 
contributions. Employers put the money in one lump 
periodically, every quarter, paid to the IRS, and the 
accounting of credits is done on an annual basis.
    It is really inherently much cheaper to administer that 
kind of system that uses wage credits than it is to imagine 
every employer managing accounts. And I think the small 
business people should know. Employee Benefits Research 
Institute did a study of how costly it would be if individual 
employers had to figure out what to do with this monthly 
contribution that 1 month the employee wants it to go here, and 
1 month the employee wants it to go there. If we did have 
earning sharing on top of that kind of individual system, so 
you had to figure out where the husband's share was supposed to 
go and the wife's share was supposed to go, it would really get 
complicated. Earning sharing and Social Security would be 
difficult enough, but if everyone is sending their own money 
where they want it to go, it is very, very complex.
    Ms. Canner. May I respond to that? There has been 
discussion of how the money would be disbursed, how it would be 
invested. One proposal is that for the employer, it essentially 
would be transparent. The employer would still send this amount 
of money to the Social Security Administration, which could 
then divvy it up and figure out from there, so that the 
employer is off the hook in terms of having to worry about all 
these different places that the money would go. He would not 
have to generate an investment statement.
    The Federal Employee's Thrift Savings Plan, which is done 
on an agency basis, essentially was done by agency. There are 
some models there. You point to a very good plan, but we are 
concerned. NAM itself includes large and a lot of small 
employers, small businesses. The administrative functions of 
getting this to work are being worked through. But it is a very 
good point.
    Mr. Tanner. I see my time has expired. Mr. Chairman, thank 
you.
    Chairman Shaw. Mrs. Thurman.
    Mrs. Thurman. Thank you, Mr. Chairman. There has been a lot 
of conversation or some conversation at least about the 
Galveston plan and what is going to come out in the GAO report. 
I think Ms. Canner talked about the woman who would have 
received $350,000. First of all, let me ask this question. In 
some of the stuff that I have, those alternative plans, 
actually the employer/employee relationship was 13.9 percent, 
not the 12.4, is that correct?
    Ms. Entmacher. I am afraid all I know about the Galveston 
plan is what I read in the USA Today. I will have to wait for 
the full GAO report to come out to really speak to the details 
of that plan. But, if you could pose some hypotheticals, I will 
try to speak to them, but I don't have much information about 
the details.
    Mrs. Thurman. One of the things they talk about in contrast 
to the Texas plan, Social Security retains its value as you 
grow old and what it says is because the benefits under the 
Texas plan are not indexed for inflation; their real value 
decreases as the individual grows older. I don't know if you 
have looked at that. I guess, this is going to be some of the 
findings.
    Maybe another one was Social Security provide spousal 
benefits, which increases the couple's total income, while the 
Texas plan's joint and survivor coverage reduces the couple's 
monthly income. Ms. Canner, you look like you are ready to 
comment.
    Ms. Canner. But see, you could change the rules. I mean, it 
is how you set it up. The study was very interesting in that 
one of the criticisms of the Galveston plan was that the 
investments were too conservative, that the plan could have 
done a lot better if they had been a little more progressive in 
investment strategy.
    Chairman Shaw. Will the gentlelady, and I would like to 
inject this because this has come up a couple of times. The 
General Accounting Office Report, which was asked for by the 
previous Chairman of this Subcommittee, Mr. Bunning, is in a 
preliminary draft stage. I would just like to not speculate 
what the final report is going to look like. I think anybody 
looking at the minutes of this particular hearing should be 
cautious to make a determination as to what is in the final 
draft or what is in the final report, as evidently the draft 
somehow has been leaked, rather extensively. It is not in its 
final state at this point. I just caution the use of that 
information.
    Mr. Matsui. But you are not suggesting we shouldn't use it 
because----
    Chairman Shaw. I am not suggesting how any of the Members 
should ask the questions.
    Mr. Matsui. Right.
    Chairman Shaw. I just want to be sure in looking at the 
minutes of this hearing that anybody----
    Mrs. Thurman. Well, Mr. Chairman----
    Mr. Matsui. Yes. And let me just say this. I realize it is 
in draft form, but the draft form is a document that is 
completed as a draft, and so I think it is legitimate unless 
they have a reversal of her opinion. So I am not suggesting 
that what you said is incorrect. I am suggesting that there is 
validity to it. I mean if the findings were in the opposite 
direction, I would imagine some others would have been saying 
the Galveston report is a good deal, and we would be saying it 
is a draft document. But there is value to it. There is some 
work that went into it, and the conclusions that were made were 
based upon reasonable analysis.
    Mrs. Thurman. And I thought what I was just talking about 
were some of the features, not necessarily the conclusions of 
the GAO. I mean, I was just trying to get to some of what has 
happened under the features part of it. But that's fine.
    Chairman Shaw. I am not correcting. I am not correcting any 
of the Members. I just put in a couple of cautionary statements 
in the record.
    Mrs. Thurman. OK.
    Ms. Entmacher. And if you would like, I think that the 
findings that have been reported are consistent with the 
predictions that people would make, which is that for women to 
achieve through an individual account--for any low earner, not 
just a woman, to achieve through an individual account--the 
kinds of long-term benefits, inflation-protected benefits, and 
minimum 50 percent spousal benefits and 100 percent of her 
husband's benefit continued indefinitely, that survivor's 
benefit, under Social Security, is much better than people get 
out of pensions. When a woman becomes a widow, the relative 
benefit that she gets as a widow under Social Security, even if 
her husband had a pension plan that had a survivor provision, 
that is going to much smaller than it is under Social Security. 
So, those reported results are entirely consistent with 
predictions that everyone has made.
    I would point out, that the CATO Institute, when it did its 
study of privatization, and I have a lot of critiques about 
that CATO Institute study, even CATO concluded that if you are 
talking about a plan that diverts only a portion of investments 
for individual accounts, that most women lose. CATO makes 
claims that if you invest all of it and go for the full monty, 
as they have called it, then you can get gains. And if anyone 
is interested in that, I can talk about, you know, those 
issues. But, even they agree that if you are talking about 
allowing low-income people to invest just a small portion of 
money, women are going to lose.
    Mrs. Thurman. Can I ask Ms. Lassus a question? Since you 
have had some dealings with this in companies that you have 
worked with, what have been your management costs in those, as 
particularly as we relate to an individual account? What are we 
looking at in management costs?
    Ms. Lassus. I would like to answer that in a couple of 
different ways. I think the management costs are controllable. 
One of the ways they are controllable is by using index fund 
type of investments. The typical stock index fund that invests 
in S&P 500 stocks is less than one-half of 1 percent per year 
in management fees. So, there are many ways to manage those 
costs.
    Mrs. Thurman. Is that per individual or would that be 
through a corporation that you are working with?
    Ms. Lassus. It is a mutual fund. It is anybody that buys 
like a Vanguard 500 fund. That is the cost that is spread 
across the fund. Individual accounts, if you went out today and 
said, I want to have an account individually managed, there are 
going to be minimum fees involved. And most fees are structured 
anywhere from one-half of 1 percent per year up to 1 percent 
per year. But again, the only way this is feasible, and we talk 
about individual accounts, but you can have individual accounts 
accounted for. It doesn't mean they have to be individually 
managed. You can still manage with pooled assets and 
significantly reduce the cost of managing those accounts.
    Mrs. Thurman. I guess my time is up, Mr. Chairman. I have 
lots more questions.
    Chairman Shaw. I think the analysts have done an excellent 
job in setting forth various problems that they see that this 
Subcommittee is going to have to tackle and have to deal with. 
I think that we have gotten a little bit off the point because 
I don't think anybody has suggested the individual accounts or 
government funding is going to solve all the problems, 
particularly, as to the women's issues, and that is what we are 
trying to bear down and concentrate on today.
    We have had a very well-versed and well-prepared panel, 
which we very much appreciate. If I am reading everybody 
correctly, it seemed that everybody sees, with the exception of 
Ms. Coleman, who is viewing this as one of the older recipients 
of Social Security, that the other members of the panel feel 
that some type of private investment is proper whether it is 
individual accounts or whether it is the President's plan, but 
I have not seen any adversity to both. So, I think that at 
least gives us some insight as to the thinking of people that 
are very close to the problem that we are facing.
    Our problem is going to be to solve some of these other 
issues, but I can assure you that we are very sensitive to the 
women's issues with regard to this, and the inequities with 
regard to this, and we will be struggling for some solutions. 
We have gotten some very good testimony today.
    I want to thank each and every one of you for being with 
us. This hearing is adjourned.
    [Whereupon, at 4:35 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

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

    Yesterday, I introduced a resolution on the importance of 
Social Security, one of our nation's greatest success stories, 
to women. The 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 give these factors serious deliberation 
when weighing proposals to reform the Social Security system. I 
am very proud to have 96 of my colleagues join me in co-
sponsoring this important piece of legislation.
    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.
    Social Security's benefit structure has been exceptionally 
helpful to widows, who have a poverty rate nearly twice the 
overall poverty rate for older Americans. In fact, the median 
annual income for widows age 65 and older in 1996 was $10,518. 
For these women, Social Security provides widows' benefits 
equal to 100 percent of their husbands' benefits. This is 
especially important because women tend to out-live their 
husbands. As of 1996, at age 65, the average woman could expect 
to live more than 19 years than the average man.
    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 and strengthens the financial security of 
women in their later years.
      

                                


Statement of Lou Glasse, Carroll Estes, and Timothy Smeeding, 
Gerontological Society of America, Taskforce on Older Women Project

Social Security Reform and Older Women: How to Help the Most Vulnerable

    Social Security and its impending reform is important to 
all Americans, particularly to women, its largest constituency. 
We see the impending Social Security reform package as an 
opportunity to improve economic security for older women, not 
just to achieve long-run actuarial balance in the trust fund.
    Specifically, we want to focus on three groups of women who 
rely heavily on Social Security income as a source for their 
retirement income security:
     Women who enter retirement age unmarried (roughly 
18 percent of those now aged 55 to 65).
     Women who enter retirement age as married (most of 
whom go on to collect benefits as widows, survivors, or retired 
workers, roughly 82 percent of those now aged 55 to 65).
     Much older single women, most of whom have been 
receiving OASI benefits for some time.
    In our forthcoming report, we deal more generally with the 
impact of Social Security reform on older women, including 
issues related to privatization, benefit reductions, taxes, and 
other matters. Here we concentrate only on the specific issue 
of protecting vulnerable older women.
    The facts on older women's reliance on OASI as their only 
inflation-protected benefit are well known. Still, we begin 
with a few of these, some of them very new, and all of them 
specific to the populations we seek to protect, in order to set 
the context for the discussion of reform options that follows.

                  I. Economic Security and Older Women

    The following facts are pertinent to our arguments for 
policy action on behalf of older women:
     Women make up over 60 percent of all Social 
Security beneficiaries. More than two in three persons age 75 
and over are women. Because the fraction of the population 85 
and over is the fastest growing age group among the old, their 
economic needs are of particular importance. Moreover, almost 
three in four persons aged 85 and older are women.
     Older women rely far more heavily on Social 
Security than do older men. And unmarried women (including 
widows, divorcees, and never-married women) rely on Social 
Security far more than do married women. Over 40 percent rely 
on Social Security for 90 percent or more of their incomes. On 
average, unmarried women receive 72% of their income from 
Social Security. This fraction rises with age, rises among 
older women living alone, and also rises as overall incomes 
decline. For instance, 80-84 year old widows with below median 
incomes rely on Social Security for more than 80 percent of 
those incomes.
     Consider the wealth status of nearly retired older 
women aged 51 to 61 and not their incomes, per se. These wealth 
accumulations present the estimated sum total support one can 
achieve from all of their resources if they draw them down 
consistently over their expected lifespans. If we take into 
account financial, housing, private pension, and Social 
Security wealth, we find that among the 18 percent of all women 
who are single, two-thirds are in the bottom three deciles 
within the wealth distribution (Table 1). And within these 
groups, future expected Social Security wealth is by far the 
largest component of their wealth. In contrast, only 25 percent 
of married women in this same cohort find themselves in the 
bottom 3 deciles. While their average wealth is much higher, 
again Social Security is the dominant form of wealth for these 
low wealth women (Table 1).
     These facts predict that older women live in a 
much less advantageous economic situation than do older men. In 
fact, three of every four poor elderly persons are women. 
Poverty rates are highest among divorced women, widowed women, 
and never married women--all about 20 percent--compared to a 
poverty rate of 5 percent for married women. Moreover, if we 
follow the National Academy of Science recommendations and 
adjust incomes for taxes, in kind benefits and for out of 
pocket expenses for health care, the poverty rate for all older 
women living alone rises to 31 percent. Out out-of-pocket 
health care expenses act like a tax on their incomes, forcing 
low-income elders to choose between health care or food and 
housing.
     As times change and women's work histories 
improve, more women will collect private pensions and Social 
Security benefits based on their own earnings. But women will 
still interrupt their work careers far more often than men to 
parent their children and to care for their own elderly 
parents. At retirement age, Social Security benefits depend on 
the 35 highest years of earnings. Years with a ``zero'' are 
those where there were no countable earnings. We asked the 
Social Security Administration to tell us how men and women 
compared with respect to ``zero'' years for those who qualified 
for Social Security in 1997 (i.e., those aged 61 in 1996). They 
find that among women aged 61 in 1996--the next generation of 
women to retire--only 32 percent have no ``zero years'' of 
earnings as part of their 35 highest earning years (Tables 2 
and 3), compared to 75 percent of all men with no ``zero'' 
years. Almost 35 percent of women have ten or more zero years 
compared to 12 percent of men. Hence, women continue to have 
interrupted work careers and will need to rely on their 
partners (married women) and former partners (divorced women) 
whose children they cared for and homes they kept during those 
zero years.
     In fact, the Social Security Administration 
projects that the percentage of all women beneficiaries who 
receive benefits based on their own earnings will rise only 
from 37 percent in 2000 to 56 percent in 2030. Nearly one-half 
of all elderly women will continue to rely on their husband's 
Social Security benefits. Future older women will rely more 
heavily on their own pensions, and hopefully, on their 
husband's pensions under joint and survivor's options. However, 
women are far less likely than men to qualify for private 
pensions (30 percent vs. 48 percent in 1994). Even when women 
do receive their own pensions, they qualify for benefits that 
are only about half the median benefits received by men. 
Finally, about one third of husbands still do not elect joint 
and survivor options for their private pensions upon 
retirement, despite federal legislation to increase such 
determinations, thus depriving one-third of widows of private 
pension support.

                             Table 1. Distribution of Women's Total Net Household Wealth for Women Aged 51 to 61 in 1992 \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                        Mean Wealth by Component \4\ (in 1992 dollars)
                                                                    ------------------------------------------------------------------------------------
                                                                                                                                                Percent
                 Decile                    Percent     Percent of                                                                               of Total
                                            Women    Decile \2\ \3\      Housing        Financial       Social      Private      Mean Total     that is
                                                                                                       Security     Pension        Wealth        Social
                                                                                                                                                Security
--------------------------------------------------------------------------------------------------------------------------------------------------------
A. Single Women
    Lowest..............................       41.0          58.3             2,795            -243       46,259        1,737          50,548       0.92
    Second..............................       17.8          27.8            21,316          13,155       57,274       10,442         102,187       0.56
    Third...............................        9.8          17.9            46,140          27,068       62,758       17,380         153,346       0.41
    Fourth..............................        7.2          12.8            47,414          39,461       67,746       35,377         189,998       0.36
    Fifth...............................        4.8           9.4            64,144          61,664       73,412       35,175         234,395       0.31
    Sixth...............................        4.6           9.1            78,138          866,19       73,771       56,508         295,036       0.25
    Seventh.............................        4.3           8.1            82,260         100,457       77,158       78,907         338,782       0.23
    Eighth..............................        4.2           8.7           109,773         153,074       81,044       95,042         438,933       0.18
    Ninth...............................        3.1           5.8           104,194         208,675       89,212      168,469         570,550       0.16
    Highest.............................        3.2           7.2           163,015         571,325      101,456      225,539       1,061,335       0.10
                                         ---------------------------------------------------------------------------------------------------------------
        Total...........................      100.0            na            41,779          61,509       61,885       36,720         201,893       0.31
                                         ===============================================================================================================
B. Married Women
    Lowest..............................        4.4          23.0           -36,196          24,998       83,578        3,941          76,321       1.10
    Second..............................        9.9          57.8            13,971           7,700      116,326        7,609         145,606       0.80
    Third...............................       10.8          73.0            27,769          24,716      133,907       18,504         204,896       0.65
    Fourth..............................       11.2          82.0            47,924          34,885      146,395       31,456         260,660       0.56
    Fifth...............................       11.3          85.5            59,799          54,986      154,189       55,115         324,089       0.48
    Sixth...............................       11.0          85.0            71,211          78,616      156,943       83,836         390,606       0.40
    Seventh.............................       11.0          85.1            87,452         122,199      162,604      107,576         479,831       0.34
    Eighth..............................       10.4          85.7           977,797         170,723      169,926      163,860       1,482,306       0.11
    Ninth...............................       10.2          88.9           118,021         287,926      169,366      222,661         797,974       0.21
    Highest.............................        9.8          86.0           185,327       1,217,035      176,027      301,720       1,880,109       0.09
                                         ---------------------------------------------------------------------------------------------------------------
        Total...........................      100.0            na            78,963         229,506      153,660      113,423         575,552       0.27
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Deciles used are overall population deciles for wealth. HRS sample weights are used to make the sample representative of all men and women as of
  1992.
\2\ Number given is percent of decile which are single women. Single women can be divorced, separated, widowed, or never married. About 18 percent of
  this cohort are single women.
\3\ Number given is percent of decile which are married women. About 82 percent of this cohort are married women.
\4\ Wealth is the present discounted value of wealth as calculated in R. Burkhauser and R. Weathers, ``Access to Wealth among the New-Old and How it is
  Distributed: Data from the HRS,'' mimeo. Ithaca, NY: Cornell University, November 1998.
Source: Health and Retirement Study (HRS), Wave 1, First Release.


 Table 2. Distribution of Zero Years of Earnings in ``High 35'' Years in
              1996: \1\ A. Number of Workers Age 61 in 1996
------------------------------------------------------------------------
                                                               Of Zero
                 Workers                  Number of Workers     Years
------------------------------------------------------------------------
All.....................................          1,591,400          4.6
Men.....................................            865,400          2.5
Women...................................            726,000         7.0
------------------------------------------------------------------------
\1\ The data were derived from SSA's Continuous Work History Sample, for
  living, nondisabled workers at age 61 in 1996. The data indicate the
  number of years in which no FICA earnings are present among the
  worker's highest 35 years of earnings.
Source: Alexa Hendley, Social Security Administration, Office of the
  Deputy Commissioner for Policy, February 2, 1999.


 Table 3. Distribution of Zero Years of Earnings in ``High 35'' Years in
      1996: \1\ B. Percent of Workers with ``Zero Years'' by Gender
                           (35 highest years)
------------------------------------------------------------------------
          Number of Zero Years             Total       Men       Women
------------------------------------------------------------------------
None...................................       55.5       74.9       32.4
1 to 2.................................        5.1        3.3        7.2
3 to 4.................................        5.1        3.2        7.4
5 to 6.................................        5.0        2.7        7.8
7 to 9.................................        6.9        4.0       10.5
10 or more.............................       22.4       12.0       34.7
                                        --------------------------------
    Total..............................      100.0      100.0     100.0
------------------------------------------------------------------------
\1\ The data were derived from SSA's Continuous Work History Sample, for
  living, nondisabled workers at age 61 in 1996. The data indicate the
  number of years in which no FICA earnings are present among the
  worker's highest 35 years of earnings.
Source: Alexa Hendley, Social Security Administration, Office of the
  Deputy Commissioner for Policy, February 2, 1999.

     Social Security benefits provide inflation 
adjusted income protection not found in other types of pensions 
(which are usually fixed in nominal terms and which therefore 
depreciate rapidly over the 25-year or longer period of older 
women's retirement lives). From December 1982 to September 
1998, the Bureau of Labor Statistics experimental price index 
for elderly consumers rose 73.9 percent compared to a 63.5 
percent increase in the official overall consumer price index 
used to adjust Social Security benefits for inflation. This 
difference was mainly because of higher costs for health care, 
especially prescription drugs.

  II. Reform Options to Protect the Financial Security of Older Women

    Clearly the facts reviewed above suggest that older women 
are at a true economic disadvantage compared to older men, in 
absolute as well as relative terms. Here we present a number of 
alternative measures that would protect the economic well-being 
of older women and provide a true floor to their incomes from 
Social Security. Our goal is to outline a set of strategies 
rather than to suggest one single strategy. While the survivors 
option estimate, 0.15 percent of payroll cost over the next 75 
years, is well known and has been consistently priced out by 
several authors, there are no cost estimates for the other 
options suggested below. We expect that they will only be on 
the order of 0.10 percent of payroll. Still, in a situation 
which requires the closing of a 2.20 percent of payroll long-
term gap between revenue and outlays, items that reduce poverty 
and provide a true floor to women's incomes at an estimated 
total cost of 0.25 percent of payroll, or less, do not place 
extravagant demands on systemic reform.

Policy Options for Survivors' Benefits

    Survivors' benefits should be strengthened, not weakened by 
Social Security reform. Social Security survivors' benefits are 
the key feature of older women's economic well-being for the 
15.3 years in old age the average female survivor spends as a 
widow. Survivors' benefits are crucial to the economic well 
being of spouses with lower lifetime earnings. Today 74 percent 
of elderly widows receive benefits based on the earnings of 
their deceased spouse. While this fraction will most certainly 
decline in the future, about half of widows will still depend 
largely on their husband's benefits in old age in 2030.
    We are opposed to any plan which allows withdrawal of 
Social Security funds prior to retirement or which does not 
mandate considerable benefits for divorced or surviving 
spouses. We favor plans which would provide a lower initial 
spouse benefit upon retirement (to reduce costs) in return for 
a higher survivor benefit upon death of a spouse. The plan 
which reduces spousal benefit from one-half to one-third of 
worker benefits upon initial receipt, but which then raises 
spousal benefit for survivors to three-fourths of the couples, 
combined benefit is the option which we favor.
    In fact, the President's proposal for Social Security 
reform, and older women, which is precisely this option, would 
go a long way toward helping women, who are married at the time 
of Social Security receipt, once they reach widowhood and 
survivor status. The President's proposal echoes the same 
recommendation made by the Advisory Council on Social Security 
in 1996 and by Aaron and Reischauer in their recent 1998 book 
on Social Security reform. The President's own White House 
document of October 27th presents a good introduction to the 
economic problems of older women, and we are pleased to see 
that he has followed up on them in his State of the Union 
Address and Budget Document. This proposal is sound policy and 
we heartily endorse it.
    However these efforts still leave two types of economically 
vulnerable older women:
     Those who are not married at the time of benefit 
receipt: divorcees and separated older women(who are in the 
process of becoming divorcees), younger survivors, and never 
married women. Of this group (16 percent of women aged 51 to 61 
in 1992), 60 percent were divorcees or separated, and only 12.5 
percent were never married, the remaining 37.5 percent being 
women already widowed.
     Very old (aged 80 to 85 and older) single women 
who have simply outlived their partners, assets and savings. 
These women could be either women widowed at a young age or 
unmarried women. Both groups will have those who slip through 
the cracks and find themselves reliant on Social Security at 
very old ages.

Policy Options for Economically Vulnerable Older Women

    Our policy goal is to provide economic support to 
vulnerable older women at reasonable cost and without creating 
a set of disincentives for economic self support. The incentive 
issue is far less important in the case of the very old women, 
but it may be relevant for relatively younger divorcees and 
relatively younger single women.
    If we are to address benefit adequacy, we must begin by 
opposing any artificial reduction in the Social Security cost-
of-living adjustment (COLA). If one takes a single percentage 
point away from a COLA every year and compounds the effect over 
20 years, the beneficiary ends up with a cut of 22 percent 
compared to the current COLA formula. Over 25 years, the 
reduction is to 72 percent of the original benefit; and over 30 
years to 65 percent of the original amount. Hence, an OASI 
recipient who elected to take a benefit worth 80 percent of his 
PIA at age 62, and who was married to a 60-year-old woman who 
subsequently became his widow in 20 years time at age 80, this 
woman has only 62 percent of the PIA as a social Security 
benefit. And if she lives to age 90, 30 years of dependence on 
the program, she has only 52 percent of the PIA. Thus, older 
women would end up with increasingly less from OASI with a 
lower COLA, when as time goes on, facts show that this is the 
asset on which they most depend.
    Note also that over this same time period, a 1.5 percent 
per year increase in the overall average income of the rest of 
society would increase their incomes by 34 percent (over 20 
years), or 56 percent (over 30 years), while older women's real 
economic security becomes less due to lower inflation 
protection. Even to hold constant income of the aged beyond 
retirement in real terms would have them fall increasingly 
further behind the income of the rest of the population, and a 
reduced COLA would compound this difference, leading to a lower 
real income at a time when the rest of society was becoming 
increasingly better off.
    There are several alternative options that could better 
help address each of the problems we outline above, including 
the inflation protection option:
     A special minimum benefit or (enhanced COLA) for 
older long time beneficiaries, e.g., those 80+ years of age, or 
those with 20+ years of benefit receipt. This would bring their 
real income up to some fraction of the difference between their 
OASI benefit and the change in the incomes of the rest of 
society over this period.
     Indexation of elder OASI benefits to the elderly 
CPI developed by the Bureau of Labor Statistics. For $40.0 
million per year, the BLS could provide an accurate elder CPI 
and in so doing increase equity across generations and provide 
true cost-of-living protected benefits for the most vulnerable 
elders, regardless of future cost-of-living increases.
     Institute a guaranteed poverty line benefit, about 
$600 per month at present, as recommended by the CSIS Social 
Security reform proposal, for those with 40+ years experience 
with the system. If we were to count a certain number of years 
for time spent in raising each child, e.g., three years; plus 
years married to a former husband when he was paying into the 
system; plus own years worked, to get to this 40 year threshold 
(with concomitant reductions for those in the system for less 
than 40 years so counted), a universal guaranteed minimum 
benefit might be both target and cost effective.
     Institute a new income tested minimum benefit 
guarantee of $600 per month within the Social Security Act and 
separate from SSI, which gave credit to OASI recipients for a 
larger share of their OASI benefit than does SSI(or more than 
the current $25 per month). The program would have a guarantee 
of $600 per month for beneficiaries with less than $400 per 
month of OASI benefits; provide a slightly lower than $200 
subsidy for those with higher OASI benefits ($400 or more); and 
would then phase-out to zero for those receiving $750 per month 
(roughly 125 percent of the poverty line). All other sources of 
income would be taxed at 100 percent by this program. Because 
the system was run by the Social Security Administration as 
part of their regular operations, no stigma or take-up problems 
would arise as long as the beneficiary filed income taxes the 
year before. And such a system would benefit only those who 
qualify for Social Security to begin with. One could think of 
this as a targeted minimum benefit. Canada has had great 
success with a system similar to that above, instituting a 
Guaranteed Income Supplement (GIS) to provide minimum benefits 
in old age. The program resulted in reducing their older single 
woman poverty rate from 21 to 8 percent over ten years. And we 
could also have a similar success.
     Reform SSI for elders so that the guarantee was 
increased from 77 to 100 percent of the poverty line (i.e., to 
$600) for elders who are Social Security beneficiaries, with a 
much higher liquid assets test and with the same disregards as 
the current system. The program would require that recipients 
apply to the program, hence risking take-up and stigma issues, 
but would otherwise approximate the structure of the previous 
program.

                            III. Conclusion

    Great advances have been made in improving the retirement 
income for most older people. But millions of older women who 
live alone have not been able to enjoy improved security. 
Current inequalities in incomes and assets have not declined 
with the continuing economic boom. And divorce rates continue 
to climb among older and middle age women. Hence, it makes 
sense to pay a modest price to build an effective income floor 
into the OASI system to address this problem as we restore 
actuarial balance to the system. Older women deserve such a 
commitment. The committee should urge the Social Security 
Administration Deputy Commissioner for Policy to estimate the 
costs and benefits of each of these five options and report 
their findings to Congress. If economic growth, private pension 
accumulation and asset accumulation continues amongst the 
future elders, all of the population, men and women alike, 
might look forward to an economically secure old age. Until 
this happens, steps must be taken to assist those who are most 
vulnerable. But we doubt that this will be the case.
      

                                


Statement of Heidi Hartmann, 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.
    Please find attached a Research-in-Brief published by the 
Institute for Women's Policy Research on the Impact of Social 
Security Reform on Women. The fact sheet summarizes the 
findings of a larger Institute report addressing several of the 
reform proposals on women. I have also attached a statement on 
Social Security developed by the National Council of Women's 
Organizations to present their views on the principles that any 
reform plan must meet. I hope that these three pieces convey to 
you the importance of Social Security for women, and that you 
take away the crucial point that any reform made to the system 
must improve the overall well-being of elderly women.
      

                                


Statement of Hon. Carolyn B. Maloney, a Representative in Congress from 
the State of New York

    Mr. Chairman. Thank you for recognizing the importance of 
the impact of Social Security on women by having this hearing 
today.
    Lately we have been hearing a lot about ways to reform 
Social Security. However, the talk of Social Security benefits 
has largely focused on reform as if all people were the same. 
This is simply not the case. Women have different needs than 
men when it comes to Social Security.
    Social Security is the mainstay of retirement income for 
women, with the average older woman relying on Social Security 
for 72 percent of their income, compared with 66 percent for 
men. One out of four women relies on Social Security for all of 
her income.
    According to the Social Security Administration, in 1997, 
median income for elderly unmarried women (widowed, divorced, 
separated, and never married) was $11,161, compared with 
$14,769 for elderly unmarried men and $29,278 for elderly 
married couples. Thus, the poverty rate for elderly women was 
higher than that of men. In 1997, the poverty rate of elderly 
women was 13.1 percent, compared to 7 percent among men. Among 
unmarried elderly women, the poverty rate was significantly 
higher--about 19 percent.
    There are many reasons why women are more dependent on 
Social Security. The main reason is that women, on average, 
live seven years longer than men. But, there are other reasons 
as well.
    Women are less likely to have a pension. Only 38 percent of 
all women receive employer-provided pension benefits compared 
with 57 percent of men. One reason for this is that women tend 
to work for smaller companies which offer less generous pension 
plans--if they offer pension plans at all.
    Women also usually earn less than men. Women ages 35 to 44 
earn roughly 72 cents for every dollar earned by men. Younger 
women are narrowing that gap somewhat and now earn an average 
of 84 cents for every dollar. Nonetheless, lower salaries mean 
smaller Social Security payouts and thinner pensions.
    Women often are the ones that spend time away from the 
workplace to raise a family or care for elderly parents. This 
not only diminishes the number of working years that pay into a 
retirement plan, but it also causes these women to lose 
seniority and experience that leads to promotions and raises. 
Social Security payouts are calculated by averaging the top 
thirty earning years of a person's life. If someone takes off 
time from the workforce and does not work thirty years, then 
zeroes are added in for those years.
    The average age for a woman to be widowed in the United 
States is 55, and a recent report by the General Accounting 
Office shows that about 80% of widows now living in poverty 
were not poor before their husbands died. While men typically 
can count on two incomes throughout their lives, 80 to 90% of 
women will be solely responsible for their finances at some 
point in their life, according to the National Center for Women 
and Retirement Research.
    With the challenges that women face, we must continue to 
have safeguards in place such as the ones used in our current 
Social Security system. It is important that our Social 
Security system not only be solvent for our children and our 
children's children, but it is also important that it gives our 
elderly the retirement security that they have earned. The 
effect on women should be one of the main focuses of any 
measure to change Social Security in order to make it more 
solvent.
    As the incoming co-chair of the Congressional Caucus for 
Women's Issues, I intend to make sure that women's priorities 
are front and center as we continue to debate Social Security 
reform.
      

                                


Statement of Diana Zuckerman, Ph.D., National Association of 
Commissions for Women, Silver Spring, Maryland

    Women depend on the Social Security system, and that 
program has been a life-saving safety net for many women, 
especially widows. We all agree that any changes made to Social 
Security need to consider how it will affect all our nation's 
citizens. The proposals that are being debated vary a great 
deal in their likely impact on women. As Director of the Social 
Security Project of the National Association of Commissions for 
Women, I welcome the opportunity to provide this testimony. The 
goal of this new Social Security Project is to make sure that 
policy makers and the American public are aware of the likely 
benefits and risks that various proposals would mean for 
American women.
    The National Association of Commissions for Women is a non-
profit, non-partisan membership organization composed of 
regional, state, county, and local commissions created by 
government, to improve the status of women. NACW works with 
legislators, commissions, women leaders, and corporate 
executives on a wide range of issues that are important to 
women. We are committed to safeguarding Social Security because 
it is a major source of economic security for millions of women 
all over the country.
    Social Security benefits treat women and men the same way, 
but many provisions tend to benefit women more than men, or 
vice versa. For example, any married individual has a choice of 
whether to receive benefits based on their own lifetime 
earnings or half their retired spouses' benefits, but choosing 
half the spouses' benefit helps more women than men, since men 
earn more.
    Social Security is more than a retirement program--it is a 
social insurance program that keeps millions of Americans out 
of poverty. That social insurance is essential for women. 
Although their Social Security benefits tend to be lower, women 
depend on Social Security more than men because women are much 
less likely to receive employer-provided benefits. Even when 
women receive private pensions they average only half the 
dollars received by men. Unfortunately, many of the proposals 
that are being seriously considered would put the lowest 
earners at greatest risk, and many of those lowest earners are 
women.
    Proposals to privatize Social Security vary, but the basic 
plan is that most of the money that is currently set aside from 
each individual's paycheck for Social Security would instead go 
into an account for that individual, and the funds would be 
invested in stocks, bonds, or other private investments. Funds 
to pay for a safety net for society's most vulnerable, and the 
enormous costs of transitioning from the current ``pay as you 
go'' system to private accounts, would either result in higher 
taxes or cuts in some Social Security benefits. These proposed 
cuts would have very different impacts on women and men.
     Raising the retirement age would affect more women 
than men, since women live longer. In addition, women tend to 
marry men who are older than they are, and many women retire 
when their husbands stop working, in order to spend time with 
or take care of them. Under current law, the retirement age 
will gradually increase from 65, stopping at 67 for those born 
in 1960 or later. Several proposals would raise the retirement 
age to 67 even sooner, and would continue to increase it to age 
70. Reduced benefits for early retirement would also be 
delayed.
     Calculating benefits on 38 years of employment 
rather than 35 years would decrease benefits for everyone, but 
women who spent several years out of the work force as ``stay 
at home mothers'' or to care for aging parents would be harmed 
more. The Social Security Administration estimates that only 
30% of women who are retired in 2021 will have worked 38 years, 
compared to 60% of men. And, more of those women's years will 
be based on part-time salaries, because even today less than 
half of women between 25-44 years old are employed full-time.
     Raising the ``cap'' so that high earners pay taxes 
on more of their earnings would harm men more than women. This 
past year, workers and their employers paid Social Security 
taxes on the first $68,400 of an annual salary; since few women 
earn more than that, substantially raising the cap would have 
little impact on women.
     Lifetime benefits tend to benefit women more than 
men since women live an average of 7 years longer than men. 
Private accounts might run out of money while some long-lived 
individuals are still alive. If the individual buys private 
annuities in the insurance market, women will probably receive 
smaller payments because of their greater life expectancy. 
Moreover, the payments would not be indexed for inflation, 
which is more of a problem for those who live the longest.
     Lowering the annual cost of living index would 
have little impact for the first few years, but the cumulative 
impact over many years would mean substantial benefit cuts for 
retirees who live the longest. The longest living retirees tend 
to be women, and since women are more likely to live alone than 
men, these cuts will create more of a hardship for them.
     Many proposals would reduce guaranteed benefits 
that provide a safety net for our lowest earners. The lowest 
earners tend to be women, so they would be hurt more if the 
safety net was reduced. This could be a particular problem for 
divorced women, and the number of divorced retirees is 
skyrocketing because divorce is much more common than it used 
to be.
     Many proposals would reduce benefits for the 
disabled. Disabled workers and disabled children and adults who 
never worked are eligible for benefits; relatives who care for 
the disabled are usually women.
    The National Association of Commissions for Women urges 
Congress to carefully consider how these changes would harm our 
nation's elderly women, many of whom are already living in 
poverty or near poverty. One strategy would be to tinker with 
the changes so that they would harm fewer women or harm women 
less--for example, by averaging fewer years of earnings for 
women who spend some years as full-time mothers. However, 
tinkering with the changes to make them less harmful to women 
would also result in less savings to the Social Security 
system, and other changes would therefore be needed to provide 
greater savings. For that reason, preserving the Social 
Security safety net and using money from the budget surplus to 
help save Social Security is a strategy that helps protect 
women. Any plans that focus primarily on increasing the rate of 
return on a proportion of earnings or on money set aside in 
voluntary savings will benefit low earners less--and that means 
women will benefit less.
    Members of the National Association of Commissions for 
Women will be speaking up on this issue all over the country, 
and will be contacting their representatives in Congress in the 
weeks and months ahead. Commissioners appreciate your interest 
in Social Security as a program of particular importance to 
women, and will keep you informed of the concerns of women in 
your districts and communities. Our president, Patricia Hendel, 
looks forward to working with all of you as various proposals 
are considered. As Director of the Social Security Project, I 
also welcome the opportunity to work with you and will be 
available to provide you with information about our efforts, 
our concerns, and our analyses of how specific proposals would 
affect women in your district.
      

                                

Statement of National Association of Manufacturers

    The National Association of Manufacturers (NAM) is the 
largest broad-based trade association in the nation. Founded 
over a 100 years ago, the NAM encompasses nearly 14,000 member 
companies that account for 85 percent of goods manufactured in 
the United States. NAM members range in size from companies 
with fewer than 25 employees to those with more than 100,000.
    Social Security is a top domestic priority for the NAM. Our 
1999 legislative agenda notes that ``the current system is 
demographically unsustainable and gives workers low or negative 
returns on their contributions; and that individually owned and 
controlled personal retirement accounts would provide workers 
with larger more secure benefits than today's system.'' Failure 
to adequately remodel Social Security would threaten the 
economic and retirement security of working men and women, and 
American business. Absent reform, the unfunded obligations of 
the government will tax the growth out of the economy, tax jobs 
out of the economy and make it extremely difficult for U.S. 
employers to compete in world markets.
    Given this legislative priority, the NAM has taken a 
leadership role within the business community in addressing 
solutions to fix this 64-year old retirement program. To this 
end, the NAM Board of Directors approved reform principles in 
April 1997. We have testified numerous times before Congress; 
convened bipartisan grassroots forums across the country; and, 
last summer, established a lobbying coalition, the Alliance for 
Worker Retirement Security (AWRS).
    AWRS includes various business trade associations, 
corporate members and representation from other concerned 
groups, including women and minorities. Like the NAM, AWRS is 
dedicated to reforming the Social Security system to ensure an 
adequate retirement income and an opportunity for workers to 
create personal economic wealth. Both the NAM and AWRS believe 
Social Security reform must respect the following principles:
     Permit workers to invest their retirement payroll 
taxes (FICA) in individually directed personal retirement 
accounts (PRAs).
     Preserve the benefits of current retirees and 
near-retirees.
     Guarantee a ``safety net'' (minimum government 
benefit) for all retirees.
     Accomplish the above with no increase in payroll 
taxes.
    The NAM recognizes that all workers do not have the same 
personal and family needs and encourages its members to tailor 
benefit packages and work schedules to respond to these 
differences. In the same way, a refashioned Social Security 
system must recognize the different work and family patterns of 
today's women versus the model on which the 1935 program was 
based.

                     Women and Retirement Security

    A visit to Miami Beach, Fl., Sun City, Ariz., and most 
other retirement communities reveals a largely female retiree 
population. Roughly 60 percent of Social Security recipients 
today are women and more than 95 percent of women age 65 or 
older receive benefits. Thus, any discussion of Social Security 
reform must closely examine the needs of elderly women, in the 
process of redesigning the system.
    Certain inequities present in the system treat women 
unfairly. Because few women worked outside the home in the 
1930s, women would have received very meager benefits. To 
remedy this, in 1939, ``spousal benefits'' were added as a 
protection for widowed housewives. This created a system in 
which a one-earner couple receives greater benefits than a two-
earner couple with the same income. A spouse is automatically 
entitled to a benefit equal to half of her spouse's benefit, 
whether or not she has worked. If she has worked, she is 
entitled to her own benefit or to the spousal benefit, but not 
both.
    A woman typically earns less and works fewer years than her 
husband, so her benefit is often less than half of his. In such 
a case, a woman would be better off with the spousal benefit 
because it would be larger. She could, however, receive this 
benefit without working, so in a sense she gets no credit for 
her own work or her taxes.
    The above inequities should be addressed. Even in so doing, 
the resulting changes would still yield a relatively small 
benefit on which to live out one's retirement years, which for 
women are at least four years longer than men. Further, Social 
Security's unfunded status means that by 2032, the Trust Fund 
will only be able to pay 75 percent of promised benefits or 
some $200 less in each monthly beneficiary check. This is 
especially critical since women beneficiaries average $621 per 
month versus an average of $810 for a male. Clearly, a reformed 
system must be restructured to provide an adequate retirement 
income to both men and women.

               Personal Retirement Accounts: A Better Way

    As noted above, the NAM supports retaining a safety net of 
benefits for all retirees. A safety net assures a basic level 
of benefits. At present, not all retirees receive even a 
poverty-level benefit, due to a reduced work history. We need 
to do more, however, to supplement even an enhanced safety net. 
Personal Retirement Accounts offer that opportunity.
    A bipartisan plan introduced in the 105th Congress would 
have taken 2 percent of each worker's FICA tax and placed it in 
a personal retirement account (PRA), administered in a manner 
similar to the federal employees' thrift savings plan (TSP). 
Individuals would choose from among a number of potential 
investments, such as stock funds, bond funds, a combination or 
even U.S. Treasury securities. PRAs would be the property of 
individuals and eventually pass to survivors or heirs, unlike 
Social Security benefits that cease with the beneficiary's 
death.
    Rules would have some similarity to those for 401(k) plans, 
but with major exceptions. Use of PRAs as collateral for loans 
or for medical or educational purposes would be prohibited, 
since PRAs must be reserved for retirement only. Less frequent 
benefit statements and fewer opportunities to change 
allocations are anticipated as a way to keep down system costs, 
at least initially. Because investing will take place over the 
long term, risk is minimized.
    Upon retirement, a female retiree would receive a basic 
defined benefit (similar to what is received from Social 
Security today). In addition, a female retiree would also 
receive her PRA with interest compounded over 30-40 years. 
Payout would be in the form of an annuity. This could be 
adjusted depending on other existing retirement income.
    PRAs have many advantages. Individual accounts would permit 
women to grow their money, unlike Social Security that returns 
a mere 1.5 percent to 2 percent on average. Money invested 
privately in the market, over a long period of time, poses 
minimal risk--a conclusion reached by many economists, from 
liberal to conservative. Remaining assets would be passed on to 
survivors and heirs. You cannot do this with Social Security.
    Critics of PRAs point to the fact that the average American 
does not have the expertise to invest wisely. Women are 
perceived as especially ill-prepared to make investment 
decisions. Yet female participation in 401(k) plans is higher 
than that of similarly situated men, according to a 1998 study 
released by Watson Wyatt. The study reviewed 150,000 employees 
in 87 401(k) plans. This same study revealed that women also 
set aside a greater portion of their pay than their male 
colleagues, except among younger and less well-paid workers. 
Restructuring Social Security should provide all women with 
opportunities now enjoyed by the higher-paid. PRAs would help 
all women to build a nest egg for retirement.
    The argument that low-income women, in particular, should 
not jeopardize any portion of their Social Security defined 
benefit because the private market is too risky, fails to 
consider that the current system is slated to run in the red. 
By investing a portion of the FICA tax in carefully selected 
stock or bond funds over the long term, a female retiree stands 
a far better chance of enhancing her retirement resources. This 
two-tiered approach permits her money to grow, even while she 
may be temporarily out of the workforce raising children or for 
other purposes.

                               Conclusion

    The current Social Security system, based on a 1930s' 
model, is inadequate in responding to the needs of women 
retirees who live longer and earn less wages or salary than do 
men. Further, current law shortchanges women who work. Taken 
together, these factors demand reforms to the defined benefit 
portion of Social Security and the creation of new 
opportunities for women to accumulate additional sources of 
retirement income.
    A revamped system featuring individually directed PRAs as 
an integral part of Social Security is a sensible, workable 
approach that will help workers--particularly women. At the 
same time, a strengthened Social Security system will help keep 
the economy strong and contribute to a brighter future for all 
Americans. The NAM believes that this approach is far superior 
to having the federal government invest the Trust Funds in the 
private market. We urge Congress to work together in a 
bipartisan manner to enact legislation to this end, and we 
pledge to work with you toward this important goal.



  REDUCING POVERTY AND PROTECTING MINORITIES, SURVIVING FAMILIES, AND 
                     INDIVIDUALS WITH DISABILITIES

                              ----------                              


                      WEDNESDAY, FEBRUARY 10, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 1:32 p.m., in 
room B-318, Rayburn House Office Building, Hon. E. Clay Shaw, 
Jr. (Chairman of the Subcommittee), presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

FOR IMMEDIATE RELEASE                       CONTACT: (202) 225-9263
February 3, 1999
No. SS-3

                    Shaw Announces Third Hearing Day
                    in the Series on Impacts of the
                     Current Social Security System

    Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on 
Social Security of the Committee on Ways and Means, today announced 
that the Subcommittee will hold a third day in a hearing series on 
Social Security's role in reducing poverty and protecting minorities, 
surviving families, and individuals with disabilities. The hearing 
which began on Tuesday, February 2, 1999, will be continued on 
Wednesday, February 10, 1999, in room B-318 Rayburn House Office 
Building, beginning at 1:30 p.m.
      
    Oral testimony at this hearing will be from invited witnesses only. 
Witnesses will include Social Security program experts and 
representatives of interested groups. 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:

      
    Our nation's Social Security program was enacted in 1935 to help 
reduce poverty among the elderly. Poverty rates among the elderly fell 
from 35.2 percent in 1959 to only 10.5 percent in 1997--a 235 percent 
reduction just since reliable poverty statistics began being kept. 
Further, today's senior poverty rate is among the lowest for all age 
groups on the basis of income, and when the value of housing is 
considered, seniors have the lowest poverty rate of any age group at 
only 5.6 percent. In addition, numerous inflation adjustments, benefit 
expansions, and tax base increases have contributed to enhanced 
protections for low-income workers, including many minorities. The 
total number of persons removed from poverty in 1996 due to social 
insurance programs (chiefly Social Security) was almost 18 million--or 
1 in 15 Americans.
      
    Many Americans think of Social Security as a retirement program, 
but program expansions after 1935 extended Social Security's 
protections to surviving widows and children (in 1939) and individuals 
with disabilities (in 1950 and 1956). Today, nearly one-third of 
beneficiaries are the survivors of workers who died prematurely or 
people with disabilities and their families. For 4.5 million 
beneficiaries and their families, Social Security disability benefits 
not only help to replace income lost due to the inability to work; 
eligibility for this program also provides a gateway to other services 
and benefits, including Medicare and vocational rehabilitation.
      
    In announcing the hearing, Chairman Shaw stated: ``Social Security 
is the number one weapon in our Nation's arsenal against poverty, 
having successfully freed millions of seniors and families threatened 
with financial insecurity due to death, disability, or retirement from 
the clutches of poverty. Members and the public need to better 
understand how Social Security has achieved this record of success, and 
how Social Security can be strengthened as reforms are considered to 
protect our Social Security safety net for generations to come.''
      

FOCUS OF THE HEARING:

      
    The third hearing day in a series on the impacts of the Social 
Security program will focus on how Social Security protects workers and 
families against risks such as disability, death, and retirement. The 
hearing also will focus on how Social Security affects minority 
families, who face disproportionate risk of low income, disability, and 
premature worker death.
      

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, Wednesday, 
February 24, 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 Subcommittee on Social Security office, room B-316 
Rayburn House Office Building, by close of business the day before the 
hearing.
      

FORMATTING REQUIREMENTS:

      
    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.
      
    1. All statements and any accompanying exhibits for printing must 
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1 
format, typed in single space and may not exceed a total of 10 pages 
including attachments. Witnesses are advised that the Committee will 
rely on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. A witness appearing at a public hearing, or submitting a 
statement for the record of a public hearing, or submitting written 
comments in response to a published request for comments by the 
Committee, must include on his statement or submission a list of all 
clients, persons, or organizations on whose behalf the witness appears.
      
    4. A supplemental sheet must accompany each statement listing the 
name, company, address, telephone and fax numbers where the witness or 
the designated representative may be reached. This supplemental sheet 
will not be included in the printed record.
      
    The above restrictions and limitations apply only to material being 
submitted for printing. Statements and exhibits or supplementary 
material submitted solely for distribution to the Members, the press, 
and the public during the course of a public hearing may be submitted 
in other forms.
      

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

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

                                


    Chairman Shaw. Good afternoon.
    Social Security is an important weapon in the Nation's 
arsenal against poverty. In fact, Social Security played a key 
role in lifting almost 18,000,000 Americans out of poverty in 
1996, more than the population of Los Angeles and Chicago 
combined. That's one in 15 Americans.
    This success is possible because of Social Security's role 
as an insurance program. We pay a portion of hard-earned wages 
into the system to ensure us against loss of income due to 
disability, retirement, or death. For example, some workers may 
qualify for more years of disability benefits than they spent 
in the work force. These benefits are critical to maintaining a 
certain standard of living for disabled persons who can no 
longer work.
    The Social Security contract between workers and government 
has survived for 60 years because Americans are confident that 
Social Security will be there for them when they need it.
    However, that confidence is eroding for one simple reason: 
Demographics. The bottom line is that unless Social Security is 
reformed soon, revenues will no longer cover benefits after the 
year 2012.
    By the year 2032, benefits will have to be cut by 25 
percent unless payroll taxes are increased by 50 percent to 
make up the difference. It is a critical fact that those most 
at risk are the same low-income minority and disabled workers 
and families who most depend on Social Security benefits today.
    None of these families can afford a 25-percent benefit cut. 
None should have to do so. For them and everyone else, Social 
Security already provides too few choices, no real savings, and 
too many hurdles to work and independence.
    The status quo will make these matters worse, adding insult 
to injury already felt when millions of American families are 
deprived of income due to worker disability, retirement, or 
death.
    So I look forward to our testimony today, which will 
highlight that doing nothing is not acceptable; especially for 
our low-income, minority, and disabled workers and their 
families. That is our starting point. Where we end, I will not 
judge. But I will continue to keep my ears and mind open to the 
best ideas to preserve and improve Social Security's prospects 
for current families and generations to come.
    I know Mr. Matsui is also very concerned about this area. 
In fact, I saw a very nice article about him in his local 
paper, which I have just read this morning, in which you do 
talk about disability and your concern about that.
    So, I would now recognize the gentleman from California.
    Mr. Matsui. I thank the gentleman from Florida and the 
Chairman of the Subcommittee.
    First of all, I'd like to thank you for your very kind 
comments in that article. I appreciate the spirit of 
bipartisanship.
    I might also want to thank Mr. Shaw for the fact that this 
is the second hearing on a number of very crucial issues. One 
was on the issue of women; and this one is on the issue of 
protecting survivors and disability benefits, and minority and 
low-income families, and how all of these groups have been 
affected by Social Security.
    And I just want to thank you, Clay, for having separate 
Subcommittee hearings on each of these areas. It's very much 
appreciated.
    I would just like to reiterate what the Chairman has said. 
Obviously, the Social Security basic benefits are crucial to 
almost every American, but equally as important are the 
survivors and disability benefits. As all of us know, survivors 
and disability benefits, if they were in the form of insurance 
policies, would average on the range of $300,000 per family. 
And so these benefits are for those that become disabled or if 
they have a loss of the breadwinner in the family, basically 
another safety net before the age of 65.
    And so, this, along with other issues that will be 
discussed by GAO and other witnesses today are very, very 
important to the whole issue of how we structure Social 
Security and what we do in terms of the long-term future of the 
system.
    And so, again, I want to thank Mr. Shaw and thank the 
witnesses.
    Chairman Shaw. Thank you. Our first witness is from the 
U.S. General Accounting Office. Cynthia Fagnoni is the Director 
of Income Security Issues in the Health, Education, and Human 
Services Division. And she is accompanied by Francis Mulvey, 
who is Assistant Director, Income Security Issues in the 
Health, Education, and Human Services Division. Welcome both of 
you. Your full statement will be made a part of the record, and 
you're free to summarize as you see fit.

  STATEMENT OF CYNTHIA M. FAGNONI, DIRECTOR, INCOME SECURITY 
 ISSUES, HEALTH, EDUCATION, AND HUMAN SERVICES DIVISION, U.S. 
   GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY FRANCIS MULVEY, 
ASSISTANT DIRECTOR, INCOME SECURITY ISSUES, HEALTH, EDUCATION, 
  AND HUMAN SERVICES DIVISION, U.S. GENERAL ACCOUNTING OFFICE

    Ms. Fagnoni. Thank you. Good afternoon, Mr. Chairman and 
Members of the Subcommittee.
    Thank you for inviting me here today to speak about the 
implications of Social Security reform for minorities. In my 
statement today, I will focus on three issues: How minorities 
fare under the current Social Security system; how they might 
be affected by some proposed changes in benefits to restore 
program solvency; and how minorities might fare under a 
restructured system to include individual accounts.
    My remarks will focus on two minority groups--African-
Americans and Hispanics--because the data we are analyzing do 
not provide sufficient information on other populations, such 
as Asian-Americans or Native Americans.
    The information I am presenting today is based upon work we 
have currently underway for Representative Charles Rangel, 
Ranking Minority Member of the Full Committee.
    Regarding the first issue, how minorities fare under Social 
Security, it is important to note that the Social Security 
system is gender-, ethnicity-, and race-neutral. However, 
blacks and Hispanics are more likely to have certain 
characteristics that affect the level and extent of benefits 
they receive relative to the contribution they make.
    Blacks, for example, have shorter life expectancies than 
Hispanics or whites, and thus are more likely to receive 
retirement benefits for fewer years. But life expectancy is 
only one of many factors that affect benefit levels.
    Social Security's progressive benefit formula has 
particular importance for both blacks and Hispanics because 
they tend to have lower lifetime taxable earnings than whites.
    In addition, blacks rely more heavily on Social Security's 
disability and survivors benefits, which provide important 
protections against the loss of earnings caused by death or 
disability.
    For example, while blacks currently make up 12 percent of 
the U.S. population, they make up 18 percent of disabled 
workers, and 23 percent of child beneficiaries.
    Regarding the second issue, how Social Security benefit 
reductions would affect minorities, we found that minorities 
would be disproportionately affected by certain reforms. Many 
proposals would increase the age at which individuals can begin 
receiving Social Security retirement benefits. Because blacks, 
on average, can already expect to spend fewer years in 
retirement than whites, they would experience a greater 
relative reduction in benefits.
    On the other hand, Hispanics have, on average, longer life 
expectancies. For them, the negative effect of raising the 
retirement age would be smaller in relative terms. An across 
the board benefit cut, such as increasing the number of years 
of earnings used in calculating Social Security benefits could 
have a more serious effect on blacks and Hispanics, because 
their lower overall incomes put them much closer to or below 
the poverty line to begin with.
    At the same time, an increase in the retirement age would 
have implications for the Disability Insurance Program. Raising 
the early and normal retirement ages would create a financial 
incentive for individuals in poor health to apply for DI 
benefits, because the gap between disability and retired worker 
benefits would increase.
    Also, as individuals stay longer in the work force, more 
older workers are likely to become disabled.
    Assuming the disability trends continue, proportionately 
more of these disabled workers would be black.
    Now, let me discuss the third issue: How minorities might 
fare under a restructured Social Security system. Many 
proposals would create individual retirement accounts that 
individuals would own and manage in addition to providing some 
level of benefits based on years of covered earnings.
    Because research has not previously been done on 
minorities' investment patterns, we have estimated the effect 
of race on individual investment behavior. Our preliminary 
results indicate that education and family income are better 
predictors of individuals' investment behavior than race.
    Specifically, individuals with less education and lower 
incomes tend to investment more conservatively than individuals 
with more education and higher incomes; and, on average, blacks 
and Hispanics have lower family incomes and fewer years of 
education than whites.
    Individuals who chose a relatively low-risk investment 
strategy for their retirement income accounts would be likely 
to earn lower rates of return over longer periods of time, but 
they would not be as exposed to large losses from riskier 
assets. And while it is true that, in the past, U.S. stocks 
have almost always posted higher returns over time than less 
risky assets, there is no guarantee that they will always do 
so, especially for shorter investment horizons.
    Our analysis also revealed that blacks and Hispanics are 
much less likely to have interest earnings from any other type 
of savings vehicles, such as savings accounts, money market 
funds, certificates of deposit or mutual fund accounts. 
Individuals unfamiliar with making investment choices may need 
assistance in understanding and managing their individual 
account investments. Providing low-income and less well-
educated individuals who have limited investment experience 
with appropriate information may be particularly challenging.
    Nevertheless, information that covers general investment 
principles and financial planning advice would be essential in 
helping all investors to better manage their accounts.
    It is not clear who would provide such information to 
workers under a restructured Social Security system that 
included mandatory individual accounts. The nature and extent 
of these information and education efforts, when combined with 
the design of related investment options, would be especially 
important in maximizing the effectiveness of and minimizing the 
risk associated with individual accounts.
    Mr. Chairman, this completes my short statement this 
afternoon. I'd be happy to answer any questions you might have.
    Thank you.
    [The prepared statement follows:]

Statement of Cynthia M. Fagnoni, Director, Income Security Issues, 
Health, Education, and Human Services Division, U.S. General Accounting 
Office

    Mr. Chairman and Members of the Subcommittee:
    Thank you for inviting me here today to speak about 
minorities and Social Security. Social Security has had a 
significant and positive effect on the nation's elderly. Since 
1959, poverty rates for the elderly have fallen from 35 percent 
to 10.5 percent, thanks largely to this social insurance 
program. Nevertheless, elderly African-Americans and Hispanics 
are much more likely to be living below the poverty line, even 
with the program's important benefits. For example, 28 percent 
of African-Americans and 27 percent of Hispanics aged 65 and 
older have incomes below the poverty threshold, compared with 
11 percent of similarly aged Caucasians.\1\
---------------------------------------------------------------------------
    \1\ Most of the data sources we relied on used the terms blacks, 
whites, and Hispanics. Therefore, for the remainder of this testimony 
we use the same terms. Although we recognize that there are other 
minority groups, such as Asians and Native Americans, for the most part 
the data were not broken down finely enough for us to look at them 
separately.
---------------------------------------------------------------------------
    My remarks today focus on (1) how minorities currently fare 
under Social Security, (2) how they might be affected by some 
of the proposed changes in benefits to restore the program's 
solvency, and (3) how minorities might fare under a system 
restructured to include individual accounts. The information I 
am providing today is based on preliminary findings from work 
we are currently doing for Representative Charles B. Rangel, 
Ranking Minority Member of the full Committee on Ways and 
Means.
    In summary, while Social Security's benefit and 
contribution provisions are neutral with respect to race, 
ethnicity, and gender, we found that because of certain 
socioeconomic characteristics, minorities have benefited from 
the Social Security program. Because minorities are more likely 
than whites to have lower lifetime earnings, they are 
advantaged by Social Security's progressive benefit formula 
that provides larger relative benefits for lower-paid workers. 
Moreover, blacks in particular are more likely to receive other 
important Social Security benefits, such as disability, that 
help protect against lost earnings. Certain reforms that would 
reduce benefits to help restore solvency could have a 
disproportionate effect on low-wage earners, including blacks 
and Hispanics, depending on how they are structured. For 
example, raising the age of retirement would lower the average 
lifetime benefits of blacks relative to whites because of 
blacks' lower life expectancy.
    Restructuring Social Security to include individual 
accounts would also likely have varying effects on different 
racial and ethnic groups. However, our analysis indicates that 
education and family income are better predictors of 
individuals' investment behavior than race. Individuals with 
less education and lower incomes tend to invest more 
conservatively than those with more education and higher 
incomes. Because blacks and Hispanics are more likely to have 
less education and lower incomes, they would likely earn 
smaller returns on their accounts, although they would bear 
less risk. These results suggest that if individual accounts 
were adopted as an element of comprehensive Social Security 
reform, investor information and education would be needed to 
help low-income individuals with their investment decisions.

                               BACKGROUND

    The Social Security program is the foundation of the 
nation's retirement income system. Since 1940, Social Security 
has been providing benefits to the nation's eligible retired 
workers and their dependents. In addition to retired worker 
benefits, Social Security protects covered workers who have 
severe disabilities and their dependents through the Disability 
Insurance (DI) program. Also, spouses and children of deceased 
workers may receive Social Security survivor benefits. As a 
social insurance program, Social Security allows workers to 
pool the risks they face from a loss of earnings that results 
from retirement, disability, or death.
    Social Security's benefit formula redistributes income from 
high-wage earners to low-wage earners to help keep low-wage 
earners out of poverty. Benefits are based, in part, on an 
individual's earnings, but when calculating actual benefits, 
Social Security uses a progressive formula that replaces a 
relatively larger portion of lifetime earnings for people with 
low earnings than for people with high earnings. To calculate 
Social Security benefits, Social Security uses average indexed 
monthly earnings, defined as a worker's lifetime covered 
earnings over his or her 35 highest earnings years. A 
progressive benefit formula is applied to these lifetime 
earnings to determine the benefit that would be payable to the 
worker at age 65. The benefit is then adjusted for the age at 
which the worker first receives the benefit.
    The Social Security system currently faces a long-term 
solvency problem. As you know, the Social Security trust funds 
are predicted to begin paying out more in annual benefits than 
they collect in taxes in 2013 and are expected to be depleted 
by 2032.\2\ A number of proposals have emerged to resolve this 
financing problem, with a great deal of variety in terms of 
both how the Social Security program would be structured and 
who would be eligible for benefits.\3\ Some of these proposals 
would restore solvency within the existing program structure, 
while others call for some form of restructuring to include 
individual accounts as an element of reform. Many major 
proposals would provide a significant defined benefit as a base 
with voluntary or mandatory individual accounts included as an 
element of the plan.\4\ In the current national debate over how 
best to restore Social Security's long-term solvency, some 
researchers have argued that minorities, particularly blacks, 
would fare better under a system that included some individual 
account element.\5\ They argue that certain minorities are more 
likely to have specific characteristics that result in their 
receiving lower benefits than others under the current system.
---------------------------------------------------------------------------
    \2\ The relevant figures include both the Old Age and Survivors 
Insurance program and the Disability Insurance program.
    \3\ The President's recent Social Security reform proposal, for 
example, would extend Social Security solvency until 2055. It would 
not, however, fundamentally reform the Social Security benefit program.
    \4\ Defined benefit refers to a benefit based on a specific formula 
linked to a worker's earnings and years worked.
    \5\ W. Beach and G. Davis, ``Social Security's Rate of Return,'' 
Heritage Center for Data Analysis, Heritage Foundation, Washington, 
D.C., 1998.
---------------------------------------------------------------------------

          HOW MINORITIES CURRENTLY FARE UNDER SOCIAL SECURITY

    Although Social Security's benefit and contribution 
provisions are neutral with respect to race, ethnicity, and 
gender, some researchers have questioned how well some 
minorities, especially blacks, have fared under the existing 
Social Security system because they have lower life 
expectancies. Differences in life expectancy affect the length 
of time that individuals from different racial and ethnic 
groups can expect to pay into the Social Security system and 
collect retired worker benefits. For example, white males born 
in 1998 can expect to live for 74 years, black males for 64.3 
years, and Hispanic males for 75 years. These differences 
become much less pronounced, but still exist, for individuals 
who survive to age 65. At age 65, in 1998, white men can expect 
to live 2.3 years longer than black men, and Hispanic men can 
expect to live 2.9 years longer than white men. The projections 
of life expectancy for white, black, and Hispanic women at age 
65 are 19.5, 17.6, and 22.2 years, respectively.
    However, life expectancy is only one of many factors that 
affect the level of benefits that people receive from Social 
Security, relative to what they contribute. Social Security's 
progressive benefit formula has particular importance for 
blacks and Hispanics because they tend to have lower lifetime 
taxable earnings than whites. The consensus among researchers 
is generally that the progressivity of the benefit formula 
outweighs the negative effect of lower life expectancy for 
blacks in terms of what they receive from Social Security 
relative to what they contribute. Hispanics' longer life 
expectancy, combined with the progressive benefit formula, 
indicates that they fare even better than blacks under Social 
Security.
    None of the currently available studies have included 
disability or survivors benefits in their assessments of the 
benefits minorities receive from Social Security.\6\ Blacks 
rely more heavily than others on these features of the program, 
which provide important protections against the loss of 
earnings caused by disability or death. While blacks currently 
make up 12 percent of the U.S. population, they are 
overrepresented in these beneficiary categories. For example, 
blacks make up 23 percent of child beneficiaries (as children 
of retired workers, disabled workers, or deceased workers), 18 
percent of disabled workers, and 14 percent of survivors of 
deceased workers. Put another way, 47 percent of black 
beneficiaries are receiving either disabled or survivor 
benefits, while only 28 percent of whites are receiving 
benefits in these categories. In contrast, blacks make up only 
8 percent of all retired worker beneficiaries, while whites 
make up 90 percent of this category.\7\
---------------------------------------------------------------------------
    \6\ We are currently working with a special data set, provided by 
the Social Security Administration and the Bureau of the Census, that 
will allow us to make more complete estimates of minorities' total 
returns to Social Security, including disability and survivors 
benefits. This information will be forthcoming in a report to 
Representative Charles B. Rangel, Ranking Minority Member of the House 
Committee on Ways and Means, later this year.
    \7\ Hispanics were not reported separately and are included in the 
numbers for whites and blacks. The final 2 percent of retired worker 
beneficiaries includes Asians and Pacific Islanders, American Indians 
and Alaskan Natives, and a subset of the total number of beneficiaries 
of Spanish origin.
---------------------------------------------------------------------------

HOW MINORITIES MIGHT BE AFFECTED BY VARIOUS REFORM PROPOSALS WITHIN THE 
                       EXISTING PROGRAM STRUCTURE

    The changes contained in various Social Security reform 
proposals could have disproportionate effects on minorities but 
these would vary depending on the nature of the reforms. Many 
reform proposals include provisions that would reduce current 
benefit levels by, for example, increasing the number of years 
of taxable earnings used to calculate benefits from 35 years to 
38 or 40 years. Even a proportional reduction in benefits such 
as this could have a more serious effect on minorities since 
their lower overall incomes put them much closer to or below 
the poverty line to begin with.
    Many Social Security reform proposals include a provision 
to raise the normal age of retirement to age 70. Some proposals 
would also increase the early retirement age from 62 to 65. Any 
increase in the age at retirement would decrease the number of 
years during which individuals would collect benefits while 
increasing the number of years they would pay Social Security 
taxes. Because blacks, on average, already can expect to spend 
fewer years in retirement than whites as a result of their 
shorter life expectancy, they would experience a greater 
relative reduction in benefits, compared with whites, from an 
increase in the Social Security retirement age. Given 
Hispanics' longer life expectancy, the negative effect of 
raising the retirement age would be smaller in relative terms. 
At the same time, an increase in the ages of early and normal 
retirement would have implications for the DI program. Raising 
the early and normal retirement ages would create a financial 
incentive for individuals in poor health to apply to the DI 
program because the gap between disability benefits and retired 
worker benefits would increase. Moreover, as individuals stay 
longer in the labor force, more older workers will become 
disabled. Assuming that current disability trends continue, 
proportionately more of these disabled workers would be black.

   HOW MINORITIES MIGHT FARE UNDER A SYSTEM RESTRUCTURED TO INCLUDE 
                          INDIVIDUAL ACCOUNTS

    Many reform proposals would fundamentally restructure 
Social Security by creating retirement accounts that 
individuals would own and manage. Many proposals would provide 
a defined benefit but would also include an individual account 
feature. For example, the plan put forth by the National 
Commission on Retirement Policy includes a minimum benefit 
provision that is set at the poverty line for individuals who 
have worked for 40 years and directs 2 percentage points of the 
payroll tax into individual savings accounts. Because no 
research has previously been done on minorities' investment 
patterns, we have estimated the effect of race on individual 
investment behavior. Using national survey data, we estimated 
the probability that people with Individual Retirement Accounts 
(IRA) would invest their accounts in stocks and mutual fund 
shares.\8\ Our preliminary results indicate that individuals 
with higher family income and more years of education are more 
likely to invest in more volatile but potentially higher-
yielding assets such as stocks and mutual funds. On average, 
blacks and Hispanics have lower family incomes and fewer years 
of education than do whites. We found that controlling for 
these and other characteristics, black IRA holders are still 
somewhat less likely to invest in stocks and mutual fund shares 
than whites.\9\ We also found that Hispanic IRA holders are 
neither more nor less likely than whites to invest their 
accounts in stocks or mutual fund shares, once we controlled 
for the other demographic characteristics.
---------------------------------------------------------------------------
    \8\ We used a cross-section of people from Census' 1992-93 Survey 
of Income and Program Participation. Because of data limitations, we 
were able to look only at the investment decisions of people with IRAs. 
In the full sample, blacks and Hispanics were less likely to have an 
IRA account than whites. In general, respondents with IRAs had higher 
family income, had completed more years of education, were older, were 
more likely to be married, and had fewer children than those without 
IRAs.
    \9\ This result was significant at the 90-percent confidence level. 
The analysis did not control for differences in levels of wealth, which 
would also explain some of the differences in investment behavior.
---------------------------------------------------------------------------
    Individuals who chose a relatively low-risk investment 
strategy for their retirement income accounts would be likely 
to earn lower rates of return over longer periods of time but 
would not be as exposed to large losses from riskier assets. 
While it is true that in the past U.S. stocks have almost 
always posted higher returns over time than less risky assets, 
there is no guarantee that they will always do so, especially 
for shorter investment horizons.
    Our analysis also revealed that blacks and Hispanics are 
much less likely to have interest earnings from any other type 
of savings vehicles such as savings accounts, money market 
funds, certificates of deposit, or mutual fund accounts. 
Individuals unfamiliar with making investment choices may need 
assistance in understanding and managing their individual 
account investments. Providing low-income and less well-
educated individuals who have limited investing experience--
including some blacks and Hispanics--with appropriate 
information may be particularly challenging. Nevertheless, 
information that covers general investment principles and 
financial planning advice would be essential in helping all 
investors to better manage their accounts. It is not clear who 
would provide such information to workers under a restructured 
Social Security system that included mandatory individual 
accounts. Within the private pension system, there are 
mechanisms for people to learn more about investing. For 
example, some employer-sponsored pension plans provide written 
material or contract with a financial planning service to give 
employees information about investing. It might be possible to 
draw from these experiences in structuring an investor 
education program for Social Security. The nature and extent of 
these information and education efforts, when combined with the 
design of related investment options, would be especially 
important to helping maximize the effectiveness of, and 
minimize the risk associated with, individual accounts under 
the Social Security system.

                              CONCLUSIONS

    The Social Security system has benefited minorities through 
a benefit formula that favors lower-paid workers and through 
important social insurance features, including disability 
benefits. Because blacks and Hispanics are more likely to have 
lower overall incomes than whites, certain reforms, such as 
increasing years of covered earnings, would have a more serious 
effect on them, because they are already closer to the poverty 
line. Because blacks and Hispanics on average have lower 
incomes and are less well educated than whites, the creation of 
mandatory individual accounts could also decrease their 
benefits relative to those of whites if they invested more 
conservatively. Our work suggests that providing information 
and education would be essential, especially to low-income 
individuals who would be making investment decisions for the 
first time. Investor education that covers general investment 
principles and financial planning advice might help all new 
investors to better manage such accounts.
    This concludes my prepared statement. I would be happy to 
answer any questions you or other Members of the Committee may 
have.
      

                                


    Chairman Shaw. Thank you.
    Mr. Hulshof.
    Mr. Hulshof. Thanks, Mr. Chairman. I realize in the 
interest of time that you didn't get to your entire statement, 
Ms. Fagnoni. But one of your conclusions is that the present 
Social Security system, I'll just read your introductory 
sentence of conclusion, ``The Social Security system has 
benefited minorities through a benefit formula that favors low-
paid workers and through important social insurance features, 
including disability benefits.''
    Basically, I think what you're saying is through the 
progressive benefit formula and the availability of disability 
benefits that minorities have benefited from the present 
structure, is that true?
    Ms. Fagnoni  That's correct. Right.
    Mr. Hulshof. Now, also some of the proposals that have a 
defined benefit, but also include an individual account feature 
that you touched on briefly. Do these proposals, at least the 
ones you've looked at, do they eliminate this progressive 
benefit formula?
    Ms. Fagnoni. Well, as I'm sure you know, there are a range 
of different proposals and proposal packages that are out there 
on the table. From the ones we've looked at, for example, a 
recent one by the Center for Strategic and International 
Studies would reduce the progressivity of the benefit formula, 
but not completely eliminate it. And many of the proposals 
would leave, from what we can tell, would leave the disability 
insurance component intact.
    Mr. Hulshof. Let's just talk some basics. And I recognize 
that we have to talk in generalities. For instance, some of the 
themes you touched on, we talked about in previous hearing. For 
instance, some of the inequities in the system as it relates to 
women. And one of the things was that we had in a previous 
hearing the Chairman called was the more conservative 
investment patterns, and, again in general terms because as I 
pointed out at that hearing, in the Hulshof household that's 
not the case as far as who's the more conservative investor. 
But let's say that a single black male, an African-American 
male works in an average paying job, and then dies at age 60. I 
think, first, we need to start off with by explaining what 
happens with the money that he or she has paid into the Social 
Security system under that scenario?
    Ms. Fagnoni. Well, first of all, we know from research that 
blacks are more likely to rely on disability insurance 
benefits, and so one of the things you'd want to look at is 
whether or not before that time of death at age 60 whether that 
individual might have been drawing from the Social Security 
Program, for example, through the DI Program. So there is the 
potential for them to receive benefits, even if they're 
single----
    Mr. Hulshof. Right.
    Ms. Fagnoni [continuing]. Prior to getting retirement 
benefits. Clearly, if they have a spouse or children, there are 
significant benefits if they die before they reach retirement 
age.
    Mr. Hulshof. But take that out of the hypothetical. Let's 
just say a hard-working African-American male, who pays into 
the system until 60, and then dies under the present system, 
assuming there had been no tapping into the disability side, 
what would happen to the money that he's paid into the system?
    Ms. Fagnoni. Well, this is part of a social insurance 
system where people make contributions, in part to protect 
themselves against risk, but also to provide for retirement 
should they reach retirement age, and that's part of the 
actuarial assumptions, factored in that an individual might not 
receive the retirement benefits should they die before the 
retirement age.
    Mr. Hulshof. And I don't mean to make this more than 
difficult than it is. The fact is that that hard-working 
African-American male, who dies at age 60, would not see any 
benefits of what he has paid into the system over the course of 
his lifetime.
    Ms. Fagnoni. That's right. If they had not--right.
    Mr. Hulshof. Would that then change if individual accounts 
were part of the system. The same African-American male working 
in the average job, hard working all of his life, but 
individual accounts then became a personal accounts, and I 
don't know what we would call them, but were part of the 
system.
    Are there some proposals, in fact, that would allow 
whatever assets or maybe that's not the correct word, because 
it's an accounting situation. But would that not, then, be able 
to be passed on to that individual's heirs? Is that part of the 
feature of some of the individual accounts?
    Ms. Fagnoni. Well, you're correct that under certain 
scenarios somebody who has an individual account component 
would have assets remaining in their own name even if they die 
before they receive maybe the defined benefit portion of the 
retirement benefits. What that package--what that individual 
account looks like would, of course, depend on what that 
individual's earnings were and what he chose to put into the 
account, and how he chose to invest it.
    Mr. Hulshof. Mr. Chairman, recognizing we have a lot of 
other good witnesses, I'll yield back the balance of the time 
that I have remaining.
    Chairman Shaw. Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman. Ms. Fagnoni, thank you 
for your report. This is the preliminary report, as it might 
have been?
    Ms. Fagnoni. Yes, we still have analysis we're doing.
    Mr. Matsui. Right. When do you suppose that you might have 
this completed?
    Mr. Mulvey. We are hoping to have this completed some time 
in the early summer.
    Mr. Matsui. OK. That's good. One of the things I've noted 
in here is on page three, you talk about disability and 
survivors benefits, and speaking about African-Americans 
specifically, you state that while blacks currently make up 12 
percent of the U.S. population, there are over represented in 
both the survivors category and also the disability category. 
In fact, 23 percent of child beneficiaries are from African-
American families. Do I have that right?
    Ms. Fagnoni. Right.
    Mr. Matsui. Right. OK, that's probably a more positive way 
of putting it in terms of a correct statement. African-
Americans make up 18 percent of disabled workers and 14 percent 
of survivors of deceased workers, and then you have put another 
way: ``47 percent of black beneficiaries are receiving either 
disabled or survivors benefits, while only 28 percent of whites 
are receiving such benefits. In contrast, blacks make up only 8 
percent of all retired worker beneficiaries'' whereas whites 
make up 90 percent of that category.
    One of the problems I have, and I guess your final report 
will have this is how you break this down in terms of benefits 
per capita, on an average basis, in these different categories 
that we're talking about. Will you have that?
    Ms. Fagnoni. You mean in terms of what their benefits would 
look like?
    Mr. Matsui. Well, maybe it's too difficult to do this, but 
how do we come up with a value placed on, let's say per 
individual, per family in terms of a Social Security benefit. I 
think we were able to do that somewhat with women, because 
there's probably more information on women. But in terms of 
minority populations, there's, from my understanding, no 
statistics. Although just preliminarily looking at these 
numbers, it seems pretty obvious that an African-American 
family with the larger disabilities and survivors benefits 
probably benefits significantly more than, let's say, the 
general population. Is that a correct, fair statement?
    Ms. Fagnoni. Right. The existing research generally shows 
that the progressive benefit formula outweighs the fact that 
blacks in particular have shorter life expectancies, and that 
they benefit relative to their contributions. But we are--the 
piece of our analysis that's not complete is looking at the 
total benefit package that different minority groups receive 
and comparing that against whites, including disability and 
survivors benefits, and looking at contributions compared with 
benefits. So that's the piece that will help enrich that 
current body of research.
    Mr. Matsui. Right. See, the mere fact that a category of 
individuals dies earlier than another category is not 
necessarily conclusive of what group benefits more from the 
first.
    Ms. Fagnoni. Right. Exactly. If you look at the entire 
package. Right.
    Mr. Matsui. Because death will bring additional benefits.
    Ms. Fagnoni. Our main point in pointing that out is that 
this is----
    Mr. Matsui. And I'm just trying to understand this.
    Ms. Fagnoni [continuing]. Is that this isn't just a 
retirement program----
    Mr. Matsui. Yes. Right.
    Ms. Fagnoni. And there are other benefits that they draw 
on.
    Mr. Matsui. I mean, just anecdotally looking at this, it's 
pretty obvious to me and I obviously await your final report. 
But it's pretty obvious to me that the minority population 
generally benefits disproportionately than the population as 
whole for Social Security benefits. Can you at least give me a 
preliminary indication of whether that statement is correct?
    Ms. Fagnoni. Yes, again, the research generally supports 
that statement.
    Mr. Matsui. That statement.
    Ms. Fagnoni. Right.
    Mr. Matsui. So that's an accurate statement. So, the fact 
that a individual might die at the age of 60 is not necessarily 
of any relevance in terms of the overall conclusion you're 
reaching?
    Ms. Fagnoni. Anytime, one looks at an average, there--the 
individual circumstances vary so much that you'd really want to 
look at what proportion of people would fall into those 
specific categories.
    Mr. Matsui. Right. So if I can generally conclude, and 
obviously, we need--I'm sorry, Mr. Chair, I know we have a time 
constraint here. If we can conclude that the current system 
benefits minorities disproportionately compared to the general 
population.
    I want to move over to another issue. Shall I come back 
with it?
    Chairman Shaw. How much time was left on the vote? Seven 
minutes. All right go ahead, Mr. Matsui.
    Mr. Matsui. Maybe I can--now, I want to talk about the 
individual accounts. Now, your preliminary comments on 
individual accounts are that low-income categories, which 
minorities are predominantly in, compared to the general 
population, have a more difficult investment pattern. They 
invest more conservatively because obviously they don't have 
other assets to overcome more risky investments, so their rate 
of return is lower.
    And second, which I think is perhaps of equal importance, 
they may not have the kind of financial background to make 
these investments. I know you didn't really address that issue, 
but are you going to address that in the final report? What's 
your preliminary?
    Ms. Fagnoni. Well, actually, we did talk about the fact 
that they are less likely to have any kind of savings vehicle, 
and this does raise important questions about how do you help 
people like that--with education and understanding of making 
investment decisions.
    Mr. Matsui. What I would hope, too, is that in your report, 
in your final report, you might try to address--if you can--I 
don't even know if it's appropriate because that may not be 
part of your challenge, but address the issue of cost of 
maintenance of the program--I mean, since low-income people 
obviously have less money in their accounts and then, you know, 
more of it is eaten up by financial advisors than, let's say, 
somebody who is wealthier and obviously has a greater 
wherewithal. Perhaps you can just respond to that.
    Ms. Fagnoni. We actually have another line of work where 
we're really looking specifically at the implementation issues 
associated with individual accounts, and one of the most 
important aspects of that is administrative costs, and how do 
you deal with things like the small accounts. And what might be 
done to reduce administrative costs on those types of accounts.
    Mr. Matsui. Thank you very much.
    Chairman Shaw. OK, we will recess for approximately 15 
minutes so the Members can vote. This will be the only vote 
that will disrupt our hearing today.
    [Recess.]
    I'll go ahead with my area of questioning, because I want 
to follow up. I think the previous questioners were closing in 
on something that I think this Subcommittee is going to have to 
take a close look at; and that is with regard to if we would go 
to some type of public investment in the private sector that 
we've got to be sure that if we do it on an individual basis 
that the individuals are sufficiently protected from their own, 
their own possible problems, and that these accounts are kept 
for retirement and for retirement only.
    Mr. Hulshof was getting into an area which I think is 
troubling when you're talking about minorities. There is no, as 
you well know, there is no vested interest and the courts have 
said so in the Social Security system. Even though you pay in 
all your life, not voluntarily but compulsory--you're employer 
pays in for you. If you die, it's tough. You have nothing left. 
You have not accumulated any wealth at all. And despite the 
fact that the minorities might do better as far as disability-
type or survivor-type of benefits, it's plain and simple that 
they do worse as far as retirement. They generally go to work 
earlier, at a younger age, and they die younger, which sort of 
gives them a double whammy, which is something I'm concerned 
about, and I would guess that all of us here on this 
Subcommittee, are also concerned about.
    Going back to your testimony and talking about general 
investment principles and financial planning advice would be 
essential in helping all investors to better manage their 
accounts. I think that would apply to all of us, whether we're 
college-educated or whether we have a high school degree; that 
we would certainly not want to allow whimsical type of 
investment with your brother-in-law or something, or on a stock 
tip that you happened to hear walking into the building this 
morning or up the elevator or something of that nature. And I'm 
sure you can foresee a plan where you can't have insulation 
with regard to that.
    Also, the question of the administrative costs. You 
wouldn't formulate a plan where someone who is close to minimum 
wage, or even with an income under $20,000 would have to have 
their own investment counselor setting up their account 
individually and managing it on an individual basis, because 
it's simply--the administrative cost would simply pretty much 
wipe out the principal. It will take just too much of it. But 
obviously, you can have investment pools where this could be 
very beneficial.
    Do you see any problems with what I have just said?
    Ms. Fagnoni. Well, to your first point about everybody 
needing education and investment advice. That's certainly going 
to be true if there is any individual account feature.
    But our point was to note that that's especially true for 
people who may not have made investments before and may not 
have quite the educational level that others might. So, it 
becomes especially important that any kind of program that 
might be set up thinks carefully about how to help people 
understand what it is they would be doing. And, of course, you 
could structure the program. That's why we're doing some of the 
work we're doing right now, looking at the different issues 
related to implementing individual accounts, to look at what do 
you do with the small accounts? Are there ways to pool so that 
you can reduce administrative costs? Those sorts of issues. 
There's a tradeoff between giving people more choices and more 
freedom versus fewer choices and perhaps more protections 
against riskier or unwise choices.
    So there are a lot of decisions that would need to be made 
about how to best structure those kinds of plans.
    Chairman Shaw. I think it would mainly be in spreading the 
risk across many investments, many type of investments. And 
also, the question of what do you do when someone retires and 
if they do have an individual account, what if the stock market 
is in a free fall at that particular time, how would you handle 
that?
    Ms. Fagnoni. Right.
    Chairman Shaw. And those are things that this Subcommittee 
is going to have to take a very hard look at.
    But you did, quite correctly, note that over a long period 
of time, and all through our history, even in times that bridge 
the thirties and the Great Depression, that the investment in 
the private sector, over the long haul, was certainly paid 
substantially better than what we're getting now. It's just the 
interest off the T-bills, is that correct?
    Ms. Fagnoni. Yes.
    Chairman Shaw. So, if we can find some way to protect the 
worker in that area and protect the worker against himself, 
really, or herself, with regard to the type of investments that 
these things are worth looking at, wouldn't you agree with 
that?
    Ms. Fagnoni. Well, in terms of timing, as you mentioned, 
I'm sure you know the story in Chile where the head of the 
retirement plan suggested that people hold off retiring because 
the stock market wasn't looking so good at the moment, and I'm 
not sure how well that would go over in this country. So there 
would be a lot of issues to consider.
    Chairman Shaw. In my district, it wouldn't go over well at 
all.
    Ms. Fagnoni. I wouldn't think so.
    Chairman Shaw. But I would suggest that if we did put some 
kind of a safety net in there, in the legislation, that we 
wouldn't--that we could tell someone very well that you could 
put off retirement if you want to, but these basic benefits are 
still in place for you so that there's some type of guarantee, 
and I don't believe there is in the Chilean model. Isn't that 
correct?
    Ms. Fagnoni. Yes, I believe that's correct.
    Chairman Shaw. So if we could, if we could put some kind of 
a guarantee in there that this would eliminate that objection 
or that concern.
    Ms. Fagnoni. And you raise another good point that----
    Chairman Shaw. Quite obviously, it would.
    Ms. Fagnoni [continuing]. It's important that people really 
know if there were to be a new sort of system that included 
individual accounts that it's very clear to people up front 
what they do and don't do, and what is and isn't protected 
under that kind of structure.
    Chairman Shaw. OK. Now, in your testimony, you have not 
addressed, at least I don't believe you did, you haven't 
addressed the President's plan. Is that right?
    Ms. Fagnoni. No, not in this testimony. As you know, Mr. 
Walker testified yesterday about that issue.
    Chairman Shaw. And I believe Mr. Walker is going to be 
testifying before the Full Committee on Monday, so I won't get 
into that area right now.
    Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman. Actually, you got 
into many of the aspects of the testimony that I wanted to 
investigate, particularly the one concerning education of 
investors, education of the population with respect to their 
investment choices. And I think you all talked about that 
enough. Suffice it to say that I don't think, Ms. Fagnoni, that 
your testimony is that the education need or the education 
component of this is a showstopper; that we just have to be 
mindful of the fact that there are going to be consumers, 
potential retirees out there that are not going to be 
sufficiently educated at the outset with respect to a wide 
range of investment choices; and that we have to be careful in 
how we package that element of the Social Security Program if 
we chose to make individual accounts an element of the Social 
Security Program. Is that a fair statement?
    Ms. Fagnoni. That's correct. Yes.
    Mr. McCrery. OK. Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Cardin.
    Mr. Cardin. Thank you, Mr. Chairman. I find this testimony 
very informative. On one hand, the current Social Security 
progressive benefit formula is of greater value, as you point 
out in your testimony, to low-paid workers. If you were to 
replace part of that benefit with private accounts, and do 
nothing else, the propensity of low-wage workers is to make 
more conservative investments, and the disparity would probably 
just grow if that's all you did?
    Ms. Fagnoni. Particularly if you were to structure 
something that cut into existing benefits. That's something 
you'd want to look very carefully at. Right.
    Mr. Cardin. But on the other hand, if we do something to 
supplement the current benefits, as the President is suggesting 
in his Universal Savings Accounts, that provides protection as 
to the types of investments that individuals could invest in, 
greater education on the benefits of long-term accumulations 
through higher rates of return, and deals with the 
administrative costs, which I think you pointed out in your 
direct testimony, then we might reduce the wealth disparity 
among retired people, if we can get low-wage workers more 
engaged in private retirement?
    Ms. Fagnoni. I think there is that potential as long as the 
structure of the system is carefully considered, and it's 
recognized the types of benefits that particularly low-income 
individuals may need to draw from, such as disability and 
survivors insurance as well as retirement.
    Mr. Cardin. No, we're all very mindful of how the structure 
is configured. I think you make a very good point about that. 
Though, I think the key here is that if you were to replace the 
current progressive protection, you run much greater risk than 
if you can do something on top of the current system. And we 
need to do a better job, particularly with low-wage workers, of 
taking advantage of greater rates of return for private 
retirement. Right now, they're not participating, as I 
understand. And when they do participate, they're participating 
in lower rates of return because of an education factor, at 
least as your testimony points out.
    Ms. Fagnoni. That's right.
    Mr. Cardin. Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Hayworth.
    Mr. Hayworth. Mr. Chairman, I thank the witnesses. I have 
no questions at this time. Thank you, sir.
    Chairman Shaw. Mr. Levin.
    Mr. Levin. Thank you. Just a couple of quick ones. I'll try 
to resist dragging you into the general debate. It's tempting. 
But I will focus on your testimony.
    Did the results surprise you?
    Ms. Fagnoni. Well, I think the place where there's the most 
controversy or discussion is we know that low-income people 
benefit from the progressive formula that Social Security has. 
One the other hand, we know that groups who don't live as long, 
for example, blacks, on average at least, that that works 
against them. So the difficulty is in what is the whole package 
look like and how does that package of benefits compare to the 
contributions. So while the individual elements were not 
surprising, I think we still have some work to do to more 
specifically demonstrate the overall contributions to the 
overall benefits. But I believe that given the demographic 
characteristics of certain groups of minorities, some of these 
results are not surprising. Because, as we point out, it's not 
the race or ethnicity itself, it's the characteristics of 
individuals and how those play out under the current Social 
Security structure that makes the difference.
    Mr. Levin. Are you pretty sure of your tentative results? 
Do you expect that they will be challenged?
    Ms. Fagnoni. I know there are some questions about--there 
have been different studies that question how good a deal, 
quote unquote, blacks are getting from the current system. But 
the research, to date, has tended not to focus on the 
disability and survivors benefits as part of that package. And 
we think it's important to look at the whole package, given how 
important those benefits are to certain minorities.
    Mr. Mulvey. The report that I mentioned that we're working 
on is looking at a new dataset, which matches SSA data with 
data from the survey that we're using, which we believe will 
give us a much better understanding of the overall rates of 
return to whites versus blacks and other groups. And as I said 
earlier, we hope to have that out later on this summer.
    Mr. Levin. Are you pretty confident of your methodology?
    Mr. Mulvey. Well, we have had a lot of review of the 
methodology. We spent a lot of time working on it and getting 
access to these data. It's a very desirable dataset, which is 
guarded very carefully by Census because of the confidentiality 
of the data. We are pretty confident that we're taking the 
right approach.
    Mr. Levin. One last question. Because there's been some 
discussion here concerning people who pass away at 60 if they 
are single they receive no Social Security benefits, this 
structure has been in place now 60 years, hasn't it?
    Ms. Fagnoni. That's right.
    Mr. Levin. And in that respect, there's been no change.
    Ms. Fagnoni. That's correct.
    Mr. Levin. And yet surveys show that the present system is 
exceptionally popular, isn't that true?
    Ms. Fagnoni. It's always considered one of the most 
popular, one of the most successful if not the most successful 
social program that this country has enacted. I think you have 
to be careful when you look at a specific scenario, because, 
overall, if you look at population characteristics, there are 
lot of people who do make it to retirement age; and a lot of 
people who need and want the protections against early death or 
disability that Social Security provides.
    Mr. Levin. So maybe it reflects the fact that there's an 
insurance aspect to this. It's securing certain guarantees. And 
it's somewhat understood that if you're single and don't 
survive to age 60, you would have helped somebody else. That's 
true of every type of insurance plan isn't it?
    Ms. Fagnoni. That's true, although I'm sure for the 
individuals I would suspect they always hope they'll be the 
ones who benefit. And we don't know.
    Mr. Levin. All right, we don't know.
    Ms. Fagnoni. If we knew, we wouldn't need insurance.
    Mr. Levin. We always hope the fire isn't in our house.
    Thank you.
    Chairman Shaw. Mr. Portman.
    Mr. Portman. I thank the Chairman, and I'm sorry I wasn't 
here for all of your testimony. I am very interested in the 
topic, and have looked at your summary conclusions on your 
report.
    I guess I have a couple of questions just to clarify where 
we are. Following on Mr. Cardin's question with regard to the 
current benefits structure, which has been talked about as a 
progressive benefits structure in the sense that so long as 
people are living the same amount of time, low-income people 
would get a better return on the amount that they've put into 
the system defined that way.
    I think we also realize that there's a tremendous solvency 
crisis ahead of us, and by 2032, I think you would agree, that 
we either have to increase payroll taxes by 40 or 50 percent or 
we have to cut benefits by, I don't know, 25 percent, is that 
fair?
    Ms. Fagnoni. Well, we are on record as saying that because 
there's a solvency problem, it's important to take action 
sooner rather than later, because then you don't have to take 
such draconian steps.
    Mr. Portman. Exactly.
    Ms. Fagnoni. To----
    Mr. Portman. And, you know, those are some of the 
parameters within which we are working. And then the question 
comes up: how do you get that higher rate of return? We've gone 
through this debate on whether there will be direct investment 
by the trust fund or whether it be individually directed.
    And again, following on Mr. Cardin's question, I understand 
what you're saying about the potential of low-wage workers 
being more conservative in their investment decisions and 
perhaps not getting as high a rate of return on the individual 
accounts or any kind of directed account, whether it's credited 
to Social Security or whether it's a so-called individual 
account. And yet, I just keep coming back to the fact that we 
need to compare those to where we are. And the question I would 
have to you would be in any of your research did you determine 
whether folks who, indeed, did chose to opt with some 
percentage of payroll tax, for instance, or even through a USA-
type account, which is really separate from Social Security, as 
compared to the return they would get under current law, even 
if they are low-income workers and regardless of the ethnicity 
or race, isn't based on a 50-year average or based on a 75-year 
average, but certainly based on a decade average, wouldn't they 
do better making even conservative investments on the whole?
    Ms. Fagnoni. I think that really ends up depending on their 
individual circumstances, because of the certain features of 
the Social Security Program, people who are lower income but 
also are married, who are one-earner families, there are 
certain kinds of individuals who benefit more under the current 
Social Security structure. You'd have to take that into account 
in looking at comparisons.
    Mr. Portman. But even taking that into account--I 
understand you have to do that--and I'm trying to get some sort 
of ``on average.'' So, despite those characteristics, still in 
terms of the return, I think we have to keep in mind here that 
we're talking about a return of about 2.9 percent, assuming the 
trust fund really is a Trust Fund and all those problems we 
have about dealing with the trust fund assets as we get into 
the baby boom retirement years. And will it be there.
    But let's assume it is. Still, even if the investment is 
made in a relatively conservative way, let's say, in a bond 
fund, as opposed to an equity fund, isn't it true that the 
return is going to be greater just based on historical data? I 
think it's a yes or no answer.
    Mr. Mulvey. Well, we are just finishing up a report looking 
at what happened in Texas, which we expect to be releasing very 
shortly. And while we can't discuss the final results of that 
report, because it hasn't been released, we can say at least, 
as Ms. Fagnoni said, it does depend to some extent on 
individual circumstances. And while----
    Mr. Portman. And, you know, obviously, it depends on----
    Mr. Mulvey [continuing]. Total return to the whole group 
might be somewhat higher. There's certainly different patterns 
for different demographic subgroups. And I think what this 
hearing is about, as was the one last week on women, is that 
there are certain groups of the population you're particularly 
concerned with because the implications for them might be 
greater. And if that is the case more than for the group as a 
whole. And what might you do to protect those, protect those 
groups.
    Mr. Portman. I think it's valid. It's very important 
information you're providing us and my only caution would be 
let's be sure we're talking about what we might be moving into 
as compared to the current system. When you do the analysis, 
for instance, in your report on African-Americans as a group 
and how they would benefit from the current system versus a 
system where some percentage of that payroll, not all of it, 
there would still be a floor, I think one has to take into 
account the fact that there does tend to be less of a benefit 
now accruing because of longevity, because of other factors 
that, as you said earlier, are characteristics, and, you know, 
I hope we're not, you know, one doesn't want to generalize, and 
yet you have in your report because necessarily that's what 
you're looking at. And my only observation is we need to 
compare what that same group, even if they don't have the same 
benefit as another group, under a system where there's some 
ability to direct accounts, what that group would get as 
compared to the current system, which is really what we're 
stuck with. And that's all I would caution against. It's not so 
much to make this a question of fairness as between groups, but 
fairness as between the current system and what it could be.
    Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Doggett.
    Mr. Doggett. Well, of course, we like to think all our 
ideas down in Texas are a little better than any other place, 
but I understand the preliminary work that you've done here, 
this Galveston plan and some of these alternative plans have 
worked better for high-wage earners, but they haven't worked 
out as well as Social Security for low-wage workers.
    Mr. Mulvey. Well, as I said, we haven't released the report 
yet, so I can't be final on that, but as you might expect, any 
plan that would rely upon individual accounts and that doesn't 
have the tilt in the benefit formula that Social Security does, 
would give greater benefits to high-wage workers than to low-
wage workers.
    The question I guess is whether or not everybody benefits, 
but the benefits are just unevenly distributed.
    Mr. Doggett. And then if I might ask you if our choices are 
between preserving and protecting the current Social Security 
system versus the approach that our initial expert witness to 
this Subcommittee provided the other day that we should have 
abandoned Social Security a long time ago, and gone with an 
individual retirement system--do I read your conclusions to be 
that doing the latter will have a disproportionately negative 
effect on African-Americans and Hispanic-Americans.
    Ms. Fagnoni. I think first of all to put it in that 
dichotomy, I think there's room somewhere in the middle in 
terms of for whom the benefit formula is important. The 
auxiliary benefits are important, but it's also important to 
consider whether there is a way to achieve higher rates of 
return on some portion of the benefits as long as there is a 
level of protection for individuals. So I'd hate to see it be 
all protection, all private, and not something in between.
    Mr. Doggett. And certainly, I hope there are some other 
alternatives as well. But if those are the two choices for 
African-Americans and Hispanic-Americans as a group, the choice 
is pretty clear.
    Ms. Fagnoni. Clearly, they have benefited especially from 
the social insurance features, the disability benefits, the 
survivors benefits, as well as for those who reach retirement 
age, the retirement benefits, and the tilt in the benefit 
formula toward low-paid workers.
    Mr. Doggett. And if I understand your testimony correctly, 
one of the reasons why that is true is because of the differing 
investment behavior of workers at low-income levels?
    Ms. Fagnoni. Well, I think it starts from how much they've 
benefited from certain features of the Social Security Program. 
What we tried to do in looking at investment behavior is tried 
to look at well, if you did restructure, kept some kind of 
defined benefit component, but then also included individual 
accounts, what might the investment pattern look like? And what 
does that tell you that you need to think about if you move in 
that direction?
    Mr. Doggett. And what it told you was that there was a need 
for more investor education?
    Ms. Fagnoni. Yes.
    Mr. Doggett. And what experience have we had in educating 
people as to anything similar that GAO might have analyzed and 
how successful it would be--it has been?
    Ms. Fagnoni. Well, we haven't really done analysis. But we 
did do a little bit of checking. I mean, there are some 
examples from the 401(k) plan experiences, where companies have 
taken certain actions to try to educate employees with respect 
to the investments they might make under the 401(k) plan--
publishing brochures, holding seminars, having interactive, 
computer-types of programs, kiosks. I mean, there are lot of 
different programs and approaches out there in the private 
sector that might be worth taking a look at, if one were to 
move in that direction of individual account components.
    Mr. Doggett. Are there studies available to show, for 
example, under 401(k) plans whether there is a disparity there 
in utilization of those plans depending upon the economic level 
of the worker?
    Mr. Mulvey. I'm not sure. We've done some work on 401(k) 
plans, and we looked fairly recently at the borrowing behavior 
of individuals. I have to go back and see what kind of data 
there are on their investment behavior. They are doing some 
work on the TSP, showing how people in the TSP Program invest, 
how their investment behavior differs by ethnic group, by race, 
by sex, and so forth.
    Mr. Doggett. Has there been any GAO studies, for example, 
of the success or lack of success in making individuals aware 
of free subsidized health insurance under our Children's Health 
Insurance Program?
    Ms. Fagnoni. Not to my knowledge.
    Mr. Mulvey. Not to my knowledge.
    Mr. Doggett. Not your area? Might you elaborate on the 
observation that you made in response to the Chairman's 
question about the experience in Chile with--we've often seen 
in some of the reports Chile extolled as an example of what we 
should follow here--what the experience there was?
    Ms. Fagnoni. Well, my point in telling that story was that 
for a number of years the stock market was very robust, and 
people were getting high rates of return. And even though the 
Chilean system has fairly high administrative costs, it was 
looking good for people. But it served as a cautionary note 
when the head of the program had to suggest that people delay 
retirement, because that just points out the issue related to 
timing; and when you take your annuity or lump sum benefit, if 
you've got that choice, if you happen to do that at a point in 
time when the market has turned down. I mean, clearly, history 
shows that over the long run, equities provide a fairly high 
rate of return--7 percent, and inflation adjusted.
    But the issue of what happens to an individual who retires 
at a specific time is--again, just a cautionary note about how 
such a system might be managed.
    Mr. Doggett. Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Johnson.
    Mr. Johnson of Texas. Thank you, Mr. Chairman. I'd like to 
follow up on that questioning a little bit. You stated that the 
minorities are at a disadvantage if we restructure the system. 
However, you also made the statement that you hadn't compared 
it with anything. Is that true or false?
    Ms. Fagnoni. Well, our point in talking about restructuring 
is--we didn't directly say that they're at a--our point was to 
talk about how they might invest assets if they were given that 
opportunity----
    Mr. Johnson of Texas. Then you said they weren't smart 
enough to invest them.
    Ms. Fagnoni. Well, what we--what it shows was those who 
invest, invest more conservatively. But we also noted that the 
data show that people with lower incomes and less years of 
education are less likely to have made investments at all, and 
so that raises some questions.
    Mr. Johnson of Texas. Yes, you say the data, where did you 
get the data?
    Ms. Fagnoni. This is data from looking at Social Security 
Administration data and national----
    Mr. Johnson of Texas. Social Security is what we're talking 
about----
    Ms. Fagnoni [continuing]. National survey data.
    Mr. Johnson of Texas. Did you perchance take a look at the 
thrift savings plan that we have here in the Congress, and we 
do have some minorities involved in that, do we not?
    Ms. Fagnoni. Yes.
    Mr. Johnson of Texas. Did you?
    Ms. Fagnoni. Well, our primary data source was a national 
survey, the Survey of Income and Program Participation because 
it allowed us to look more specifically at minorities. The 
thrift savings plan is for government workers and is a--we were 
not able to do the kinds of analyses that----
    Mr. Johnson of Texas. So you're saying that the minorities 
in the government are better than the minorities in the Social 
Security system? True or false?
    Ms. Fagnoni. No, that's not what I am saying.
    Mr. Johnson of Texas. Tell me what you're saying.
    Ms. Fagnoni. We were unable to examine the thrift savings 
plan data because it didn't allow us to look more specifically 
at the details of different subpopulations, so we used a 
broader national survey dataset that allowed us to look at 
different patterns.
    Mr. Johnson of Texas. Yes, who did that?
    Ms. Fagnoni. This was a Census Bureau dataset.
    Mr. Johnson of Texas. A Census Bureau study. And you said 
you studied some 401(k) plans, whose did you use?
    Ms. Fagnoni. Well, the 401(k) plans, this is----
    Mr. Mulvey. That's a HRS survey, I believe. It was the 
401(k) plans. That's another dataset that I believe the 
University of Michigan----
    Ms. Fagnoni. University of Michigan----
    Mr. Mulvey [continuing]. Is the one that has those data.
    Mr. Johnson of Texas. Are those recognized studies that 
everyone uses?
    Mr. Mulvey. Yes.
    Mr. Johnson of Texas. And what are the dates on them? How 
old are they, in other words?
    Mr. Mulvey. The HRS is updated fairly frequently. I'd have 
to get that for you with the date of the dataset.
    [The following was subsequently received:]

    We used two data sets to do the 401(k) analysis. the first 
was the Health and Retirement Survey, prepared by the 
University of Michigan Survey Research Center in 1992. The 
second was the Survey of Consumer Finance, prepared by the 
Federal Reserve in 1992. We used one data set to do the 
analysis of investment patterns by race. it was the Survey of 
Income and Program Participation, prepared by the Bureau of the 
Census in 1992-93.

    Mr. Johnson of Texas. Yes, well, I think your conclusions 
are a little bit suspect in your answers to Mr. Doggett and 
some of the others on this Subcommittee. And I think that if 
you all can substantiate your findings with reference to 
precise data I think it would be appreciated.
    Thank you very much.
    Chairman Shaw. Thank you. Ms. Fagnoni, do you know of any 
other pension plan that only invests in Treasury Bills?
    Ms. Fagnoni. No.
    Chairman Shaw. Social Security is the only major retirement 
plan in this country that only invests in Treasury Bills?
    Mr. Mulvey. Well, these are special Treasuries--
nonmarketable special Treasuries----
    Chairman Shaw. I'm sure they're special, but they base----
    Ms. Fagnoni. That's true.
    Chairman Shaw [continuing]. But they pay you regular 
interest rate, which is a damned bad rate of return when you 
compare it to how other pension plans are performing.
    Now, let me ask you, let me ask you one--do you have 
children?
    Ms. Fagnoni. Yes.
    Chairman Shaw. How old are they?
    Ms. Fagnoni. I have a 7-year-old son.
    Chairman Shaw. All right. I'm about to throw you a curve 
ball. Would you advise your 7-year-old son to enroll in the 
Social Security Program at his age when he gets into the work 
force, or if he had a choice to get into some other plan, how 
would you advise him?
    Ms. Fagnoni. Well, I would have to say that I have faith 
that policymakers will, will----
    Chairman Shaw. You're lying. [Laughter.]
    Ms. Fagnoni [continuing]. Will be able to restore solvency 
to the Social Security Program in a way that it would be there 
for him.
    Chairman Shaw. Right. OK. Well let me let you go home and 
assure your son that that's exactly what we're going to do. We 
are.
    Ms. Fagnoni. Thank you.
    Chairman Shaw. And I thank you for your testimony.
    Mr. Mulvey. Thank you.
    Chairman Shaw. Thank you.
    All right. The first thing I'm going to do is ask the next 
panel to come back and correct me on my pronunciation of all of 
your names.
    Mr. Robert Garcia de Posada. Now, that's coming--that's 
reaching back into high school Spanish--executive director of 
the Hispanic Business Roundtable. William E. Spriggs, Ph.D. He 
is the director of research and public policy of the National 
Urban League. Kilo--oh, boy. Kijakazi. Thank you. Senior policy 
analyst, the Center on Budget and Policy Priorities. Eric 
Rodriguez, who is a senior policy analyst, the National Council 
of La Raza, and William W. Beach, director, Center for Data 
Analysis, Heritage Foundation.
    We welcome all of you. We have your full statements that 
will be made part of the record, and we would you invite you to 
summarize as you see fit.
    Mr. de Posada.

   STATEMENT OF ROBERT GARCIA DE POSADA, EXECUTIVE DIRECTOR, 
       HISPANIC BUSINESS ROUNDTABLE, ALEXANDRIA, VIRGINIA

    Mr. de Posada. Thank you, Mr. Chairman.
    My name is Robert Garcia de Posada. You pronounced it 
right. I am the executive director to the Hispanic Business 
Roundtable. Hispanic Business Roundtable was created in 1995 to 
address policy issues that affect the well-being of Hispanics.
    The creation of these personal retirement accounts is one 
of those issues we believe will build family wealth and will 
raise the standard living of the low-income Hispanic family.
    Hispanics are the fastest growing segment of the work 
force. Hispanic businesses are also the fastest growing segment 
of our economy. And according to the U.S. Census, currently 66 
percent of Hispanic population is under the age of 35.
    The Census also shows that by the year 2030, 25 percent of 
the American working population will be Hispanic. As such, 30 
years from now Hispanic workers will disproportionately carry 
the burden of our retirement system. This is why Social 
Security reform is so important to the U.S. Hispanic community.
    On the one hand, it will directly affect the 1.5 million 
Hispanic-owned businesses which will have to pay higher taxes 
if nothing is done.
    And yet on the other hand, under the current system, in 30 
years, the tax burden will be felt disproportionately by 
millions of a young Hispanic workers.
    U.S. Hispanics have larger families, lower incomes, and are 
generally younger than the general population. Studies show the 
current system's rate of return for Hispanics will be 
significantly less than what they could generate under 
conservative private investment.
    If Hispanics were allowed to direct the employee portion of 
their payroll taxes into safe investment accounts, or in U.S. 
Treasury bonds, they could nearly double the rate of return 
they currently receive under the Social Security system. For 
example, in Galveston, Texas, where county government workers 
have a private, a full private plan, an employee making $20,000 
per year will collect a lifetime monthly benefit at retirement 
at $2,740. Under the current Social Security system, the 
comparable benefit per month is only $800. This makes an 
additional $1,900 per month for a retiree.
    Also, under the Galveston plan, if a worker dies before 
retirement his or her heirs can collect between $50,000 and 
$150,000, money that could be used to help family members 
improve their lives, such as by going to college or starting a 
new business.
    Under the current Social Security system, the maximum death 
benefit is a lump sum of only $253, money that won't even cover 
the college textbooks.
    The balance of the money paid into the Social Security 
system is lost. I know this firsthand because my father died 
when I was 16.
    I am sure there are flaws in the Galveston plan. However, 
studying the pros and cons could be a great start. Those who 
oppose the private retirement accounts system, stating that 
low-income families have no experience in investing and the 
brokers will not be interested in accounts of $100 per month or 
less. As arrogant as this might sound, we should address this 
concern.
    There are ways low-income individuals can be brought into 
the system with everybody benefiting. We need to look at 
consumer education and attract community-based organizations, 
cooperatives and local governments to pool workers' retirement 
income together to attract these brokers and investors. For 
example, strong and established organizations like the 
Americans Association of Retired Persons to pool income from 
their members and their families into these personal retirement 
accounts.
    Just imagine the possibilities. More people buying Treasury 
bonds and investing in the stock market. Low-income children 
learning about the market and pursuing careers in this field. 
All in all, more money available to help low-income families 
escape the vicious cycle of poverty and inequity.
    We can reform to save Social Security, but we need to do it 
now. However, we cannot do this by raising taxes on businesses 
and workers and cutting benefits. And we certainly cannot 
continue to ignore the problem by using accounting gimmicks.
    If we want real reform, personal retirement accounts must 
be one of the choices available to those affected by the 
system. It should be an individual choice, because it's their 
risk and it's their money. Without a doubt, private retirement 
accounts will increase the rate of return on retirement income, 
and, therefore, put more money into people's pockets. But most 
importantly, a more profitable retirement system will generate 
greater family wealth, especially in the Hispanic community, 
and our community desperately needs this.
    Thank you.
    [The prepared statement follows:]

Statement of Robert Garcia de Posada, Executive Director, Hispanic 
Business Roundtable, Alexandria, Virginia

    My name is Robert Garcia de Posada, and I am the Executive 
Director of the Hispanic Business Roundtable. The Hispanic 
Business Roundtable was established in 1995 to address policy 
issues that directly affect the well-being of Hispanics in the 
U.S. The Roundtable's agenda is to develop and promote policies 
that will enhance overall business, economic and social 
development of Hispanics, and to empower those individuals 
through the promotion of self-reliance and personal 
responsibility.
    The creation of personal retirement accounts is one of 
those issues we believe will help generate family wealth and 
raise the standard of living of low-income families.
    Hispanics are the fastest growing segment of the workforce. 
Hispanic-owned businesses are also the fastest-growing segment 
of our economy. According to the U.S. Census, currently 66% of 
the U.S. Hispanic population is under the age of 35. The Census 
also shows that by the year 2030, 25% of the working American 
population will be Hispanic. As such, 30 years from now, 
Hispanic workers will disproportionately carry the burden of 
our retirement system.
    This is why real Social Security reform is so important to 
the U.S. Hispanic community. On the one hand, it will directly 
affect the 1.5 million Hispanic-owned businesses, which will 
have to pay higher taxes if nothing is done. Yet on the other 
hand, under the current system, in 30 years the tax burden will 
be felt disproportionately by millions of young Hispanic 
workers.
    U.S. Hispanics have larger families, lower incomes and are 
generally younger than the general population. Studies show the 
current system's rate of return for Hispanics will be 
significantly less than what they could generate under 
conservative private investments. If Hispanics were allowed to 
direct their payroll taxes into safe investment accounts or 
into U.S. Treasury bonds, they would nearly double the rate of 
return they currently receive under the Social Security system.
    For example, in Galveston, Texas, where county government 
workers have a full private plan, an employee making $20,000 
per year will collect a lifetime monthly benefit at retirement 
of $2,740. Under the current Social Security system, the 
comparable benefit per month is only $800. This means an 
additional $1,900 per month for a retiree.
    Also under the Galveston plan, if a worker dies before 
retirement, his or her heirs can collect between $50,000 to 
$150,000--money that could be used to help family members 
improve their lives such as going to college or starting a new 
business. Under the current Social Security system, the maximum 
death benefit is a lump sum of only $253.00--money that won't 
even pay for college text books. The balance of the money paid 
into the Social Security system is lost.
    There are those who oppose private retirement accounts 
stating that low-income families have no experience in 
investing and that brokers will not be interested in accounts 
of $100 or less per month. As arrogant as this might sound, we 
should address this concern.
    There are ways low-income individuals can be brought into 
the system with everybody benefiting. We need to look at 
consumer education and attract community-based organizations, 
cooperatives and local governments to pool workers' retirement 
income to attract brokers and investors. For example, we need 
strong and established organizations, like the American 
Association of Retired Persons, to pool income from members and 
their families into personal retirement accounts.
    Just imagine the possibilities. More people buying Treasury 
Bonds and investing in the stock market. Low-income children 
learning about the market and pursuing careers in this field. 
All in all, more money available to help low-income families 
escape the vicious cycle of poverty and inequity.
    We can reform and save Social Security, but we need to do 
it now. However, we cannot do this by raising taxes on 
businesses and workers and cutting benefits. And we certainly 
cannot continue to ignore the problem by using accounting 
gimmicks. If we want real reform, personal retirement accounts 
must be one of the choices available to those affected by the 
system. It should be an individual choice; because it's their 
risk; and their money.
    Without a doubt, private retirement accounts will increase 
the rate of return on retirement income and therefore put more 
money into peoples' pockets. But most importantly, a more 
profitable retirement system will generate greater family 
wealth, especially in the Hispanic community. And our community 
desperately needs this.
    Thank you.
      

                                


    Chairman Shaw. Mr. Spriggs.

STATEMENT OF WILLIAM E. SPRIGGS, PH.D., DIRECTOR, RESEARCH AND 
              PUBLIC POLICY, NATIONAL URBAN LEAGUE

    Mr. Spriggs. Thank you, Mr. Chairman, for the opportunity 
to testify. And I appreciated the invitation because I remember 
meeting you at the White House Conference, and I certainly 
enjoyed the openness that you had at that conference.
    My name is Dr. William Spriggs. I am the director of 
research and public policy for the National Urban League. I'm 
here to represent Hugh Price, who is our president.
    Founded in 1910, the National Urban League is the premier 
social service and civil rights organization in America. 
Headquartered in New York, we are a nonprofit, nonpartisan, 
community-based movement with 114 affiliates in 34 States and 
the District of Columbia.
    The mission of the Urban League movement is to help 
African-Americans attain social and economic equality. The 
fundamental objective of the National Urban League is to enable 
those who are striving toward the mainstream to achieve 
economic self-reliance and enjoy their rights as equal citizens 
under law.
    In that context, we are extremely concerned about Social 
Security reform. This is a very important debate, affecting the 
lives of African-American retirees, children and disabled 
workers.
    The primary concerns of the National Urban League are that 
the program not lose its progressive benefit structure; 
maintain adequate levels of support for disabled workers; 
continue to provide benefits to spouses after divorce or 
separation; and provide for early retirement at age 62. The 
National Urban League signed onto the principles of the New 
Century Alliance for Social Security to set forth goals for 
reforming Social Security. Fellow signers include the NAACP, 
the Rainbow-Push Coalition, the National Council of Negro 
Women, the Children's Defense Fund, and the National 
Organization for Women.
    Currently, Social Security, whose program's formal name, 
the Old Age, Survivors, and Disability Insurance Program 
replaces more of the wages of workers who had low earnings 
during their work careers than high-wage workers. African-
Americans, because of continued effects of discrimination, are 
disproportionately among low-wage workers.
    Let me say that we support and are very happy with the path 
that the President has laid out for trying to save Social 
Security. It has certainly made the problem smaller. We think 
that we should look seriously at the ability of the fund to 
invest in the equities market.
    Having said that and applauding the downpayment that the 
President made to shrink the problem, we know that there are 
tough choices ahead, and we're willing to work to make those 
choices.
    We further applaud the President for announcing a program 
of savings accounts. African-Americans need the third leg in a 
retirement program. That third leg is missing for most African-
Americans, because of continued discrimination in the labor 
market that cuts us off from private pensions.
    So, those who are concerned about savings for retirement, I 
think, should be encouraged, as we are, by the path that the 
President has laid to talk about the gap that we have in the 
private pension market.
    Debating Social Security drops the program's formal name. 
And what's in the name? Well, you have survivors and 
disability. It's not just old age. Even the tax is called the 
Federal Insurance Contribution Act. As an insurance product, 
the OASD insurance is unique because it insures families. The 
benefits of the programs are not just for the worker, but for 
the worker's dependents and spouse. That makes the program very 
complex and difficult to assess when viewed as only an annuity 
program for a worker. Calculations of rates of return on the 
program miss that point.
    When viewed as an insurance program, the rate of return 
calculations for the program look different for whites and 
African-Americans. African-Americans, as you heard in the 
earlier panel, disproportionately benefit from the current 
structure of the insurance program. An analysis of benefits 
paid relative to taxes paid shows that, on net, African-
American families have received more benefits than were paid in 
taxes.
    In the private market, insurance premiums tend to exceed 
benefit disbursements. This is because of the progressive 
nature of the benefits that African-Americans benefit and 
because it insures families.
    Many aspects of this OASD Insurance Program would be 
unavailable to African-American families in the private market. 
Disability insurance would be difficult to find. And so we 
think that it is necessary to think of this in its more complex 
form.
    As you think of ways of saving the program, we hope that 
you will not include provisions that would diminish the ability 
of workers to retire early. This especially concerns our 
ability to find work for those who are healthy and want to find 
jobs, but find it very difficult in the low-wage market; and 
those who have not acquired a lot of skills.
    In closing, the broad-based support for the program comes 
from the many ways it touches the lives of American families. 
For some families, it the receipt of disability benefits. For 
some, it is the receipt of dependent survivor benefits. For 
some, it is the receipt of old age retirement benefits. For 
each family, a different need is met.
    A program which separated the treatment of retirement from 
the family insurance portion of the program would not have such 
a universal family focus. A program that separated the 
individual worker and placed the risk of a decent retirement 
lifestyle on the individual and so we move the assurance of the 
program because of its insurance nature would not have such a 
universal family focus.
    The issues facing Social Security face all Americans. The 
National Urban League hopes that solutions can consider all 
Americans. Americans who are disabled, Americans who are 
spouses of retired workers, Americans who are dependents of 
workers, and Americans who survive workers all need to be 
considered. We think Americans value most the safety net of 
Social Security. Changing the philosophy of the program would 
remove the moral underpinnings that Americans value.
    [The prepared statement follows:]

Statement of William E. Spriggs, Ph.D., Director, Research and Public 
Policy, National Urban League

    Thank you, Mr. Chairman for the opportunity to testify 
before the Subcommittee on Social Security of the House Ways 
and Means Committee. My name is Dr. William Spriggs, and I am 
the Director of the Research and Public Policy office of the 
National Urban League (NUL). I am here today on behalf of Hugh 
Price, President and Chief Executive Officer of the National 
Urban League.
    Founded in 1910, the NUL is the premier social service and 
civil rights organization in America. Headquartered in New York 
City, with an office strategically located in Washington, D.C., 
the League is a nonprofit, nonpartisan, community-based 
movement with 114 affiliates in 34 states and the District of 
Columbia.
    The mission of the Urban League movement is to help African 
Americans attain social and economic equality. The fundamental 
objective of the NUL is to enable those who are striving toward 
the mainstream to achieve economic self-reliance and to enjoy 
their rights as equal citizens under the law.
    In that context, we are extremely concerned about Social 
Security reform. This is a very important debate, affecting the 
lives of African American retirees, children and disabled 
workers. The line between poverty and meager subsistence 
depends on the outcome of this debate. Few issues could be more 
important when the gap between the rich and poor is widening.
    The primary concerns of the NUL are that the program not 
lose its progressive benefit structure; maintain adequate 
levels of support for disabled workers; continue to provide 
benefits to spouses after divorce or separation; and provide 
for early retirement at age 62. The NUL has signed onto the 
principles of the New Century Alliance for Social Security to 
set forth goals for reforming Social Security. Fellow signers 
include the NAACP, Rainbow--PUSH Coalition, National Council of 
Negro Women, National Council of La Raza, the Children's 
Defense Fund, and the National Organization for Women.
    Currently, Social Security, whose program's formal name, 
Old Age, Survivors and Disability Insurance (OASDI), replaces 
more of the wages of workers who had low earnings during their 
working careers than high wage workers. African Americans, 
because of continued affects of discrimination are 
disproportionately among low wage workers.
    Social Security provides retirement and other benefits to 
women, through the earnings of their spouse. This protects 
women married to low wage workers. In a privatized system, 
women married to low wage workers would have their benefits 
split if their spouse remarried. Because the marriages of low 
wage workers are less stable, privatization would 
disproportionately affect such women. Low wage workers often 
have the most physically demanding jobs, and have lower life 
expectancies. Raising the early retirement age would make it 
likely that they would not be able to work until retirement, or 
live long enough to collect Social Security benefits. And, 
because low wage workers are in more physically demanding jobs, 
they are more likely to need disability benefits. All plans 
should be measured against those concerns.
    Debating ``Social Security'' drops the program's formal 
name, Old Age, Survivors and Disability Insurance. ``What is in 
a name?'' Shakespeare asked. The current public debate is about 
the annuity portion of the program. Great debate. Interesting 
points. The problem is, the Old Age, Survivors and Disability 
Insurance program is about more than Old Age. For purposes of 
clarity, OASD Insurance, as its full name implies, is an 
insurance program. The tax collected to support the program 
comes from the Federal Insurance Contribution Act. It can best 
be described as a life insurance product, with disability and 
an annuity fully indexed to inflation.
    In debating the annuity portion of the program, much has 
been made about the ``pay-as-you-go'' nature of Social 
Security. Oddly, when the system began, planners had great 
concerns about inadequate growth in the economy, and a fear 
that the birthrate would not recover from its Depression era 
low-level, so a growing share of the population would be 
elderly.\1\ Still, the decision was made to grant full 
retirement benefits to workers as they retired. This ignored 
that those workers had not participated in the Social Security 
system long enough to have created the savings justifying their 
benefits. Less is made about several changes that have taken 
place since then. Four major changes were the extension of 
family benefits for survivors, spouses and dependents in 1939, 
the addition of disability benefits in the 1950's, and then 
later lowering the age when workers could collect disability 
benefits, and granting early retirement in 1961. Those 
transformations created an insurance program, from an aid to 
the elderly program. To make the insurance system work, then, 
there is a delicate balance among those who will get benefits 
as retirees, as spouses of retirees, as widows or widowers, as 
dependent children, and as disabled workers. Changing one 
component of the system, therefore, has ramifications for that 
balance. So, balancing the retirement benefit cannot be done 
without affecting the other components of the program. Almost 
half the African Americans who receive benefits under the 
current program receive disability, dependent or survivors' 
benefits.
---------------------------------------------------------------------------
    \1\ Edward D. Berkowitz, Yesterday and Today: History and Social 
Security Reform, presented at the 11th Annual Conference and Membership 
Meeting of the National Academy of Social Insurance, Washington, DC, 
(January 27-28, 1999).
---------------------------------------------------------------------------
    As an insurance product, OASD Insurance is very unique 
because it insures families. The benefits of the program are 
not just for the worker, but for the worker's dependents and 
spouse. That makes the program very complex, and difficult to 
assess, when viewed as only an annuity program for a worker. 
Calculations of ``rates of return'' on the program miss that 
point. When viewed as an insurance program, the ``rate of 
return'' calculations for the program look different, for 
whites and African Americans.\2\
---------------------------------------------------------------------------
    \2\ See Dean Baker, The Full Returns from Social Security, A 
Century Foundation/Economic Policy Institute Report, Century 
Foundation, 1998.
---------------------------------------------------------------------------
    In the real world, income, family structure and life 
expectancy combine in very complex ways. So, calculating a 
``rate of return'' on Federal Insurance Contribution Act taxes 
for a hypothesized ``typical'' worker is difficult since the 
``typical'' worker must be matched along a wide array of 
characteristics. For instance, taking the median income for 
workers and creating a hypothetical worker, with assumed family 
structure and life expectancy, and the likelihood of becoming 
disabled, may be giving family characteristics, life expectancy 
or chances of disability that would not be common for workers 
of that income. Even if the median worker along all the 
dimensions was characterized, movement away from the median in 
one direction, like family structure, could be dramatically 
different than movement away from the median in another 
direction, like life expectancy. This is because the median of 
each individual characteristic, like income and life 
expectancy, is not the same as the median for the combined 
characteristics of income and life expectancy.
    The broad based support for the program comes from the many 
ways it touches the lives of American families. For some 
families, it is in the receipt of disability benefits. For some 
it is in the receipt of dependent survivor benefits. For some 
it is in the receipt of old age retirement benefits. For each 
family, a different need is met. A program which separated the 
treatment of retirement from the family insurance portion of 
the program would not have such a universal family focus. A 
program that separated the individual worker, and placed the 
risks of a decent retirement lifestyle on the individual and so 
removed the assurance of the program because of its insurance 
nature, would not have such a universal family focus. It would 
move the intergenerational transfer of funds to support the 
elderly from a socially secured level, to individuals. And, so 
would put greater burdens on low wage earners, because their 
parents are more likely to also have had low earnings.
    The Americans Discuss Social Security Project has found 
that Americans overwhelmingly value most of the social 
insurance aspects of the program, specifically disability and 
survivor benefits.\3\ So the National Urban League's concerns 
are the ones Americans, in general, have.
---------------------------------------------------------------------------
    \3\ Americans Discuss Social Security, Citizen Voices on the Future 
of Social Security: What We're Learning and How We're Learning It, 
(November 25, 1998).
---------------------------------------------------------------------------
    For African American families, the OASD Insurance program 
works. An analysis of benefits paid relative to taxes paid 
shows that, on net, African American families have received 
more benefits than were paid in taxes.\4\ For an insurance 
program, that is unique. In the private market, insurance 
premiums exceed benefit disbursements.
---------------------------------------------------------------------------
    \4\ See David R. Leimer, ``Historical Redistribution Under the 
Social Security Disability Insurance Program,'' Social Security 
Bulletin, Vol. 61 (Number 3, 1998): 3-19.
---------------------------------------------------------------------------
    Many aspects of the OASD Insurance program would be 
unavailable to African American families in the private market. 
Disability insurance would be difficult for many African 
American workers to get, or afford. And, differences to access 
in life insurance between whites and African Americans probably 
reflects a marketing decision of life insurance companies to 
avoid the higher mortality rates for African Americans. But, 
most notably, three aspects of the OASD Insurance product are 
unique. One is the progressive nature of the benefit structure, 
which compensates for the lower earnings of African American 
workers. The benefit structure is progressive because it lets 
low wage earners recover a higher amount of their earnings, and 
because the earnings formula ignores the lowest years of 
earnings, which for African American workers can be greatly 
affected by a much higher relative unemployment rate, 
especially for young workers.
    Another is the indexation of benefits, to prevent the 
effects of inflation eroding the purchasing power of 
benefits.\5\ This has been extremely important as the 
purchasing power of the earnings of African American men, in 
particular, have seen a dramatic fall in the last twenty years. 
So, unindexed disability and retirement benefits tied to their 
earnings would have fallen more than the indexed benefits.
---------------------------------------------------------------------------
    \5\ See for example, Kelvin R. Utendorf, ``Recent Changes in 
Earnings Distributions in the United States,'' Social Security 
Bulletin, Vol. 61 (Number 2, 1998): 12-25.
---------------------------------------------------------------------------
    Finally, again, is the extension of benefits to cover 
dependents. To equally provide for additional dependents would 
require a higher premium in the private market. Yet, OASD 
Insurance automatically covers the expansion of families.
    Thus, calculations that suggest a low rate of return on 
Federal Insurance Contribution Act taxes for African Americans, 
miss the complex structure of the program as it plays out for 
real African American families.\6\ They also tend to 
misrepresent the nature of the lower life expectancy of the 
African American population. (See the attached Figures 1 and 
2). Differences in mortality between whites and African 
Americans, and hence life expectancy, are greatest for African 
Americans in their twenties and thirties. That set of workers 
has low earnings, and would accumulate very little value in 
individual accounts. Maintaining the insurance and family based 
benefit structure of the OASD Insurance program is vital for 
the fairness of the program to them, and so to African 
Americans.
---------------------------------------------------------------------------
    \6\ For a discussion of fallacies in some of these calculations, 
see Kilolo Kijakazi, African Americans, Hispanic Americans, and Social 
Security: The Shortcomings of the Heritage Foundation Reports, Center 
on Budget and Policy Priorities, (Revised October 8, 1998).
---------------------------------------------------------------------------
    The National Urban League would look with great alarm on 
attempts to alter the insurance nature of the program by 
shifting to individual retirement accounts. We would be greatly 
concerned about the implied change in the philosophy of the 
program that would signal. We believe that the broad support of 
the program comes from its family orientation. Individual 
accounts would shift the focus from families to individuals. It 
is unlikely, given that change in philosophy that the insurance 
portion of the program could stand alone. To date, the 
proposals to do so, have proposed reductions in disability and 
survivors benefits that would not be acceptable to us, because 
such cuts would knock the current program out of balance for 
African American families.\7\
---------------------------------------------------------------------------
    \7\ See Kathy Larin and Robert Greenstein, Social Security Plans 
that Reduce Social Security Retirement Benefits Substantially are 
likely to Cut Disability and Survivors Benefits as Well, Center on 
Budget and Policy Priorities, (December 15, 1998).
---------------------------------------------------------------------------
    The National Urban League would also be concerned that 
individual accounts could not produce the benefits of the 
current system. A more realistic modeling of the switch to 
individual accounts, done by the Employee Benefits Research 
Institute, found individual accounts would lower benefits for 
most workers, but especially for low-income Americans.\8\ A 
shift from the current system--which is a defined benefit 
program, like many private pension plans--to a defined 
contribution plan--like a 401(k), would be costly. The shift 
would require the next generation to pay for their own 
retirement and continue to support the current program. 
Proposals to take even as little as 2 percent out of the 
current structure to be set aside for individual retirement 
accounts would increase the gap in revenues needed to maintain 
the current program.
---------------------------------------------------------------------------
    \8\ Kelly Olsen, Jack VanDerhei, Dallas L. Salisbury, Martin R. 
Holmer, How Do Individual Accounts Stack Up? An Evaluation Using the 
EBRI-SSASIM2 Policy Simulation Model, Employee Benefit Research 
Institute Report No. 195 (March 1998).
---------------------------------------------------------------------------
    Another issue is the soundness of the program that will be 
tested when the number of retirees, compared to the number of 
workers, shifts as the baby boom generation begins to retire. 
The number of workers per retiree is a way to view the 
demographic changes of the next century. But, another view is 
the number of workers to the number of non-workers. From that 
perspective, the next century will be less a challenge than the 
1960's. Why? Because in the 1960's the number of children and 
retirees were greater per worker than they will be in the 
beginning of the next century. The smaller number of children 
is a greater factor than the greater number of retirees.
    But the fear of the baby boom generation retirement has 
served to mislead debating the size of the problem. 
Privatization of benefits with individual accounts is not 
necessary to save Social Security. The retirement benefits 
portion of the program is the most successful anti-poverty 
program the government has ever run. Little wonder. It is a 
massive transfer of income to low income households. So, there 
is an ideological string that will attack the transfer, and 
want to make the program more closely tied to an individual 
worker's own earnings. We hope this program is not the place to 
fight an ideological war. The well being of the elderly should 
be beyond ideology, and risking a proven approach to lower 
poverty for senior Americans. The Washington Post has concluded 
that privatization, ``has great ideological appeal to those who 
would reduce the role of government in political life. But a 
successful bedrock program central to the well-being and 
otherwise vulnerable share of the population is the wrong place 
to conduct an ideological trophy hunt.''
    What is the size of the problem? Law requires the Social 
Security Board of Trustees to project the solvency of the 
Social Security system 75 years out. The 1998 Board of Trustees 
report suggests that in the year 2019, if the benefit and tax 
structure for OASDI do not change, then to maintain current 
benefits, the system will need additional revenue. For a while, 
the additional revenue will come from the Social Security Trust 
Fund. Then in 2032, the trust fund will be depleted, and the 
program will need additional revenue, or benefits will need to 
be reduced. The system will not be ``broke.'' The projected 
revenue stream in 2032 will be able to meet $0.75 per $1.00 of 
current benefit levels. So, the debate is how to resolve the 
$0.25 gap.
    First, it is important to understand that the projected 
revenue stream assumes that the economy will grow at a 1.5 
percent rate over the next 75 years. In the past 75 years, the 
economy has grown at a 3.5 percent rate. In the past 20 years, 
the economy has slowed, but has still managed to grow at a 2.5 
percent rate. The pessimistic view of a 1.5 percent growth rate 
is based on projections of slow productivity growth and a low 
growth rate in population. For the ten year period that the 
Congressional Budget Office and the Social Security trustees 
forecast of the trust fund overlap, the CBO estimates the trust 
fund will be over $300 billion greater than the Trustees 
forecast.
    Using a more optimistic view of economic growth, the Social 
Security trustees found no problem in 2032. Business Week has 
noted that, ``America doesn't need to kill Social Security to 
save it. It just has to grow fast enough to save the boomers.'' 
As Hugh Price explained in his comments before the New Century 
Alliance for Social Security press conference December 3, 1998 
a faster growth rate could be achieved by making investments in 
our children--the workers of our future.
    Second, it is important to understand that the Trust fund 
running out is not the same as the insolvency of Social 
Security. The Trust fund is created by the current FICA tax 
being greater than the current benefits paid by Social 
Security. The Trust fund was created by Congress to provide a 
cushion for when the baby boom would begin to retire. It did 
not always exist, and is not a major funding source for the 
program now. In 2032 we will simply return to the pay-as-you-go 
system that marked most of the program's history. To meet the 
shortfall that the Social Security Trustees project, we would 
need to raise FICA taxes from their current 6.2 percent level 
to 7.3 percent. So, the debate is whether to do that, or lower 
benefits, or some combination of the two.
    Thanks to the down payment on the problem that President 
Clinton has proposed, drastic changes are not necessary given 
the size of the problem. Many minor changes can be made to the 
program to maintain its current structure, and be fair to 
future workers. For instance, without increasing the Federal 
Insurance Contribution Act (FICA) tax rate, but extending the 
range of income taxed to reflect changes in the wage 
distribution would close about one-fourth of the gap between 
projected benefits and revenues. Currently, the FICA tax is 
collected on the first $68,400 of income. That affects about 85 
percent of wage income. The more typical historic level has 
been to collect taxes on 90 percent of wage income. So, 
increasing the cap on FICA taxable income to restore that 
historical level could be done to restore revenue.
    The National Urban League would have great concern about 
increasing the age for early retirement and similarly for 
retirement with full benefits. Commissioner Kenneth Apfel 
testified before your Subcommittee on Social Security in 
February, and raised some of the concerns we have.9 Early 
retirement at age 62 gives African Americans, with lower life 
expectancy, a program that is more fair. Part of the concern is 
the issue of health for retirees. The National Urban League has 
an additional concern about employability. We have 24 
affiliates that operate the Seniors in Community Service 
Program for the Department of Labor. The National Urban League 
has operated this program for twenty years. In 1997-1998 we 
served 3,203 participants, 89 percent of the participants were 
minorities, 74 percent women, and 89 percent were below the 
poverty level. We were able to transition 595 participants into 
unsubsidized employment, which achieved 138 percent of the 20 
percent Department of Labor annual placement goal. So, we are 
one of the more successful partners for the Department of Labor 
in providing services. The participants averaged $6.76 an hour, 
with the highest hourly wage being $8.33. Half the unsubsidized 
placements were in the nonprofit sector, while 36 percent were 
in the private for-profit sector.
---------------------------------------------------------------------------
    \9\ Kenneth S. Apfel, Commissioner, Social Security Administrator, 
Testimony Before U.S. House of Representatives Ways and Means 
Subcommittee on Social Security, 105th Congress, 2nd Session, February 
26, 1998.
---------------------------------------------------------------------------
    The data from our program strongly suggest the difficulty 
that low-income seniors face in the labor market. Even though 
our program served 49 percent more seniors than the number of 
established enrollment positions, the need for our services was 
far greater. So, despite our concerted efforts as a partner 
with the Department of Labor, we have observed first-hand the 
difficulty low-income seniors have in finding employment.
    Other solutions are being discussed. Serious consideration 
should be given to allowing the Trust fund to diversify and 
make investments in stocks as well as in U.S. Treasury notes. 
Currently, by law, the Trust fund buys U.S. Treasury notes. 
Because they are very secure investments, U.S. Treasury notes 
have a low rate of return. Stocks have more risk, and so 
investments in stocks have always had a higher rate of return. 
The higher rate of return compensates investors for the risk 
involved. Most state retirement plans have a diversified 
portfolio that includes safe government securities, and riskier 
stock investments. Of course details need to be settled around 
this change.
    The issues facing Social Security, face all Americans. The 
National Urban League hopes that solutions can consider all 
Americans. Americans who are disabled, Americans who are 
spouses of retired workers, Americans who are dependents of 
workers, and Americans who survive workers all need to be 
considered. We think Americans value most the safety net of 
Social Security. Changing the philosophy of the program, would 
remove the moral underpinnings that Americans value.





      

                                


    Chairman Shaw. Thank you. Help me once more.
    Ms. Kijakazi. Kilolo Kijakazi. It's easier when you say it 
slowly.
    Chairman Shaw. It's a very pretty name.
    Ms. Kijakazi. Well, thank you.

  STATEMENT OF KILOLO KIJAKAZI, PH.D., SENIOR POLICY ANALYST, 
             CENTER ON BUDGET AND POLICY PRIORITIES

    Ms. Kijakazi. Chairman Shaw and Members of the 
Subcommittee, thank you for inviting me to testify. I am, as I 
said, Kilolo Kijakazi, a senior policy analyst with the Center 
on Budget and Policy Priorities.
    My testimony will focus on the importance of Social 
Security to African-Americans, the limitations of some 
proposals to reform Social Security using individual accounts, 
and an alternative approach that would maintain the guaranteed 
benefit provided by Social Security.
    Social Security has been one of the country's most 
successful programs, as pointed out by Chairman Shaw. The 
program is of particular importance to African-Americans. 
Elderly African-American households rely on Social Security for 
77 percent of their income, compared to 60 percent for elderly 
white households.
    This is not surprising given the lower rates of pension 
coverage for African-Americans, as Mr. Spriggs just pointed 
out. Pension income makes up 46 percent of income for elderly 
white households, but only 35 percent for elderly African-
Americans.
    Additionally, African-Americans are disproportionately 
represented among low-wage workers, which means that we have 
fewer resources to set aside for retirement saving. This places 
greater weight on Social Security as a reliable, guaranteed 
source of income.
    The arguments have been made by the Heritage Foundation and 
other organizations that Social Security provides a lower rate 
of return to African-Americans due to our shorter life 
expectancy. This reasoning is faulty because it overlooks the 
protections that Social Security provides for African-Americans 
and low-wage workers.
    Three aspects of Social Security help to compensate 
African-Americans for our higher mortality rate. First, since 
African-Americans make up a disproportionate share of low-wage 
workers, we gain from the progressive benefit formula.
    Second, early retirement is an option that is elected by 
two-thirds of all workers, including African-Americans. Due to 
our shorter life expectancy, receiving benefits earlier and for 
a longer period of time increases the total benefits we receive 
and raises the rate of return that we get from Social Security.
    And third, Social Security is a comprehensive insurance 
program. African-Americans benefit disproportionately from the 
disability and survivors insurance components of the program.
    Some studies, including the Heritage Foundation's research, 
have attempted to estimate Social Security's rate of return for 
African-Americans. The Social Security Administration's Office 
of the Chief Actuary has found that their methodology was 
faulty. Consequently, their estimates were wrong.
    Robert Meyers, the former Chief Actuary for Social 
Security, also criticized such attempts to estimate rates of 
return without having sufficient information. One study, by 
Duggan, Gillingham and Greenlees, who were researchers at the 
Treasury Department, did have access to the necessary data. 
These researchers found that African-Americans have a slightly 
higher rate of return than the general population.
    A second study by Dean Leimer at the Social Security 
Administration looked specifically at the disability insurance 
component of Social Security and found that African-Americans 
had a substantially higher rate of return than whites.
    Although Social Security has been successful, it is clear 
that there is a need for making some changes in the program, 
given the demographic changes ahead. However, some proposals 
would be particularly disadvantageous for African-Americans. 
These include plans to privatize Social Security by diverting 
payroll taxes from the Social Security Trust Fund to individual 
accounts. Proponents of these plans often fail to factor in 
privatization costs. First, the unfunded liability, that is, 
the financial obligation to current and near retirees, must be 
paid whether we retain the existing system or privatize it. 
This is the transition cost. When the Employee Benefit Research 
Institute factored in the transition cost, they found that 
young, low-wage workers are likely to face lower rates of 
return under individual accounts than under any option they 
examined to restore solvency to Social Security without 
individual accounts. I think this addresses Mr. Portman's 
question.
    Second, administrative costs will also reduce the rate of 
return for individual accounts. Henry Aaron of the Brookings 
Institution and Peter Diamond of MIT have estimated that the 
administrative costs for IRA-type accounts would eat up 20 
percent of savings of a workers over a 40-year work life.
    Additionally, the cost for workers to annuitize their 
savings would consume another 15 to 20 percent of their 
accumulated savings.
    And finally, low-wage workers are not as likely to receive 
high rates of return from individual accounts. They are more 
likely to invest conservatively--which is logical since they 
have less financial capacity to sustain losses. These workers 
also have less investment experience, and fewer resources with 
which to purchase investment advice.
    An alternative approach has been offered by President 
Clinton. He has proposed to restore solvency to Social Security 
thereby ensuring workers would receive a defined, guaranteed 
benefit. In addition to restoring the defined benefit, he 
proposed to add USA accounts. These accounts would be funded 
with 12 percent of the unified budget surplus and would not 
divert payroll taxes from the trust fund.
    Furthermore, these accounts would be progressive in two 
ways. Equal amounts would be contributed to accounts for each 
worker, thus contributions would make up a larger percentage of 
income for low-wage workers. Additionally, a progressive match 
would be provided to workers who contribute some of their own 
savings to these accounts. This proposal would leave the basic 
Social Security system intact. And since Social Security has 
played such a vital role in the economic well-being of African-
Americans, this is an essential factor in Social Security 
reform.
    [The prepared statement follows:]

Statement of Kilolo Kijakazi, Ph.D., Senior Policy Analyst, Center on 
Budget Policy Priorities

    Chairman Shaw and members of the subcommittee, thank you 
for inviting me to testify today. I am Kilolo Kijakazi, a 
senior policy analyst at the Center on Budget and Policy 
Priorities. My testimony will focus on the importance of Social 
Security to African Americans, the limitations of some 
proposals to reform Social Security using individual accounts 
and an alternative approach that would maintain the guaranteed 
benefit provided by Social Security.

                       Social Security's Success

    Social Security has been one of the country's most 
successful social programs. It is largely responsible for the 
dramatic reduction in poverty among elderly people. Half of the 
population aged 65 and older would be poor if not for Social 
Security and other government programs. Social Security alone 
lifted over 11 million seniors out of poverty in 1997, reducing 
the elderly poverty rate from about 49 percent to about 12 
percent. Additionally, Social Security has become more 
effective in reducing poverty over time. In 1970, Social 
Security reduced the poverty rate among the elderly from about 
50 percent to 17 percent, compared to 12 percent today.
    Social Security payments provide the majority of the income 
of poor and near poor elders. It is the major source of income 
for 66 percent of beneficiaries age 65 or older and it 
contributes 90 percent or more of income for about 33 percent 
of these individuals.

         The Importance of Social Security to African Americans

    Social Security is particularly important to African 
Americans. Elderly African Americans rely on Social Security 
benefits more than white elders rely on the program. Social 
Security benefits make up 77 percent of the income received by 
elderly African American households, compared to 60 percent of 
elderly white households. This is not surprising given the 
lower rates of pension coverage for African American. Among 
households with workers age 30-50, only 48 percent of African 
Americans have pension coverage while 61 percent of whites are 
covered. Pension income makes up 46 percent of total income for 
elderly white households, but only 35 percent of total income 
for elderly African American households. Moreover, African 
Americans are disproportionately represented among low-wage 
workers. It is, therefore, more difficult to set aside savings 
for retirement to supplement Social Security. While Social 
Security is intended to be one leg of a ``three-legged stool'' 
for retirement income, the lack of pension coverage and limited 
resources for savings place greater weight on Social Security 
as a reliable source of income for many African Americans.

                     Protections of Social Security

    The argument has been made that Social Security provides a 
lower rate of return to African Americans because this 
community has a lower life expectancy than the general 
population. Based on this premise, an African American worker 
would contribute payroll taxes, but would not live long enough 
to receive Social Security benefits sufficient to achieve the 
same rate of return as non-African American beneficiaries. This 
reasoning is faulty, however, as it overlooks important 
protections Social Security provides for African-American and 
low-wage workers including disability and survivors insurance.
    The design of the Social Security system helps to 
compensate African Americans for their shorter life expectancy. 
There are three aspects of the program that provide such 
protection. First, Social Security's benefit formula is 
progressive. Benefits replace a larger percentage of pre-
retirement earnings for low-wage workers than high-wage 
workers. Since African Americans are disproportionately 
represented among low-wage earners, they gain from this 
formula.
    The second feature is the option for early retirement. The 
Social Security System allows workers either to retire with 
full benefits at a given age, currently 65, or to retire early 
with reduced benefits. A worker can take early retirement at 
age 62. Workers who retire at 62 contribute payroll taxes for 
three fewer years. They also begin receiving benefits three 
years earlier, with monthly benefits reduced to compensate for 
the increased number of years during which they will receive 
benefits.
    The reduction in the monthly benefit amount for those who 
retire early is based on actuarial tables and is intended to 
make the amount of benefits received from age 62 to the point 
of death equivalent, on average, to the amount of benefits 
retirees would receive if they waited until the ``normal 
retirement age'' to retire. Over the population as a whole, the 
Social Security early retirement option is close to a wash--the 
lower monthly benefits paid are designed to offset the 
increased number of years for which benefits will be received.
    The story is different, however, for African Americans. 
Given the shorter life span for African Americans, the benefits 
these early retirees receive from age 62 to the end of their 
lives exceed the benefits they would receive, as a group, if 
they waited until 65 to retire. Starting to receive benefits 
several years earlier increases the total benefits they receive 
and raises their average rate of return.
    Two-thirds of all workers, including African Americans 
retire early. Thus, most African-American retirees are 
compensated for their shorter life span by this aspect of 
Social Security.
    The third component of Social Security that mitigates the 
impact of higher mortality among African Americans is the 
comprehensive nature of the program. Social Security is not 
solely a retirement program, but also an insurance system that 
protects against risks that are unforseen or for which workers 
are not sufficiently prepared. In addition to benefits for 
retired workers, Social Security provides benefits to the 
worker's spouse and dependents when the worker retires or 
becomes disabled, as well as survivors benefits if the worker 
dies. The divorced spouse of the retired or deceased worker 
also is generally entitled to benefits.
    African Americans benefit disproportionately from the 
disability and survivors components of Social Security. While 
African Americans account for 11 percent of the civilian labor 
force, they comprise 18 percent of the workers receiving Social 
Security disability benefits in 1996. When a worker becomes 
disabled, the worker's dependents also become eligible for 
Social Security benefits. African Americans made up 23 percent 
of children and 15 percent of the spouses who received Social 
Security benefits in 1996 because workers in their families 
were disabled.
    As a result of the above-average mortality rates among 
African Americans, the African-American community benefits 
disproportionately from the feature of Social Security that 
provides benefits to non-elderly survivors. Although African-
American children comprise about 16 percent of all children in 
the United States, they made up 24 percent of the children 
receiving survivors benefits in 1996. African Americans also 
accounted for 21 percent of the spouses with children who 
received survivors benefits. Benefits for non-aged survivors 
are one of the aspects of Social Security most favorable to 
African-American workers.
    Some studies have attempted to estimate Social Security's 
rate of return for African Americans. The Social Security 
Administration's (SSA) Office of the Chief Actuary has assessed 
some of these estimates, such as those used by Heritage, as 
well as the methodology for reaching the estimates. The 
actuaries found that the methodology was inaccurate; 
consequently the estimates were wrong. Furthermore, Robert 
Myers, a former Chief Actuary of SSA, heavily criticized such 
attempts to calculate rates of return particularly those by 
Heritage, without sufficient information.
    Most of these studies faced a major limitation. They did 
not have access to databases on actual earnings records of 
workers and benefits of retirees, the Continuous Work History 
database. This information is confidential and is not released 
to the public so that the privacy of workers and beneficiaries 
will be protected. These data have only been available to 
Treasury and SSA. One study that did not face this limitation 
was conducted by employees of the Treasury Department (Duggan, 
Gillingham, and Greenlees). These researchers did have access 
to the Continuous Work History database. Their research showed 
that African Americans had a slightly higher rate of return 
from Social Security retirees and survivors than the general 
population. A second study by the Social Security 
Administration also used this database and looked specifically 
at disability insurance. It shows that African Americans 
received substantially more benefits from Social Security 
Disability Insurance in relation to the taxes they have paid 
than whites do. Thus, despite the shorter life span of African 
Americans, aspects of the programs such as the progressive 
benefit, early retirement and comprehensive insurance, offset 
the effects of higher mortality rates for this community.

                          The Need for Reform

    Although the Social Security System has clearly served as 
an important source of income for the general population, 
including African Americans, demographic changes necessitate 
reforms in the program to maintain solvency. The baby-boom 
generation is aging and will begin retiring in large numbers 
after 2010. By 2025, most of this group will be 65 or older.
    Moreover, rising life expectancy will further increase the 
number and proportion of the population that is elderly. The 
Social Security actuaries' projections, reported by the Social 
Security trustees, show the number of people age 65 and older 
will nearly double from 34 million in 1995 to 61 million in 
2025. During that period, the proportion of the total 
population that is elderly will grow from 12.5 percent to 18.2 
percent. There also will be a decline in the rate of growth of 
the working-age population. As a result of these various 
changes, the ratio of workers to Social Security beneficiaries 
will decrease from just over three-to-one today to two-to-one 
in 2030, and remain at approximately this level through 2075, 
the last year of the actuaries' projections. At that point, the 
elderly will comprise 22.7 percent of the total population.
    Social Security payroll tax revenues currently exceed 
benefit payments and the trust funds are accumulating assets. 
The demographic changes that lie ahead, however, will result in 
substantial increases in benefit payments in coming decades and 
create an actuarial imbalance in the program over the long-
term. The actuaries project that the assets in the trust funds 
will be exhausted by 2032.
    After 2032, the trust funds will be dependent entirely on 
payroll tax collections for income. From that time on, Social 
Security will be insolvent because it will not have sufficient 
annual income to make the full benefit payments to which its 
beneficiaries are entitled by law. This does not mean Social 
Security will collapse at that time and have no funds to pay 
any benefits; to the contrary, the problem is that after 2032, 
incoming payroll taxes are projected to be sufficient to cover 
about 75 percent of the benefit payments, rather than 100 
percent of these costs. Policymakers need to make policy 
changes that eliminate this shortfall.

             Drawbacks of Some Individual Account Proposals

    Some proposals to reform Social Security would be 
particularly disadvantageous to African Americans. Proposals to 
fully or partially privatize Social Security by diverting 
payroll taxes from the Social Security trust funds to 
individual accounts would have a detrimental impact on low-wage 
workers and African Americans.
    How is it possible for advocates of individual accounts 
that replace Social Security benefits to claim that their 
proposals will benefit African Americans and low-wage workers? 
The answer is proponents of these accounts often fail to factor 
in the costs and risk of such individual accounts when 
determining the rate of return for the accounts. There are 
three such types of costs--transition costs, the administrative 
costs, and the cost to covert accounts to annuities.
    If retirement benefits are privatized, the payroll taxes 
that are currently used to finance Social Security retirement 
benefits will instead be deposited in individual accounts. That 
will create a financing gap--funds will be needed to fulfill 
the government's obligation to pay Social Security benefits to 
current retirees and those nearing retirement. Robert 
Reischauer, a senior fellow at the Brookings Institution, 
addressed this point in his statement at the White House Forum 
on Social Security in New Mexico, July 27, 1998. ``Whether we 
retain the existing system or privatize it, this unfunded 
liability will have to be met unless we renege on the benefits 
promised to today's elderly and near elderly. Dealing with the 
unfunded liability inescapably will reduce the returns workers 
can expect on their contributions.''
    Under a privatized system that diverts all payroll taxes 
into individual accounts, workers would have to pay a new tax 
to continue financing the Social Security benefits of current 
and soon-to-be retirees. As senior researcher Paul Yakoboski of 
the Employee Benefit Research Institute recently testified, 
``Because the current Social Security system is largely pay-as-
you-go, most of what workers pay into the system funds today's 
benefits. . . . [O]n top of paying current benefits, workers 
moving to a privatized system would have to pay `twice'--for 
the benefits going to today's beneficiaries and again to their 
own [personal] accounts.'' For this reason, the General 
Accounting Office has noted that if Social Security retirement 
benefits were privatized, ``the [payroll] contributions needed 
to fund both current and future retirement liabilities would 
clearly be higher than those currently collected.''
    A study conducted by the Employee Benefit Research 
Institute incorporated transition costs into its calculations. 
It found that for workers who are 21 today and receive low 
wages, the rate of return would be lower under the individual 
accounts options it examined than under all options it examined 
to restore long-term balance to Social Security without 
individual accounts.
    Administrative costs further reduce the rate of return for 
individual accounts. Accounts that are designed like IRA 
accounts will result in significant administrative costs and 
management fees, which would be paid out of the proceeds of the 
accounts and consequently reduce the amounts available in those 
accounts to pay retirement benefits. Moreover, additional costs 
are incurred when the funds in these accounts are converted to 
lifetime annuities upon retirement.
    Based on data on IRA accounts, two eminent Social Security 
experts--Henry Aaron of the Brookings Institution and Peter 
Diamond of M.I.T.--have estimated that the administrative costs 
for retirement accounts like IRAs would consume 20 percent of 
the amounts that otherwise would be available in these accounts 
to pay retirement benefits. They note that a one percent annual 
charge on funds in such accounts eats up, over a 40-year work 
career, 20 percent of the funds in the accounts. The 1994-1996 
Advisory Council on Social Security estimated an annual charge 
of one percent on the assets in privately managed individual 
accounts.
    Furthermore, recent financial data indicate that a one 
percent annual charge is a conservative estimate. In 1997, the 
average annual charge on stock mutual funds was 1.2 percent of 
the amounts invested in those funds. In addition, Diamond has 
noted that administrative and management costs consume 
approximately 20 percent of the amounts in individual accounts 
in Chile's privatized retirement system and more than 20 
percent of the funds in privatized retirement accounts in Great 
Britain and Argentina.
    Some of these costs are fixed-dollar expenses that do not 
vary with the size of an account. As a result, such costs would 
generally consume a larger percentage of the amounts in 
smaller-than-average accounts (and a smaller percentage of the 
amounts in large accounts). This suggests these costs would, on 
average, consume more than 20 percent of the funds in the 
accounts of lower-wage workers. That is of particular 
significance to African-Americans since, as a group, they 
receive lower-than-average wages and would consequently have 
smaller-than-average accounts.
    To these costs must be added the costs of converting an 
individual account to an annuity upon retirement. The leading 
research on this matter indicates that an additional 15 percent 
to 20 percent of the value of an individual account is consumed 
by the costs that private firms charge for converting accounts 
to annuities. The General Accounting Office recently noted that 
``While individual annuities are available, they can be costly 
especially relative to annuities provided through Social 
Security.''
    Taking all of these costs into account--both administrative 
and management fees and the costs of converting accounts to 
annuities--Aaron estimates that at least 30 percent and as much 
as 50 percent of the amounts amassed in individual accounts 
similar to IRAs would be consumed by these costs rather than 
being available to provide retirement income. (While the 
administrative cost would be lower for accounts centrally 
managed similar to the federal employees Thrift Savings Plan, 
the cost would still be significantly higher than the 
administrative cost for Social Security.)
    In addition to the costs of these individual accounts, 
there are some risks. Retirees who are particularly lucky or 
wise in their investments could receive retirement income from 
individual accounts that more than offsets their loss of Social 
Security benefits. But retirees who are less lucky or wise, 
including those who retire and convert their account to a 
lifetime annuity in a year the stock market is down, would 
likely face large reductions in the income they have to live on 
in their declining years.
    A recent GAO report takes note of these issues. ``There is 
a much greater risk for significant deterioration of an 
individual's `nest egg' under a system of individual 
accounts,'' the GAO wrote. ``Not only would individuals bear 
the risk that market returns would fall overall but also that 
their own investments would perform poorly even if the market, 
as a whole, did well.\1\
---------------------------------------------------------------------------
    \1\ General Accounting Office, Social Security: Different 
approaches for Addressing Program Solutions, July 1998, p. 6.
---------------------------------------------------------------------------
    This is a concern for workers in general--surveys have 
found Americans are not very knowledgeable about financial 
markets--and a particular concern for lower-wage workers, who 
generally would not be able to afford as good investment advice 
as individuals at higher income levels. Moreover, lower-income 
groups have less investment experience and would be more likely 
to invest in an overly conservative manner because they could 
not afford to expose the funds in their accounts to much risk. 
African Americans and Hispanic Americans make up 
disproportionate shares of the low-income population. As a 
result, they would be likely to receive a somewhat lower-than-
average return on amounts invested even while, as explained 
above, they would likely pay an above-average percentage of 
their holdings in fees.

                        An Alternative Approach

    There is an alternative to plans that would fund individual 
accounts by diverting payroll taxes from the Social Security 
trust funds. In his 1999 State of the Union address, President 
Clinton proposed to commit 12 percent of the unified budget 
surplus to the creation of USA Accounts.
    A key difference between the previously discussed accounts 
and the President's proposals is that the first step taken 
would be to reestablish solvency within the defined benefit 
portion of the Social Security System, without redirecting any 
of the payroll revenue to USA accounts. The President's plan 
would preserve the guaranteed benefit that is the cornerstone 
of the Social Security System and would not divert any revenue 
from the trust funds.
    Furthermore, the USA accounts are designed to be 
progressive in two ways. First the government would contribute 
the same amount of money to each worker's account. This means 
the contribution will represent a higher percentage of income 
for low-wage earners than for high wage earners. Second, under 
this proposal, the government would also provide progressive 
matching contributions to workers who add their own savings to 
their accounts. For example, a low-wage worker might receive a 
dollar match for each dollar he or she contributes to the 
account while an average-wage worker might receive a match of 
50 cents for each dollar he or she contributes.
    This proposal would leave intact the basic Social Security 
System that has played such a vital role in the economic well-
being of African Americans. At the same time, it would 
encourage savings using a design that targets resources to 
workers who would benefit the most from a boost in their 
retirement income.
      

                                


    Chairman Shaw. Mr. Rodriguez.

 STATEMENT OF ERIC RODRIGUEZ, SENIOR POLICY ANALYST, NATIONAL 
                       COUNCIL OF LA RAZA

    Mr. Rodriguez. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the Subcommittee, my name is Eric Rodriguez. I'm a 
senior policy analyst at the National Council of La Raza, the 
Nation's largest constituency-based Hispanic organization.
    I would like to thank the Subcommittee for allowing me the 
opportunity to participate in this hearing and contribute to 
this discussion.
    Let me preface my oral statement by saying that this is a 
new issue for NCLR, and we have undergone a rigorous process to 
get at the substance of the issue for Hispanics. Our work on 
retirement issues and Social Security reform is not and has 
never been ideologically driven.
    We have participated in roundtable discussions with 
Hispanic leaders, have conducted a townhall meeting at our 
annual conference, and have participated in forums with leading 
policymakers. This testimony is the result of this lengthy 
process.
    Why is it important to consider Hispanics in this 
discussion? Because Social Security reform is not just a 
retirement issue, but also a work force issue. Currently, 10 
percent of U.S. workers are Hispanic. Hispanics are projected 
to make up more than 17 percent of the U.S. labor force by 
2020. Hispanics tend to work in low-paying jobs with no 
benefits, like pension coverage. Hispanics typically have low 
earnings and little disposable income to save and invest for 
their own retirement. And Hispanics tend to rely heavily on 
Social Security for retirement support.
    Therefore, for Hispanics, the system has to be there. 
Moreover, Hispanics need to be considered in this discussion 
because of demographic projections that tell us that Latinos 
will play a critically important role in supporting and 
preserving the Social Security Program.
    Consequently, the effectiveness of any long-term Social 
Security solution may hinge on how it impacts Hispanic workers.
    So what about Latinos and the Social Security system? It is 
important to point out that we believe Social Security benefits 
Hispanics more than any other group of Americans. This is 
largely because the Hispanic community's economic profile 
closely resembles the overall U.S. population during the 
thirties, when Social Security was created. In general, many 
Hispanics earn low wages, experience higher than average 
unemployment, do not save and invest for retirement, have 
limited access to quality health care and pension coverage, and 
experience disproportionate poverty among their elderly.
    The Social Security system is designed to progressively 
benefit low-wage earners, so Latinos fare well under the 
current structure. Hispanic retirees maintain higher than 
average rates of return on payroll tax contributions and better 
than average replacement rates on annual earnings. As a result, 
the guaranteed benefit and the social insurance character of 
the current Social Security system significantly helps Latinos.
    What are some of the concerns we have with Social Security 
reform initiatives?
    Overall, we agree that it is desirable for lawmakers to 
bring the Social Security system into long-term fiscal balance. 
However, we have some serious concerns with the direction of 
several prominent provisions.
    Specifically, we believe that a payroll tax increase will 
greatly affect Hispanic workers already overburdened by the 
current tax rate and that benefit cuts could significantly 
increase poverty among retirees, especially those who were 
formerly low-wage workers and who solely rely on Social 
Security as a main source of retirement income.
    Furthermore, we believe the benefits of transforming the 
Social Security system into a more privatized one are vastly 
overstated, and we have serious concerns that such a plan would 
undermine the social insurance character of the system, erode 
the guaranteed benefit, and impose severe costs on low-wage 
workers, like Hispanics, over the long run.
    Therefore, we are inclined to oppose any reform proposals 
that feature any of these three elements.
    So what are the key elements of reform that are most 
promising for Latinos?
    Overall, we understand that the final Social Security 
reform package may contain measures that directly reduce 
benefits and increase revenues into the system. NCLR will 
support only the most progressive means of bringing the system 
into long-term fiscal balance.
    Of utmost importance to Latinos is maintaining the social 
insurance character of the current system. Therefore, the best 
Social Security reform package for Latinos would retain the 
equity and progressivity of the current system and maintain a 
guaranteed benefit upon retirement.
    Nevertheless, NCLR supports the goals of improving the 
economic status of elderly retirees, and increasing the 
retirement savings rates of Americans. However, we are not 
convinced that a dramatic change in the Social Security Program 
is the only, much less the most appropriate course, to achieve 
these goals.
    From NCLR's perspective, the most successful Social 
Security reform efforts should include a modest plan that 
brings the Security System into long-term balance and separate 
proposals that reduce poverty levels among elderly retirees, 
increase the retirement savings rate of Hispanic and other low-
income Americans, and increase the productivity of Latino and 
other workers.
    Such steps are critical not just to ensure a decent source 
of retirement income for Hispanics, but also to sustain the 
long-term economic growth of the Nation as a whole.
    Bearing this in mind, we applaud the President--President 
Clinton's proposal to use a large portion of the projected 
Federal budget surpluses to preserve Social Security, while 
investing a modest portion in programs designed to promote the 
future productivity of the work force. We believe it is an 
important first step and should go a long way toward moderating 
the potentially harmful economic effects of bringing the Social 
Security system into long-term fiscal balance.
    In addition, while we have some questions regarding the 
details of his plan, we support the general thrust of President 
Clinton's proposal to create Universal Savings Accounts, to 
increase the personal savings among Americans.
    As the Nation's demographics change, the Latino population 
will be an increasingly significant driving force behind 
America's social, economic and public policy agendas.
    With this in mind, NCLR appreciates the opportunity to 
present our views and strongly encourages Congress to consider 
and include the perspectives and concerns of the 30,000,000 
Hispanic-Americans in the unfolding national debate.
    We also welcome you to call on NCLR to provide additional 
information about the economic well-being of Latino workers and 
future retirees.
    Thank you.
    [The prepared statement follows:]

Statement of Eric Rodriguez, Senior Policy Analyst, National Council of 
La Raza

                            I. INTRODUCTION

    NCLR, the largest constituency-based national Hispanic 
organization, exists to improve life opportunities for the more 
than 30 million Americans of Hispanic descent. NCLR acts as an 
umbrella for almost 230 affiliated Hispanic community-based 
organizations which together serve 37 states, Puerto Rico, and 
the District of Columbia, and reach more than three million 
Hispanics annually through a range of services. NCLR 
appreciates the opportunity to provide for the record this 
statement of Latino perspective on Social Security reform.
    Given that Hispanics are a growing segment of the total 
U.S. population and an increasing proportion of the total U.S. 
elderly and working-age populations, they are likely to play a 
pivotal role in the nation's economic future. For example, in 
1990, Hispanics constituted 8% of the total U.S. workforce, 
compared to 78% for Whites and 10% for Blacks. However, by 
2010, 2020, and 2030, Latinos are projected to account for 
13.2%, 15.2%, and 17.2%, respectively, of all U.S. workers. 
Moreover, between 1997 and 2007, the Hispanic elderly 
population is predicted to increase 50.2%, and from 1997 to 
2020 the number of Hispanics 65 years of age and over is 
projected nearly to double (an increase of 185.1%).
    Notwithstanding this, Latinos have not been fully included 
in policy discussions related to Social Security, pension 
coverage, and retirement savings--a dialogue that has sharply 
intensified over the last two years. Without complete 
information on, and consideration of, Hispanics and Social 
Security, the likelihood of policymakers achieving a credible 
and effective long-term Social Security solution is seriously 
impaired. For this reason the following statement presents 
socio-demographic trend data that underscore the importance of 
the Social Security system for Hispanic retirees and highlight 
the critical role that Hispanics will play in preserving the 
nation's pension system. In addition, this statement outlines 
key public policy areas with regard to Social Security reform 
and Latinos, and examines specific Social Security reform 
initiatives, providing a much-needed Hispanic perspective on 
the relevant reform issues. Finally, the statement offers 
recommendations on the Social Security reform strategies that 
are the most promising, and least harmful, for Latinos.
    As a point of clarification, the terms ``Hispanic'' and 
``Latino'' are used interchangeably throughout this statement. 
In addition, all data presented below are for the Hispanic 
population in the 50 states, and do not reflect the status of 
Puerto Rico Island residents.

              II. THE SOCIAL SECURITY SYSTEM AND HISPANICS

    NCLR agrees that it is wise and prudent for the federal 
government to bring the Social Security system into long-term 
fiscal balance. In the absence of reform in the near term, the 
sheer size of the projected short-fall would likely impose 
severe economic strains on the federal budget and overall U.S. 
economy. Such economic pressure would undoubtedly translate 
into serious financial hardships for most Americans, and would 
have dire consequences for low-income workers--many of whom are 
Latino--typically more susceptible to economic downturns than 
higher wage earners. However, NCLR does not believe that the 
current system has major structural flaws or is 
programmatically outdated. Rather, NCLR understands that 
lawmakers should consider options to improve the system's 
effectiveness in providing a source of income for retirees and 
their survivors.
    The Social Security system--which provides retired workers 
age 65 or older with a livable income--is designed, in part, to 
help alleviate poverty among elderly Americans and meet the 
retirement needs of workers (especially those who do not have 
access to, or are unable to participate in, employee pension 
plans). The program disproportionately benefits Latinos 
primarily because the overall socioeconomic picture of the 
Latino community closely resembles that of the nation in 1935 
when the program was enacted. Today's Hispanic workers are 
concentrated in low-wage jobs typically lacking in pension 
coverage, experience high poverty and relatively high 
unemployment, and have less ability to save and invest for 
retirement than most other Americans. As a result, in 1996, the 
median income for Hispanics 65 and over was $8,036, compared to 
$12,921 for Whites and $8,656 for Blacks. Furthermore, that 
same year, 24.4% of Hispanics 65 and over lived below the 
poverty level, compared to 9.4% of comparable Whites and 25.3% 
of comparable Blacks.
    Given this profile, Latinos fare better than most other 
Americans in the Social Security system for several reasons. 
First, Social Security's benefit formula is progressive, 
therefore, it ensures that low-wage workers receive a greater 
share of the resources that they contributed to the system. 
Second, benefits are based on the length of time worked, as 
well as on the level of reported wages and salaries earned, 
during a worker's lifetime. The progressive formula means that 
while low-wage retired workers receive a smaller amount in 
Social Security benefits than high-wage retired workers, the 
system compensates the burdensome nature of the payroll tax by 
replacing a greater share of a low-wage worker's lifetime 
earnings. According to the Social Security Administration, the 
proportion of annual earnings replaced by the system is about 
60% for a low-wage earner, 42% for an average-wage earner, and 
25% for a high-wage earner. Consequently, since Hispanics have 
relatively low earnings levels, they are more likely to put a 
smaller amount in, but receive a greater share of income from, 
Social Security than either Whites or Blacks. In addition, 
because Latinos tend to have longer life expectancy rates than 
other Americans, they are especially likely to receive benefits 
for a longer period of time, which helps them recover the 
proportion of income they contributed to the system. In short, 
the labor force and demographic picture of Hispanic workers and 
retirees actually results in a higher rate of return on 
investments for Latinos in the Social Security system.
    Nevertheless, because benefit levels are low, the Social 
Security system has not met its goal of reducing poverty among 
elderly Latino and Black retirees. To illustrate, the Hispanic 
elderly population is more likely than Whites, but less likely 
than Blacks, to be poor; in 1996, about one-quarter of Hispanic 
(24.4%) and Black (25.3%) persons aged 65 years and over were 
poor, compared to fewer than one-tenth (9.4%) of their White 
peers.

                III. SOCIAL SECURITY REFORM AND LATINOS

    In 2013, soon after the number of retirees starts 
increasing by more than one million per year, it is projected 
that Social Security will begin to pay out more in benefits 
than it collects in payroll tax revenues. In the absence of 
reform, the federal government will need to borrow from the 
Social Security trust fund (accumulated reserves) in order to 
continue to pay necessary benefits. It is projected that in 
2032, shortly after the youngest of the baby boomers is of 
retirement age, the trust fund will be depleted and revenues 
will support only 75% of guaranteed benefits. Based on these 
projections, policy intervention is necessary to ensure that 
neither American workers nor the economy are adversely 
affected.
    Lawmakers have examined and proposed policy options that 
bring the system into long-term balance and which, in some 
cases, are designed to improve the financial outcomes for 
retirees. While some reformers have closely examined the impact 
of plans and proposals on low-wage workers--lending due 
consideration to the social insurance mission of the Social 
Security system--few have examined the impact of reform 
specifically on Latinos. Instead, policymakers, both 
progressive and otherwise, have tended to lump Hispanic 
concerns into the all-encompassing ``low-wage/minority issues'' 
category. Yet, Hispanics are, and will continue to be, a 
significant segment of the American work force, whose 
productivity, savings, and investments help to ensure the 
continued economic prosperity of the nation. In this sense, 
Hispanics are not simply part of the low-wage workforce, but an 
exponentially growing segment of America that currently 
experiences serious economic challenges. Therefore, any long-
term Social Security ``fix'' that purports to help the majority 
of Americans but harms Latinos disproportionately will not be 
beneficial to the nation over the long run. Moreover, any long-
term Social Security solution that does not address, in some 
manner, the economic and employment challenges that Latinos 
currently face will not be fully successful.
    Accordingly, NCLR has outlined below several essential 
considerations, from a Latino perspective, that should be 
central to Social Security reform:
     Financial Security. Social Security invests a 
worker's payroll taxes in government securities. There is very 
little risk to these investments, except for the extremely 
unlikely possibility that the U.S. government will fail to 
honor its debts. Under the current system, benefits are 
guaranteed to be paid upon retirement and the amount is tied 
closely to wages earned over a worker's life. Several reform 
options inject a measure of risk by proposing to invest part of 
an individual worker's contribution into the stock market in 
the hope of generating greater returns on their investments. 
Under such models, benefit levels are not guaranteed and the 
value of one's retirement package is at considerably greater 
risk than with the current Social Security system. Because 
Latinos tend to be the least likely of all Americans to receive 
private pension coverage, the guarantee of a benefit upon 
retirement is critically important. In 1996, Hispanics 65 years 
of age and over received only 13.5% of their income from 
pensions, compared to 18.3% for Whites and 18.1% for Blacks. 
Moreover, according to Department of Labor (DOL) employee 
pension coverage data, while there were about 12.3 million 
Hispanic Americans in the workplace in 1997, only about one-
third (32%) participated in employee pension plans, compared to 
more than two-fifths (44%) of other minorities and one-half 
(51%) of Whites. In fact, DOL reported that between 1979 and 
1993 the rate of pension participation for Hispanics declined 
five percentage points, compared to a one percentage point 
increase for Whites. Therefore, a guaranteed and defined 
benefit is an essential component of any reform plan that 
considers the interests of Hispanic workers.
     Retirement Income and Rate of Return. Many 
reformists have focused on Social Security's rate of return as 
a key issue. As previously mentioned, NCLR believes Latinos--
due to their low wages and high life expectancy, coupled with 
the Social Security system's progressive benefits formula and 
guarantee of life-long benefits (with cost of living 
adjustments)--receive a higher rate of return on Social 
Security benefits than other Americans. Moreover, because the 
benefit formula is tied to earnings during working years, 
Hispanics maintain high-income replacement rates; thus, a 
Latino retiree is likely to receive a substantial proportion of 
the earnings s/he made the year prior to retirement. Such an 
approach helps to maintain a worker/retiree's standard of 
living. However, it is precisely because the formula is based 
on wages over a lifetime that Social Security does not 
effectively prevent poor workers from becoming poor retirees. 
But disproportionate poverty among retirees who earned low 
wages as workers is not necessarily a result of Social 
Security's rate of return on payroll taxes. Rather, high 
poverty among elderly Hispanic Americans is due more to the 
fact that Hispanic and other low-wage workers lack access to 
private pensions and have little opportunity to save and invest 
for their retirement; two important sources of supplemental 
retirement income. As a result, Latinos tend to rely heavily on 
Social Security as the sole source of retirement income. 
Efforts to improve access to private pensions and increase 
personal savings and investment by low-wage workers, including 
many Hispanics, should be distinct from, but closely parallel, 
Social Security reform efforts.
     Equity. Overall, the current system is very 
progressive because low-earners--and Hispanics in particular--
fare better than high-earners in terms of rate of return on 
investments and income-replacement rates. Yet several reform 
proposals, most notably ``privatization'' or ``private 
individual saving account'' plans, include provisions that 
would alter the progressive nature of the current system. These 
plans would create an exponentially more favorable structure 
for high-earners than low-earners by providing substantially 
higher returns for high-earners (largely because the benefit 
level of a defined contribution plan is principally dependent 
on the amount of contributions made over a lifetime). This 
transformation may have serious implications for the 
distribution of wealth in the nation. No policy option under 
consideration should seek to re-distribute benefits unevenly, 
widen the wealth gap between upper and lower-income Americans, 
or increase elderly poverty.
     Hispanic Women. While Social Security reform has 
serious implications for the overall Hispanic community, 
Hispanic women may be the most severely affected by reform 
efforts. Hispanic women are more likely than other women to 
work inside the home and are less likely than other women to 
have saved for retirement. Moreover, Hispanic women are less 
likely than other workers to have access to private pension 
coverage, they tend to rely heavily on Social Security 
benefits, and they tend to receive the lowest wages of any 
group of workers. As a result, changes in marital status or 
loss of a family member who is a principal wage-earner places 
Latinas in a particularly vulnerable economic position. In 
1997, more than one-quarter of Hispanic women 65 years of age 
and older lived below poverty--while in households with a 
female householder over 65 years of age and no husband present, 
the poverty rate was 50%. Consequently, reform plans that 
threaten the economic status of retirees by making direct 
changes to the structure of the Social Security system--and 
also the survivors benefits system--will have a 
disproportionately harmful affect on Hispanic women.
    Finally, for Hispanics overall, there is one additional 
issue related to Social Security reform that policymakers must 
consider. Specifically, it is generally accepted that raising 
worker productivity--thereby increasing payroll tax 
contributions--would go a long way toward reducing the 
projected long-term Social Security imbalance. Because 
Hispanics will play a crucial role in supporting and promoting 
the nation's overall economic growth, Social Security reformers 
should seek to increase the productivity of current and future 
Latino workers. The data reveal that about three in five 
(59.9%) Hispanics between the ages of 18 and 34 had graduated 
from high school in 1996, compared to four in five Whites 
(83.6%) and Blacks (79.0%). Similarly, while 9.3% of Latinos 
had graduated from college in 1996, by contrast, 24.3% of 
Whites and 13.6% of Blacks had completed college that year. 
Given the direct link between educational attainment and 
income, earnings, wages, and disposable income for savings, 
increasing the educational attainment of Hispanic workers will 
directly enhance the solvency of the Social Security system.

IV. SPECIFIC SOCIAL SECURITY REFORM OPTIONS: IMPLICATIONS FOR HISPANICS

    Experts suggest, there are only three legitimate ways to 
reform the Social Security program and bring it into long-term 
actuarial balance: increase revenues (i.e., payroll taxes, 
etc.), cut benefits, or utilize federal budgetary surpluses to 
strengthen the Social Security Trust Fund. Keeping in mind the 
aforementioned concerns for Hispanics, NCLR examined three 
broad policy options that are likely to be included in a final 
package of Social Security reform initiatives. In addition, we 
reviewed an alternative reform proposal to restructure the 
Social Security system to increase rates of return on worker 
investments.

Payroll Tax Increases

    Perhaps the most rudimentary Social Security reform policy 
option, a payroll tax increase, is politically unpalatable to 
most lawmakers. Nevertheless, because of its simplicity, a 
modest payroll tax increase may be included in any serious 
Social Security reform package. As detailed in a 1997 NCLR 
report, Burden or Relief? The Impact of Tax Policy on Hispanic 
Working Families, federal payroll taxes already extract a 
disproportionately large share of income from Latino families 
because they are levied at a flat rate. For example, in 1995, 
Hispanic families in the lowest income bracket (quintile) had 
their incomes reduced by 6.6% by the payroll tax. NCLR opposes 
payroll tax increases and we believe that without a 
corresponding payroll tax relief package for low-wage workers, 
a significant tax increase would seriously and unfairly 
diminish the economic status of Latino workers and low-income 
families.

Benefit Cuts

    There are a host of proposals and strategies to reduce the 
amount of benefits Social Security pays out to retirees. These 
include increasing the retirement age, modifying the cost of 
living adjustment, and altering the benefit formula. Because 
Latinos disproportionately rely on Social Security as the sole 
source of retirement income, and often receive lower benefits 
than other Americans, reductions in benefits would have serious 
negative implications for Latino retirees. NCLR opposes benefit 
cuts. If any such cuts occur, reformers must strike the right 
balance between fairly distributing the impact and burden of 
reform efforts, and harming vulnerable retirees. We expect that 
policymakers will apply any benefit cut initiatives 
progressively, to avoid imposing disproportionate economic harm 
on poor elderly retirees.

Unified Federal Budget Surplus

    The Clinton Administration has proposed, and several 
Congressional leaders have agreed, to carve-out 62% of the 
unified federal budget surplus to fortify the Social Security 
Trust Fund. The Administration's plan would use projected 
budget surpluses to pay down the national debt. Most experts 
agree that reducing public debt enhances the prospects of 
sustaining long-term economic growth. While the proposal does 
not bring the Social Security system into 75-year fiscal 
balance, it moves close to long-term balance without imposing 
deep benefit cuts or steep payroll tax increases. In addition, 
the proposal does not significantly modify the structure of the 
Social Security program; a move that could have far-reaching 
negative affects on workers and retirees. NCLR believes that 
reserving a significant portion of the budget surplus to build 
up the Social Security Trust Fund, and using resources to pay 
down the national debt, is a sound and prudent plan that should 
be supported by Congress.

Mandatory Private Individual Accounts

    There are a host of proposals that create mandatory private 
individual accounts that would be de-facto retirement savings 
accounts that could be invested in common stocks and bonds. 
Proponents of these plans suggest that such accounts would 
increase the rate of return on investments for retirees, 
increase national savings, and boost U.S. economic growth. 
However, there are several factors that suggest that such an 
option may not proportionately benefit Hispanic workers; 
specifically:
     Investment Expertise. While it is unclear what 
investment choices Hispanics will make (which determine their 
final benefit amount and rate of return), research shows that 
Hispanics have limited experience with, and exposure to, 
private investments and financial institutions in general. For 
instance, data from the Employee Benefits Research Institute's 
1998 Retirement Confidence Survey show that only one in five 
Hispanics has tried to figure out how much they will need to 
save for retirement. A similar proportion indicated that they 
are not comfortable dealing with banks, insurance companies, or 
mutual funds. Given this, it is likely that under such a system 
Latinos would seek investments in the most risk-averse 
portfolios--which also happen to maintain the smallest long-
term yields.
     Administrative Costs. These accounts would be 
subject to administrative costs that would further erode the 
rate of return; and most analysts agree that such costs are 
reasonably higher in private market investments than under the 
current system. These costs would have a disproportionately 
greater adverse effect on the relatively smaller account that 
Hispanics, due to their relatively lower contributions, would 
have.
     Economic Status. There are several issues that 
will affect the ability of Latinos to save and invest in such 
accounts. As a group, Hispanic workers have variable work 
histories, due to high levels of unemployment, displacement 
from jobs, and work in unstable industries. Mandatory private 
accounts require consistent, stable employment to ensure steady 
contributions; for Hispanics, such changes over a lifetime 
would vary and ultimately hinder long-term returns. In 
addition, Hispanic workers are less likely to have health 
insurance than any other group of Americans, which means that 
at least one in three Latinos has to use a significant amount 
of earnings for out-of-pocket health care costs. Similarly, 
almost one in five Latinos spends almost half of his/her income 
on housing. The lack of health insurance, coupled with high 
housing costs, seriously diminishes disposable income available 
to hispanics for saving and investing.
    Furthermore, any major structural change in the Social 
Security program would impose serious economic burdens on 
current workers. The transformation of a system from one that 
uses current contributions to pay the benefits of current 
retirees to one that builds accounts for current workers would 
have to be financed. In addition, private individual accounts 
are likely to alter significantly the progressive nature of the 
system; specifically, high-wage earners will fare much better 
than low-wage earners in a defined-contribution system, which 
would exacerbate the wealth gap, with nation-wide social and 
political implications. NCLR believes that the creation of 
mandatory private accounts is not likely to benefit Latino 
workers and retirees over the long run. As a result, NCLR is 
inclined to oppose the creation of mandatory private individual 
accounts within the Social Security system.

               V. SOCIAL SECURITY REFORM RECOMMENDATIONS

    Overall, given that the final Social Security reform 
package may contain measures that directly reduce benefits 
exiting the system and increase revenues entering the system, 
NCLR will support the most progressive means of bringing the 
system into long-term fiscal balance. Of utmost importance to 
Latinos is maintaining the social insurance nature of the 
current system. Therefore, the best Social Security reform 
package for Latinos would retain the equity and progressivity 
of the current system and maintain a guaranteed benefit upon 
retirement.
    Nevertheless, NCLR suppors the goals of the majority of 
Social Security reform proposals that attempt to imporve the 
ecomic status of elderly retirees and increase the retirement 
savings rate of Americans. However, we are not convinced that a 
dramatic change in the Social Security program is the only, 
much less the most appropriate, course to achieve these goals; 
on balance, we believe this would do more harm than good. From 
NCLR's perspective, poverty levels among hispanic elderly 
retirees, increase the retirement savings rate of Hispanic and 
other low-income Americans, and increase the productivity of 
Latino workers. Such steps are critical not just to ensure a 
decent source of income for Hispanic retirees, but also to help 
sustain the economic growth of the national as a whole.
    Bearing this in mind, we applaud President Clinton's 
proposal to use a large portion of projected federal budget 
surpluses to preserve Social Security while investing a modest 
portion in programs designed to promote the future productivity 
of the workforce. We believe it is an important first step, and 
should go a long way toward moderating the potentially harmful 
economic effects of bringing the Social Security system into 
long-term fiscal balance. In addition, while we have some 
questions regarding the details of his plan, we support the 
general thrust of President Clinton's proposal to create 
Universal Savings Accounts to increase the persoanl savings 
among all Americans.
    As the nation's demographics change, the Latino population 
will be an increasingly significant driving force behind 
America's social, economic, and public policy agendas. With 
this in mind, NCLR appreciates the opportunity to submit this 
statement, and strongly encourages Congress to consider and 
include the perspectives and concerns of the 30 million 
Hispanic Americans in the unfolding national debate on 
retirement issues. We also welcome you to call on NCLR to 
provide additional information about the economic well-being of 
Latino workers and future retirees. Thank you.
      

                                


    Chairman Shaw. Thank you.
    Mr. Beach.

   STATEMENT OF WILLIAM W. BEACH, DIRECTOR, CENTER FOR DATA 
                 ANALYSIS, HERITAGE FOUNDATION

    Mr. Beach. Chairman Shaw, Members of the Subcommittee, it's 
a great pleasure to be with you today. My name is William 
Beach, with the Heritage Foundation. It's especially a pleasure 
to be with my fellow panelists. We have been disputing these 
points on Social Security in a very friendly manner over the 
past year, and we will continue, I am assured, to be very 
friendly with one another.
    Mr. Chairman, I am also going to take the risk of giving 
you extemporaneous remarks. Many of the things that I had 
planned to read to you today you have heard from Eric, and 
Kilolo, and Dr. Spriggs, and Roberto.
    We agree on so many points that I hope this discussion will 
bring those points to this Subcommittee's attention. It's very 
important that you understand the common ground.
    Second, I would like to begin by addressing some 
prejudgments that I have heard today in this set of testimony 
and in testimony prior to this panel.
    Reformers, like myself, will not support any change to 
disability insurance or preretirement survivors insurance as 
part of this reform. In all of our analysis that we have done 
at the Heritage Foundation, we have held harmless disability 
insurance, preretirement survivors insurance, and the 22 other 
programs that Social Security currently administers because we 
want the attention of this Subcommittee and other Committees on 
this Hill to be on retirement. I am going to address that in a 
moment.
    Second, we will not support, nor will we encourage, a 
solution to Social Security that's done through the payroll tax 
window for obvious reasons. This is a tax that is especially 
burdensome on low- and moderate-income Americans and this is a 
tax that--this is a program that is especially designed for 
low- and moderate-income Americans.
    Third--and there are many other principles in my printed 
testimony--we believe that whatever changes are made to the 
program should be made in such a way as to leave current 
beneficiaries with all of the benefits they have been promised 
and near beneficiaries, however you define that, those who are 
coming on to retirement, with promised benefits. There are 
costs involved to making any change but, gentleman, there are 
costs to not making changes.
    Now, sometimes I think when I work this issue that I'm 
actually involved in reforming the trust fund. That's when I'm 
inside the Beltway. When I'm outside the Beltway, I know 
something else. Let's keep a clear focus on what's at stake 
here. OASI, the Old Age and Survivors Insurance Program is the 
dominant retirement program of low- and moderate-income 
Americans. To define moderate, somewhere around $35,000 and 
below.
    It wasn't intended to be that way. There was a three-legged 
stool in 1935. One leg was pensions through the place of work. 
The second leg was savings and you have heard of this from 
Kilolo. The third leg was Social Security. And, in fact, the 
President at that time insisted upon this, and Arthur Altmeyer 
said, once one leg of the system begins to crowd out the other 
legs, then we have to look at Social Security very, very 
carefully.
    But payroll taxes have risen very high, and they could rise 
higher--12.4 percent currently supports OASDI--10.6 percent 
just supports the OASI Program alone, and that is crowding out 
savings for low-income households and for many moderate-income 
households. Why else do we have 40,000,000 households in this 
country that are covered by Social Security without savings 
programs in any form?
    Dependency on Social Security because of tax rates, because 
of economic discrimination, because of what else has now made 
Social Security the dominant program of retirement for low- and 
moderate-income Americans. And the moment we lose that focus, 
we are going to lose the correct emphasis in this debate.
    Now, why is that an important focus? Here, I think is the 
point upon which there may be some departure, but I hope not. 
There are many people, including myself, who are not going to 
depend on Social Security. I'm going to depend on it somewhat, 
but I have supplemental retirement programs. I've got 401s. 
I've got a pension maybe if I stay at Heritage long enough. 
After today, they may not want me there.
    I'm able to enjoy the benefits of higher rates of return in 
markets, in funds; that because I have the funds, I can invest 
in. But if you are solely dependent upon Social Security for 
your retirement program, and your rate of return is lower than 
the 3 percent that you can get on a CD, lower than your nominal 
order of withdrawal checking account, then you're going to fall 
further and further behind in the economic race. There may be 
an argument to make that Social Security--the retirement 
program, just the retirement program could be adding to the gap 
between the rich and the poor.
    We need to create a savings element within Social 
Security--make it 2 percent, make it 3, make it 4 percent--that 
will provide at least some emphasis, some ability of people to 
go into the bond market, U.S. Treasuries, where you can earn 
slightly higher rates of return, or into a mixed portfolio of 
bonds and equities. We believe there ought to be a two-tiered 
Social Security system. Part A with a savings element, 
somewhere in the neighborhood of 3 or 4 percent. And part B is 
the program we have now with the progressive formulas, with all 
of those sorts of things that would be maintained by the rest 
of the system.
    This debate is really very important. It's important 
because we're debating the retirement program for tens of 
millions of Americans. And as long as we keep our focus on 
that, as opposed to some other things, then I think we'll come 
out all right.
    Thank you very much.
    [The prepared statement follows:]

Statement of William W. Beach, Director, Center for Data Analysis, 
Heritage Foundation

    So fertile has this century been in producing great events 
that many subtle though equally important developments may 
escape notice by historians. What memorial on the Twentieth 
Century would be complete without comment on the dramatic 
changes in family structure and gender roles that people in 
industrialized countries have experienced? What would a history 
of Twentieth Century America be like without a critical inquiry 
into the expansion of racial and ethnic diversity? Or, what 
future student of our times would understand us without 
learning about our commitment to publicly insuring all of our 
fellow citizens against the economic hardships that often 
attend disabling accidents, illness, and old age?
    The curious thing about history is that the living are the 
authors, in a sense, of their own epitaphs. We may, therefore, 
appropriately ask, how will our stewardship be judged? We can 
do nothing, of course, to change the fiber of this century's 
brutal conflicts or to improve on our frequently brilliant and 
sometimes dull economic performance. We may also be powerless 
to shape the larger demographic trends. However, those 
commitments that transcend generations clearly are within our 
powers to mold.
    Few of the commitments made in the Twentieth Century rise 
higher in significance than those made in 1935 through the 
Social Security Act. Not only did Congress and the President 
fundamentally alter the course of public policy by aligning it 
with the principles of private mutual aid, but they also 
established a virtually irrevocable promise to future 
generations. Today's workers insure themselves against certain 
vagaries of their future economic lives by supplying tax 
dollars for those in need. Social Security is the 
quintessential intergenerational insurance program. In exchange 
for lower incomes, current workers shift the provision of their 
own future retirement needs onto the earnings of future 
workers.
    In the beginning, this arrangement worked very well. Social 
insurance programs complimented work and health insurance 
provided by employers and private savings. In fact, the 
founders of Social Security (including President Roosevelt) 
insisted that the Old-Age and Survivors Programs must always be 
one of three legs to the insurance stool: private aid, mutual 
aid, and social aid. In fact, OASI's first director, Arthur 
Altmeyer, believed that Social Security should change if it 
ever crowded out either of the other two legs.
    I believe we have reached the point that Altameyer feared. 
Demographic trends unimagined by the System's founders combined 
with numerous expansions of Social Security's original mandate 
now threaten the future of this important commitment. It is 
altogether possible that a failure to change the retirement 
portion of the Old-Age and Survivors Insurance program will 
lead to significantly higher taxes on low and moderate-income 
workers. A failure to act now also may lead to lower retirement 
income for all beneficiaries and longer work lives before 
retirement. The system's challenges are, indeed, numerous.
     Social Security's founders established a statutory 
retirement age of 65 at a time when average life expectancy 
stood at 61 years. They also had no idea that an explosion of 
population loomed just ten years after Social Security's 
creation. The largest generation of workers in world history is 
steadily approaching retirement in better health than any 
preceding generation in world history. By 2010, nearly 70 
million ``baby boomers'' will begin drawing Old Age benefits 
from Social Security. In fact, the fastest growing segment of 
the population by 2020 will be people older than 75. If nothing 
changes between now and then, this draw on public resources 
will force a substantial reduction in our commitment to social 
insurance, particularly publicly provided medical care. The 
estimates of how much this ``draw'' amounts to vary, depending 
on which of several economic and accounting model you choose. 
No one can take comfort, however, is any part of the range of 
the ``unfunded liability'' estimates. Prominent actuaries and 
economists put the amounts of future payments between $4 
trillion and $11 trillion dollars (after inflation). Indeed, no 
change in the current system could mean a forty-percent 
increase in payroll taxes over the next twenty years.
     Unfortunately, this same post-World War II 
generation failed to reproduce itself, thus assuring that much 
fewer workers will be paying their parents retirement after 
2010 than the system minimally needs. The currently retired 
population enjoys a dependency ratio of nearly 3.5 to 1. By 
2030, this ratio will have fallen to 2 to 1. In 1950 the ratio 
stood at 16 to 1. This declining ratio may mean that benefits 
will be cut, which would result in many retired parents having 
to depend in larger part on the incomes of their children and 
grandchildren.
     The current population of retirees secured a 
retirement and medical care packages for itself that compete 
well with very good, privately financed programs. However, 
today's workers must pay historically high payroll taxes to 
fund this publicly supported retirement and medical program. 
These taxes fall heaviest on those workers in low and moderate-
income households. They frequently crowd out the ability to 
create private savings, to make important investments in the 
education of children, and advance economically. ``Fixing'' 
Social Security by any of the traditional means (higher taxes, 
lower benefits, or longer working life) directly worsens the 
life of people at the bottom of the economic ladder.

     The Heritage Foundation's Standards for Social Security Reform

    Social Security needs to be reformed to deal with these 
problems. The reform should do two things: secure the ability 
of the system to deliver on its promises to beneficiaries, and 
enable today's workers to look forward to more income in 
retirement. To do this Heritage proposes the following reforms:
     Enact a Social Security contract between the 
government and citizens, specifying the benefits that today's 
and future retirees will receive (currently the Supreme Court 
says there is no right to benefits).
     Concentrate immediately on securing the retirement 
years of working Americans by raising the retirement income 
they can expect: make no changes in Social Security's 
disability and dependents program.
     Raise retirement income by allowing workers to 
place a portion of their payroll taxes now devoted to 
retirement income (but not disability etc.) into a personal 
savings/investment retirement account instead. Workers who 
exercised this choice would not receive the Social Security 
benefits associated with the portion of their taxes they placed 
in a private account, but they would receive the Social 
Security benefits financed by the rest of their payroll taxes.
     Require all personal retirement accounts to 
include an annuity at least equivalent to the Social Security 
benefits foregone by the worker. The annuity would have to be 
insured--with back-up insurance provided by the federal 
government.
     No worker would be required to open a personal 
retirement account.
    All Americans, whether or not they opened a personal 
retirement account with a portion of their payroll taxes, would 
be entitled to a minimum benefit from the traditional Social 
Security.
    Too frequently in the current debate over Social Security 
do the disputants forget for whom the system was especially 
designed. Social Security is the dominant retirement program 
for low and moderate-income American workers. The system's 
advocates from its creation clearly describe the program as 
social insurance for those workers at the greatest risk of not 
having adequate retirement income. Indeed, current law taxes 
wages and salaries only up to a level called the ``maximum 
taxable income threshold,'' which today is roughly $72,600. 
This threshold indicates truth that workers making more than 
that amount have the means (and presumably the common sense) to 
create supplemental retirement savings. Current law also pays 
out benefits to low-income workers that nearly equals the 
average of their last few years of work, but pays a worker who 
earned above the maximum taxable threshold only 16 percent of 
their average earnings.
    Discussions about ``revenue neutral tax rates,'' 
``dependency ratios,'' and ``closed economy trust fund 
projections'' may escape a mind occupied with some other part 
of life. If so, take the comfort I take in a fact that those 
elements of the debate are secondary to how well the program 
serves low and moderate-income workers.
    First, let me reiterate that my focus is solely upon the 
retirement portion of Social Security. I will not support any 
change to Social Security that alters the current funding or 
benefits of the Disability Insurance program or the other 23 
programs administered by Social Security, such as the Pre-
Retirement Survivors Insurance Program. I will assume in the 
remarks that follow that Congress leaves these programs alone 
or acts in a fashion as to improve them. Workers currently pay 
12.4 percent of their earnings to support the Old Age, 
Survivors, and Disability Insurance program. Of this amount, 
10.6 percentage points go to retirement and less than one 
percent goes to pre-retirement survivors insurance.
    If we count the Medicare portion of payroll taxes, workers 
pay 15.3 percent of their earnings to support Social Security. 
For millions of workers, this percentage exceeds what they pay 
in income taxes. For about 30 million workers who have no 
income tax liability, this is their tax system. The payroll 
tax, however, is a flat tax of the worst sort: no deductions 
and, of course, no offsetting benefit retirement benefits 
payments that would make it ``progressive.'' This regressive 
tax is a greater burden on those at low than at high-income 
levels. While other elements of Social Security (such as 
Disability Insurance and Pre-Retirement Survivors Insurance) 
offset the regressive nature of the taxes paid to support those 
programs, workers must wait all of their working lives to be 
compensated for the regressive nature of the retirement tax 
portion.
    These high taxes also crowd out private savings. Some 
analysts believe that nearly 65 percent of current workers have 
no significant savings for their own retirement. The truth is 
simple: low and moderate-income Americans are dependent on 
Social Security for their retirement and, worse, believe that 
it will be there for them when they retire.
    This state of affairs--high and regressive taxes and low 
personal savings--would be acceptable if Social Security glowed 
with the financial health of the Magellan Fund or, at least, 
assured current workers that they would receive a rate of 
return on their retirement payroll taxes equal to what the 
least savvy upper income investor makes. Sadly, however, the 
Old-Age Insurance program fails even that test.
    If you are young, single male born in 1967 and earning the 
average wage of $28,400, your inflation adjusted rate of return 
from Social Security is .4 percent. If you are a similarly 
defined female, your rate of return reflects your long life 
expectancy, but it is still only .7 percent. Suppose these two 
people are married, both working, and living in New York with 
two children. Their rate of return from Social Security is a 
paltry .8 percent. They will pay about $395,000 in payroll 
taxes and receive about $506,000 in retirement benefits from 
Social Security.
    Despite these low returns, you may be wondering why all the 
fuss. Clearly, these typical workers get more from Social 
Security than they paid in. The fuss is this. As long as 
someone else is free to invest $395,000 in, say, 30-year 
Treasury Bonds, and our typical couple is not; the higher 
income worker will get richer and the lower income worker will 
get poorer. Had Social Security allowed this average income 
couple to place their payroll taxes in a Treasury bond account 
earning only 2.8 percent after inflation, they would have 
$830,000 at the time of their retirement rather than $506,000, 
or $324,000 more.
    If you are a young, single, African-American male, Social 
Security's retirement program contains little if any value at 
all. Due to lower life expectancies, many African-American 
males may not live long enough to collect benefits equal to 
their taxes. Such a low-income male born in 1970 has a rate of 
return of -.7 percent. That negative percentage means that the 
retirement program is more expensive for them than for someone 
with a positive rate of return. Indeed, this black male loses 
about $14,000 in the Old-Age Insurance program. Had Social 
Security allowed him to invest his payroll taxes in Treasury 
bonds, he would have at his retirement $79,800 more than Social 
Security promises to pay him. In other words, his participation 
in Social Security would not mean that he would fall further 
behind in the economic race.
    A single Black female born in 1970 and making about $25,000 
per year in taxable wages ``enjoys'' an inflation adjusted rate 
of return of .98. An African-American, married couple both of 
whom were born in 1970, work, earn average incomes and have two 
children also have a dismal rate of return: only 1.07 percent. 
Worse yet are African-American couples who earn above the 
maximum taxable income threshold. Their rate of return is -1.64 
percent, after inflation.
    Even though life expectancy is higher for Hispanic 
Americans, their rates of return under Social Security also are 
low. If Hispanic Americans were allowed to direct their payroll 
taxes into safe investment accounts similar to 401(k) plans, or 
even in super-safe U.S. Treasury bonds, they would accumulate 
far more money in savings for their retirement years than they 
are likely ever to receive from Social Security. For example, 
an average-income single Hispanic male born in 1975 who earned 
about $17,900 in wage, salary, and self-employment income in 
1996 can expect to receive an annualized real rate of return 
from Social Security of just 1.44 percent. By contrast, he 
could expect to receive a long-run real rate of at least 2.8 
percent from super-safe long-term U.S. Treasury bonds.
    Social Security also pays a very low rate of return for 
two-income Hispanic households with children. A Hispanic, 
double-income couple that has two children, that was born in 
1965, and that earns the average wages received by Hispanic 
Americans can expect a rate of return of 2.17 percent from 
Social Security during its lifetime. This rate contrasts with a 
return of 3.17 percent over the same period on an ultra-
conservative portfolio composed of 100 percent U.S. Treasury 
bonds, or a return of 4.67 percent on a prudent portfolio made 
up of 50 percent broad market equities and 50 percent U.S. 
Treasury bonds. In terms of 1997 dollars, this couple could 
expect to receive $347,000 more in lifetime after-tax income 
from a portfolio composed equally of government bonds and broad 
market equities than it could from Social Security.
    The rate of return has a damaging impact on communities. 
The cumulative effects of Social Security's low rates of return 
can be appreciated by considering a hypothetical community. 
Suppose there existed a city composed entirely of 50,000 young, 
married, double-earner Hispanic couples in their 30s in which 
each person earned the average wage for Hispanics and each 
couple had two children. The cumulative amount such a community 
could save in a private pension plan by retirement with the 
same dollars they currently pay in Social Security taxes is 
more than $12.8 billion greater in 1997 dollars than what these 
couples will get in Social Security benefits. This amount is 
roughly equal to half that the federal government currently 
spends on food stamps each year for the whole country and half 
as much as direct federal spending on education
    These numbers should raise serious doubts about Social 
Security's ability to supply adequate income to future low and 
moderate-income workers without threatening their ability to 
advance during their working lives. They also should highlight 
a glaring deficiency in current law. Now that payroll taxes 
have risen to a point that crowds out private savings, these 
same low and moderate-income households have little give to the 
next generation. If payroll taxes have to remain as high as 
15.3 percent of earnings, then Congress should change the 
system to create a savings element within Social Security. Not 
only should Social Security provide adequate income, it also 
should be a vehicle for creating wealth in low and moderate-
income households.
      

                                


    Chairman Shaw. Thank you.
    Mr. Hulshof.
    Mr. Hulshof. Thanks, Mr. Chairman. I'm now understanding 
the importance of getting here early, and being the first one 
here.
    Chairman Shaw. You're senior. Go ahead.
    Mr. Hulshof. I appreciate that very much. Mr. Beach, thank 
you for actually pointing up the common ground, because as I've 
heard from various testimonies some of those discrepancies, and 
I also want to say that we do applaud the fact that the 
President has at least entered the discussion about this issue.
    Mr. Beach. Yes.
    Mr. Hulshof. I was proud to have been the Republican Member 
of the House at the first town meeting, if you want to call it 
that, in Kansas City with the President. And yet, Dr. Spriggs, 
in your testimony you mention ``thanks to the downpayment on 
the problem that President has proposed, drastic changes are 
not necessary given the size of the problem.'' Now, I listened 
to the State of the Union, and I agreed until we began to 
listen to expert testimonies. And I'm not--it's unfair of me to 
ask you to comment on witnesses that we've heard. I know that 
Mr. Doggett, with the last panel mentioned it. In fact, Ms. 
Kijakazi also cited specifically Henry Aaron, who when I saw 
him on the witness list thought I was going to get an 
autograph. I thought it was the baseball player when, in fact, 
the economist from Brookings, but here's what Dr. Aaron told us 
just last week: ``The President's plan actually advances''--
that is, moves forward--``Social Security's day of reckoning.'' 
In other words, instead of 2013, we're moving the time line 
ahead, instead of back in that the President wants to eliminate 
the earnings limit, which I think there's a lot of support for 
here, but second, raising benefits for elderly women. And in 
the expert opinion of Dr. Aaron, it actually makes Social 
Security's immediate problem worse rather than better.
    Yesterday, on the Senate side, and again, talking about 
being here early, getting here early to Washington and getting 
to watch C-SPAN yesterday, the GAO Comptroller General, Mr. 
Walker, testified that the President's proposal would actually 
require our children to pay higher income taxes.
    I do think we have a lot of common ground about what we 
don't want to see. We don't want to see higher payroll taxes, 
as Mr. Beach has said. We don't want to cut benefits and 
probably don't want to tap into the general revenue funds or 
the income taxes.
    One of the things you suggest is increasing the cap on FICA 
taxable income to historical levels. Let me just ask you this, 
because this was something that came out at the national town 
meeting that I participated in: The unique feature of the 
Social Security system is that it is not a welfare system. The 
President himself talked about the fact that, if Michael 
Jordan, using as an example before Mr. Jordan retired form NBA, 
that he is entitled to take out of the system at least partly 
what he has paid into it, because this is not a social system.
    Does the National Urban League continue to ascribe to that 
fundamental principle of the Social Security system, that it 
should not be a type--and I don't know how else to say it--but 
a type of welfare system?
    Mr. Spriggs. I don't think the redistributive nature or the 
fact that low-income workers benefit more than high-income 
workers is really a welfare aspect. I think that that is the 
insurance aspect. As such, having paid an insurance premium, 
then everyone should be able to collect on that insurance.
    Part of that insurance program includes an annuity. When we 
stopped collecting taxes on the full 90 percent of wage income, 
that meant there are now some workers who previously would have 
been paying more taxes into the system, so we are going to have 
a cohort, who are going to get the maximum benefit, even though 
they would not have paid the same amount of taxes that would 
have been historically the case that other workers paid.
    So, in suggesting that we restore the cap to its historical 
level, it is just saying, for that cohort, let's have you 
contribute to get the maximum benefit what we have asked 
workers in the past to pay, in terms of how we looked at our 
income distribution.
    The fact that our economy is doing well, and many of you in 
the room take credit for that all the time, means that you have 
generated more people who are in that higher income. But the 
nominal income cutoff level no longer captures 90 percent of 
wage income. So, they ought to actually be saying thank you to 
you for giving them that higher income. Now you are just asking 
them, in fairness, let's restore the balance that we had 
before.
    Chairman Shaw. The time of the gentleman has expired. Mr. 
Matsui.
    Mr. Matsui. Thank you, Mr. Chairman.
    I don't want an answer from you, Mr. de Posada, but I just 
want to point out, I have just observed something here. In your 
testimony--and you can get back to me in writing, or maybe the 
Committee in writing--you speak about an individual working 
full time from Galveston, Texas, making $20,000 a year will 
collect, if my calculations are right--and I did it two or 
three times--retirement benefits of $32,880 a year, about 150 
percent of one's income. I find that to be incredible; it's 
unbelievable. But I will take your word for it.
    But what I would like you to do, will you back up this 
statement with an actual--obviously, the Retirement Fund cannot 
give an individual's name, but I would like to know where this 
data came from. If you could send it to my office, or perhaps 
the Committee, Majority and Minority, if they want it--I don't 
know if they want it.
    Then, also, I might just point out that there is a GAO 
study coming out on Galveston that, at least preliminarily, has 
indicated some skepticism about the benefit level. But, I, 
again, won't get into that, because I don't want to debate 
Galveston. That will be at another time.
    But I would like the information to back this paragraph up.
    [The following was subsequently received:]
    [GRAPHIC] [TIFF OMITTED] T7557.003
    
      

                                


Prepared Testimony of Mr. K. D. Kebodeaux, Chairman of the Board, First 
Financial Capital Corporation, Senate Banking, Housing and Urban 
Affairs Committee, Subcommittee on Securities, Oversight Hearing on 
Social Security Investments in the Securities Markets, April 30, 1997

The Alternative Plan for Galveston County, Texas

             PART I--POLITICAL PROCESS FOR ADOPTION OF PLAN

    The Commissioners Court of Galveston County is an elected 
body of the county consisting of a County Judge and four 
Commissioners.
    The Commissioners Court contracted with First Financial 
Capital of Houston to present an alternate proposal to the 
county, should the employees elect to change from the United 
States Government program to a full private plan.
    Public hearings were held with employees to compare the 
alternate plan with the existing Social Security program, both 
plans were presented in detail by the private company (First 
Financial) and representatives from Social Security.
    The employees voted 77% in favor of the private plans--
Commission Court then authorized First Financial private 
company to proceed to implement the program and for the county 
to finalize the withdrawal from Social Security.

       PART II--PLAN DESIGN--FIRST FINANCIAL CAPITAL CORPORATION

    First Financial Capital Corporation was commissioned to 
replace an existing plan sponsored by the Federal Government. 
We were to offer the same type of benefit using the same 
contributions but with better results.
    The Alternate Plan consists of Disability, Survivorship and 
Retirement Benefits. The plan is based on contributions made by 
the participating employee and the employer (County of 
Galveston).
    The employee's contribution to the plan is 6.13% of 
eligible gross annual compensation. The employer (County) will 
contribute 7.785% of compensation.

                      ELIGIBIILITY FOR ENROLLMENT

    An employee is eligible for enrollment in TheAltemate Plan 
when the employee is actively at work, and scheduled to work 20 
or more hours per week on a permanent basis (unless otherwise 
noted for individual benefits).

                           PLAN CONTRIBUTIONS

A--Disability and Survivorship Benefits

    The Plan's disability and survivorship benefits are provided to the 
eligible employee at no cost to the employee. The premium cost of this 
coverage will be paid by the employer.
    Disability and Life Insurance coverage for the eligible employee 
will begin on the first day the employee is actively at work. 
Accumulations of the retirement benefits under THE ALTERNATE PLAN BEGIN 
with the first deposit to the Deferred Compensation Plan Account.

B--Deferred Compensation Retirement Benefits

    The Plan's retirement benefit is funded through tax-deferred 
contributions made by the employee and the employer. The required 
employee's contribution is 6.13% of eligible gross annual compensation 
which is deposited into the employee's Retirement Annuity Account. The 
employer also contributes an amount to the Retirement Annuity Account. 
The amount of the employer's contribution will be 7.785%, less the cost 
of the employee's Life and Disability Insurance premiums. 
(Approximately 3% to the retirement plan from the employer)

                                BENEFITS

A--Survivorship Benefits

    The Group Term Life and Accidental Death and Dismemberment Policy 
provides benefits under the following programs:
    Schedule of Life Insurance and Members regularly scheduled to work 
40 hours each week:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
 Under Age 70.............................  300% of employee's ANNUAL
                                             EARNINGS with a minimum
                                             benefit of $50,000 and a
                                             maximum benefit of
                                             $150,000.
Age 70-74.................................  200% of employee's ANNUAL
                                             EARNINGS with a minimum
                                             benefit of $33,330* and a
                                             maximum benefit of
                                             $100,000.
Age 75 or older...........................  130% of employee's ANNUAL
                                             EARNINGS with a minimum
                                             benefit of $21,665* and a
                                             maximum benefit of $65,000.
------------------------------------------------------------------------


    * If a FULL-TIME MEMBER who has 10 years service prior to attaining 
age 70, the LIEFE INSURANCE will be a minimum of $50,000. If a FULL-
TIME MEMBER who attains 10 years of service after age 70, the LIFE 
INSURANCE will have no further reduction.
    Schedule of LIFE INSURANCE for MEMBERS regularly scheduled to work 
20 but less than 40 hours each week:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Under Age 70..............................  150% of employee's ANNUAL
                                             EARNINGS with a minimum
                                             benefit of $25,000 and a
                                             maximum benefit of $75,000.
Age 70-74.................................  100% of employee's ANNUAL
                                             EARNINGS with a minimum
                                             benefit of $16,665 and a
                                             maximum benefit of $50,000.
Age 75 or older...........................  65% of employee's ANNUAL
                                             EARNINGS with a minimum
                                             benefit of $10,832and a
                                             maximum benefit of $65,000.
------------------------------------------------------------------------


B--DISABILITY (Monthly Income Benefit)

    After a 180-Day elimination period, the totally disabled insured 
will receive 60% of base pay up to a maximum benefit of $5,000 per 
month. There is a minimum benefit payable of $100 per month.

C--Schedule of RETIRED LIFE RESERVE, (RLR) BENEFITS for full-time 
members with eight years of service to employer:

    Post Retirement Death Benefit for Active, Full-time Employees (2080 
hours per year), who have accrued a minimum of eight years of service 
to the employer.
    The Plan provides a Paid-up Death Benefit to employees who retire 
after reaching the earlier of:
     Rule of 75 where Age plus Years of Credited Service total 
75;
     Age 60 with eight Years of Credited Service; or
     Accumulate at least 30 Years of Credited Service.

                                 BENEFIT
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Age 55 and Younger....................................           $25,000
Age 56................................................           $27,500
Age 57................................................           $30,000
Age 58................................................           $32,500
Age 59................................................           $35,000
Age 60................................................           $37,500
Age 61................................................           $40,000
Age 62................................................           $42,500
Age 63................................................           $45,000
Age 64................................................           $47,500
Age 65 or Older.......................................           $50,000
------------------------------------------------------------------------

D--RETIREMENT INCOME BENEFITS

    Employees retiring at normal, late or early retirement will receive 
their retirement income from their Deferred Compensation Plan Account. 
All contributions, plus interest earned, will accumulate to provide 
this retirement benefit.

                     Retirement Benefit--25 years old, working 40 years, retiring at age 65
----------------------------------------------------------------------------------------------------------------
 
----------------------------------------------------------------------------------------------------------------
Average Annual Income.......................................      $20,000      $30,000      $40,000      $50,000
Accumulated value at Retirement.............................     $383,032     $573,782     $765,042     $956,303
Lifetime Monthly Benefit at Retirement......................      $ 2,740      $ 4,106      $ 5,474      $ 6,843
----------------------------------------------------------------------------------------------------------------


    *Above assumed interest rate of 6.50% (no Equity Investment)
    (Note: Social Security maximum is $1,280 per month)
    The employee who is retiring from service or terminating employment 
may choose from several payment options available. These include, but 
are not limited to, monthly distributions of lifetime payout. The 
departing employee should consult with the Plan Administrator prior to 
electing any distribution option.

                          PART III CONCLUSION

    Social Security consists of Retirement, Disability, and 
Death (Survivors) benefits. The Alternate Plan also offers the 
same benefits but is superior in each category.

                       Comparison--Maximum Benefit
------------------------------------------------------------------------
                                 Social Security       Alternate Plan
------------------------------------------------------------------------
Death.......................  $253.00 Lump Sum....  $50,000 Minimum
                                                    $150,000 Maximum
                                                    $75,000 Average
Disability..................  $1,240 Per Month (If  $2,749 Average
                               Qualified).
Retirement..................  $1,280 (1996)         $4,790 Average
                               Subject to Cost of
                               Living Adjustment.
                              * Additional
                               Benefits May Be
                               Alternate Program.
                              Paid to Spouse &      Vested Each
                               Children (If          Employee's Spouse &
                               Qualified).           Children
------------------------------------------------------------------------

      

                                


    Mr. Matsui. Let me just make one observation. The President 
has put out his plan, and it has been subject to a wide range 
of criticism--double accounting, $5.1 trillion is going into 
it, the whole issue of investments. So far, what we have had, 
Mr. Beach--and I want to ask you this--is that we have had 
comments about individual investments will be great for America 
or great for the individual, but then we don't have a plan.
    Here's what my problem is, and, you know, I want to solve 
this; I think we all want to solve this. I like your good-faith 
offer. But you don't want to make any change in the disability 
survivors' benefits. You are just talking about the retirement 
portion of this.
    Now if you take 2 percent or 4 percent, whatever it may be, 
you have a huge transition cost. Mr. Aaron says that transition 
cost is anywhere from $3 to $8 trillion. Mr. Rubin says now it 
is $8.5 trillion. So that has to be paid somehow, if you want 
to maintain current benefits. And nobody wants to cut current 
benefits. Somebody has got to address that issue. The President 
has addressed that issue, because he doesn't reduce benefits.
    Second, you have got to deal with this: You take 2 or 4 or 
3 percent off of the level of benefits. At the end with the 
private pension part of the program, are you going to have that 
converted into an annuity? If it is in the form of an annuity, 
how do you guarantee the CPI index. Hispanics, demographically, 
live longer in retirement than any other group, including the 
white community. That means, if somebody lives 20 years in the 
Hispanic community, they don't get the inflationary increase, 
although rents go up; cost of living goes up; everything goes 
up. So they end up losing, if they live 20 years, maybe a 
significant sum.
    I need to know how these thing are dealt with, if you want 
to support individual accounts. And maybe you can just briefly 
answer, because I want to ask a couple of other questions.
    Mr. Beach. Surely.
    Mr. Matsui. Maybe you can address this. What is your entire 
plan? Do you set up an annuity? How much does that cost? Mr. 
Aaron says that costs 20 percent of the total cost of the 
package. Then, obviously, I think it was Ms. Kijakazi who 
indicated that Mr. Aaron also talked about 20 percent being the 
cost of maintenance of one of these accounts. So you are 
talking about losing perhaps 40 percent off the top before a 
person even can annuitize his retirement benefits. These 
questions have to be answered. We just can't be throwing around 
numbers, talking about how lovely it is to give individuals 
chances.
    Mr. Beach. You are absolutely right. There are far too many 
questions there, Mr. Congressman, for me to answer in just a 
few minutes, but let me point to a couple of things.
    First of all, besides making certain that the income and 
retirement in the future--say 2030--is the same as is now 
promised and better, there should be more income, we need to 
also make certain that the reforms also create wealth in low- 
and moderate-income households, so that we can begin to have 
intergenerational wealth transfers in places like the Crenshaw 
district of Los Angeles. Now those are important objectives. 
How do we get there?
    We published a paper on July 1 of last year, which I would 
direct your attention to, and I'll make sure your staff gets a 
copy of it, in which we have a 5-percent proposal. Now we don't 
have a plan. There is no Heritage plan yet, but we put a 
scenario out for that.
    I think that is a very interesting plan, and transition 
costs are addressed. Administrative costs, transition to an 
annuity, are addressed in another paper which we published in 
August, and we have some dispute with Mr. Aaron, but there are 
some costs there. Whatever the costs are, it looks like it 
works on paper out through 2075.
    Mr. Matsui. Well, obviously, you haven't gotten it costed-
out, though. I mean, this is my problem.
    Mr. Beach. Social Security has costed some of these plans 
out. As you know, there is----
    Mr. Matsui. What is your plan, the 5 percent----
    Mr. Beach. Well, we don't have one that we have submitted 
to Social Security, but soon. But they have two plans which 
they have costed out, and it looks like there is a certain 
transition cost. But, remember, the current system has a 
transition cost, too, and it could be $4 trillion. So is it the 
current system's plan or some other--whatever that number is.
    Mr. Matsui. If I can just suggest this: Maybe what you 
should do is incorporate your 5 percent, whatever it is, and 
come up with a plan and let us cost it out for you.
    Mr. Beach. Let me send you the July 1 paper.
    Mr. Matsui. That is the only way we are going to get a 
comparison, and that is the only way you are going to be fair 
to everybody. It is unfair to the President to have his plan 
attacked and then talk anecdotally about what a wonderful 
idea----
    Mr. Beach. Not anecdotally at all, Mr. Congressman. I have 
a paper on July 1 that I am going to send you, your staff.
    [The following was subsequently received:]

Heritage Foundation Backgrounder No. 1199, July 1, 1998

A NEW FRAMEWORK FOR CUTTING TAXES: REFORMING THE TAX CODE AND IMPROVING 
SOCIAL SECURITY \1\

    Congress appears headed toward a tax bill containing less 
than $100 billion in tax cuts over five years. The passage by 
the House in early June of a budget resolution that would 
return $101 billion in tax revenue to Americans, which followed 
the Senate's vote to return only $30 billion, sets the stage 
for one of the most disappointing tax ``cut'' bills in recent 
history.
---------------------------------------------------------------------------
    \1\ The principal authors of the text and policy are William W. 
Beach, Stuart M. Butler, Gareth G. Davis, Robert Rector, D. Mark 
Wilson, and John S. Barry (consultant). The Heritage analysts 
responsible for each major section of this paper are identified in 
footnotes appended to each of these sections. Other Heritage analysts 
who contributed to the text and policy recommendations are Angela 
Antonelli, Rea Hederman, and Daniel J. Mitchell. Statistical analysis 
supporting this study was provided by the staff of the Center for Data 
Analysis of The Heritage Foundation: William W. Beach, Ralph A. Rector, 
D. Mark Wilson, Gareth G. Davis, Rea Hederman, and Phillipe Lacoude.
---------------------------------------------------------------------------
    This is discouraging because rarely has there been a better 
opportunity, or clearer need, to return tax revenues to 
America's families. Consider:
     Tax revenues are far above the projections made in 
last year's budget. The Congressional Budget Office (CBO) 
estimates that the government will take in $340 billion more 
revenue between fiscal year 1999 and fiscal year 2003 than it 
forecast as recently as January 1997.\2\
---------------------------------------------------------------------------
    \2\ Congressional Budget Office, The Economic and Budget Outlook: 
Fiscal Years 1998-2007 (Washington, D.C.: Congressional Budget Office, 
1997), Table 2-3; Congressional Budget Office, The Economic and Budget 
Outlook: Fiscal Years 1999-2008 (Washington, D.C.: Congressional Budget 
Office, 1998), Table 3.1; letter to the Honorable John R. Kasich from 
June E. O'Neill, Director, Congressional Budget Office, May 6, 1998 
(available on the CBO Web page at http://swww.cbo.gov/
showdoc.cfm?index=470).
---------------------------------------------------------------------------
     Federal revenues are expected to consume nearly 21 
percent of economic output in 1998, a peacetime record.\3\
---------------------------------------------------------------------------
    \3\ According to the Congressional Budget Office, the tax burden 
was higher in 1944 (21.3 percent) and 1945 (20.8 percent), when the 
United States was locked in a two-front global war.
---------------------------------------------------------------------------
     Since Bill Clinton became President in 1993, the 
tax burden as a proportion of output has risen by nearly two 
percentage points, equivalent to $157 billion in extra taxes 
this year. Just reducing taxes to their level at the time 
President Clinton took office would mean the average family of 
four would receive more than $1,930 in annual tax relief this 
year.\4\
---------------------------------------------------------------------------
    \4\ For the 1993 ratio of federal revenue to nominal gross domestic 
product, see Economic Report of the President, 1998 (Washington, D.C.: 
U.S. Government Printing Office, 1998), Tables B1 and B78. For the 
current ratio, see Office of Management and Budget, ``FY 1999 Mid-
Session Review,'' 1998, Tables 1 and 2.
---------------------------------------------------------------------------
     The House-passed tax cut resolution of $101 
billion over five years pales in comparison to a tax cut of 
$1.3 trillion--in terms of today's dollars and gross domestic 
product (GDP)--proposed by House Democrats in 1981 as an 
alternative to the Reagan tax cut.
    Placed against this context of a rapidly growing federal 
government that is absorbing hundreds of billions in extra 
projected taxes, the tax relief proposed even in the current 
House resolution is puny. It would cut total taxes over five 
years by just 1 percent, meaning that taxes as a proportion of 
economic output would fall by just 0.3 percent from their near 
record level. Only one-fourth of the Treasury's unexpected 
windfall tax revenue (or only one-third of the projected 
surplus) will be returned to taxpayers. And although the House 
and Senate do plan to take serious action to end the marriage 
penalty, the level of tax relief they propose will do little or 
nothing to end pernicious death taxes, cut the tax penalties on 
savers and investors, ease the burden on families with 
children, and begin a serious reform of Social Security.
    Candidates for office in November who are committed to 
reducing today's record tax burden and achieving real reform of 
the tax system should be planning now for a package of tax 
changes that would attain a level and scope of tax relief that 
this Congress appears unwilling to propose and the Clinton 
Administration unwilling to accept. It may be possible to enact 
some of the necessary measures this year within the framework 
of the very modest relief that seems likely to be signed into 
law. Even more important, it is vital for tax reformers to 
begin now to make the case for tax reductions and reforms that 
can be enacted next year.
    Serious tax reduction must achieve two objectives:
    First, it must be on a scale that gives truth to the 
President's hollow declaration in his 1996 State of the Union 
Address that ``the era of big government is over'' (just 
returning the tax burden to its 1993 proportion of national 
output would mean a $930 billion tax cut over five years).\5\
---------------------------------------------------------------------------
    \5\ See OMB, ``FY 1999 Mid-Session Review,'' Tables 1 and 2.
---------------------------------------------------------------------------
    Second, it should be designed not to placate particular 
constituencies, but to end damaging deficiencies in the code 
that hurt economic growth and to pave the way for fundamental 
reform of the tax code and Social Security.
    Analysts at the Heritage Foundation have crafted just such 
a tax cut plan that would deliver tax relief to America's 
families at the same time it promotes job creation and economic 
growth. The Heritage plan would:
    1. Create worker-owned retirement accounts funded by five 
percentage points of the current payroll tax. Providing Private 
Savings Accounts would substantially increase the ability of 
families to save for a better retirement and create wealth that 
could be passed on to their children.
    The five-year diversion of payroll taxes equals $867 
billion.
    2. Repeal the marriage penalty. Repealing the marriage 
penalty would assist those families that pay additional taxes 
because of the way their income is split between the primary 
and secondary earner.
    The five-year tax savings equals $101 billion.
    3. Cut the tax on long-term capital gains from 20 percent 
to 10 percent and repeal the complex ``holding'' rules enacted 
last year. Reducing the taxes levied on capital gains would 
produce an immediate increase in federal revenues and a solid, 
sustainable boost to the general economy. Lower capital gains 
taxes encourage large and small investors to move (or unlock) 
their funds from less productive to more productive companies.
    The five-year tax savings equals $6.5 billion with 
unlocking, and $66.6 billion without it.
    4. Expand ``back-ended'' education IRAs to cover all levels 
of education, including K-12, and all education savings plans, 
including those offered by states and private institutions of 
higher education. This proposal would help the families of 
approximately 19 million school-age and/or college-bound 
children.
    The five-year tax savings equals $1.4 billion.
    5. Modify Section 125. Allow workers in ``cafeteria'' 
benefit plans or flexible spending accounts to roll over their 
own contributions, up to $500, from one year to the next 
instead of forfeiting unused funds under the current ``use-it-
or-lose-it'' system. This would encourage more prudent use of 
medical care, as workers would not have to worry about losing 
money at the end of the year. Even workers not currently 
enrolled in cafeteria plans would benefit from lower overall 
costs to the entire health care system.
    The five-year tax savings equals $2.1 billion.
    6. Repeal the death tax. Taxing the transfer of assets from 
one generation to the next hurts small businesses, farmers, the 
self-employed, and others. Federal death taxes are probably the 
most expensive taxes to pay and to collect. It is estimated 
that the $20 billion in death taxes collected last year 
actually cost taxpayers $26 billion.
    The five-year tax savings equals $132.3 billion.
    7. Provide greater tax relief for families with children 
below the age of five. Current tax law provides cumbersome, 
complex, and largely ineffective tax relief to families that 
need day care for their pre-school children. The Dependent Care 
Tax Credit should be replaced with a tax credit of $500 per 
child under the age of five. An estimated 10.7 million children 
could have been claimed under this credit in 1997.
    The five-year tax savings equals $11.1 billion.
    TOTAL SAVINGS FROM THE TAX PORTION OF THE HERITAGE PLAN = 
$314.48 billion over five years. Even after this tax cut (which 
excludes Social Security reform), the federal budget not only 
remains in balance, but runs a surplus of $30.4 billion over 
five years.
    Full implementation of the Heritage tax plan would produce 
the following economic benefits:
     The total indebtedness of the government would 
decline. The ``present value'' of government obligations is 
projected to decline by over $15.5 trillion between 1999 and 
2075 under the Heritage plan.\6\ The long-term unfunded Social 
Security liability is reduced by approximately $21 billion. 
Changes in the major components of on-budget spending and 
revenues account for the remaining decline in government 
indebtedness.
---------------------------------------------------------------------------
    \6\ ``Present value'' is an accounting term that measures how much 
money would need to be invested today to finance future obligations.
---------------------------------------------------------------------------
     Personal savings would increase nearly $1 
trillion. Diverting five percentage points of the payroll tax 
to private investment accounts nearly doubles the personal 
savings rate between FY 1998 and the end of FY 2003 to 8.9 
percent. In fact, the total amount of personal savings rises by 
$1.1 trillion over this five-year period.
     There would be an average of 451,000 more jobs per 
year. Repealing the marriage penalty, federal death taxes, and 
the rollover prohibitions of cafeteria plans, as well as 
reducing the capital gains tax and creating education IRAs, 
reduces the taxes on labor income an average 5.8 percent per 
year from FY 1999 to FY 2003. Lowering the tax costs a worker 
faces leads some people to find employment and others to 
increase their hours. The WEFA model forecasts an increase of 
552,000 jobs in FY 2001.
     The cost of capital would fall by an average of 5 
percent per year. The Heritage tax plan encourages more 
investment in equipment and factories by reducing the taxes on 
capital. These lower capital costs stem from repealing the 
death taxes, which directly tax capital assets, and cutting the 
capital gains tax rate by 50 percent. The lower capital costs 
lead to a 24.1 percent increase in investment over five years, 
which contributes to an increase in worker productivity.
     The economic well-being of succeeding generations 
would grow dramatically. The Heritage tax plan focuses on 
building wealth in all households. Low- and moderate-income 
households benefit substantially from the hundreds of billions 
in new savings that Social Security privatization creates. Not 
only will these new savings provide for comfortable retirement 
in the future, but they also will be used as nest eggs for the 
children of current savers. For the first time, Social Security 
payroll taxes will provide the means for passing wealth to the 
next generation, who in turn will start their working lives 
with more money for education, health care, and housing than 
their parents had. Accompanying this significant public policy 
change with repeal of the federal death taxes assures that the 
new wealth of American families will be protected from the 
rapacious tax appetite of the federal government.

                       THE HERITAGE TAX CUT PLAN

    Congress can craft a tax cut plan that delivers significant 
tax relief to millions of Americans without undermining the 
integrity of each individual measure. To be sure, this is not 
the perfect tax cut plan; but given the range of tax proposals 
that may be possible in this Congress, if tax writers keep in 
mind a few simple principles, they can craft tax cuts that 
would benefit families and the U.S. economy:
     Taxpayers must see an immediate benefit from this 
year's budget agreement. The tax cuts should not be phased in 
over the next five years in order to reduce their ``cost'' to 
the Treasury. Taxpayers should not have to wait until after the 
turn of the century to see the benefits of this relief.
     The tax package must be a step toward good, long-
term tax policy. It should not make the current system more 
complex and thus undermine the future potential for tax reform. 
To the extent tax cuts can be implemented, lawmakers should 
insist that the changes lower marginal tax rates, reduce double 
taxation, and simplify the tax code.
     The tax cuts must be broad-based and benefit the 
greatest number of Americans possible. Lawmakers should avoid 
means-testing or other devices that exclude some families to 
the benefit of others. Moreover, they should not create special 
or targeted tax breaks that benefit a select group of 
individuals or industries at the expense of others.
     The tax cuts must promote good, long-term economic 
effects. Tax cuts for education, for example, should promote 
long-term savings rather than subsidize college fees or 
encourage more family debt. Subsidizing college fees and debt 
will boost higher education costs; long-term savings will 
control higher education costs.
    Features of the plan include the following:
    1. Empowering Families to Save: Create Private Savings 
Accounts.\7\
---------------------------------------------------------------------------
    \7\ Heritage analysts responsible for this section are Gareth G. 
Davis, Stuart M. Butler, and Daniel J. Mitchell.
---------------------------------------------------------------------------
    The Social Security system faces two severe crises. First, 
it faces a funding crisis: The system simply cannot pay 
promised benefits to future retirees without major changes in 
the program. Beginning in 2032, if Congress and the 
Administration do not make changes, it will not be possible to 
pay full benefits.
    In addition, the system will be burdened with the huge 
costs of the aging baby boomers. If we consider the workers and 
retirees currently in the Social Security system, the ``present 
value'' of the unfunded liability, measured by the amount (in 
today's dollars) of extra money beyond payroll taxes that would 
be needed today to pay benefits, would be as much as $9 
trillion to $12 trillion.\8\ That liability does not appear on 
the government's books--it is not figured into the official 
national debt--but, like the national debt, it is money that 
future taxpayers will have to pay.
---------------------------------------------------------------------------
    \8\ Martin Feldstein, ``The Missing Piece in Policy Analysis: 
Social Security Reform,'' American Economic Review, Vol. 86, No. 2 (May 
1996).
---------------------------------------------------------------------------
    Second, Social Security is a terrible way for most 
Americans to save for their retirement. Although the system 
currently provides reasonably good benefits for the disabled 
and the dependents of deceased workers, most workers face their 
own Social Security crisis because the program typically is a 
very poor way to save for retirement. Indeed, the retirement 
income generated from Social Security contributions generally 
is far below the amount these same contributions would generate 
in the safest private investments or even in U.S. Treasury 
bills.
    For example, Social Security's inflation-adjusted rate of 
return is only 1.2 percent for a typical average household of 
two 30-year-old earners with children, in which each parent 
makes just under $26,000.\9\ Such couples will pay a total of 
about $320,000 in Social Security taxes over their lifetime 
(including employer payments) and can expect to receive 
benefits of about $450,000 (in 1997 dollars, before applicable 
taxes, after retiring at age 67, the retirement age when they 
are eligible for full Social Security Old-Age benefits).
---------------------------------------------------------------------------
    \9\ William W. Beach and Gareth G. Davis, ``Social Security's Rate 
of Return,'' Heritage Foundation Center for Data Analysis Report No. 
CDA98-01, January 15, 1998.
---------------------------------------------------------------------------
    Had this average household placed that same amount of 
lifetime employee and employer tax contributions into 
conservative tax-deferred IRA-type investments--such as a 
mutual fund composed of 50 percent U.S. government Treasury 
bills and 50 percent equities--they could expect a real rate of 
return of over 5 percent per year prior to the payment of taxes 
after retirement. In this latter case, the total amount of 
income accumulated by retirement would equal approximately 
$975,000 (in 1997 dollars, before applicable taxes).
    Social Security needs to be reformed to deal with these 
twin crises. The reform should do two things: help secure the 
ability of the system to deliver on its promises to 
beneficiaries, and enable today's workers to look forward to 
more income in retirement.
    The Heritage Proposal. The Heritage tax plan would achieve 
both of these goals by allowing--not requiring--workers to 
place a portion of their payroll taxes now devoted to 
retirement income (but not disability or other insurance 
elements) into a private savings account instead.
    Workers who exercised this choice would exchange income 
from their Private Savings Accounts for the Social Security 
retirement benefits associated with the portion of their taxes 
they placed in a private account. They would, however, receive 
the Social Security benefits financed by the rest of their 
payroll taxes.\10\ The insurance elements of Social Security, 
such as disability and benefits for the dependents of workers 
who die before retirement, would not be affected, and all 
Americans, whether or not they opened a private savings account 
with a portion of their payroll taxes, would be entitled to a 
minimum benefit from traditional Social Security.
---------------------------------------------------------------------------
    \10\ See Appendix A, Social Security section for details on the 
benefit reductions and Private Savings Accounts.
---------------------------------------------------------------------------
    Specifically, every worker would be permitted to divert 
five percentage points of his or her Social Security payroll 
tax into a private retirement savings account that met certain 
federal requirements. General federal revenues would be used to 
make up the resultant shortfall in trust fund receipts. The 
reduction in Social Security benefits would be based on the 
number of years during which the individual elected to place a 
part of his or her payroll tax in a private account.
    While this proposal involves a significant ``cost'' to the 
Treasury from the perspective of the annual unified budget 
accounts, it leads to a reduction in the long-term unfunded 
liability of the Social Security trust fund. Taken together, 
the total liabilities of the federal government that will have 
to be paid by future taxpayers (specifically, the national debt 
plus the unfunded liabilities of Social Security) would be 
sharply cut.
    Meanwhile, workers could look forward to a higher income 
during retirement, thanks to the better returns likely to flow 
from private accounts.\11\
---------------------------------------------------------------------------
    \11\ See Beach and Davis, ``Social Security's Rate of Return,'' 
Table 1. ``Present value'' is an accounting term that measures how much 
money would need to be invested today to finance future obligations.
---------------------------------------------------------------------------
    2. Eliminating the Second Earner Bias: Repeal the Marriage 
Penalty.\12\
---------------------------------------------------------------------------
    \12\ Heritage analysts responsible for this section include William 
W. Beach and Rea Hederman.
---------------------------------------------------------------------------
    In the government's attempt to tax equal-earning couples at 
the same rate, to incorporate progressive marginal rates, and 
to enforce marriage neutrality, the federal tax system 
unintentionally penalizes millions of American families. As the 
Congressional Budget Office has stated, ``The incompatibility 
of those three goals...results in continuing tension within the 
tax code.'' \13\
---------------------------------------------------------------------------
    \13\ Congressional Budget Office, For Better or For Worse: Marriage 
and the Federal Income Tax (Washington, D.C.: U.S. Government Printing 
Office, June 1997), p. XII.
---------------------------------------------------------------------------
    This tension in the tax code harms the pocketbooks of 
Americans and the institution of marriage, and has significant 
implications for the economic and cultural health of our 
nation. Throughout the tax code, joint filers are repeatedly 
disadvantaged: Married couples are forced to pay more than they 
would pay on aggregate as single filers, benefits are 
consistently lower for married couples in comparison to single 
individuals, and secondary earners receive lower levels of 
Social Security benefits than they would have realized had they 
remained single.
    The marriage penalty is arguably the most significant of 
the secondary earner biases. In short, ``the basic source of 
the marriage tax is the fact that key elements of the tax law 
depend on an individual's family situation, including the rate 
schedule, the standard deduction, and the earned income tax 
credit. Hence, the act of getting married per se affects 
individuals' tax liabilities, even if their work and saving 
decisions stay the same.'' \14\
---------------------------------------------------------------------------
    \14\ Daniel R. Feenberg and Harvey S. Rosen, ``Recent Developments 
in the Marriage Tax,'' National Tax Journal, Vol. 47, No. 1 (March 
1995), p. 2.
---------------------------------------------------------------------------
    In most cases, federal income tax laws require that married 
couples file joint tax returns based on the combined income of 
husband and wife. When a husband and wife both work, the 
secondary earner (that person with the lower income) in effect 
is taxed at the top rate of the primary earner, taxed at the 
margin. As a consequence, a married couple may pay more taxes 
than they would if each spouse were taxed as a single.
    Unfortunately for the American taxpayer, the federal 
government has grown dependent on the marriage penalty. The 
millions of dollars in excess revenues that the government 
reaps at the expense of married couples has led many to argue 
preposterously that any significant change in the tax system is 
impossible because of the potential cost. These revenues do not 
belong in Washington in the first place, and they must be 
returned to the taxpayer.
    According to the Congressional Budget Office, an estimated 
42 percent of married couples incurred marriage penalties in 
1996; ``more than 21 million married couples paid an average of 
nearly $1400 in additional taxes in 1996 because they must file 
jointly.'' \15\ Most severely affected by these marriage 
penalties were couples with a more equal division of income 
between husband and wife and those who receive Earned Income 
Tax Credit (EITC) benefits. Essentially, Americans with the 
lowest incomes and those families dependent upon two wage 
earners are the biggest casualties of our current tax policy.
---------------------------------------------------------------------------
    \15\ CBO, For Better or For Worse, p. 1.
---------------------------------------------------------------------------
    Consider what happens to two $30,000 wage earners who 
decide to wed. As a single individual, a $30,000 wage earner 
would pay $3,457.50. The principle of marriage neutrality means 
that when a $30,000 wage earner marries another $30,000 wage 
earner, the new tax liability should be $6,915. Under joint 
filing, however, this married couple, who now earn a combined 
total of $60,000, are now taxed $7,795 per year; there is, in 
other words, an $880 penalty for marriage.
    According to the ideal of marriage neutrality, tax burdens 
should not be altered when two people decide to marry. However, 
the goal of progressive taxation is violated under such 
circumstances. Progressivity states that a person (or, under 
today's joint filing, a combination thereof) who has twice the 
income of another pays more than twice the taxes. The tax 
system has sided with the ideal of progressive taxation and 
punished hard-working Americans.
    The second earner bias, and the marriage penalty 
specifically, can have significantly negative economic 
implications for the country as a whole. Not only do these 
faults of the tax system stand as an obstacle to marriage, but 
they can discourage husbands or wives from entering the work 
force. ``By adding together husband and wife under the rate 
schedule, tax laws both encourage families to identify a 
primary and secondary worker, and then place an extra burden on 
the secondary worker because her wages come on top of the 
primary earner's. The secondary earner is on the margin.'' \16\
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    \16\ Edward J. McCaffery, Taxing Women (Chicago and London: 
University of Chicago Press, 1997), p. 15.
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    As the family realizes lower income levels, the nation 
realizes lower economic output. From a strictly economic 
standpoint, for potential workers to avoid the labor force as a 
result of peculiarities within the tax code is a clear sign of 
failure to maximize eligible resources. As a result, the nation 
as a whole fails to reach its potential, demonstrated by 
decreased earnings, output, and international competitiveness.
    The Heritage Proposal. Families with married parents should 
not be penalized by federal tax policy. The Heritage proposal 
permits married taxpayers to choose the tax filing status that 
gives them the lowest tax on the income they earn individually.
    This option is available widely in the states: 10 states 
allow married couples to file separately when paying state 
income tax; an additional 21 states have rate schedules that 
reduce or eliminate the marriage penalty.\17\
---------------------------------------------------------------------------
    \17\ Ibid., p. 62.
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    In nearly half of all married households, such taxpayers 
will find that filing as single taxpayers will result in lower 
taxes. Common income (such as interest on a savings account or 
dividends) would be apportioned between the two taxpayers 
according to the percentage of total income that each earned 
from their jobs.
    The standard deduction or the itemized deductions would be 
treated in a similar fashion. These married taxpayers would 
recombine their income when determining whether or not they are 
eligible for tax credits.
    3. Unlocking Economic Growth: Cut the Capital Gains 
Tax.\18\
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    \18\ Heritage analyst William W. Beach contributed this section.
---------------------------------------------------------------------------
    One of the most important things Congress can do this year 
to spur job and economic growth is to reduce capital gains 
taxes. Lower capital gains taxes stimulate economic growth by 
reducing the cost of capital: Taxes make up one part of the 
cost of capital, and lowering capital taxes reduces the 
``price'' of capital to all kinds of borrowers.
    When borrowing costs fall, entrepreneurs create more new 
businesses, managers of existing businesses expand their 
factories and buy new machines, and families buy new cars and 
homes. All of this expansion in economic activity means more 
jobs and higher worker productivity. Productivity gains that 
stem from workers using new and improved machines help to 
increase average wages, thus returning income benefits even to 
households that may never have capital gains income.
    Some Members of Congress still believe that lower taxes on 
capital gains benefit only rich taxpayers. The data, however, 
tell a different story. As Table 2 illustrates, nearly 88 
percent of all current taxpayers with capital gains 
declarations on their tax returns have incomes from other 
sources (such as wages, salaries, self-employment, and 
pensions) under $100,000; and 55 percent of all capital gains 
dollars are found in households with incomes below $100,000.
    In other words, those taxpayers who would benefit from a 50 
percent cut in the capital gains tax rates are likely to be in 
the middle class.
    Just as lawmakers should shun the ``tax cuts for the rich'' 
argument, they should reject the counsel of those tax 
economists who suggest that lowering the effective tax rate on 
capital will not result in a significant change in capital 
gains declarations. History suggests otherwise.
    Experience with changes in capital gains tax rates over the 
past 25 years indicates strongly that rate decreases (or 
exclusions) produce more declarations of capital gains, and 
thus more capital gains taxes. Owners of appreciated assets who 
face high tax rates generally hold on to their assets in 
anticipation of lower future rates. When rates come down, the 
amount of capital gains taxes goes up. In fact, it appears that 
last year's reduction in the capital gains tax rate has 
produced a huge windfall of federal tax revenue.
    Economists estimate that trillions of dollars in unrealized 
capital gains (perhaps as much as $7.5 trillion) exist in the 
portfolios of American taxpayers.\19\ Some economists have 
estimated that significant capital gains rate changes could 
produce substantial economic benefits and create revenue 
windfalls for federal and state governments.
---------------------------------------------------------------------------
    \19\ See, for example, Jude Wanniski's March 15, 1995, testimony 
before the Senate Finance Committee as cited in Stephen Moore and John 
Silvia, ``The ABCs of the Capital Gains Tax,'' Cato Institute Policy 
Analysis No. 242, October 4, 1995.
---------------------------------------------------------------------------
    In a 1994 article for the American Economic Review, Leonard 
Burman and William Randolph, two leading tax economists on the 
staff of the Congressional Budget Office, estimated the 
response of taxpayers to rate reductions as being on the order 
of 1 to 6 in the short term. This means that for every 1 
percent drop in the rate (or the equivalent in exclusions), 
capital gains realizations would rise by 6 percent.\20\
---------------------------------------------------------------------------
    \20\ Leonard E. Burman and William C. Randolph, ``Measuring 
Permanent Responses to Capital-Gains Tax Changes in Panel Data,'' 
American Economic Review, Vol. 84, No. 4 (September 1994), p. 803.
---------------------------------------------------------------------------
    A 50 percent reduction in the capital gains tax rate, 
therefore, has the potential of raising declarations by 300 
percent. It is from this increase in declarations that the 
federal government receives capital gains revenues above what 
it would have received without the 50 percent tax cut.
    The Heritage proposal. Congress should cut the tax rates on 
long-term capital gains from 20 percent to 10 percent, and from 
10 percent to 5 percent for lower income tax margins, and 
repeal the complex ``holding'' rules enacted last year.
    Congress reduced the top capital gains tax rate from 28 
percent to 20 percent in the Taxpayer's Relief Act of 1997, 
which resulted in significant increases in federal revenues as 
investors sold appreciated assets that the higher tax rate had 
``locked up.'' However, at the same time that Congress boosted 
tax collections and lowered the cost of capital by cutting the 
top capital gains tax rate, it also passed accounting and tax 
rules that increased taxpayers costs of complying with capital 
gain tax law.
    The new ``holding period'' rules are so complex that even 
the IRS had great difficulty determining how to design the tax 
form (Schedule D) that taxpayers use when declaring their 
capital gains; not until late February of 1998 did the IRS 
issue this important schedule for the 1997 tax year.
    By cutting the tax rate by 50 percent, Congress will add 
new revenues as more taxpayers ``unlock'' more of their 
appreciated assets. And by repealing the complex holding period 
rules, Congress will reduce the cost taxpayers currently face 
when complying with tax law. Both reforms lead to a fairer, 
simpler, and flatter tax code.
    4. Providing Health Choices for Americans: Allow Workers to 
Roll Over Flexible Spending Accounts.\21\
---------------------------------------------------------------------------
    \21\ Heritage analysts responsible for this section include William 
W. Beach and Gareth G. Davis.
---------------------------------------------------------------------------
    Members of Congress have the opportunity to put Americans 
more in charge of their own health care decisions and to make 
health insurance and medical services more accessible, more 
accountable, and more affordable for working families. That 
opportunity lies in making a slight revision in Section 125 of 
the Internal Revenue Code, which governs flexible spending 
accounts (FSAs) and ``cafeteria'' plans.
    These tax-free accounts allow workers to save for 
unexpected costs of medical services or benefits not covered by 
their employer-provided health insurance packages. Today, both 
employers and employees can contribute to FSAs, and the money 
in these accounts can be used to pay for out-of-pocket medical 
expenses or for the co-payments and deductibles of their 
employer-provided packages.
    Under the ``use-it-or-lose-it rule,'' however, employees 
who do not use all of the pre-tax money they set aside each 
year for medical needs must lose any excess money in the 
accounts at the end of that year. From the standpoint of cost 
control, this policy is counterproductive since it creates an 
incentive for working families to expend all the funds in their 
FSAs, even if the medical services they purchase are only 
marginally desirable or beneficial, rather than lose the money 
entirely.
    The Heritage Proposal. Congress could easily correct this 
flaw by modifying Section 125 to allow workers to roll over up 
to $500 of unused FSA funds, year after year, tax-free. The 
immediate results of such a change would be an increase in the 
direct purchasing of medical services from doctors and other 
providers, a change in the dynamics of the current insurance 
market, and an increase in personal savings for future health 
care spending or retirement.\22\
---------------------------------------------------------------------------
    \22\ Robert E. Moffit and William W. Beach, ``Rollover Flexible 
Spending Accounts: More Health Choices for Americans,'' Heritage 
Foundation Backgrounder No. 1159, February 24, 1998.
---------------------------------------------------------------------------
    As more funds are saved through such rollover FSAs or 
cafeteria plans and are available for retirees' health care 
coverage, the future demands on Medicare would decline. The 
change in revenue to the federal Treasury in the meantime, 
based on Heritage Foundation calculations, would amount only to 
an average revenue decrease of $482 million per year, or $2.1 
billion over five years.
    Revising Section 125 of the Internal Revenue Code would 
result in immediate benefits for a significant portion of the 
American work force. According to the Bureau of Labor 
Statistics, as of 1994, 21.7 million private-sector employees 
chose to take advantage of employee-provided FSAs--14.8 million 
employed in medium to large establishments and 6.9 million in 
small establishments. In addition, 50 percent of state and 
local government employees had FSAs.\23\
---------------------------------------------------------------------------
    \23\ ``Talking Points on Section 125,'' Employers Council for 
Flexible Compensation, Washington, D.C., 1997.
---------------------------------------------------------------------------
    Today, FSAs and cafeteria plans are gaining popularity in 
the marketplace. They have been proven to meet the needs of a 
diversified pool of workers. If FSA funds can be rolled over 
tax-free, they will become a great boon, stimulating employee 
savings and enhancing employee security.
    5. Helping Families Afford a Total Quality Education: 
Expand Education Savings Accounts.\24\
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    \24\ John Barry, a consultant, contributed this section.
---------------------------------------------------------------------------
    Last year, as part of the Taxpayer's Relief Act of 1997, 
Congress and the President established education IRAs as a new 
way for American families to save for their children's college 
education. As a result of the new law, families with an annual 
income of less than $110,000 are able to set aside up to $500 
in after-tax earnings each year for future college expenses. 
This money can then be withdrawn to pay for qualified higher 
education expenses without any further taxes being paid.
    With the exception of the income cap on eligible families, 
education IRAs are sound tax policy (the accounts eliminate the 
double taxation on savings) and sound education policy (they 
also encourage savings for college rather than debt).
    The rising cost of higher education is one of the major 
concerns facing American families today. Over the past 18 
years, the cost of a college education has increased some 221 
percent, while the general rate of inflation and the average 
household income have increased only about 80 percent.
    Furthermore, the cost of college is uncertain, making it 
difficult for families to anticipate just how much they must 
put aside or how much debt they or their children will have to 
incur to pay for a college education. Both the uncertainty and 
the generally high cost of a college education should be 
matters of concern to Congress and the President.
    The Heritage Proposal. Congress should expand the scope of 
education savings accounts to cover not only higher education 
expenses, but also primary and secondary education costs.
    Senator Paul Coverdell (R-GA), Senator Robert Torricelli 
(D-NJ), and House Speaker Newt Gingrich (R-GA) proposed such a 
sensible approach earlier in the 105th Congress. The measure 
(H.R. 2646), as passed by both the House of Representatives and 
the Senate, would expand education IRAs to cover primary and 
secondary education expenses and would increase the annual 
contribution limit to $2,000 per student.
    Ideally, both the annual contribution limit and income cap 
should be eliminated. In the end, all families should have the 
ability to save all that is necessary to secure a quality 
education for their children from kindergarten through graduate 
school.
    Moreover, the coverage of tax-free education savings should 
be expanded to include new and innovative education investment 
plans. Numerous states and several private interests, for 
example, have established prepaid tuition plans. These programs 
allow families to lock in future college tuition at or below 
today's tuition rates.
    Such prepaid tuition plans are attractive to families 
because they guarantee a predetermined amount of future 
education. Thus, prepaid tuition plans not only help families 
save for college, but also eliminate the uncertainty of ever-
increasing college tuition costs. All of these plans, both 
public and private, as well as other innovative education 
investment options, deserve the full support of Congress and 
the President.
    6. Helping Family Businesses and Farms: Repeal the Death 
Tax.\25\
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    \25\ William W. Beach is responsible for this section.
---------------------------------------------------------------------------
    Death taxes place burdens on those groups in society that 
current tax policy intends most to help: minority and female 
business people; farmers; the self-employed; and (indirectly 
but no less significantly) blue-collar workers, especially 
those just starting their working careers.
    The estate tax hurts small businesses. Investing in a 
business is one of the many forms of saving--for some families, 
the only form. For most small firms, every available dollar 
goes into the family business--the dry cleaning business, the 
restaurant, the trucking company--because the business creates 
an asset for the children and income for the owners. Women re-
entering the work force after raising children often find self-
employment the only employment open to them. Minorities also 
rely heavily on self-employment.
    All of the financial security provided by these businesses 
is put at risk if the owner dies with a taxable estate. In an 
important 1995 study of how minority businesses perceive the 
estate tax,\26\ Joseph Astrachan and Craig Aronoff found that:
---------------------------------------------------------------------------
    \26\ Joseph H. Astrachan and Craig E. Aronoff, ``A Report on the 
Impact of the Federal Estate Tax: A Study of Two Industry Groups,'' 
Family Enterprise Center of the Coles School of Business, Kennesaw 
State College, July 24, 1995.
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     Some 90 percent of the surveyed minority 
businesses knew that they might be subject to the federal 
estate tax;
     About 67 percent of these businesses had taken 
steps (including gifts of stock, ownership restructuring, life 
insurance purchases, and buy/sell agreements) to shelter their 
assets from taxation;
     Over 50 percent of these same businesses indicated 
that they would not have taken these steps had there been no 
estate tax; and
     Some 58 percent of all businesses in the survey 
anticipated failure or great difficulty surviving after 
determining their estate taxes.
    Death taxes are, in a real sense, more ``affordable'' as 
income rises. In other words, what appears to be a progressive 
tax contains a regressive dimension.
    Students of the estate tax are continually struck by the 
frequency with which taxpayers are insufficiently prepared to 
pay the tax, and nearly as frequently by the correspondence 
between those unprepared and those who have not had the benefit 
of high-priced legal and accounting advice. Indeed, legal 
avoidance of high death-tax liabilities is closely related to 
the fees taxpayers can pay throughout their lives for expensive 
tax-planning advice. Taxpayers who cannot pay these tax-
planning fees end up paying high estate taxes.
    Not only do death taxes reduce potential employment and 
undermine the promise that hard, honest work will be rewarded, 
but they also reward consumption and undermine saving. What can 
be said generally about income taxes can be emphatically 
affirmed about death taxes: Accumulation of even modest wealth 
will lead to heavy taxes, while consumption of income results 
in relatively light taxation.
    In other words, it makes tax-planning sense to buy 
vacations in Aspen or a painting by Rubens rather than invest 
in new productive equipment and new factories.
    Federal death taxes are probably the most expensive taxes 
to pay and to collect. Death taxes raise just a bit more than 1 
percent of total federal revenues, but they are amazingly 
expensive for the taxpayer and the tax collector.
    Christopher Erblich places total compliance costs 
(including economic disincentives) at 65 cents for every dollar 
collected. Other studies that subtract disincentives and 
examine only direct outlays by taxpayers to comply with estate 
tax law put compliance costs at about 31 cents.\27\ This 
additional cost of compliance means that the $20 billion 
collected in federal death taxes last year actually cost 
taxpayers $26 billion.
---------------------------------------------------------------------------
    \27\ For a review of this literature, see Richard F. Fullenbaum and 
Mariana A. McNeill, ``The Effects of the Federal Estate and Gift Tax on 
the Aggregate Economy,'' Research Institute for Small and Emerging 
Business Working Paper Series 98-01, 1998, p. A-2.
---------------------------------------------------------------------------
    The Heritage Proposal. Congress should repeal the death 
tax. The economic effects of the disincentive to savings and 
investment are quite striking, especially in light of the 
relatively small amounts of federal revenue raised by federal 
death taxes.
    An analysis by The Heritage Foundation, using the WEFA 
Group's U.S. Macroeconomic Model, found that repealing the 
estate tax would have a large and beneficial effect on the 
economy.\28\ Specifically, the Heritage analysis found that if 
the tax were repealed this year, over the next nine years:
---------------------------------------------------------------------------
    \28\ See William W. Beach, ``The Case for Repealing the Estate 
Tax,'' Heritage Foundation Backgrounder No. 1091, August 21, 1996.
---------------------------------------------------------------------------
     The nation's economy would average as much as $11 
billion per year in extra output;
     An average of 145,000 additional new jobs could be 
created;
     Personal income could rise by an average of $8 
billion per year above current projections; and
     The deficit actually would decline, since revenues 
generated by extra growth would more than compensate for the 
meager revenues currently raised by the inefficient estate tax.
    Richard Fullenbaum and Mariana McNeill recently confirmed 
these results in an important study for the Research Institute 
for Small and Emerging Business.\29\ In a simulation of estate 
tax repeal using the WEFA U.S. Macroeconomic Model, they found 
that private investment would rise by an average of $11 billion 
over the seven years following repeal. Consumption expenditures 
would rise by an average of $17 billion (after inflation), and 
an average of 153,000 new jobs would be created in this more 
buoyant economy.\30\
---------------------------------------------------------------------------
    \29\ See Fullenbaum and McNeill, ``The Effects of the Federal 
Estate and Gift Tax on the Aggregate Economy,'' esp. pp. 11-15.
    \30\ Ibid., p. 15.
---------------------------------------------------------------------------
    7. Helping Families Care for Their Children: Create a 
Parental Care Preschooler Tax Credit.\31\
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    \31\ The Heritage analyst responsible for this section is Robert 
Rector.
---------------------------------------------------------------------------
    During the baby-boom era, when most of today's parents were 
born, the federal government had a deliberately low-tax policy 
which was friendly to families and children. But that family-
friendly policy has long since disappeared.
    In 1950, the typical family of four paid about 5 percent of 
its income in taxes to the federal government. Today, that same 
family would pay roughly 23 percent of its income in direct 
federal taxes. Adding state, local, and indirect taxes raises 
the tax bite typically to about 37 percent. This means that in 
the average two-earner married-couple family, the mother works 
not to raise her family's standard of living, but primarily to 
pay for the enormous tax increases imposed by decades of 
government spending.
    Studies show that many parents would prefer to work less 
and spend more time with their children. But with today's 
record peacetime levels of taxation, many mothers feel 
compelled to enter the work force.
    Working mothers with young children, particularly preschool 
children, commonly pay for some child-care services. Combined 
with the impact of the marriage penalty, this means that a 
mother can work full-time and yet add only a few dollars to the 
family's net monthly income. If, on the other hand, the mother 
stays at home to care for her children, leaving the husband as 
the only earner, the family does not receive the dependent care 
tax relief available to mothers who work outside the home.
    President Clinton proposes to ``solve'' this problem with 
new subsidies for day care. The Clinton proposal targets over 
$20 billion of the projected budget surplus on one kind of 
service: the care of children outside of the family environment 
and away from parents. In addition to providing tax relief to 
middle-class parents who use day care, Clinton is proposing 
billions in new government day-care spending through such 
programs as the Child Care and Child Development Block Grant 
and Head Start. Two-thirds of the funds under the Clinton plan 
is allocated to new government spending, not tax reduction.
    Thus under Clinton's plan, middle-class parents who hire 
others to care for their children will receive some help for 
their day-care costs, but parents who make a great financial 
sacrifice so that one parent can remain at home to care for 
their young children will receive neither assistance nor tax 
relief. Indeed, families who care for their own children will 
be taxed to pay for day care used by typically more affluent 
families.
    To deal with the burden of excessive taxes on families with 
children, Congress should provide tax relief to parents, not 
new spending directed to day-care centers. In providing that 
tax relief, Congress should allow parents to decide how best to 
care for their children; it should aim to expand rather than 
narrow their options.
    Furthermore, Congress should treat all working families 
with preschool children equally. Under no circumstances should 
it discriminate against families who make a financial sacrifice 
so that one parent can remain at home (either full-time or 
part-time). Nor should paid professional day care be favored 
over the unpaid care given by the children's grandparents.
    Congress took a small step last year toward rolling back 
the punitive taxation of families with children by enacting a 
tax credit for children under the age of 18. The credit will be 
worth $400 per child in 1998 and $500 in each subsequent year. 
Congress should build on this foundation by providing 
additional badly needed tax relief to working families with 
preschool children.
    The Heritage Proposal. Current law provides a cumbersome 
and complex system of tax relief for second-earner mothers 
working outside the home who use child care services. Under the 
Heritage proposal, this Dependent Care Tax Credit would be 
replaced with a new $500 tax credit per preschool child. This 
would be in addition to the credit enacted last year, and the 
credit would not be refundable.
    In other words, the total credit available would be limited 
to the amount that otherwise would be paid by the family in 
income tax--it could not be claimed against Social Security 
payroll taxes and would be calculated after the Earned Income 
Tax Credit had been computed.

     HOW THE HERITAGE PLAN WOULD BENEFIT JOBS AND THE ECONOMY \32\

    The Heritage Foundation tax cut plan promotes job creation 
and economic growth while delivering substantial tax relief to 
American families over the next five years. The plan also 
promotes significant increases in private savings devoted to 
retirement.
---------------------------------------------------------------------------
    \32\ Heritage analysts responsible for this section are D. Mark 
Wilson and William W. Beach.
---------------------------------------------------------------------------
     Over 70 percent of the $1,104.6 billion in total 
tax cuts goes to help families save for a better retirement.
     Another 18 percent would be used to reduce the 
high taxes imposed on families who try to pass down their 
life's work to their children and to reduce the tax penalties 
on savings and investment.
     The remaining 10.4 percent would flow to American 
families to eliminate the marriage penalty and promote savings 
for their children's education, the out-of-pocket medical 
expenses that are not covered by insurance, and the additional 
child credit.
    Heritage Foundation economists analyzed the tax cut plan's 
impact on jobs and economic growth using the January 1998 U.S. 
Macroeconomic Model of the WEFA Group. WEFA economists 
reconstructed their January model for The Heritage Foundation 
to embody CBO economic and budgetary assumptions published by 
the CBO in January of this year.\33\ Thus, it is fair to say 
that simulations of policy changes using this specifically 
adapted model produce dynamic results based on CBO assumptions.
---------------------------------------------------------------------------
    \33\ See Congressional Budget Office, The Economic and Budget 
Outlook: Fiscal Years 1998-2008. See also the Appendix A for a 
description of The Heritage Foundation's use of the WEFA Model and 
various steps incorporated to simulate the budget resolution. It should 
be noted that the methodologies, assumptions, conclusions, and opinions 
herein are entirely those of Heritage Foundation economists and have 
not been endorsed by, and do not necessarily reflect the views of, the 
owners of the WEFA U.S. Macroeconomic model.
---------------------------------------------------------------------------
    Next, the elements of the Heritage tax plan were entered 
into the model to simulate the plan's dynamic economic impacts. 
See Appendix A for a description of how elements of the 
Heritage tax plan were incorporated into this adapted version 
of the WEFA U.S. Macroeconomic Model.
    The Heritage analysis using the WEFA model indicates that a 
balanced package of tax cuts to help families and encourage 
investment will result in a stronger, more vigorous general 
economy over the five-year period between FY 1999 and FY 2003 
(see Appendix B). This analysis suggests that the Heritage tax 
cut plan would:
     Increase real GDP. The Heritage tax plan increases 
the real gross domestic product by $50.2 billion in FY 2003. 
Despite this increase in economic growth, inflation, as 
measured by the Consumer Price Index, remains a low 2.7 
percent. The model also indicates that the increases in output 
are due in part to real growth in productivity. The rate of 
growth in productivity increases 0.3 percentage points in FY 
1999 and 0.1 percentage points in FY 2001, which is a 
significant expansion for an economy currently operating at 
near-capacity levels.
     Increase average household income over $2,280. The 
Heritage tax plan produces $248.7 billion in additional, 
inflation-adjusted disposable income for households in FY 
2003--equal to $2,288 in higher income for the average American 
household. Almost 92 percent of this increase flows directly 
into Private Savings Accounts.
     Increase household savings and investment. 
Personal saving increases by $229.2 billion and inflation-
adjusted investment rises by $18.1 billion in FY 2003. This 
private-sector saving and investment will improve the 
productive capacity of the U.S. economy and the standard of 
living for future generations.
     Spur job creation. Repealing the marriage penalty 
and death taxes and reducing the capital gains tax rewards work 
and promotes economic growth. The Heritage tax plan produces an 
average of 451,000 more jobs per year over the five-year 
period. In fact, in FY 2001, the simulation shows that the 
private sector produces 552,000 more jobs. The average 
unemployment rate is lower under the Heritage plan than in the 
baseline economy.
     Produce economic ``feedback.'' Using mostly 
``static'' estimates that take only limited account of the tax 
cut's influence on the economy's performance, the Heritage tax 
plan would reduce revenues to the federal Treasury by $313.6 
billion over five years (excluding Social Security reform). The 
more ``dynamic'' analysis using the WEFA model, however, 
suggests that because the tax cut plan promotes stronger 
economic growth, the expanding tax base feeds new tax revenues 
back into the federal Treasury. These new tax revenues replace 
or ``feed back'' 23.3 percent of the expected revenues lost to 
the Treasury under a static analysis.
    In other words, when the tax cut plan's effect on economic 
performance is accounted for, the actual ``cost'' of the plan 
to the Treasury is only 76.7 percent of the purely static 
reduction in tax revenues over five years. This revenue 
feedback, when combined with the tax plan's impact on federal 
spending and the effect of slightly lower Old-Age and Survivors 
Disability Insurance (OASDI) benefit payments, increases the 
overall feedback effect on the federal deficit to 38.3 percent 
over five years.

                               CONCLUSION

    This Congress, like the one elected in 1994, is pledged to 
reduce taxes and spending. And President Clinton, according to 
his own pledge, is committed to ending the era of big 
government. But while Congress has enacted tax relief and ended 
programs, government continues to grow.
    More specifically, major spending control exists only on 
paper--with the hard decisions on how to meet the targets put 
off until future years--and the tax cuts enacted since the 
beginning of 1995 have placed only a mild restraint on the 
growth of taxes. This year, the federal government will take in 
an estimated $1.7 trillion, equivalent to roughly $17,000 in 
taxes for the average family. Americans are now paying a higher 
proportion of their national income than at any time since the 
last years of World War II. Moreover, Americans are now paying 
far more in taxes than Congress intended, with the 
Congressional Budget Office forecasting hundreds of billions of 
dollars in unanticipated taxes flowing to Washington over the 
next five years.
    If taxpayers discover they have paid too much in tax when 
they file their tax returns on April 15, they know they are 
entitled to a refund. Congress should be honoring that normal 
principle of taxation and returning extra taxes to the 
taxpayers. But a majority of Members of Congress evidently are 
unwilling to do that, as is the Clinton Administration. Nor is 
Congress willing this year to take the serious steps needed to 
reform the tax system and Social Security that can be achieved 
with today's strong economy and surging tax revenues.
    But even if perceived political constraints prevent 
Congress this year from significantly reforming and reducing 
the share of family budgets that go to the federal government, 
now is the time to construct a framework for serious action. 
This framework should be discussed with the American people 
this November and in Congress next year.
    Analysts at The Heritage Foundation have developed such a 
framework. It would sharply reduce income taxes, earmarking 
over two-thirds of the projected surplus to income tax relief--
doing so in ways that would encourage saving and end today's 
bias against marriage and child-rearing. And it would take a 
large step toward reforming Social Security by giving workers 
the right to devote part of their payroll taxes to a private 
savings account--doing so in a way that would significantly cut 
the total liabilities of the federal government.

The principal authors of this study are William W. Beach, 
Director of the Center for Data Analysis; Stuart M. Butler, 
Vice President for Domestic and Economic Policy Studies; Gareth 
G. Davis, Research Assistant in the Center for Data Analysis; 
Robert Rector, Senior Policy Analyst for Welfare and Family 
Issues; D. Mark Wilson, Labor Economist in the Center for Data 
Analysis; and John S. Barry, consultant to The Heritage 
Foundation.
    Other Heritage analysts who contributed to the text and 
policy recommendations are: Angela Antonelli, Director of the 
Thomas A. Roe Institute for Economic Policy Studies; Rea 
Hederman, Research Analyst in the Center for Data Analysis; and 
Daniel J. Mitchell, McKenna Senior Fellow in Economics.
    Statistical Analysis supporting this study was provided by 
the staff of the Center for Data Analysis: William W. Beach; 
Ralph A. Rector, Project Manager; Gareth Davis; Rea Hederman; 
Phillipe Lacoude, intern; and D. Mark Wilson.
      

                                


APPENDIX A: METHODOLOGY \34\

    Heritage economists follow a two-step procedure in 
analyzing the revenue and economic effects of proposed policy 
changes.
---------------------------------------------------------------------------
    \34\ Inquiries concerning matters covered in this section should be 
addressed to Ralph A. Rector, Project Manager for the Center for Data 
Analysis.
---------------------------------------------------------------------------
    First, estimates are prepared of revenue changes that stem 
from changes in the taxpaying population eligible for the tax 
change, from the base of taxable income absent any change in 
the economy, and from the tax rates. These estimates frequently 
are called ``static'' estimates, largely because they are 
unaffected by changes in the behavior of taxpayers that stem 
from tax policy reforms.
    Second, these static revenue changes and other important 
modifications of tax law are introduced into the WEFA U.S. 
Macroeconomic Model. The WEFA model has been designed in part 
to estimate how the general economy is reshaped by policy 
reforms. The results of simulations performed in the WEFA model 
produce the ``dynamic responses'' to policy changes.
    The following sections describe how Heritage economists 
prepared the static estimates described in the paper and how 
these results and other assumptions were introduced into the 
WEFA model.

                    THE REVENUE AND OUTLAY BASELINE

    Heritage analysts revised the five-year revenue and 
expenditure forecasts of the Congressional Budget Office that 
were issued on March 3, 1998. These revisions first accounted 
for additional FY 1998 and FY 1999 revenues announced by the 
CBO in a May 5, 1998, letter to John Kasich (R-OH), chairman of 
the House Budget Committee.
    Second, Heritage extended the CBO's forecast of higher 
revenues for FY 1998 and FY 1999 to fiscal years 2000 through 
2003. Minor changes were made in the CBO expenditure forecasts 
to reflect smaller outlays due, among other things, to slower 
than expected inflation. The year-over-year change rates in the 
Heritage revenue forecasts follow forecasted growth rates in 
WEFA's income tax base.
    It is worth noting that these adjustments resulted in a 
five-year cumulative surplus that is $70 billion above the 
CBO's cumulative surplus and $152 billion below the amount 
forecasted by the Office of Management and Budget in its FY 
1999 Mid-Session Review.

                         TAX POLICY ASSUMPTIONS

Social Security

    Heritage analysts used the Center for Data Analysis Social 
Security Revenue and Expenditure Model to estimate the net 
effect on the federal government's liabilities of a 5.0 
percentage point carve-out of Old-Age and Survivors Insurance 
taxes that is coupled with a proportional reduction in future 
benefit payments.\35\
---------------------------------------------------------------------------
    \35\ For a description of the model, see Center for Data Analysis 
Social Security Revenue and Expenditure Model working paper, available 
upon request.
---------------------------------------------------------------------------
    Under the Heritage proposal, workers between 20 and 61 
years of age can choose to divert 5.0 percentage points of 
their payroll taxes into a Private Savings Account. For each 
year they divert their taxes, participants lose 2.44 percent 
(or \1/41\) of Old-Age and Survivors Insurance benefits that 
are payable after they reach age 62. Entitlement to pre-
retirement Survivors Insurance, Disability Insurance, and any 
benefits payable to children of deceased workers are not 
affected by participation.
    This policy change was introduced into the WEFA U.S. 
Macroeconomic Model by reducing the OASDI payroll tax rate by 
5.0 percentage points and constraining the model to devote the 
resulting increase in disposable personal income to savings. 
OASDI transfer payments were also reduced by a small amount to 
reflect the decline in OASDI benefit payments for workers with 
Private Savings Accounts. Finally, tax revenues on a Unified 
Budget basis were increased by $14.6 billion for FY 1999 to FY 
2003 to reflect the distribution of the FY 1998 surplus.
    The net effect of this proposal on the present value of 
federal liabilities is estimated using the baseline contained 
in the Congressional Budget Office's May 1998 Long-Term 
Budgetary Pressures and Policy Options. Heritage analysts used 
the elasticities contained in Section II G to adjust the 
intermediate projections of the 1998 Report of the Trustees of 
the Federal Old-Age and Survivors and Disability Insurance 
Trust Funds so that they conformed with the economic 
assumptions contained in the CBO's baseline.
    The CBO projection assumes a long-term growth in total 
factor productivity consistent with that actually experienced 
during the post-war period. This was interpreted to imply a 
rate of real wage growth consistent with the historical wage 
growth experienced over this period, and the Trustees' 
projected long-term annual growth rate of real wages was 
adjusted from 0.9 percent to 1.4 percent. Analysts also altered 
the Trustees' inflation and GDP assumptions to match those 
projected by the CBO. However, Heritage analysts adopted the 
Trustees' population forecasts.
    The CBO's projection of implied interest rates on the 
national debt shows a slow increase for the next 20 years 
followed by a rapid increase over the following 30 years, with 
rates over 9 percent by the year 2050. Sustained interest rates 
at this level have a profound effect on the overall level of 
debt. For example, holding the CBO's interest rates and debt 
growth rates constant past 2050 results in estimated payments 
on the national debt that exceed the entire GDP in 2075. The 
imbalance between interest payments and the economy as a whole 
is caused, in part, by applying a long-term trend even when 
debt reaches very high levels. A simple but accurate way to 
address this problem is to use a logistic differential equation 
in which interest rates asymptotically approach a limit value 
as the debt increases. Using this approach and an assumed 
maximum interest rate of 7 percent, Heritage analysts fitted a 
logistic curve based on a sensitivity analysis performed on the 
WEFA model. Both the CBO baseline forecast and the Heritage 
Foundation forecast were adjusted using this method of 
calculating interest payments.
    Heritage analysts projected the net present value effect on 
the future liabilities of the federal government from 
reductions in payroll tax receipts and Social Security 
benefits. A nominal discount rate of 5.3 percent was used to 
value these amounts. This discount rate is based on the Social 
Security Trustees' long-term real interest rate projection of 
2.8 percent. The Heritage nominal rate also reflects the CBO's 
projected long-term inflation rate of 2.5 percent. In line with 
the practice of the Social Security Administration's Office of 
the Chief Actuary, a participation rate of 100 percent in the 
private retirement account was assumed.\36\
---------------------------------------------------------------------------
    \36\ A preliminary analysis indicated that while lower rates of 
participation may have some effect on the magnitude of the net change 
in long-term federal liabilities, they do not appear to affect the 
direction of this change.

---------------------------------------------------------------------------
Marriage Penalty Provisions

    Heritage analysts used revenue estimates for marriage 
penalty repeal prepared by the staff of the Joint Committee on 
Taxation (JCT) for H.R. 2456 (105th Congress, 2nd Session).\37\ 
This legislation would permit a married taxpayer to choose the 
filing status (married or single) that produces the least 
amount of tax liability. The legislation also states rules for 
allocating joint income, deductions, and exemptions between 
married taxpayers. Heritage also used data relating to this 
form of marriage penalty repeal contained in the CBO's review 
of marriage penalties and bonuses, For Better or for Worse: 
Marriage and the Federal Income Tax. This report provides 
estimates of the level of marriage penalty and the amount of 
change in tax liabilities stemming from correcting the second-
earner bias in a manner similar to that described in H.R. 2456.
---------------------------------------------------------------------------
    \37\ This legislation was co-sponsored by Representatives David 
McIntosh (R-IN) and Gerald Weller (R-IL). For JCT's revenue estimates, 
see letter to the Honorable Jerry Weller from Lindy L. Paull, Chief of 
Staff, Joint Committee on Taxation. Contact the Center for Data 
Analysis for a copy of this letter.
---------------------------------------------------------------------------
    The purely static revenue loss estimated by the JCT staff 
was introduced into the WEFA U.S. Macroeconomic Model as a 
proportional change in average effective personal income tax 
rate.

Capital Gains Provisions

    The Heritage Foundation's estimate of the reduced capital 
gains tax revenues from individuals is based on data from the 
1993 IRS Statistics of Income and revenue forecasts from the 
Heritage Foundation Individual Income Tax Model. Heritage 
analysts selected only those tax returns that contained taxable 
capital gains in 1993, subtracted the amount of these gains 
from the taxpayer's adjusted gross income, and created a new 
income variable that summed all of the taxpayer's income except 
capital gains income. Forecasts of capital gains declarations 
under current law were made that assumed an annual growth in 
the base of 4 percent and a real tax rate elasticity of -0.43 
percent. These forecasted declarations and associated capital 
gains taxes were distributed across the new income variable.
    These baseline capital gains taxes were reduced by 50 
percent to reflect a drop in the long-term tax rate from 20 
percent to 10 percent. These reductions were designated the 
``purely static'' revenue losses under this provision. To 
calculate the changes in revenues under an assumption of 
``unlocking,'' Heritage economists assumed a transitory 
elasticity of -5.0 percent and -3.0 percent, respectively, for 
years one and two of the tax plan; a permanent elasticity of 
-1.8 percent was assumed for years after the second year. The 
application of these elasticities to the base of capital gains 
declarations significantly decreased the purely static revenue 
losses. The difference between these purely static revenue 
losses and the revenues stemming from ``unlocking' were 
introduced to the WEFA U.S. Macroeconomic Model as a 
proportional change in the average effective personal income 
tax rate.

Estate and Gift Tax Provisions

    Heritage Foundation estimates of the static revenue impact 
of the increase in the unified credit and the introduction of a 
family-owned business exclusion are based on data from the JCT 
summary of estate and gift taxes prepared for the House Ways 
and Means Committee hearing on January 28, 1998.\38\ Additional 
data were drawn from 1993 IRS Statistics of Income and revenue 
forecasts based on these and JCT data produced by the Heritage 
Foundation Estate and Gift Tax Model. Heritage forecasts of 
estate tax revenues for fiscal years 1999 to 2003 were 
distributed across adjusted gross income following the 
techniques described by Daniel Feenberg, Andrew Mitrusi, and 
James Poterba in ``Distributional Effects of Adopting a 
National Retail Sales Tax,'' Tax Policy and the Economy, 
Conference Report, National Bureau of Economic Research, 
September 1996, pp. 20-22. The purely static revenue loss was 
introduced into the WEFA U.S. Macroeconomic Model as a 
proportional change in average effective personal income tax 
rate.
---------------------------------------------------------------------------
    \38\ See Joint Committee on Taxation, ``JCT Description of Present 
Law and Background on Estate and Gift Taxes (JCX-2-98) for Ways and 
Means Committee Hearing Jan. 28, 1998,'' printed in Bureau of National 
Affairs, Daily Tax Report No. 18, 1998, pp. L-11 through L-22.

---------------------------------------------------------------------------
Educational IRA Provisions

    The Heritage Foundation's estimates of the static revenue 
impact of the educational IRA provisions in this plan are based 
directly on the amounts estimated by the JCT. The purely static 
revenue loss was introduced into the WEFA U.S. Macroeconomic 
Model as a proportional change in average effective personal 
income tax rate.

Section 125 Rollover Provisions

    For the data in Table 1, Heritage economists estimated 
annual revenue changes stemming from Section 125 reform by 
constructing a model based on publicly available data and 
technically derived tax rate and program participation 
assumptions. Heritage used data on worker participation in 
flexible saving account plans published by the Bureau of Labor 
Statistics. The Bureau's Earnings and Employment Reports for 
1993 and 1994 contain participation data for small, medium, and 
large private firms. These estimates were confirmed by survey 
data developed in 1997 by Hewitt Associates, a national 
benefits consulting company. Heritage calculated a weighted 
midpoint participation rate of 20 percent and applied this 
percentage against an estimate of total establishment payroll 
employment for 1998. This employment estimate total 
(123,859,000 establishment employees) was taken from a forecast 
produced by WEFA, Inc., and is available upon request from the 
Center for Data Analysis at The Heritage Foundation. The 
participation rate estimates from Hewitt Associates also are 
available upon request.
    The average annual amount of flexible saving account health 
care coverage purchased by participating workers ($744) comes 
from studies prepared by the General Accounting Office in 1988, 
1990, and 1992. Heritage analysts confirmed these estimates by 
comparing them with an estimate of average participation 
produced by Hewitt Associates for 1997. Heritage assumed that 
the rollover provision would lead participating workers to 
purchase an additional $89 in annual health care coverage and 
capped the maximum amount of the rollover at $500 per worker. 
Assuming this additional purchase raises the level of revenue 
decreases from the policy change. Average effective tax rates 
were derived from data contained in the IRS Public Use File for 
1994.
    Heritage's estimates for fiscal year 1998 were projected 
forward into fiscal years 1999 through 2003 by a formula that 
contains annual estimates of price changes and employment 
growth among participating employees. All values in Table 1 are 
expressed in nominal or current millions of dollars.
    The purely static revenue loss was introduced into the WEFA 
U.S. Macroeconomic Model as a proportional change in average 
effective personal income tax rate.

Under-Five Child Credit

    The Heritage Foundation's static revenue estimate of the 
new tax credit for children under five years of age was 
calculated from the 1997 March Current Population Survey and 
the 1994 IRS Public Use File. Taxpayers would be eligible to 
claim the credit if they had federal tax liability after 
deducting the 1997 Child Tax Credit and the Earned Income Tax 
Credit. The credit is $500 per child under the age of five for 
all taxpayers who qualify and is non-refundable. The projected 
number of children under the age of five was taken from the 
Bureau of the Census Middle Series Projections. The average 
value of the credit per child was assumed to increase in pace 
with inflation each year up to a maximum of $500. The total 
value of the credit is offset by the elimination of the 
Dependent Care Tax Credit.

                      MODEL SIMULATION ASSUMPTIONS

    The WEFA January 1998 CBO Baseline model was initially 
modified to reflect current law.\39\
---------------------------------------------------------------------------
    \39\ The January 1998 CBO Baseline model originally had the Social 
Security payroll tax increasing from 6.2 percent in 2005 to 6.48 
percent in 2008; the Medicare payroll tax increasing from 1.45 percent 
in 2003 to 1.63 percent in 2008; and the minimum wage increasing from 
$5.15 in 1999 to $6.15 in 2003. These policy assumptions were removed 
from the model, creating a corrected baseline forecast.

---------------------------------------------------------------------------
Social Security Reform

    Heritage economists decreased the Social Security payroll 
tax by 5.0 percentage points and constrained the WEFA model to 
devote this tax cut to private saving. The loss in payroll tax 
revenue was made up with increased government borrowing and a 
net increase in government debt. OASDI transfer payments were 
also reduced by a small amount to reflect the decline in OASDI 
benefit payments for workers with Private Savings Accounts. 
Finally, tax revenues on a Unified Budget basis were increased 
by $14.6 billion for FY 1999 to FY 2003 to reflect the 
distribution of the FY 1998 surplus.

Average Effective Tax Rate

    The WEFA model contains a variable that measures the total 
amount of all federal taxes on individual income as a 
percentage of nominal personal income. Heritage adjusted this 
average effective tax rate downward for each of the forecast 
years to reflect the purely static revenue decreases resulting 
from adoption of the Heritage tax plan.

Monetary Policy

    The model assumes that the Federal Reserve Board will react 
to these policy changes. This assumption was embodied in our 
simulation by including the stochastic equation for monetary 
reserves.

Labor Force Participation and Average Weekly Hours

    A small adjustment of 0.18 index points was made in the 
model's labor force participation rate to account for the 
dynamic effects of repealing the marriage penalty and the 
estate and gift tax, as well as reducing the capital gains tax. 
A small adjustment was also made in average weekly hours to 
account for the dynamic effects of repealing the marriage 
penalty. These adjustments in the labor force participation 
rate and average weekly hours are based on previous research by 
Heritage economists and the Congressional Budget Office study 
``Labor Supply and Taxes,'' January 1996.

Declarations of Capital Gains

    Heritage economists adjusted federal tax collections to 
reflect a higher level of capital gains declarations. The base 
was increased to reflect estimated elasticities associated with 
significant capital gains rate reductions.\40\
---------------------------------------------------------------------------
    \40\ See Burman and Randolph, ``Measuring Permanent Responses to 
Capital-Gains Tax Changes in Panel Data.''

---------------------------------------------------------------------------
Corporate AAA Bond Rates

    Heritage economists decreased the corporate AAA bond rate 
by 50 basis points to reflect the drop in taxes on capital 
stemming from capital gains and estate tax reform. This 
variable is a component in a large WEFA equation that 
calculates the cost of capital.

Business Sector Price Index

    Heritage economists decreased the business sector price 
index by an average of 0.25 points to reflect the lower 
compliance costs associated with the repeal of the estate tax. 
With repeal comes less reliance on accountants and lawyers to 
comply with estate and gift tax law. Experts on estate tax 
compliance have estimated that current compliance costs equal 
31 percent of total taxes collected.\41\ This variable is a 
component in a large WEFA equation that calculates the cost of 
capital.
---------------------------------------------------------------------------
    \41\ Fullenbaum and McNeill, ``The Effects of the Federal Estate 
and Gift Tax on the Aggregate Economy,'' p. A-2.
---------------------------------------------------------------------------
      

                                


                      Measuring the Heritage Plan

    Heritage economists employed the most current and extensive 
data available to estimate the effects of these policy changes. 
Analysts constructed each of the revenue estimates shown in 
Table 1 from data contained in the Bureau of the Census Current 
Population Survey for 1997 and the Internal Revenue Service 
(IRS) Public Use Files for 1993 and 1994.
    The annual Current Population Survey represents the largest 
regularly produced collection of demographic data available to 
the general policy community. The IRS Public Use File is the 
largest machine-readable sample of individual income tax 
returns available. Both databases contain tens of thousands of 
observations selected by the Census or the IRS using stratified 
random sampling techniques, and each database is the most 
accurate source available for variables used in this Heritage 
tax analysis.
    The dynamic analyses were conducted using the WEFA Group's 
Mark 11 economic model specially modified for The Heritage 
Foundation by the economists at WEFA to reflect the economic 
and budgetary assumptions of the Congressional Budget Office, 
announced by the CBO in January 1998.\1\
---------------------------------------------------------------------------
    \1\ The WEFA Group's Mark 11 U.S. Macroeconomic Model was developed 
in the late 1960s by Nobel Prize-winning economist Lawrence Klein and 
several of his colleagues at the University of Pennsylvania's Wharton 
School of Business. It is widely used by Fortune 500 companies and by 
prominent federal agencies and economic forecasting departments. It 
should be noted that nothing contained in this paper has been endorsed 
by WEFA, Inc.
---------------------------------------------------------------------------
    In scoring the Social Security reform proposal, Heritage 
analysts used the latest projections from the 1998 Report of 
the Trustees of the Federal Old-Age and Survivors and 
Disability Insurance Trust Funds. In all cases, the 
intermediate projections, which constitute the Trustees' ``best 
guess'' of future demographic and economic conditions, were 
used.
    Heritage economists also used special unpublished 
population projections in creating the 1998 Trustees' Report, 
which were made available by the Social Security 
Administration's Office of the Chief Actuary.
      

                                


  The Marriage Penalty: Struggling Middle-Income Couples Are Hit Hard.

    Take, for example, a family in which the husband, Paul, 
earns $60,000 annually. Paul's first $16,000 of income goes 
untaxed under the modern-style married tax rate schedule; 
earnings from $16,001-$42,350 are taxed at a 15 percent rate; 
and earnings from $42,351-$102,300 are taxed at a 28 percent 
rate.
    With two young children, Paul's wife Sara seriously 
considers joining the labor force. Unfortunately for Sara and 
her family, because of the secondary earner bias, her first 
dollar of income will be taxed immediately at a 28 percent 
rate. Even if Sara accepts a job that pays only $30,000--half 
of what her husband makes--she will end up paying $8,400 in 
taxes, just below her husband's burden of $11,290. With 
increased child care costs and work expenses, what appeared to 
have increased the family's income to $90,000 now looks like a 
wash.
    With reference to women in Sara's situation, the 
Congressional Budget Office has said, ``The higher initial tax 
rate she faces when married reduces the value of her work and 
thus may induce her to work fewer hours each week, fewer weeks 
each year, or even not to work at all.'' \1\ Inherently, Sara's 
decision to work less or avoid the workforce entirely affects 
both her family and the national economy.
---------------------------------------------------------------------------
    \1\ CBO, For Better or For Worse, p. 10.
---------------------------------------------------------------------------
    The CBO went on to say that ``generally higher tax rates 
for lower-earning spouses prompt them to work between 4 percent 
and 7 percent less than they would if they could file 
individually. Overall, requiring couples to file joint tax 
returns induces them to work less. As a result, their total 
earnings are between 0.7 percent and 1.2 percent less than they 
would otherwise be.'' \2\
---------------------------------------------------------------------------
    \2\ Ibid., p. 12.
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    Mr. Matsui. My time has run out. I thank you. My time has 
run out, but I want to thank all the witnesses for testifying 
today.
    Chairman Shaw. Mr. Levin.
    Mr. Levin. Let me ask a question that is directly relevant 
to the caption of the hearing, because we were going to focus 
on the impact on the minorities and low-income families, and 
those with disabilities. It's tempting to move beyond it, but 
before--and I will probably do the same, but let me just ask 
you, Mr. Beach: You were here for the GAO report, which comes 
to a different conclusion than you did earlier. I think that is 
safe to say. Do you accept the GAO analysis?
    Mr. Beach. I have not read it, Congressman. I was sitting 
in the back of the room in a covey of teenagers and was unable 
to hear the majority of what was said up here at the panel. 
Teenagers are noisy--well, they had a number of comments about 
the panel and the distinguished testimony. [Laughter.]
    So I have been privileged to advise GAO on some of their 
work, and they have come to the Foundation. We have worked with 
them on understanding data, what the longitudinal data does and 
what other kinds of data does to rates of return. I am looking 
forward to their statement, but I would be giving you a 
speculative response if I said I knew anything about it.
    Mr. Levin. Well, could you supply this Subcommittee your 
analysis?
    Mr. Beach. You bet. When it is done, we will be writing a 
memo and an analysis on it, because we have a very close 
interest in their work. I will be happy to supply each member 
with that analysis.
    [The following was subsequently received:]

Heritage Foundation Backgrounder No. 1238, December 3, 1998

THE COSTS OF MANAGING INDIVIDUAL SOCIAL SECURITY ACCOUNTS

David C. John and Gareth G. Davis \1\

    Administrative costs are an important part of the debate 
about the future of Social Security. Even though it is widely 
acknowledged that Americans could have a much more prosperous 
retirement if their Social Security taxes earned a better rate 
of return, some critics claim that the allegedly high 
administrative costs of individually owned and privately 
managed Social Security accounts would sharply reduce this 
gain. As this paper will show, such charges are not true.
---------------------------------------------------------------------------
    \1\ The authors extend a note of thanks to Mark Wilson, Labor 
Economist in The Center for Data Analysis, for his contributions to 
this paper.
---------------------------------------------------------------------------
    Creating and administering a retirement program does not 
require rocket science, and while the task may be difficult, it 
is not impossible. To keep administrative costs low, a simple 
retirement program could start with individually owned accounts 
with limited investment options. Existing private investment 
plans--ranging from stock index mutual funds to multi-employer 
defined contribution retirement plans--could be adapted to a 
system of individual Social Security accounts. In some cases, 
administrative fees could be as low as 0.20 percent of fund 
assets; in all cases, they would continue to decline over time. 
History shows that administrative costs are highest when a 
system is first implemented and start-up costs must be covered. 
As a system matures, costs decline sharply. For instance, 
administrative costs at the federal Thrift Savings Plan (TSP) 
declined 76 percent over the TSP's first ten years of 
operation.
    Administering a system of more than 140 million individual 
Social Security accounts involves little more than processing 
data. Similar financial data systems already exist. The 
nation's three largest privately owned credit bureaus, for 
instance, administer databases that average 190 million 
accounts, most of which are updated monthly. As computer 
technology increases, the difficulty of administering such 
immense databases will continue to diminish. Market competition 
keeps administrative costs low for the millions of Americans 
who currently own mutual funds and similar investments. There 
is every reason to believe that market competition would have 
the same effect on individual Social Security accounts.
    In the upcoming debate on Social Security, Congress and the 
President should work to structure a simple system of 
individually owned, privately managed Social Security accounts. 
They should look beyond the pension industry for examples of 
technology and management techniques that can be adapted to 
this task. And they should not assume that any aspect of 
creating or managing these accounts must necessarily be handled 
by a federal agency.

              INDIVIDUAL SOCIAL SECURITY ACCOUNTS: A MODEL

    A retirement program's costs are determined largely by its 
structure, and seemingly minor structural changes can affect 
administrative expenses significantly. A host of proposed 
programs that would establish individual Social Security 
accounts are likely to follow the pattern of development that 
401(k) plans took, beginning as simple programs and adding 
features over time.
    Although administering a retirement program may be complex, 
private businesses and the government have run such plans for 
decades. It is not necessary for Washington to invent either 
the technology or the investment options to give Americans an 
opportunity to save more money for retirement. Computers today 
are capable of tracking the investments of almost 190 million 
people. Risk-reducing investment programs, such as stock index 
mutual funds, that could be used to increase the retirement 
benefits available under Social Security also exist.
    Of course, every retirement program, whether privately or 
governmentally managed, incurs administrative costs. These 
costs cover such items as the collection of money and 
information from employees or employers, the investment of that 
money, and the processing of retirement claims and benefits 
payments. Costs are directly related to the complexity of the 
plan, the level of service provided, and the number of 
available investment options (see page 3). It should go without 
saying that a simple system with very limited service--such as 
today's Social Security system--will cost much less to 
administer than one that is more complex and provides more 
information and services.
    To make this study more meaningful, it is necessary to 
consider what Heritage expects private accounts to look like. 
The simplest, and most likely, Social Security accounts would 
be individually owned and privately managed, and have a limited 
number of investment options. Participants would be allowed to 
choose among a Standard & Poor's 500 Index mutual fund, a high-
grade corporate bond fund, or a super-safe government bond fund 
that invests in the new Series I Savings Bonds. These bonds are 
designed specifically for retirement savings and pay an 
inflation-adjusted rate of return that is guaranteed for the 
30-year life of the investment.\2\
---------------------------------------------------------------------------
    \2\ For more information about Series I bonds, see the U.S. 
Treasury's Web site at http://www.publicdebt.treas.gov/sav/
sbiinvst.htm.
---------------------------------------------------------------------------
    Administrative costs can be kept low. The Social Security 
system already spends $2 billion a year to administer 
retirement and survivors benefits. For the average household of 
two 30-year-old workers with children who each earned just 
under $26,000 in 1996, however, it will provide a return on 
their taxes of only about 1.23 percent after inflation.\3\ If 
this family had invested the same dollar amount in a portfolio 
of 50 percent equities and 50 percent government bonds, they 
could have earned a return of 5 percent or better. Although the 
administrative costs would be slightly higher in this program 
than under the current Social Security system, the increase in 
the couple's return would more than make up for the added 
administrative expense. In this example, the couple will have 
an additional return of 3.77 percent on their taxes, and even 
after paying administrative costs should be able to keep about 
90 percent of the increase.
---------------------------------------------------------------------------
    \3\ William W. Beach and Gareth G. Davis, ``Social Security's Rate 
of Return,'' Heritage Foundation Center for Data Analysis Report No. 
98-01, January 15, 1998.
---------------------------------------------------------------------------

         HOW TO ADMINISTER INDIVIDUAL SOCIAL SECURITY ACCOUNTS

    A system of individually owned, privately managed Social 
Security accounts would be far larger and more complex than any 
existing retirement plan. The task of setting up and managing 
such a plan should not be underestimated. But it is not 
technologically impossible, nor would it have to be 
administered by the federal government.
    This is really a question of data management. The Social 
Security program today administers about 140 million accounts. 
By contrast, the three largest private credit bureaus currently 
administer databases of more than 190 million accounts and, on 
average, update each active account monthly. These existing 
private systems are almost a third larger than Social Security, 
yet they post their account changes much faster. This type of 
data management could be adapted to a system of individual 
Social Security accounts.
    Moreover, setting up a system of individually owned, 
privately managed Social Security accounts should become easier 
over time: The computer industry estimates that the capacity of 
a computer chip doubles roughly every 18 months.\4\ And 
programming ability has kept pace with this rapid growth in 
hardware capability.
---------------------------------------------------------------------------
    \4\ ``It Seems Like Yesterday,'' The Wall Street Journal, November 
16, 1998, p. R10.
---------------------------------------------------------------------------
    Data processing could be contracted out to a private 
entity. In the United Kingdom, for example, the administration 
of the privatized segment of its social security system has 
been contracted out to the accounting firm of Arthur Andersen. 
Contracting out could be structured so that the processing 
contractor uses only the latest computer equipment. This 
stipulation would afford the manager of the plan the best 
technology available. The system would not be burdened and 
slowed by outdated hardware or software owned by the government 
or a previous contractor.
    Transferring money to a funds manager is becoming more 
efficient and timely in the private sector. Years ago, private 
financial institutions developed an efficient, low-cost, and 
fast electronic funds transfer system (EFTS). Today, thousands 
of companies and financial institutions use EFTS to move 
billions of dollars daily. This method could be adapted for use 
with individually owned and privately managed Social Security 
accounts.
    Thus, because of the rapid increases in computer 
capabilities today, establishing and administering individually 
owned Social Security accounts will become faster, easier, and 
less costly in the future.

                      A PATTERN OF DECLINING COSTS

    History shows that administrative costs are highest when a 
system is first implemented and start-up costs must be covered. 
As time goes on, administrative costs decline significantly. 
This is true in the case of 401(k) accounts, the Thrift Savings 
Plan for federal employees, and even Social Security.
    Over the years, for example, the administrative costs of 
401(k) plans have decreased despite the growth in investment 
options and the level of personal service. Although the costs 
of specific plans vary according to each plan's complexity and 
size, as well as the type of assets in which the plan is 
invested, many large companies have been able to keep their 
annual costs as low as 0.3 percent by offering only a limited 
number of broad-based funds.\5\
---------------------------------------------------------------------------
    \5\ Testimony of James S. Phalen, Executive Vice President, State 
Street Bank and Trust Company, before Committee on the Budget, U.S. 
Senate, 105th Cong., 2nd Sess., July 21, 1998, p. 3.
---------------------------------------------------------------------------
    The federal Thrift Savings Plan, which is a privatized 
retirement plan open only to federal employees, has seen an 
even more dramatic reduction in administrative costs. Since the 
system started in 1988, administrative costs have decreased by 
76 percent.
    Social Security showed similar reductions during its 
formative years. In 1940, when the system first began to pay 
benefits, its administrative costs equaled 74 percent of all 
Old-Age and Survivors' Insurance (OASI) benefits paid. In 1945, 
this figure had declined to 9.8 percent.\6\ Today, 
administrative costs make up only 0.64 percent of payments from 
the OASI trust fund. Even though Social Security's structure 
has changed over the years so that this is not a perfect 
comparison, it does give analysts an idea of the possible size 
of the reduction.
---------------------------------------------------------------------------
    \6\ Social Security Administration, 1998 Annual Report of the Board 
of Trustees of the Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds, p. 97.
---------------------------------------------------------------------------

        THE COSTS OF INDIVIDUALLY OWNED SOCIAL SECURITY ACCOUNTS

    Few people dispute that individual Social Security accounts 
can work in theory. The question concerns how much they will 
cost to administer in practice. There is powerful evidence from 
real-world examples that the increased administrative costs of 
a private system are small in comparison with the increased 
income generated by the accounts.
    The sources for the information on probable administrative 
costs of a system of worker-controlled accounts include (1) 
existing private retirement programs, such as employer-provided 
pension plans and 401(k) plans; (2) management fees on mutual 
funds and other private investments; and (3) privatized social 
security systems in other countries.

Private Retirement Plan Costs

    Plans offering individually owned and privately managed 
Social Security accounts would resemble a number of private 
retirement and investment plans currently available in the 
United States. Although the actual costs of such accounts would 
be determined by how a program of individual Social Security 
accounts was implemented, their administrative costs would 
approximate those of a fully privatized system.
    Defined Contribution Plans. Individual Social Security 
accounts are likely to be structured like the existing defined 
contribution retirement plans currently offered by various U.S. 
employers. Defined contribution plans allow workers to invest 
up to a certain level of income (which may be matched, either 
partially or wholly, by the employer) in a specified range of 
investments. A 1996 U.S. Department of Labor report suggests 
that the expenses associated with administering defined 
contribution plans are very low. In 1992, total annual costs 
for these plans amounted to $34.99 per participant, or just 
over 0.17 percent of total assets held.\7\
---------------------------------------------------------------------------
    \7\ Olivia S. Mitchell, ``Administrative Costs in Public and 
Private Retirement Systems,'' in Martin Feldstein, ed., Privatizing 
Social Security (Chicago, Ill.: University of Chicago Press, 1998), p. 
433.
---------------------------------------------------------------------------
    The expenses associated with a private account can be 
divided into categories. Investment advisory and management 
fees generally are set as a fixed percentage of a fund's 
balance. Other fees, such as record-keeping and legal fees, 
usually are a fixed amount regardless of the balance in an 
account. Using these as assumptions and the data from the 
report, the expenses associated with each employer-provided 
defined contribution account in 1992 amounted to $24.99 per 
account, plus an investment fee of 0.05 percent of the account 
balance. In 1992, this investment fee equaled $10 per account, 
bringing the total annual cost to the $34.99 cited above.
    401(k) Plans. Another fast-growing private component of the 
U.S. retirement savings system is made up of employer-sponsored 
401(k) plans, which range in size and complexity. Initially, 
most 401(k) plans offered members few investment choices and a 
low level of service. Over time, however, some added dozens of 
ways to invest the contributions, and several plans even allow 
members to rearrange their investments on a daily basis.
    Currently, over $1 trillion is invested in 401(k) plans. 
According to University of Pennsylvania Professor Olivia 
Mitchell, who recently completed an extensive analysis of the 
likely costs of a private Social Security system, ``On an 
annual basis, the average per participant cost of administering 
a 401(k) plan appears to be between $5.00 and $55.00 annually, 
including non-discrimination testing, quarterly statements, and 
investor information.'' \8\
---------------------------------------------------------------------------
    \8\ Ibid., p. 437.
---------------------------------------------------------------------------
    Declining Costs. These private retirement programs cover a 
variety of products available in the consumer market. A system 
of private Social Security accounts most likely would be 
structured so that administrative costs would be even lower 
than those assessed by private retirement accounts today. This 
is because a privatized Social Security system operating on a 
national scale would have many more participants than the 
private alternatives have. And as the number of accounts 
increases, the cost-per-participant would tend to fall as 
``fixed'' costs, such as the cost of computer hardware, are 
spread over a greater number of participants.
    Private retirement programs tend to offer a large degree of 
investment choices, including relatively expensive (and 
riskier) products such as international equity funds. In a 
system of individually owned and privately managed Social 
Security accounts, at least initially, federal prudential 
regulations likely would confine retirement investments to 
inexpensive and less risky assets, such as U.S. Treasury bonds 
and passively managed mutual funds that track broad market 
indexes like the Standard & Poor's 500 Index.
    In this context, perhaps the best indicator of the costs of 
a system of individual Social Security accounts is the Thrift 
Savings Plan operated by the federal government for its 
workers. At the end of 1995, the TSP provided its 2.2 million 
participants with a comprehensive retirement package that 
included optional annuities and allowed employees a limited set 
of investment alternatives. Participants divided their 
investments among three plans, including a stock index fund, a 
corporate bond fund, and a government debt fund. In 1995, 
investment and administrative costs for the TSP totaled 0.09 
percent of net assets, or $15.20 for each participant.\9\
---------------------------------------------------------------------------
    \9\ Arthur Andersen, LLP, Report of Independent Public Accountants 
to the Executive Director of the Federal Employee Thrift Investment 
Board, 1996.

Administrative Costs of Mutual Funds and Other Private 
---------------------------------------------------------------------------
Investments

    Mutual Funds. Mutual funds are an extremely popular way to 
save for retirement. The Investment Company Institute estimates 
that about 35.5 percent of all the assets in retirement plans 
are invested in mutual funds.\10\ For individual retirement 
accounts (IRAs), which in most cases are self-owned and self-
directed instead of affiliated with an employer, the figure is 
higher, with 42 percent of assets invested in mutual funds.\11\
---------------------------------------------------------------------------
    \10\ ``Mutual Funds and the Retirement Market,'' Fundamentals, 
Investment Company Institute Research in Brief, Vol. 7, No. 2 (July 
1998).
    \11\ Ibid.
---------------------------------------------------------------------------
    One of the most suitable forms of investment for retirement 
is an index fund that passively tracks a broad market index 
such as the S&P 500, the Dow Jones Industrial Average, or the 
Russell 2000. Mutual funds following this investment strategy 
usually have very low administrative and investment costs.
    According to Lipper Analytical Services, the principal 
provider of fund fees and expense data to the mutual fund 
industry, the median administrative cost of funds that follow 
the S&P 500 was just 0.38 percent.\12\ One such fund offered by 
Vanguard has a cost that is only 0.19 percent of assets.\13\ 
Although the median expense ratio for all mutual funds invested 
in equities is 1.38 percent, this amount includes a number of 
funds that would probably be unsuitable for individual Social 
Security accounts, such as those with extremely risky 
investment strategies.
---------------------------------------------------------------------------
    \12\ Unpublished data provided by Lipper Analytical Services, 
October 1998.
    \13\ Ibid.
---------------------------------------------------------------------------
    U.S. Treasury Bonds. U.S. Treasury bonds constitute an 
extremely inexpensive and risk-free retirement savings option. 
According to Lipper Analytical Services, the median mutual fund 
invested in U.S. Treasury bonds has an expense ratio of 0.83 
percent.\14\ But it may not even be necessary for an individual 
to use a mutual fund to hold bonds.
---------------------------------------------------------------------------
    \14\ Ibid.
---------------------------------------------------------------------------
    An extremely low-cost retirement investment with no 
management fees and no risk would be the U.S. Treasury 
Department's new Series I Savings Bonds. Designed for 
retirement savings, these bonds pay an inflation-adjusted rate 
of return that is guaranteed for their 30-year life. They can 
be purchased for no cost from almost any local bank branch in 
denominations as low as $50. Savings bonds issued through April 
1999 will pay a guaranteed real rate of 3.3 percent for the 
next 30 years.\15\
---------------------------------------------------------------------------
    \15\ U.S. Department of the Treasury, Bureau of the Public Debt, 
``U.S. Savings Bond Home Page,'' at www.publicdebt.treas.gov/sav/
sav.html.

---------------------------------------------------------------------------
The Australian and British Private Social Security Systems

    The experience of other countries is also instructive. The 
closest comparisons to the U.S. system are those of Australia 
and Britain, two developed nations with sophisticated financial 
markets that have partially privatized their social security 
systems.
    According to government statistics, annual administrative 
costs for Australia's system of private accounts totaled 0.85 
percent of fund assets in the first quarter of 1998--the 
equivalent of an annual average cost per participant of $70.20 
in Australian dollars (or US $44.71). A number of funds in 
Australia offer participants total fixed annual costs of $52 
(or US $33.12 per year).\16\
---------------------------------------------------------------------------
    \16\ Australian Government Publishing Service, Insurance and 
Superannuation Commissions Statistical Bulletin, various issues. U.S. 
dollar valuations based on exchange rate of 1.57 (quoted on http://
www.cnnfn.com on November 25, 1998). See also Daniel J. Mitchell and 
Robert P. O'Quinn, ``Australia's Privatized Retirement System: Lessons 
for the United States,'' Heritage Foundation Backgrounder No. 1149, 
December 8, 1997.
---------------------------------------------------------------------------
    Britain's system illustrates the importance of requiring a 
simple, easy to understand disclosure of fee schedules. 
Although several major banks advertise that their annual fees 
will be 1.0 percent of assets, fees for the popular Group 
Personal Pensions (GPP) tend to be confusing. An October 1998 
survey of these plans \17\ showed that, in addition to annual 
management charges, all plans also charged commissions and 
various annual policy fees. While the total cost may be clear 
to financial professionals, it can be highly confusing to the 
average investor. However, GPP plans usually are offered 
through the employer, which often pays the fees, and appear to 
be negotiable for larger employers.\18\
---------------------------------------------------------------------------
    \17\ ``Take Your Pick,'' GP Magazine, October 1998, p. 5.
    \18\ See also Robert E. Moffit and Louis D. Enoff, ``Social 
Security Privatization in Britain: Key Lessons for America's 
Reformers,'' Heritage Foundation Backgrounder No. 1133, August 6, 1997.
---------------------------------------------------------------------------

   THE IMPACT OF ADMINISTRATIVE COSTS ON AVERAGE-INCOME PARTICIPANTS

    Although individual Social Security accounts may cost 
slightly more to administer, the benefits they generate will 
far outweigh these costs. This is particularly important to 
remember in light of the low rate of return offered by the 
current Social Security system. An administratively ``cheap'' 
system may offer a lower level of retirement security than a 
system that offers higher rates of return, but it also costs 
more to administer. Consider the following example.
    A typical young worker makes $25,000 in 1998. This worker 
chooses to invest 3 percent of that income ($765) in a system 
of private accounts. Assume that:
     The cost of administering this account is $50 
(which is the worst-case scenario--an annual fee of $50 lies at 
the upper range of the data on average costs presented earlier 
in this paper);
     Costs are allocated on a flat basis per account so 
that workers with $1 million in their accounts pay the same 
fixed charge as workers with $50 in their accounts (in 
practice, costs should vary with the size of the account, so 
costs of the relatively small account would be much less than 
$50); and
     The worker allocates 50 percent of the account to 
U.S. Treasury bonds yielding 2.8 percent per year after 
inflation, and 50 percent to a broad market equity index fund 
yielding 7 percent per annum after inflation. Earnings are 
assumed to grow at one percent after inflation.\19\
---------------------------------------------------------------------------
    \19\ 1998 Annual Report of the Board of Trustees of the Federal 
Old-Age and Survivors Insurance and Disability Insurance Trust Funds, 
op. cit.
---------------------------------------------------------------------------
    Although critics of individual Social Security accounts 
usually focus on the impact of administrative costs on the 
first year of earnings, this is a long-term investment, and 
fees should be considered the same way. In this case, the $50 
administrative cost absorbs just over 6.5 percent of the 
account's balance during its first year. However, 
administrative costs fall rapidly and amount to less than 1.0 
percent of the account balance within six years. Thus, the 
claim that the higher returns of private accounts would be 
wiped out by their administrative costs is demonstrably false, 
especially if one takes the medium-or long-term perspective 
that is appropriate for retirement planning.
    The Social Security Administration's own projections imply 
that the mixed bond/equity portfolio described above would 
yield an after-inflation return of 4.9 percent per annum before 
administrative costs are included.\20\ By contrast, according 
to the Social Security Administration's own calculations, a 
male child born in 1997 who earns a low income can expect to 
receive only 1.95 percent from Social Security after 
inflation.\21\
---------------------------------------------------------------------------
    \20\ Ibid. and Social Security Administration, Report of the 1994-
1996 Advisory Council on Social Security, March 1997.
    \21\ Average-income workers can expect less. Social Security 
Administration, Report of the 1994-1996 Advisory Council on Social 
Security.
---------------------------------------------------------------------------
    Chart 1 compares the performance of the high yield/``high'' 
administrative cost private account with the performance of a 
plan that invests in an asset with the same yield as Social 
Security. The Social Security Administration has already 
considered administrative costs in calculating this yield. In 
the first scenario, the worker saves 3 percent of income in a 
private account and earns a return of 4.9 percent per annum. In 
the second scenario, the worker makes a similar investment 
decision but pays an annual administrative fee of $50. In the 
third scenario, his money is retained in a Social Security-type 
investment and yields a post-inflation return of 1.95 percent 
per annum.\22\
---------------------------------------------------------------------------
    \22\ A direct comparison with Social Security is not possible, as 
individual balances do not compound over time within the Social 
Security system. This example is constructed only for the purpose of 
illustrating the point that a low-return/low administrative costs is 
often inferior to an investment that is more expensive to administer 
but that yields a higher return. However, 1.95 percent is the rate of 
return the Social Security Administration estimates that a low-income 
male born in 1997 will receive from Social Security.
---------------------------------------------------------------------------
    Over the long term, the power of compound interest and the 
higher return from private investments entirely negates the 
initial impact of higher administrative costs within six years. 
At the end of the 40-year period, administrative costs have 
reduced the difference in returns between the low cost/low 
return Social Security-type asset and the private account by 
only 11 percent.

                               CONCLUSION

    Administrative costs are not a barrier to creating a system 
of individually owned and privately managed Social Security 
accounts. It is not that difficult to structure the new system 
to keep accounts simple and costs low. Existing technology 
allows for the creation of a method to track these investments, 
and the experience of the United Kingdom shows that the 
administration of such accounts could be contracted out 
successfully.
    Because administrative costs are determined largely by the 
structure of the accounts, investment options for these worker-
controlled accounts could be limited initially to a stock index 
mutual fund, a high-grade corporate bond fund, and a government 
bond fund that invests in the new Series I Savings Bonds. As 
the system matures and costs drop, additional investment 
options and consumer features could be added.
    All Americans could be earning a higher rate of return on 
Social Security taxes than is possible today if Washington 
allowed them to invest in individually owned and privately 
managed accounts. The low administrative costs of these 
accounts over time, along with their returns, would provide 
most Americans with a more secure and prosperous retirement.

David C. John is a Senior Policy Analyst for Social Security at 
The Heritage Foundation. Gareth G. Davis is a Policy Analyst in 
The Center for Data Analysis at The Heritage Foundation.
      

                                


                     What Are Administrative Costs?

    Administrative costs generally include the amount of money 
that an account owner must pay for maintenance and funds 
management. In most cases, these costs fall in three general 
categories: (1) the processing of information related to income 
and the amount invested; (2) actual funds management; and (3) 
determining eligibility for benefits and the payment of those 
benefits. The relative size of each component will vary 
according to how the plan is structured.
     Information processing is essentially data 
processing. Salary and contribution information is sent from an 
employer to a location to be added to the individual's file. 
Although a database of over 140 million individual Social 
Security accounts would be far larger than any existing 
retirement plan, it would still be much smaller than the 
databases of the three largest existing credit bureaus that 
maintain an average of 190 million individual accounts.
     Funds management includes the actual selection, 
purchase, and sale of assets and the cost of research to select 
investments. Costs vary widely depending on how complex the 
investment strategy is. The lowest cost would be associated 
with a stock index fund, in which equal amounts of every stock 
on the selected index are purchased by computer. These costs 
could be as low as 0.20 percent of assets. Strategies which try 
to outdo the market by short-term trades in selected stock or 
other financial instruments are both expensive and relatively 
risky. In most cases, funds using this strategy do not realize 
long-run returns that even equal the market return. For this 
reason, Heritage would limit these accounts to investing in 
index funds.
     Benefits determination is a mixture of data 
processing and human judgment. It involves determining whether 
individuals meet the criteria for retirement and their 
appropriate benefits level, and then arranging payment. Once 
benefits are determined, computers could disperse the monthly 
payments.
    In most cases, administrative costs are measured as a 
percentage of assets under management. If a fund manages $100 
million in assets and its annual expenses come to $500,000, its 
annual expense ratio would be about 0.50 percent. Percentage of 
assets is considered the best measure of administrative costs, 
since it reflects the way that investment management fees are 
usually assessed and spreads the costs over the entire 
investment. The one exception is a pay-as-you-go system such as 
today's Social Security, in which each year's benefits payments 
are funded by that year's taxes and only the surplus goes into 
the trust fund. The trust fund is merely a measure of excess 
taxes collected over time, and not a pool of investments upon 
which future benefits would be based. Benefits that will be 
paid to both present and future retirees are determined by a 
formula that is independent of any measure of the trust fund.
    It is also possible to express administrative costs as a 
percentage of annual contributions to the plan, as a percentage 
of benefits paid, or as a dollar cost per participant. 
Comparing one cost measure from one plan against a different 
cost measure from another is likely to be meaningless. For 
instance, comparing Social Security's administrative cost of 
0.64 percent of benefits paid in fiscal year 1997 with a 
Standard & Poor's stock index mutual fund's administrative cost 
of 0.38 percent of assets means as little as comparing the cost 
of a dozen apples to the cost of a pound of oranges. The 
comparison is useful only when the same standard of measurement 
is used.
    Administrative costs usually do not include costs that the 
employer and/or employee incur in sending money or information 
to the manager of the retirement plan. For both the current 
Social Security system and private pensions, these costs must 
be measured separately.
      

                                


                  Today's Social Security Is Not Free

    Americans pay a high price for their Social Security 
retirement benefits, especially when Social Security's rate of 
return is compared with that of private retirement plans. For 
example, consider the experience of an average household of two 
30-year-old workers with children who earned just under $26,000 
each in 1996 and who invest in a retirement plan of 50 percent 
equities and 50 percent government bonds. After inflation, 
their savings would earn them a return of at least 5 percent 
annually. Yet under Social Security, they will see a return of 
only 1.23 percent on their tax dollars.\1\
---------------------------------------------------------------------------
    \1\ William W. Beach and Gareth G. Davis, ``Social Security's Rate 
of Return,'' Heritage Foundation Center for Data Analysis Report No. 
98-01, January 15, 1998.
---------------------------------------------------------------------------
    During fiscal year (FY) 1997, the Social Security 
Administration spent almost $2 billion to administer its Old-
Age and Survivors Insurance (OASI) trust fund,\2\ which covers 
only the cost of the retirement and survivors programs. Other 
benefit plans such as Disability Insurance (DI) are 
administered by separate trust funds. The billions of dollars 
Social Security spent on administrative costs in 1997 
represented 0.52 percent of the trust fund's income, or 0.64 
percent of the benefits paid during FY 1997. But, because 
Social Security is an unfunded pay-as-you-go program, measuring 
these costs as a percentage of assets, from an accounting point 
of view, is meaningless.
---------------------------------------------------------------------------
    \2\ $1,998,406,000. See Social Security Administration, 1998 Report 
of the Trustees of the Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds, p. 38.
---------------------------------------------------------------------------
    As with any retirement program, Social Security's 
administrative costs measured in this way declined over time. 
In 1940, when the system first began to pay benefits, its 
administrative costs equaled 74 percent of all OASI benefits 
paid. In 1945, this figure had declined to 9.8 percent.\3\ 
Today, administrative costs make up only 0.64 percent of 
payments from the OASI trust fund in FY 1997.\4\ Social 
Security's cost structure reflects the nature of the program. 
On average, the determination of benefit eligibility and 
payment of monthly benefits account for 93 percent of 
administrative costs.\5\ About 7 percent is spent to collect 
Social Security taxes and only about 0.01 percent on funds 
management. Unfortunately, these priorities have resulted in 
extremely uneven service performance. Furthermore, the current 
system gives individuals no ability to structure their 
retirement program to meet their own circumstances. Each 
retiree simply takes whatever the Social Security program 
chooses to give.
---------------------------------------------------------------------------
    \3\ Ibid.
    \4\ Ibid.
    \5\ Olivia S. Mitchell and Annika Sunden, An Examination of Social 
Security Administration Costs in the United States, Report to the 
Public Sector Management Division, Latin America and Caribbean Region 
Technical Department, World Bank, 1993; as cited in Olivia S. Mitchell, 
``Administrative Costs in Public and Private Retirement Systems,'' in 
Martin Feldstein, ed., Privatizing Social Security (Chicago, Ill.: 
University of Chicago Press, 1998), p. 415.
---------------------------------------------------------------------------
    Social Security takes an average of 17 days to begin 
benefits payments after receiving an application, yet it 
regularly takes between 7 and 22 months to post earnings 
information to an individual's account.\6\ Furthermore, the 
U.S. General Accounting Office (GAO) has criticized Social 
Security for issuing Personal Earnings Benefits Estimate 
Statements (PEBES) that are confusing and contain inaccurate 
information.\7\
---------------------------------------------------------------------------
    \6\ Kelly Olsen and Dallas Salisbury, ``Individual Social Security 
Accounts: Issues in Assessing Administrative Feasibility and Costs,'' 
EBRI Issue Brief, November 1998, p. 13.
    \7\ U.S. General Accounting Office, ``SSA Benefit Statement Well 
Received by Public, But Difficult to Comprehend,'' GAO/ HEHS-97-19, 
December 5, 1996.
---------------------------------------------------------------------------
      

                                


                   Are Small Accounts a Big Problem?

    Critics of individually owned accounts often point to an 
apparently large number of low-wage workers. Particular 
attention has been given to the claim that in 1998, 30 percent 
of all wage and salary earners earned $10,000 or less. It has 
been argued that the small amounts of money flowing into the 
private accounts of these earners are likely to be taken 
entirely to pay the accounts' higher administrative costs. 
However, a closer look at the evidence suggests that the 
problems implied by small accounts may not be as large or 
intractable as defenders of the status quo claim.
    According to U.S. Census Bureau data cited by the Employee 
Benefit Research Institute (EBRI), 53 percent of these low 
earners consist of workers either at the very end of their 
careers (older than age 60) or at the very beginning (aged 25 
and under).\1\ A system of private accounts could be structured 
to avoid the compulsory inclusion of those over mandatory 
retirement age or of very young workers who are in the 
educational system and work only on a part-time basis.
---------------------------------------------------------------------------
    \1\ Kelly Olsen and Dallas Salisbury, ``Individual Social Security 
Accounts: Issues in Assessing Administrative Feasibility and Costs,'' 
EBRI Issue Brief, November 1998.
---------------------------------------------------------------------------
    The overemphasis on small accounts is the result of the 
failure to consider income mobility. Many workers' incomes 
fluctuate widely from year to year. This fluctuation will not 
be captured in the annual data. Indeed, there is strong 
evidence that a large proportion of ``low-income'' workers in 
any year are experiencing atypical years, and their earnings in 
that year do not reflect their long-term income.
    A 1996 Syracuse University study examined the income 
mobility experience during the 1980s of workers aged 25 to 55 
(this group excludes most college students whose incomes rise 
upon graduation and older workers who are nearing 
retirement).\2\ Within one year, 19 percent of all workers in 
the bottom 20 percent of the population had moved to a higher 
level. Within five years, 36 percent of workers in the poorest 
20 percent of the population moved into the upper 80 percent. 
These data show that better than one-third of those who, in 
their prime working ages, are recorded as earning $10,000 or 
less are experiencing an atypical and temporary downward 
fluctuation in earnings.
---------------------------------------------------------------------------
    \2\ Richard V. Burkhauser, Douglas Holtz-Eakin, and Stephen E. 
Rhody, Labor Earnings Mobility in the United States: 1970s Versus 
1980s, Maxwell School Center for Policy Research, Syracuse University, 
1996.
---------------------------------------------------------------------------
    Not only is the scale of the problem of small private 
accounts overstated, but the solution to this problem could be 
generated by sound policy decisions. Pricing could be designed 
so that fund managers are required to charge expenses on the 
basis of a proportion of fund balances, rather than as flat 
fees that are proportionately more burdensome on small 
accounts.
      

                                


[GRAPHIC] [TIFF OMITTED] T7557.019

[GRAPHIC] [TIFF OMITTED] T7557.021

      

                                


    Mr. Levin. Have you read Mr. Meyers' critique of your 
analysis?
    Mr. Beach. Oh, yes, we have read it very closely, and we 
have responded in two different venues.
    Mr. Levin. And you don't agree with his criticism?
    Mr. Beach. Well, I am not disagreeing with his 
representation of the various methods that you use to do these 
kinds of things, but I think we have, in Mr. Meyers and some 
other critics who are well-meaning, misunderstanding of what we 
really are attempting to do in our papers, which began in 
January and the methods that we have used.
    As I pointed out in a letter that I wrote back to a 
publication called, ``The Actuary,'' and that I have since 
published in a paper, I would be happy to supply your staff, 
called, ``Social Security's Rate of Return: A Reply to Our 
Critics,'' there are a number of common points between us and 
what Mr. Meyers and Steve Goss does, and there are differences, 
methodological differences.
    We recalculated some of our rates of return using the 
method proposed by Mr. Meyers and Mr. Goss at the Office of 
Chief Actuary and came up with some numbers which are somewhat 
similar to ours. They are a little higher rates of return. We 
are still waiting for them to do their rates of return and 
publish those on African-Americans and others.
    I would be happy to answer specific questions, but let me 
just say that the information currently available----
    Mr. Levin. Why don't you supply it, because I think one of 
the dangers here for everybody is that they have a conclusion. 
It is no secret what your conclusion is in terms of where 
Social Security should go. I mean, that is very clear.
    Mr. Beach. It has been for 20 years.
    Mr. Levin. I think the danger is that--it is true for 
everybody--that we are going to kind of look at the facts 
through the scope of our conclusions. The GAO study is a pretty 
definite--I won't say, ``definitive''--critique of the impact 
on minorities or critique of your criticism.
    So I will await your response to the GAO.
    [The following was subsequently received:]

Heritage Foundation Center for Data Analysis Report No. 98-08, December 
14, 1998

Social Security's Rate of Return: A Reply to Our Critics

William W. Beach and Gareth G. Davis

    In January 1998, The Heritage Foundation published the 
first paper in a series analyzing Social Security's rate of 
return.\1\ We presented our findings from a detailed study of 
the retirement income that typical groups of Americans could 
expect from the retirement portion of their payroll taxes, and 
we compared this income with the likely return that could be 
generated by investing those taxes instead in a conservative 
portfolio of stocks or bonds.
---------------------------------------------------------------------------
    \1\ William W. Beach and Gareth G. Davis, ``Social Security's Rate 
of Return,'' Heritage Foundation Center for Data Analysis Report No. 
CDA98-01, January 15, 1998.
---------------------------------------------------------------------------
    Experts across a wide spectrum of political opinion now 
concede that Social Security's retirement program provides a 
poor return for a lifetime of tax payments--the conclusion of 
the Heritage study as well. Indeed, President Bill Clinton has 
argued that Social Security's rate of return needs to be 
higher.\2\ Much of the current debate discussing Social 
Security reform focuses on ways to improve its retirement rate 
of return--an objective rarely heard just a few years ago.
---------------------------------------------------------------------------
    \2\ Remarks by President Bill Clinton before the National Forum on 
Social Security, Kansas City, April 7, 1998.
---------------------------------------------------------------------------
    This new emphasis on Social Security's rate of return has 
reshaped the Social Security reform debate by connecting the 
interests of taxpaying workers to such arcane but important 
concepts as ``trust fund balances,'' ``dependency ratios,'' and 
other elements of a technical analysis of Social Security's 
long-term problems. But it also triggered criticisms of 
Heritage's rate of return analysis. By the time the second 
Heritage report appeared,\3\ for instance, the Commissioner of 
the Social Security Administration, Kenneth Apfel, had given 
congressional testimony on its alleged methodological 
shortcomings, and left-leaning think tanks had begun issuing 
studies criticizing our work.
---------------------------------------------------------------------------
    \3\ William W. Beach and Gareth G. Davis, ``Social Security's Rate 
of Return for Hispanic Americans,'' Heritage Foundation Center for Data 
Analysis Report No. CDA98-02, March 27, 1998.
---------------------------------------------------------------------------
    As the authors of the Heritage study, we responded promptly 
to several of these criticisms. Meanwhile, Heritage's Center 
for Data Analysis continued to offer workers in various age, 
income, and ethnic groupings information about their publicly 
funded retirement program--information that the Social Security 
Administration (SSA) often refuses to produce, even when asked 
by the presidentially appointed Social Security Advisory 
Council.\4\ Given the current emphasis on Social Security 
reform, it is both timely and useful to address specific 
criticisms of our study and offer a more detailed response.
---------------------------------------------------------------------------
    \4\ Members of the 1996 Social Security Advisory Council asked the 
Office of the Chief Actuary to calculate several rates of return based 
on several factors, including life expectancy, adjusted for income. The 
Social Security Administration refused their request. See Sylvester 
Schieber, Rates of Return on Social Security Contributions: Good Deal, 
Bad Deal, or Do We Even Care? testimony before the Committee on the 
Budget, U.S. Senate, January 21, 1998.
---------------------------------------------------------------------------

                        CRITICISMS AND RESPONSES

    The following criticisms either paraphrase or, where 
appropriate, quote from specific objections to our published 
rate of return studies.\5\
---------------------------------------------------------------------------
    \5\ William W. Beach and Gareth G. Davis, ``Social Security's Rate 
of Return,'' Heritage Foundation Center for Data Analysis Report No. 
CDA98-01, January 15, 1998; ``Social Security's Rate of Return for 
Hispanic Americans,'' Center for Data Analysis Report No. 98-02, March 
27, 1998; and ``Social Security's Rate of Return for Union 
Households,'' Center for Data Analysis Report No. 98-06, September 7 
1998. See also William W. Beach, Gareth G. Davis, and Sarah E. Youssef, 
``A State-by-State Analysis of the Returns from Social Security,'' 
Center for Data Analysis Report No. 98-05, July 30, 1998.

---------------------------------------------------------------------------
On Transition Costs

    Criticism: The Heritage analysis does not take into account 
the cost of the transition to a system of private Social 
Security accounts. The rates of return cited fail to 
acknowledge that workers entering a private system would have 
to pay for their own retirement as well as support the benefits 
paid to those who are currently retired and close to 
retirement.
    Response: The purpose of Heritage's rate of return analysis 
is to apply a yardstick to measure the performance of the 
current Social Security system, not to propose or cost out an 
alternative plan. To that end, the comparison of outcomes under 
Social Security today with outcomes under a hypothetical 
private system illustrates the opportunity costs of the current 
program instead of setting out a specific blueprint for reform. 
In other words, the Heritage analysis provides a benchmark for 
comparing alternative reforms.
    Rate of return outcomes vary enormously, of course, 
depending on the transition rules that are adopted. Interim 
financing could be raised through tax increases, benefit cuts, 
and the issuance of debt--which pose widely different 
implications for the rates of return of different groups. To 
impose an arbitrary transition rule on the model would serve to 
undermine the validity of the analysis as an examination of the 
``pure'' opportunity cost of the current system.
    Moreover, it is far from certain that including transition 
costs would significantly alter the differences in rates of 
return between the current system and a private system, since 
maintaining the current system as a viable long-term program 
also involves large costs. Nevertheless, Mark Weisbrot of the 
Institute for America's Future has claimed that ``as soon as we 
take into account the real world costs of moving from Social 
Security to a system of private accounts, the superior return 
that the [Heritage] authors calculate for private savings 
vanishes, and in fact becomes negative.'' \6\ In support of his 
criticism, he cites the increased taxes contained in the 1994-
1996 Social Security Advisory Council's Personal Security 
Account (PSA) proposal to fund the transition to a partially 
privatized Social Security system.
---------------------------------------------------------------------------
    \6\ Mark Weisbrot, Flawed Assumptions, Fatal Errors: An Analysis of 
the Recent Heritage Foundation Report on Social Security's Rate of 
Return (Washington, D.C.: Institute for America's Future, undated), p. 
2.
---------------------------------------------------------------------------
    However, Weisbrot fails to note that the SSA's Office of 
the Chief Actuary analyzed this PSA proposal and found that, 
even when transition costs are included, it actually offers a 
higher rate of return to virtually all participants than the 
current Social Security system does.\7\
---------------------------------------------------------------------------
    \7\ Social Security Advisory Council, ``Findings and 
Recommendations,'' Report of the 1994-1996 Advisory Council on Social 
Security, Vol. I, January 1997, Washington, D.C., p. 51.
---------------------------------------------------------------------------
    Table 1 shows the returns calculated by the SSA for a low-
income single male worker who made $11,000 in 1995, under both 
the current system (fully funded, using the SSA's own 
assumptions) and the Personal Security Account proposal of 
Carolyn L. Weaver, Sylvester J. Schieber, and several other 
members of the Social Security Advisory Council.

On Rate of Return Methods of Calculation

    Criticism: Steve Goss, Deputy Chief Actuary of the Social 
Security Administration's Office of the Chief Actuary, has 
charged that
    [T]he Heritage study erroneously analyzes a single outcome 
where an individual is assumed to know how long he or she will 
live . . . This approach consistently overestimates the 
expected number of years of work and consistently 
underestimates the expected number of years after reaching 
retirement age. As a result, it grossly underestimates the 
expected rates of return from Social Security retirement 
benefits . . . Clearly, computed rates of return for all men 
will be much higher for all men [sic], and, moreover the 
difference between rates of return for black and white men will 
be dramatically smaller than if the erroneous Heritage method 
is used.\8\
---------------------------------------------------------------------------
    \8\ Steve Goss, Deputy Chief Actuary, Social Security 
Administration, memorandum, ``Problems with `Social Security's Rate of 
Return: A Report of the Heritage Center for Data Analysis,' '' February 
4, 1998.
---------------------------------------------------------------------------
    Response: This criticism will be addressed directly later 
in this section, but it is worth noting here that rates of 
return for 20-year-old white and black male workers--based on 
Goss's own data and calculating method--are 0.59 percent and 
-0.15 percent, respectively. When Goss calculates rates of 
return for whites and blacks in this same age group, he will 
find that the return for blacks is below that for whites and is 
negative.
    We chose our method for calculating Social Security's rate 
of return after careful consideration of the advantages and 
disadvantages of three alternatives:
     The ``expected value'' method involves summing the 
expected (or ``probability adjusted'') value of benefits and 
taxes on a year-by-year basis.
     The ``median value'' return method calculates the 
return to the 50th percentile in a population's mortality 
distribution, and essentially yields the return below which 
half of a population would receive less.
     The ``average life expectancy'' method involves 
first calculating a group's life expectancy and then 
calculating the return from Social Security for a worker who 
lives to that life expectancy. This method, which we selected, 
usually yields results that lie between the ``expected'' return 
and the ``median'' return.
    Each of these methods has strengths and weaknesses. Goss 
favors the expected value method. In his discussion of the 
Heritage analysis, Goss chose to characterize the method we 
selected as ``erroneous'' while failing to note some of the 
disadvantages of the expected value method as a measure of the 
typical return for members of a demographic group. The expected 
value method in particular is susceptible to distortion by 
skewed data. This can make it an unsuitable estimator of the 
likely return from Social Security for a typical member of a 
population.
    A simple analysis of an imaginary lottery will illustrate 
this point. Consider a lottery with a single prize of 
$1,000,000. There are 1,000 contestants, each of whom pays a 
stake of $900. According to the method suggested by Goss, the 
expected price for each individual from this lottery would be 
$1,000, implying an overall positive (net) return of $100. Yet 
99.9 percent of the entrants would actually lose $900. It would 
be misleading to suggest to potential buyers of these lottery 
tickets that they will receive $100--based on the expected 
return method.
    Although this is an extreme example, there is evidence that 
the returns from the current Social Security system, and those 
for African-Americans in particular, are highly skewed in a 
similar fashion. Preliminary calculations made by Heritage 
(which will be the subject of a future publication) suggest 
that, while the calculated expected return for a group of 
recipients may be positive, a large majority of the members of 
this group (up to 70 percent in the case of African-Americans) 
may in fact receive negative returns from the Social Security 
program.
    Thus, while the expected rate of return may be useful to 
the actuary who is responsible for administering an entire 
program (such as the administrator of the lottery mentioned 
above) and must account for all participants (including 
exceptional cases like the single winner above), it often is a 
less useful tool for those charged with advising individual 
participants on how they likely will fare in the program. This 
is why many actuaries, especially in the private sector, have 
long recognized the weaknesses associated with the expected 
value method. In offering investment advice to their clients, 
actuaries routinely use the average life expectancy method that 
we employed in our study. Since our objective was to enable 
ordinary Americans to compare the likely consequences of 
remaining within today's Social Security program with their 
likely returns realized from a reform that incorporates some 
private investments, it was also logical to adopt the average 
life expectancy method.
    Critics not only characterize the nature of Heritage's 
methodology, but in some cases mischaracterize or misunderstand 
the data we used. One such critic, former Chief Actuary of the 
Social Security Administration Robert Myers, mistakenly claimed 
that Heritage used a life expectancy of exactly 69 years for a 
21-year-old African-American male. In fact, we used a life 
expectancy of 73.81 years, which was based on projections made 
by the U.S. Census Bureau and the Social Security 
Administration and takes into account future improvements in 
longevity.
    Perhaps the most flagrant example of mischaracterization of 
the Heritage approach was the use by the Center on Budget and 
Policy Priorities (CBPP) \9\ of a table created by Steve Goss 
of life expectancies for 20-year-old white and black males in 
1997. This table featured prominently in a paper attacking the 
Heritage rate of return studies. The use of this table was 
misleading on a number of levels. Among them:
---------------------------------------------------------------------------
    \9\ Kilolo Kijakazi, African Americans, Hispanic Americans and 
Social Security: The Shortcomings of the Heritage Report (Washington, 
D.C.: Center on Budget and Policy Priorities, October 5, 1998).
---------------------------------------------------------------------------
     The table referred to examples that were not even 
computed in our study. For example, we did not calculate the 
rates of return for any white males at all, or for any African-
American males born after 1975.
     The data presented in the Goss table were drawn 
from a different source (the 1992 Life Tables of the United 
States \10\) than the one we used and were inappropriate for 
calculating rates of return from Social Security. In 
particular, the Life Tables figures are based solely on 
demographic conditions prevailing in 1992 and, unlike the data 
used by Heritage, do not take into account likely improvements 
in life expectancy in the future.
---------------------------------------------------------------------------
    \10\ National Center for Health Statistics, Vital Statistics of the 
United States, 1992 Life Tables, Vol. II, Section 6, April 1998. It 
should be noted that this life table is based only on conditions 
prevailing in 1992. It does not reflect changes in life expectancy that 
may occur in subsequent years. The original Heritage analysis uses a 
life table that was adjusted to take into account changes in longevity. 
The 1992 Life Table cited here is also the one quoted by Steve Goss in 
his ``Problems'' memorandum and is used for the purposes of allowing 
direct comparison with his examples.
---------------------------------------------------------------------------
    Ironically, despite these shortcomings, the data presented 
by Goss in this table and prominently featured in the CBPP 
study can be used to illustrate both the shortcomings of the 
expected value method favored by Goss and the robustness of the 
general results calculated in the Heritage study.
    According to the data in the 1992 Life Tables, half of all 
20-year-old black males who enter the labor force will die 
before they reach the age of 69.7. Half of all white 20-year-
old males will die by age 77. If the retirement age is 65, this 
means that half of all black male workers will die before 
receiving Old-Age and Survivors Insurance (OASI) benefits for 
4.7 years, and half of all white male workers will die before 
receiving OASI benefits for 12 years. According to Goss's 
expected value method, however, ``typical'' black and white 
males would receive, respectively, 8.1 years and 12.1 years of 
benefits. In reality, over 60 percent of black males and 50 
percent of white males will die before collecting benefits for 
this length of time.
    The expected value method produces results that do not 
represent the experiences of African-American males. As Table 2 
shows, the Goss method suggests that an ``average'' black male 
worker fares much better from Social Security (paying taxes for 
only 4.8 years for each year of benefits) than the median black 
worker (paying taxes for 9.6 years for each year of benefits). 
In statistical terms, this difference is due to the 
concentration of very high rates of return among a very few 
individuals. But, as noted above, far fewer than half of all 
black males will receive a rate of return as favorable as the 
average rate of return estimated by Goss's method. The racial 
disparity between the return received by the 50th white worker 
and the return received by the 50th black worker is also much 
greater than the disparity revealed in Goss's ``expected 
value'' method.
    Even if the expected value methodology and data cited by 
Goss are used to evaluate the rate of return from Social 
Security, the major conclusions of the Heritage study remain 
unrefuted. To show this, we calculated the expected rate of 
return from Social Security for the two men described in the 
Goss memorandum using his ``expected value'' method. In line 
with U.S. Department of Labor data, we assumed that the white 
worker would earn 118 percent of the national average wage and 
the black earner would earn 89 percent of the average wage.\11\ 
The results are shown in Chart 1.\12\ Chart 1 shows that a 
black 20-year-old worker in 1998 can look forward to an 
inflation-adjusted rate of return of -0.15 percent. His white 
counterpart, however, will ``enjoy'' a return of 0.59 percent--
better, but nothing that should make him too excited. These 
calculations show that the real rate of return from Social 
Security remains well below the measures of the opportunity 
rate of return, even when the expected value method is used 
(this is the case whether one uses the 2 percent discount rate 
used by SSA analysts, the 2.5 to 3 percent available from long-
term government securities, or the 7 percent real rate of 
return that the Social Security Advisory Council estimates to 
be available from equities). In short, regardless of the method 
used to measure its return, Social Security remains a poor 
retirement investment for either minority or non-minority 
Americans.
---------------------------------------------------------------------------
    \11\ These are the ratios of median-wage, full-time-employed white 
males and black male workers in the final quarter of 1997. See U.S. 
Department of Labor, Bureau of Labor Statistics Release, ``Usual Weekly 
Earnings of Wage and Salary Workers, Fourth Quarter, 1997,'' January 
22, 1998.
    \12\ In calculating this rate of return, Heritage analysts made a 
number of assumptions in order to keep the calculation as close as 
possible to the example contained in the Goss memorandum. It is assumed 
that current law taxes and benefits continue in effect, even though the 
Social Security Trustees project that Trust Fund outgo will exceed 
income from 2013 onwards. The calculations were based entirely on the 
mortality conditions contained in the National Center for Health 
Statistics' 1992 Life Tables of the United States, the source used by 
Steve Goss in his analysis of the life expectancies of the two workers 
contained in his memorandum. Because mortality rates for 1992 are 
available only up to age 85, post-age 85 mortality rates in 1992 are 
assumed to be the same ratio of the death rate at age 85 as they were 
reported to be in the National Center for Health Statistics' 1989-91 
Life Tables of the United States. Only Old-Age and Survivors Insurance 
and tax benefits are contained in these calculations.
---------------------------------------------------------------------------
    Treasury Department Findings. A number of critics have 
referred to a series of studies carried out by U.S. Treasury 
Department researchers James Duggan, Robert Gillingham, and 
John Greenlees.\13\ For example, Steve Goss claimed that
---------------------------------------------------------------------------
    \13\ See James Duggan, Robert Gillingham, and John S. Greenlees, 
``Returns Paid to Early Social Security Cohorts,'' Contemporary Policy 
Issues, Vol. 11, No. 4 (October, 1993), pp. 1-13.
---------------------------------------------------------------------------
    [I]n fact more careful research reflecting actual work 
histories for workers by race indicates that the non-white 
population actually enjoys the same or better expected rates of 
return from Social Security than for the white population. (See 
Duggan et al., ``The Returns Paid to Early Social Security 
Cohorts,'' Contemporary Policy Issues (October, pp. 1-13).\14\
---------------------------------------------------------------------------
    \14\ Goss, ``Problems with `Social Security's Rate of Return.' '' 
The authors are puzzled by Goss's criticism that they did not use these 
data in their rate of return studies, because the Duggan et al. study 
is based on data that are not available to non-federal researchers.
---------------------------------------------------------------------------
    The evidence from this valuable study, however, has been 
misused and distorted. For one thing, the studies carried out 
by Duggan, Gillingham, and Greenlees refer only to workers born 
in the period before the one covered in our Heritage study. In 
particular, the report cited by Goss is based on workers who 
were born between 1895 and 1922 and who retired between the 
early 1950s and the mid-1980s. By contrast, the Heritage study 
calculates returns for workers born after 1932 and retiring 
from 1997 until 2042. These two periods have seen extensive 
changes, both in the structure of Social Security taxes and 
benefits and in socioeconomic differentials in life expectancy. 
For example, recent trends and projections suggest that the 
longevity gap between African-Americans and whites, and between 
rich and poor, is growing.\15\
---------------------------------------------------------------------------
    \15\ For information on the widening socioeconomic differentials in 
mortality, see G. S. Popper, W. Hadden, and G. Fisher, ``Increasing 
Disparity in Mortality Between Socioeconomic Groups in the U.S.,'' New 
England Journal of Medicine, July 8, 1998.
---------------------------------------------------------------------------
    The other mistake in the use of the Duggan et al. study is 
that Goss implies we calculated a general weighted average rate 
of return for all African-Americans and all whites. This is not 
the case. Such an average is almost impossible to calculate and 
in practice is meaningless, requiring as it does an 
amalgamation of workers of all income levels, marital status, 
ages, etc. Rather, the aim of our analysis was to compare 
workers of similar age, income level, and family structure.\16\ 
In this respect, the result of the U.S. Treasury Department 
studies is unequivocal: For the African-American worker, Social 
Security offers a worse deal than it does for a white worker 
with an identical income and family structure.
---------------------------------------------------------------------------
    \16\ Duggan et al. did estimate an average for all of the 
observations in their data. However, because of the lack of data on 
spouses and family members, these calculations cannot be viewed as 
unbiased estimates of returns received by the entire white and black 
populations. For a more extensive discussion, see Daniel Garrett, ``The 
Effects of Differential Mortality Rates on the Progressivity of Social 
Security,'' Economic Inquiry, July 1995.
---------------------------------------------------------------------------
    Chart 2, which is based on data from the most recent study 
by Duggan, Gillingham, and Greenlees, shows that black workers 
born in 1918 can expect a real rate of return from Social 
Security that is 0.75 percent below that which a white worker 
with an identical income will receive.\17\
---------------------------------------------------------------------------
    \17\ See Schieber, Rates of Return on Social Security 
Contributions: Good Deal, Bad Deal, or Do We Even Care?

---------------------------------------------------------------------------
On the Exclusion of Disability Insurance

    Criticism: The Heritage study ignores Disability Insurance 
(DI). Disability Insurance taxes are included, but not 
disability benefits. When this is corrected, many of the 
findings are reversed. This is especially true regarding the 
result that African-Americans have particularly low rates of 
return from Social Security.
    Response: This common objection is simply wrong and is 
based on a failure to read our study carefully. DI is a 
separate program within the Social Security system that has its 
own tax rate and trust fund. Heritage's study explicitly 
examined only the Old-Age and Survivors Insurance program 
within Social Security, ignoring DI taxes as well as benefits.
    It is possible to reform the OASI program and leave the 
Disability Insurance program untouched. With this in mind, both 
DI taxes and benefits were excluded from the analysis. We 
carefully accounted for pre-retirement Survivors Insurance by 
excluding the taxes necessary to purchase this insurance.
    The Heritage study thus constitutes a complete and 
consistent analysis of the retirement portion of Social 
Security--and only this portion of Social Security. In effect, 
it assumes that, in the hypothetical partly private system, 
Disability Insurance and pre-retirement Survivors Insurance are 
retained exactly as they exist under current law.
    Moreover, no empirical study exists to support the claim of 
Social Security's defenders that including the DI program in 
rate of return calculations will offset the racial 
differentials embedded within the OASI program.\18\ Many 
advocates of the current Social Security system cite higher 
than average DI payments to black workers as a defense against 
the criticism that Social Security yields a lower than average 
retirement rate of return for blacks. Besides the fact that DI 
payments are made to workers and not retirees,\19\ the argument 
that Disability Insurance is the principal means by which 
Social Security makes up for poor retirement rates of return is 
a particularly tortured defense of the current system. It is 
like telling people whose bank gives a poor return on their 
savings accounts that they should not worry because their homes 
are insured.
---------------------------------------------------------------------------
    \18\ Ibid., p. 30.
    \19\ Disabled retirees may receive an Old-Age benefit that equals 
their previous DI payment.
---------------------------------------------------------------------------
    Even if a study of the combined OASDI program as a whole 
were conducted and led to a narrowing of racial differentials 
in rates of return, such a study would itself be vulnerable to 
the criticism that it failed to include the effects of Hospital 
Insurance (HI)--more commonly known as the Medicare program. 
Chart 3 shows that medical expenditures are highly concentrated 
among the very old.
    The inclusion of HI is likely to increase racial 
differentials in Social Security's rates of return. Compared 
with the general population, African-Americans have a much 
lower probability of reaching the very old ages at which 
medical costs tend to escalate. For example, according to the 
1992 Life Tables cited by Goss, a white male has a 40.1 percent 
chance of living to the age of 80, while a black male has only 
a 24.3 percent chance.\20\
---------------------------------------------------------------------------
    \20\ National Center for Health Statistics, 1992 Life Tables of the 
United States.

---------------------------------------------------------------------------
On the Risk of Private Rates of Return

    Criticism: Private investments, unlike Social Security, are 
highly risky. Given that most people are risk-averse, if the 
returns from a private system are adjusted for uncertainty, 
they will compare much less favorably with those from Social 
Security.
    Response: Before addressing the risk associated with 
private investments, it is important to recognize that Social 
Security is not inherently less risky than private investments. 
There are at least two major risks associated with Social 
Security: a demographic risk and a political risk.
     Social Security's Demographic Risk. Every 
participant in the Social Security retirement program faces the 
risk of dying before reaching retirement age. In the event of 
death, Social Security pays a monthly benefit to a worker's 
children who are under the age of 18 and to the spouse who 
cares for these children. However, if a worker is childless or 
has adult children, the family receives no such pre-retirement 
Survivors Insurance benefits, other than a one-time-only death 
benefit of $255.
    Widowed retired spouses sometimes collect Old-Age benefits 
based on the taxes paid by their husband or wife. If they do 
so, they receive nothing in return for the taxes they 
themselves have paid. Thus, when one partner of a married 
couple dies without leaving children under the age of 18, at 
least one spouse ultimately loses all of the taxes he or she 
has paid into the system.
    Most workers who die between ages 50 and 70 face a high 
risk of receiving little or nothing in return for a lifetime of 
paying Social Security taxes. In most cases, their children, if 
any, are older than age 18 when they die and are ineligible for 
pre-retirement Survivors benefits. Those who die in a slightly 
narrower age band (ages 50 to 65) are not eligible to collect 
full Social Security retirement benefits. Those dying at age 70 
are eligible to collect less than five years' worth of full 
Old-Age benefits.
    Chart 4, using the National Center for Health Statistics 
data cited by Goss,\21\ shows that 13 percent of white males 
and 22 percent of African-American males will die between the 
ages of 50 and 65. Another 8 percent of all white males and 11 
percent of all African-American males will die between the ages 
of 65 and 70. Thus, one in three African-American males and one 
in five white males will die between ages 50 and 70.
---------------------------------------------------------------------------
    \21\ Goss, ``Problems with `Social Security's Rate of Return.' ''
---------------------------------------------------------------------------
    Stanford University economist Daniel Garrett drew on such 
data and calculated the variation in returns from Social 
Security for a single cohort of individuals with the same 
average life expectancy and income. These variations are shown 
in Chart 5. For this set of workers, the lifetime net present 
value of participation in Social Security ranges from -$92,259 
for the worst-performing percentile to $85,993 for the best-
performing percentile, in terms of 1988 dollars in 1990 present 
values.\22\
---------------------------------------------------------------------------
    \22\ Garrett, ``The Effects of Differential Mortality Rates on the 
Progressivity of Social Security.''
---------------------------------------------------------------------------
     Social Security's Political Risk. The political 
risk in Social Security arises because workers and families do 
not enjoy secure property rights, which are enforceable in 
court, over their future Social Security benefits. The U.S. 
Supreme Court has ruled in Fleming v. Nestor that a worker's 
claim to Social Security benefits is ``non-contractual and 
cannot be soundly analogized to that of a holder of an annuity, 
whose right to benefits are [sic] bottomed [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.'' \23\
---------------------------------------------------------------------------
    \23\ Fleming v. Nestor, 363 U.S. 603 (1960).
---------------------------------------------------------------------------
    In other words, the future benefits of retirees are 
completely dependent upon future voters and politicians. Given 
the tax burden needed to fund promised benefits under the 
current system, it seems appropriate to assign a considerable 
degree of political risk to future Social Security benefits.

On Figuring the Private Rates of Return

    Criticism: The rates of return on private investments 
assumed in the Heritage study are too high. This exaggerates 
the benefits of a privately held individual account.
    Response: We used very cautious assumptions regarding the 
rates of return paid on private investments. For the years up 
to 1997, we used the actual annual historical rates of return 
on bonds and equities. For 1998 and future years, the real rate 
of return on equities was assumed to be 5.7 percent, and the 
real rate of return on bonds was projected to be 2.8 percent.
    The 5.7 percent real rate of return on equities lies well 
below the long-term rates found in the professional literature. 
For example, the Social Security Administration's own 1994-1996 
Advisory Council used a projected return of 7 percent on 
equities after considering a wide range of expert 
testimony.\24\ During the 1926 to 1997 period, large company 
stock returns averaged 7.7 percent after inflation, while small 
company stocks yielded an average post-inflation return of 9.3 
percent.\25\ Heritage reduced even these returns on equities 
and used a return of 5.7 percent.
---------------------------------------------------------------------------
    \24\ Social Security Advisory Council, ``Findings and 
Recommendations,'' Report of the 1994-1996 Social Security Advisory 
Council, Vol. I, January 1997, p. 35.
    \25\ Ibbotson Associates, Stocks, Bonds, Bills and Inflation, 1997 
Yearbook (Chicago, Ill.: Ibbotson Associates, 1998).
---------------------------------------------------------------------------
    The 2.8 percent return on U.S. government bonds is the same 
as the long-term rate used by the Social Security 
Administration in the 1998 Report of the Trustees of the 
Federal Old-Age and Survivors Insurance and Disability 
Insurance Trust Funds.
    However, even if ultra-pessimistic predictions regarding 
the returns on stocks are adopted, the major conclusions of the 
Heritage study would be unaffected. One critic of the study 
cited a report by Dean Baker of the Economic Policy Institute 
\26\ in which the claim was made that economic growth, as 
projected in the Social Security Trustees' Report (whose 
assumptions were used as the basis for the Heritage study), was 
consistent with a real rate of return on stocks of only 4.5 
percentage points. Citing this rate of return on equities does 
not, however, indict the Heritage analysis: Our assumed rate of 
return is even lower, at a very cautious 4.25 percent. In the 
great majority of cases, returns from a private account 
exceeded returns from Social Security, even where taxes were 
invested wholly in ultra-low-risk U.S. government bonds.
---------------------------------------------------------------------------
    \26\ ``Saving Social Security With Stocks; The Promises Don't Add 
Up,'' The Twentieth Century Fund, 1997. Also see Weisbrot, Flawed 
Assumptions, Fatal Errors.
---------------------------------------------------------------------------
    In our study, we assumed that individuals were extremely 
risk-averse in their investment strategies and would 
concentrate their investments among low-yield, ultra-secure 
investments. The riskiest portfolio we used was one in which 
half of all investments were made in long-term government bonds 
and the remainder in a broad market equity index. The projected 
future rate of return on this portfolio is 4.25 percent, with 
the bond component returning only 2.8 percent annually.

On Administrative Costs and Private Rates of Return

    Criticism: Administrative costs would eat up 1.5 percent to 
2 percent of all private funds annually. This would remove much 
or all of the gains from privatization for most workers.
    Response: Heritage's first rate of return study did not 
consider administrative costs explicitly. Instead, these costs 
were taken into account implicitly through an assumption of 
extremely low rates of return on private assets. However, both 
a Social Security Administration study and empirical data show 
that administrative fees will be much lower than the critics' 
1.5 percent to 2 percent projection. A study by the Actuary's 
Office for the 1994-1996 Social Security Advisory Council 
estimated that administrative costs for the Personal Security 
Accounts (PSA) plan, which would privatize a substantial part 
of Social Security, would be only 1.0 percent of fund 
assets.\27\
---------------------------------------------------------------------------
    \27\ David C. John and Gareth G. Davis, ``The Costs of Managing 
Individual Social Security Accounts,'' Heritage Foundation Backgrounder 
No. 1238, December 3, 1998.
---------------------------------------------------------------------------
    In actual practice, costs are even lower. A 1996 U.S. 
Department of Labor study showed that the administrative costs 
for private-sector, multi-employer defined contribution plans 
were only 0.82 percent of assets. The mean administrative cost 
for Standard & Poor's 500 Index mutual funds was lower still--
0.39 percent, according to Lipper Analytical Services.\28\ And 
the Thrift Savings Plan, a privatized retirement plan run by 
the federal government for its employees, has costs for its 
three funds that range from 0.08 percent to 0.10 percent.
---------------------------------------------------------------------------
    \28\ Lipper Analytical Services, unpublished data, October 1998, 
available from the authors upon request.
---------------------------------------------------------------------------
    These lower estimates are supported by data from 
Australia's privatized social security system, in which annual 
administrative costs average 0.8 percent of fund assets.\29\ 
The structure of the plan is also important. Limiting 
investment options and creating larger investment pools will 
hold costs down. These are features of most privatization 
plans. Also, costs decline rapidly after the plan starts. For 
instance, administrative costs for the Thrift Savings Plan are 
76 percent lower than they were when the plan began operations 
in 1988.\30\
---------------------------------------------------------------------------
    \29\ Insurance and Superannuation Commission, Bulletin, Australian 
Government Publishing Services, various issues.
    \30\ See Thrift Savings Plan at http://www.tsp.gov/features/
tspcx.html#sub3.
---------------------------------------------------------------------------
    One low-cost option would be to allow individuals to invest 
their Social Security taxes in the new 30-year Series I Savings 
Bonds, which currently pay a return of 3.3 percent over the 
inflation rate. These bonds can be obtained at virtually no 
cost, and they pay a substantially higher rate of return than 
does the current Social Security system.

On the Employer's Share of Payroll Taxes

    Criticism: The Heritage study included not only the 
employee's share of taxes, but also those paid by the employer. 
This overestimates the costs of the program to workers.
    Response: Glen Lane, district manager of the Social 
Security Field Office in Cedar Rapids, Iowa, was among those 
who criticized our inclusion of the employer's share of the 
Social Security tax burden in our study.\31\ However, the 
``employer's share'' of Social Security taxes is part of the 
total amount an employer expends on employee compensation, 
which includes the worker's wages and employer-provided 
benefits. The ascription of the term ``employer's share'' is an 
accounting label, rather than a meaningful distinction. In the 
absence of Social Security taxes, this money from the 
employee's paycheck would be available for the worker to invest 
in a private account or to use as an addition to take-home pay. 
As Dean Leimer, chief author of the Social Security 
Administration's own calculations of its rate of return, has 
noted:
---------------------------------------------------------------------------
    \31\ Glen Lane, ``Don't Distort Benefits Offered by Social 
Security,'' Cedar Rapids Gazette, February 5, 1998.
---------------------------------------------------------------------------
    In any event ignoring the employer share of the tax is 
clearly inappropriate, because it results in the comparison of 
benefits with taxes that are insufficient to fund those 
benefits; as a consequence, Social Security appears to be a 
much better deal than it actually is when all taxes required to 
fund the program are considered.\32\
---------------------------------------------------------------------------
    \32\ Dean Leimer, ``A Guide to Social Security Money's Worth 
Issues,'' Social Security Administration, Office of Research and 
Statistics, Working Paper Series No. 67, April 1995.

On Judging Social Security's Effectiveness by Its Rate of 
---------------------------------------------------------------------------
Return

    Criticism: The rate of return is not a proper measure of 
the effectiveness of the Social Security program. Rather, the 
system should be judged on social criteria, such as its success 
in reducing the poverty rate among the elderly.
    Response: To be judged effective, a retirement social 
insurance program not only must protect all workers from the 
threat of poverty when they are elderly, but also must provide 
an efficient level of retirement income for the taxes paid. The 
rate of return measures the difference between the money that 
Social Security takes from a family and the money that the 
family receives from Social Security. A low or negative rate of 
return means that individual families are foregoing higher 
retirement income because Social Security is returning less to 
them than they could have accumulated had they been able to 
invest their payroll taxes in private accounts. When the rate 
of return from Social Security for lower-income workers is 
below the rate available from alternative investments, the 
program actually may add to poverty--or at least slow wealth 
accumulation--by reducing the resources available to a family 
over their lifetime.
    The founders of Social Security recognized the importance 
of the program's rate of return. Arthur J. Altameyer, chairman 
of the Social Security Board from 1937 to 1946 and the first 
Commissioner of the Social Security Administration, argued 
against policies that would lead to the evolution of a social 
security system that robbed workers of the chance of higher 
lifetime incomes or a more elaborate safety net by subjecting 
them to rates of return below those available from private 
markets. As Altameyer stated in 1945,
    Therefore, the indefinite continuation of the current 
contribution rate will eventually necessitate raising 
employees' contributions later to a point where future 
beneficiaries will be obliged to pay more for their benefits 
than if they had obtained this insurance from a private 
insurance company . . . I say it is inequitable to compel them 
to pay more under this system than they would have to pay to a 
private insurance company, and I think that Congress would be 
confronted with that embarrassing situation.\33\
---------------------------------------------------------------------------
    \33\ Quoted in Schieber, Rates of Return on Social Security 
Contributions. Also see I. S. Falk, ``Questions and Answers on 
Financing of Old-Age and Survivors Insurance,'' memorandum to O. C. 
Pogge, Director, Bureau of Old-Age and Survivors Insurance, February 9, 
1945, p. 13.

---------------------------------------------------------------------------
On Payroll Tax Assumptions

    Criticism: Heritage inappropriately assumes that if Social 
Security is not partially privatized, it will be restored to 
balance entirely by raising payroll taxes and that this tax 
increase will begin in 2015, a decade earlier than the Social 
Security actuaries project would be necessary.\34\
---------------------------------------------------------------------------
    \34\ Kijakazi, African Americans, Hispanic Americans and Social 
Security.
---------------------------------------------------------------------------
    Response: There are several ways to balance the Social 
Security system within its current framework. In addition to 
increases in payroll taxes, Congress could cut benefits, 
increase the retirement age, and require all state and local 
government workers to participate. Each of these proposals 
would have a different impact on workers of different ages and 
income levels. For example, extending Social Security coverage 
to all state and local government workers would create a 
massive unfunded liability among existing state and local 
employee retirement funds that would have to be corrected 
either by cuts in payments to retired state and local employees 
or by increased taxes.\35\
---------------------------------------------------------------------------
    \35\ See Robert J. Scott, Testimony Before the Social Security 
Subcommittee of the House Ways and Means Committee Concerning Mandatory 
Social Security Coverage of Public Employees, March 21, 1998.
---------------------------------------------------------------------------
    In their calculations of the rate of return to the current 
system, Social Security's own actuaries used two assumptions to 
reflect the financial imbalance in the system. The first of 
these assumes that the system is balanced through across-the-
board cuts in Social Security benefits. The second assumes that 
balance is achieved by increases in payroll tax rates. Dean 
Leimer, who authored SSA's rate of return calculations, found 
that the rate of return from Social Security for workers born 
between 1932 and 1975 is higher under a regime of payroll tax 
increases than in a scenario where benefit cuts are used to 
balance the system.\36\ This higher return occurs because 
current workers bear the full costs of benefit cuts while 
bearing only a partial share of future tax increases.
---------------------------------------------------------------------------
    \36\ Leimer, ``A Guide to Social Security Money's Worth Issues.''
---------------------------------------------------------------------------
    We used one of the two assumptions adopted by Social 
Security in its examination of the current system, and the 
assumption that we selected for Social Security's rate of 
return was the one that yielded the higher rate of return. Had 
we chosen the assumption of reduced future benefits, the rate 
of return would have been even lower.
    The Social Security trust funds are composed entirely of 
U.S. government bonds, which means they are a set of IOUs that 
one part of the federal government (the U.S. Treasury 
Department) has written to another branch of the federal 
government (the Social Security Administration). When the 
Social Security system starts taking in less money than it 
needs to pay its promised benefits (as it is scheduled to do in 
2013),\37\ then the federal government as a whole will have to 
meet the shortfall. It can do this either by redeeming the IOUs 
in the Social Security trust fund (which would mean raising 
non-Social Security taxes or cutting non-Social Security 
spending) or by cutting promised Social Security benefits or 
raising payroll taxes.
---------------------------------------------------------------------------
    \37\ Social Security Administration, 1998 Report of the Trustees of 
the Federal Old-Age and Survivors Insurance and Disability Insurance 
Trust Funds.
---------------------------------------------------------------------------
    In each case, Social Security participants will have to 
bear the burden of this shortfall through increased federal 
non-Social Security taxes, reduced federal non-Social Security 
spending, Social Security benefit cuts, or Social Security tax 
hikes. In making their projections, Social Security's actuaries 
merely assume that the IOUs in the trust fund are redeemed, and 
do not take into account the non-Social Security tax hikes and 
spending cuts that the rest of the federal government will have 
to implement should it repay these IOUs. The day of financial 
reckoning is easily within the lifetime of the baby boomers and 
their children. Unless Congress raises taxes or cuts benefits 
and other spending, the Social Security Trustees will begin 
calling in their loans to the U.S. Treasury by about 2012. By 
about 2030, the Trustees will have been paid back all of their 
loans and will have to begin making sharp reductions in Social 
Security's basic programs.

              A LACK OF COMPETING ANALYSES BY OUR CRITICS

    The criticisms leveled at Heritage's rate of return 
analysis have not succeeded in altering our finding: Social 
Security offers a very low rate of return for most Americans, 
including minorities and low-income families. Not only does a 
low rate of return reduce a family's potential retirement 
income, but it also diminishes the ability of families to pass 
wealth on to children.
    That Heritage's major finding remains unrefuted is perhaps 
best underscored by the failure of any of its critics to 
publish their own estimates of Social Security's rate of 
return. In advancing their criticisms, neither the Center on 
Budget and Policy Priorities, nor the American Association of 
Retired Persons, nor Robert Myers, nor the Institute for 
America's Future has produced their own estimates of the rate 
of return for Social Security or the degree to which our 
estimate is affected by the alleged errors in its analysis.
    However, one major question remains: Why has the Social 
Security Administration itself not published calculations of 
the impact of the current program (or any of the major reform 
alternatives) on minorities, especially in light of the fact 
that it readily answers rate of return questions based on age 
and income? This stunning silence is puzzling, given that 
Social Security constitutes the federal government's largest 
domestic program, that the mortality and income data required 
to complete such a study are readily available to federal 
researchers, \38\ and that the impact on minorities of almost 
every other federal program has been subjected to extensive 
analysis.
---------------------------------------------------------------------------
    \38\ See Gareth G. Davis, ``Ethnic and Racial Differentials from 
Social Security Old-Age and Survivors Insurance,'' unpublished essay, 
November 1998, available upon request from the author.

William W. Beach is John M. Olin Senior Fellow in Economics and 
Director of The Center for Data Analysis at The Heritage 
Foundation. Gareth G. Davis is a Policy Analyst in The Center 
for Data Analysis at The Heritage Foundation.
      

                                


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    Mr. Levin. Let me just ask you this quickly: As I 
understand it, you want to take the nonretirement portions out 
of the picture and guarantee people who fall within those 
categories what they have today essentially in perpetuity. You 
don't have any idea of reshaping that program.
    Mr. Beach. That is not precisely correct.
    Mr. Levin. It isn't?
    Mr. Beach. No. What I want to make certain is that we keep 
a focus during this debate on the retirement portion. Now, as 
you know, the Congress is looking at disability insurance and 
other things, is on a separate track----
    Mr. Levin. Well, except, I mean, there are some 
suggestions--and I think worthwhile ones--about trying to allow 
people with disabilities to earn money, and so forth. So there 
would be greater moneys.
    You would not basically change the disability program, 
right?
    Mr. Beach. Not in the work that we are doing right now on 
retirement. We want to hold that to one side for separate 
discussion.
    Mr. Levin. That may scare people, too.
    Mr. Beach. Well, it is a very interesting and important 
program that is at great risk right now, and we should take 
seriously our obligations to make it work better.
    Mr. Levin. I just want to make one other comment. It is 
said on your side that you accept the 62 percent figure. I 
think it is correct that one should do that, if you mean what 
the President does, you are going to use general revenues. If 
you are going to set aside 62 percent of the surplus for Social 
Security, you are going to use general revenues, too.
    Mr. Hulshof. Will the gentleman yield?
    Mr. Levin. Yes, surely.
    Mr. Hulshof. Are you saying 62 percent of the unified 
surplus or are you talking about 62 percent of the FICA 
surplus?
    Mr. Levin. The President is saying he is going to use 62 
percent of the overall unified surplus, not of the Social 
Security surplus. So I think we need to be cautious when we 
attack the President for using general revenue moneys, because, 
as I understood the articulated position by some of you, you 
would do the same.
    I yield back what I don't have.
    Thank you. [Laughter.]
    Chairman Shaw. I would just like to make a comment on that. 
The Chairman of the Full Committee made the statement that he 
would hold in reserve 62 percent of the surplus until such time 
as Social Security is saved. The figures, it is a question of 
working it through. It is also a question of working through a 
plan. It is also a question of what the return is, what 
percentage goes into equities. I mean, there are a lot of 
things to thrash out. A plan is not yet on the table. So it is 
very hard to disagree or agree with you, Mr. Levin.
    Mr. Levin. That is what Chairman Archer said, and when he 
said it, I thought that was one interpretation.
    Chairman Shaw. The President said--the President has 
committed a sum equal to 62 percent of the surplus, to put it 
into the Social Security Fund.
    Mr. Levin. Right.
    Chairman Shaw. The Chairman has said that he will hold that 
money in reserve until such time as the Social Security problem 
is solved. We don't know exactly what part of that is required.
    While we are on that, before I call on the next questioner, 
I would like to just make a little bit of a point as to where 
we are. The Social Security Fund right now looks like this 
[indicating], and then it drops off like that [indicating]. Now 
what the President does, his plan takes this arrow or this line 
and puts it out to about 2055, somewhere around there. The 
critical point which everybody is missing in this entire 
debate, this is the point we have to look at, because what 
happens to the money? If you put 62 percent of the reserve into 
the Social Security Fund, what is the Social Security Fund 
supposed to do with it? They can go buy Treasury bills. That is 
what they have got to do with it. That's the law; that is what 
the law says they have to do with it. That is nothing but IOUs 
of the Federal Government. When you start cashing in the IOUs 
is right in here, and that is when the taxes are going to go 
through the roof.
    When we start getting out into these years [indicating], 
all of a sudden, you will find that our grandkids are going to 
have to be paying about 40 percent of what they earn in order 
just to take care of their parents. That is the disaster that 
is going to affect low- and high-income people, and that is the 
disaster that this Congress has a unique ability to avoid. That 
is what we have to do.
    The question of criticizing the President or not 
criticizing, I compliment him for bringing the point or putting 
that position on the table, that equities do have a position in 
the Federal insurance program, and we are going to try to work 
with him from that standpoint, even though we don't agree 
exactly how he does it. That is what we are going to do, and I 
am not going to trash the President's proposal, but I think, in 
all honesty, we have to be very concerned as to what we are 
talking about, and keep the eye on the ball, and not be looking 
in the other direction. Because when you get down here, you are 
in deep trouble. So you don't even look down here. It is up 
here, what we have to avoid, and we have to take the position 
whether it's 2013 or 2016, but wherever that point is, that's 
the date we have got to move, and we have got to move it way 
down the line, because if we don't, our children are going to 
turn our pictures to the wall and curse us. That is the 
problem.
    Mr. Matsui. If the gentleman would yield, because this is a 
different subject than the one we are talking about. I would 
just submit to the gentleman--the gentleman has been very fair. 
He has not said anything particularly negative about the 
President's plan, and certainly that is appreciated by 
everybody, I think. But there are some that have suggested the 
President's plan is inadequate, and my suggestion is perhaps 
these people should come up with their own. If people don't 
like using the surplus, that is, a part of the on-budget 
surplus, then one ought to come up with their own plan, because 
that means----
    Chairman Shaw. Well----
    Mr. Matsui [continuing]. If I could just finish--it would 
entitle benefit cuts or revenue increases, or a combination of 
both. People ought to step up to the plate, if that is what 
they support, because certainly we can't fight phantoms. We 
have to be able to have a discussion in good faith. But all we 
hear is double accounting, using the surplus, but no one says 
they want benefit cuts or increasing taxes. You have got a 2 
percent of revenue shortfall over the next 35 years.
    So I need to hear more. We all need to hear more. We just 
can't sit for the next 6 months trashing the President's 
program. You're not, but then come up with a proposal. But if 
you want benefit cuts or tax increases, say it, so then we can 
join the issue.
    Chairman Shaw. Well, let me say it: We are not going to 
increase the taxes and we are not going to cut benefits, and we 
are going to come up with a plan. Bob, I would invite you to 
join me.
    Mr. Matsui. I have been suggesting that for months and 
months, but Chairman Archer first wanted the President to come 
out with one. He did; now he has; now you guys are saying it is 
not enough. But when are we going to sit down and roll up our 
sleeves, as you suggested, and maybe make some hard decisions?
    Chairman Shaw. Mr. McCrery is back.
    Mr. McCrery. Well, thank you, Mr. Chairman. I wasn't going 
to get involved in this. [Laughter.]
    Chairman Shaw. I thought this was a good time to throw your 
name in. [Laughter.]
    Mr. McCrery. Well, I have said before that I appreciate the 
President coming forward with his proposal. I think there are 
some good parts to his proposal, but I don't think there is 
anything wrong, Mr. Matsui, with us--in fact, I think we have 
the obligation to thoroughly examine the President's proposal 
and point out deficiencies as we see them, or as we appreciate 
them, in this proposal, and then work together to repair those 
deficiencies, and come up with a proposal that takes us not to 
2055. In that sense, the President's plan is inadequate. He 
only gets us to 2055. We want to take it at least to 2075, and 
we hope even beyond that.
    You are right, it is up to us to come up with the rest of 
the plan. I think the President, it would be swell if he would 
come up with the rest of the plan, and he may, but I don't 
think it is necessarily incumbent upon him to do that. I think 
he has gotten us off to a good start. He has given us some meat 
to talk over, and that is what we are doing here today. I 
appreciate the testimony of all these folks, who have helped us 
examine some of the aspects of the President's plan.
    But I don't think that we necessarily have to put anything 
on the table or take anything off the table right now, except 
maybe payroll taxes. I think there is pretty much unanimity on 
not increasing payroll taxes. On the benefits side, I am not 
going to say right now I am not in favor of any kind of change 
in benefits, because it depends on how you define benefits, If 
we are talking about the age of retirement or things like that, 
I think all those ought to be on the table and we ought to 
discuss them in a reasonable, intelligent manner, and examine 
that. We may in the end discard them, but we ought not take any 
of that off the table immediately.
    So, anyway, I do appreciate the testimony of the witnesses. 
I am sorry I had to run in and out and miss some of your 
testimony, but I have looked at your testimony. I encourage all 
of you to continue working with us here in the legislative 
branch, as well as with the administration, to try to arrive at 
some sort of consensus, because I don't think we are going to 
be able to solve this problem without consensus. Republicans 
can't do it; Democrats can't do it; the President can't do it; 
and Congress can't do it alone. In the end, I think we are 
going to have to all be together on the solution that we 
propose to the American people. So thanks for your input.
    Chairman Shaw. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman.
    Mr. Beach, is it correct that it would take a fourth of all 
our FICA taxes in order to accomplish the initial objective 
that you subscribe to of preserving the disability and 
survivors' insurance system?
    Mr. Beach. By all of the FICA taxes, do you count the part 
that goes to Medicare or only those parts that go to OASI and 
DI?
    Mr. Doggett. Only OASDI.
    Mr. Beach. So a fourth would be about 3 percentage points?
    Mr. Doggett. Approximately.
    Mr. Beach. Well, it sort of depends. I am not an expert on 
disability insurance. I would suggest that what we are getting 
right now with disability insurance is at least a half a point 
too little to keep the system fully funded. If there are 
transfer from OASI to DI over the next couple of years, as are 
planned, because DI goes into negative cashflow in about--
what?--about 2 or 3 years, then that will keep the system 
afloat, but I wouldn't dispute--perhaps not a full fourth, but 
close to that.
    Mr. Doggett. Approximately. And would the implementation of 
the universal savings accounts that President Clinton has 
proposed be consistent with your stated objective of increasing 
our national savings rate?
    Mr. Beach. We are having quite a nice debate in my office 
on that right now. I think what we will do is we will come down 
this way. The universal savings account, as you know, is a 
supplemental savings, and there is a match to that, and there 
is all of that. First of all, it looks like it is going to 
benefit most those people in middle income and the upper part 
of a little bit below the maximum taxable income. I don't think 
that that is really where the focus ought to be. We ought to be 
focusing on the low and moderate side, as I have defined it.
    Second, we really believe there are structural changes that 
have to be made within the program. So when we say put a 
savings element within Social Security, that is where we want 
to keep our focus. Then we really do have some serious 
questions about the funding of that.
    Mr. Doggett. Yes, sir. Well, I understand you have many 
other aspects of it that you think might be done in a better 
way, but, as proposed----
    Mr. Beach. It is a wonderful step forward.
    Mr. Doggett. It is a step forward in increasing the 
national savings rate.
    Mr. Beach. Well, I will tell you something that President 
Clinton has done----
    Mr. Doggett. Well, I would just like to get an answer to 
that question, if I might. Don't you agree that the universal 
savings accounts, as proposed, while there may be better 
alternatives and there may be ways that Congress could improve 
it, that it is consistent with your objective of increasing the 
national savings rate?
    Mr. Beach. I doubt that.
    Mr. Doggett. You doubt that?
    Mr. Beach. Yes.
    Mr. Doggett. OK. And with reference to your testimony, 
respecting the comments of my colleague, Mr. Matsui, you are 
one person who does advocate cutting benefits, aren't you?
    Mr. Beach. We are looking at the way other countries have 
handled this. For example, if you----
    Mr. Doggett. Let me just get an answer to that question, if 
I might. When you talk about enacting a Social Security 
contract between the government and citizens, it is not a 
contract that would preserve the existing level of benefits----
    Mr. Beach. That is correct.
    Mr. Doggett [continuing]. With a cost-of-living adjustment.
    Mr. Beach. That is correct.
    Mr. Doggett. It is a benefit cut, is it not?
    Mr. Beach. If you are in a--I would like to give you a 
quick yes, but I will give you a quick answer. If you are in 
the system with a private account, there would be a 
proportional reduction in benefits in the future for, say, 80 
percent of what you were scheduled. That is one way you can be 
sure to raise the national savings rate.
    Mr. Doggett. For just your ordinary worker out there now, 
you are advocating a benefit cut----
    Mr. Beach. Well, actually, we are advocating an increase in 
their income.
    Mr. Doggett. Well, you hope that that would be the effect 
of your plan, but it is a reduction in current benefits with 
cost-of-living adjustments that would be guaranteed?
    Mr. Beach. Well, the other part of Social Security, part B, 
as I have said, would continue to be there.
    Mr. Doggett. I just need to know whether you----
    Mr. Beach. I think it is better to say it is an increase in 
their income and their wealth.
    Mr. Doggett. That is your hope, but, as a part of that 
plan, the first step you have in the plan is to enact a 
contract that will reduce existing guaranteed benefits with 
cost-of-living adjustments; is that correct, sir?
    Mr. Beach. Incorrect.
    Mr. Doggett. It is not correct?
    Mr. Beach. The first step is the institution of the private 
accounts.
    Mr. Doggett. Well, it is an element of your plan, is it 
not, sir, to enact a Social Security contract that will reduce 
existing guaranteed benefits, including cost-of-living 
adjustments; is that correct?
    Mr. Beach. As I have said, and I direct to our principles, 
no change in benefits for current retirees, no change in future 
benefits for those near retirement. If you are in the plan, 
Congressman--and I don't mean to bear on your patience here--
but if you are in the plan with a private account, in your 4 
percent, you would have a proportional decrease in benefits for 
the amount that you are privatized, but not for the other side. 
That is what other countries have done.
    Mr. Doggett. So it is correct, as to those workers, that 
would represent a reduction, a cut, in existing benefits and 
cost-of-living adjustments?
    Mr. Beach. I think it is about time somebody stood up and 
said this is the way that these things work.
    Mr. Doggett. And you may well be correct; this is part of 
the national debate, and I am glad you are willing to stand up 
and do it, even though we may disagree on it.
    Now, another principle you have is that no worker would be 
required to open a personal retirement account; is that 
correct?
    Mr. Beach. Yes. We would like to see----
    Mr. Doggett. What would happen to those that don't 
volunteer?
    Mr. Beach. They would stay in the full system.
    Mr. Doggett. Would they be guaranteed their cost-of-living 
adjustment?
    Mr. Beach. We hope that that would be the case.
    Mr. Doggett. Well, do you hope, or is it a part of your 
plan, a vital part of your plan, to guarantee----
    Mr. Beach. You say, ``our plan.'' We don't have that plan, 
but our principles would indicate that the plan we will support 
would be one like, say, Great Britain has, where they have got 
that guarantee in there, yes, for those that are in that 
portion of Social Security, that progressive----
    Mr. Doggett. So under the plan you hope to design, every 
worker in this country, present and future, who wished to stay 
in a system with a guaranteed benefit and a cost-of-living 
adjustment would be assured that right?
    Mr. Beach. Yes.
    Mr. Doggett. Thank you.
    Then I would like to ask, time permitting, Mr. Rodriguez 
one question.
    Mr. Rodriguez. Surely.
    Mr. Doggett. Is there time, Mr. Chairman?
    Chairman Shaw. Go ahead.
    Mr. Doggett. That is with regard to the 1998 survey that 
you mentioned concerning the discomfort of some Hispanic-
Americans with dealing with banks and mutual funds, and the 
like. Some here advocate personal responsibility, which I 
agree, and I am sure you do, is a good concept. But as it 
applies here, what are the implications of that study for 
moving to individual accounts for Hispanic-Americans?
    Mr. Rodriguez. I think it clearly suggests that there are 
some serious barriers that need to be overcome--some of this 
was mentioned earlier--regarding financial education, so to 
speak, and outreach that needs to take place prior to any 
implementation of an individual development concept. I think 
this is a serious issue among the Hispanic community right now, 
who do not have very good relationships with financial 
institutions. In fact, many, many financial institutions are 
not located in Hispanic communities, and so there are some 
serious, serious obstacles in order for Hispanics to, at a 
minimum, take advantage of any individual accounts of any sort.
    Thank you. Thank you, Mr. Chairman.
    Mr. Johnson of Texas [presiding]. Mr. Weller.
    Mr. Weller. Thank you, Mr. Chairman. Though Chairman Shaw 
has stepped out of the room, I certainly want to commend him on 
the quality of these hearings that he has been conducting under 
his new leadership as Chairman of the Subcommittee. I have 
found them to be very helpful in many ways, particularly in 
learning how traditional Social Security discriminates, 
particularly against women and widows. I have also learned, 
with the various panels that we have had, that whether it is 
African-American or Latino or other communities, that there is 
diversity of opinion within the communities, conservative and 
liberal, and that has been enlightening as well.
    So I really want to commend him for conducting these 
hearings, as we look at how do we save Social Security for the 
long term, for the next three generations, which is a goal I 
think we all share on both sides of the aisle. We have a real 
opportunity; thanks to the fiscal responsibility of this 
Congress over the last few years, we, of course, now have extra 
money. It has been nicknamed ``the surplus.'' We are projecting 
to have $2.3 trillion in extra tax revenue over the next 10 
years, extra money. Of course, the debate is, what are we going 
to do with it? It is burning a hole in people's pockets. They 
want to decide what to do with it. I think we all agree a 
majority would like to devote the majority of it to saving 
Social Security.
    Last fall this House of Representatives passed a plan that 
would set aside 90 percent of the surplus to save Social 
Security, and the President, just a few weeks ago, says we only 
need 62 percent. So, at a minimum, I certainly agree that we 
should set aside a majority, at least 62 percent, of the 
surplus tax revenue for saving Social Security. Of course, the 
debate is then, what do we do with the rest? Do we spend it on 
new government programs or do we give it back? And do we give 
it back in an effort which helps bring simplicity and fairness 
to the Tax Code, and ending discrimination against married 
couples and family farmers and family businesses?
    Also, can we use it to help eliminate another area of 
discrimination in the Tax Code, which is the discrimination 
against savings. We tax savings. We discriminate against those 
who set aside money for their own retirement. Because of that, 
of course, our Nation now has one of the lowest savings rates 
in the industrialized world, and that certainly is one area 
where we need to do better.
    My hope, as we go through this process and look for ways of 
giving some of this extra money back, is that we look at ways 
we can increase the opportunity to save and reward savings, so 
that we reestablish that three-legged stool that FDR talked 
about over 60 years ago, expanding the opportunity to increase 
the amount you can put into your IRAs and your 401(k)s, and 
also doing something that I feel may be an area which would 
really benefit working women, as well as minorities and 
immigrants, and that is in creating something that I call a 
catchup IRA, to allow those who may be out of the work force 
for a while or in low-paying jobs to be able to make up 
contributions to their IRAs or their 401(k)s.
    The theory is, those who are immigrants or many in the 
minority community or working women, working moms, either take 
time off, if they have kids at home, off the payroll, or they 
start out at low wages. When you start out at low wages, you 
are contributing less to Social Security, which affects your 
long-term benefits. Maybe later on, as you are moving up the 
economic ladder, you have more money, which may give you the 
opportunity, with higher income, to contribute more for your 
own personal savings.
    I think of my own sister, Pat, with the catchup accounts; 
she and her husband, Rich, took time off--or excuse me, got 
married and they were both working. Now, a few years later, she 
took time off from working, being on a payroll, to be home with 
the kids, and for about five or 6 years, she was a full-time 
mom, and then when the kids were old enough, she went back to 
working and being on a payroll again. She wasn't working at 
home; she was working, collecting a paycheck. So she had more 
income, which allowed her to save more. I would like to see her 
have that kind of opportunity to make a catchup contribution, 
to make up that missed contribution to her IRA and 401(k).
    I was wondering, from the perspective of the minority 
community which is represented today, how you feel we can 
accomplish some sort of catchup mechanism, if you have thought 
about that, to help minorities and working moms catch up when 
it comes to saving for retirement. I thought maybe we would 
start on the lefthand side, Mr. de Posada, and if each of you 
has a comment, I would appreciate your opinions and ideas.
    Mr. de Posada. Part of the problem is that, currently, in 
low-income communities, particularly Hispanics, we are not 
talking about investments; we are not talking about savings. I 
think what is good about this discussion, particularly personal 
retirement accounts, is that it is bringing it into the 
discussion of savings and investments in the local communities, 
and particularly in those low-income areas. I think that this 
discussion, ultimately generating some kind of system where we 
can allow individuals to do this--because everybody keeps 
talking about how low-income people do not have the experience. 
Well, let's provide consumer education; let's provide some of 
this pooling with individuals, with organizations, and some of 
the other components, local governments. I think the discussion 
is going to at least lead us into that direction.
    Mr. Weller. Mr. Spriggs.
    Mr. Spriggs. I hope that you are offering that as a way to 
structure what the President proposed as a universal savings 
account. I think that that idea that you have is intriguing. It 
makes more work for your Subcommittee, I think, but, as an 
economist, I think you are exactly right. What you are 
concerned about with savings is someone's permanent income. If 
you look at the caps that we put on ability to contribute to an 
IRA, you are looking at income in 1 year, and the cap prevents 
you from giving more in 1 year. As you rightly point out, the 
permanent income flow for that person has been affected by lots 
of things, and it would be nice to be able to adjust that 
equation to let someone, as you say, catch up.
    The gap for low-income workers, though, is not having that 
match that a 401(k) would provide from their employer or a 
pension plan that would match something. So that is where I 
think the President's plan is useful in at least talking about 
the need to give these workers a match, because we don't have 
the private pension system.
    So I would hope you would explore the idea. I think the 
basic philosophy behind it is correct, because you are aiming 
it at savings, but I would hope that it would be in the context 
of creating this third-legged stool. So that workers who 
sometimes find themselves in low-wage jobs and don't have 
access to a 401(k) or a 403(d) could then at some point roll it 
over, so that when they are eligible, they can then catch up as 
well.
    Mr. Weller. What I'm thinking, Mr. Spriggs, I think of 
those who start out at a minimum wage job, work a number of 
years, and then get the opportunity as a cement finisher or an 
operating engineer----
    Mr. Collins. Or a truckdriver.
    Mr. Weller [continuing]. Or a truckdriver, where they are 
going to make a higher income, perhaps get an extra bonus at 
the end of the year, or are able to collect a lot of overtime, 
where they are able to make up that missed contribution, and it 
is a chance for them to set aside more without penalty, as 
currently they are penalized under our Tax Code. Currently, our 
Tax Code discriminates that extra savings, that opportunity. Of 
course, I am hoping that----
    Mr. Johnson of Texas. The gentleman's time has expired. Mr. 
Collins.
    Mr. Collins. I mentioned truckdriver because I am one.
    Mr. Matsui, now that I have called your name, you didn't 
raise a point of personal privilege. [Laughter.]
    The dialog with the President on Social Security actually 
began in December, when a number of us went over for a 2-day 
summit on Social Security, and had very interesting meetings, 
not only with the Commissioner and those who are very involved 
and concerned about Social Security, but we also had a very 
good meeting on the second day with the President himself.
    The President told us that he was going to come forward 
with an idea, and basically, that is what we have. When he 
presented his budget, he presented a general idea of how to 
address Social Security. His idea incorporates the idea of 
setting 62 percent of, what people refer to as, surplus--I 
don't refer to it as surplus; I refer to it as a positive 
cashflow in certain areas of the budget, the unified budget--
aside. We actually were able to resolve the Social Security 
situation.
    As we move forward in the Congress, we, too, will be 
drafting a budget document. That budget document will reflect 
some type of general concept of how we will address Social 
Security budgetwise. Some have said 62 percent, but there are 
some of us who feel like that all trust funds should be set 
aside, because those trust funds are encumbered, and someday 
they will have to be paid out in some type of benefit--as well 
as setting aside all of the interest that is owed through the 
government securities that are held by the general fund, to set 
those aside, too.
    Now when you do that, disassemble that unified budget, we 
cease to have a positive cashflow in the overall budget. Even 
under the budget that was proposed by the President, and I 
would not be at all surprised if the Budget Committee that we 
have does not come back with something very similar, but it 
increases the national debt year after year. I think a lot of 
people are concerned at home about the national debt, as well 
as they are about Social Security, because if we keep 
increasing the national debt, people know that we are using a 
lot of those trust funds to cover that deficit spending. So 
there are some of us who believe that we should totally set 
aside all of those funds and the interest that accrued on those 
funds.
    Mr. Matsui, were you listening to me?
    Mr. Matsui. I have heard every word you said.
    Mr. Collins. But I haven't said them to you directly, and I 
was talking to you directly, and you were reading while I was 
talking. I'm sorry, I won't bother you again.
    Mr. Matsui. I know you were talking to me, and I just 
thought you were just wasting your time.
    Mr. Collins. I probably was, but I thought it needed to be 
said, and I would appreciate the courtesy, when I do address 
you directly, that you do listen. I mean, I would do you that 
way.
    Mr. Matsui. Well, you know, I only listen when it is 
important.
    Mr. Collins. Do you know the difference of what is 
important and what is not?
    Mr. Matsui. When you speak, I certainly do.
    Mr. Collins. I do, too.
    I yield back.
    Mr. Johnson of Texas. We thank the panel for being with us 
today. We appreciate your testimony, and I hope we can count on 
you when we need you again. Thank you so much for being here.
    The next panel can take their places, please: Patricia 
Owens from UNUM Life Insurance Co. of America; Marty Ford with 
the Consortium for Citizens with Disabilities; Dr. Ruth Hughes 
from the Psychosocial Rehabilitation Services in Maryland, and 
Dr. Burkhauser with Cornell University.
    Please take your seats.
    Chairman Shaw [presiding]. Ms. Owens, evidently, I missed 
something interesting.

STATEMENT OF PATRICIA M. OWENS, SENIOR DISABILITY ADVISOR, UNUM 
     LIFE INSURANCE COMPANY OF AMERICA, BROOKLYN, NEW YORK

    Ms. Owens. Mr. Chairman, thank you for inviting me to give 
my views to this distinguished Subcommittee about Social 
Security's role in protecting people against the threat of 
disability. I am going to be talking to you from a programmatic 
perspective, and not necessarily from a financing one.
    My remarks center on disability and working-age persons, 
for which I use the term ``work disability.'' The Social 
Security Disability Program, SSDI, uses a very strict work 
disability definition. There are many other such definitions 
which, when met, qualify persons for cash and services. The 
basic premise under all of these programs is that persons need 
protection against the risk of being unable to work because of 
a disability, and that--and this is an important thing I didn't 
have in my written comments--and that disability can, in large 
part, be medically determined. That is a piece of all of these 
programs.
    Now I will switch a minute. The enactment of the Americans 
with Disabilities Act, the ADA, grants certain rights to 
working-age people with disabilities. For one, they have the 
legal right not to be discriminated against in the course of 
employment because of their disability, if they can perform 
essential functions of work with or without reasonable 
accommodation. The basic premise of the ADA is that some 
persons with disabilities can and want to work. These 
provisions of cash benefits in lieu of wages under SSDI and the 
articulation of equal rights in employment for persons with 
disabilities under the ADA illustrate the remarkable 
heterogeneity of the term ``disability.'' Two persons with the 
same level of impairment, one may be seeking benefits in lieu 
of work, and one, equal rights and employment.
    For the last 20-plus years--I hate to say that--I have been 
working in the disability policy field, first in the public 
sector, and now in the private sector. When I was Associate 
Social Security Commissioner for Disability, during the 
development and the enactment of the 1984 disability 
amendments, and testified in front of you, Mr. Matsui, I 
learned some very important lessons. Deciding if a person's 
impairment or medical condition prevents work is a judgment 
based on finding of facts, but is not fact alone. There is no 
one set of rules that can cover or be uniformly applied to all 
potential interactions of persons' illness, injury, motivation, 
skills, education, environment, health care, work, that sort of 
thing. It is a very difficult type of thing.
    Having said that, however, the Social Security Disability 
Program, in my opinion, has generally done a very good job. 
Without this program, many people with work disabilities, and 
their families, would be destitute. It is the framework upon 
which most private sector programs, with which I am now more 
familiar, are built. But it is not without its problems, nor 
the problems without their solutions. What I am encouraging us 
to think about with the disability program is not in 
relationship to financing alone, but in relationship to how the 
disability program is designed.
    SSDI, in practice now, is an all-or-nothing program. While 
incentives for return to work exist, we all know the figure; 
less than one-half of 1 percent of people actually do return to 
the disability rolls. Because it often takes an inordinate 
amount of time to get on disability and to prove disability, it 
is no wonder that people actually believe they are totally 
disabled by the time they get through the system.
    The point is that it is a very difficult kind of program. 
For many older, unskilled workers whose work history consists 
only of heavy labor, there just are not enough jobs available 
for them in today's job market, unless they can acquire new 
skills.
    Then we have the point of after 2 years comes Medicare, the 
health insurance portion for persons with disabilities, and 
sometimes people, after they have gone through the system, all 
the way through the system through the ALJ, they almost get 
Medicare at the same time that they get their disability 
benefits.
    The possibility of the loss of Medicare, the possibility of 
not being able to successfully go back to work, is a very 
difficult threat to persons who currently qualify for 
disability.
    When the SSDI benefit program was conceived in the fifties, 
jobs available in the national economy were very different. The 
health care system was very different also. The nature of 
treatments and their effectiveness are now greatly altered, and 
we also have assistive technology, which is important.
    In the last 40 years, work and the workplace have changed 
from industrial to service settings; work at home is 
increasing; many jobs require mental skills, reasoning, 
decisionmaking, the ability to work under pressure, not heavy 
lifting. Computing skills are practically mandatory for a 
majority of jobs. Mergers and downsizing are commonplace and 
bring a reduced sense of job security.
    In the fifties acute illness and injury were the primary 
health care concerns. Today we see more chronic disease, where 
advanced treatment techniques enable people to maintain or 
regain capacity to work. Assistive devices can also help with 
this. Preventing death occurs more frequently, but often those 
saved have remaining impairment. Currently, psychiatric 
conditions, as a cause of disability, are in the ascendancy.
    Health and disability programs in the private sector 
suggest ways for Social Security to move toward a less 
permanent benefit structure for more people, not for all 
people, but for more people, to help people transition back to 
work, and at the same time improve long-term financing.
    Examples of these programs are--and I will be very quick--
case management that recognizes disability is not a static 
state for many people; setting recovery expectations and 
working with people to bring together all available resources 
can help people get back to work.
    In contrast, SSDI, after making a disability decision, does 
not systematically manage any case to assist in return-to-work 
efforts. Benefit structures and entitlement periods are set up 
in the private sector to encourage return to work. There is 
short-term disability. There are different types of disability 
periods. Some private sector disability programs reduce 
benefits and relationship to a staged reentry into the 
workplace.
    Health care is an essential element of an effective 
disability program. It is a broad continuum of services 
directed at prevention, illness, and maximizing function. 
Presently, Medicare and Social Security do not work together in 
any way in relationship to the disability program and getting 
people back to work. We need to think about that.
    Partnerships with other interested parties, currently, a 
lot of people are looking at this--the independent living 
center movement goal is to enable persons with disabilities. 
All of us need to work together to find and deliver better 
solutions than just permanent cash benefits.
    These solutions must recognize there is no simple answer 
for the complex work disability. Incentives for training and 
job placement for both employer and employees is just one idea 
that could be helpful.
    Chairman Shaw. Ms. Owens, I am going to ask you to put the 
balance of your statement on the record, if you would.
    Ms. Owens. OK, this is it; this is the last paragraph.
    Chairman Shaw. Go right ahead.
    Ms. Owens. SSDI is, for some, the only and the right 
answer; for others, it is a building block on which other 
programs must rest. However, as the nature of illness and 
injury change, as work and the workplace changes, as people 
change, so must the program. I know you are concerned with 
other things about Social Security, but I hope that you will 
look at this also.
    [The prepared statement follows:]

Statement of Patricia M. Owens, Senior Disability Advisor, UNUM Life 
Insurance Company of America, Brooklyn, New York

    Mr. Chairman, thank you for inviting me to give my views to 
this distinguished committee about Social Security's role in 
protecting people against the threat of disability. I will 
discuss this from a programatic rather than a financing view.
    My remarks center on disability in working age persons for 
which I use the term work disability. The Social Security 
Disability Program (SSDI) uses a very strict work disability 
definition. There are many other such definitions which when 
met, qualify persons for cash and services. The basic premise 
under all of these programs is that persons need protection 
against the risk of being unable to work because of disability 
and that disability can be in large part medically determined.
    The enactment of the Americans With Disabilities Act (ADA) 
grants certain rights to working age people with disabilities. 
For one, they have the legal right not be discriminated against 
in the course of employment because of their disability, if 
they can perform the essential functions of work with or 
without reasonable accommodation. The basic premise of the ADA 
is that some persons with disabilities can and want to work.
    These provision of cash benefits in lieu of wages under 
SSDI and the articulation of equal rights in employment for 
persons with disabilities under the ADA illustrate the 
remarkable heterogeneic nature of the term disability. Of two 
persons with the same level of impairment, one may be seeking 
benefits in lieu of work and one, equal rights in employment.
    For the last twenty years I have been working in the 
disability policy field, first in the public sector and now in 
the private sector. As Associate Social Security Commissioner 
for Disability during the development and enactment of the 1984 
Disability Amendments, I learned some important lessons.
    Deciding if a persons' impairment or medical condition 
prevents work is a judgement based on a finding of facts but is 
not fact alone. No one set of rules can cover or be uniformly 
applied to all the potential interactions of persons, illness, 
injury, motivation, education, skills and environment.
    Having said that, the Social Security Disability Program, 
in my opinion generally has done a good job. Without this 
program, many persons with work disabilities and their families 
would be destitute. It is the framework around which most 
private sector programs are built. But, it is not without 
problems, nor are the problems without solutions.
    SSDI is an all or nothing program. While incentives for 
return to work exist, we all know this figure,--less than one/
half of one percent of beneficiaries return to work. Because it 
often takes an inordinate amount of time and effort to prove 
disability (inability to do any work), it is not surprising 
that when the system finally awards benefits to people, they 
may believe themselves permanently unable to work. It is also 
not surprising that persons with SSDI fear having to go through 
the ordeal again if a return to work effort fails.
    For many older, unskilled employees whose work history 
consists only of heavy labor, there just aren't jobs available 
for them in today's job market unless they can acquire new 
skills.
    After two years of SSDI entitlement, beneficiaries acquire 
health insurance--Medicare. (In 1996 nearly one quarter of all 
disability awards were made by an Administrative Law Judge so 
Medicare may be almost simultaneous for these workers as it may 
take two years to get a favorable decision.) The possibility of 
the loss of Medicare or lesser health care coverage frightens 
people who have medical conditions because most believe they 
will not get health insurance for pre-existing conditions. If 
they do get coverage, costs may be prohibitive.
    When the SSDI program was conceived in the nineteen 
fifties, jobs available in the national economy were very 
different. The health care system too, was different. The 
nature of treatments and their effectiveness are now greatly 
altered. Assistive technology provides ability to work for many 
persons today.
    In the last 40 years, work and the work place have changed 
from industrial to service settings. Work at home is 
increasing. Most jobs require mental skills, reasoning, 
decision making, ability to work under pressure, not heavy 
lifting. Computing skills are practically mandatory for a 
majority of jobs. Mergers and downsizings are common place and 
bringing a reduced sense of job security.
    In the fifties, acute illness and injury were the primary 
health care concern. Today, we see more chronic disease where 
advanced treatment techniques (and assistive devices) enable 
persons to maintain or regain the capacity to work. Preventing 
death occurs more frequently but often those saved have 
remaining impairment. Currently, psychiatric conditions as a 
cause of disability are in the ascendancy.
    Health and disability programs in the private sector today 
suggest ways for Social Security to move toward a less 
permanent benefit structure for more people, help people 
transition back to work and at the same time improve long term 
financing. Examples of these programs are:

          Case Management that recognizes disability is not a static 
        state for many. Recovery expectations including positive return 
        to work goals are set up front and a plan is followed to assure 
        all available resources are used to assist in recovery of 
        function and return to work. Case management starts early and 
        provides for gradual return to work. In contrast, SSDI after 
        making a disability decision, does not systematically manage 
        any cases to assist in return to work efforts.
          Benefit structures and entitlement periods that are set up to 
        encourage return to work. Some private sector disability 
        programs reduce benefits in relationship to a staged re-entry 
        into the work place and wages earned.
          Health Care as an essential part of an effective disability 
        program. Health care is a broad continuum of services directed 
        at prevention of illness and injury and maximizing function not 
        just treatment of disease. Health care providers must be 
        educated to their responsibility to help patients return to a 
        productive life. Presently, Medicare and Social Security 
        Disability Programs are not synchronized with prevention 
        services and treatment outcomes.
          Partnerships with other interested parties, (insurers, 
        employers, academicians, health care providers, engineers) to 
        find and deliver solutions that are better than permanent cash 
        benefits for some persons. These solutions must recognize that 
        there is no one answer for the complex work disability. 
        Incentives for training and job placement for both employer and 
        employee is just one idea to be further honed.

    SSDI is for some the only and the right answer. For others, 
it is a building block on which other programs rest. However as 
the nature of illness and injury change, as work and the work 
place change, as people change--so must the program if it is to 
continue as a meaningful protection against disability by 
providing a range of relevant benefits and services.
      

                                


    Chairman Shaw. Thank you, Ms. Owens.
    Ms. Ford.

   STATEMENT OF MARTY FORD, ASSISTANT DIRECTOR, GOVERNMENTAL 
AFFAIRS, ARC OF THE UNITED STATES; AND COCHAIR, SOCIAL SECURITY 
     TASK FORCE, CONSORTIUM FOR CITIZENS WITH DISABILITIES

    Ms. Ford. Chairman Shaw and Members of the Subcommittee, 
thank you for this opportunity to discuss the Social Security 
system's solvency issues from the perspective of people with 
disabilities.
    People with disabilities have a stake in Social Security 
reform. We believe that the title II, Old-Age, Survivors, and 
Disability Insurance Programs are insurance programs, not 
investment programs, designed to reduce risk from certain 
specific or potential life events, for the individual. They 
insure against poverty in retirement years. They insure against 
disability limiting an individual's capacity to work, and they 
insure dependents and survivors of workers who become disabled, 
retire, or die.
    In fact, more than one-third of all Social Security benefit 
payments made monthly are to people who are nonretirees. People 
with disabilities benefit from the title II trust funds under 
several categories of eligibility. They include, obviously, 
disabled workers, but also retirees and, I would like to point 
out, adult disabled children who are dependents of disabled 
workers and retirees and, also, adult disabled children who are 
survivors.
    People with disabilities cannot be easily separated out of 
the debate. For instance, adult disabled children receive 
benefits from their retirement and survivors' programs based on 
the work history of their parents.
    The nature of the OASDI Programs as insurance against 
poverty is essential to the protection of people with 
disabilities. The programs provide benefits to multiple 
beneficiaries across multiple generations under coverage earned 
by a single wage-earner's contributions.
    Partially or fully privatizing the Social Security Trust 
Funds would shift the risks that are currently insured against 
in title II from the Federal Government back to the individual.
    Plans which spend the current or projected Social Security 
Trust Funds on building private accounts would be devastating 
for people with disabilities, and we oppose them.
    We believe we have a system that works. We believe that 
Congress should only consider legislation that: maintains the 
basic structure of the current system, based on workers' 
payroll taxes; preserves the Social Security Disability, 
Survivors, and Retirement Programs; guarantees benefits with 
inflation adjustments; and preserves the Social Security Trust 
Funds to meet the needs of current and future beneficiaries.
    Certainly, changes will be necessary within the basic 
structure to bring the program into long-term solvency. 
However, those changes must not be so drastic as to undermine 
or dismantle the basic structure of the program.
    I need to point out that many privatization proposals try 
to address the very high transition costs associated with 
privatization through very deep cuts in the current program. In 
addition, although some solvency proposals claim to leave 
disability benefits untouched, they actually include elements 
that will hurt people with disabilities. Proposals that claim 
to offset cuts by the creation of individual accounts ignore 
the fact that many people with disabilities are significantly 
limited in their ability to contribute to those accounts for 
themselves and their families.
    In my full testimony, I have highlighted some basic 
components of the major proposals that could have a negative 
impact on people with disabilities. These are provided to 
assist in understanding how people would be affected, and they 
include the potential impact of changes to the benefit formula, 
privatization of retirement and survivors only, the whole issue 
of annuities and how they affect adult disabled children, and 
the issue of increased risk and capacity to manage accounts.
    To assist the Subcommittee--and, indeed, all parties to the 
debate--we urge the Subcommittee to follow through on a 
suggestion made at an earlier hearing at Full Committee, to 
request a beneficiary impact statement from SSA on every major 
proposal or component of a proposal under serious 
consideration. In a program with such impact on millions of 
people of all ages, it is simply not enough to address only the 
budgetary impact of change. The people impact must also be 
studied and well-understood before any change is initiated. For 
our constituency, people with disabilities, their very lives 
depend on such analyses.
    Again, I thank the Subcommittee for considering our 
viewpoints on these critical issues. People with disabilities, 
and their families, will be vitally interested in the 
Subcommittee's work, and we pledge to work with you in 
developing solvency solutions.
    Thank you.
    [The prepared statement follows:]

Statement of Marty Ford, Assistant Director, Governmental Affairs, ARC 
of the United States; and Cochair, Social Security Task Force, 
Consortium for Citizens with Disabilities

    Chairman Shaw and Members of the Subcommittee, thank you 
for this opportunity to discuss the Social Security system 
solvency issues from the perspective of people with 
disabilities.
    I am Marty Ford, Assistant Director for Governmental 
Affairs of The Arc of the United States, a national 
organization on mental retardation. I am here today in my 
capacity as a co-chair of the Social Security Task Force of the 
Consortium for Citizens with Disabilities.
    The Consortium for Citizens with Disabilities is a working 
coalition of national consumer, advocacy, provider, and 
professional organizations working together with and on behalf 
of the 54 million children and adults with disabilities and 
their families living in the United States. The CCD Task Force 
on Social Security focuses on disability policy issues and 
concerns in the Supplemental Security Income program and the 
disability programs in the Old Age, Survivors, and Retirement 
programs.
    For more than 60 years, the Social Security program has 
been an extremely successful domestic government program, 
providing economic protections for people of all ages. It works 
because it speaks to a universal need to address family 
uncertainties brought on by death, disability, and old age. The 
Social Security system has evolved to meet the changing needs 
of our society and will have to change again in order to meet 
changing circumstances in the future. However, any changes must 
preserve and strengthen the principles underlying the program: 
universality, shared risk, protection against poverty, 
entitlement, guaranteed benefits, and coverage to multiple 
beneficiaries across generations.

    People With Disabilities Have A Stake In Social Security Reform

    The Title II Old Age, Survivors, and Disability Insurance 
(OASDI) programs are insurance programs designed to reduce risk 
from certain specific or potential life events for the 
individual. They insure against poverty in retirement years; 
they insure against disability limiting a person's ability to 
work; and they insure dependents and survivors of workers who 
become disabled, retire, or die by providing a basic safety 
net. While retirement years can be anticipated, disability can 
affect any individual and family unexpectedly at any time.
    People with disabilities benefit from the Title II trust 
funds under several categories of assistance. Those categories 
include: disabled workers, based on their own work histories, 
and their families; retirees with benefits based on their own 
work histories; adult disabled children who are dependents of 
disabled workers and retirees; adult disabled children who are 
survivors of deceased workers or retirees; and disabled 
widow(er)s.
    More than one-third of all Social Security benefit payments 
are made to 16.7 million people who are non-retirees, including 
almost 4.7 million disabled workers, nearly 1.5 million 
children of disabled workers, about 190,000 spouses of disabled 
workers, and 713,000 adult disabled children covered by the 
survivors, retirement, and disability programs. Other non-
retirees include non-disabled survivors and dependents. For the 
average wage earner with a family, Social Security insurance 
benefits are equivalent to a $300,000 life insurance policy or 
a $200,000 disability insurance policy.
    Beneficiaries with disabilities depend on Social Security 
for a significant proportion of their income. Data from the 
Census Bureau's Current Population Survey indicates that, in 
1994, the poverty rate for working age adults with disabilities 
was 30 percent. The recently conducted National Organization on 
Disability--Harris Poll revealed significant data on employment 
of people with disabilities: 71 percent of working age people 
with disabilities are not employed, as compared to 21 percent 
of the non-disabled population. The capacity of beneficiaries 
with disabilities to work and to save for the future and the 
reality of their higher rates of poverty must be taken into 
consideration in any efforts to change the Title II programs.

    I. Maintaining Old Age, Survivors, and Disability Insurance as 
                           Insurance Programs

    The nature of the OASDI programs as insurance against 
poverty (for survivors; during retirement; or due to 
disability) is essential to the protection of people with 
disabilities. The programs are unique in providing benefits to 
multiple beneficiaries and across multiple generations under 
coverage earned by a single wage earner's contributions. 
Proposals that partially or fully eliminate the current sharing 
of risk through social insurance and replace it with the risks 
of private investment will be harmful to people with 
disabilities who must rely on the OASDI programs for life's 
essentials, such as food, clothing, and shelter, with nothing 
remaining at the end of the month for savings and other items 
many Americans take for granted.
    Privatization of the Social Security trust funds would 
shift the risks that are currently insured against in Title II 
from the federal government back to the individual. This could 
have a devastating impact on people with disabilities and their 
families as they try to plan for the future. The basic safety 
nets of retirement, survivors, and disability insurance would 
be substantially limited and individuals, including those with 
limited decision-making capacity, would be at the mercy of 
fluctuations in the financial markets. In this document, the 
use of the term privatization does not include the proposals 
for the federal government to invest a portion of the trust 
funds in the private market. Those proposals contemplate shared 
investment with no shift of the risks from the government to 
the individual.
    In addition, solvency plans which are likely to produce 
substantial pressure on the rest of the federal budget in the 
future could have negative impact on people with disabilities, 
ultimately reducing the other services and supports upon which 
they also must rely. Plans which spend the current or projected 
Social Security trust fund surpluses on building private 
accounts would have such negative results. Plans which create 
private accounts from non-Social Security surpluses, though 
promising, must be weighed against other priorities, such as 
preserving Medicare.
    In short, we believe that Congress should only consider 
legislation that maintains the basic structure of the current 
system based on workers' payroll taxes; preserves the social 
insurance disability, survivors, and retirement programs; 
guarantees benefits with inflation adjustments; and preserves 
the Social Security trust funds to meet the needs of current 
and future beneficiaries. Certainly, changes will be necessary 
within the basic structure to bring the trust funds into long-
term solvency. However, those changes must not be so drastic as 
to undermine or dismantle the basic structure of the program.

   II. Effects of Proposals to Privatize and to Pay for Privatization

    Many proposals try to address the very high transition 
costs associated with privatization through deeper cuts in the 
current program; these cuts could negatively affect people with 
disabilities. In addition, many solvency proposals claim to 
leave disability benefits untouched. However, as described 
below, these plans include elements that will seriously hurt 
those with disabilities. Further, proposals that claim to 
offset cuts in the basic safety net by the creation of 
individual accounts based on wages ignore the fact that many 
people with disabilities are significantly limited in their 
ability to contribute to those accounts for themselves and 
their families.
    Following are some basic components of the major proposals 
that could have a negative impact on people with disabilities. 
These must be critically analyzed since the combined effects of 
the provisions may push many people with disabilities and their 
families into or further into poverty.
    Changes to the Benefit Formula--A common element in several 
reform plans is a modification to the benefit formula so that 
the Primary Insurance Amount (PIA) is lower. This change also 
would cut disability benefits since they, like retirement 
benefits, are based on the PIA. Such a modification would 
reduce disability benefits from 8 to 45 percent or more, 
depending on the plan, with some of the major proposals 
resulting in cuts of 24 to 30 percent. Reducing the PIA would 
force more people with disabilities further into poverty.
    Access to Retirement Accounts--Under most plans, disabled 
workers younger than age 62 would not have access to their 
individual investment account to offset the cuts created by 
changes to the benefit formula. About 85 percent of disabled 
workers are below age 62 and would have to make up for lower 
disability benefits with their own resources, which may be 
limited, until age 62. In addition, those adult disabled 
children who are substantially unable to earn a living or save 
for retirement, or those workers who are disabled early in 
their work years, could have no individual retirement account 
to access, even if allowed, and could have little to no 
personal assets to supplement benefits.
    Conversions from Disability to Retirement/Adequacy of 
Accounts--Upon reaching normal retirement age, disabled workers 
(DI program) convert from disability to retirement benefits. At 
this point, disabled workers could find their individual 
accounts are inadequate because the proceeds from individual 
accounts would necessarily be limited by the fact that, while 
disabled and not working, no additional contributions could 
have been made. If the disabled worker were able to work, 
earnings would likely be lower than average. Therefore, the 
disabled worker would have far less accrued (in both principal 
and investment return) than had s/he been able to contribute 
throughout their normal working years or been able to 
contribute at higher rates due to higher earnings. Yet, Social 
Security benefits also would have been reduced due to changes 
in the benefit formula. In addition, there would be a 
substantial number of adult disabled children who would have no 
accounts or minimal accounts at retirement age.
    In addition, for each worker, there would be only one 
individual account. Now, Social Security will pay benefits to 
spouses, children, adult disabled children, surviving spouses, 
and former spouses. Under individual account proposals, those 
accounts would have to be divided among, or may be unavailable 
to, those who can now get benefits.
    Computation of Years of Work--The proposals to extend the 
computation period for retirees could hurt those people with 
disabilities whose condition or illness forces a reduction in 
work effort (with resulting lower earnings) in the years prior 
to eligibility for disability benefits. These proposals would 
increase the number of years of earnings that are taken into 
account in deciding the individual's benefit amount. 
Essentially, the number of years of ``low'' or ``no'' earnings 
that are now dropped in the computation would be reduced; thus, 
the years of low and no earnings that people with disabilities 
may experience prior to eligibility for disability benefits 
would have a more substantial effect on the individual's 
average earnings when computing their retirement benefits.
    Maintaining the purchasing power of benefits--Social 
Security benefits are adjusted for inflation so that the value 
of the benefit is not eroded over time. Some proposals would 
reduce annual cost-of-living adjustments (COLAs) by arbitrary 
amounts. These arbitrary reductions cumulate over time so that 
a 1 percent reduction in the COLA would result in a 20 percent 
reduction in benefits after 20 years. For people with 
disabilities who must rely on benefits from the OASDI system 
for a substantial period of time, cuts could be devastating. It 
is critical that benefits be set at meaningful levels to 
support such individuals and that appropriate COLAs be included 
to ensure that the purchasing power of the benefit is not 
reduced over time.
    Raising the Normal Retirement Age (NRA)--Raising the normal 
retirement age could create an incentive for older workers to 
apply for disability benefits in two ways. (1) If only the NRA 
is increased, the early retirement age benefit would be reduced 
to a greater degree than under current law (reflecting the 
actuarial reduction in benefits based on drawing benefits for a 
number of years earlier than NRA). Disability benefits, unless 
similarly reduced, would then become more attractive to older 
workers. (2) For many of those in hard, manual labor jobs who 
simply can no longer work at the same level of physical 
exertion, leaving the workforce before NRA will be necessary. 
Many would apply for disability benefits. These added pressures 
on the disability insurance program (to make up for changes in 
the retirement program) would increase costs and potentially 
create political pressure for more drastic changes in the 
disability program based upon its ``growth.''
    Privatization of Retirement and Survivors Only--Some 
privatization proposals claim they privatize retirement and 
survivors protection but leave disability protection alone. 
There would be no intended direct effect on the disability 
insurance program. However, those adult disabled children who 
depend upon retirees' dependent benefits or upon survivor's 
benefits would be directly negatively affected. The private 
accounts of the parents are unlikely to be adequate to provide 
basic support to adult disabled children for the rest of their 
lives, perhaps decades after the parents' deaths (especially if 
the parents were themselves dependent on the private accounts 
for any length of time before death) and some plans would 
require the parents to purchase annuities. Under plans where a 
deceased worker's funds go to the estate, there is no assurance 
that, upon distribution of the estate, the adult disabled child 
would be adequately protected for the future. Under some plans, 
funds are transferred to the worker's surviving spouse's 
account; again, there is no protection of the adult disabled 
child.
    Annuities--Where retirees are required to purchase 
annuities with individual account proceeds (as some plans 
require), no funds would be available for the surviving adult 
disabled child when the retiree dies. Again, the adult disabled 
child may live for decades after the death of the parent; the 
annuity approach makes no plans for these dependents/survivors.
    Opting Out of the System--One proposal which allows 
individuals to opt out of the system would require those who 
opt out to purchase disability insurance. Whether this 
insurance would be comparable to the current disability 
insurance system is unknown; currently, there is no insurance 
comparable to Social Security disability benefits which 
includes indexing for inflation and coverage of family members. 
In addition, as the disability community well knows, disability 
insurance (or for that matter, health or other insurance) is 
essentially non-existent for most people who already have 
disabilities. Also, there is no guarantee of support through 
this means for dependents or survivors with disabilities.
    Flat Retirement Benefit--One proposal would replace the 
benefit formula with a flat retirement benefit ($410 in 1996 
dollars). This plan would provide a disability benefit (based 
on the primary insurance amount) using the current law formula, 
but reduced to reflect the age-based reduction applicable to 
age 65 as the NRA rises. This would lead to a 30% reduction 
when fully phased-in. Without the protection of well-funded 
private accounts, which people with disabilities are unlikely 
to have, this reduction would harm beneficiaries in the 
disability insurance program.
    Increased Risk and Capacity to Manage Accounts--The 
increased risk associated with retirement that depends upon 
private account earnings is an issue for everyone. In addition, 
the capacity of an individual to manage these private accounts 
profitably is similarly an issue for everyone, and involves 
many factors including education, money management skills, and 
risk-taking. The risks and management issues become a much more 
significant concern when considering people with cognitive 
impairments, such as mental retardation, or mental illness, 
when the impairment creates substantial barriers to the 
individual's ability to make wise and profitable decisions over 
a lifetime. In many cases, the person may be unable to make any 
financially significant decisions. Privatization removes the 
shared-risk protection of social insurance and places these 
individuals at substantial personal risk.
    Again, we strongly recommend that the Subcommittee and 
Congress only consider legislation that maintains the basic 
structure of the current system based on workers' payroll 
taxes; preserves the social insurance disability, survivors, 
and retirement programs; guarantees benefits with inflation 
adjustments; and preserves the Social Security trust funds to 
meet the needs of current and future beneficiaries. Changes 
necessary to bring the trust funds into long-term solvency must 
not be so drastic as to undermine or dismantle the basic 
structure of the program.
    To assist the Subcommittee, and, indeed all parties to the 
debate, we urge the Subcommittee to follow through on a 
suggestion made at an earlier hearing to request a beneficiary 
impact statement from SSA on every major proposal, or component 
of a proposal, under serious consideration. In a program with 
such impact on millions of people of all ages, it is simply not 
enough to address only the budgetary impact of change; the 
people impact must also be studied and well understood before 
any change is initiated. For our constituency, people with 
disabilities, their very lives depend on such analyses.
    Again, I thank the Subcommittee for considering our 
viewpoints on these critical issues. People with disabilities 
and their families will be vitally interested in the 
Subcommittee's work; the CCD Task Force on Social Security 
pledges to work with you to ensure that disability issues 
remain an important consideration in reform analysis and 
solution development.

    ON BEHALF OF:
Adapted Physical Activity Council
American Network of Community Options and Resources
Bazelon Center for Mental Health Law
Children and Adults with Attention Deficit Disorders
International Association of Psychosocial Rehabilitation Services
National Alliance for the Mentally Ill
National Association of Developmental Disabilities Councils
National Association of Protection and Advocacy Systems
National Association of State Directors of Developmental Disabilities 
Services
National Easter Seal Society
Paralyzed Veterans of America
Research Institute for Independent Living
The Arc of the United States
United Cerebral Palsy Associations, Inc.
      

                                


   STATEMENT OF RUTH HUGHES, PH.D., CHIEF EXECUTIVE OFFICER, 
   INTERNATIONAL ASSOCIATION OF PSYCHOSOCIAL REHABILITATION 
                  SERVICES, COLUMBIA, MARYLAND

    Ms. Hughes. Chairman Shaw and Members of the Subcommittee, 
I appreciate the opportunity today to address the potential 
impact of Social Security reform on people with mental illness. 
My name is Ruth Hughes, and I am the chief executive officer of 
the International Association of Psychosocial Rehabilitation 
Services, an association that represents both individuals and 
agencies that provide treatment and rehabilitation for those 
with severe mental illness.
    Severe mental illnesses usually strike an individual at the 
beginning of adulthood, between the ages of 18 and 25. A quick 
example to help illustrate what I would like to say later: Dave 
is first diagnosed with schizophrenia and hospitalized when he 
is 18. He spends the next 7 years of his life in and out of 
treatment and rehabilitation programs. At 25, he enters the 
work force for the first time with a part-time position, making 
minimum wage. With medication and with ongoing support, he is 
able to manage 20 hours a week, but not more. Over the next 10 
years, he is in and out of the hospital and in and out of the 
work force. In his mid-thirties, the symptoms of his illness 
become more manageable, and Dave slowly works toward a full-
time position. Even with a full-time job, Dave is unable to 
cover his medication and health expenses. With his family's 
financial assistance, he just manages to get by. But as Dave 
reaches his forties, his father passes away and his mother is 
no longer able to help financially. Without adequate 
medication, Dave experiences a serious relapse, is fired from 
his position, and is rehospitalized. The slow process of 
recovery must begin again, and Dave does not reenter the work 
force for many years.
    This pattern, while it changes for every individual, is 
very typical of people with severe psychiatric disabilities. 
Most people with psychiatric disabilities enter the work force 
later; they work intermittently, as they are able to, and they 
make significantly less income than their peers. Salary over a 
lifetime is a fraction of what it might be without a mental 
illness. The cost of medication and treatment, even when health 
insurance is available, is a major and necessary living 
expense. The result is the vast majority of those persons with 
psychiatric disabilities who do work are working poor.
    Congress is currently in the process of reviewing and 
considering a number of proposals to reform the Social Security 
Program. It is important that any reform proposal not risk the 
integrity or compromise the universality of either the 
Disability Insurance Program, SSDI, or the Social Security 
Retirement Program.
    Some of the proposals to reform the retirement program have 
serious and unintended consequences for people with mental 
illness. For example, increasing the retirement age may not 
seem to have an impact on folks with disabilities. However, it 
could have a serious impact on the SSDI Program. People whose 
disabilities occur later in life, say at age 62, can take early 
retirement. But as the retirement age increases, that 62-year-
old disabled worker is forced onto the disability income rolls. 
The DI Program is already growing at an unsustainable rate. In 
a few years it is expected to begin placing a strain on the 
overall Social Security Trust Fund. An influx of older persons 
could endanger the integrity of the SSDI Program, unless the 
ramifications are carefully considered and addressed in any 
reform that happens.
    Another proposal would have people manage their own 
retirement accounts. Assuming the government requires you set 
aside the requisite funds, this might work for a disabled 
individual if you earn at or above the median national income 
for most of your working years, you are able to work during 
most of those working years, and you are a savvy investor.
    But a person who works only intermittently for low wages, 
and often part time, is unlikely to have enough at retirement 
to pay for even the basic necessities of life. For some people 
with mental disabilities, the cognitive deficits associated 
with a mental illness may, in fact, interfere with the ability 
to make prudent financial and investment decisions.
    The bottom line, Mr. Chairman and Members of the 
Subcommittee, is that no plan will enjoy the support of people 
with disabilities unless the integrity of the SSDI Program is 
protected and the universality and the progressivity that 
protects people with disabilities under the current retirement 
system is also present. It is imperative that each proposal be 
evaluated for its impact with people with disabilities and we 
address these potential and largely unintended consequences, or 
we may well destroy the fragile safety net for those with 
disabilities.
    Thank you.
    [The prepared statement follows:]

Statement of Ruth Hughes, Ph.D., Chief Executive Officer, International 
Association of Psychosocial Rehabilitation Services, Columbia, Maryland

    Chairman Shaw and members of the subcommittee, I appreciate 
the opportunity to testify this afternoon on the issue of 
Social Security solvency and reform and, in particular, to 
address this issue as it could affect people with mental 
illness.
    I am Ruth Hughes, CEO of the International Association of 
Psychosocial Rehabilitation Services, an association that 
represents individuals and agencies that provide treatment and 
rehabilitation, housing, case management, job training and 
vocational rehabilitation to people with severe mental 
illnesses.
    When we discuss the issue of Social Security reform and 
people with mental illness, it is important to start at 
beginning. Severe mental illnesses like depression, manic-
depression, and schizophrenia, usually strike an individual at 
the beginning of adulthood, between the ages of 18 and 25. Dave 
is a young man who was first diagnosed with schizophrenia and 
hospitalized when he was 18. His hopes of attending college are 
dashed, and he spends the next seven years in and out of 
treatment and rehabilitation programs. At 25 he enters the 
workforce with a part time position making minimum wage. With 
medication and ongoing support, he is able to manage 20 hours a 
week but not more. Over the next ten years he is in and out of 
the hospital and in and out of the workforce. In his mid 
thirties, the symptoms of his illness become more manageable 
and Dave slowly works toward a full time position. However the 
pay is still minimum wage; the benefits are poor, and there is 
no health insurance. Even with a full time job, Dave is unable 
to cover his medication and health expenses. With his family's 
assistance, he just manages to get by. As Dave reaches his 
forties, his father passes away and his mother is no longer 
able to provide the financial assistance his family provided in 
the past. Without adequate medication, Dave experiences a 
serious relapse, is fired from his position and is 
hospitalized. The slow process of recovery begins again, and 
Dave does not re-enter the workforce for another five years.
    Most people with psychiatric disabilities enter the 
workforce later, work intermittently as they are able, and make 
significantly less income than their peers. Salary over a life 
time is a fraction of what might be anticipated without a 
mental illness. While the unemployment rate for all people with 
disabilities is a whopping 71%, for people with psychiatric 
disabilities the rate is 85% to 90%. The cost of medication and 
treatment, even when health insurance is available, is a major 
and necessary living expense. The result is the vast majority 
of those persons with psychiatric disabilities who do work are 
working poor.
    Consequently, the current construct of the Social Security 
program, including both the disability program and the 
retirement program, is critical for people with mental illness. 
The Social Security Disability Insurance program is essential 
for people whose working career is intermittently interrupted 
because of disability. The universal coverage and progressive, 
guaranteed benefit structure of Social Security ensures that 
people whose lives have been impacted by severe disabilities, 
including mental illnesses, do not approach retirement age 
staring at poverty.
    Congress is currently in the process of reviewing and 
considering a number of proposals to reform the Social Security 
program. While consensus around a specific plan has not been 
reached, it is important that any reform proposal not risk the 
integrity or compromise the structure of either the Disability 
Insurance program, SSDI, or the Social Security retirement 
program.
    Some of the proposals could have serious consequences for 
people with mental illness. For example, accelerating the 
increase in the retirement age seems fairly noncontroversial. 
However, it could have a severe impact on the SSDI program. 
People whose disabilities occur later in life, say at age 62, 
can take early retirement and qualify for Social Security 
rather than SSDI. But as the retirement age increases, that 62 
year old disabled worker is forced onto the DI rolls where they 
will stay until they transfer to the retirement program. The DI 
program is already growing at an unsustainable rate. In a few 
years, it is expected to begin placing a strain on the overall 
SS Trust Fund. An influx of older disabled persons could 
endanger the integrity of the SSDI program unless the 
ramifications are carefully considered.
    Another proposal would have people manage their own 
retirement accounts. Assuming the government requires you set 
aside the requisite funds, its probably not a bad idea IF you 
earn at or above the median national income for most of your 
working years and are a savvy investor. In that case a disabled 
individual could and probably would save enough for retirement. 
But a person who works only intermittently, for low wages and 
often part time is unlikely to have enough at retirement to pay 
for the basic necessities of life. For some people with mental 
disabilities, the cognitive deficits associated with the 
disability may in fact interfere with the ability to make 
prudent investment decisions.
    I have only touched on a couple of the proposals that 
Congress might consider, but the bottom line, Mr. Chairman and 
members of the subcommittee, is that no plan will enjoy the 
support of people with disabilities unless the integrity of the 
SSDI Program is protected and the universality and 
progressivity that protects them under the current retirement 
system is present. It is imperative that each proposal be 
evaluated for its impact on people with disabilities and any 
potential unintended consequences which may destroy the fragile 
safety net for those with severe disabilities.
    Again, Mr. Chairman, thank you for the opportunity testify 
this afternoon.
      

                                


STATEMENT OF RICHARD V. BURKHAUSER, CHAIR, DEPARTMENT OF POLICY 
 ANALYSIS AND MANAGEMENT, CORNELL UNIVERSITY, ITHACA, NEW YORK

    Mr. Burkhauser. Thank you, Chairman Shaw. The following 
four propositions reflect my perspective on how to save Social 
Security, while protecting the most vulnerable members of our 
society.
    One, every person in this room will die. This proposition 
requires no additional evidence. Unfortunately, it will occur 
even if you come from a safe district.
    Two, most of us will experience the onset of a disability 
before we die, and many of us will do so while we are of 
working age. My research shows that most adults with 
disabilities experience their disability as adults.
    Three, the most effective way to observe the importance of 
disability on work and economic well-being is to follow people 
before and after the onset of a disability. In tables 1 and 2 
of the paper that I am submitting, I do this and show that, 
thanks to increases in the work of other family members and our 
Social Security safety net, the onset of a disability is not a 
devastating event for most people. While not perfect, on 
average, our system works to prevent serious economic losses, 
including a drop into poverty, following a disability.
    Four, the social welfare networks created in western 
countries to offset economic effects of old age, death of a 
spouse, and disability are in financial trouble. Two main 
demographic forces are behind this problem. The first and best 
known is the graying of the aging baby boomers. At age 53, I am 
the oldest of that post-World War II generation that will 
increasingly start knocking at the door of the disability 
system over the next decade and the retirement system in the 
following decade.
    The second is the long-run improvement in both age-specific 
mortality and morbidity rates and the expected improvement of 
those rates in the future. I show that in table 3.
    In the years between 1930, when the baby boomers parents 
were born, and 1990, when their children were born, life 
expectancies at birth increased by 10 years for both men and 
women. Even more important, recent studies have shown that the 
age-specific risk of disability over the life cycle has 
declined.
    The problem with this good news is that the primary risk 
that Social Security protects us against--that is, living too 
long after retirement; hence, running out of money to support 
ourselves--will be much greater for the baby boomers than it 
was for our parents, and even riskier for our children.
    Hence, as I see it, baby boomers and their children have 
three choices: Save more to pay for a greater number of years 
in retirement, either through higher Social Security taxes or 
privately; work to an older age than did their parents, or 
agree to die at the same age as their parents and, even better, 
their grandparents.
    Let me suggest that not only is option 2 viable for most 
baby boomers, but it can be accomplished without dramatically 
increasing the risk of poverty for most people. In my work and 
in a new CBO study, we confirm that the vast majority of 
workers who currently take early Social Security benefits are 
in good health, could continue to work, and have other sources 
of income sufficient to keep them out poverty, even if they had 
not received Social Security.
    Table 4 shows, for instance, that only 7 percent of men who 
took early retirement benefits were both in poor health and did 
not have an employer pension. The number is a little higher for 
blacks. It is 11 percent. But like whites the vast majority of 
blacks are fully capable of working or have private pension.
    However, it is imperative that social policy encourage work 
without abandoning the minority of older people with poor 
health and little wealth who cannot continue to work. Can this 
be done?
    The answer is demography is not destiny. To see the power 
that public policy plays in the way people exit the labor 
force, it is useful to compare the United States and the 
Netherlands. Both countries have seen dramatic improvements in 
the wealth and health of their populations. However, the Dutch 
have among the highest taxes on work in Western Europe, and 
they fund an elaborate and highly protective social insurance 
system that provides strong incentives to workers to leave the 
labor force through the disability rolls. Appendix tables 1 and 
2 of my paper show the results of such policies. The Dutch have 
dramatically higher ratios of disability transfer recipients 
per 1,000 workers at all ages, and Dutch workers leave the 
labor force far earlier than we do in this country. These 
outcomes are the result of policy decisions, not differences in 
the underlying health of the two countries.
    So what policies should we pursue?
    (a) Better integrate people with disabilities in the work 
force. This is the goal of the Americans with Disabilities Act 
of 1990. In addition to enforcing this law, we need prowork 
policies to do something for the Daves of the world that we 
just heard Ruth Hughes talk about to keep them in the work 
force. We should provide tax subsidies for employers who 
experience real costs in accommodating workers with 
disabilities; as well as tax subsidies for relatively low 
productivity workers or part-time workers via disability tax 
credit.
    In my view President Clinton's greatest achievement, which 
he achieved with bipartisan support, was the increase in the 
earned income tax credit. But his advisors told him: People 
with disabilities aren't expected to work. So that tax credit 
doesn't do much for folks with disabilities. People with 
disabilities can work and this credit should be targeted toward 
them. Tax subsidies for health care insurance, should also be 
considered.
    All of these credits can be paid for if we agree that 
healthy workers should work to age 65. However, not everyone 
can work. We need to adjust other elements of the social safety 
net for those who can't work.
    Two changes that should be considered if we raise the 
earliest age for Social Security retirement benefits to 65 are: 
lowering the age of Old Age Supplemental Security Income 
benefits from 65 to 62 and maintaining age as a vocational 
factor in determining disability eligibility. These two changes 
will provide a safety net for those who cannot work to age 65 
in a far better-targeted manner than our current system, and 
for far less cost both to the Federal budget and, more 
importantly, to the productivity of our country.
    Thank you, and I look forward to your questions.
    [The prepared statement follows:]

Statement of Richard V. Burkhauser, Chair, Department of Policy 
Analysis and Management, Cornell University, Ithaca, New York

    The following propositions based on my past research 
reflect my perspective on how to save Social Security while 
protecting the most vulnerable member of our society.

1. Every person in this room will die.

    This proposition requires no additional evidence, 
unfortunately and will occur even if you come from a safe 
district.

2. Most of us will experience the onset of a disability before 
we die, and many of us will do so while we are of working age.

    Based on data from the Health and Retirement Study, a major 
new longitudinal data study funded by a government consortium 
lead by the National Institute on Aging (NIA), Burkhauser and 
Daly (1996) show that most people with disabilities aged 51 to 
61 in 1992 experienced the onset of their disability as an 
adult.

3. The most effective way to observe the importance of 
disability on wealth and economic well-being and the ability of 
government policies to ameliorate a disability's influence is 
to track the labor earnings and economic well-being of people 
with disabilities before and after onset of a disability.

    Burkhauser and Daly (1996) do so and find that, thanks to 
increases in the work of other family members and Social 
Security Disability Insurance (SSDI) and Supplemental Security 
Income-disability (SSI) safety net benefits, the onset of a 
disability is not a devastating economic event for most people. 
(See Tables 1 and 2.) For men, the median change in before 
government income is a drop of 10 percent. When government 
transfers are taken into consideration the news is even better. 
After one year the median fall for men is less than 3 percent.
    While not perfect, on average our disability system works 
to prevent serious economic losses including a drop into 
poverty for the households of adults who experience the onset 
of a disability. Hence, if forced to label persons with 
disabilities as either heroes who overcame their disabilities 
or as victims who were overwhelmed by them and suffered 
dramatic economic losses, the stereotype I would choose is 
hero.

4. The sophisticated social insurance and welfare network 
created in Western Industrialized Countries to offset the 
economic effects of old age, death of a spouse, and disability 
are in financial trouble.

    Two major demographic forces require changes in the across 
generation social contract that establishes the size and scope 
of social security protection in most Western Industrialized 
Countries. The first and best known is the graying of the 
babyboom generation. At age 52, I am the oldest of that post-
World War II generation that will increasingly make use of the 
SSDI and SSI disability rolls over the next decade and of the 
social security retirement system (OASI) in the following 
decade.
    The second is the long-term improvement in both age 
specific mortality and morbidity rates, and the expected 
improvement in those rates in the future (See Table 3). In the 
years between 1930, when the babyboomers' parents were born, 
and 1990, when their children were born, life expectancy at 
birth increased from age 66 to 76 for men and from age 73 to 83 
for women. Even more important, recent NIA studies by Ken 
Manton and others have shown that the age specific risk of a 
disability over the life-cycle has also declined.
    The problem that this good news brings to our social 
security retirement system is that the primary risk that social 
security old-age insurance protect us against--living too long 
after retirement and hence running out of money to support 
ourselves--will be much greater for babyboomers then it was for 
their parents and even riskier for their children. Hence, 
babyboomers and their children have three choices:
    1. Save more to pay for a greater number of years in 
retirement either through higher Social Security taxes or 
privately.
    2. Work to an older age then did their parents.
    3. Agree to die at the same age as did their parents or 
even better their grandparents.
    Let me suggest that not only is option two viable for most 
babyboomers but it can be accomplish without dramatically 
increasing the risk of poverty for most people without 
disabilities. Burkhauser, Couch and Phillips (1996) show and a 
new Congressional Budget Office study (Smith, 1999) confirms, 
that the vast majority of workers who took early Social 
Security benefits in the early 1990s were in good health, could 
have continued to work, and had other sources of income 
sufficient to keep them out of poverty, even if they had not 
received Social Security. Table 4 using data from the HRS shows 
for instance, that only 7 (11) percent of white men who took 
early OASI benefits were both in poor health and did not have 
an employer pension.
    Major improvements in the health and wealth of older 
workers make it clear that the vast majority of such workers 
could cope with an increase to age 65 as the earliest age of 
Social Security retirement. (This was the earliest Social 
Security retirement age for men prior to 1961.) However, it is 
imperative that social policy encourage increased work without 
abandoning the minority of the older working age population 
with poor health and little wealth who can not continue 
working.
    Table 5, taken from Burkhauser and Weathers (1998) uses HRS 
data to show the wealth distribution of men and women aged 51 
to 61 in 1992. In each of the bottom four deciles of the wealth 
distribution, expected OASI benefits make up the majority of 
their wealth portfolio. Hence, those proposing changes in the 
Social Security System must recognize its importance in the 
lives of older Americans.

                           Does Policy Matter

    Demography is not destiny. Public policies can be enacted 
to adjust our social welfare system to the problems associated 
with the longer and healthier lives succeeding generations of 
Americans will lead. To see the power that public policies play 
in the way people exit the labor force, it is useful to compare 
labor force behavior in the United States and The Netherlands. 
Both of these Western Industrialized Countries have seen 
dramatic improvement in the wealth and health of their 
populations. However, the Dutch have among the highest taxes on 
work in Western Europe and fund an elaborate and highly 
protective social insurance system that provides strong 
incentives for workers to leave the labor force through the 
disabilities rolls. Appendix Tables 1 and 2 show the results of 
such policies. The Dutch have dramatically higher ratios of 
disability transfer recipients per worker than does the United 
States at all ages and leave the labor force far earlier than 
we do in this country. These outcomes are the result of policy 
decisions not in differences in the underlying health of the 
two countries. Public policy can either focus on better 
integrating people with disabilities into the labor force or on 
encouraging them to leave the labor force.

Preserving the social security safety net for people with disabilities 
    while saving the Social Security System from demographic forces

A. Better integrate people with disabilities into the workforce

    Social Security is funded by a tax on work and it provides 
benefits based on past labor earnings. Hence for the health of 
the system as well as to best protect people with disabilities 
when they must leave the labor force, people with disabilities 
should work as long as other Americans. It is therefore in 
their interest and the interest of society that the market 
place be accessible. This is the goal of The Americans with 
Disabilities Act of 1990 (ADA). In addition to enforcing this 
law, pro-work policies for people with disabilities should 
include:
     Tax subsidies for employers who accommodate 
workers with disabilities. This carrot of subsidy to offset 
accommodation cost along with the regulatory stick of the ADA 
would encourage employers to keep people with disabilities on 
the job. Burkhauser, Butler, Kim and Weathers (forthcoming) 
provide evidence that accommodation substantially extends work 
and reduces dependence on SSDI.
     Tax subsidies for relatively low-productivity 
workers via a Disabled Worker Tax Credit. This pro-work subsidy 
could, for instance, help to transition the one million 
children now on the SSI-children transfer rolls into the labor 
force rather than onto the permanent SSI rolls. (See 
Burkhauser, Glenn and Wittenburg, 1997 for fuller discussion)
     Tax subsidies for health care insurance. Medicare 
buy-ins for people with disabilities would offset the single 
most difficult obstacle for people with disability--who have 
greater risks of future health care cost--to being offered and 
accepting market work. For workers with disabilities who are 
fully integrated into the work force, no specific changes in 
Social Security policy are necessary. For those who are not we 
must turn to transfer policies.

B. Adjust other elements of the social safety net for those who 
can't work

    Two changes in our Social Security System that should be 
consider if we raise the earliest age of OASI benefits to age 
65 are:
     Lower the age of Supplemental Security Income--Old 
Age From 65 to 62. Supplemental Security Income (SSI) was 
established in 1972 to provide a social safety net under the 
aged and disabled who did not have sufficient OASDI benefits to 
reach a minimum income floor. Eligibility based on age should 
be lowered to age 62 as the earliest age for Social Security 
benefits is raised to 65. This would offer a guaranteed minimum 
income to the small minority of older workers who could not 
work to age 65 and who do not have the financial means to 
support themselves.
     Maintain Age as a vocational factor in determining 
SSDI and SSI disability eligibility. SSDI and SSI-disability 
already provide benefits to workers under age 65 who are not 
capable of substantial gainful activity. Age is and should be a 
factor in determining disability status from those unable to 
work. Such a criteria ensures those older persons of working 
age who are covered by SSDI that these benefits are available 
if they are unable to work.

                               References

    Aarts, Leo J. M., Richard V. Burkhauser, and Philip P. de Jong 
(eds.). 1996 Curing the Dutch Disease: An International Perspective on 
Disability Policy Reform. Aldershot, Great Britain: Avebury, Ashgate 
Publishing Ltd.
    Burkhauser, Richard V., J. S. Butler, Yang-Woo Kim, and Robert W. 
Weathers. Forthcoming ``The Importance of Accommodation on the Timing 
of Male Disability Insurance Application: Results from the Survey of 
Disability and Work and the Health and Retirement Study.'' Journal of 
Human Resources.
    Burkhauser, Richard V., Kenneth A. Couch, and John W. Phillips. 
1996 ``Who Takes Early Social Security Benefits: The Economic and 
Health Characteristics of Early Beneficiaries, ``The Gerontologist, 
36(6) (December): 780-799.
    Burkhauser, Richard V. and Mary C. Daly. 1996 ``Employment and 
Economic Well-Being Following the Onset of a Disability: The Role for 
Public Policy.'' In Jerry Mashaw, Virginia Reno, Richard V. Burkhauser, 
and Monroe Berkowitz (eds.), Disability, Work and Cash Benefits. 
Kalamazoo, MI: W.E. Upjohn Institute for Employment Research (1996), 
pp. 59-102.
    Burhauser, Richard V., Debra Dwyer, Maarten Lindeboom, Jules 
Theeuwes, and Isolde Woittiez. Forthcoming ``Health, Work, and Economic 
Well-Being of Older Workers, Aged 51 to 61: A Cross-National Comparison 
Using the United States HRS and the Netherlands CERRA Data Sets.'' In 
James Smith and Robert Willis (eds.). Wealth, Work, and Health: 
Innovations in Measurement in the Social Sciences. Ann Arbor, MI: 
University of Michigan Press.
    Burkhauser, Richard V., Andrew J. Glenn, and David C. Wittenburg. 
1997 ``The Disable Worker Tax Credit.'' In Virginia Reno, Jerry Mashaw, 
and William Gradison (eds.), Disability: Challenges for Social 
Insurance, Health Care Financing and Labor Market Policy. Washington, 
DC: National Academy of Social Insurance, pp. 47-65.
    Burkhauser, Richard V. and Robert W. Weathers. 1998 ``Access to 
Wealth Among the New-Old and How it is Distributed: Data From the 
Health and Retirement Study'' Ford Foundation Conference on the 
Benefits and Mechanisms for Spreading Asset Ownership, New York City, 
December.
    Phillips, John W. 1997. ``Essays on the Accumulation and Transfer 
of Wealth at Older Ages.'' Syracuse University Ph.D. dissertation.
    Smith, Ralph E. 1999. ``Raising the Earliest Eligibility Age for 
Social Security Benefits'' Congressional Budget Office Papers. 
Washington, DC: GPO.

          Table 1. Economic Changes Following the Onset of a Disability among Working Age Men and Women in the United States, 1970-1989 \1\ \2\
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                              Men                                             Women
                                                       -------------------------------------------------------------------------------------------------
                                                                                 Equivalent Median 1991                           Equivalent Median 1991
                                                         Percent                       Dollars \4\        Percent                       Dollars \4\
                      Time Point                         Working   Median Labor ------------------------  Working   Median Labor -----------------------
                                                         Positive  Earnings \3\    Before       After     Positive  Earnings \3\    Before       After
                                                          Hours                  Government  Government    Hours                  Government  Government
                                                                                   Income      Income                               Income      Income
--------------------------------------------------------------------------------------------------------------------------------------------------------
Two Years Prior.......................................       90.4       21,215       17,347      16,224       67.3        5,063       18,247      16,842
One Year Prior........................................       90.8       21,543       18,381      16,812       68.0        6,582       19,921      17,370
Year of Disability Event..............................       87.2       18,760       16,434      16,160       70.0        5,995       19,827      17,923
One Year After........................................       72.3       13,220       14,567      15,739       63.6        3,277       18,446      17,859
Two Years After.......................................       68.2       11,798       13,930      15,406       57.6        1,699       20,251      18,537
Median Percent Changes From:
One Year Prior to One Year After Disability...........         na        -24.0         -9.7        -2.6         na        -41.0          1.7         5.0
One Year Prior to Two Years After.....................         na        -31.0        -12.1        -3.7         na        -61.7          5.5         7.6
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The sample is based upon data from the 1970 to 1989 waves of the PSID. The sample includes household heads and spouses who report two consecutive
  periods of no disability followed by two consecutive periods of disability, who were between the ages of 25 and 61 at onset. A period of disability is
  one in which the respondent reports that a physical or nervous condition limits the type of work or the amount of work that he/she can do.
\2\ Sample size for men in the first four periods is 725. It is 677 in the fifth period (two years after). Sample size for women in the first four
  periods is 303. It is 236 in the fifth period (two years after). The sample size is smaller for women because the PSID did not ask about spouses'
  disability status until 1981.
\3\ Median labor earnings includes zero earnings. Earnings are in 1991 dollars.
\4\ Before and After Government incomes are adjusted for household size using the equivalence scale implied by the United States poverty line. Income to
  Needs ratios can be computed by dividing equivalent median income by the 1991 one person poverty threshold of $6,932.
Source: Burkhauser and Daly (1996), Table 4, p. 71.


[GRAPHIC] [TIFF OMITTED] T7557.023


   Table 3. Life Expectancy for Babyboomers, Their Parents, and Their
                                Children
------------------------------------------------------------------------
                                     Life Expectancy in Years
                         -----------------------------------------------
  A Person    Will Reach           Males                  Females
  Born in:    Age 65 in: -----------------------------------------------
                           At Birth    At Age 65   At Birth    At Age 65
------------------------------------------------------------------------
      1930         1995         65.7        15.6        73.4        19.8
      1955         2020         71.9        16.8        79.5        21.0
      1990         2055         76.4        18.2        83.3        22.7
------------------------------------------------------------------------
Source: Office of the Social Security Actuary, 1992.



 Table 4. Employer Pension Eligibility, Health, and Household Net Assets of Men and Women Who Take or Postpone Taking Social Security Benefits at Age 62
                                                                     in 1993 or 1994
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                   Takers                          Postponers
                                                                                     -------------------------------------------------------------------
                                                  Employer Pension  Poor Health 1994            Median Household Net              Median Household Net
             Race                    Gender        Eligibility \1\         \2\        Sample           Assets           Sample           Assets
                                                                                       Share --------------------------  Share -------------------------
                                                                                       [obs]      1992         1994      [obs]      1992         1994
--------------------------------------------------------------------------------------------------------------------------------------------------------
Black.........................  Men.............  yes.............  yes.............   0.18*           --           --   0.07*           --
                                                  yes.............  no..............   0.43       $90,000     $102,500   0.41       $83,250      $78,000
                                                  no..............  yes.............   0.11*           --           --   0.21        $2,500         $105
                                                  no..............  no..............   0.29*           --           --   0.31       $32,900      $48,000
White.........................  Men.............  yes.............  yes.............   0.15      $193,000     $103,750   0.11      $123,000     $105,000
                                                  yes.............  no..............   0.51      $180,550     $202,700   0.50      $180,250     $218,465
                                                  no..............  yes.............   0.07*           --           --   0.09      $144,350     $161,000
                                                  no..............  no..............   0.28      $207,480     $218,500   0.29      $203,000     $194,500
Black.........................  Women...........  yes.............  yes.............   0.03*           --           --   0.07*           --
                                                  yes.............  no..............   0.35       $82,750     $126,750   0.19       $85,500     $126,000
                                                  no..............  yes.............   0.27        $7,200      $33,000   0.29        $3,100       $5,750
                                                  no..............  no..............   0.35       $56,000      $46,900   0.45       $36,750      $44,750
White.........................  Women...........  yes.............  yes.............   0.03*           --           --   0.07      $140,100     $216,300
                                                  yes.............  no..............   0.20      $153,000     $198,000   0.36      $190,000     $225,000
                                                  no..............  yes.............   0.26      $199,250     $154,500   0.16       $92,468      $77,500
                                                  no..............  no..............   0.51      $187,000     $191,500   0.40      $166,150     $192,750
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Respondent reports either receiving private pension income in 1992 or that they expect to receive private pension income in the future.
\2\ Respondent reports being in fair or poor health in 1994.
*Less than ten observations. Medians are not reported in these cases.
Source: Health and Retirement Study, Gamma version of Wave 1 (1992) and Beta version of Wave 2 (1994). For more details see Phillips (1997).



  Table 5. Distribution of Total Net Household Wealth and its Components by Person-Based Wealth Deciles in 1992
                                         for Persons Aged 51 through 61
                                                (in 1992 dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                     Mean Net
                                  Mean Total Net     Mean Net        Mean Net         Social         Mean Net
          Wealth Decile               Wealth         Financial    Housing Wealth     Security     Pension Wealth
                                                      Wealth                          Wealth
----------------------------------------------------------------------------------------------------------------
Bottom..........................          34,084           2,801          -5,015          35,570           1,115
                                      (0.86) \1\          (0.20)         (-0.10)          (3.64)          (0.16)
 2..............................          77,890           5,888           8,781          58,955           4,522
                                          (1.97)          (0.48)          (1.99)          (6.89)           (.74)
 3..............................         115,625          14,588          17,707          72,604          10,859
                                          (2.92)          (1.22)          (4.06)          (8.61)          (1.79)
 4..............................         155,189          22,496          28,285          84,366          20,201
                                          (1.92)          (1.84)          (6.37)          (9.82)          (3.24)
 5..............................         195,646          33,913          35,774          91,353          34,299
                                          (4.94)          (2.87)          (8.32)         (10.99)          (5.74)
 6..............................         243,018          52,211          44,280          95,240          51,262
                                          (6.13)          (4.21)          (9.82)         (10.92)          (8.17)
 7..............................         301,493          79,162          54,482         100,275          67,727
                                          (7.61)          (6.40)         (12.12)         (11.53)         (10.83)
 8..............................         380,665         109,862          64,561         106,528          99,616
                                          (9.63)          (8.92)         (14.41)         (12.29)         (15.98)
 9..............................         518,327         186,173          76,772         109,304         146,311
                                         (13.09)         (14.92)         (16.92)         (12.45)         (23.18)
 Top............................       1,210,203         750,315         124,991         115,263         194,356
                                         (30.57)         (58.93)         (26.99)         (12.86)         (30.17)
 All............................         319,395         124,115          45,146          87,338          62,795
                                         (100.0)         (100.0)         (100.0)         (100.0)         (100.0)
 Share of Total Wealth..........          100.00           38.86           14.13           27.34           19.66
GINI \2\........................            0.49            0.75            0.45            0.10            0.59
90-10 Ratio.....................           10.93          4058.5              --            3.46              --
----------------------------------------------------------------------------------------------------------------
Source: Burkhauser and Weather (1998) based on data from the Health and Retirement Study Weave 1 Final Release.
Notes: HRS sample weights were used to make the sample representative of men and women aged 51 through 61 in
  1992. Equivalence scale is (e) = 0.5.
\1\ Column shares are in parentheses.
\2\ All negative wealth values are assigned a zero value in the calculations



  Appendix Table 1. Disability Transfer Recipients per Thousand EmployedWorkers by Age in the United States and
                                                 The Netherlands
----------------------------------------------------------------------------------------------------------------
                  Population                       1970       1975       1980       1985       1990       1994
----------------------------------------------------------------------------------------------------------------
Aged 15 to 64
    United States.............................         27         42         41         41         43         62
    The Netherlands...........................         55         84        138        142        152        151
Aged 15 to 44
    United States.............................         11         17         16         20         23         38
    The Netherlands...........................         17         32         57         58         62         66
Aged 45 to 59
    United States.............................         33         68         83         71         72         96
    The Netherlands...........................        113        179        294        305        339        289
Aged 60 to 64
    United States.............................        154        265        285        254        250        294
    The Netherlands...........................        299        437      1,033      1,283      1,987      1,911
----------------------------------------------------------------------------------------------------------------
Source: Aarts, Leo J.M., Richard V. Burkhauser, and Philip P. De Jong (eds.). Curing the Dutch Disease: An
  International Perspective on Disability Policy Reform. Aldershot, Great Britain: Avebury (1996).



   Appendix Table 2. Prevalence of Work and Transfer Benefits for Men by Age in The Netherlands and the United
                                                     States
----------------------------------------------------------------------------------------------------------------
                                                                                        Not Working
                                                                          --------------------------------------
                             Age                              Working \1\    Disability     Employer
                                                                           Transfers \2\  Pension \3\  Other \4\
----------------------------------------------------------------------------------------------------------------
United States
    51......................................................        82.6           4.1           0.9        12.4
    52......................................................        84.9           3.0           2.4         9.9
    53......................................................        82.8           3.5           0.5        13.2
    54......................................................        84.6           2.9           2.7         9.8
    55......................................................        78.5           4.5           1.8        15.3
    56......................................................        76.9           5.0           6.3        11.8
    57......................................................        80.3           4.6           7.0         8.0
    58......................................................        71.5           7.5           9.2        12.0
    59......