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




                               before the


                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             FIRST SESSION


                             APRIL 15, 1999


                             Serial 106-10


         Printed for the use of the Committee on Ways and Means


                      U.S. GOVERNMENT PRINTING OFFICE
 58-722 CC                   WASHINGTON : 1999
                   For sale by the U.S. Government Printing Office
 Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

                      COMMITTEE ON WAYS AND MEANS

                      BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
BILL THOMAS, California              FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida           ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut        WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana               JIM McDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania      KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma                LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
RON LEWIS, Kentucky

                     A.L. Singleton, Chief of Staff
                  Janice Mays, Minority Chief Counsel


                    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
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



Advisory of April 8, 1999, announcing the hearing................     2


Social Security and Medicare Board of Trustees, Stephen G. 
  Kellison and Marilyn Moon, Public Trustees.....................     5

                       SUBMISSION FOR THE RECORD

Steinberg, Michael A., Michael Steinberg & Associates, Tampa, FL, 
  statement......................................................    38



                        THURSDAY, APRIL 15, 1999

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 10 a.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:]




FOR IMMEDIATE RELEASE                           CONTACT: (202) 225-9263
April 8, 1999
No. SS-6

                       Shaw Announces Hearing on
                 1999 Social Security Trustees' Report

    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 to examine the findings of 
the recently released 1999 Annual Report of the Board of trustees on 
the financial status of the Federal Old-Age and Survivors Insurance 
(OASI) and the Federal Disability Insurance (DI) Trust Funds. The 
hearing will take place on Thursday, April 15, 1999, in room B-318 
Rayburn House Office Building, beginning at 10 a.m.
    Oral testimony at this hearing will be from invited witnesses only. 
Invited witnesses will include the Social Security Public trustees. 
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.


    On March 30, the Social Security Board of trustees released its 
1999 Annual Report on the financial status of the trust funds. The 
report's projections regarding the Old Age, Survivors and Disability 
Insurance (OASDI) Trust Funds are slightly improved from those reported 
in 1998. For example, spending out of the trust funds is projected to 
exceed tax income in the year 2014, and the trust funds will be 
depleted by the year 2034. In last year's report, those dates were 2013 
and 2032, respectively.
    As in prior years, however, the trustees concluded that the OASDI 
program is not ``in close actuarial balance'' over the next 75 years, 
the traditional measure for the financial soundness of the system. Also 
as in prior years, the trustees once again call for action to reform 
the Social Security program: ``It is important to address the financing 
of both the OASI and DI programs soon to allow time for phasing in any 
necessary changes and for workers to adjust their retirement plans to 
take account of those changes.''
    In announcing the hearing, Chairman Shaw stated: ``Once again, the 
Trustees' Report reminds us that the Social Security reform clock is 
ticking. The trustees continue to call for reform, and no one should 
take the slight improvement noted in this year's report as an excuse 
for delay.''


    The Subcommittee will examine the findings of the 1999 Annual 
Report of the Board of trustees on the financial status of the Social 
Security Trust Funds.


    Any person or organization wishing to submit a written statement 
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch 
diskette in WordPerfect 5.1 format, with their name, address, and 
hearing date noted on a label, by the close of business, Thursday, 
April 29, 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 


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

    Note: All Committee advisories and news releases are available on 
the World Wide Web at ``http://www.house.gov/ways__means/''.

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


    Chairman Shaw. Good morning.
    By now, many Americans are familiar--in fact, I think you 
have to live on the Moon not to be familiar--with how Social 
Security works, and why reforms are needed.
    Today, 44 million Americans--1 in 6--depend on Social 
Security Retirement, Disability, or Survivor Benefits. But 
because Americans are having fewer children, living longer, and 
retiring sooner, Social Security's financing system faces 
trouble ahead.
    Each year's benefits are paid for by that year's workers, 
so as our society ages, there will be more retirees supported 
by fewer workers.
    That will place Social Security's financing system under 
increasing strain as the years go by.
    As Social Security's Trustees told us in their most recent 
annual report, this problem will become acute after 2014 when 
Social Security begins to spend more on benefits than it takes 
in through taxes.
    If we want to keep the budget balanced and pay all the 
benefits seniors are promised, other government spending will 
have to fall or taxes will have to be raised.
    By no later than 2034, Social Security benefits will have 
to be cut or taxes increased, but not just for retirees, but 
for their children and their grandchildren as well.
    That is if we fail to act. Some see the latest Trustees' 
Report as a reason to delay. Our problems are remote, they say, 
as much as 35 years away.
    But that assumes that a good solution can be reached later 
when the choices will be much more painful and much more 
    You can call me a skeptic, but I think that will be 
incredibly difficult, especially if reform is delayed until the 
crisis is actually upon us. By then, no good options will be 
    The good news is that once again, the Trustees' Report has 
served as a call to action for reasonable and ultimately 
necessary steps to preserve and strengthen our Nation's Social 
Security system.
    I am pleased that we have Social Security public Trustees 
with us to review their report and its implications, and we 
certainly look forward to your testimony.
    Mr. Matsui.
    Mr. Matsui. Mr. Chairman, I think that in the interest of 
time, I'll just submit my written statement.
    Thank you.
    [The prepared statement follows:]

Opening Statement of Hon. Robert T. Matsui, a Representative in 
Congress from the State of California

    Thank you, Mr. Chairman. I want to thank our witnesses for 
testifying today on the Social Security program's annual report 
released two weeks ago by the Social Security Board of 
Trustees. Today we will hear from the two public members of the 
Board of Trustees, Marilyn Moon and Stephen Kellison, whose 
role on the Board is to increase public confidence in the 
integrity of the Trust Funds. I look forward to hearing their 
assessments of Social Security's financial status and their 
views on proposals to restructure the program.
    Although the 1999 Trustees Report shows that Social 
Security is out of actuarial balance over the next 75 years, it 
nonetheless brings us better news than any other Trustees 
Report in the past six years. The 1999 Report projects a long-
range financing shortfall equal to 2.07 percent of taxable 
payroll and estimates that the Social Security Trust Funds will 
be exhausted in 2034, more than three decades from now. This is 
the smallest actuarial deficit and the latest projected date of 
Trust Fund exhaustion since the 1993 Trustees Report.
    Of course, this is encouraging news, but we must continue 
to be vigilant in addressing the long-term challenges 
confronting Social Security. We should take advantage of the 
projected budget surpluses and robust economy to strengthen 
Social Security and protect the retirement income security of 
all Americans for the 21st century. And I know we can do it if 
we work together.
    The 1999 Trustees Report makes it abundantly clear that, 
while the challenges Social Security faces are significant, 
they are manageable. Consequently, radically restructuring 
Social Security by replacing part or all of the progressive, 
guaranteed, life-long benefits it provides with individual 
accounts would greatly endanger the income security of future 
retirees. Individual accounts would subject the most dependable 
element of workers' retirement income to greater risk and would 
impose the burden of enormous transition and administrative 
costs on our government and our working families.
    The 1999 Trustees Report also highlights the critical 
importance of sustained economic growth in meeting our 
obligations to future retirees. According to the trustees, 
better-than-expected short-term economic growth, combined with 
a reduction in projected rates of unemployment over the long-
term, were responsible for nearly half of the improvement in 
the program's financial status. We have learned that what 
counts the most in determining Social Security's long-term 
financial status is not simply the number of Baby Boomers or 
their projected life expectancies, but the size of the economy 
during their retirement and the resources available to meet 
their needs once they are out of the workforce.
    The most direct way for the federal government to promote 
economic growth is to increase national saving by reducing the 
amount of debt held by the public. We know that national saving 
rises by one dollar for every dollar of public debt that is 
retired. In contrast, for every dollar dedicated to individual 
accounts, national saving would rise less than a dollar, since 
people would be likely to reduce other forms of saving or 
borrow more in response to the accounts.
    The President's plan makes great strides in reducing the 
amount of debt held by the public. Under his plan, budget 
surpluses would be used to reduce the amount of debt held by 
the public for sustained period of time. In fact, the amount of 
debt held by the public would ultimately reach its lowest level 
since World War I. While the reform package upon which we 
ultimately agree may differ in some respects from the 
President's plan, its impact on national saving must be the 
same if we are truly to strengthen Social Security for the 21st 
    Thank you, Mr. Chairman. And thank you again to our 
witnesses for being here. I look forward to hearing your 


    Chairman Shaw. Thank you.
    Our panel this morning, and it's our only panel, is 
composed of Stephen Kellison, who is a Trustee of the Social 
Security Board of Trustees; and Dr. Marilyn Moon, who is a 
Trustee of the Social Security Board of Trustees.
    Mr. Kellison.


    Mr. Kellison. Thank you, Mr. Chairman. It is an honor and 
privilege for Dr. Moon and myself to be with you today to 
discuss the 1999 Trustees' Reports and some of the issues that 
involve our activities surrounding those reports.
    We have been public Trustees since 1995. This is a part-
time statutory position that involves confirmation by the 
Senate, and we are privileged to serve in this role as the 
public reviewer of the process by which the Trustees' Reports 
are assembled.
    The experience under the Social Security System depends on 
a lot of variables as they develop. And these break down into 
two broad categories, the first being economic experience; and 
the second being demographic factors.
    In the economic area, we have assumptions that need to be 
made on a variety of things--gross domestic product, 
unemployment rates, wage growth, inflation, CPI, consumer 
product index, rates, productivity increases, interest rates, 
and the list just goes on and on.
    On the demographic side, we similarly have some very major 
factors. We have life expectancies to look at, fertility rates, 
disability rates that are key in the Disability Insurance 
Program, immigration rates, and others.
    This array of economic and demographic factors have to come 
together in a very complex methodology that leads to the 
results that you see in the Trustees' Reports.
    In this process, there's a very large amount of very good 
work that is done within the Social Security Administration on 
this program and similarly within the Health Care Financing 
Administration on the Medicare Programs. I would like to 
commend the work of the actuaries in those two governmental 
agencies that do a tremendous amount of the detail work that 
lies behind these reports.
    This is very high-quality professional work. I'm an actuary 
by profession, and I think this is an outstanding group of 
people and the government is very fortunate to have this 
quality of staff preparing the work that goes into these 
    The assumption-setting process is probably one of the key 
roles that the public Trustees participate in, because one of 
our charges is to assure the public and the Congress and others 
of the integrity of these assumptions, and that they are truly 
the best estimates of what expected experience under these 
programs may be.
    This year, Dr. Moon and I sponsored a series of review 
meetings with leading economists on the economic assumptions. 
There were several such meetings during the summer, probably 
the most extensive review of the economic assumptions we have 
conducted in the 4 years that we've been in this position, and 
we feel very comfortable at the conclusion of that process, 
that the assumptions that are in these reports are honest, fair 
assessments, based on the best information we have received 
from a lot of individuals, both within government and outside 
    So, we do have, I think, a clean bill of health to give in 
that regard from our public role in terms of the quality and 
integrity of the assumptions in this process.
    The 1998 results of the program were good. The financial 
condition of both the OASI, the Old Age Survivors Insurance 
Program, and the DI, or Disability Insurance Program, improved 
during 1998.
    In terms of key dates, as the Chairman has reported, the 
year 2014 is the first year where tax revenue begins to fall 
short of paying the benefits. That's an extension of about 1 
year from last year's report.
    The next key year is 2022, when the tax revenue plus 
interest falls short, and then the final year is 2034 when the 
combined OASDI Trust Fund is exhausted.
    This year of exhaustion is an extension of about 2 years 
over the 1998 report.
    In terms of the long-range actuarial deficit measurement, 
which is expressed as a percentage of taxable payroll, the 
OASDI long-term actuarial deficit declined from 2.19 percent of 
payroll to 2.07 percent, a decline of 0.12 percent, which is a 
significant decline.
    This is the second straight year of improvement, which is 
very welcome news, following many years of the trend going in 
the other direction.
    These results were driven largely by the strong performance 
of the economy during the past year--high rates of employment, 
low inflation rates, and strong wage growth.
    In terms of the Disability Insurance Program, in 
particular, there were lower rates of disability incidence than 
in years past when the economy may not have been as strong.
    One issue that deserves special mention in the assumptions 
this year is that the effects of the 0.2 percent adjustment in 
CPI, consumer product index, made by the Bureau of Labor 
Statistics in April 1998, was included in this year's report. 
It came in too late to be included in the 1998 report 1 year 
ago. That was fully reflected in this report.
    In terms of the formal tests of trust fund solvency that 
the program has experienced, the program does satisfy the 
short-range test. The OASI and DI funds are above 100 percent 
of the following year's payments, and that does persist over 
the 10-year period.
    However, the program does fail the long-range test of close 
actuarial balance. The maximum tolerance there is 5 percent, 
and the long-term actuarial deficit is much larger than that.
    In making these projections, there is a significant amount 
of uncertainty. We talked about that in our report this year. 
As part of the measures of uncertainty, we do look at some 
alternative scenarios, called alternatives I and III, to try to 
capture a range of possible outcomes.
    Despite the uncertainty and the difficulty of trying to 
make projections over a 75-year period, we are strongly 
committed to the desirability of continuing to do that. The 75-
year period has been part of the process for a long time, and 
we think it should continue.
    This is a period of time that basically encompasses a 
working lifetime and a period of retirement for a typical 
person. It is a period of time that is necessary to capture the 
full effect of demographic factors like the baby boom, and it 
does impose a discipline on our process of recognizing that 
this is a long-term program that needs frequent review as it's 
going along to continue to refine estimates of the financial 
condition of the system.
    In terms of the dynamics of the system, what is driving the 
pattern of costs is essentially a demographic issue. It was the 
baby boom generation followed by the baby bust generation, low 
fertility rates that have been fairly stable now for close to 
25 years, and increasing life expectancies, people living 
longer in retirement.
    This is what is driving the long-term financial results of 
the program.
    These factors are pretty well locked into place. They're 
not going to change dramatically in a short period of time.
    Economic factors are also important in the sense that a 
richer economy that's more productive perhaps can afford a more 
rich social insurance program; a poorer economy that's leaner, 
probably cannot afford as much of one.
    But the demographic effects will be in there, regardless of 
the performance of the economy.
    The effect is that today, Social Security is running 
surpluses because the FICA taxes bring in more revenue than the 
payments. Once the baby boom generation retires, costs escalate 
dramatically until revenues fall short of the benefits, and 
then the cost rates ultimately do stabilize, but they stabilize 
at a much higher level than they are at today.
    Another way to look at this is in terms of the worker/
beneficiary ratio. Today there are 3.4 workers per beneficiary.
    At the end of the 75-year projection period, that will fall 
to 1.8 workers per beneficiary.
    At the end of the 75-year period, the tax rates will pay 
about two-thirds of the cost of the program.
    In terms of percentages of gross domestic product as 
another measure of the magnitude of the system today, Social 
Security, OASDI, represents about 4.5 percent of the gross 
domestic product.
    At the end of the 75-year period, this will rise to a 
little over 7 percent of the gross domestic product, so that 
gives you some magnitude. It's about a 58-percent increase in 
the magnitude of the program in terms of the portion of the 
total economy that it represents.
    Another phenomenon of the current law and the financing 
program is that because cost rates are less than the tax rates 
today and higher later on, you do get a significant trust fund 
buildup, followed by a significant trust fund drawdown.
    Today, the combined OASDI Trust Fund is about 190 percent 
of 1 year's payment, well in excess of the 100 percent that we 
look at for short-term solvency. This will increase to about 
360 percent in the year 2013.
    At that point, it declines very precipitously, going to 
zero in the year 2034, so you do have this phenomenon of a huge 
trust fund built up, followed by a very significant drawdown.
    This has budgetary and macroeconomic effects. As we know, 
the effect today is that Social Security surpluses mask 
deficits in the rest of the budget.
    This will all reverse when the trend goes the other 
direction, and when Social Security would be running 
shortfalls, and that will exacerbate any deficits that exist 
    At this point, I think I've run out of time by quite a bit. 
I'd like to close with a summary and then turn it over to Dr. 
Moon who will talk about where we might go from here in terms 
of Social Security.
    I think my recap would be that 1998 was a very favorable 
year. However, the long-term picture of the program is 
relatively unchanged. The demographic issue is still there.
    There was modest improvement, but the basic picture is 
unchanged over the last several years, really.
    I think as we continue to monitor this system and work on 
the annual reports, that it's important we make the changes in 
the assumptions incrementally as experience really develops 
over a period of time.
    There is a temptation when times are good as they are now, 
to get euphoric about how well things may work out; equally, 
there are temptations when the economy is in a recession to 
think it's gloom and doom forever.
    These extremes in perspective probably are not the way to 
run a 75-year program, and I think the changes that we look at 
should be made incrementally, and I think this report was done 
in that spirit.
    At this point, I would turn it over to Dr. Moon and 
entertain questions at the end.
    Chairman Shaw. Thank you.
    Dr. Moon.
    Ms. Moon. Thank you. Like Steve, I'm very privileged to be 
here. I appreciate the chance to address the Subcommittee.
    As one of the two public Trustees, I am not the actuary, so 
I have learned a lot in the last 4 years about how these 
estimates are done, and I've also been impressed at how 
carefully the review process goes on and how difficult it is to 
look in your crystal ball 75 years into the future. These are 
not easy things to look forward to.
    Nonetheless, I think that we feel these trust fund reports 
provide a good indication of what we could likely expect, and 
provide essentially an early warning device for changes that 
are going to be needed in the program.
    And it is in that spirit, rather than taking all of the 
numbers literally, that I think we move forward. I would 
reiterate what Mr. Kellison said: Despite the good news that we 
are discussing today, there is still an urgency to make changes 
in this program because we like to think of this program as a 
very long-term program that you want to keep secure, and you 
want to assure younger people that it will still be there in 
the future.
    As a consequence, I think that vigilance is something that 
people should take very seriously.
    As we note in our testimony, payroll taxes for OASI, which 
are now at 5.35 percent each for employers and employees, would 
have to be raised, if you did it only through taxes, which we 
are not proposing, but as an illustration, by 16 percent if we 
made those changes today, to 6.2 percent of payroll.
    If we wait until the year 2025, we would have to raise 
those tax rates to a little over 7 percent each. That means not 
only a much larger increase in those burdens, but it also means 
a shifting of the burdens away from this current generation of 
baby boomers who are still working and contributing to the 
system to future generations as well.
    We also note in the testimony that we believe there are 
many ways to solve the problems, and it is not our role as 
public Trustees to advocate one particular approach, but rather 
to be here to indicate what we think will be the future for the 
trust funds with no action, and then, of course, once action is 
taken, to evaluate those in another report later on.
    We also note, however, that we do not see these problems, 
serious as they are, as ones that mean inherently you must do a 
massive structural change. We do have a choice still at this 
point in time of whether or not you have major structural 
changes or more modest, incremental changes.
    Those are choices that fortunately are still before people 
like your Subcommittee, to make those decisions, rather than 
being forced into a particular decision.
    We also note that this year's good news reminds us that we 
should not just use a few years, as Steve Kellison also said, 
of good news or bad news to make policy. The disability changes 
that occurred, for example, in the early nineties caused a lot 
of consternation and concern because it looked as though 
disability was going to rise forever, and it suddenly stopped 
with no particular understanding or reasoning as to why all 
those changes had occurred.
    So, if we had locked in a lot of changes at that point in 
time, we might now be talking about undoing them.
    Similarly, good news and bad news for a few years does not 
change the outlook of the picture, although it is interesting 
to see how even small changes in the economy can sometimes 
change the projections.
    We are, therefore, cognizant of how important it is to make 
changes in the assumptions very slowly over time, recognizing 
both the uncertainty and the need not to unduly alarm or 
reassure people by short-term changes.
    Finally, the other important thing that I think we take 
from this is that seeking 75-year fixes represents an ambitious 
undertaking. As we sit in our position, we're concerned that 
sometimes the emphasis on just a 75-year fix can lead us in the 
wrong directions.
    This can be, perhaps, either in terms of seeking only an 
all-or-nothing sort of change, only overarching changes and no 
incremental changes, or in tailoring those changes that do take 
place, only to achieving 75-year numbers. But one of the things 
we certainly have become cognizant of over time is how 
difficult it is to target 75 years into the future with 
    So, our testimony essentially urges you to make changes 
when you feel you can and there is consensus. Even if they 
don't solve the 75-year problem, perhaps that may be one way of 
adding some urgency and discussion that otherwise is lacking in 
some of the situations that we're facing in terms of trying to 
find consensus.
    In conclusion, we would add that based on our experience as 
Trustees over the last 4 years, it is clear that Social 
Security cannot and should not be insulated from all the other 
things that take place in society. Social Security will need to 
change and be adaptive.
    But it is also important that we need to think about this 
program in the very long term. That's how it was created, and 
we are strong believers in that's how it should continue.
    Thank you very much.
    [The joint statement follows:]

Joint Statement of Stephen G. Kellison and Marilyn Moon, Public 
Trustees, Social Security and Medicare Board of Trustees

    It is our privilege to be here today to testify regarding 
the financial status of the Social Security Trust Funds as 
shown in the 1999 Annual Report of the Board of Trustees of 
those funds. As you know, the Public Trustees are part-time 
officials appointed by the President and confirmed by the 
Senate to represent the public interest in this important 
process of public accountability. In our normal activities, Mr. 
Kellison is an actuary and consultant and Ms. Moon is an 
economist and researcher, both with extensive public and 
private experience in Social Security and Medicare.
    As Public Trustees, our primary activities are directed at 
assuring that the Annual Trust Fund Reports fully and fairly 
present the current and projected financial condition of the 
trust funds. To this end, we work closely with the Offices of 
the Actuary in the Social Security and the Health Care 
Financing Administrations to ensure that all relevant 
information is considered in the development of assumptions and 
methods used to project the financing of these vital programs. 
Mr. Chairman, we would note for the record what we are sure you 
and this committee know well: it is an extraordinarily complex 
task to make financing projections for these programs for the 
next 75 years. It is only through the high professionalism and 
decades of experience of the Social Security and Medicare 
actuaries that such projections are possible. But it is 
critical to remember always that these projections ultimately 
are only estimates and must necessarily reflect the 
uncertainties of the future.
    Thus, the projections in the trustees reports are most 
useful if understood as a guide to a plausible range of future 
results. And, as this hearing illustrates, the reports serve as 
an early warning system that allows us the opportunity to make 
changes in a timely and responsible manner.

             The Old-Age and Survivors Insurance Trust Fund

    In the 1999 report, the Old-Age and Survivors Insurance 
(OASI) Trust Fund, which pays Social Security retirement and 
survivors benefits, shows a positive balance at the end of 1998 
of $681.6 billion with a net increase in that year of $92.5 
billion. The fund's assets now equal 2 years of projected 
benefit costs. The OASI fund has been taking in more in tax 
revenues than it has been spending for a number of years and is 
projected to continue in that mode for 15 years. As the baby 
boom generation begins to reach age 65 after 2010, however, 
OASI benefit costs each year will increase rapidly and, 
beginning in 2015, will exceed annual tax income.
    However, the accumulated assets of the OASI fund, interest 
on those assets and tax revenues are projected to cover benefit 
outlays until 2036, two years longer than projected in the 1998 
trustees report. Although the assets of the OASI fund would be 
exhausted at that time, tax income provided under current law 
would equal nearly three-quarters of full benefit costs in 
2036. By 2073, however, the portion of benefits that tax income 
would cover is projected to decline to about two-thirds. Over 
the full 75-year period, the OASI fund shows a deficit of 1.70 
percent of payroll, which is almost 13 percent of the projected 
summarized 75-year cost of the OASI program.

                  The Disability Insurance Trust Fund

    Turning to the Disability Insurance (DI) Trust Fund, it 
also showed a net increase in 1998 of $15.4 billion and ended 
that year with a positive balance of $80.8 billion. As this 
committee is well aware, disability costs are more difficult to 
project than are retirement and survivors benefits. 
Historically, the Social Security Disability Insurance program 
has experienced periods of growth and decline for which causes 
cannot be established with certainty. In the early 1990's the 
number of workers applying for disability benefits increased 
rapidly, and there was great uncertainty whether this was a 
temporary or a long-term phenomenon. Actual experience since 
1993 shows that applications for disability insurance benefits 
levelled off in 1994 and have actually declined slightly each 
subsequent year despite the fact that more people are moving 
into the prime ages for disabilities. It seem likely that the 
tight labor market has contributed to the lack of growth in 
disability insurance applications. The total number of disabled 
workers receiving benefits has continued to increase, however, 
because more people have come onto the rolls each year than 
have left.
    The disability program has experienced significant and not 
fully explained fluctuations over the last two decades. The 
trustees therefore recommend that the program be monitored 
closely in coming years. The 1999 Trustees Report intermediate 
projections show that income to the DI fund will exceed 
expenditures through 2005, but that full DI benefits can be 
paid until the fund's assets are exhausted in 2020. Over the 
75-year projection period, the DI fund shows a deficit of 0.36 
percent of payroll, or about 16 percent of the program's 
projected 75-year cost.
    If the DI and OASI trust fund projections are combined, the 
exhaustion date for the combined funds is 2034, 14 years later 
than for the DI fund and 2 years sooner than for OASI. On a 
combined basis, expenditures first exceed tax revenues in 2014. 
From 2015 through 2021 interest income will be needed to 
supplement current tax income to meet costs, and in 2022 
through 2034, current tax income, interest income plus a 
portion of the trust fund assets will be needed to pay 
benefits. Considered together, the OASI and DI programs have a 
projected long-term deficit of 2.07 percent of payroll, which 
represents an decrease in the deficit of 0.12 compared to the 
1998 projection.
    The primary reasons for the reduction in the projected 
actuarial deficit in the 1999 trustees report are the continued 
good economic experience in 1998 and an improvement in the 
projected economic performance in the future. The major reason 
for the improved outlook was taking account of the announcement 
by the Bureau of Labor Statistics in 1998 that the measured 
cost-of-living will be reduced by 0.2 percent per year in 1999 
and later due to the Bureau making changes in the measurement 
methodology it uses. We met with a variety of economic experts 
last year to perform a comprehensive review, particularly in 
light of the BLS change, of the economic assumptions used in 
this report. We were gratified that there was wide agreement on 
the range for the assumptions, but with full recognition of the 
uncertainty involved.

                     Is Legislative Action Needed?

    The Board of Trustees has established both short-term (10 
year) and long-term (75 year) tests of financial adequacy for 
the trust funds. Over the short range, if a fund has sufficient 
assets on hand at the beginning of each year to pay projected 
benefits for that year--what is termed a trust fund ratio of 
100 percent--we considered its financing adequate. Both the 
OASI and DI trust funds are expected to maintain trust fund 
ratios above 100 percent throughout the next 10 years and thus 
meet the trustees short-term financing test. You will recall 
that the DI fund failed this short-term test early in this 
decade and the trustees wrote to the Congress, as they are 
required to do, to recommend legislative action, which was 
taken in 1994. Then, the Hospital Insurance part of Medicare 
failed the short-term test for several years until the Balanced 
Budget Act of 1997 was enacted. Based on the 1999 trustees 
reports, however, the OASI and DI, as well as HI, trust funds 
satisfy the trustees' short-term financing test.
    Over the long range, the trustees' test of financial 
adequacy is that a trust fund projected actuarial costs be no 
more than 5 percent larger than projected income in the 75th 
year, or a proportionally smaller variance for shorter periods. 
Neither the OASI nor the DI trust fund meets this test, 
referred to as ``close actuarial balance.'' Thus, the trustees 
recommend that legislative action be taken to bring these trust 
funds back into close actuarial balance and stress that it is 
important to address the long-range financing shortfalls in the 
OASI and DI funds soon in order to allow time for phasing in 
any necessary changes and for workers to adjust their 
retirement plans to take account of those changes. We would 
also note that there has been an alarming erosion of public 
confidence in the Social Security program over the past few 
years, particularly among younger generations. Early attention 
to Social Security's financing problems is important to 
restoring public confidence in the program.
    Another important consideration regarding the timing of 
action on Social Security financing is that the sooner changes 
are enacted the more broadly can the burden of closing the 
financing deficit be distributed across different age groups. 
For example, if it were decided to raise payroll taxes now to 
eliminate the OASI projected deficit, employers and employees 
each would have to pay about 16 percent more in all future 
years (i.e., to about 6.2 percent rather than the 5.35 percent 
for 1999). If the change were not effective until 2010, the 
rate would have to be increased to 6.42 percent, and if delayed 
until 2025, the tax rate would have to be increased by almost 
one-third to 7.02 percent. Other types of changes would have 
similar increases in size if their effective dates were 
significantly delayed. Further, the longer we delay in making 
changes in either taxes or benefits, the more the burden of 
those changes will be concentrated on future workers and 
beneficiaries. Thus, while we have time to consider and plan 
carefully for necessary changes in Social Security, we should 
act as soon as a rational reform plan can be developed and 
support built for it.
    So, in answer to the oft-asked question, ``When is 
legislative action on Social Security financing needed?,'' on 
the basis of the 1999 trustees report projections we would 
respond, ``The sooner the better!'' But we would add that this 
program is too vital to every American to make hasty changes 
that are not fully thought out. Of course, Mr. Chairman, we 
recognize and appreciate that this committee has over the years 
exercised great diligence in assuring that changes in Social 
Security are as good as we can devise. We applaud the 
committee's efforts to investigate proposed reforms and build a 
record on which well-considered legislation can be based.

      Is All-or-Nothing the Only Approach to OASI Financing Reform

    As we have said many times, Social Security's financing 
deficit can be solved with OR without major structural change. 
Unfortunately, it appears at times that Social Security 
financing reform is presented as a choice between dramatic 
structural change or nothing. That is, those who support 
structural change have seemed to have an incentive to oppose 
any other change because it looked as though with each new 
trustees report the OASI and DI deficits would grow larger and 
the pressure for reform greater. Then, in both the 1998 and 
1999 trustees reports the projected deficits under the 
intermediate assumptions were reduced somewhat, in considerable 
part due to the continued good performance of the U.S. economy. 
Given this set of historical circumstances, three points 
regarding long-term financing reform of Social Security strike 
us. First, longer term change should not be driven by only a 
few years' experience. For example, in the early 1990s, the 
Social Security disability insurance rolls grew dramatically in 
1991 and 1992, but then just a quickly stopped growing. 
Legislation based only on either of those periods would have 
been subject to error. Similarly, Social Security financing 
legislation enacted on the basis of only the poor economic 
performance of the U.S. economy in the 1970s would have been 
misdirected, just as basing legislation only on the last few 
years of economic experience could be misleading. The trustees, 
with the extraordinarily able assistance of the actuaries, have 
always tried to base their projections on long-run expected 
averages, and not on extremes in experience over short periods.
    Second, aiming for a reform package that will ``fix'' the 
Social Security program's financing for as long as 75 years may 
be too ambitious and potentially can mislead policymaking. As 
the trustees note each year, the projections in their reports 
are not intended as predictions but rather as indicators of the 
expected trend and likely range of future income and outgo 
under a variety of plausible economic and demographic 
conditions. In recognition of the fact that we cannot predict 
the future perfectly, the trustees' long-range test of 
financial adequacy calls, as we described, for projected costs 
income and costs not to diverge by more than 5 percent. 
Implicit in this test is an allowance for change in the 
actuarial balance in each new annual trustees report without 
ringing alarm bells because the program's 75-year projected 
actuarial income and costs do not perfectly balance. Thus, we 
believe any Social Security financing legislation should 
evaluate changes on their merits, and not allow a 75-year point 
estimate to influence the type or degree of change.
    Third, we would hope that when programmatic changes arise 
that make sense and can obtain substantial support, legislative 
action will not be delayed until one overarching reform package 
is developed. For example, a number of changes, such improved 
benefits for widows(ers), were contained in at least two of the 
reform plans offered by the 1996 Social Security Advisory 
Council, but the strong sense of need for changes in such areas 
is lost in the standstill over finding a comprehensive 
financing plan. Further, the danger of making policy changes in 
the context of seeking a specific level of savings or achieving 
perfect 75-year actuarial balance is that the policy change may 
be altered to fit the numbers rather than designing it on the 
basis of what makes the best sense. For example, the scheduled 
increase in the retirement age--2 months per year for 6 year, 
no change for 11 years, and then 2 months per year for 6 more 
years--was an artifact of achieving the right level of savings 
rather than deciding the best way to phase in changes in the 
retirement age without creating unnecessary ``notch'' effects.


    Based on our experience as trustees over just the last 4 
years, it is overwhelmingly clear that Social Security cannot 
be insulated from social and economic change in our country in 
the future, just as it has not been in the past. The strength 
of the Social Security program has been that it can adapt as 
our national circumstances change. It is the acceptance of the 
necessity for change by all of us as individuals that is most 
difficult. This can be eased only by having the information we 
need to be able to understand why change is necessary and in 
which direction it should take us. This committee serves a 
crucial role in developing the necessary information for Social 
Security policy development, and we welcome the opportunity to 
participate in this hearing to discuss the dimensions of Social 
Security's financing problem.
    We have attached the four-page ``Message From the Public 
Trustees'' that is included in the Summary of the 1997 Annual 
Reports, as well as our biographical information. We thank you 
for the opportunity to present our views and will be pleased to 
answer any questions.




    We are privileged to take part in the thorough and careful 
process by which the Annual Reports are prepared to provide 
this vital public accounting. Our goal as Public Trustees is to 
ensure the integrity of the process by which these Reports are 
prepared and the credibility of the information they contain. 
Further, although we are of different political parties, we 
approach our work as Public Trustees on a bipartisan basis 
because this is the only way through which financial problems 
facing Medicare and Social Security can be solved.

1998: Strong Economic Performance Boosts the Trust Funds

    Continued strong economic growth in 1998 caused income to 
the Social Security and Medicare trust funds to be higher than 
expected, strengthening the current financial condition of both 
programs. In addition, for Medicare the growth of benefits was 
lower than projected. The long-run financial outlook for both 
programs also has improved for the second consecutive year. The 
Social Security trust funds now are projected to run short of 
money to pay full benefits in 2034, rather than 2032 as 
projected last year, while the Medicare Hospital Insurance 
trust fund is projected to have insufficient funds in 2015, 
rather than 2008 as previously projected.
    After many years of watching the outlook for both programs 
worsen without legislative action, two successive years of 
improvement is significant. Further, this reminds us that the 
demography of an increasingly older population with its 
resulting declining number of workers per retiree is not the 
only issue--that continued strong economic growth could make 
promised benefits more affordable in the future. We say 
``could'' rather than ``will'' because we cannot prudently rely 
on economic growth continuing at this rate. Instead, it is 
essential to make the best projections possible based on the 
best available data and methods and to update those projections 
each year.

Projections Are Always Uncertain

    One lesson we have come to fully appreciate is that 
projections are expert ``guesses'' about the future and not 
predictions of what will actually happen. Uncertainty is 
unavoidable because projections depend upon almost everything 
that happens in our society (marriage and divorce rates, birth 
rates, immigration rates, death rates, disability and recovery 
rates, retirement age patterns) and in our economy (the number 
of people working, their productivity and wages, inflation 
rates). Accurately predicting any one of these factors even for 
one year is difficult; projecting all of them for 75 years is 
    Then why undertake such projections, especially for 75 
years into the future? As the reports note, a 75-year period 
spans the working and retirement years of the vast majority of 
people now covered by these programs. And, the effects of 
demographic changes, such as the sharp increase in the birth 
rate after World War II that led to the ``baby boom'' 
generation, can be fully taken into account.
    One way we as trustees deal with the inherent uncertainty 
in long range projections is each year to reexamine in light of 
recent experience all our assumptions about the factors that 
underlie Social Security and Medicare financing projections. 
During 1998 we met with a variety of economic experts to 
undertake a comprehensive review of the economic assumptions in 
these reports. We were gratified that outside reviewers were 
generally supportive of the assumptions we use. But even when 
modifications are needed, assumptions for a period as long as 
75 years into the future should change only slowly over time. 
For example, two or three or even five years of poor or strong 
economic growth do not mean that we should assume such 
performance for 75 years.

Uncertainty, Politics and Reform of Social Security and 

    In each of our previous statements regarding the annual 
trustees reports, we have indicated the need for reforms in 
both Medicare and Social Security and the benefits of acting 
sooner rather than later. Like our predecessors in this job, we 
believe it is important to indicate that even with the 
uncertainty that exists in projections, changes will be needed 
to keep these programs on a solid financial footing. Last year 
an important national debate on Social Security was begun and a 
greater awareness of the problems facing that program was 
achieved. The National Bipartisan Commission on the Future of 
Medicare also worked over the past year to find a set of 
recommendations to send to the Congress for action but was 
unable to reach agreement on proposals for change. Thus, 
despite wide agreement that reforms should be made sooner 
rather than later, it is not at all certain that major changes 
in either program will be forthcoming in the near term.
    Why is reaching agreement on change in these programs so 
difficult? Fear of change is instinctive, but it should be 
reassuring that Social Security and Medicare have been adjusted 
many times since they were enacted. And, there is no reason for 
us to think now that Social Security or Medicare should be 
frozen in place for the decades ahead. The economic and social 
factors that determine the financial health of Social Security 
and Medicare will change in the future as they have in the 
past. Thus, as citizens, we have to expect and accept the need 
to periodically adjust eligibility, benefits and financing for 
these programs.
    How much of the reluctance to act is due to legitimate 
concerns about the inherent uncertainty of the financial 
projections, and how much to an inability to reach political 
consensus on what will be hard choices, is not clear. But the 
Bipartisan Medicare Commission's difficulty in reaching 
consensus raises the issue of whether it is wise to focus on 
finding one overarching solution to the problems these programs 
face, or whether to seek instead incremental changes on which 
agreement might be reached.


    Medicare costs are increasing both because new, more 
expensive (and effective) medical technology is being developed 
every year and because an aging U.S. population has greater 
medical care needs. As the slowing of spending in response to 
recent legislative changes indicates, more efficient health 
care delivery systems can moderate Medicare's cost growth. Even 
with these improvements, however, the system still faces major 
financial shortfalls because program costs are increasing much 
faster than the rest of the economy. A lack of consensus on 
sweeping reforms should not preclude measured changes to make 
Medicare a more streamlined and effective program. Additional 
substantial legislation needs to be enacted no later than 2007, 
the year that HI annual expenditures are projected to again 
exceed annual income. Once deficits begin, the financial 
outlook for the HI trust fund will dramatically worsen. The 
extension of the trust fund exhaustion date to 2015 should be 
welcomed as an opportunity to take the time to evaluate what 
options may mitigate the financing problem but also preserve 
the strengths of the program.

Social Security

    The long-term financing problem facing Social Security is 
significant but could be solved by small gradual changes IF 
those changes are enacted soon. The public discussion of the 
last year has advanced the reform debate by bringing into 
sharper focus the limitations and administrative difficulties 
of replacing a major part of Social Security with individual 
savings accounts. One way not discussed in recent years to deal 
with uncertainty and political gridlock could be to enact 
modest changes in benefits or eligibility that would be 
triggered by changes in key indicators. For example, [in some 
way] tying the age of eligibility to life expectancy changes, 
or tying benefits to the growth in wages rather than prices, 
would help stabilize program financing. We are not proposing 
such indexing: a reasoned political debate reaching consensus 
would be the preferred solution. But we do note that a major 
step in the direction of indexing was taken in 1972 when 
automatic cost-of-living adjustments and automatic earnings-
base indexing were added to replace ad hoc legislative 
adjustments made haphazardly, and that these changes have come 
to be valued as integral parts of the program.


    We strongly believe that these Reports serve as an early 
warning of the need for changes to ensure continuation of 
Social Security and Medicare and not as evidence of their 
failure to protect future generations. Working cooperatively, 
with informed public debate, solutions can be found to the 
financing problems facing America as our population ages. It is 
time to begin that undertaking.


    Chairman Shaw. I thank you both for very fine testimony. I 
also would be remiss if I didn't thank you for your good work. 
I know that you're up for reappointment, and if that's the 
direction you want to go, that's the direction that is in the 
stars for you, and I certainly appreciate the quality of the 
work of both of you.
    Mr. Kellison, I have just a few questions with regard to 
your actuarial assumptions.
    Do you predict rising unemployment, recession, in and out 
of recession, as far as your projections are concerned, or do 
you assume that the economy we have today will continue?
    Mr. Kellison. We have a long-term assumption that would be 
less favorable than the economy today.
    The economy is today, by historical standards, extremely 
strong. Unemployment rates are at 30-year lows, really,
    The long-term unemployment rate assumption, we did bring 
down in the report, I think, from 6 to 5.5 percent, if I 
remember. This is higher than the unemployment rate currently 
in the economy, but certainly in terms of a historical average 
over longer periods of time, something we think is very 
commensurate with long-term experience.
    So, we did improve the long-term actuarial balance on the 
unemployment assumptions this year, thinking there was enough 
evidence to bring it down, but it is still higher than is 
experienced in the economy at the present time.
    Chairman Shaw. Your assumption assumes a level of 5.5 
percent unemployment?
    Mr. Kellison. In the long range, as an average, yes.
    Chairman Shaw. Life expectancy, did you assume that we may 
conquer cancer? There are, I tell you, medical research and 
technologies that are going forward at a tremendous speed, 
which could very well--I remember, growing up, my grandfather 
died in his early eighties, and we thought that was as old as 
you can be.
    Today, when someone dies in their seventies, we say isn't 
it a shame, they were so young.
    What are you assumptions with regard to that? I am very 
sensitive, in that I turn 60 on Monday, and I'm very sensitive 
to that.
    Mr. Kellison. Well, I'm increasingly sensitive to that 
myself. It's amazing how your perspective changes over time on 
    Chairman Shaw. It surely does.
    Mr. Kellison. You rightly have identified life expectancy 
as a key factor in the cost of the program.
    That is, clearly, the length of time people live in 
retirement, on average, is an obvious contributor to the cost 
of the program.
    There have been increases in life expectancy throughout 
this century that we've measured and looked at. There have been 
some oscillations in that over time, but there certainly, 
overall, has been significant improvement in life expectancy.
    The Trustees' Reports project continued improvements in 
life expectancy, based on past trends. I guess that would be 
the best way to put that. It's broken down by gender and other 
factors to try to refine it, but it's essentially extrapolated 
off of past experience.
    I would not say that we have quantified a quantum 
breakthrough in miraculous cures of diseases in the elderly 
population. It did not encompass that kind of an assumption on 
our best estimates.
    I think in some of the alternative III, that is, the high 
cost estimates, there are much more significant improvements in 
life expectancy that were looked at to see what their effects 
would be.
    In the Trustees' Reports there are sensitivity tests on all 
of the assumptions so that you can isolate each one, one by 
one, to get some idea as to what the effect of that change 
would be.
    There is some information in the Trustees' Reports on that, 
but I would, I guess, indicate that the best estimate 
assumption and our central assumption is an extrapolation off 
of past experience; it does not assume a quantum breakthrough 
in life expectancy in the elderly.
    Chairman Shaw. What has been the increase in life 
expectancy, say, over the last 20 or 25 years?
    Mr. Kellison. Since 1980, it's a little under 1 percent a 
year in the overall rate for males, but about 0.5 percent and 
decreasing for females.
    Chairman Shaw. Is that what you project in the future, a 
continuation of 1 percent?
    Mr. Kellison. Yes, under alternative III assumptions, but 
closer to 0.5 under alternative II.
    Chairman Shaw. OK.
    Dr. Moon, what is your Ph.D. in?
    Ms. Moon. Economics.
    Chairman Shaw. OK.
    I've got a degree in accounting, so I'll try to deal with 
it, and maybe we can communicate, if we talk slowly to one 
    Ms. Moon. OK.
    Chairman Shaw. The structural changes that you referred 
to--and I think that your economics degree would certainly 
qualify you to discuss this particular area.
    If we are not to change the benefit structure, and if we 
are not to increase the taxes, what are the alternatives 
available to us in trying to reform Social Security?
    Ms. Moon. My guess is that no one has invented a way to 
solve the problems in the future without talking about changes 
in the benefits or in the----
    Chairman Shaw. I'm not asking you to invent anything. I'm 
asking you just how other pension plans work, how other 
investments work, as to where does this Subcommittee turn to 
find how we can solve the problems of Social Security.
    I'm talking about for 75 years now, because I think that is 
very telling. It would be, to my knowledge, one of the first 
times this Congress has really looked forward in trying to 
solve something for 75 years, instead of just dumping the 
problem on the future generations.
    Ms. Moon. The 1996 Social Security Advisory Council, I 
think, pretty much defined the range of alternatives that are 
out there, looking at everything from incremental changes only, 
to more structural changes that would rely on having 
individuals develop private accounts or that would try to 
obtain some additional returns from investing the trust funds 
in riskier stock market activities and so forth, as one way to 
try and expand what the opportunities are for Social Security.
    I think that pretty much is the list, if you looked at that 
list, that is, I think, the relevant list that you all should 
begin to think about.
    My sense is that there is a whole range of things that 
could solve this problem, and you could, to some extent, take 
some from column A and some from column B, but I think there 
probably are directions that move you off on to a couple of 
different branches.
    Chairman Shaw. Let me give you a yes or no question. If we 
are to hold the line on payroll taxes, not increase payroll 
taxes, and we are not to cut benefits, then it's correct that 
we do have to look at the investment structure of Social 
Security; is that not correct?
    Ms. Moon. If that is your restriction, yes, then I think 
you would do that, but the caveat, I would say, is that there 
are costs of the other direction as well. That is that higher 
risks from investing privately are clearly there and will 
result in not necessarily then an equivalent change. There will 
be a different set of choices.
    Chairman Shaw. OK, now, what you are telling me then is 
that we set that out as our model, then we are going to have to 
turn to the private sector in order to increase the return on 
our investment, but those investments do carry with them, 
certain risks?
    Ms. Moon. That's right.
    Chairman Shaw. Now, over the long run, if you have 
widespread investment over large areas of stocks and a mix of 
corporate bonds, does that reduce the risk, if you're looking 
over the long period of investment from historical data?
    Ms. Moon. Yes, indeed, certainly expanding the range of 
things that you look at will reduce the risks. Whether it will 
reduce the risks for individuals when they have choices among 
those options and then they have timing issues in terms of when 
they retire, is another issue, as well.
    Chairman Shaw. But over the long run, over the long period 
of time, realizing there will be fluctuations in the market and 
if somebody is retiring in 2014, they could have a bad year in 
the stock market and they could find that an individual 
retirement account is actually deflated.
    But if you were to go over the long run, then the return on 
investment, the return on the taxes that are paid in for Social 
Security would be far greater than they are today; is that not 
    Ms. Moon. I don't know that I would say far greater, 
because I think people sometimes make an incorrect assumption 
about the rates of return today.
    The rates of return today, if you look at the rates of 
return from the Treasury bills themselves that are held, are 
reasonably high.
    The rates of return that people often talk about for Social 
Security are a reflection of the demographic issues; that I, as 
an individual, paying taxes into a pay-as-you-go system, will 
not draw out as much as if I put that money into a private 
    But, in part, that's because my tax dollars today are going 
to help support today's generation, and next, when I retire, 
then I'm depending upon the next generation.
    Some of that lower return that people sometimes point to is 
simply because there are going to be fewer of those workers 
that Steve was talking about to support me in my retirement.
    Chairman Shaw. Now, this is going to be the ultimate test. 
I'm going to ask you an accounting question.
    Ms. Moon. OK. I did take accounting.
    Chairman Shaw. And I took economics, and I didn't 
understand it. [Laughter.]
    In the existing system--and it has been made very clear, I 
think, by both of you that the tax dollars outside of the FICA 
tax are going to be necessary after 2014 in order to support 
our retirees. One of you made the observation that it's going 
to be 75 years from now that you're going to have just 1.8 
workers supporting one retiree, which would be just an 
unbelievably horrible burden for those young workers.
    I've got two grandchildren that are going to be coming into 
the world this year, and I just can't imagine leaving that mess 
to them.
    But from the cash flow situation, would the result be any 
different as far as the cash flow with or without the trust 
    Ms. Moon. In terms of the cash flow? I'm not sure exactly 
what you're asking.
    Chairman Shaw. In other words, we have a system where FICA 
dollars are being paid into the Social Security Trust Fund. By 
law, those funds immediately go out of the trust fund and are 
invested in Treasury bills under existing law.
    The President made a suggestion that we run the surplus 
back through the trust fund. It certainly could be argued that 
that money came out of the trust fund to begin with, so 
following his scenario, we could increase the amount of 
Treasury bills in the trust fund.
    But if that's a great idea, then we should take that money 
that came out of the trust fund and run it through several more 
times and pile up a lot more Treasury bills.
    Now, my question to you, and what I am concerned about is 
the tax burden on the future generations. The Trust Fund 
itself, would the result to the taxpayer through general 
revenue and through FICA tax, be any different with or without 
the trust fund itself?
    Ms. Moon. I am a believer in the trust fund, which probably 
is rational since I'm a public Trustee. I believe these are 
promises to pay that are taken seriously, and that are an 
important contribution to try to ease the burden into the 
    Chairman Shaw. Right.
    Ms. Moon. In that sense, I think that if what happens on a 
cash flow basis is the trust funds, over time, become the most 
important and perhaps the dominant way in which debt is held by 
the Federal Government----
    Chairman Shaw. You're not answering my question. I 
understand that it is a commitment, it's a public commitment by 
the taxpayers, future taxpayers.
    But my question is strictly asked on a cash flow basis.
    Ms. Moon. But I thought you were asking whether or not it 
is going to make it easier in the future to pay these----
    Chairman Shaw. I didn't say easier, I said, whether it 
would be any difference on a cash flow basis if you had or 
didn't have the trust funds.
    Ms. Moon. Well, now you're going to catch me on some of the 
accounting of which I am not as skilled as you.
    I believe the notion that, over time, the higher interest 
being paid into the trust fund by having the trust fund be 
larger is helpful to the system.
    Chairman Shaw. And where does that interest come from?
    Ms. Moon. It comes from the Federal Government.
    Chairman Shaw. And where does the Federal Government get 
that money?
    Ms. Moon. It gets it from taxes, you're absolutely right.
    Chairman Shaw. The burden on the taxpayer is going to be 
the same, with or without a buildup of the trust fund.
    It's a simple question.
    Ms. Moon. The burden on the taxpayer is not necessarily--I 
think of the question of what other resources are used for 
other things. If the rest of the----
    Chairman Shaw. I'm having trouble getting an answer.
    Let's assume----
    Ms. Moon [continuing]. The rest of the debt----
    Chairman Shaw. The economists always make assumptions, so 
let me try to make an assumption. All things remaining equal, 
would the burden on the taxpayer be any different with or 
without the existence of the trust fund?
    Ms. Moon. No, I don't believe that it would be.
    Chairman Shaw. Thank you.
    Mr. Matsui.
    Mr. Matsui. Thank you, Mr. Chairman. I appreciate the 
report and your testimony today. I think even though the report 
is somewhat more optimistic from what it was 2 years ago, it 
does bear out that something has to be done and something has 
to be done soon.
    We really appreciate this. I don't think anybody, because 
we have an additional 2 years on the program, takes the 
position that we can relax a little bit and not take action.
    Mr. Kellison, what I'd like to ask you is, your 
assumptions, CBO has certain assumptions over the next years 
and certainly OMB does as well in terms of massive surpluses, 
both in the Social Security system through the payroll tax, and 
obviously general fund surpluses that will build up 3 or 4 
years from now and be very sizable as well.
    Are your assumptions more optimistic, pessimistic, or about 
the same as CBO and OMB?
    Mr. Kellison. I think in the short run, 3 or 4 years, 
they're pretty consistent. The way we go at the assumption-
setting process is to look at both the long-range and the 
short-range assumptions as two separate exercises, and then we 
try to develop a program of grading in the assumptions from the 
short run into the long run.
    I think the short-range assumptions that we use, we try to 
validate against other assumptions, both within the government 
and outside government by private sector forecasters.
    We try to make an independent judgment on our own 
assumptions, but we certainly do look at what others are 
projecting, and we look at the ones that CBO and others within 
government do.
    My sense is that in the short-range period, they're not 
exactly identical, but they're quite close.
    Mr. Matsui. What about the long-term assumptions?
    Mr. Kellison. The long-term assumptions, they don't make 
long-term assumptions, really, in the same way that we do.
    We're about the only group that tries to do that.
    Mr. Matsui. In terms of the unfunded liability at this 
time, assuming that all current employees receive the benefit 
levels that currently exist, do you happen to know what your 
numbers might be? I know Mr. Rubin said $8.5 trillion, and I 
believe Dr. Aaron has said somewhere in the range of $5.5 
trillion or up. Do you have a number from your actuarial 
    Mr. Kellison. I don't have a number in front of me. It's 
several trillion dollars, but exactly, a specific number on a 
crude liability type calculation, I do not have that particular 
number at hand.
    Mr. Matsui. In other words, that's not anything you 
calculate when you do your actuarial report?
    Mr. Kellison. No, it's not.
    Mr. Matsui. OK.
    I want to ask both of you these questions. My understanding 
is that the 75-year period that you use is not a legislative 
mandate; this is something you feel is appropriate in terms of 
your projections.
    Could you just explain why that is, why 75 years, rather 
than 80 years or 72 years or 100 years?
    Mr. Kellison. Well, it's clearly an arbitrary number. It 
could be 80, could be 60, it could be 100.
    But it's a number that has been used for a number of years, 
and we're very comfortable with it. It tends to equate to the 
period of time when someone entering the work force, say, in 
the teenage years, might live in the work force and go through 
an extensive period of retirement.
    It's a period that's relatively compatible with that period 
of time. It's a period that is long enough to capture the full 
effect of the demographic factors like the baby boom 
generations so that you reach a complete state of equilibrium 
or maturity out there.
    So, I think it's a reasonable period of time for a long-
term program in terms of what is a lifetime of a person, and 
what is a period of time that's sufficiently long that you can 
really get the full dynamic effect of the demographic profile 
of the population.
    Mr. Matsui. Thank you.
    Now, I'd like to ask both of you this question, with, 
perhaps, Dr. Moon, first.
    Assuming that we can't come to an agreement on a 75-year 
fix, in 1983 I believe we thought we did, but we created the 
cliff, I guess. We just did it and fixed it up to 75 years, but 
we didn't project beyond that, and as a result of that, I guess 
your long-term projections required going beyond the 75 years, 
and all of a sudden we face this 2.09-percent deficit.
    But the question I have for you is, If we could fix this 
for 60 years, as the President's proposal does, does it make 
sense at least to try to do that, and then maybe work the 
additional 25 years later, or is it better to wait until we 
have a 75-year fix?
    Maybe that's a political question, but perhaps you can give 
me your thoughts on it.
    Ms. Moon. One of the difficulties of a 75-year projection 
is that in a period of time like we're in today where you have 
in 1999, taxes that will come in that will far exceed the 
benefits that will be paid, and next year, that year will drop 
out and be replaced by a year in the 2070s in which the 
benefits would be higher than the revenues, then you get an 
effect essentially every time you move forward 1 year that puts 
the system naturally out of balance. That is part of what 
happened since 1983.
    The other part is that it is very difficult to project well 
and predict well, what will happen, and there are changes that 
have been made since 1983 in our economy that people didn't 
    So, I think that that helps to clarify an answer that would 
suggest that if you can make progress, come to consensus on 
changes that make sense for the system programmatically, move 
in a direction that people think is a valuable direction to 
move the program in, it seems to me you should make them as you 
go along, rather than necessarily packaging it as a 75-year 
    The 75 years I view not as a requirement for any change, 
but rather as something that you should always keep in mind as 
a goal to have. If you could make substantial progress with any 
number of changes in the meantime, I think that that would only 
be for the better.
    The only thing that would be a caution there is that if 
some of them would turn out to be in directions that people 
didn't think the program should go, then I wouldn't recommend 
that you make those changes anyway.
    Mr. Matsui. I know my time is running out, Mr. Chairman.
    Just as a further followup, you mentioned that obviously 
there are massive structural changes we can make, or we can 
make incremental or moderate structural changes.
    You suggested that because we do have time, the funding 
shortfall begins in 2014 to 2015, but the real problem doesn't 
begin until years beyond that in terms of a cash flow problem. 
So, we do have some time.
    If we give the current generation in the work force time to 
prepare for the retirement, do you feel we still have an 
opportunity to make moderate changes and basically keep the 
program as a safety net retirement program for seniors. If we 
didn't have Social Security, about 50 percent of seniors would 
live in poverty, and right now about 11.9 percent live in 
poverty according to your actuarial report.
    Is that a correct assumption?
    Ms. Moon. I would say that's certainly fair. I think that 
it's nice to be in a situation where the choice of whether you 
want to make structural changes in the program, or you want to 
try to retain the program as it is, although you would have to 
affect either benefits or taxes to do so, is a good position to 
be in because that allows you to make choices on the basis of 
good policy, rather than feeling that one set of changes is 
necessary or required.
    Mr. Kellison. I would like to supplement that, though, by 
pointing out that if you do--right now, we do have the time to 
look at a range of options, as Dr. Moon has suggested.
    If we wait 15 years until 2014, until we hit that point at 
which we're in a negative cash flow position, the choices at 
that point are much more difficult than they are today. The 
solutions have to be much larger, more painful, so that even 
though there's not a current cash flow problem today and there 
won't be for 15 years, earlier action is still distinctly 
    Mr. Matsui. I hope my question wasn't interpreted that I 
want to wait until 2014 or 2015. I think we should deal with it 
now, but I appreciate the testimony and the responses.
    Thank you.
    Chairman Shaw. Thank you. I particularly like your last 
statement, Mr. Matsui. We should deal with it right now.
    Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. I appreciate the 
input today, and I think we're fortunate to have you all as 
Trustees, and to have the actuarial information that we've been 
receiving from SSA that's critical to solving the OASDI 
    Let me just get back to one thing that my friend, Mr. 
Matsui, said with regard to 2014 and 2034 or the 2036 time 
period. We've gone over this again and again in this 
Subcommittee and in the Full Committee, and there's a lot of 
debate about it.
    I agree with what Mr. Matsui said at the end, which is, I 
think, that it's better to take the action now rather than to 
have the train wreck occur and being able to adjust. I think 
Dr. Moon and Mr. Kellison both agreed with that.
    But just for the public's purposes, I think it's important 
to lay out here very clearly today, that both of you, although 
you have more optimistic projections because of the better 
economic conditions than we'd expected, you're extending the 
life of the trust fund a couple of years, you're both saying--
and I think this is a direct quote from you, Dr. Moon, it's an 
early warning device, and there's still an urgency to make 
legislative changes.
    I think that clearly needs to be on the record.
    Second, if you could both answer this question, and, again, 
this has been kind of haunting this Subcommittee. What is the 
key date?
    Mr. Matsui said there's a problem in 2014, but the real 
problem doesn't occur until later. What's your view of that?
    Mr. Kellison, you could start, and then Dr. Moon.
    Mr. Kellison. Well, I don't know that there is one key 
date. There are a series of dates.
    I think, to me, if I had to pick one, I guess it probably 
would be 2014, in the sense that that's the crossover point 
where now the revenue is falling short of the benefits in that 
year, and that's a very distinct reversal from where we are 
    Mr. Portman. At that point, what would our options be? When 
do we have this issue of not having enough payroll taxes coming 
in to be able to pay out the benefits, our options would be 
    Mr. Kellison. Well, the options at that point are that you 
start drawing down the trust fund interest, and then----
    Mr. Portman. What does that mean? For instance, for the 
taxpayer, does that mean more borrowing, or does it mean higher 
taxes, or does it mean that the government can simply absorb 
    Mr. Kellison. Well, it basically gets back to the cash flow 
discussion that was discussed earlier. If the revenue coming in 
falls short of the payments going out, the difference will be 
made up out of the Treasury, whether it be interest or drawing 
down, or selling off the assets.
    The net effect, on a cash flow basis is that the income 
into the system is falling short of the benefits and that has 
to be made up out of the rest of the budget.
    Mr. Portman. At this point, are there assets in the trust 
fund to be able to account for that cash flow problem?
    Mr. Kellison. There are government bonds, Treasury bonds, 
in the trust fund which earn market rates of interest, and 
those are real assets; they're not phony assets. But it clearly 
does have an effect on the rest of the budget and on the cash 
flow situation in the government.
    If there were no trust fund in place, what's in there would 
have to be held somewhere; in other words, those government 
bonds represent debt that somebody has to hold.
    Mr. Portman. How would you characterize those assets, Dr. 
Moon, and what do you think about----
    Ms. Moon. About the dates?
    Mr. Portman [continuing]. About the dates. This is 
relevant, not just for our Subcommittee, but it is as to the 
public's thinking about this. We're talking about whether it's 
incremental change or more dramatic changes that are for many 
people, difficult to deal with, especially folks who have 
believed over the years that anything Congress does to change 
Social Security is going to result in hurting them one way or 
another, because potentially their benefits will be reduced or 
taxes increased.
    Ms. Moon. I agree with you that there is often a 
misunderstanding in the public about what these issues are. 
What the sense of the trust fund is, I believe that beyond the 
2014 date, the issue of the timeframe in which the OASDI outgo 
can also be paid for by interest on the debt is meaningful.
    Another way to think about the issue is that the debt that 
is held by the U.S. Government earns interest; that interest is 
a promise to pay, particularly in an environment in which we 
may be able to reduce debt held by the public, that makes it 
much easier to pay the interest.
    Mr. Portman. Because it's easier to go out and borrow more 
money, which would incur additional costs because of the 
service of that debt.
    Ms. Moon. The revenues that go into the payment of the 
interest is intended to be there. Now it is on the books as a 
payment that we make with the full faith in the same way that 
if I hold a Treasury bill, there is an interest payment on it.
    The notion, however, is quite correct that one way or 
another, one has to come up with the dollars to pay the 
benefits and the cash flow issue is an important one and not 
one to set aside.
    It is extremely difficult over time to imagine ways in 
which my generation of baby boomers can put money aside through 
the Federal Government in order to pay for my retirement, and I 
think that struggling with that is going to be a difficult 
    I have some concerns about ways to do it as a private 
individual and private accounts where I think that carries some 
additional risks that are not inherent in a program like Social 
Security, but I think that those things should all be on the 
table for discussion.
    Mr. Portman. That was going to be my next two or three 
questions, and I've run out of time, I'm sorry. I do appreciate 
very much, the very informed testimony that we've gotten today.
    Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Doggett.
    Mr. Doggett. Thank you, Mr. Chairman.
    Dr. Moon, you have indicated previously that while the 
challenges we face with Social Security are important 
challenges, we can meet them with incremental changes rather 
than junking the system that America has relied on for about 
six decades now.
    Is that your general feeling?
    Ms. Moon. I believe that that is one of the options, and as 
a public Trustee, I think the important thing to stress is that 
a number of those different kinds of changes could occur.
    I do think it is appropriate to point out that it would not 
be possible, I believe, to have Social Security continue into 
the future as it is now, without change.
    There would have to be some changes in the program.
    Mr. Doggett. But as far as some of the changes that have 
been suggested, in fact, we've had people come and sit where 
you are, and tell us they really don't believe in the Social 
Security system and would like to see it replaced entirely.
    We've had the Majority Leader indicate that it was a 
mistake to have Social Security in the first place.
    We've had one person who came and testified with a fairly 
comprehensive study indicating that if we were to replace the 
current Social Security system with an individual account 
system, either in whole or in part, there's not any person 
living on the planet today who would get any personal economic 
gain from that, largely due to the high transition costs of 
moving from the system we have now to a individualized account 
    Could you describe what some of those transition costs 
problems might be, and how the system would try to deal with 
    Ms. Moon. Transition costs, I think, are important. There 
is a very big difference between starting a system from scratch 
that is a funded system as people are talking about with 
personal accounts, versus a pay-as-you-go system, as opposed to 
then trying to move into that.
    There are many people over the age of 50 for whom such 
changes are just not feasible because they have contributed to 
Social Security all their working lives, and to suddenly move 
to a system of personal accounts, obviously would not work for 
    Most reasonable proposals obviously don't do that. Instead, 
they would keep on the books, a basic Social Security benefit 
for such individuals and current retirees for a very long 
period of time. I'm hoping, as someone just over 50, that I'll 
also have a very long life expectancy, so the transition 
problem for me would be a 40-year transition problem, 
potentially, quite easily.
    So, there are going to be some substantial issues that way 
that need to be dealt with. As a Trustee, I think the thing to 
stress is that one would hope we could find ways--and these are 
tough questions to analyze--to do them so that people could 
agree on what the nature of those costs are, neither to 
overstate nor understate what they would be.
    Mr. Doggett. And you used age 50 as an example, but I 
suppose if somebody began flipping hamburgers when they were 18 
and they paid into that system, Social Security earnings for 20 
years, they also feel, though they haven't hit 50, that they've 
been paying into a system that they hope to get a Social 
Security check from.
    Ms. Moon. Yes, I believe the transition would be much 
longer than 50 years. I think people talk often in the nature 
of 70 to 75 years.
    Mr. Doggett. And then some of those countries that have 
moved to an individualized system like the United Kingdom seem 
to have incurred rather substantial administrative costs. I 
know the low administrative costs associated with the Social 
Security system that has served our country so well has been 
one of the real points of pride of the system.
    Could you describe some of the administrative costs that 
might come into play if we junked the system and moved to an 
individualized account system?
    Ms. Moon. Certainly, the administrative costs are going to 
vary depending upon what kind of system you move to. I think 
one of the things, in terms of doing a study of this, is that 
there are better and worse ways in terms of administrative 
costs of thinking about that.
    I believe most people who have looked at this have thought 
that a highly individualized, decentralized approach would have 
the highest administrative costs. Administrative costs could 
come down substantially if you restrict the number of choices 
or plans that people could go into, for example, and how they 
are overseen.
    But there would be higher administrative costs than under 
the current system, presumably offset by higher returns.
    Mr. Kellison. I think Dr. Moon has summarized it pretty 
well. I think any individual account program will incur higher 
administrative costs than the current one.
    I think that's inevitable, but there's a large range of 
administrative costs that would exist, depending upon the 
structure, and again it depends on the degree of complexity, 
the number of options.
    If you had a very bare bones simple approach with three or 
four options, and there's not a lot of complexity in it, the 
costs would be lower than say, an IRA type model, where you 
sort of----
    Mr. Doggett. Where you just go off and do your own thing, 
the more choice, the more costs.
    Mr. Kellison. That's correct. There's a real tradeoff 
between flexibility of options and cost.
    Mr. Doggett. Some of these plans that have involved 
significant choice have taken almost as much as half of a 
worker's individual account balance, haven't they, in some 
other countries?
    Ms. Moon. I think are a number--there are some other 
countries that certainly, ne would not want to use as a model 
in the United States, and one would hope that those lessons 
were learned. I don't exactly know how high they are, though.
    Mr. Doggett. Thank you.
    Chairman Shaw. Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman.
    Dr. Moon, referring to Mr. Doggett's question about 
incremental changes to Social Security that we could make to 
tide us over until sometime, what are some examples of 
incremental changes that we could do?
    Ms. Moon. There are a number of incremental changes that 
people have discussed. One which, for example, would be to 
eliminate the hiatus that's going to exist in the increase in 
the age of eligibility where the normal retirement age will 
rise to age 66, then I believe there's about an 11-year hiatus 
before it begins to rise again.
    You could eliminate that hiatus and take care of about one-
quarter or a little bit less than one-quarter of the imbalance 
that currently exists.
    Some people have suggested raising the cap on the wages 
that people pay into the system on the argument that, over 
time, the share of wages that have been subject to payroll 
taxes have declined a little bit.
    Another set of changes would affect the benefits and the 
way that the formulas work, so there are a whole range of them.
    Mr. McCrery. What do you mean by affect the benefits?
    Ms. Moon. It would reduce the benefits, either at the top 
end of the scale is one way to do it, or across the board. All 
of these obviously involve some pain.
    I think what you are probably getting at is the notion that 
incremental doesn't mean painless.
    Mr. McCrery. Incremental is a nice way of saying we are 
either going to raise the age of retirement, raise taxes, or 
reduce benefits.
    That's what you just told us, and I think that's correct.
    I would hope that this Subcommittee would try to be, and 
the Congress would try to be, a little more imaginative when it 
comes to solving the Social Security crisis, and I believe it 
is a crisis, than just raising taxes, cutting benefits, or 
raising the age of retirement.
    Now let's talk about administrative costs of individual 
    Dr. Moon, do you or Mr. Kellison know what the 
administrative costs of the Thrift Savings Plan are for Federal 
    Ms. Moon. I don't know. I know it's relatively low, but I 
don't know exactly what it is.
    Mr. McCrery. Isn't that a system of individual accounts?
    Ms. Moon. Yes, it is.
    Mr. McCrery. What makes you think that administrative costs 
for the same type of program for individuals in Social Security 
would be so much higher?
    Ms. Moon. I think when you compare a system, such as one 
that's run through a Federal employee or any employee 
environment, as opposed to one that's going to reach out to 
hundreds of millions of workers with multiple jobs and multiple 
accounts, potentially over time, and to turn over, the 
administrative costs would be higher than under the FERS 
    The FERS system, I think, is a model of how you would 
structure the accounts but would lower the costs.
    But when you deal with individuals who have sometimes two 
or three part-time jobs, for example, change jobs frequently, 
that will also add to administrative costs over time.
    Mr. McCrery. Don't all those people who change jobs have 
employers who report to the IRS their income and withhold taxes 
and all those things?
    Isn't that done already?
    Isn't there already a reporting mechanism to the Federal 
Government for every one of those jobs?
    Ms. Moon. Yes, there is. The question is, are those 
employers then liable in a private account system to deposit 
the money in the private accounts. How would that structure 
    In Social Security, my understanding is that it takes about 
18 months before all those accounts are resolved in terms of 
figuring out where the money is going into what account and so 
    It doesn't matter in a pay-as-you-go system; it does matter 
in a funded system. You'd have to do it much more rapidly I 
    Mr. McCrery. Well, the rapidity with which we do it is 
another issue. The issue we're talking about is administrative 
costs and I just think that in today's world of technological 
wizardry, that there's a way to do this without administrative 
costs overwhelming the advantages of a higher rate of return.
    And I think it's really ridiculous for us to sit here and 
dismiss a rather--I almost said innovative--we've known for a 
long time that the power of compound interest is a pretty 
powerful thing, and to me it's regrettable that we've not 
utilized that for the Social Security system before now.
    I would hope that this Subcommittee and the Congress would 
not dismiss trying to get a higher rate of return for at least 
this window that we have of a huge surplus over the next 15 
years to help us out of this problem.
    And speaking of that, the President has proposed setting 
aside 62 percent of the anticipated surplus in the General 
Treasury over the next 15 years for the purpose of solving the 
Social Security problem.
    Do you know how much that amounts to, 62 percent of the 
surplus over the next 15 years?
    Ms. Moon. I don't know.
    Mr. McCrery. You're not really up on the President's plan? 
OK. It's a large amount of money.
    Ms. Moon. My recollection is it's something like $2.7 
    Mr. McCrery. Two and seven-tenths trillion dollars just 
over the next 15 years, and that's money--is that money over 
and above what we will need to pay benefits for the next 15 
    Ms. Moon. That would be money that's over and above what 
would be needed to pay benefits.
    Mr. McCrery. We have approximately $2.7 trillion sitting 
out there, and the Republicans have agreed to that, the 
President agrees to it, that we can use to finance the 
transition to some newer, better system.
    Is that correct?
    Ms. Moon. That's certainly one use of those funds. It seems 
to me that that's an appropriate way to put one of your sets of 
    Mr. McCrery. Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Cardin.
    Mr. Cardin. Thank you, Mr. Chairman.
    I first want to thank both of our public Trustees for their 
public service, and I appreciate your holding this hearing on 
the 1999 Social Security Trustees' Report.
    It's clear, in reading the report, that the trust fund is 
    And I think it's interesting that a lot of this discussion 
talks about the Social Security Trust Fund and the Social 
Security obligations in insolation.
    And then we look at the total budget of the nation, and we 
try to reconcile our national budget system with the Social 
Security system.
    And sometimes we want to make a point rather than taking a 
look at whether we're going to meet future obligations.
    I agree with both of our Trustees that the trust funds are 
very important, and the question you asked, Mr. Chairman, as to 
if everything remained equal, if we didn't touch any of the 
money, would it make any difference on cash flow.
    Well, we've never gone more than 2 years in the history of 
this Nation without changing our budget. The problem is that we 
already passed a budget. We passed it yesterday on the floor of 
    Everything will not be equal. The money will be spent on 
tax cuts or other ways, so the money won't be there.
    I guess my first question to you is, If we didn't have a 
trust fund, if there was no trust fund today, would your annual 
report be different?
    Mr. Kellison. I would guess it would because if there were 
no trust fund, there probably would be no Trustees. [Laughter.]
    Mr. Cardin. Would the projections on the long-term solvency 
issues change if you didn't have a trust fund?
    Mr. Kellison. I would hope the projections that were done, 
the assumptions setting and the rest of that, would continue 
unchanged. I would certainly hope that would be the case.
    Mr. Cardin. If you didn't have the $600 billion or so 
that's currently in the OASDI fund, would your projections for 
long-term solvency issues be altered?
    If all of a sudden, we said we're just going to get rid of 
the trust fund, and whatever surpluses happen to come out in 
Social Security, we're just going to put that in the Treasury 
of the nation and pay down on our debt, or whatever we do with 
it, spend it, and so forth, but we're not going to dedicate any 
special bonds to the Social Security Trustees because it's all 
one country, one system.
    Would there be a difference in your analysis as to where we 
would be?
    Mr. Kellison. There would not be a difference in the 
actuarial analysis in terms of making these assumptions on 
economic and demographic factors and what that results in.
    Mr. Cardin. Where would we be in your projections in the 
year 2000 and let's say 2015, if we didn't have a trust fund?
    Mr. Kellison. In the year 2015, if there were no trust 
fund, you essentially would be in a negative cash flow position 
at that point because you----
    Mr. Cardin. Where would you get the money to pay for that?
    Mr. Kellison. It has to come out of the rest of the budget.
    Mr. Cardin. Legally, how would that happen?
    Mr. Kellison. I am not a lawyer. Clearly, at this point in 
time, the only resources available to pay Social Security 
benefits have to come out of the trust fund. Clearly, that kind 
of a law would have to change.
    Mr. Cardin. Congress would have to take action in order to 
make sure that Social Security checks continued?
    Mr. Kellison. Absolutely.
    Mr. Cardin. In the full amount.
    If we continued the trust fund, would Congress have to take 
specific action?
    Ms. Moon. My understanding is no. If we continue the trust 
fund,certainly there's the period in which the interest would 
continue to keep the balance in terms of payments and the 
revenues into the system. And after that, we would be drawing 
down the debt that is dedicated for this purpose.
    My understanding is that this is a commitment and an 
obligation that is a strong indication that we believe this is 
important enough to continue it in that vein.
    I also think there's the issue of, if you were to eliminate 
the trust funds, I think that there would be a very strong 
incentive to substantially reduce the taxes that are now going 
to fund both Social Security and other things that we are now 
seeing in terms of the buildup of the trust fund.
    Mr. Cardin. It would be difficult to continue public 
support for overpaying for current benefits is what you're 
    One last question because my time is running out.
    You're Trustees, and if you were charged with providing for 
75-year solvency, and if there were no restrictions on how you 
could invest the moneys, and if you were looking to ensure a 
75-year system with the modifications that we would be making 
this year, would you continue an investment strategy that would 
buy U.S. Government bonds, or would you look at a different way 
of dealing with the return you have on your trust assets?
    Mr. Kellison. That's not an option that we have had. 
Current law requires all of the money----
    Mr. Cardin. I said if we didn't have that. You're a 
    Mr. Kellison. We're Trustees. I think we would, as 
fiduciary responsibility as a Trustee, we would clearly have to 
look at the appropriateness of that investment policy very 
    And it could conceivably change if that were a flexibility 
that we had.
    Mr. Cardin. Dr. Moon, you're an economist. How would you 
see that as a Trustee?
    Ms. Moon. My belief is that one would want to look both at 
what was possible to responsibly invest in elsewhere, but I 
think some considerable amount of conservativeness is 
    Social Security is the absolute base of retirement for 
individuals, it's not where I think you'd try to maximize 
returns, either individually or publicly.
    I think what you want to do, if you thought there were 
things you could do for which there were protections, the 
appropriate protections, you might consider it, but I think you 
should err on the side of investment conservativeness in this 
    Mr. Cardin. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shaw. Just a couple of observations.
    I know Mr. Cardin wasn't implying this, but I want to be 
very clear, particularly in facing the Trustees here.
    I don't know of anyone who is talking about, in any way, 
diminishing or doing away with the trust fund.
    I want to be very clear as to your futures if you are 
reappointed. [Laughter.]
    Mr. Cardin. If the Chair would just yield very briefly, 
there are proposals, though, that would increase the trust 
fund, and I think the Chair was inferring that that wouldn't 
have any impact on the overall budget of our Nation or overall 
cash flow issue.
    Chairman Shaw. That was the point I was trying to make.
    Mr. Cardin. The point I was raising is that if you go to 
zero, the point that you're making that by increasing it, it 
has no effect, then I would suggest that by decreasing it, by 
the same analogy, it would have no effect. Therefore, if it 
makes no sense to double the fund, then why don't we just get 
rid of it?
    Obviously, I'm not suggesting we get rid of it.
    Chairman Shaw. And neither am I.
    I'd also like to comment with regard to what would happen 
if we do do nothing and the trust fund, FICA taxes coming into 
the trust fund, are not sufficient to pay its obligations, as 
has been stated, it won't be in 2014, it won't be relying upon 
interest paid on the bonds to take it to 2022.
    And then the appropriate process will have to come in, 
unless this Subcommittee was willing to increase FICA taxes.
    We would be leaving a terrible, terrible burden to future 
Congresses or a terrible disservice to future generations 
relying upon Social Security.
    And I think that's a tremendously important point.
    Mr. Hayworth.
    Mr. Hayworth. Thank you, Mr. Chairman, Dr. Moon, Mr. 
    Dr. Moon, I appreciate it when you use the word 
``conservative'' in any context, and I thank you for that.
    My good friend from Maryland, and my esteemed Chairman, 
just had an exchange that I think is illustrative of part of 
the problem.
    There was once a wise man who said, Isn't it a shame that 
youth must always be wasted on the young.
    We could amend that perhaps this morning to say, Isn't it a 
shame that sound policy must always be predicated on electoral 
politics, not the notion that the people decide, but some of 
the trappings that go along with it.
    I'm so sorry my good friend from Texas schedule would not 
allow him to stay, because I feel compelled in the record just 
to ask you both--and it may be in terms of what you perceive, 
both as Trustees of our Social Security funds--do you know of 
any scheme on the part of any political party, especially the 
two parties that inhabit the U.S. House of Representatives, to 
destroy Social Security?
    Mr. Kellison. I personally know of none that are serious. 
There are fringe groups that might take that position, but I 
know of none that are serious.
    Ms. Moon. I think there have been proposals that have been 
made by people that would largely dismantle some of the 
protections of Social Security, but my belief is that even 
relatively major restructuring proposals usually try to retain 
a number of the elements that I think are very important in the 
Social Security system.
    Mr. Hayworth. And the record should reflect and perhaps you 
can feel free to correct me, since my friend from Texas 
mentioned the Majority Leader specifically, and I think it's 
important to have it in the record, you know of no plan from 
the Majority Leader to dismantle or destroy Social Security?
    Ms. Moon. Not that he's communicated to me anyway, no.
    Mr. Hayworth. Thank you.
    I'm sorry we had to do that, but again it points up some of 
the difficulties we face because there are those who succumb to 
a temptation to replace facts with fear and perhaps it's just 
the legal background that they have. They feel they have to 
plant a sufficient doubt in the minds of the jury when it comes 
to making decisions.
    I appreciate the comments of my good friend from Louisiana 
about administrative costs.
    Would you agree with me that administrative costs are not 
static? In other words, they do not occur in a vacuum. There 
are changes that can occur in the current system that could 
lead to reduction of administrative costs, are there not?
    Ms. Moon. Certainly.
    Mr. Hayworth. For example, one of those, because we had 
some interesting testimony from a man whose government job is 
that of a Social Security claims representative, but who has 
not actually handled a claim since 1983, he instead spends his 
time as basically a shop steward of a union to make sure that 
union conditions are maintained for the betterment of the 
    Indeed, he was dispatched to Oklahoma City in the wake of 
that horrible tragedy, not to deal with Social Security claims 
but instead to represent the interests of the union, and he 
does so on the taxpayers' dime.
    Do you think that's a wise use of administrative funds in 
Social Security?
    Ms. Moon. You can answer that one. [Laughter.]
    I think we're getting into areas of policy that are 
probably beyond both our expertise. [Laughter.]
    Mr. Hayworth. But Dr. Moon, certainly with your 
intelligence and your ability to observe the scene, do you 
think there could be some readjustments, that perhaps people 
who have job titles in administering what has become a sacred 
trust for the American people, that should actually spend time 
on fulfilling what their job descriptions say they do?
    Ms. Moon. I believe collective bargaining is a well-
established and valued part of our history.
    Mr. Hayworth. Certainly. That's not my question.
    Ms. Moon. And I think those same protections need to be 
available to workers in the Federal Government. Sometimes that 
means some higher costs. And I assume that's a negotiated 
agreement and that's part of it.
    Mr. Hayworth. I appreciate that, Dr. Moon.
    That's not the nature of my question.
    It was simply, could we reduce costs if those who have a 
job title saying they are claims representatives in fact 
carried out that job rather than constantly spending their time 
in the collective bargaining process?
    We can agree that collective bargaining plays an important 
role in the labor force. I think we would all agree with that.
    Let me go to another question before my time is up.
    Chairman Greenspan came to testify to us, and we 
appreciated the President's remarks thinking outside the box 
about the future of Social Security.
    But the President talked about government direct investment 
in the stock market. Indeed, the Senate voted in 1999 to 
nothing in opposition to such investments.
    What are your thoughts about the government investing 
directly in stocks, as our President has proposed?
    Mr. Kellison. I think that's a topic we would have to face 
as Trustees if the restrictions on investments in Treasury 
securities were removed.
    At that point, we would have to look at a broader range of 
investment options.
    I think there are a number of issues that have to be dealt 
with very carefully there.
    When I was a schoolboy, we used to call government 
ownership of private industry socialism. That's a term that we 
don't use much anymore in quite that way.
    But I think if Federal funds were to be invested directly 
into equities, there would have to be a number of questions 
answered along those lines that really are policy questions, as 
well as rate-of-return questions.
    I think Chairman Greenspan was basically trying to draw 
attention to the fact that there are a number of issues of that 
kind, corporate governance issues, who owns industry, and so 
forth, that we can't ignore if we get into that realm.
    Ms. Moon. And although it might be tempting, as a public 
Trustee, to own America On Line personally and control it, I 
think you would want to have a lot of protections in place.
    My responsibility as a public Trustee would say I would 
want to have a lot of protections where I felt that the gains 
that you might get from higher returns were not only worth it 
in terms of the kinds of restrictions that would need to be 
placed on such a system, but also there would need to be a lot 
of protections put in place to keep it out of the political 
system and environment.
    I think there are a lot of questions.
    As public Trustees, I don't think we believe it's our role 
to say this is a good idea or a bad idea, but rather to caution 
there are a lot of things you'd want to put in place before you 
did that.
    Mr. Hayworth. I see my time is up.
    Again, Dr. Moon, Mr. Kellison, I thank you for your 
    Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman.
    There are several groups in the Congress that are working 
on this particular issue, and I happen to be on a task force 
with another Committee, the Budget Committee, that's trying to 
find some answers to the Social Security problem.
    Yesterday, we met with a number of actuaries, two from the 
Social Security system, the administration, as well as two 
    They all had a lot of facts and figures about how we are 
extending the life expectancy, and how the new gadgets are 
making people physically able to work longer, and they differed 
on some of the numbers.
    But one thing they didn't differ on is the fact that as 
time goes on, there will be a lower or a closer ratio of 
workers to beneficiaries. Today, it's about 3.3.
    I believe by the time the report ends, it's 1.8 or almost 2 
to 1. There was no dispute over that.
    Mr. Greenspan's been mentioned.
    Mr. Greenspan testified that unless you end the current 
pay-as-you-go type system, where the current beneficiary or the 
current workers pay the benefits, at some point in time, you'll 
have the same problem reoccur again.
    The question is, Do you end the current pay-as-you-go 
system, or the current Social Insurance Program.
    If so, who do you end it for, what age group or what age 
    And that question hasn't been answered.
    There is no immediate crisis. We know there's a problem 
coming, the train, you can listen to the rumble and the roar, 
and you'll hear it, but it's not immediate.
    That's the reason currently it's seniors who are under the 
Social Security system, the drawing of benefits, it's the 
reason they don't trust Congress to deal with this, especially 
if it affects them.
    In fact, Members of Congress don't even trust Members of 
Congress to deal with this because of the political volatility 
of it.
    Any plan that comes up that changes the benefit structure 
of the current recipients of Social Security or those who are 
just about to go into it, raises red flags to the point it 
makes it difficult, probably makes it impossible for us to do 
anything in this Congress that will be substantial or will be 
beneficial, far different from the way Medicare was.
    We dealt with Medicare in 1995 and then again in 1997. That 
was a crisis. It was in a deficit cash flow. And I go home and 
I talk about Social Security at every meeting that I have, 
every group I talk to. I'm not afraid of it as the third rail 
of politics, it's real.
    It's my old age pension as well as yours. But people at 
home say, If you hadn't have robbed the trust fund, and spent 
it, we wouldn't have a problem.
    They haven't been convinced yet that there is a problem 
coming, and I'm glad to see that both the administration and 
the Congress are taking steps to try to stem that concept at 
    The President said we're going to set aside 100 percent 
last year, and changed a little bit on percentages for this 
    But the Congress just passed a budget yesterday that does 
set aside FICA taxes, plus the interest that's owed on the 
notes that are held by the trust fund.
    We're making some headway, but it's slow, and I think it 
needs to be slow.
    My daddy had only a third-grade education. In fact, he 
didn't even finish the third grade. And when I was a young guy, 
I thought I was a lot smarter than he was. But as I got a 
little bit older, I found out that he was a whole lot smarter 
than I was and I am.
    But he used to tell me, when I wanted to get in a hurry to 
do something, Son, haste makes waste.
    We thank you for coming today, we thank you for your 
report, and I look forward to reading through your report.
    Thank you.
    Chairman Shaw. Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman.
    I was afraid if we didn't ask a second round of questions, 
this would be the shortest hearing we'd ever had before the 
Subcommittee, so I wanted to take advantage of these two 
prominent experts in the field to just ask a couple of more 
    Over the past 75 years, the economy has grown, on average, 
3 to 3.5 percent per year. Yet your projections, the Trustees' 
projections about future economic growth are about 1.5 percent 
per year.
    Why are the growth assumptions so much lower for the future 
than the facts show about the past?
    Mr. Kellison. That's a complex question, but I'll try to 
give you some answer, and Dr. Moon may have a little different 
way to express it.
    It largely is a result of labor force participation, and 
essentially labor force participation rates have increased 
fairly significantly over time.
    That inevitably comes to an end because of the baby boom 
generation moving toward retirement, and the percentage over 
time of, say, working women in the work force has increased 
significantly, but at some point hits a plateau.
    In terms of just the age distribution of the population, 
and the percentage of both genders for that matter that are 
already in the work force, entry into the work force has to 
slow down significantly in the next 25 years, compared to, say, 
what it has been in the last 25 years.
    I think, in a nutshell, that a large part of the 
explanation has to do with just what the potential work force 
    Ms. Moon. It's interesting you asked that question because 
when Steve and I first came on board as public Trustees, we 
were actually criticized sometimes for being too optimistic 
about the future.
    And now the criticism tends to be that we are too 
    Maybe we're honing in on getting it right.
    But I think our sense has been that the economic 
assumptions, while we would like them to be higher, and we 
would hope that that's what happens, we think that since this 
trust fund report is supposed to provide some warning about 
potential problems ahead that we should try to err on the 
conservative side, that we should try to keep the growth rates 
a little lower than some people have thought they might be.
    The other thing is you have to be very sober in looking at 
something 75 years ahead. One of the things the actuaries do 
for us every year, when we start to talk about the assumptions, 
is provide us with a wealth of information about what has 
happened in the last 5 years, 10 years, 20 years, 50 years, 75 
years, and it is an enormous task to try to think about what 
the long run really does look like.
    Mr. McCrery. In other words, the Trustees don't see much 
hope of growing our way out of the problem?
    Ms. Moon. I think the last couple of years indicate that 
certainly economic growth can play a part in helping to reduce 
the size of the problem. And one would certainly like to 
encourage everything that's possible, as people have talked 
about, to encourage savings and higher productivity. That will 
certainly help.
    Because whatever we do about Social Security, we will have 
an aging population into the future that's going to change 
enormous numbers of things about our society in all sorts of 
    But I think we don't want to count on it, and we don't want 
to base this report counting on such change.
    Mr. McCrery. The Social Security Advisory Council included 
in its report some data that most of us are familiar with.
    One being that over the last 75 years or so, stocks have 
earned an inflation adjusted return of about 7 percent 
annually, whereas Treasury bills or bonds have averaged about 3 
percent or a little less than 3 percent annually.
    In light of your expectations for lower economic growth 
over the next 75 years, is there any reason to expect that 
those returns will differ, vis-a-vis stocks and Treasury bonds?
    Mr. Kellison. I'm not an economist so I'll defer to people 
that are to perhaps give you a more solid answer to that 
question. I think that is a valid question.
    In other words, if the future growth rate in the economy 
does decline, say, from three-something to one-something, can 
the stock market continue to deliver 7-percent returns over a 
long period of time is certainly a question that needs to be 
    On the surface of it, it does appear to be difficult to 
achieve, and again I would predicate my answer by saying I'm 
not an economist but I think that's a valid question that will 
really have to be looked at.
    Mr. McCrery. Dr. Moon.
    Ms. Moon. I concur with Steve Kellison, that this is 
something that's very difficult to know. There ought to be a 
link. One would think that there would be a strong linkage 
between the health of the economy and the health of the stock 
market, but I've been around long enough to observe that there 
doesn't always seem to be a very close correlation, and I know 
a number of my economics colleagues who have also found that 
out through bitter experience over the years.
    But I do think that that is one of the things, when someone 
wants to make the comparisons, that you have to try to be very 
careful to be as realistic as possible in those comparisons.
    You would want to try to have a consistent set of 
assumptions between what you're using to compare the current 
system as it is now and one that involved private accounts in 
which there would be these kinds of investments to be able to 
make the best possible comparisons about the pros and cons of 
those different approaches.
    Mr. McCrery. Just one quick addition.
    Even if the rates of return for stocks are lower because of 
lower economic growth, would rates of return on Treasury bonds 
also be lower because of low economic growth?
    And could we or should we expect still a premium on the 
return of stocks over Treasury bonds, even with lower economic 
    Ms. Moon. On average, one would expect that the returns 
would be higher from stocks over time, again because of the 
risk differential. That's really what they're reflecting in 
part. That is the big driver in terms of that differential.
    Mr. McCrery. Thank you, Mr. Chairman.
    Chairman Shaw. Thank you.
    If there are no further questions, we will conclude this 
    Steve, Marilyn, we'd like to thank you for the job that you 
do, the work you do for all of us, and for your time here 
    Without objection, I would ask that the graph contained in 
the status of the Social Security and Medicare Programs be 
inserted in the record.
    This is a graph that shows the diminishing number of 
workers to support the number of retirees that's contained in 
the Trustee's Report.
    [The information follows:]
    [GRAPHIC] [TIFF OMITTED] T8722.001
    Chairman Shaw. Thank you very much.
    The hearing is concluded.
    [Whereupon, at 11:35 a.m., Thursday, April 15, 1999, the 
hearing was adjourned.]
    [A submission for the record follows:]

Testimony of Michael A. Steinberg, Esquire, Michael Steinberg & 
Associates, Tampa, Florida

    I appreciate the opportunity to submit a written statement 
for the printed record of this hearing and your consideration 
of the same. My name is Michael Steinberg, and I am the 
principal attorney in the law firm of Michael Steinberg and 
Associates. Michael Steinberg and Associates is a moderate-
sized law firm with offices in Worcester, Massachusetts; 
Washington, D.C.; Jacksonville, Florida; Ft. Lauderdale, 
Florida; Tampa, Florida; and Clearwater, Florida. Our firm 
primarily handles Social Security related matters and is made 
up of attorneys with both strong Democrat and Republican 
affiliations. This statement, however, is not submitted on 
behalf of any client, firm, or organization, but is simply a 
personal analysis and critique of the 1999 Annual Report of the 
Board of Trustees on the financial status of the Federal Old-
Aged and Survivor's Insurance (OASI) and the Federal Disability 
Insurance (DI) Trust Funds.
    It is my understanding that despite the report's 
projections regarding OASDI are slightly improved from those 
reported in 1998, the spending is still projected to exceed tax 
income in the year 2014 and trust funds will be depleted by 
    As in prior years, the Trustees recommend that action be 
taken to reform the Social Security program. ``It is important 
to address the financing of both the OASI and DI programs soon, 
to allow time for phasing in any necessary changes and for 
workers to adjust their retirement plans to take account of 
those changes''
    We all are familiar with the traditional choices to reform 
the Social Security program, but for the purpose of analysis, I 
will enumerate the same below:
    1. Establish individual accounts without reducing benefits 
for those approaching retirement age: Those in favor of 
allowing individuals to set up personal savings accounts 
suggest that benefits to be paid to current retirees and those 
soon to retire be maintained by the Social Security surplus 
while future Social Security recipients' benefits be reduced. 
They argue that the increased revenues from the personal 
savings accounts will exceed the expected rate of return on 
Social Security Trust Fund monies, thereby netting the future 
retirees with the same or more retirement income. Opponents of 
this type of plan counter that by 2010-2014, the plan would 
require new taxes, deeper cuts in the rest of government, or 
deficit spending, and that individual accounts are essentially 
a large new entitlement program. For instance, Wendell Primus 
of the Center on Budget and Policy Priorities, posits that this 
plan would sacrifice the needs of younger generations to 
increase benefits directed to the elderly, especially the more 
affluent elderly, and weaken the progressive nature of the 
current benefit structure.
    2. Cutting benefits: A. The retirement age for full 
benefits is currently scheduled to increase to 67 over the next 
20 years. There are suggestions that the retirement age be 
raised to 70. Opponents argue that this would be unduly 
burdensome on many ``blue collar'' workers who will not be able 
to physically sustain work until age 70. Proponents say that it 
is the poor and middle class that will actually benefit from 
raising the retirement age. If someone is physically unable to 
engage in substantial, gainful activity, he or she qualifies 
for Social Security Disability Insurance Benefits, which pays 
benefits at substantially the same rate as if he or she retired 
at ``full benefit retirement'' age. Blue collar workers are 
more likely to qualify for Disability Insurance benefits than 
white collar workers. Presently, many middle income workers 
cannot make ends meet if they retire at age 65. It is the 
wealthy that can afford to retire earlier. Furthermore, as the 
country's economy shifts from agriculture and industry to 
service and technology, people will be able to physically work 
longer. There is no reason why a lawyer, accountant, judge, or 
Congressman should not be expected to work until age 70.
    B. Cost-of-living adjustment: There is a growing consensus 
that the current method of calculating the cost-of-living 
adjustment (COLA) based on the Consumer Price Index (CPI) 
overstates inflation and that some change in the COLA formula 
needs to be made.
    C. Reduction in benefits for the middle-class and upper-
middle class: For some time there has been discussion about 
reducing benefits to retirees with higher average monthly 
earnings and/or retirees with high retirement income from other 
sources. Opponents argue that the wealthier participants paid 
money in the system, it is ``their money,'' and they are 
entitled to a fair return on their ``investment,'' regardless 
of whether they ``need'' the income as much as their poorer 
    Proponents point out that the Social Security Retirement 
system is a non-contractual welfare benefits program and 
thatSocial Security recipients' benefits are not dependent on 
the amount they have put into the system by taxation. 
Furthermore, although Social Security is an earned benefit 
program, Congress has wide latitude to create classifications 
for the allocation of benefits.
    D. Increase the cap on taxable earnings: A viable, partial 
solution to bolster the Trust Fund is to accelerate the 
increase of the cap on taxable earnings. Since Social Security 
is a progressive tax, the higher the average earnings of a 
participant, the lower the percentage rate of his return. 
However, once the participant reaches his cap on taxable 
income, he can theoretically invest the same percentage of his 
earnings in his IRA or 401K plan, netting a higher rate of 
return than his lower income cohort. Raising the cap on taxable 
earnings would raise the participant's expected return on 
contributions, but at a lower percentage rate of return. An 
advantage to this type of proposal is that the cap on taxable 
earnings can be periodically adjusted without a drastic 
overhaul of the Social Security system.
    E. Invest Trust Funds in securities: At present, Trust Fund 
surpluses are ``invested'' in Treasury securities, earning a 
relatively low rate of interest. Many suggest that we invest 
part of that money in securities in private securities. 
Initially, one might conclude that since historically the stock 
market has realized higher rates of return than Treasury 
securities, the Trust Fund would grow more rapidly, easing the 
solvency problems.
    There are several problems with this solution. First, if 
the United States Treasury did not have the ability to borrow 
Social Security Trust Funds at a low rate of interest, it would 
have to borrow elsewhere at a higher interest rate. This would 
in turn exacerbate the deficit problem and/or result in 
decreased spending on other programs. At the same time, a 
greatly increased supply of capital to the stock market may not 
have beneficial results and might result in smaller rates of 
return on investments. Furthermore, opponents are wary of 
giving so much control over the stock market to the government.
    F. Reduce disability rolls: According to Social Security 
data, as of January 1999, 44,168,500 received Social Security 
benefits of which 27,473,000 were retired workers, and 
4,763,900 were nondisabled widows and widowers.
    There were 5,617,700 beneficiaries receiving payments on 
the basis of disability. 4,710,700 disabled workers, 712,700 
disabled adult children, and 194,300 disabled widows and 
widowers. In addition, 185,500 spouses, and 1,398,400 minor and 
student children of disabled workers were receiving benefits. 
Monthly retirement benefits totalled $31.3 billion and $3.8 
billion to disabled workers.
    The average monthly benefits as of January 1999 were $780 
for retired workers and $733 for disabled workers. Having been 
practicing law for 17 years, most of them in the area of Social 
Security Disability law, I have had the opportunity to 
represent literally thousands of Social Security Disability 
recipients and discussed the economics of the Social Security 
Disability program with Administrative Law Judges, claims 
representatives, state disability determiners, claimants, and 
other attorneys (both private and government). Recently, there 
have been hearings and discussions about efforts to assist 
disabled beneficiaries in returning to work. One proposal was 
to raise the amount Social Security would deem substantial 
gainful activity. Another way is to extend health care coverage 
to persons removed from the disability rolls. The above 
proposals are faulty both theoretically and in practice.
    Proponents of raising the substantial gainful activity 
level to $700 suggests that if a person is on disability and 
the SGA amount is $500, a person will not even try to return to 
work for fear of losing benefits, but if the SGA amount is 
$700, that person will get a job making less than $700 per 
month until he or she can regain skills and eventually get off 
the disability rolls. The other theory is that disabled workers 
will not get off the disability rolls for fear of losing health 
care coverage. Both of these theories are irrational and 
    First, Social Security already gives disabled recipients a 
trial work period of 9 months (earnings during trial work 
periods do not affect payment of benefits). Secondly, health 
care is readily available to the poor and lower income families 
who do not qualify for Medicare, i.e., county health care, VA, 
state welfare, etc.
    Instead, legislation needs to address a disincentive to 
beneficiaries receiving Disability Insurance benefits, for not 
making an attempt to return to work. A rational proposal would 
be to require disabled workers to perform community service as 
a condition requisite to receiving benefits. (Exceptions could 
be made for persons with extreme disabilities.) By requiring 
this, recipients would be persuaded to return to work and learn 
job skills and trades, while doing ``volunteer'' work. In 
addition, the general public would benefit from the services 
performed and recipients would receive a boost in self esteem. 
There are already nonprofit organizations such as the United 
Way, Salvation Army, etc., that have the capability of 
monitoring participation in such a program.
    G. Increase the cap on how much a retiree may earn before a 
reduction in retirement benefits and/or eliminate reduction in 
benefits altogether: Many Social Security retirees do not see 
the logic in reducing their retirement benefits, if they choose 
to continue to work after retirement age. After all, if they 
paid money into the system, aren't they entitled to a return 
after reaching a certain age? Reducing benefits to retirees who 
earn over a certain amount, does not increase revenues or 
decrease expenditures. It merely discourages the elderly from 
working, thereby actually reducing the potential contributions 
to the system far greater than any savings in expenditures.
    Those against the change say that since Social Security 
system is not a retirement program, but a social welfare 
benefit designed to replace a worker's lost earnings, allowing 
retirees to receive their full retirement benefit and earn an 
unlimited amount of money would be contrary to the intent and 
purpose of the program.


    Drastic changes should not be made to the Social Security 
retirement and disability programs. Small changes should be 
made in several areas rather than large changes in any one 
area. The changes that are made should be ones than can be 
``undone'' or modified without an inordinate cost, i.e., 
decreased COLA, increasing income cap, etc., versus setting up 
private savings accounts, investing Trust Funds in stock 
market, etc. Efforts should be made to decrease the disability 
rolls by mandating community service by recipients of 
Disability Insurance Benefits.
    It is important to bear in mind that the economics of 
Social Security cannot be studied in a vacuum. There are many 
factors that effect the integrity of the program which occur 
outside of the program.
    Ironically, it appears that the traditionally conservative 
party is more apt to support ``changes'' in the Social Security 
system, while the ``liberal'' party is more ``conservative.''
    Thank you for your consideration of the above.