[House Hearing, 106 Congress]
[From the U.S. Government Publishing 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.
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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\
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\1\ Social Security Reform: Implications for Women's Retirement
Income (GAO/HEHS-98-42, Dec. 31, 1997).
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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\
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\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.
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\3\ Covered earnings are earnings subject to the Social Security
payroll tax, up to $72,600 for 1999.
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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.
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\4\ These data include only earnings from 1951 to the year the
worker reaches age 61.
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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.
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\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.
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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\
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\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.
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\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.
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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\
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\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.
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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\
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\5\ See OMB, ``FY 1999 Mid-Session Review,'' Tables 1 and 2.
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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.
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\6\ ``Present value'' is an accounting term that measures how much
money would need to be invested today to finance future obligations.
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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\
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\7\ Heritage analysts responsible for this section are Gareth G.
Davis, Stuart M. Butler, and Daniel J. Mitchell.
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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.
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\8\ Martin Feldstein, ``The Missing Piece in Policy Analysis:
Social Security Reform,'' American Economic Review, Vol. 86, No. 2 (May
1996).
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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).
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\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.
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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\
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\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.
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2. Eliminating the Second Earner Bias: Repeal the Marriage
Penalty.\12\
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\12\ Heritage analysts responsible for this section include William
W. Beach and Rea Hederman.
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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\
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\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.
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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\
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\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.
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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.
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\15\ CBO, For Better or For Worse, p. 1.
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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\
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\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.
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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.
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\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.
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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\
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\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.
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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\
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\21\ Heritage analysts responsible for this section include William
W. Beach and Gareth G. Davis.
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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\
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\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.
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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\
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\23\ ``Talking Points on Section 125,'' Employers Council for
Flexible Compensation, Washington, D.C., 1997.
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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.
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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.
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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:
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\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.
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\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.
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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:
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\28\ See William W. Beach, ``The Case for Repealing the Estate
Tax,'' Heritage Foundation Backgrounder No. 1091, August 21, 1996.
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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\
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\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.
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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.
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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.
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\32\ Heritage analysts responsible for this section are D. Mark
Wilson and William W. Beach.
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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.
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\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.
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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.
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\34\ Inquiries concerning matters covered in this section should be
addressed to Ralph A. Rector, Project Manager for the Center for Data
Analysis.
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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\
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\35\ For a description of the model, see Center for Data Analysis
Social Security Revenue and Expenditure Model working paper, available
upon request.
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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\
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\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.
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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.
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\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.
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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.
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\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.
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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\
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\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...................................................... 68.9 6.5 9.3 15.3
60...................................................... 67.9 6.1 12.6 13.3
61...................................................... 65.9 5.6 16.0 12.5
The Netherlands
51...................................................... 83.3 13.7 0.0 3.0
52...................................................... 87.5 8.1 1.9 2.5
53...................................................... 81.9 14.1 1.7 2.3
54...................................................... 74.6 17.2 1.9 6.2
55...................................................... 72.2 16.7 3.5 7.5
56...................................................... 59.0 23.9 10.2 6.8
57...................................................... 58.7 17.4 15.6 8.3
58...................................................... 49.0 25.0 19.0 7.0
59...................................................... 44.1 23.2 27.5 5.2
60...................................................... 20.9 33.3 42.3 3.5
61...................................................... 16.8 26.9 50.5 5.8
----------------------------------------------------------------------------------------------------------------
\1\ Those who are working at the time of the interview--1993 in The Netherlands and 1992 in the United States.
\2\ Those who are not working and are receiving disability transfers at the time of the interview.
\3\ Those who are not working or receiving disability transfers but who are receiving private pension benefits
at the time of interview.
\4\ Those who are not working and receiving neither disability transfers nor private pension benefits at the
time of interview.
Source: Burkhauser, Richard V., Debra Dwyer, Maarten Lindeboom, Jules Theeuwes, and Isolde Woittiez
(forthcoming). Data from The Netherlands are weighted values of the 1993 Wave 1 CERRA Retirement Panel Study.
Data from the United States are weighted values of the 1992 Wave 1 Gamma Release of the Health and Retirement
Study.
Chairman Shaw. Thank you. Mr. Hulshof.
Mr. Hulshof. Thanks, Mr. Chairman.
Hopefully, as an appropriate segue, Mr. Burkhauser, to your
last comments, I hope each of you on the panel recognizes the
work that this Subcommittee and its former Chairman has done in
your area of expertise. I think there are Members on the
Subcommittee that do want to try to encourage and remove as
many barriers that are in the way for the disabled community to
return. I see everybody is nodding their heads.
I know that on the Senate side, Senators Kennedy and
Jeffords and others have talked about that. Mr. Chairman, my
staff tells me I would be remiss if I didn't at least mention
that there are some of us--myself, Congressman Ramstad,
Congressman Lazio, and others--that hope that we can continue
that work, but that is not the subject of this hearing. So I do
want to put that quick, 30-second commercial plug.
Thank you, Mr. Chairman.
The Social Security Trust Funds, actually, what we have
been talking about is combining both the old age survivor
insurance and the disability insurance. Actually, as I
understand it--and please correct me if I am wrong--the
disability insurance, the DI Trust Fund is really in more
trouble regarding solvency than the OASI fund. The number that
I have seen, rather than 2032, is that the DI Trust Fund will
be completely insolvent around 2019. Yet, we have not been
talking about that, or at least witnesses and advocates, that
has not been part of the equation.
Especially Dr. Hughes, you brightened when I mentioned that
this is a problem. I throw this out to any of you on the panel.
Should DI reforms be considered, as we undertake this difficult
task? Dr. Hughes, I will pick on you first.
Ms. Hughes. Well, I think that there are things happening
which we need to pay attention to. We have more people with
disabilities in this country because people are living longer.
Things that people used to die from, now they may have a
chronic illness and have a disability that, then, they can live
with, and often continue to work with, but not always.
So our risk as a country is greater than it has been in the
past, when it comes to disability. That is a fact that I think
is very important to pay attention to.
The enrollment in the SSDI Program, as I understand it, is
increasing. We are facing serious financial problems with that
portion of the program.
All of us at this table have been working to help people
change policies, so more people with disabilities can go to
work. An irony of that is that, for psychiatric disabilities,
people who are currently on SSI would be moving to the SSDI
rolls, as they work longer, and therefore, become eligible for
that. That is not going to go away; that is a fact of life.
So I think it is important to look at how the disability
program relates to and fits with the retirement program. The
structure of the program, though, is one, I think, that I
would--and many of us--would be very reluctant to see changed.
It is a financial issue rather than a structural issue.
Mr. Hulshof. OK. Anybody else want to weigh in?
Ms. Owens. I would just like to say that the line between
the DI Trust Fund and the OASI Trust Fund has always been kind
of blurry. Having been in the disability program, there have
been times in the past years where the Disability Program has,
in fact, had to borrow from the OASI Trust Fund, and there has,
in fact, been a time, as Marty tells me, that the OASI Trust
Fund borrowed, in effect, from the DI Trust Fund.
So I think, to me, the issue is not so much of the Trust
Funds. I think it does go back to your point, what you are
trying to do to fix the Disability Program. The issue is using
some of the remedies that you are suggesting of getting people
back to work and looking at the program, recognizing that one
size doesn't fit all.
So I would encourage you to think about what you are doing
in relationship to the financing issue.
Mr. Hulshof. Ms. Ford, either one, my time is running
short.
Ms. Ford. Well, I would agree with what they have both
said, and just reiterate also that people with disabilities,
particularly adult disabled children, can move back and forth
between the DI and the OAS Trust Funds, and, in fact, SSI, and
it is very difficult to try to separate them out. They really
do work better together.
Mr. Hulshof. I am sorry, Mr. Burkhauser, my time is almost
up. Let me just conclude with this general statement. Ms. Ford
mentions it, I just noted in her testimony, and perhaps others
of you have done the same. Ms. Ford, you say in your statement,
``We believe Congress should only consider legislation that
maintains the basic structure of the current system based on
workers' payroll taxes.'' I think that is where we started this
whole debate from this Congress. Yet, now that we have heard
from other expert witnesses that, as, for instance, yesterday
in the Finance Committee in the Senate, that maybe that is not
possible, especially under the marker that the President has
put out there.
So I recognize the gentleman from Michigan, who is not
here, who questioned maybe the aggressive nature of the
questions of the last panel. Yet, the point is, as we learn
more information, I think that we should challenge to some
degree, especially based on some of the experts who are telling
us that I think those are legitimate lines of questions,
whether or not we agree with a proposal.
But I really appreciate you all being here today, and
especially on the other issue, that we will have a chance to
work on that.
Thanks, Mr. Chairman.
Chairman Shaw. Mr. Matsui.
Mr. Matsui. Thank you, Mr. Chairman.
Ms. Ford, you were saying, at least in your written
testimony, that the Social Security insurance benefits are
equivalent to $300,000 of a life insurance policy and $200,000
in terms of a disability insurance policy. Where did you get
those statistics, and how was that formula acquired?
Ms. Ford. That statement comes from the Social Security
Administration in terms of the general value of, for instance,
of a young worker becoming disabled and the value of benefits
to that worker and family, or to the family of a deceased
worker.
Mr. Matsui. Because that is the number I have seen, too,
but I haven't verified it. You, obviously, have verified it at
the Social Security Administration itself.
The amount of Social Security benefits that are currently,
and will continue to be, paid out, about a third of it is in
the area of survivors and disability benefits. Obviously, that
is a substantial sum.
The different plans that you have seen, the Feldstein plan,
and I don't even know if you are familiar with the Feldstein
plan, but do those plans give you any concern in terms of
cutting back on these benefit levels, given some of the
implications on tax policy and deficits in the years ahead?
Ms. Ford. Well, that does cause us concern, and it is an
issue in terms of what happens with the rest of the Federal
budget. Even if the Social Security Trust Funds are untouched,
we have to analyze critically what is going to happen to the
rest of the surpluses, if there are surpluses, and the rest of
the budget, and the other needs that must be met. So those are
issues for us, too, yes.
Mr. Matsui. Perhaps, Dr. Hughes, you could comment on that
as well, because you represent----
Ms. Hughes. Actually, I am not familiar with those plans,
but I would be glad to take a look and get back to you and let
you know if there are some concerns we have.
Mr. Matsui. I appreciate that.
Dr. Burkhauser, in some of your studies--now you indicated
that you can increase the age of retirement----
Mr. Burkhauser. Early retirement age?
Mr. Matsui. I'm sorry?
Mr. Burkhauser. Early retirement age?
Mr. Matsui. Early retirement. I am sorry. Will you explain
that, again, to me, what you are suggesting?
Mr. Burkhauser. What I am suggesting is that, as we
increase the normal retirement age, from 65 to 67 or 68, we
ought to, in parallel, increase the early retirement age, so
that the earliest age of retirement should rise to 64 or 65.
I have used the health and retirement study to look at who,
in fact, is taking early benefits right now. The surprising
finding is that the vast majority are healthy, could work, or
they have a private pension. That study, which was highly
controversial 2 years ago, has just been verified by a CBO
study using a different data set.
I find that approximately 7 percent of men who take early
Social Security benefits are at risk. They are in poor health
and they are not eligible for a private pension. These are the
folks we need to help by moving the SSI old age down from 65 to
62. And by recognizing that some of those folks are going to
come onto the DI rolls. That is a reality.
But if we could increase the labor force participation rate
of 62-year-olds to that of 61-year-olds, we would dramatically
increase productivity and tax revenues. This would go a long
way toward doing the real things that are necessary to fund the
Social Security system--either increased work or increased
savings.
Mr. Matsui. I want to thank all four of you for your
testimony today. We appreciate it.
I yield back.
Chairman Shaw. Mr. Collins.
Mr. Collins. Dr. Burkhauser, you had an interesting thought
there on the tax incentives to encourage people to hire
disabled back to work. What type of incentive are you referring
to?
Mr. Burkhauser. Well, I had two ideas. One comes from the
National Academy of Social Insurance's proposal, I think to the
Ways and Means Committee, 2 years ago, when you asked us to
suggest ways to get folks with disabilities into the work
force. Pat Owens and I were both on that NASI task force.
One is to expand the earned income tax credit, by providing
a disabled worker's tax credit for folks aged 18 to 25 with
disabilities who work. Such a credit would encourage the
million kids now on the SSI-Kids disability rolls to transition
to work rather than go on to the permanent SSI rolls.
With regard to employers, accommodations cost money. It is
reasonable if we, as a society, think it is appropriate for
folks with disabilities to be in the work force, that we
subsidize firms who have to bear additional costs to provide
accommodations. I am in favor of carrots. I think they work
better than sticks in terms of getting firms to act in the
appropriate way.
Mr. Collins. What about in the area of health care? An
employer oftentimes is very reluctant to hire someone who is
considered disabled, because, once they come to work for them,
then they have to pick them up under their group insurance.
What kind of ideas do you have in the area of health insurance?
Any of you? Yes, Dr. Hughes.
Ms. Hughes. For many people with disabilities, but
particularly for people with psychiatric disabilities, no
health care means you are very, very ill. Without the
medication and treatment you need, you will end up in a
hospital for long, long periods of time. A person with a
psychiatric disability must have health care to work.
The unemployment rate for people with psychiatric
disabilities is 85 to 90 percent for severe disabilities. It is
incredibly high. The No. 1 barrier is the loss of health care
coverage. Income is something people are willing to take a risk
with, but not the loss of health care coverage. If they can't
get that medication and that treatment, then they are not even
going to consider trying to go to work.
They also say that, in the hundreds of programs I have
visited and talked with people with severe mental illness, the
No. 1 thing they want to do is to go to work. They want the
opportunity to do that.
Mr. Collins. How would you suggest covering them with
health care insurance? As long as they are disabled, they are
under Medicare.
Ms. Hughes. With the SSDI Program, I think if we could
change the work incentives to be more similar to those that are
currently in the SSI, and that is certainly one of the things
under some consideration now, being able to stay on Medicare or
Medicaid, depending on which is applicable, makes an enormous
difference when that person goes to work, if there is not other
health insurance available for them.
Mr. Collins. Anyone else?
Ms. Owens. I was just going to echo that, that the bills
that Mr. Hulshof was talking about, the Kennedy-Jeffords bill,
does have a provision for continuing Medicare in some cases. I
think that is an important idea to consider.
Mr. Collins. That is all. Thank you.
Chairman Shaw. Mr. Doggett.
Mr. Doggett. Just continuing that same line of questioning,
do I understand, Ms. Owens, that you feel that a significant
number of individuals with disabilities are being discouraged
from returning to the work force because they lack the ability
to maintain their Medicare or Medicaid health insurance
benefits?
Ms. Owens. Yes, I do, and I don't have the actual studies
that have been done, but there are studies of persons on
disability who say that.
Mr. Doggett. Is it your belief that the bipartisan proposal
that Senator Jeffords is offering in that regard is a
constructive way of resolving that problem?
Ms. Owens. Yes, it is.
Mr. Doggett. Is that view shared by each of our panelists?
Ms. Ford. Yes, it is shared by the Consortium for Citizens
with Disabilities Task Force on Social Security.
Ms. Hughes. Yes. We have been very involved for several
years with working on that bill, and it would be an incredible
boon to people with psychiatric disabilities.
Mr. Burkhauser. I think something needs to be done in this
regard. I am not sure whether or not Kennedy-Jeffords is the
way to do it.
For instance, one thing that might be done with regard to
Medicare that would be very encouraging to employers to hire
older workers, plus some people with disabilities, is if we
went back to the old system, when Medicare was the first payor
of health care, and the private sector's insurance policy was
the second. I think that would lead to an increase in the
demand for older workers in firms that provide health care to
their employees.
We should also extend Medicare coverage for folks with
disabilities who leave the DI rolls by allowing them to buy in.
But the key point is to not have folks with disabilities come
onto the rolls in the first place. Only about 1 percent of
folks who are on the DI rolls return to work. If we quadrupled
that, which would be a tremendous achievement, that is 4
percent. The real action is in keeping folks with disabilities
on the job and not into the rolls in the first place.
Mr. Doggett. I appreciate your responses.
Ms. Ford, I suppose that it was somewhat reassuring to hear
the Heritage Foundation at least support preserving the
existing disability insurance benefits, but I wonder, since you
were here during my colloquy with their representative and
during his testimony, if you have any reaction on behalf of
your Consortium for groups representing individuals with
disabilities concerning the idea of spinning off the disability
system and combining that with some fend-for-yourself
retirement system?
Ms. Ford. Thank you. We do have some concerns about that. I
mean, it is heartening to hear that there is no intention of
affecting the disability program, but, as I point out in our
longer testimony, in fact, all or many of the components of
plans to make changes in the system will actually affect
disability, regardless of whether they originally intend to or
not. There are a lot of issues interwoven throughout--issues of
an individual who is disabled being unable to contribute to an
account during their disabled nonworking years, questions of
whether they would even have access to that account during
those years. Upon reaching normal retirement age, would there
be an account of any value to help them?
Those are some very serious questions to ask about those
kinds of proposals, and then there are lots of other issues, as
I mentioned, dealing with adult disabled children who depend on
their parents' work history and issues of annuities, and
whether or not private accounts would be required to provide
for those adult children who may live decades beyond their
parents, and whether or not there is any kind of provision to
deal with people with disabilities throughout the programs, and
not just in the DI Program.
So we have very serious concerns, and that is why we have
addressed it in the context of components to look at, because I
don't think we are just going to see one proposal or another
proposal passed into law. I think that we are going to see
components addressed, and we want to try to look at each one of
those and what the potential impact might be.
Mr. Doggett. What are your concerns about the impact on the
adult children who might have a disability of workers in the
work force?
Ms. Ford. The adult children with disabilities?
Mr. Doggett. With disabilities.
Ms. Ford. Of workers in the work force. Social Security
uses the term disabled adult child. Their benefits are based on
the parents' work history. Essentially, the parent, through
his/her working years and paying payroll taxes, has earned
insurance coverage for their adult disabled child. It is a very
important aspect of our system. The gaps, if that were lost,
would not be filled in easily, if at all, by private insurance,
and that is part of why we raise very serious questions about
the ability to split these programs apart and do one thing in
the retirement area and something else in disability, because
they are so interwoven. The insurance benefits that are earned
are very interwoven.
Mr. Doggett. Thank you very much.
Ms. Ford. Thank you.
Mr. Doggett. Thank you, Mr. Chairman.
Chairman Shaw. Thank you, and we thank all of you for being
here. We have a lot of repair work to do; there is no question.
The Congress has too long ignored so many of these problems,
and the longer we wait, the more difficult it is going to be to
solve them. So, hopefully, we can rise up to the occasion in a
bipartisan way and solve many of these problems.
I want to thank you for highlighting the disability portion
of this, because the crisis is even greater in this area than
it is in the more visible area, being the Social Security
Retirement Fund.
Thank you very much.
We are now adjourned.
[Whereupon, at 4:45 p.m., the hearing was adjourned.]
[A submission for the record follows:]
Statement of Kristen Cox, Assistant Director, Governmental Affairs,
National Federation of the Blind, Baltimore, Maryland
As Congress discusses both the financing and restructuring
of the Social Security system, I appreciate the opportunity to
present the views of the National Federation of the Blind (NFB)
regarding Social Security earnings limit issues. There are over
fifty thousand blind people who are members of the National
Federation of the Blind. We have a local chapter of the
Federation in almost every sizable population area in this
country and a state affiliate in all states, Puerto Rico, and
the District of Columbia. In short, NFB is organized and active
in all parts of the United States.
By virtue of its size and scope NFB represents and speaks
for the blind as a collective body. We speak for older blind
persons and younger blind persons as well. The positions we
express in hearings such as these are the result of the
democratic process of debate and decision-making among people
who are blind in the United States. The supreme authority of
the Federation is its National Convention, which occurs
annually. During the convention we openly debate (and approve
or disapprove) a number of policy resolutions. In this manner
the Federation is truly the blind speaking for themselves. It
is not simply an organization speaking for the blind. All of
our elected officers and the vast majority of our members are
blind. For these reasons the NFB is widely known as the voice
of the nation's blind.
ANNOUNCED PLANS TO RESTRUCTURE THE SOCIAL SECURITY SYSTEM
Blind people have a special concern in relationship to
this subject. Most blind people are age sixty-five or older.
The retirement test affects blind retirees in precisely the
same way that it affects all senior citizens age sixty-five to
seventy. But the retirement test also affects blind people
under age sixty-five who receive Social Security benefits.
According to information available from the Social
Security Administration we estimate that this latter group is
made up of about 104,300 blind beneficiaries. There are in
addition approximately 57,000 blind individuals (most of whom
are of working age) who receive Supplemental Security Income
(SSI) payments but do not also receive disability insurance
checks. This adds up to an estimated total of 161,300 blind
beneficiaries whose work patterns and earnings could be
significantly improved by work incentives.
Until 1996, under a provision in section 223(d)(4) of the
Social Security Act, working-age blind individuals were subject
to the earnings limitation which was precisely the same as the
earnings limitation for age sixty-five retirees. This
limitation is stated in section 203(f)(8)(D) of the Social
Security Act. However, in 1996, an amendment to the Social
Security Act was attached to a debt ceiling bill. This changed
the law by creating an earnings limit for the blind which is
different from the earnings limit for age sixty-five retirees.
As a result, the earnings limit for the blind of working age is
far more severe than the earnings limit which applies to
retirees. For this reason, while we enthusiastically support
further changes in the earnings exemption threshold for
seniors, we are asking the Committee and the Congress to
exclude the conforming amendment passed in 1996 from any future
bills and hence, re-establish the link between the blind and
seniors earnings exemption thresholds.
RATIONALE
In terms of establishing the point at which an individual
becomes eligible, the Social Security Act treats blindness and
retirement age (age sixty-five) in almost precisely the same
manner. Section 216(l)(1) of the Act presently defines
retirement age as age sixty-five. The definition of blindness
is found in section 216(i)(1)(B). In looking at this definition
it is critical to understand that blindness is not the same as
disability.
The definition of disability is an ``(A) inability to
engage in any substantial gainful activity . . . , or (B)
blindness; . . . .'' In the latter case (blindness) the
inability to perform ``any substantial gainful activity'' is
not a defining condition. Blindness is defined by means of
specific visual acuity and field restrictions. Medical evidence
is used to determine whether an individual has impaired
eyesight to the extent of blindness. The determination is as
clear as it is in the case of determining whether a given
individual has reached retirement age.
Substantial Gainful Activity (SGA) is the test for
eligibility for persons who are disabled. In such cases, the
SGA guidelines are applied to determine the extent of the
disability and its relationship to an individual's ability to
work. Earnings are considered, but the SGA guidelines go far
beyond that. Factors such as ``comparability and worth of
work'' tests are also applied. The purpose of an SGA evaluation
is, therefore, to determine whether the individual is disabled.
Disability is actually defined by an individual's ``inability
to perform SGA.'' The determination of blindness under the
Social Security Act does not depend upon an SGA finding.
Although blindness is defined medically and not by SGA as
just described, there is an SGA guideline for blind people.
This is the earnings limit which is also established for age
sixty-five retirees. Also, in Title XVI (SSI) no SGA
determination is made in the case of blind individuals. They
are categorically eligible. This is exactly the same situation
for persons who have reached age sixty-five. They, too, are
categorically eligible for SSI. Of course, income and resources
may affect eligibility or payment amounts for any individual
(age 65 or blind), but the ability to work does not affect
eligibility. This is as it should be.
Unlike SSI, eligibility under Title II is not means-
tested. Social Security benefits are paid to wealthy people and
to poor people alike. True to the principles of insurance, not
welfare, income for Social Security beneficiaries can be
unlimited, but work activity is limited. For blind people as
well as for retirees this is a counterproductive policy, and it
is so for precisely the same reasons.
Blindness as we still experience it today has profoundly
adverse social and economic consequences. Therefore, Social
Security benefits should offset these consequences insofar as
possible. The social attitudes about blindness are full of
myths and misconceptions. As a group, the blind face an
incredibly devastating set of artificial impediments when they
seek to enter and compete in the labor force. The blind are not
just viewed as unemployed. We are usually considered
unemployable.
To be sure, the blind pay a heavy price for this erroneous
labeling. For example, most people agree that over seventy
percent of the employable blind population is either unemployed
or underemployed. If before blindness an individual had an
income of, say, $25,000.00 annually (not an uncommon income for
sighted individuals), and if after blindness that same
individual finds employment at $14,000.00 annually (not at all
an uncommon experience for the blind), he or she will still not
be eligible to continue receiving Social Security benefits
despite the fact that a substantial loss of income has
occurred.
Under prevailing social conditions, blind people are
pushed aside in competition for jobs and social opportunities.
This results in significant lost income which is not replaced
by Social Security. Responsibility for the prevailing attitudes
about blindness does not rest with the blind alone; it is a
general social phenomenon. However, it is the blind members of
our society who currently bear the cost in lost opportunities,
lost jobs, and lost income.
The Social Security system itself presents additional
economic barriers to the full integration of the blind. I am
referring to the direct impact of the earnings limitation.
These are the stark economic realities: under existing law, if
an individual becomes blind and has average monthly earnings
which do not exceed the ``exempt amount,'' he or she will
likely draw Social Security benefits. The individual has every
incentive to remain unemployed and not return to work at all.
Why? In the first place, the beneficiary is undoubtedly not an
expert in the law. The law is complex, and the talk of allowed
earnings, trial work periods, impairment-related work expense
deductions, and extended eligibility is confusing and not
generally conducive to an attempt to resume or continue
working.
Ironically, the work incentives for blind people under
Social Security are inversely related to the likelihood that an
individual can engage in productive activity. For example,
persons who are age seventy and older have the maximum
incentive to work--there is no limitation on their earnings.
Persons age sixty-five to seventy are faced with the
disincentive of an earnings limitation, but their earnings
exempt threshold is gradually increasing at a much higher rate
than the blind and two-thirds of their earnings are still
exempt. Blind persons under age sixty-five are subject to the
harshest penalty of all--there is an absolute barrier to
earnings over the exemption threshold. If the individual goes
to work and (after a specified trial work period) is earning
somewhere in the neighborhood of $1,110.00 per month, benefits
will be terminated.
Place yourself in the position of a blind person
considering possible employment. Remember that, including
dependents' benefits, the family income from Social Security
may exceed $1,500.00 per month in many instances. I know a
number of blind people who (believing in the work ethic) would
accept employment offering gross wages at somewhat less than
their possible Social Security income. However, many people are
simply not in a financial position which would allow them to do
so. Of course, there are also costs associated with working
that any blind person must consider. These costs may include
employment of readers or drivers or other assistants, which
will further reduce take-home pay. When all of these costs are
taken into account, many individuals find that they cannot
sustain the economic losses which may result from working.
In the example under consideration the annual Social
Security benefit available to the primary beneficiary and
dependents would be approximately $18,000.00. The blind
beneficiary who, under present law, earns $13,340.00 ($20.00
over the limit) would lose $18,000.00. Almost anyone I know
would have to refuse to take a job which would cost $18,000.00
a year as a trade-off for earning $13,340.00. This is precisely
the kind of economic choice presented to blind beneficiaries
under the present law.
Taking the example a step further, it is revealing to
examine just how much the primary beneficiary would need to
earn, if working, in order to replace the loss of $18,000.00 in
Social Security benefits. Using conservative numbers, such as
28% for all taxes (including FICA withholding) and taking into
account the cost of working (transportation, meals away from
home, blindness-related work expenses, union dues, et cetera),
I would estimate that the working blind individual would need
to have an income of $27,917.00, not including child care
expenses. Since the example includes two dependents, child care
expenses can be anticipated. A conservative estimate for child
care would be approximately $4,600.00. This amount added to
$27,917.00 means that the working blind beneficiary with two
dependents in child care would likely need to have gross income
of $32,517.00 in order to replace the buying power of the
Social Security income--$18,000.00--if lost due to working.
With the amendments to the Social Security Act passed in
1996, benefits for seniors are increasing during a seven year
period in order to reach an annual ceiling of $30,000.00 in the
year 2000. This policy of mandated adjustments for seniors is a
good one. However, it should apply to blind people and to age
sixty-five retirees alike. As I have already said, the
conforming amendment which excluded the blind from the earnings
limit change in 1996 should not be included in future bills of
this type.
The policy of linking the earnings limit for the blind and
for seniors became law with the 1977 amendments to the Social
Security Act. Mr. Archer, who was at that time the ranking
minority member of this Subcommittee and is now the Chairman of
the full Committee, is the architect of this policy. The
amendment which he offered to create the linkage was approved
with unanimous Republican support when the conferees met to
resolve differences between the Senate and House versions of
the Social Security Financing Amendments of 1977.
The 1977 bill contained five mandated increases in the
earnings exemption threshold, with automatic annual adjustments
kicking in beginning in the sixth year. Under Mr. Archer's
amendment both blind people and seniors were subject to the
mandated increases as well as to the automatic adjustments. The
current mandated adjustments to seniors' exempt earnings
threshold are the first since 1977's provisions. The precedent
clearly establishes that both the mandated increases and the
annual adjustments should apply to blind people as well as to
age sixty-five retirees.
If this is done the blind person who earns less than
$30,000.00 could not lose by working. This policy, while not
removing the earnings limit altogether, would cover the vast
majority of blind people. The harsh reality of the choice to
receive benefits or to work would seriously be diminished, and
it would be replaced by an extremely powerful work incentive.
The beneficiaries who respond will become taxpayers, and they
will join the productive ranks of our society. The blind person
is better off being productive. Society in general is better
off if the individual is productive instead of idle--working
instead of sitting at home.
Proponents of the earnings limitation complain that
individuals with high earnings will continue to receive Social
Security benefits. The fact is that the number of blind people
being paid $13,320.00 a year or more is surprisingly small.
Most blind people do not even work. Approximately 161,300 blind
persons under age sixty-five now receive Social Security or SSI
benefits. They would not be paid more as a result of increasing
the earnings exemption threshold. They would have the maximum
incentive to work, and thousands would begin paying into Social
Security.
By comparison, raising the earnings exemption threshold
would add some blind persons as new beneficiaries but this
would only be a fraction of the more than 160,000 who are now
beneficiaries. The new beneficiaries would be individuals who
earn more than the present exempt amount but less than
$30,000.00. Although they would begin to receive benefits,
there would be an overall positive effect on the Social
Security system. That would result from providing a powerful
incentive to work to more than 160,000 beneficiaries who would
not receive one dime more from Social Security. Besides, fewer
blind individuals would receive SSI as a result of becoming
Social Security beneficiaries.
Overall, there would actually be a positive cost impact on
the Social Security system resulting from increased payments
into the trust funds by working blind beneficiaries. The
greater their earnings, the greater will be the amount that
they pay into the trust funds. Considering the costs and
benefits involved, the provision which withholds the mandated
earnings limit adjustments from blind people is truly punitive.
In conclusion, I would like to restate our long-standing
position about work incentives and the counterproductive impact
of the Social Security earnings limitation. The blind as a
group are prepared to work--and work hard. The disincentives
created by Social Security force blind people into financial
dependence. We seek to renounce this status. We are asking only
for the opportunity to lead normal, self-supporting,
independent lives. If there continues to be a limitation on
earnings, those who are subject to it will be paid to remain
outside of the work force. This policy reinforces the myth that
the blind cannot be productive members of society. Until that
myth is changed, we will be subject to the conditions of
ignorance, prejudice, and discrimination which have long kept
blind people out of the mainstream. We are committed to use
work incentives effectively as instruments of rehabilitation,
self-help, and self-support for the blind. As Congress
considers ways to create a more viable and solvent Social
Security System, developing policies which support independence
verses dependence will be crucial.