[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
THE PRESIDENT'S SOCIAL SECURITY LEGISLATION
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
NOVEMBER 9, 1999
__________
Serial 106-33
__________
Printed for the use of the Committee on Ways and Means
__________
U.S. GOVERNMENT PRINTING OFFICE
65-744 WASHINGTON : 2000
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
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converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
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C O N T E N T S
__________
Page
Advisories announcing the hearing................................ 2
WITNESSES
U.S. Department of the Treasury, Hon. Lawrence H. Summers, Ph.D.,
Secretary.............................................. 10
U.S. General Accounting Office, Hon. David M. Walker, Comptroller
General of the United States................................... 61
Congressional Budget Office, Dan L. Crippen, Ph.D., Director..... 75
SUBMISSIONS FOR THE RECORD
American Farm Bureau Federation, statement....................... 94
Ramstad, Hon. Jim, a Representative in Congress from the State of
Minnesota, statement........................................... 95
Smith, Hon. Nick, a Representative in Congress from the State of
Michigan, statement............................................ 96
THE PRESIDENT'S SOCIAL SECURITY LEGISLATION
----------
TUESDAY, NOVEMBER 9, 1999
House of Representatives,
Committee on Ways and Means,
Washington, D.C.
The Committee met, pursuant to call, at 10:05 a.m., in room
1100, Longworth House Office Building, Hon. Bill Archer
(Chairman of the Committee) presiding.
[The advisories announcing the hearing follow:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
October 27, 1999
FC-15
Archer Announces Hearing on
the President's Social Security Legislation
Congressman Bill Archer (R-TX), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a hearing on
President Clinton's new Social Security plan. The hearing will take
place on Wednesday, November 3, 1999, in the main Committee hearing
room, 1100 Longworth House Office Building, beginning at 10:30 a.m.
Oral testimony at this hearing will be from invited witnesses only.
However, any individual or organization not scheduled for an oral
appearance may submit a written statement for consideration by the
Committee and for inclusion in the printed record of the hearing.
BACKGROUND:
On Wednesday, October 26, 1999, President Clinton submitted
legislation outlining a Social Security plan. The proposed legislation
reflects the third plan set forth by the President over the past 10
months. The new plan would create several budget enforcement rules to
ensure that 100 percent of the Social Security surplus is used to pay
down the public debt over the next 15 years. Under the proposed
legislation, during fiscal years 2011 -2044, nearly $7 trillion of
general revenues would be transferred to the Social Security Trust
Funds in the form of interest-bearing, special-issue Treasury
securities. Transfers made during the first six years are supposed to
reflect interest savings generated from the debt reduction. However,
the transfers would not be contingent on debt relief; instead, they
would be appropriated in the law according to a specified formula.
Transfers made after fiscal year 2016 would be set by law at the fiscal
year 2016 level. According to Social Security's actuaries, the
President's plan would extend the life of the Social Security Trust
Funds to 2050 -16 years later than current law.
In announcing the hearing, Chairman Archer stated: ``I have serious
reservations about the President's latest plan, so I look forward to
hearing from our witnesses as to how this plan actually works. Does it
meet our principles of no tax hikes or benefit cuts? Does it save
Social Security for 75 years? Does it offer new options for younger
workers? I'll be looking for these and other answers from the
witnesses.''
FOCUS OF THE HEARING:
The hearing will evaluate the President's new Social Security plan
and discuss the impacts of the plan on taxpayers, the Federal Budget,
the Social Security program, and the economy.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Wednesday,
November 17, 1999, to A.L. Singleton, Chief of Staff, Committee on Ways
and Means, U.S. House of Representatives, 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Committee office, room 1102 Longworth House Office
Building, by close of business the day before the hearing.
FORMATTING REQUIREMENTS:
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witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1
format, typed in single space and may not exceed a total of 10 pages
including attachments. Witnesses are advised that the Committee will
rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
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3. A witness appearing at a public hearing, or submitting a
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comments in response to a published request for comments by the
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clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at ``http://www.house.gov/ways__means/''.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
***NOTICE--CHANGE IN DATE AND TIME***
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
October 28, 1999
FC-15-Revised
Date and Time Change for Full Committee Hearing on
Wednesday, November 3, 1999,
on the President's Social Security Legislation
Congressman Bill Archer (R-TX), Chairman of the Committee on Ways
and Means, today announced that the full Committee hearing on President
Clinton's new Social Security plan, previously scheduled for Wednesday,
November 3, 1999, at 10:30 a.m., in the main Committee hearing room,
1100 Longworth House Office Building, will now be held on Thursday,
November 4, 1999, at 10:00 a.m.
All other details for the hearing remain the same. (See Full
Committee press release ``fc-15.htm'' No. FC-15 , dated October 27,
1999.)
***NOTICE--CHANGE IN DATE AND TIME***
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
October 28, 1999
FC-15-Revised
Date and Time Change for Full Committee Hearing on
Thursday, November 4, 1999,
on the President's Social Security Legislation
Congressman Bill Archer (R-TX), Chairman of the Committee on Ways
and Means, today announced that the full Committee hearing on President
Clinton's new Social Security plan, previously scheduled for Wednesday,
November 4, 1999, at 10:00 a.m., in the main Committee hearing room,
1100 Longworth House Office Building, will now be held on Tuesday,
November 9, 1999, at 10:00 a.m.
All other details for the hearing remain the same. (See Full
Committee press release ``fc-15.htm'' No. FC-15 , dated October 27,
1999.)
Chairman Archer. The Committee will come to order. Good
morning to everyone on this beautiful Washington fall day.
Mr. Rangel. Good morning, Mr. Chairman.
Chairman Archer. Thank you, Mr. Rangel. Today's hearing is
on the President's Social Security plan. We committed at the
beginning of this year that when the President sent up the
Social Security plan, that we would give it very serious
consideration. And we are fulfilling our commitment today, and
it is our pleasure to have with us the new Secretary of the
Treasury, Secretary Summers, who is making his first appearance
before our Committee since being confirmed by the Senate, which
confirmation sailed through without controversy, a great
compliment to Mr. Summers. I congratulate you and welcome you
before the Committee.
The President's latest version of his Social Security plan
is in some ways a step forward and a step back. It is a step
forward because it has been long awaited by this Committee and
the Chairman had hoped that it would have occurred much, much
earlier this year to give us time to try to find a bipartisan
answer this year.
It is also a step forward because the President dropped his
original recommendation that the Social Security Trust Fund
dollars be invested by the government directly in the stock
market rather than having personal savings accounts where
individual workers would be able to determine the investment of
their own funds. And I applaud the removal of this provision by
the President from his original plan.
In doing so, however, the President has also abandoned
entirely the concept that we should use the strength of the
financial markets to help shore up Social Security's finances.
Most experts, including the President's own Social Security
Advisory Council, believe that we should do this in some
fashion, and I think it is best accomplished by providing
Americans with their own personal savings accounts. But I hope
the President will keep an open mind about this as we move in
that direction.
I think it is very important that we find a way to resolve
this problem and resolve it cooperatively between the White
House and the Congress, but I must say that I am disappointed
in the President's program in what I believe is a step
backwards. After saying in 1998 that we should put first things
first and save Social Security first, and after a year-long
national debate and dialogue on Social Security and after a
White House summit now almost a year ago on Social Security,
after countless hearings and forums discussing the need to save
Social Security, I really had hoped that the President would
submit a better long-term plan.
First, this plan will not save Social Security for the
required 75 years. Second, it leaves Social Security hurtling
toward a cliff of insolvency at the end of the year 2050. And
third, because it does not satisfy the long-term goals, I do
not believe it has any chance of becoming law. Despite this, I
am still hopeful that we can work together to save Social
Security. And Social Security Subcommittee Chairman Shaw and
some Members of this Committee may be the few other people who
agree with me.
We have offered a plan that saves Social Security for 75
years without tax increases or benefit cuts, gives every
working American a personal savings account that can be
invested at their decision, and provide retirement security for
them and their families. Others, including many senior
Democrats in the House and Senate have introduced plans based
on the concept of personal savings accounts. But the President
apparently still is unwilling to accept this.
In closing, let me say I am still optimistic. Conventional
wisdom says we cannot fix Social Security in a Presidential
year, next year, but there are always exceptions to prove the
rule. This so-called conventional wisdom said we couldn't
balance the budget, we couldn't strengthen Medicare, we
couldn't reform welfare, and that we couldn't cut taxes.
I know from the discussions that I have had personally with
President Clinton that he wants to save Social Security and I
think he would be a lot bolder than this plan if he were
totally free of all political constraints, because I believe
that deep down he knows this plan just doesn't do the job. But
as is often the case in Washington, politics have gotten in the
way, and that goes for both parties, but if we put principles
before politics and ideas before ambition, we can fix Social
Security, working together.
I now recognize Mr. Rangel for any opening statement that
he might like to make and, without objection, all Members may
enter their written statements at this point in the record.
Mr. Rangel.
Mr. Rangel. Thank you so much. Good morning again, Mr.
Chairman.
Chairman Archer. Good morning, Mr. Rangel.
Mr. Rangel. We want to thank you and the Republican Party,
really, under the leadership of President Reagan, for moving us
forward in balancing the budget and looking forward to this
surplus. It was your idea, and we Democrats thought that we
could support President Clinton's budget and move forward and
do this even without the help of existing Republicans and we
reached that goal. We have accomplished it and some of us
believe that the President is right in asking that while we are
moving forward with this surplus, that we take care of Social
Security and Medicare first.
Now, I know you have been waiting a long time for the
President's legislation on Social Security. Why, I don't know,
because we have always prided ourselves in the House of
Representatives, and especially on the Ways and Means
Committee, in not just doing what Presidents tell us to do. We
like their recommendations. We like working with them,
certainly when it comes to tax cuts. We didn't go to the
administration and ask about the $792 billion tax cut. We are a
pretty independent Committee and House. However, since we did
not draft the bill and still don't have a Social Security bill,
and we are the legislative Committee, let me join you in
thanking the President's people for coming forward and giving
us at least an outline that we can follow.
Now, this bill should not be everything that we want as
Democrats or as Republicans. It should be a guideline. And,
whether it is short term or long term, it is better than not
having any fix at all. That is where I think with your
leadership, Mr. Chairman, working with the President,
Republicans and Democrats working together, we can just put
aside this notion of a trillion dollar tax cut and stop cooking
the books on the other side of how much this thing costs, and
start moving forward and taking care of Social Security,
Medicare, and, God willing, give the American people some
substantial tax relief.
I certainly would hope that it would be part of your legacy
that, in the last year that you are here, that you work with
our President, you work with your Republican and Democratic
friends, and that we do have a Social Security bill that can
pass. In order to do that, I think we have to move away from
$792 billion in tax cuts and kind of think in terms of what to
do with Social Security.
I would like to yield to the Ranking Member of the
Subcommittee on Social Security and hope he would support my
position.
Mr. Matsui. I thank you, Mr. Rangel, for yielding to me,
and I appreciate your remarks and your comments. I am going to
be very brief because I know we want to hear from Mr. Summers
and I do believe that Mr. Shaw will have an opening statement
as well. But I would like to just make one observation. I think
the President's plan is an excellent starting point. It tried
to accommodate some of the objections that Mr. Greenspan and
you, Mr. Archer, as Chairman of the Committee, have raised
regarding investments by fund managers into the equity markets.
But it tried to deal with some of the issues that you raised
over the last 6 or 7 months. This proposal will buy down the
debt for the next 15 years, and for the first time since 1834,
believe it or not, we would end up having a situation in our
economy where there would be no national debt. At the same
time, by using the savings from the reduction in the debt--that
is, interest savings--we will be able to put that money into
the Social Security fund to preserve the solvency of the Social
Security account until the year 2050.
That means a child today would undoubtedly be in a better
position to collect his or her benefits. Somebody who is 20
today will be guaranteed his or her benefits. And so this is a
situation where it makes sense, as Mr. Rangel said, at least to
get the ball rolling. We still have a number of years, over the
next 50 years, to solve the additional 25 years of the problem,
if in fact, as Mr. Archer suggested, that we should. But this
will give us 50 years' savings on the fund.
Now, I don't want to get into charges back and forth
between different plans, but I don't think you can look at the
President's plan in a vacuum. And I hope there will be
opportunities to talk about other plans as well, particularly
the plan advanced by Chairman Archer and Mr. Shaw. The problem
with that plan, I think, as everyone knows, is that if you give
a $792 billion tax cut over the next decade, and beyond that as
well, and then you also institute the Archer-Shaw plan with a 2
percent of payroll credit for every American in the work force,
you will not have enough money available for both of these
initiatives. And certainly what would happen then is we would
be in major deficit spending.
In fact, under Archer-Shaw--and they admit this
themselves--35 years from now when the President's plan would
create a balanced situation and there would be no debt, Archer-
Shaw would increase the debt held by the public by $11.7
trillion. So I would have to say the President's plan is the
only realistic practical plan available. Archer-Shaw is just
not an option available to us given the fact of the
uncertainty of the Federal debt, and certainly our budget.
I look forward to these hearings and certainly hearing from
the witnesses, but it is my hope that we begin to look at the
President's plan with a little more practicality instead of
ideology. I yield back the balance of my time.
Chairman Archer. I yield to the Subcommittee Chairman of
the Social Security Subcommittee, Mr. Shaw, for a statement.
Mr. Shaw. I thank you for yielding me this time. I have
been looking forward to this hearing for some time and I think
we are making progress. There are two issues that are before us
this morning. The first is the President's Social Security
bill. As our witnesses will attest, while it takes positive
steps such as paying down the debt, the President's plan will
not save Social Security for 75 years. That is his own
yardstick for reform. That is just not good enough for us.
The second issue is are we ready to save Social Security
for all time, for 75 years and beyond? I think that we are.
Most of our Democrat colleagues, including Ranking Member
Rangel and Matsui, showed support for the action by
cosponsoring the President's plan. We expect, Chairman Archer
and I, expect to and will be introducing the Archer-Shaw plan
shortly. It is in legislative form and it is ready to go.
Our plan doesn't cut benefits. It doesn't raise taxes, but
it does save Social Security for 75 years and beyond. And I
would say to my Democrat friends that we listened to your
concerns. Several of you asked why your concerns were not
addressed and why you were not part of drawing the bill. Mr.
Archer and I have been working on this bill for almost--for
just about 2 years. We have had more hearings on this than we
had when we reformed welfare. We have been listening to you. We
have addressed your concerns and I think that we have taken
them into account on this legislation.
First of all, we don't touch Social Security. We don't
touch it at all. The FICA tax is still out there. It is still
invested in Treasury bills. The system stays exactly the way it
is under the Archer-Shaw bill. We protect all the benefits so
there is no need to cut COLAs or raise the retirement age. We
don't do that. We maintain all existing benefits. We avoid a
tax hike, a concern that Mr. Rangel and I have discussed, and
we allow for tax cuts in the long run. Actually we can see and
the Social Security Administration tells us that under our
plan, the FICA tax can be cut in the outyears.
And we fully protect against individual risks. There is no
risk. We even provide new benefits like inheritance of the
individual retirement accounts and we eliminate that terrible
Social Security earnings penalty, which is grossly unfair to so
many of our low-income retirees, and we save Social Security
for all time. That is not our estimate, this is the estimate
that is given us by the Social Security Administration.
So we say to the President, work with us. No plan is
perfect. Yours certainly isn't. Ours isn't either, but as I see
it, we now have two clear options: One option is for you to
tell us how you would further change our plan to save Social
Security for 75 years and beyond, and I would say to the
President, I would say to our distinguished witness today, work
with us. We can do this and we can do it together.
The President has asked to us do it together and wait for
his lead at the White House conference of a year ago. We waited
and waited and we still have not received a plan that saves
Social Security for all time. But we do still look to the White
House for leadership and I think it is very important.
I would comment on Mr. Rangel's statement. Sure, we are the
legislative body, but in every major Social Security reform
that we have had in this country, we have had leadership from
the White House. I think it is very important and I think, most
important, it is important that this be done in a bipartisan
way.
The other option is for you to tell us whether you would
sign the Archer-Shaw plan or, if you wouldn't, what changes are
needed for your signature. Again, we are ready to sit down and
go to work, meet with the President anytime, anywhere, in order
to reach these goals.
I want to say to you, Secretary Summers, to convey to the
President personally the message that we have. And I want to
welcome you. You have been a friend of this Committee, I think
a very forthright witness. Some tough questions are going to be
asked of you today. That is our job as the Republican side, is
to look to problems that are within the Social Security plan
put forth by the President, but that does not in any way
diminish our desire to work in partnership with the President,
and I thank you for being here, Larry.
Opening Statement of Hon. Fortney Pete Stark, a Representative in
Congress from the State of California
Mr. Chairman, along with the Minority Leader, the Minority
Whip and many of my Democratic colleagues on the Ways & Means
Committee, I have taken the initiative to end the partisan
politics over Social Security by cosponsoring H.R. 3165, the
Strengthen Social Security and Medicare Act of 1999. This bill
extends the life of Social Security from 2034 to 2050. In
addition, this bill reduces the amount of debt held by the
public from roughly 44 percent of GDP today to 7 percent by
2014. It is time for the House Leadership to meet us half way
and give the issue of Social Security solvency the serious
consideration it deserves.
The GOP makes false accusations that the Democrats are
raiding the Social Security Trust Funds but has done nothing to
ensure long-term solvency. The only reason the majority
leadership has not taken action on Social Security this session
is because they would rather politicize the issue than extend
its solvency. All of this finger pointing and bickering over
the surplus serves to hide the fact that no action has been
taken to extend the life of the Social Security trust fund.
Beginning in the year 2014, the Social Security trust fund
will take in fewer taxes than it pays out in benefits. This
means that Social Security will need to redeem the treasury
notes it holds starting in the year 2014. By the year 2034, all
of those treasury notes will have been cashed in. Once those
notes are gone, the Social Security trust fund will not have
any additional revenue coming in other than the payroll taxes
paid in week by week to pay the promised benefits. Without
additional revenue, this would result in a significant decrease
in the benefit of about 25 percent. But the majority party will
have the American people believe that the Democrats are raiding
the Social Security Trust Fund to bolster other programs.
This is simply not true!
This long-term shortfall is what Congress should be
addressing now, not arguing about who's stealing the surplus
dollars of tomorrow. However, the GOP would rather cloud the
issue with false accusations than confront the American people
with their plan to offer billions of dollars in tax breaks to
the wealthiest Americans.
I have already offered my own plan to shore-up the Social
Security system-H.R. 2039; however, the leadership will not
consider it. So I have once again signed my name to another
plan that lengthens the life of Social Security. The plan
before us today extends the life of Social Security from 2034
to 2050 by paying down the public debt and using the interest
savings from the debt reduction to reinvest in the Social
Security Trust Fund.
The American worker wins in two respects from this plan.
First and foremost, the plan helps to strengthen Social
Security. The life of Social Security is extended an additional
sixteen years. This is enough time for Congress to come up with
a comprehensive plan to extend the system beyond 2050, so that
Generation Xers can have the same confidence that their parents
have in the Social Security system. Second, a lower national
debt means lower interest rates. Lower interest rates is the
equivalent of a tax cut that benefits middle-income families.
The bill goes one step further by protecting Medicare as
well. The bill creates a lockbox for Medicare to ensure that it
is protected from those who would rather give big tax breaks to
CEOs and big business. The bill prohibits reducing any non-
Social Security surpluses by more than two-thirds of the
projected surplus unless those funds are used for a Medicare
solvency package. This reserves at least one-third of future
surpluses to protecting seniors' healthcare. This includes
setting aside funds for a prescription drug benefit.
Finally, to prove that there is no gimmickry in this plan,
the bill further protects Social Security and Medicare by
extending the budget enforcement rules that have helped
generate the current surpluses.
I encourage the Ways & Means Committee and the House
Leadership to stop pointing fingers and take action on H.R.
3165. It is a responsible first step in shoring up the Social
Security and Medicare systems.
Chairman Archer. Mr. Secretary, again, welcome. And we are
pleased to be able to receive your testimony. And if you are
ready, you may proceed.
STATEMENT OF HON. LAWRENCE H. SUMMERS, PH.D., SECRETARY, U.S.
DEPARTMENT OF THE TREASURY
Secretary Summers. Thank you very much, Mr. Chairman, Mr.
Ranking Member, Chairman of the Subcommittee, Ranking Member on
the Subcommittee. I am grateful for the opportunity to appear
to testify before you with respect to the President's plan for
preserving Social Security, and in a broader fiscal context,
which I know to be of great interest to this Committee and
others in the Congress.
I have a longer statement for the record if that is all
right, Mr. Chairman, which I will summarize here today.
Chairman Archer. Mr. Secretary, without objection, your
entire written statement will be inserted in the record.
Secretary Summers. In my remarks today, I would like to
address three issues: First, dramatic fiscal progress that has
been achieved in the nineties and the benefits for the American
people that have resulted. Second, the President's plan for
maintaining this progress and assuring that the savings it
brings will not be dissipated and will be channeled into
strengthening the Social Security system. And third, the
broader significance of the President's plan and our further
economic and fiscal priorities going forward.
Mr. Chairman, I think we can all take satisfaction from the
progress that our country has achieved over the last decade in
bringing about, first, an end to budget deficits and budget
balance, and now a period of surplus where our national debt is
being reduced.
Some years ago we faced a vicious cycle of substantial
deficits, high interest rates, slower growth, less tax revenue,
larger deficits, and the cycle went round and round again. With
the progress that we have made in recent years with the 1993
and the 1997 budget agreements, we have seen that vicious cycle
converted into a virtuous circle of greater economic growth,
lower interest rates, larger surpluses, still lower interest
rates, greater economic growth, more revenue collections,
larger surpluses and so forth.
It is that change in our Nation's fiscal position and the
underlying doubling in our level of national savings that has
contributed greatly to the strength of our economy over the
last 6 years. It is that change which has brought the prospect
not just of a balanced budget but of the elimination of the
national debt over a 15-year period into view, that leaves us
in a position to tackle the challenge of an aging society that
is far stronger than almost any observer expected a few years
ago. And it is that fiscal strength that forms the basis for
the President's approach to Social Security.
Common sense is that you use a moment of opportunity to
prepare for a future possible problem. Economic logic is that
you use the space created by the removal of one liability, the
national debt, to make room to meet another liability: the
obligation we have to a generation of retiring seniors. And
political logic points towards establishing a set of mechanisms
that ensure that in the face of what will be very real
temptations, we as a country do not dissipate the surpluses
that are in prospect on either unwise spending programs or
unwise tax cuts.
The President's approach has four main elements. First, the
President's approach is based on the idea that we should
respect the integrity of the Social Security Trust Fund by
ensuring that all of Social Security surpluses are used to pay
down debt rather than finance other government activities. The
President's approach enhances the trust fund's ability to
contribute to the government and Nation's capacity to meet its
promises by ensuring that its accumulations translate directly
into increases in national savings and reduced indebtedness.
The second principle behind the President's plan is that
the interest savings from the debt reduction coming from Social
Security should be channeled into the Social Security Trust
Fund. Essentially we devote the savings that we have earned
from reducing one liability, the Federal debt held by the
public, to meeting another government liability; namely,
promised Social Security benefits. According to the Social
Security actuaries, the transfers we propose would extend the
solvency of the Social Security system to 2050 compared to 2034
under current law.
The third principle is that as we look at our budget
framework, we should make provision for devoting increased
resources to Medicare that are likely to be necessary in the
context of any enduring approach to its long-term future.
Whichever route this country ultimately takes with respect to
the fundamental reform of Medicare, most independent observers
agree that Medicare will require increased funding to
substantially extend its solvency without damaging benefit cuts
or tax increases.
The fourth principle embodied in the President's proposal
is that the Nation's budget plans should be based on realistic
discretionary plans. We have seen that discretionary caps can
be very helpful in achieving fiscal discipline over the past
decade. The President's plan extends them. It would also use
some of the surplus as part of a plan that extends Social
Security solvency to assure we are providing and budgeting
based on realistic levels of appropriations for the fulfillment
of government's core functions.
To be sure, even with the President's proposal,
discretionary spending will grow less rapidly than inflation,
as it has in recent years. We believe that such cuts are
feasible if the spending is targeted at our critical needs.
Deeper cuts, such as the cuts on the order of 50 percent
contemplated in some budget proposals over 10 years, are in our
view not feasible if core government functions, the services
that every American taxpayer expects, are to be maintained.
Respecting the integrity of a Social Security Trust Fund,
channeling the interest savings from debt reduction to the
Social Security Trust Fund, making proper allowance for
Medicare in the context of fundamental reform and budgetary
realism: If we can agree to these principles going forward, we
can make a major contribution to America's economic and fiscal
future.
It would be an important step for our economic future
because it would continue the paydown of our publicly held debt
with the projected elimination of that debt by 2015, and it
would be an important step for our fiscal future because we
would realistically provide funding to help us meet the
existing obligations of the Federal Government that are not yet
funded.
To be sure, this plan, the approach that I have described
is a foundation; it is not a finished edifice. Notably other
priorities would remain: the need to increase personal
retirement savings, especially for the 73 million Americans who
do not participate today in any of our major tax-favored
savings vehicles. We will also need to make further reforms to
assure the long-term viability of Social Security and Medicare.
The President hopes that his comprehensive Medicare reform
proposal could help provide a basis for bipartisan discussion
of this critical issue in the future.
Let me conclude, Mr. Chairman, by just saying that I share
the statements that you made and that members of the Minority
made, that it is important that we work together in a
bipartisan way on these issues; that it is important that we
build on the fiscal progress that we have achieved; and that it
is important that any approach we pursue be an approach that
preserves the strength of the American economy and the enduring
values of the Social Security program, which in many ways
represents one of the most important successes of public policy
over the last half century.
I am ready to answer your questions.
[The prepared statement follows:]
Statement of Hon. Lawrence H. Summers, Ph.D., Secretary, U.S.
Department of the Treasury
Mr. Chairman, Mr. Ranking Member, Members of the Committee,
I appreciate the opportunity to appear before you today to
discuss the President's plan for preserving Social Security,
which I know to be of great interest to this Committee and
others in Congress.
During the last six years, the United States has made
enormous progress toward putting this country's budget on a
sustainable long-term path. The core principle underlying the
Social Security legislation recently put forward by the
President is that we should work to preserve and extend that
progress--and ensure that its benefits are devoted as much as
possible to meeting this country's long-term priorities.
In this context, I would like to address three topics:
First, the dramatic fiscal progress that has been
achieved in the 1990s and the benefits for the American people
that have resulted;
Second, the President's plan for maintaining this
progress and ensuring that the savings it brings will not be
dissipated; and
Third, the broader significance of the
President's plan and our further economic and fiscal priorities
going forward.
I. Recent Fiscal Accomplishments
It is fair to say that fiscal responsibility has been the
centerpiece of this Administration's economic policy from its
very beginning. In conjunction with strong economic growth,
difficult and sometimes unpopular choices that we made in 1993
and 1997 have helped to turn years of unified budget deficits
into a surplus.
In 1992, the unified deficit was $290 billion and projected
to rise; in 1998, we achieved a surplus of $69 billion, and in
the fiscal year just completed, the surplus increased to $123
billion. During the past two years, we paid down $140 billion
of debt held by the public, the largest decrease on record. As
a result, the debt that was held by the public at the end of
fiscal year 1999 was $1.7 trillion less than was projected when
President Clinton took office.
The result for the American economy is that we have moved
from a vicious circle of rising debt and lagging economic
performance to a virtuous cycle of fiscal discipline and
continued strong economic growth. An additional $1.7 trillion
that would have been absorbed by government borrowing has
instead been invested in America's future--in its businesses,
workers, and communities.
With the resources that this progress has made available,
business investment has surged, with purchases of equipment and
software growing at double-digit rates for six years in a row.
A rising capital stock, in turn, has contributed to a rise in
workers' productivity: productivity in the nonfarm business
sector has accelerated to a 2.1 percent annual average rate
since the end of 1995 from the 1.4 percent that prevailed from
the 1970s through the early 1990s.
And higher productivity, in turn, has helped produce higher
real wages and higher standards of living. For the first time
in a generation, we are seeing real wages rise. Most
encouraging, real wage increases seem now to be reaching a
broader spectrum of Americans, with low-and moderate-income
workers benefiting in addition to workers further up the
economic ladder.
When the Federal government reduces its draw on the pool of
savings, interest rates fall. This decline not only lowers the
cost of capital to businesses; it makes it easier and cheaper
for people to borrow money to purchase houses, to buy cars and
to send children to college. For example, a family with a home
mortgage of $100,000 might expect to save about $2000 in
mortgage costs each year. As housing has become more affordable
during the past six years, an additional 8.7 million families
have become homeowners, and the homeownership rate has risen to
a record high.
A smaller debt also means lower interest costs for the
Federal government. Net interest payments since 1993 have been
a cumulative $191 billion lower than projected in 1993, which
amounts to roughly $2700 per American family.
In all of these ways, our strategy of fiscal responsibility
is producing tangible benefits for American workers,
homeowners, and taxpayers.
A similar improvement has taken place in the stance of the
government budget excluding Social Security. From a record high
of $340 billion in 1992, the non-Social Security deficit, just
like the unified budget, has improved in every year of the
Administration. Building on the achievement of a balanced
unified budget, the President, in his June budget review,
highlighted the importance of setting a higher fiscal
objective--balancing the government's books without using the
surpluses generated by the Social Security system.
Balancing the on-budget account would mean that the bonds
accumulating in the trust fund would be matched very nearly
dollar-for-dollar by a reduction in debt held by the public.
Put differently, accumulations in the Trust Fund will truly
represent accumulations of a national asset--an increased
capacity to meet our obligations to tomorrow's retirees.
This is the responsible way to prepare for the retirement
of the baby boom generation: increasing the productive capacity
of the economy and thus making tomorrow's workers more
productive and better able to meet the benefits obligations
that are promised under current law. The increment to national
saving from following this approach would be dramatic: under
current projections the debt held by the public would be
completely paid off by 2015.
II. The Right Principles for Preserving Social Security
This discussion brings us to the crucial question: If we
achieve this degree of fiscal success, how should we use the
interest savings that result? Should we use them for a tax cut,
for additional spending, or for Social Security? The
responsible answer to this question needs to take into account
two important facts about the future.
First, the retirement of the baby boomers in coming decades
stands to put great stress on Social Security, which is the
cornerstone of our retirement system. Social Security benefits
are the largest source of income for two-thirds of Americans
over age 65 and the only source of income for 18 percent of
them.
The system has enjoyed dramatic success in reducing poverty
among retirees, helping to lower the elderly poverty rate from
35.2 percent in 1959 to around 10.5 percent in 1998--although
poverty among certain groups, such as elderly widows, remains
high. Without Social Security, nearly half of today's elderly
would be in poverty. We should not forget that it is also a
major family protection plan: nearly one third of Social
Security beneficiaries is under the age of 62 and receiving
either disability benefits or survivors' benefits.
The aging of our population will challenge all of these
accomplishments. In fact, the Social Security trust fund is
predicted to be exhausted by 2034.
Second, in making our budget plans we need to remember that
the savings that would result from continuing on the current
path of fiscal discipline would be very large indeed. If we
follow the President's budget framework, the amount that the
Federal government spends on interest payments, relative to the
interest payments that would prevail if the government balanced
the unified budget, would be $107 billion lower in 2011 and
more than $200 billion lower per year by 2016. We believe that
we should earmark those savings to meet the commitments to
future retirees that are implicit in our existing Social
Security system.
Let me now describe the four main principles underlying the
President's approach:
The first principle is that we should respect the integrity
of the Social Security Trust Fund. By ensuring that all of the
Social Security surpluses are used to pay down debt, rather
than finance other government activities, the President's
approach enhances the Trust Fund's ability to contribute to the
government's and the nation's capacity to meet its promises.
The legislation that we transmitted to Congress embodies
this principle in specific rules. The legislation extends the
discretionary spending caps and pay-as-you-go rules that have
been very helpful in achieving fiscal discipline over the past
decade. It also goes one step further, by creating a new point-
of-order to protect the Social Security surplus.
The second principle is that the interest savings from the
debt reduction coming from Social Security surpluses should be
channeled into the Social Security Trust Fund. These transfers
are the central link between our overall budget framework and
Social Security reform. Essentially, we devote the savings we
have earned from reducing one liability--the federal debt held
by the public--to meeting another government liability, namely
promised Social Security benefits.
According to the Social Security actuaries, the transfers
we propose would extend the solvency of the Social Security
system to 2050, compared with 2034 under current law. This
approach of earmarking the interest savings from debt reduction
can be distinguished from the lockbox proposals that have been
discussed in Congress this year. These do not extend the
solvency of Social Security by even one day--since they do not
direct those savings to Social Security and thereby help to
prevent them from being used for other purposes.
In considering these issues it is worth thinking about the
steps that a private company would take to address a financial
shortfall in its defined-benefit pension plan. Clearly, the
firm would look at ways to modernize and update the pension
plan. But if it were enjoying extraordinary profits, and
expected to continue to do so, then its first step would be to
devote some of those profits to meeting the shortfall in its
pension plan.
In much the same way, we believe there needs to be broad-
based and bipartisan reform of Social Security. But we also
believe that our first step should be to use the opportunity
presented by budget surpluses to strengthen the program's
finances today.
The third principle is that we should make provision for
devoting the increased resources to Medicare that are likely to
be necessary in the context of any responsible approach to
assuring its future. Medicare has been a great American social
policy success--but there is now widespread agreement that the
program requires basic changes if it is to continue that
success in a new century. In fact, the Medicare trust fund is
now projected to be exhausted by 2015, nearly two decades
before the projected insolvency of the Social Security Trust
Fund.
The reform of Medicare poses a wide range of difficult
issues. The President has put forward a plan containing his
proposals for modernizing Medicare and realizing the quality
and cost advantages that increased competition within the
system would offer. A number of other constructive reform
proposals have emanated from Congress. But whichever route this
country ultimately takes, most independent observers agree that
even with reform, Medicare will require increased funding to
extend substantially its solvency without damaging benefit cuts
or tax increases. That is why we believe that we should combine
reform with steps to assure the availability of increased
resources for the Medicare system in the future.
The legislation that the President just submitted to
Congress would reserve one-third of the projected surpluses
from any use except for reform that extends the solvency of the
Medicare program. To repeat, the President wants to work with
Congress to achieve comprehensive Medicare reform, but we know
that reaching an agreement on this complicated issue will not
be a simple process. In the meantime, we should preserve the
resources that will be needed to strengthen and modernize
Medicare as outlined in the legislation that the President just
submitted to Congress.
The fourth principle is that this nation's budget plans
should be based on realistic discretionary spending plans. The
discretionary caps have been very helpful in achieving fiscal
discipline over the past decade. The President's plan extends
them. But it would use some of the surplus, as part of a plan
that extends Social Security solvency, to provide realistic
levels of appropriations for the fulfillment of government's
core functions.
This is a necessary and prudent response to the unrealistic
spending levels envisioned, for example, in the current
Congressional Budget resolution, which by 2009 would reduce
nondefense discretionary spending by approaching 50 percent,
assuming that defense were funded at the level requested by the
President.
It is important, in considering the President's spending
proposals, to remember that this is not a debate about making
government bigger. It is about ensuring that government has the
resources to fulfill its core functions. The executive branch
non-postal federal civilian workforce has declined by about 16
percent since 1993--representing more than 357,000 positions.
Non-defense discretionary spending today is at its lowest level
in 35 years. And for a family of four with median income, the
burden of Federal income and payroll taxes is the lowest it has
been in 20 years.
The President's plan would increase defense spending
slightly in real terms, in order to ensure military readiness
and an effective national defense. However, the plan would
reduce inflation-adjusted nondefense spending, leaving it more
than 10 percent below its current real level by 2009.
Overall, the growth of discretionary spending proposed in
the President's plan would remain slightly below inflation as
currently forecast. We believe that such cuts are feasible, if
the spending is targeted at our critical needs. Deeper cuts, in
our view, are not feasible if core government functions--the
services that every American taxpayer expects--are to be
maintained.
Some have said that any modest increase in discretionary
spending is fiscally irresponsible. I would suggest that the
opposite is true. The irresponsible course would be to build
the nation's budget plans on the foundation of spending plans
that we can safely predict will not be achieved.
As we have seen in this year's budget debate, unrealistic
discretionary caps will be exceeded--through emergencies that
expand the term ``emergency'' well beyond its accepted meaning,
or through other budgetary gimmicks. If we base large tax cuts
today on the promise of unspecified deep cuts in future
spending, we may create a situation in which the spending that
ultimately occurs will lead to additional and unneeded
government borrowing. The result would be to erode the enormous
fiscal progress that this country has made--and the enormous
economic benefits that have come with that progress.
III. Broader Significance of the President's Plan and Challenges for
the Future
Respecting the integrity of the Social Security trust fund;
channeling the interest savings from debt reduction to the
Social Security trust fund; making proper allowance for
Medicare; and budgetary realism--if we could agree to respect
these four principles going forward it would make a major
contribution to America's economic and fiscal future.
It would be an important step for our economic future
because it would continue the paydown of our publicly-held
national debt, with a projected elimination of that debt by
2015. We would establish the principle of using the Social
Security surplus to pay down debt rather than financing other
government activities. And we would free up substantial new
resources for business investment and housing, further reducing
interest rates and the cost of capital, and boosting
productivity and American living standards.
Respecting those four principles would be an important step
for our fiscal future because we would realistically provide
funding to help us meet the existing obligations of the Federal
government that are not yet funded. We would extend the
solvency of Social Security by earmarking for the Social
Security Trust Funds the savings gained from using Social
Security surpluses to pay down the debt held by the public.
Thus, the principles embodied in the President's budget and
Social Security plan can provide a crucial foundation for our
long-term economic and fiscal future. But they are just that -a
foundation, not a completed edifice. Going forward we would
need to build on this foundation, because even after passing
this plan, important national challenges would remain.
Notably:
We would still need to increase personal
retirement savings, especially for the 73 million American
workers who do not participate in employer-sponsored pension
plans. In 1994, less than half of all individuals aged 65 and
over received any private pension benefits.
We would also still need to make further reforms
of both Social Security and Medicare. As I have mentioned, the
President hopes that his comprehensive Medicare reform proposal
could help to provide a basis for bipartisan discussions of
this critical issue in the near future.
IV. Concluding Remarks
Mr. Chairman, as I have discussed, I believe that our
strong economy and dramatically improving fiscal condition
offer us an historic opportunity to address some of the core
long-term challenges confronting our nation. Certainly, we may
have very different views about how to respond to these
challenges, but I hope we can all agree that this opportunity
should not be wasted.
I look forward to working with you, Mr. Chairman, Mr.
Ranking Member, and others in this committee and with others in
Congress as we work to progress further on these critical
issues in the months to come. Thank you. I would now welcome
any questions.
Chairman Archer. Thank you, Mr. Secretary, and thank you
for making your verbal presentation more succinct. I am sure we
will learn even more as we read your written statement.
You made a couple of comments that I wanted to ask you
about. One is I believe you said that over 15 years you would
eliminate the national debt, and you are nodding in assent that
you did say that. I am curious then, should we not also
incorporate a provision, if this were to become law, reducing
the debt ceiling in each of those 15 years so that we would be
sure that this would occur? In other words, tracking what you
said in the way that you plan to pay off the national debt and
simply changing the debt ceiling requirements.
Secretary Summers. Mr. Chairman, I appreciate the logic of
the question. While the President's proposal, based on current
economic projections and the economic projections of the past,
proved to be too conservative, it does provide for the
elimination of the national debt by 2015. I think there would
be two problems with trying to legislate adjustments of the
debt ceiling to reflect those projections. First, the debt
ceiling has traditionally been defined in terms of gross debt
rather than in terms of debt held by the public. Most
economists would agree it is debt held by the public that is
relevant, but the metric that has traditionally been used with
respect to the debt ceiling, which is not really what is a
meaningful economic statistic, has rather different properties.
Second, while these are projections, the best available
projections--I believe in some ways you can argue conservative
projections--they are just that, projections. And I think it
would be very unfortunate to legislate commitments that could
call the country's credit rating into doubt at some point in
the future or could lead to repeats of what I think both sides
can agree were the rather unfortunate confrontations that took
place around the debt limit increase in the winter of 1996. And
so the administration believes that while the objective of
public debt reduction needs to be paramount, the use of debt
ceilings is probably not the right vehicle for bringing that
about.
Chairman Archer. Mr. Secretary, I think you put your finger
on my concern. It is not just traditional. It has been, as far
as I know, forever that the debt ceiling applies to all of the
debt. The Treasury bonds that are held in the Social Security
Trust Fund represent real debt to the American people to pay
off. If that debt were not there, it would be held by the
public because it is there to cover the expenses of the
Treasury, and I think to look at it in any different way would
undermine the confidence of the people in the Social Security
Trust Fund.
So the total debt of the country is the, quote, "national
debt," and I think it would be appropriate because I also saw
an article where the chairman of the Council of Economic
Advisors, Gene Sperling said the same thing: We will pay off
the national debt.
You won't pay off the national debt. Your projections are
if you--if everything works right, as you said, you will be
able to pay off the debt held by the public, which I would call
the private debt, and you would still be having an interest in
the national debt and that is why you can't reduce the debt
ceiling. And I do believe that it would be appropriate, in
order to convey the correct portrayal of the debt, to talk
about paying down either the publicly held debt or the
privately held debt, whichever you want to refer to, but not
the national debt. I have town meetings where my senior
citizens come and they want to know that that debt that is in
the Social Security Trust Fund is just as important as the debt
that is held by the public, and I tell them, yes, it is. And I
don't think you would want to undermine that.
Secretary Summers. Mr. Chairman, there can be no question
not just about the government's obligation to the debt in the
Social Security Trust Fund, but the yet more profound
obligation represented by the government's commitment to senior
citizens to pay the benefits that have been earned by those
senior citizens. And whatever we all argue about here, I think
we can all agree on a bipartisan basis that we should reassure
people that the money is there in the trust fund and that
promised benefits will be paid. And if we all could agree that
in no way were we going to rob citizens of their benefits, I
think that would be a helpful step and would perhaps cause our
discussions to be less divisive.
With respect to the question of a publicly held debt versus
the national debt, some of this is semantic; and I will move
beyond the semantics to the underlying economics. And perhaps
an analogy is helpful in conveying what I think is the view of
almost all the economic experts who have looked at these
questions.
From the point of view of our family, if my wife or I
borrow money from a bank, that is one thing. If my wife or I
borrow money from each other, that is a very different thing
with respect to the economic position of our family. My wife
and I lending money to each other does not represent a change
in the economic position of our family. Buick borrowing money
from Chevrolet does not represent a change in the economic
position of the General Motors Corporation. The Social Security
Trust Fund accumulating an IOU from the remainder of the
Federal Government does not represent a change in the
underlying economic position of the Federal Government. There
is no impact on interest rates from such a transaction. There
is no impact on national savings. And so the crucial question
for economic performance is the movement in the publicly held
debt.
Of course and this is something I think we can all agree
on, the IOUs in the Social Security Trust Fund represent an
embodiment of what is a crucial national commitment that we all
share: the obligation to pay promised benefits to our seniors.
And for that reason they have great significance. But for those
concerned with tracking the performance of our economy, the
relevant statistic--and this is something that I think
conservative and liberal economists would all agree on--is the
behavior of the publicly held debt.
Chairman Archer. Mr. Secretary, the important thing, I
think, is that you not convey to the American people that your
plan pays off all the debt of the country. It does not, as you
just said; because the debt, the viable debt that has the full
faith and credit of the United States Government on the bonds
that are held by the Social Security Trust Fund is just as much
debt and is under the debt ceiling as a publicly held debt. And
so I just want to be sure that you don't convey to the people
you are paying off all the debt through your plan.
Secretary Summers. Let me leave it at this. No American
savings would be absorbed by debt under the President's plan.
The Federal Government would have no net interest liability to
the public under the President's plan. The consolidated Federal
Government, inclusive of the Social Security system, would have
no net liability under the President's plan. There would indeed
be special government bonds contained in the Social Security
Trust Fund under the President's plan. That indeed would be one
of the strengths of the President's plan that would expand the
size of that trust fund and its capacity to pay benefits.
Chairman Archer. And that debt is still there in the trust
fund and the reason the trust fund has that debt is because the
funds came into the trust fund, and rather than borrowing from
the public, the government borrowed from the trust fund to pay
its current operating bills.
Now, there is also the economic argument that I have heard
for many, many years, that the debt that is owed to the public
doesn't matter because we owe it to ourselves. That is the same
sort of argument you are making now; that if we owe it to the
trust fund, it doesn't matter. Economists have said for years,
many economists--and I don't agree with it--that if we owe it
to the public, we owe it to ourselves, so it is part of the
total national budget of our society. Therefore, it doesn't
matter.
But I just want to be sure that the people understand that
your plan does not pay off the debt. That debt that is in the
trust fund is still there, and that obligation. And I can
assure the people of this country that I personally will do
everything to protect the sanctity of the debt and the trust
fund as much as debt to, doubly, bondholders or people who own
Treasury bonds on the outside. It has the same full faith and
credit of the government.
Secretary Summers. Let me put it to you this way if I
could, Mr. Chairman. If my family was successful in replacing
the debt that I now owe a bank with debt that I owed my wife
instead, I think our family's financial position would be much
stronger. I think my kids would feel better off; and that is
even though my obligation to my wife would be very, very real.
Chairman Archer. Mr. Secretary, I would submit to you that
there would be a great likelihood of greater controversy
between you and your wife.
Mr. Rangel.
Mr. Rangel. Mr. Secretary, welcome to the first bipartisan
step forward to resolving this Social Security problem. I am
glad to see the thrust of the Chairman's questions because in
addition to being legislators, we are politicians, and before
we can sit down to legislate, we ought to set aside some
serious political questions. My Republican friends truly
believe that they can have a $792 billion tax cut and at the
same time fix the Social Security system. I would like your
opinion of that, because until we can set that out of the way
and commit ourselves to dealing with Social Security and not
the tax cut, we will be just looking for a train wreck.
Do you believe it is possible to have close to $1 trillion
in tax cuts and at the same time fix the Social Security
system, either the Archer-Shaw or the President's plan?
Secretary Summers. I believe tax cuts of that magnitude,
Mr. Rangel, would interfere with the basic fiscal progress that
we have made and would put at risk the prospect of sustained
economic expansion through the virtuous circle that I
described, and would therefore make it far more difficult to
repair and establish long-term solvency for Social Security.
I would also make the judgment that we came to a consensus
in the first half of this year, and I believe it reflected the
views of many Members on both sides of the aisle, that it was
important to segregate the progress we were making through
accumulating the Social Security Trust Fund, through what
happened in the on-budget, and that a tax cut of the magnitude
you described would absorb essentially all of the available on-
budget resources and would therefore make it impossible to
dedicate those on-budget resources to Social Security, either
through contributions to the trust fund or contributions
through individual accounts. And so it would make impossible,
in an arithmetic sense, a solution to Social Security, except
to resort to multiple uses of the fund that were being
accumulated by Social Security, the kind that were quite widely
criticized as double counting.
Mr. Rangel. The second stumbling block, it would seem to
me, toward the bipartisan effort to resolve the Social Security
problem, is that we would agree to work from one set of books.
Now, traditionally the Republicans have rejected the
President's Office of Management and Budget. To my great
surprise, the Republicans rejected the Congressional Budget
Office, even though they had the privilege or right to appoint
its Director, after the Director says that they are $17 billion
into the Social Security funds. The Republicans say no, not
according to their reading. And then, of course, in evaluating
the Social Security program, I think the General Accounting
Office might show that the Archer-Shaw plan isn't all that they
say it is, and they Republicans reject that too, I assume.
Don't you believe that one of the steps that we have to
take is to agree that we are going to read from one set of
books if we are going to work together?
Secretary Summers. It is always helpful, Mr. Rangel, to
have a common arithmetic frame for a negotiation or a
discussion of this sort, and I think it is best when such a
frame reflects the professional judgment of some group of
technical experts. I believe such an idea was behind the
Congress' judgment in establishing the Congressional Budget
Office some quarter century ago and I think it has proved out
over time.
So, yes, I would agree with you that common dimensioning of
the problem, common dimensioning of the fiscal consequences of
the various alternatives is a very useful step with respect to
a negotiation. And as you noted, the Congressional Budget
Office has provided us with some judgments about the
consequences of the legislative actions that have taken place
in recent months.
Mr. Rangel. Lastly, you will notice that, while the
majority have demanded from the President his legislation for
Social Security, everytime they talk about working together in
a bipartisan way and their willingness to sit down with the
President to review, comment, and improve their legislation, it
never happens. There is no Archer-Shaw bill but, assuming that
they will have one soon as Mr. Shaw suggested, don't you
believe that the discussion should also be around the
President's bill as well as their bill?
Secretary Summers. I think at this stage, the beginning of
any profitable discussion would have to be an attempt to
synthesize the various elements that are contained in the
various plans. I don't think at this point there is any
particular plan that has been put forward that--although I hope
the President's plan will achieve this status--that has
achieved a situation where it could be said to represent base
text for a negotiation.
I do think that we have established what I think is perhaps
the key to a solution at this point, the idea that we need to
marry the issue of maintaining the fiscal progress we have made
with the idea of extending solvency. And what I find
unfortunate in much of the discussion of Social Security
lockboxes that has taken place this year and much of the
discussion of the questions of raiding the Social Security
Trust Funds this year, that with the exception of the
President's proposal, none of that discussion has been oriented
to what I think is the profoundly important long-run question
of the extension of solvency.
Mr. Rangel. Thank you.
Thank you, Mr. Chairman.
Chairman Archer. Mr. Shaw.
Mr. Shaw. Thank you, Mr. Chairman.
Looking back and reading over the President's State of the
Union address--and I quote him directly--``We should put Social
Security on a sound footing for the next 75 years.'' With that
statement, we all jumped up and we applauded. That was a good
thing and it was a thing that we came together on.
Clearly, according to your own testimony, we are falling
way short of that, so the President's plan does not fit into
his own requirements. I would like to also--and anyone
listening to this debate must be totally confused right now
about the difference of offices of OMB and CBO. They are two
groups that score the budgets, and the President's own budget
is with OMB, and the OMB figures are what the Congress is
using. So we are going off of one set of books.
Now, it can be argued since CBO disagrees with that, they
say that the President's budget goes into the Social Security
Trust Fund and they say the Republican budget goes into the
Social Security Trust Fund--so I would say that we have got
consistency, but it is interesting how people pick up on what
suits them the best when they are trying to make a point. But I
think that point needed to be cleared up for anyone who is
watching these proceedings.
Dr. Summers, I want to read a statement to you, ``These
trust fund balances are available to finance future benefits.''
This is up on the placard to your right. But only in a
bookkeeping sense. ``These funds do not consist of real
economic assets that can be drawn down in the future to fund
benefits. Instead, they are claims on the Treasury that, when
redeemed, will have to be financed by raising taxes, borrowing
from the public, or reducing benefits or other expenditures.
The existence of large trust fund balances therefore does not
by itself have any impact on the government's ability to pay
benefits.'' And that was in the President's budget, that
statement. I assume you agree with it.
Secretary Summers. I agree with the statement, though I may
or may not agree with any implication you choose to draw.
Mr. Shaw. Let me get to the implication, because that is
what I want to talk to you about because I think this is very
important. You made two statements in reply to questions a
moment ago, both by Mr. Rangel and Mr. Archer. You made
reference to money in the trust fund. Well, clearly you know
and I know there is no money in the trust fund. There are only
IOUs or Treasury bills.
And you made the statement just a moment ago,``by raiding
the trust fund.'' and I would like to dig into that for a
moment, because I think that is a misstatement that Members on
both sides of the aisle make, and I don't think we should be
making it. We can talk about raiding the surplus, but you can't
raid the trust fund because there is nothing but Treasury bills
in there.
What you do, and what we are trying to protect, and what I
think both the President and the Republican Members keep
talking about both during the tax debate, during the spending
debate that we are involved in now, and certainly during the
Social Security debate, is that we have set aside the surplus
into what we call a ``lockbox,'' which is a good thing; and I
think the President has bought on to that and I think he thinks
that is a good thing and that does pay down the debt.
But I do want to talk about that trust fund and how it is
made up. You keep talking about IOUs from Chevrolet to General
Motors.
Let's put it in an even simpler case. If you write yourself
an IOU--not your wife--if you write your IOU, that is not a
real economic asset, is it? If you put it on your bank
statement and apply for a loan and say that you are a
millionaire because of that note, you would be in big, big
trouble for bank fraud. So it is not a real economic asset.
Just as the President said in his own budget, the Treasury
bills, where they are an obligation to pay future retirees, you
cannot call that a real economic asset because it is an IOU
from the government to the government. So when you start
talking about real assets, you have really got to get something
out there other than just the IOUs, and this is what we keep
trying to get involved with.
Now, I think we have an opportunity to take on much of what
the President is talking about. I think taking what we don't
put into real economic assets should go to pay down the debt,
and I think that is a good thing, but I don't think we should
confuse the debate by saying that we are increasing solvencies
by 16 years when you and I both know that in the year 2014 we
are going to have to tax the devil out of the American people
in order to keep benefits where they are today. That is what we
have to avoid and that is what Archer-Shaw avoids because we
protect those benefits, and this is not what the President
does.
Secretary Summers. Mr. Shaw, you have--you have suggested
the need to clarify two things that I said for the public, and
I would like to just respond briefly on each of them. First,
with respect to CBO and OMB, it is my understanding that on a
consistent application of CBO scoring, the congressional
Majority's budget proposals would result in an approximately
$17 billion on-budget deficit; that there have been
constructions put forward that involve the use of OMB for some
issues and CBO for other issues based on which would produce
the most favorable scoring, that have been argued to produce a
balance; but that I am not aware of a consistent accounting by
anybody on which the proposals that have been put toward by the
congressional Majority would result in on-budget balance.
With respect to the question of the meaningfulness of the
IOU, Chairman Archer and I discussed that a little earlier.
Chairman Archer made the point, with which I completely agreed,
that there could be no possibility that the promise represented
by those securities in the trust fund would ever fail to be
honored, and in that sense, from the point of view of those who
are looking at retirement and those who are looking at
assessing the Nation's political commitment to meeting the
benefits, could certainly take consolation from the fact that
the fund that had been established for that purpose had been
augmented by the actions of their government. So in that sense,
I believe that the extension of solvency, extension of solvency
such as that contemplated, would lead me to be more confident
of the security of my children.
Mr. Shaw. Dr. Summers, you and I both know that those notes
are going to be paid off out of the hide of future taxpayers
and that is what I am concerned about. We can plan ahead now
and that is what we need to do.
Secretary Summers. We agree completely on that, Mr. Shaw,
but the way to assure that it doesn't come at the hide of
future taxpayers is to assure that we make the fiscal space to
pay those benefits. And the way we can make the fiscal space is
to pay off the national debt and to remove the 2 to 3 percent
of GNP that we have been spending on interest so we don't have
to meet that expense, and we can use the revenues that used to
go for the purpose of serving interest instead to the objective
of meeting Social Security benefits. I think that is the
highest and best use that we can make of our savings from
eliminating the national debt. That is the basis of the
President's approach.
Chairman Archer. Mr. Shaw's time has expired.
Mr. Houghton.
Mr. Houghton. Thank you, Mr. Chairman.
Mr. Secretary, I have some numbers here that show through a
75-year period in terms of costs of the various plans, Archer-
Shaw, Kolbe-Stenholm-Kasich-Gramm, and the President and the
current law. Maybe you could explain to me that for a 75-year
plan under the Archer-Shaw plan it costs $64 trillion and under
the President and current law it is $77 trillion. That is over
a 75-year period. The others are in the same range as the
Archer-Shaw plan. It is in the low to mid-sixties. Why the
difference in that increased cost?
Secretary Summers. The reason I believe, Mr. Houghton--and
I may be corrected from behind me--is that the plan, the
Archer-Shaw plan and a number of the other plans, assume that
the monies will be invested in the stock market and assume
therefore that there will be a high return earned. And because
of the assumption that a higher return will be earned, the
necessary contribution year by year is reduced. That is at
least one major difference.
What I think is perhaps the more relevant measure of cost
to the country is the present value of the benefit liabilities
incurred--which, discounted at a common discount rate, which is
the way a business would assess its pension liabilities--and if
you do that calculation, of course, any plan that preserves the
existing benefit structure will have the same 75-year present
value cost. But I think what is driving the differences in the
numbers that you describe is the assumption about the use of
the stock market, which is obviously something that could be
brought into a number of different approaches.
Chairman Archer. Would the gentleman yield?
Mr. Houghton. Absolutely.
Chairman Archer. I don't think that is true, Mr. Secretary.
He is talking about the raw costs without any feedback revenues
coming off of the investments. Because over 75 years SSA has
projected that the Archer-Shaw plan would generate $122
trillion surplus, unified budget surplus, and that does include
the earnings from the private sector.
Secretary Summers. Excuse me if I am not getting these
numbers right. I think the point I was making, Mr. Chairman, I
wasn't addressing the feedbacks and extra corporate revenue or
anything like that. I was simply saying I think this is an
analytical point, not an advocacy point in any direction. If
you assume that a liability in 2030 is going to be met by
putting in $1 today and that $1 is going to earn 6 percent each
year, then you have to put a smaller amount of money aside than
if you assume it is going to earn 3 percent real each year.
And the difference between your approach, one of the
differences between your approach and the President's plan in
the form that it has recently been submitted is that your
approach, as you highlight it, Mr. Chairman, takes advantage of
the returns offered by the stock market; and if you assume that
those returns will freely be available, then you can reduce
your contributions by doing that.
Clearly, I think a full analysis of that would need to
recognize the risks involved, since the stock market may
perform better or may perform worse than the figure that is
embodied in the actuarial projections.
Mr. Houghton. There are always risks when you go into the
market, and I think the President and everyone in Congress
recognizes that.
What I am trying to get at is this. The President's plan
uses the excess FICA or Social Security income to fund the
plan, entirely apart from dipping into general Treasury or
general government funds later on. But the difference here, I
think, is with the individual equity accounts and what that
generates. That to me would be the difference between the
Archer-Shaw plan and the President's current plan.
Secretary Summers. I would agree with you in part and
disagree with you in part. I agree with you that the difference
resides in the equity accounts. One can imagine, it seems to
me, a number of different approaches to equity involvement. One
approach which some have advocated is a Chilean approach, where
individuals simply get equity accounts and they invest them,
and if the stocks do well, they do well, and if the stocks do
poorly, they do poorly. That is one approach.
Another approach that would be towards the other end of the
continuum would be an approach where you simply took the Social
Security Trust Fund and invested a portion of it in equities
with some independent government management scheme. An approach
that is in a sense intermediate, if I understand it right, is
the approach that Chairman Archer and Congressman Shaw have put
forward in which there would be individual accounts, but to a
substantial extent the government would be the beneficial owner
of the individual accounts because the individual accounts
would be used to finance--a significant portion of the
individual accounts would be used to finance the base benefit.
And so unless the individual--unless a person died early, or
unless the individual account performed extraordinarily well,
at the margin if the individual account did better or did
worse, it would not affect the individual's promised benefit
but it would affect the magnitude of the government's
liability.
And so that approach, where the government would be
involved in assuring that every individual had an account, that
approach is in a sense an intermediate between the pure private
sector approach, such as exists in Chile, and the invest the
trust fund in equities approach. It involves many of the same
issues because the government would clearly have a stake in
making sure that individuals were not ripped off in the
accounts; the government would have a stake in making sure that
the investment policies in the accounts were appropriately
prudent. There would still be a national system, and the
concern that that national system could be used for some
inappropriate political purpose at some point in the future
would still be a concern that would have to be addressed. So
that alternative involves many of the same issues that are
involved with respect to the suggestion that a portion of the
trust fund be allocated to equities.
Those problems may well be problems that could be
surmounted with a great deal of thought. But to go back to what
is the original premise of your question, that differences in
cost do, as you suggest, derive from the use of equities, but
equities can be used in ways that are more fully individual,
like a defined contribution plan, or more fully collective as
in a defined benefit pension plan, and the desire to use
equities need not shape one's choice between a defined benefit
plan and a defined contribution approach.
Mr. Houghton. Could I say just one more thing, Mr.
Chairman? Would you bear with me for a second? I notice the
angry expression on your face [Laughter], but the bottom line
of all of this, if you take the Social Security numbers--and
forgetting about the Chilean plan or various other individual
investment plans--that the Archer-Shaw plan would save the
citizens of the United States over a 75-year period $13
trillion versus the President's plan.
Secretary Summers. An approach based on the use of
equities, which the President would also be prepared to support
with appropriate safeguards but also be capable of realizing
the same $13 trillion economy, and I think there is a strong
case to be made for finding a formula that would prudently take
advantage of the returns from equities; but these questions of
political interference, the question of avoiding excessive
exposure of individuals to risk, the question of making sure
that any implicit liability with respect to uncertainty is
managed, are all issues that have to be addressed.
Indeed, I confess that I was a little surprised when I
looked at the numbers and saw that the beneficial ownership of
the government of equities would actually be rather greater 30
to 40 years from now under the Archer-Shaw plan than it would
be under the plan that the President had originally put forward
because of the President's concern about avoiding a situation
where government took too large a role in the private economy.
Chairman Archer. Mr. Secretary, just very briefly, I think
this colloquy is very instructive, and I hope that at a time
when we have a chance to move in a bipartisan way to an
ultimate Social Security resolution, which I hope will be next
year, that we will do more of this. But let me simply insert
that even in Chile, there is a beneficial benefit to the
government because the government guarantees benefits; and if
the personal account does not equal that, the government has
the responsibility to pay the difference. So I just want to
point out that that very same beneficial interest to the
government exists in Chile.
Mr. Matsui.
Mr. Matsui. Thank you, Mr. Chairman. I have a series of
questions I would like to ask you, Mr. Summers. One is that
there has been a lot of talk about a lockbox under the budget
discussions going on right now that is preserving and walling
off the Social Security surplus as opposed to the on-budget
surplus.
We received a letter from Mr. Crippen, the CBO director
recently, and he said already about $18 billion has been
invaded into the Social Security surplus for fiscal year 2000.
Is that your understanding as well?
Secretary Summers. My understanding of Mr. Crippen's letter
is as you described it, that on a consistent set of CBO's
preferred budget assumptions, that there would be--that on the
trajectory that we were on as of the time he wrote the letter,
it appeared that there could be a deficit that would--a deficit
in the on-budget of $18 billion. Of course, the appropriations
process isn't yet finished. There are still issues we all face
about taxes, BBA extenders. There is uncertainty about what
will happen next year to the economy, so none of us can be sure
of where it will play out. But I believe your basic statement
that the Congressional Budget Office, applying a consistent set
of its preferred assumptions, has concluded that this path
would lead to deficit is correct.
Mr. Matsui. In fact, I don't want you to speculate, but I
have heard it can be anywhere from $20 billion to $40 billion,
the invasion into the Social Security surplus, in spite of the
fact that the Republican leadership has been sending letters
stating they don't intend to invade that surplus.
Let's assume a miracle happens over the next 48 hours and
they don't invade the Social Security surplus. The money just
vanishes, which I suppose on the floor of the House could
happen. Does that preserve and extend the life of Social
Security 1 year, 1 month, 1 day, by locking up the surplus?
Does it have any impact on the fact that we will begin a cash
flow problem in 2014 and then a real major problem in 2034?
Secretary Summers. No, Mr. Matsui. And to emphasize, just
to emphasize what I think is a crucial point, the real
priority, in our judgment, should be using the budget surpluses
to extend solvency of Social Security. No amount of accounting
rules with respect to the on-budget deficit and the off-budget
deficit, the use of lockboxes, will have that effect unless a
specific mechanism is proposed for assuring that the fiscal
space created by running down national debt is dedicated to the
objective of Social Security. That is what I think is the very
important contribution of the President's plan to this debate.
Without that, we will not be making a meaningful change in the
prospects for the Nation's meeting our obligations to our
seniors.
Mr. Matsui. You don't have to answer this, but the 2.09
percent of payroll problem over the next 75 years will not at
all be altered by just locking up this so-called Social
Security surplus as opposed to the----.
Secretary Summers. That is correct.
Mr. Matsui. Chairman Archer mentioned in his opening
remarks and his question to you, I believe, that we don't
have--you don't have a 75-year solution. In terms of the
overall scheme of things, is it better to get started on this
problem? Because it is a huge potential problem unless we begin
to work on it now. Is it better to work incrementally and get
what we can, rather than waiting for perfection and getting 75
years? It may not happen because maybe politically we just
can't come to an agreement. Could you talk about that?
Secretary Summers. Mr. Matsui, I think you may have been
leading the witness but you have been leading me in a direction
that I very much would agree with. Clearly it is better to
extend solvency as far as possible and every bit of extension
of solvency is important.
Second, if you think about what I think is an imperfect
analogy, if you think about what is the best business analogy
for a situation of this kind, looking at a corporation that
based its pension plan--it would seem to me that before the
corporation could accept an obligation to make further
contributions beyond those now statutorily committed, would ask
its workers to make further contributions; or before the
corporation would contemplate the possibility of anything that
would reduce the promised benefits, it would be natural to
explore whether there was a financing technique available with
the corporation's existing resources for better meeting the
defined benefit obligation.
And indeed many would say that it was a basic principle of
financial responsibility that you should look at the resources
that are now available before contemplating tax increases or
benefit cuts. And that is the essence of the President's
approach. It seems to me it would not be prudent to get into
the other issues until we had come to some collective judgment
about what progress we could make based on reinvesting the
progress that we have made in bringing down the debt.
Mr. Matsui. Thank you. I appreciate your testimony today.
Thank you.
Chairman Archer. Mr. Herger.
Mr. Herger. Thank you, Mr. Secretary, for appearing before
our Committee on this incredibly, crucially important issue
before the American people, and that is preserving and saving
Social Security not only for this generation but for the next
as well.
I would like to follow up on my good friend from
California's line of questioning and mention something to begin
with, and that is ever since the beginning of Social Security
in the early thirties the reason that 75 years was used back
then, and the reason why the Archer-Shaw plan continues to use
75 years, was that as I understand, that involved everyone who
would be in Social Security: the generation that was receiving
it now; the generation that would be receiving it in the near
future; and the generation that was just being born.
So I think it is very important that we continue in that
light, not just with a 16-year plan, which I understand what
the President says, or a 25-year plan, as my friend from
California mentioned, but continue with the life span of those
who are living.
Secretary Summers. Just for clarity, the President's plan
is a 50--year--I understand the argument for 75 years, but in
the sense in which that measurement is taking place, the
President's plan is not a 16-year plan. The President's plan is
a 50-year plan. I agree with you that the President--as I said,
the President's plan is a foundation.
Mr. Herger. Sixteen years beyond this present solvency
plan.
Secretary Summers. That is correct, or what would seem to
be a goal of extending it, the necessary 41 years behind its
current solvency so as to get to the goal of 75.
Mr. Herger. But the question I would like to get to has to
do with legislation which I authored earlier this year,
legislation which passed the House by an overwhelmingly
bipartisan vote, 416-12. And it is my understanding that the
President's plan does contain a Social Security lockbox
proposal similar to the one that I authored, and it was
mentioned again by my friend that this is not a cure-all plan.
All it does is try to stop the bleeding, if you will, of the
spending of Social Security surplus dollars which has been over
$100 billion a year for the last 30 years or more--to stop that
now.
And the concern I have is that even though this plan passed
overwhelmingly out of the House, the plan has been stalled in
the Senate due to our inability to invoke cloture on six
separate occasions. And, Mr. Secretary, it appears that the
President clearly supports the concept of a lockbox. In fact,
the proposal before us today uses many of the same mechanisms,
such as points of order, as my legislation to protect Social
Security dollars. And while Social Security lockbox is not the
long-term answer, it would appear to be certainly an important
and necessary first step.
Having said that, I have a simple question. Does the
Clinton-Gore administration support the Social Security lockbox
proposal which passed the House by an overwhelming bipartisan
vote in May but has been stalled in the Senate; and if so,
would the administration be willing to prevail upon the Senate
Democrats to help move the proposal along?
Secretary Summers. Mr. Herger, the administration supports
the objective of assuring that the Social Security Trust Fund
makes a positive contribution to national savings but believes
that the lockbox legislation you are referring to is a flawed
vehicle for achieving that desired objective for two crucial
reasons: First, and most important, because it does not achieve
what is the ultimate objective in this area, even a day of
extension of Social Security solvency. Second, because it
doesn't make use of what we have judged to be the most
effective mechanisms for assuring fiscal discipline, those that
include sequesters.
So while we continue to be eager--and indeed it is the
purpose of my testimony today to underscore our eagerness to
work on appropriate legislative vehicles for assuring continued
debt reduction through recognizing the distinction between the
Social Security Trust Fund and the--recognizing the distinction
between the Social Security budget and the on-budget. That is
exactly our objective today. We believe that the particular
vehicle you are describing is flawed for the two reasons I
mentioned, and it is also unfortunate that unlike the
President's proposal, it does not take steps to provide funding
for what I think we could probably all agree are serious
Medicare issues down the road.
Mr. Herger. Again, Mr. Summers, this was never intended to
be the fix for Social Security. What it was intended to do was
for the first time prevent the Congress and the President and
the administration from spending over $100 billion of Social
Security dollars on ongoing programs. This was meant to be a
first step in doing that.
And are you saying the President does not support this
first step of locking up these dollars so they cannot be spent
on current programs?
Secretary Summers. It is an appreciated step, one that we
believe would have ultimate meaning and ultimate political
impact to a far greater extent if the separation of the Social
Security Trust Fund was explicitly linked to the extension of
its solvency in the way that the President has proposed.
Mr. Shaw [presiding]. The time of the gentleman has
expired.
Ms. Dunn.
Ms. Dunn. Thank you very much, Mr. Chairman. Welcome, Mr.
Summers. Congratulations on being Secretary. We are happy you
are here today.
I have a couple of questions, one of which relates to
personal retirement accounts and the second relating to equity
for women in the Social Security system.
These days I am concluding from folks who live in my
district that people want more control over their dollars and
certainly are not willing to stand for the 2\1/2\ percent
average that is the return from current-day Social Security.
The Archer-Shaw plan does provide for individual retirement
accounts that can be left to your beneficiary until the time
you retire and those dollars turn into an annuity.
I would like to know, first of all, is there any kind of
element of personal retirement accounts in the President's
Social Security proposal?
Secretary Summers. In the President's Social Security
proposal, there is not. The President believes that
universalizing access to private savings, though, is a crucial
value and as you know, he put forward his USAs, his Universal
Savings Account proposal, some months ago to pursue that
objective. It was his judgment that we, as I think has been a
traditional judgment in our country for many years, that we
need to have a three-pillar private savings system based on
personal savings, based on pensions, and based on retirement
security; and that the best place to respond to what--I agree
with you, Representative Dunn--is a very strong feeling that
people should have more control, that people should have access
to more savings vehicles, is by strengthening the personal
savings and pension vehicles. And, of course, as we designed
USAs, we did it in a way that was particularly responsive to
the set of concerns around female workers, around assuring that
those who were widowed were properly provided for.
Ms. Dunn. Thank you, Mr. Secretary. As you know, we had a
very successful and effective group of pension reforms in our
tax relief plan that was vetoed by the President. For example,
for women we had catch-up IRAs, so if they stepped away from
the work force to raise children, they could come back in and
do that kind of catch-up. And I was sorry to see the President
vetoed this, but I think it is very important for folks to know
that there is no degree of personal retirement accounts in the
President's proposal. I would hope that as we talk about a
bipartisan plan, that that would be something that you would be
open to considering.
Secretary Summers. In the President's overall budget
proposals, there was explicit provision for a personal
retirement vehicle through the Universal Savings Account. The
only difference was that it was segregated and clearly
supplemental to Social Security in the President's approach,
whereas in a number of other approaches it would be established
in a way that was more competitive with Social Security, which
we feel is a less effective approach.
Ms. Dunn. I certainly do hope eventually in our Social
Security plan we will have that element, because I think it is
a huge positive.
Let me ask you a second question. In the current Social
Security program which was designed some 60 years ago, there
really was very little consideration given beyond the role of
the woman in the traditional--at that time, traditional family.
Now huge percentages of women are working, and yet there
continues to be that provision that would affect a working
woman in the same way it affects a woman who is not working. At
the end of her working career, she has paid payroll taxes
through all these years. She is automatically given the larger
of the Social Security payment, whether it is her husband's or
herself. Generally it is her husband's because of certain
inequities still in the pay scale. The same is true for women
who didn't work.
So in essence, a working woman has wasted a lot of dollars
during their working years, and this is where I become very
quickly the advocate of the personal retirement account. If she
can put dollars into that account, then she can provide for her
own retirement, which lasts generally longer than 75 percent of
the cases than men and involves fewer dollars.
Has the administration's policy looked at inequities in the
old Social Security system, provided for some upgrading,
updating?
Secretary Summers. Yes. The President has made clear his
commitment in the context of any overall Social Security reform
to addressing in particular the set of issues surrounding
survivors' benefits, which in about five-sixths of the cases
involve women, and in some cases involve women who have had
working lives outside the home, in some cases involve women who
have not had working lives outside the home, in order to assure
the adequacy of their benefits.
In considering the Universal Savings Accounts proposals, we
were very focused, for the reasons that you describe, on
providing for separate accounts for spouses, precisely so as to
address the issue that you describe; although an important
issue that is reflected in the USA, one I suspect you might
support, is the idea that women who are working in the home
should have an opportunity to make contributions or have
contributions made on their behalf, because that is important
work as well, and we need also to honor that work by making it
possible for it to support contributions to retirement
accounts.
I think this is an area where I sense there to be
considerable bipartisan consensus on the need to be sensitive
to the changing nature of family issues. Of course, another
issue that arises in this context, Representative Dunn, is the
incidence of divorce, which unfortunately is far, far more
common in American life today than it was in the time of Social
Security's founding, and we need to be sure that our benefit
systems are as fair as they possibly can be in those difficult
circumstances to all who are involved.
Ms. Dunn. I agree with you, Mr. Secretary. And I would hope
that we could move those provisions into the President's Social
Security proposal, because that makes me very uncomfortable to
see them sitting in the Universal Savings Accounts part which
may not pass House muster. So I would hope as you add detail to
the President's plan, you will consider moving those provisions
that help women as they move into retirement into your Social
Security plan, as we have done with Archer-Shaw. Thank you very
much.
Chairman Archer [presiding]. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Mr. Secretary, in presenting the President's plan here
today, you seem to put a premium on maintaining the progress on
the economy that has been made while we work toward a solution
to the Social Security problem. And as you outlined earlier in
your testimony, there were a number of positive developments
that took place as a result of the President's 1993 budget and
the 1997 Deficit Reduction Act, but one element that you seemed
to have left off was the record low unemployment, the best
unemployment performance that we have had in the last 31 years.
The figure came out last Friday. Would you want to include that
as an aspect of what has happened as a result of the 1993 and
1997 Deficit Reduction Act?
Secretary Summers. Mr. Coyne, I suspect I will be willing
to take as much time as the Congress will allow me to sing the
praises of our current economic performance. Clearly there is
no more salient element in that than our success in reducing
unemployment to its lowest level in 30 years and our success in
reducing unemployment in many categories to levels that are
lower than they have ever been before.
One of the aspects of the reductions in unemployment that
probably gets less attention than it should is the very
powerfully demonstrated statistical pattern of, in a sense,
first-hired, first-fired. Which means that the most vulnerable
groups in our society--teenagers, those with less education,
minorities--have an elasticity of greater than 1 for 1.
Therefore, the progress we have made in reducing unemployment
in the overall rate each 1 percentage point reduction in the
unemployment rate overall translates into several percentage
points of reduction in unemployment for our minority
populations or for our teenagers. And there is the further
benefit that when the labor market in an area or in the country
gets tight, as it does with 4.1 percent unemployment, employers
work much harder to pull people into the labor force, and so
the fraction of our young people who are not working and not in
school has gone down very substantially as a consequence of our
tight economy.
I think that in terms of things we need to do to prepare
for the 21st century, educating our workers, giving them
skills, including everybody, that there is nothing as effective
as a strong high-pressure economy where in addition to having
people looking for jobs, we now have jobs looking for people,
and that means all kinds of steps for the benefit of workers
that help them prepare going forward.
There is no question that low unemployment is probably the
single most important manifestation along with, for the first
time in two decades, rise in real wages of our economic success
in recent years.
Mr. Coyne. I wonder if you could explain why it is
important as we work towards a solution to the Social Security
problem, why is it important to the President's plan that it
have such a major component of reducing the deficit? Why is
that important to the average worker to pay down the debt as
part of a solution to the Social Security problem?
Secretary Summers. There are two main reasons why it is
important. First, reducing the debt is tantamount to a future
tax cut because it means you don't have to pay the interest and
the principal in the future, and it means by taking the
pressure off credit markets, you reduce interest rates today.
Each 1 percentage point reduction in interest rates translates
into $80 a month on somebody with a $100,000 mortgage. Each 1
percent reduction in interest rates translates into something
like $250 billion tax cut equivalent over the next decade. So,
first tantamount to a tax cut.
Second, it makes the economy perform better. The $1.7
trillion that would have gone into buying government paper over
the last 6 years that has instead gone into plant and equipment
to make workers more productive, into homes for American
families, is investment in our future that we wouldn't have if
American savings had to be channeled into the sterile asset of
government paper.
So I believe that our prospects as a country of avoiding
recession, our prospects as a country of continuing these low
rates of unemployment, our prospects as a country of continuing
the significant real wage growth that we have seen in the last
2 years, depend upon nothing as much as they depend upon our
success in maintaining these budget surpluses and reductions in
national indebtedness.
Mr. Coyne. Thank you.
Chairman Archer. Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman.
Mr. Summers, do you think it is wise to begin putting
general revenues into a Social Security system without actually
reforming the system first? I believe I read where Japan
started this same thing by putting general revenues in and
didn't reform a retirement system. About a third of the
administrative costs and benefits come from general revenues.
Is this not leading toward that same thing, because once you
start doing this it is so easy to just continue, that you fail
then to reform the system? And I believe it has been emphasized
a number of times that we really need to reform this system, we
need to reform the pay-as-you-go system, especially for those
younger people at ages of 18 to 35. Do you think it is really
wise to do this first?
Secretary Summers. That is a very important question, Mr.
Collins, and it is one we gave a great deal of thought to as we
worked in advising the President as he came to his plan. The
President's judgment--and I think it is the right one--is that
an indiscriminate donation of general revenues to Social
Security without reform probably would not be prudent, but that
the earmarking of general revenues from general revenues of the
savings achieved by reducing indebtedness, so taking a portion
of the fiscal space that we create by bringing down the debt
and taking a portion of that would be a useful spur to reform
and in many ways a necessary foundation for reform efforts.
And so I would suggest to you that the context where you
are generating an explicit savings by the reduction of a
government liability and using the proceeds to fund a different
growing liability makes this a very different discussion than
the traditional discussions of general revenues that we have
had historically in this country or in the Japanese example
that you cited.
Mr. Collins. But in the long run, is this probably going to
generate a better retirement system for people, for working
folks, especially younger people? Because what I see happening
here is that you are taking general revenues which are coming
from additional taxes or other taxes and you are merging them
with an already, I think, excessive payroll tax, but you are
not changing the system. You still have the current pay-as-you-
go system.
Secretary Summers. I guess I would respond to that in two
ways. First, ultimately the pillar on which any long-term
retirement security system rests is the strength of the
underlying economy, and by supporting debt reduction, we
strengthen the underlying economy with this plan.
Second, we are not raising general revenue taxes or cutting
a general revenue program to make room. We are taking the
savings that come directly from reducing the stock of the
government's debt and using it for this purpose, and we are not
taking the whole reduction from the debt stock reduction. We
are simply taking the interest savings which come from the
reduction of one liability and using it to serve as another.
I make these points to emphasize that I think the
President's plan is an important, desirable and valuable first
step. Clearly there is also scope for addressing the kinds of
issues that Representative Dunn raised, the kind of issue that
Chairman Archer raised in his opening statement with respect to
the retirement test and other structural issues with respect to
Social Security that certainly also warrant our attention, but
I think that the President's plan of using the interest savings
in a sense represents harvesting a low-hanging fruit and ought
to be a foundation for future efforts.
Mr. Collins. I know it is a first step and I hope the
President will move in a direction that we can all be involved
in the second step, but I am very concerned about additional
revenues being placed into the trust fund for the purpose of
benefits. I don't see that as a long-term solution to this
problem.
Secretary Summers. I appreciate your concern.
Chairman Archer. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. Mr. Secretary, thank
you for being here and I appreciate your comments you made
about increasing our national savings and importance of
reducing the debt. I don't know how to say this diplomatically
other than to say I think the proposal is a copout and it is a
copout in the sense that, maybe to put it in more diplomatic
terms, it is, as Mr. Matsui said, a start. He said it is an
excellent start but he said it is a start. You said it is
harvesting the low-hanging fruit, it is a useful spur to real
reform, it is the necessary foundation to reform.
You have only got a year left in this administration. As
you know when you became Treasury Secretary, many of us
believed strongly that given your background and your interest
in grappling with the issue of retirement savings generally,
that we might be able to spur some real reform in the next year
rather than just issuing a proposal that moves some money
around that in the end could spur reform for somebody else.
I also think we are setting the foundation now for the next
administration. I believe next year we could handle this issue
if we had a real proposal on the table, but in any case I think
unfortunately, whether it is the Gore administration or the
Bush administration, whoever it is, they will be using this as
their foundation too, and I am afraid we haven't gone far
enough. I would hope we could go further. The Archer-Shaw
proposal is out there. As you know, it is a substantive
proposal that makes real reforms. It can be analyzed in
different ways but it is a real reform and it does save Social
Security, not just for 75 years but forever.
I would just like to focus on two specific things if I
could. First is what does this do? As I analyze it, what it
does essentially is it takes a page from the Wally Herger
Republican book and says, let's stop the raid, which is fine
and that is good and I think the President now is on board with
that. It just means that the money going in from our FICA taxes
doesn't go for other government spending. Instead it is used in
the Social Security Trust Fund to pay down the publicly held
debt, which is fine; and then the additional angle that you all
have added in this proposal, is to the extent there is interest
savings to the taxpayer because the debt is being reduced,
which is a good thing, let's take that calculation of what that
interest savings is, which is general revenue, and let's pump
that back into Social Security benefits; and by doing so we
keep the system solvent until about 2050 instead of 2034, so it
is 16 more years you get from putting more general revenue.
That is fine. You can use any calculation you want. It
doesn't have to be the interest savings. It can be any amount
of general revenues. It is general revenues. But I really hope
we can move beyond this and get into some real reform.
I guess I have two quick questions for you, and if I have
time, I want to talk a little bit about retirement savings
generally, because I do appreciate very much your focus on that
and the need to help everybody plan for retirement through
IRAs, private pensions and so on.
Would you say that by making some structural reforms to
permit some kind of private savings--and let's take the Archer-
Shaw plan because there are so many different assumptions you
could make, but taking some part of the Social Security Trust
Fund surplus and allowing that to be invested directly. And
let's say it is individually directed, although that is not
necessarily relevant to this question. Do you think that would
encourage and increase economic growth in this country? What
would the macroeconomic impact be?
Secretary Summers. The crucial question for economic growth
in the country comes not from the question of a portfolio
composition of assets, comes not in my judgment from the
question of the trust--the question of the trust fund per se,
but comes from the impact of any proposal on national savings
which, of course, is the sum of public savings and of private
savings.
The reason why I believe that the President's approach is
probably in many ways the most constructive for economic growth
is that it is consistent with maximizing the level of public
savings, whereas some of the proposals that have been put
forward would include on the side very large tax cuts, or even
if they didn't include on the side very large tax cuts, would
include contributions to accounts of some kind that were very
large relative to the on-budget surpluses, would risk a
reduction in public savings that might offset any possible
benefits that would result from increased private savings under
those proposals.
Now, of course there is the question, which is very much
what has to be worked out in all of this, of what would happen.
Is the public sector capable of maintaining a high rate of
public savings for a number of years? There are those who are--
who feel that the lesson of experience is cynicism and who
believe that that is not possible and therefore favor various
kinds of tax cuts.
Our judgment is that with legislation like that proposed by
the President, we can lock in the basic fiscal progress we have
made, maintain large surpluses, and maximize the public
contribution to the high national savings that is ultimately
responsible for economic growth. That is the logic behind the
President's proposal, and I think there has been a quite
widespread agreement that if we can maintain the surpluses, use
the surpluses for debt reduction, that is, the use of those
surpluses rather than any particular kind of contributions,
that can make the greatest contribution to spur economic
growth.
Mr. Portman. My time has expired. I would just make the
obvious comment that reduction of national debt has nothing to
do with Social Security per se; and the ability to get a higher
rate of return and the ability to have private investment in
our capital markets will, I think you would say regardless of
what we do on the debt side, not as a tradeoff to debt, but
that will spur additional economic growth and will lead to
higher national savings because of that economic growth.
And I understand that this is the easy way to go. This is
the low-hanging fruit, as you said. There is no reason for
anybody to oppose a proposal that says let's pay down the debt
and use that interest savings which is general revenue for
Social Security, but it doesn't answer the tough question: How
are we going to make this system solvent over the next 75 years
or even into the future, as the Archer-Shaw proposal does? I
would hope we can get together and work on that as well as
working on these other proposals that you talked about, which
are great ideas, but I am getting no support from Treasury on
our pension proposals, for instance, although you may
personally support them. I am amazed we can't come together
even on the private savings side.
I apologize for taking so much time, Mr. Chairman. I look
forward to continuing to work with you, Mr. Secretary.
Chairman Archer. The gentleman's time has expired. Mr.
Levin.
Mr. Levin. Thank you. Mr. Secretary, I am a bit perplexed.
You know there is a discussion that the President's plan covers
50 years and Archer-Shaw 75 years. The Republicans have a
majority on this Committee and in the House and in the Senate.
If they really were so sure of the Archer-Shaw plan, they could
have introduced it by now and acted on it. We are going to mark
up a minimum wage bill, I guess in a few hours, that the
President opposes but that won't deter their marking it up. If
it is a good plan, mark it up.
I think the problem is that there are problems with Archer-
Shaw in terms of the immense amount of general funds that are
used by that plan, among other problems. And so I think the
question is whether a realistic plan as proposed by the
President that admittedly covers or expands the security of
Social Security for 50 years is better than an unrealistic plan
that it says covers 75 years.
So let me just ask you to boil it down. Some people are
watching. As I understand what the administration is saying, is
take the savings from using monies to pay down the public debt
to lock them in so that it increases the odds that Social
Security will be funded. Is that--just say it as simply as you
can, the essence of the plan?
Secretary Summers. Pay down debt, use the savings for
Social Security, reduce one liability, assure you can meet
another. Those are the premises of the President's plan. Fix
the roof while the sun is shining. Use the surpluses that we
have today to meet the obligation that we have tomorrow.
Mr. Levin. And as I understand it, the notion is that that
would promote growth, right?
Secretary Summers. Right.
Mr. Levin. And also as I understand the President's
proposal, there are provisions in it to try to make sure that
Congress uses the money for Social Security to extend its life
rather than for other purposes?
Secretary Summers. That is exactly right.
Mr. Levin. I would submit it is realistic if we will make
those tough decisions. One of our colleagues said it is easy to
do that. It wasn't easy to pass the 1993 deficit reduction
package and it wasn't so easy to act in 1997, so I hope you
will keep on explaining the essence of this so that we all
understand that it would be a significant step even though it
would leave unresolved issues beyond the 50 years, right? That
is acknowledged.
Secretary Summers. [nodding in the affirmative.]
Mr. Levin. Let me just say one thing because there is
reference to Chile and that is kind of a motto for our doing
something. In Chile, the way that the private accounts can be
invested is quite heavily regulated by the government. And one
of the problems with a plan like Archer-Shaw is that there is a
danger that it becomes kind of a gamble and the government
picks up the loss if the gambler loses.
So I would suggest, Mr. Secretary, that you persevere and
encourage this Congress to take what I think would be a
courageous step, and that is paying down the debt using the
surpluses that are saved for Social Security, promoting
national growth, and taking steps to try to be sure that the
savings from lower or no interest payments are used for Social
Security. That would be a courageous step by this institution.
Secretary Summers. If I could just amplify briefly,
Representative Levin, on your comment. I think it is a
misconception to believe that somehow this is the easy way that
avoids a tough choice.
I think very much the opposite. The tough choice embodied
in the President's approach to make the investment in the
future of our country by reducing debt is by forswearing what
is always the enormously strong temptation for all of us to
propose new programs, expensive new programs or to propose
large tax cuts, and instead to work at paying down debt. Those
are the difficult and real choices that we can make that will
benefit our economy and benefit our national retirement system.
And I think the alternative approach of precommitting today
large amounts of resources in the form of tax cuts or
contributions to accounts and so everybody is getting--
everybody is being promised something, and no resistance to
future spending or future tax cuts are being built in, is in
many ways the easier approach and I believe is the less prudent
approach.
So while I urged that the place for us to begin and in many
ways the easier Social Security policy was a policy using the
savings from debt reduction, I don't want to be misunderstood.
The most important consequential and I believe courageous
choices that we face involve whether we commit as a country to
debt reduction over the next 10 years. I believe that the
President's approach can help us make those choices in the
right way and that is why I think it is so very important.
Mr. Levin. Thank you.
Chairman Archer. Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman.
Mr. Summers, welcome. I was going to try to resist the
temptation until the last gentleman's question, resisting the
temptation to make the difficult choices or to expand
additional government programs like hiring 100,000 new
teachers, or Federal monies to purchase private lands for
public consumption. I agree with you that those choices are
extremely difficult.
I do want to just focus on, however, some of the things
that you summarize in your oral testimony and your written
testimony specifically talking about the four principles that
the President and you agree with, and one of them is that we
should respect the integrity of the Social Security Trust Fund.
That was the first principle you talked about by, quote,
"ensuring that all of the Social Security surpluses are used to
pay down debt rather than finance other government activities,"
end quote.
Now, about 10 months ago, the President addressed a joint
session of Congress in the Nation in the State of the Union
address and said we should take 62 percent of the Social
Security surpluses and set them aside. To what do we owe this
change of position from 62 percent in January now to 100
percent--which I am reading at least in between the lines--to
what do we owe that change of position by the President of the
United States?
Secretary Summers. Let me just respond first to the earlier
part of your question, if I could, Mr. Hulshof, with respect to
the teachers and the police.
The President and I make no apology for proposing a budget
that includes proposals that address what we think are crucial
national needs. What has been accomplished in the last 7 years,
for the first time since the Second World War, is a protracted
period in which the size of government has been reduced by some
600,000 workers, by more than 13,000 workers at the Treasury
Department.
What is embodied in the President's proposal is continuing
reductions in the size of civilian government, with spending
that does not keep up with inflation, even as new priorities
are accommodated.
With respect to the 62 percent and the 100 percent, the
President's initial budget was crafted in the context of a
unified surplus framework, and he proposed the allocation of a
certain portion of the unified surplus to Social Security.
As the debate evolved, it became clear that there was a
strong desire in the Congress to frame these issues in terms of
a separation between the on-budget and the Social Security off-
budget. So the President recrafted his basic approach of using
the surpluses and the debt paydown to finance extensions of
solvency into that framework and that improved proposal, or
proposal that has been responsive to the concerns of many in
Congress, including, especially in your party, is the proposal
that I am presenting here today.
Mr. Hulshof. Also in your testimony, in your written
statement, you mention Medicare, and, as Mr. Greenspan who
appeared before us earlier this year said, fixing Social
Security, I am paraphrasing, is a walk in the park compared to
fixing Medicare. And I want to point out that there has been a
bipartisan commission that came very close, absent one vote, of
having a very realistic reform of the Medicare system.
My time is about to expire. Let me quickly ask, regarding
the President's proposal, is the President still interested in
eliminating the earnings penalty, and is it included in this
plan?
Secretary Summers. Yes, he is, and I don't know whether it
is included in this particular--in this particular piece of
legislation which goes to the overall fiscal framework, but
that is a continuing--that is a continuing commitment on the
President's part.
Mr. Hulshof. Are the USA accounts included in this
legislation?
Secretary Summers. I believe not.
Mr. Hulshof. As a final point, and in the remaining time
that I have, as a complete pandering new father of a daughter
who is 10 days old, I just--President Ford, former President
Ford, was just recently honored with the Congressional Gold
Medal, and something that he said in early 1977 regarding
Social Security being the third rail of politics, former
President Ford said that our conscience demands what our
children deserve; God willing, we will disappoint neither,
which I hope that we will continue to use as our theme if we
are truly serious about restructuring Social Security for not
only today's seniors, but for tomorrow's.
Thank you, Mr. Chairman.
Secretary Summers. Mr. Hulshof, congratulations on the
birth of your daughter. It is a reflection on the remarkable
progress our country has made and is making in many spheres
that your daughter, like my twin 9-year-old daughters, can,
according to the--according to some of the best available
experts, have a chance of 1 in 3 or even 1 in 2 of living to
100, and those improvements in life expectancy really point in
another way to the importance of the challenge that is before
us of preparing our economy for the challenge of an aging
society.
Mr. Hulshof. Thank you, Mr. Secretary.
Chairman Archer. Mrs. Johnson.
Mrs. Johnson of Connecticut. Thank you, Mr. Chairman.
Welcome, Honorable Secretary Summers.
First of all, I am very concerned about the fact that your
proposal condemns anyone who is 14 years or under to no Social
Security. If you are 14 years old now, if you are 13, if you
are 12, if you are 11, if you are 10, since your program would
leave Social Security bankrupt by 2050, they will get no Social
Security benefits. If you are 18, you will only get 4 years.
So I just want to say that because I want to highlight
that.
Secretary Summers. Well----.
Mrs. Johnson of Connecticut. Wait a minute. Let me just
finish because the real core of my question is later on.
I just want to highlight how important I think it is that
when we take action on Social Security, we take action to the
75-year measure that the law requires, because it takes a long
time to build consensus on reforming such a big program, and it
is just imperative that we not let ourselves fall short of that
75-year measure.
Now, I do want to comment. You described your--and ask you
a question. You described your proposal to one of my colleagues
as very simple. We simply want to take the savings from the
interest on the debt, as we reduce the debt, and dedicate it to
Social Security.
Now, first of all, that is just general fund tax revenues,
and the question is, do we take general fund tax revenues to
fix Social Security?
Currently, currently, if we do nothing, just under current
law, in less than 5 years, I don't remember the exact amount,
but in a handful of years this Nation will be spending 44
percent of all the money that comes into it on people over 65.
Now, you talk about your daughters and you talk about
Kenny's new baby. You know, there is a limit to how much of the
Nation's resources can be spent to support our grandparents, as
much as we love them, and they will tell you the same thing.
So your solution, and my concern about your solution, is
that all the money you are taking is from the general revenue--
the general revenues of the Nation, and you are pushing--you
are going to push that 44, because that's without any change,
up toward 50. At a certain point, fairness and equity, how will
we fund the public schools? How will we fund environmental
enforcement? How will we fund the much more state-of-the-art
airport system?
So I liked your first idea better, and I know you abandoned
it for a good reason, but at the beginning of this discussion,
the President understood that we needed to bring the higher
earnings capability of the market into Social Security. In
other words, we needed new resources, but we could get a
significant portion of the new resources from the market.
You proposed the government investing the surpluses.
Everybody agreed the government should invest the surpluses.
Now, my Chairman and Mr. Shaw have proposed a very useful way
of using Social Security surpluses going on down into
individual accounts, not unlike the Federal Employees
Retirement Plan, and through that mechanism creating real
assets and, therefore, real new money into the system.
Now, laying aside the technicalities of this challenge,
that seems to me--and furthermore, recognizing your USA
account, this seems to me ground on which we ought to be
working together. That is one issue.
Your other comment that you made, strengthening pension
plans is very important. Fifty percent of Americans do not work
for an employer who provides pension benefits, and yet if we do
it only the USA account way, again, it will be general
revenues, more general revenues, to support retirement
security. If we do it through pension reform, like Mr. Portman
wants to do, and I strongly support, and we had in our tax
bill, you will enable small employers to provide pension plans
and bring the power of the private market to the earning
capabilities, the retirement security planning of employees.
So in pension reform, we have a chance to bring outside
resources to help that 50 percent who don't participate if we
reform our pension laws.
If we look at the Archer-Shaw proposal, there are ways to
bring the higher earnings of the market in to strengthen Social
Security in a way that is absolutely secure, respectful of the
job of Social Security, and would make a difference long term
and have very, very solid projections against it. Whether you
like every detail of the Archer-Shaw plan, it does secure
Social Security for 75 years or all time.
That is my concern. You use entirely general revenues. In
the long run, that is not going to be supportable. You had
ideas similar to those of the Chairman. Can't we work together
on trying to get those earnings in? Can't we work together on
pension reform? Can't we work together to use public and
private resources not only to secure Social Security, but to
give people much greater retirement security both in terms of
monetary income and health care?
Secretary Summers. Let me respond by saying five things
very quickly. First, on budgets for seniors versus others, I
hope you will pass your concerns on to the appropriators as we
work to ensure adequate funding for COPS, for teachers, for
technology----.
Mrs. Johnson of Connecticut. I will, but I will just say--
--.
Secretary Summers [continuing]. In these last, in these
last few days.
Second, with respect to--I am sorry.
Mrs. Johnson of Connecticut. I am just very proud that the
Republicans have brought a very good Medicare reform bill to
save all those providers outside there, and we hope the
administration will support us on it.
Secretary Summers. I am sure we will work something out.
That is one area where I expect we will find some bipartisan
cooperation.
Second, with respect to fiscal space, I agree with you
about the dangers of new, unpaid-for claims on general
revenues, and that is why the President's proposal is carefully
crafted to assure that any claims it places on general revenues
use only a portion of the general revenue savings that it
achieves by reducing future interest burdens through debt
paydown, because I think you are absolutely right about the
dangers of unpaid-for claims on general revenues, and I might
say that in that regard I do have some concerns about the
Chairman's proposal, which I think does potentially involve
larger use of general revenues.
With respect to the use of equities and the power of the
market, I continue to be very sympathetic to the sentiments
that you expressed, with these qualifications: I think we need
to assure that the risk is not borne to a dangerous extent by
individuals. We need to ensure that we do not have excessive
government intrusion into the economy, and we need to be
mindful of the fact that we have been extraordinarily fortunate
in what has happened to markets in this country over the last
17 years and that it will not always be that way; that we need
to be careful not to do anything that threatens the
progressivity of the Social Security System, but if we can find
a way to use the power of markets subject to those tests, that
is something that the President would very much support.
With respect to pensions, I share the broad sentiment that
you and, earlier, Congressman Portman expressed, but would
caution that in our judgment, the right priority should not be
raising the limits for the minority who already have a
substantial opportunity to save, but taking steps for the
majority, who really have very little capacity to take--or no
capacity to take advantage of tax-favored savings right now.
Finally, I agree with you very much, and I know the
President agrees with you very much, on the importance of
bipartisan cooperation in all of these areas, and that is
something which we are very much committed to.
Chairman Archer. Mr. McDermott.
Mr. McDermott. Thank you, Mr. Chairman.
Mr. Summers, I must say the President's proposal, I like
this one better than the other one because you took out the
private accounts and those kinds of things.
I want to understand or at least hear your thinking about
this whole issue, because when I came to Congress, the Dow
Jones was at 3,000. It is now at 10,000. And I think it would
be a little grandiose for me to take credit for doing that, but
there are periods--there have been periods when we have not had
that kind of growth in the stock market.
Now, if you begin in 1966, the Dow was at 1,000. It didn't
get back to 1,000 until 1982, almost a 17-year period when
there was no growth, and my feeling is, or at least my
question, the dollar went from worth 100 cents to 30 cents
because of inflation over that period of time. Why should we
ever put any of our money out into the stock market if we want
to make absolutely sure it is going to be there when we come to
the time of retirement?
What is it that--I mean, everyone is mesmerized by the Dow
Jones right now because of what it has done, but it hasn't
always been that way.
Secretary Summers. Congressman McDermott, you are very
right in pointing to the uncertainties, even over substantial
periods of time, in the behavior of what happens to stock
markets, to a substantial decline in the Dow Jones average that
you mentioned as one example. The performance of the Japanese
market over the last decade is another example.
Clearly, stock market investments do carry higher returns
on average, though those higher returns come with substantial
risks.
The judgment of retirement planners in most contexts, I
think about as an example State and local pension funds where
there is a defined benefit obligation for workers, or most
corporate defined benefit pension plans, or most of us as
individuals planning for our own retirement, is that prudence
can take the form of accepting a small amount of that risk in
return for a higher return. The longer we have, the more risk
we can probably accept, because over time it averages out.
In designing the President's original proposal, we were
very mindful of this and tried to calibrate an amount of risk
that would assure that the fiscal burden would be a tolerable
one, even in the event that the stock market outcome was quite
an unfortunate one, but I would suggest to you that what is
important is that we collectivize that risk because the
national government, as an entity, has a capacity to bear that
risk, to spread that risk over long periods of time that any
one of us, as we think about the years before our retirement,
does not have.
That is why the approaches that we favor would rely on the
principle of defined benefits, but would accept the funding of
those defined benefits through the partial use, the prudent
use, of equities. Where we would be concerned is in the use of
equities for individual accounts, because to take the period
that you cited, Congressman McDermott, the stock market over
one interval in 1974 actually fell by two-thirds in real terms.
Imagine if those were the 9 months before your 65th--before
one's 65th birthday.
So I think that we have to look for approaches that are
collective. Now, that, of course, has the consequence of--this
is something that Chairman Archer and Mr. Shaw have recognized
in their plan, in guaranteeing defined benefits, but when you
guarantee defined benefits, you create a situation in which
because the government has the defined benefit liability, the
government becomes the beneficial owner. It is better off if
the stock does better, just as the State of Washington is
better off if its pension fund does better, given that it has a
fixed obligation to the teachers.
Then the question arises whether one can find suitable
means of political insulation of those equity investments in a
situation where the government is the beneficial owner, and
that is part of the challenge of mechanism and institution
design.
Mr. McDermott. You are saying----.
Chairman Archer. The gentleman's time has expired.
Mr. English.
Mr. English. Thank you, Mr. Chairman.
Mr. Secretary, your testimony so far today has been
illuminating, and I really appreciate the opportunity to pose a
couple of questions that I hope will clarify the President's
position.
I am delighted that the President has come forward with a
more detailed proposal. I believe that Social Security reform,
in order to be successful, must be bipartisan. So I guess what
I wanted to first get a sense of, given that a number of
Members, including a number of Members of the President's
party, have signed on to a variety of Social Security reform
proposals over the course of the past year, can you share with
us does the President see any common ground for building a
bipartisan product based on any of those proposals, or does he
fully oppose every one of the plans that have been presented so
far in Congress?
Secretary Summers. I think the President sees a number of
elements in various proposals that represent important common
ground: the use of the resources provided by the surpluses; the
maintenance in many cases of the progressivity of Social
Security; the commitment to using Social Security reform as a
vehicle for encouraging fiscal discipline; the desirability of
addressing the special needs of widows and more generally the
changed nature of the American family since Social Security was
founded; the need to address the retirement test.
These are all very important points of common ground, that
the President sees them as things on which he can and we are
very much prepared to build. But there also are lines that are
not possible to cross: exposing individual workers to excessive
personal risk with respect to their benefits; threatening to
unravel the fabric of a system which provides in a number of
different ways for progressivity and for transfers across
individuals that we need to preserve both now and in terms of
avoiding any political dynamics that could lead to its unravel.
There are a number of other----.
Mr. English. Mr. Secretary, I think those are very good
general principles, and perhaps we could follow up in writing
and spell out some of those differences in a little more
detail. I think it is important for us to understand where
those lines are if we move forward, as I hope we do, and try to
build a concrete bipartisan proposal on Social Security.
Let me say on one particular issue, the President's
original proposal in embracing the idea of relaxing the
earnings limit for recipients of the old age retirement system,
recipients who currently, if they continue to work, face higher
tax rates than Donald Trump. I was very encouraged that the
President embraced the idea of getting rid of that earnings
limit in his earlier proposal, reversing a position that
administration Representatives had taken when they had
previously testified from that seat before our Committee.
Mr. Secretary, I noticed in the current proposal there is
no reference to eliminating the earnings limit. Can you give us
a sense of what the administration's position is now?
Secretary Summers. Yes, I can. The President continues to
support the need to eliminate the retirement earnings test; to
reduce poverty among elderly women. He believes that the
details of these proposals need to be worked out as part of the
bipartisan efforts to build on the foundation. His plan would
provide and extend solvency for at least 75 years.
I can't resist, Mr. English, since you made a comparison of
marginal tax rates, suggesting that, without referencing any
particular individual, I would hope that this Committee's work
in the tax shelter area would do something to ensure that those
comparisons of marginal tax rates between different individuals
would be less challenging to all of us.
Mr. English. Mr. Secretary, we look forward to exploring
the administration's proposal and looking for ways of making it
perhaps a little more viable and a little less arbitrary, and
there may be some common ground on that.
On a final point, I noticed that you have, as Mr. McDermott
noted, dropped the idea of USA accounts in this legislation.
Why is that?
Secretary Summers. The President's legislation was an
attempt to codify the fiscal framework that would underlie an
expansion of Social Security--of Social Security. We would hope
to return next year, in the context of our overall budget
discussions, to the question of private savings, which I think
we can all agree is something that is very important, and that
it is very important that we find ways of spreading the benefit
of tax-favored savings to a larger fraction of Americans than
now--than now enjoy them.
At this point in the tax debate, when the tax discussions
are largely and, in my judgment, appropriately focused on
extenders, and, in my judgment, extenders that should be fully
paid for, that did not seem the appropriate moment for a
broader tax policy discussion.
Mr. English. Thank you, Mr. Chairman.
Chairman Archer. Mr. Foley.
Mr. Foley. Thank you very, very much, Mr. Chairman.
Mr. Summers, thank you for your appearance today.
Mr. Rangel raised some questions earlier regarding the tax
policy of this Committee, and we had advocated a tax cut. Would
you acknowledge that the tax cuts we initiated, the capital
gains tax cut specifically, had the influence, if you will, of
increasing transactions and increasing revenues to the Treasury
vis-a-vis the sale of those underlying assets?
Secretary Summers. I am sorry, Mr. Foley. Are you referring
to the 1997 tax changes in this?
Mr. Foley. Right.
Secretary Summers. Or are you referring to proposals that
were contained in the legislation this year?
Mr. Foley. I am referring to prior tax cuts that have been
initiated into law. Do you feel that they stimulated revenues
to the Treasury?
Secretary Summers. I have not seen a careful analysis of
the last 2 years' statistics. It was our--it was the judgment
of the Treasury, and I believe the judgment of the Joint
Committee at the time, that while there would be, particularly
at the beginning, some induced realizations as a consequence of
those tax changes, that the net revenue consequence would be
negative, for two reasons: Because each of the transactions
would yield less revenue, so even if there were more of them,
unless there were a lot more of them, you would still be
realizing less revenue; and because the reduction in the
capital gains rate would encourage various kinds of shelter
opportunities--that is perhaps a pejorative word--various kinds
of situations in which transactions would be created where
individuals took interest or depreciation deductions at the
full rate and then took capital gains on the other side of the
transaction, and so one might see larger volumes of capital
gains revenues, but the total collections of the tax system
would nonetheless be reduced once one took account of the
offsetting deductions.
So while there were undoubtedly some feedback and economic
offsets, I have not seen any evidence that would call into
question the judgment that was reached at the time, that there
was a net revenue cost of those proposals.
Mr. Foley. On Social Security, the President had initially
proposed a government investment vehicle, if you will, where
the government would invest in equities. Would you explain to
me the difference why the government is a better investor in
the equity speculative market versus the investor, the
individual, the IRA account holder, in a stand-alone or side
account established? What makes the government a more wise
investor and insulates the government and the taxpayers and
Social Security from risk? Why shouldn't the individual have
that same liberty to make judgments based on the marketplace?
Secretary Summers. It is not a judgment, Congressman Foley,
that the government is a superior investor. Indeed, in no
proposal of which I am aware would the government exercise
investment discretion. It would simply ask market managers to--
private managers to track published indices. So there is no
notion of the government exercising discretion as an investor.
The crucial question is the one I referenced in the
conversation I had with Mr. McDermott regarding the spreading
and bearing of risk. If, as is common in Social Security
arrangements, one envisions annuitizing a stream at the age of
65, someone who faced a situation such as occurred in 1974 or
occurred in 1987, where the stock market fell by a large margin
in the 6 months or the year prior to a person's retirement,
could see their retirement annuity fall by one-third or fall
even in the 1974 case by two-thirds because of an adverse
movement in the market.
Mr. Foley. Wouldn't that be the same result if the
government was investing?
Secretary Summers. No, because the government could
function like most States do, with their defined benefit
pensions, or most corporations do, with their defined benefit
pensions in providing a fixed benefit and then managing the
fund to finance those benefits so that over time the fund would
do well--the fund would do well at certain points, and the fund
would do poorly at certain points, but it would be possible to
maintain a fixed level of benefits.
The government has a capacity, by virtue of being a
permanent institution, to spread risk over time that an
individual facing retirement at a particular point in time does
not have. That is why most State and local governments have
adopted defined benefit pension plans for their workers.
The basic premise of why Social Security was started was
the premise of the government's ability to spread risk across
individuals and spread risk over time, and, therefore, to
provide for defined benefits. Indeed, that is something that is
very importantly recognized in Mr. Archer's and Mr. Shaw's
plan, where for the vast majority of individuals, they would be
getting a guaranteed government benefit regardless of how the
stock market performed, and only in cases where the stock
market performed extraordinarily well would there be the
possibility of supplementation of those benefits, or at least
that is my understanding. Perhaps it is wrong for me to be
trying to characterize the Chairman's plan.
Mr. Foley. Let me just--I know my time has expired, but
following along on that thought, would you be agreeable to
pursuing the initiative of Mr. Shaw and Mr. Archer based on, if
you will, a mutual fund concept?
You mentioned the government would have these independent
private equity managers that would go out and make the risk
assessments and insulate, if you will, from a certain degree
risk. Using the Archer-Shaw model as a separate account and IRA
account, but using your model as a global money manager,
allowing individuals to have, as we have in Congress, 401(k)-
type plans where you designate your deposits but aggregate them
so they are not separate and apart, but they are indeed
investing in private vehicles, but ownership would reside would
the individuals, would you concede that that may be something
to look at?
Secretary Summers. These are certainly questions--certainly
all ideas, I think--these are sufficiently important questions
that I think all ideas should be looked at, and the question of
the definition of ownership in a situation where there is going
to be a guaranteed level of benefits, it becomes a little bit
unclear what one means by ownership.
I mean, just to use an example, if it is said that I am
going to pay you $100 1 year from now, but that you have an
account in which $2 has been placed in the stock market, which
is going to be used as one component of that $100 that I owe
you, so it is very unlikely that the $2 would come to exceed
$100, then who is the real owner of that?
Is it you because it is said to be your account, or is it
me because those $2 are going to be--if it turns into $4 or $6,
that is going to reduce my payment from $98 to $94? I am not
sure in that case who one should think of as the owner of the
account.
There is a similar kind of ambiguity that is involved, it
seems to me, in thinking through Chairman Archer's proposal,
but it is certainly--and Mr. Shaw's proposal, but it is
certainly a very valuable contribution to thinking through what
I think we all agree is a very powerful idea, which is the use
of markets to help make--to help assure increased solvency with
a minimum of any changes in tax rules or benefits.
Chairman Archer. I hate to call the end of time when you
are on such a positive note, Mr. Secretary, but the gentleman's
time has expired.
Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Chairman.
Mr. Secretary, I am sorry I wasn't here. We were out doing
another issue that many of us are concerned about on
pharmaceutical assistance for our seniors in this country, so I
apologize for not being here.
The only question I want to ask you is: What is the
significance of us not doing anything? And how long do you
think, in your judgment, we have to really work through this
issue before it does become a problem and we can't do anything
without adding lots and lots of money to the system?
Secretary Summers. Mrs. Thurman, Hippocrates had a very
powerful principle when he said, first do no harm, and I think
it is of the greatest importance for these issues that we
respect that principle and not take steps this year or in any
subsequent year that interfere with the broad progress we are
making in paying down national debt. That is why I am very
concerned about the reluctance in parts of the Congress to
accept the various offsets, particularly the tobacco policy
that the President has proposed this year, and to maximize the
fiscal integrity of the outcome that we come out with this
year.
That is why I believe it is very important that tax
extenders legislation be paid for in the interest of our
economy to achieve that objective. I believe that to the extent
possible that should be done with respect to any legislation,
such as the important objective of repairing problems that have
arisen with Medicare providers.
So, overwhelmingly, I would assign importance to assuring
our progress in continuing to reduce debt. Beyond that, I don't
know that there is a point where one falls off a cliff, but it
is the arithmetic of compound interest, and it is common sense
that the sooner we move to address these problems, the less
painful the necessary adjustments will be, and that now at what
is such a fortunate moment for our national economy, it seems
to me to be--when we have surpluses to commit, it seems to me
to be an ideal time to address the challenges facing both
Social Security and Medicare.
Mrs. Thurman. And as this economy continues to grow, we
have also seen, I believe, over the last couple of years, so
does the solvency of the Trust Fund. So everything that you are
talking about that is working, and if we can continue keeping
that moving the way it should, puts us in a better position at
any time to work through this.
Secretary Summers. I would agree with that.
Mrs. Thurman. Thank you. I thank you very much for spending
the time with this Committee today.
Chairman Archer. Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman.
Mr. Secretary, good to see you. Good afternoon.
Secretary Summers. Good to see you.
Mr. Weller. You have been here for a while. I appreciate
you taking the time to be with us today.
Before I begin a couple of questions, I would like to ask
you on Social Security--of course you brought up the issue of
education, which, of course, is a major priority in this
Congress. This last weekend I had a discussion with a local
school board member. In Illinois, our school board members are
volunteers, but they are elected officials, and it is their job
to set the priorities in the local school district,
particularly how they spend their money.
He asked me to convey, if I ever had the opportunity, to
our friends in Washington, he says, you know, we are pretty
good people out here. We feel we have a pretty good
understanding of the needs of our communities, but we sure
would like to have some greater flexibility on how to use the
dollars we have to spend.
He pointed out that while about 6 percent of the money that
comes from--that funds our local public schools comes from
Washington, so do two-thirds of the mandates. He said, you
know, we are pretty happy with our class size. We are pretty
happy with the number of teachers we have, and we appreciate
the extra money, but we would really like to be able to decide
how best to do that ourselves. Maybe we want to put that money
into putting in the wire and the fiber and the hardware so we
can put in computers and Internet access for our schools, and
they asked for that choice. I realize that is really one of the
fundamental discussions as we finalize the budget over the next
couple of days: Does Washington essentially hog-tie our local
school board members on how they can use Federal dollars, or do
we give them the flexibility and respect to make those
decisions themselves? My hope is that we will give the
flexibility to our local school board members.
Now, getting to your Social Security plan----.
Secretary Summers. Can I----.
Mr. Weller. My friend here, Kenny Hulshof, has a beautiful
little girl named Casey, just born last week, and we all wish
he and the Hulshof family a hearty congratulations on the birth
of their daughter. One of the concerns I wanted to raise about
the Social Security plan that you have brought before us today
is that Casey turns 67 in the year 2066. Now, under the
President's Social Security plan, the proposal that you are
advocating today, Social Security will go bankrupt 16 years--
excuse me, yes, 16 years before it is her turn to collect. Of
course, during that time she will be in the work force and
paying taxes into the Social Security system.
Now, you stated in your comments earlier that the
President's guidelines, since he was looking at Social Security
proposals, was that he wanted to extend the life of Social
Security for 75 years. Now, under the Social Security actuaries
for the Social Security Administration, they state that your
proposal will only extend the life of Social Security to the
year 2015--excuse me, 2050, which, of course, is only 16 years
later than current law, so by 16 more years of life, but it
falls short for little Casey Hulshof by 16 years.
I was wondering, why did you not propose a plan that
actually met the President's goal of 75 years so that little
Casey Hulshof will have Social Security there when it is her
turn? Mr. Secretary.
Secretary Summers. Let me first say that I yield to no one
in my concern for the welfare of little Casey Hulshof.
I just want it to be absolutely clear on that point.
Mr. Foley. We will take up a collection at the end.
Secretary Summers. Frankly, because I am concerned--
because, Mr. Weller, I am concerned with Casey Hulshof's
welfare well before she faces retirement, I strongly support a
Federal commitment to assure that she has the opportunity to go
to a public school where class sizes are sufficiently small;
that she can receive adequate attention, and that seems to me
to be a particularly important Federal priority in this----.
Mr. Weller. Mr. Secretary----.
Secretary Summers [continuing]. And one we should
encourage. But I am not an expert on education policy.
Mr. Weller. Mr. Secretary, we have a philosophical
disagreement. I think our school board members should be able
to make those choices themselves if they have other priorities
to meet the needs of their communities.
Secretary Summers. I think we probably do have a
disagreement there, but I think we all have a national stake in
Casey Hulshof's successful education, and so earmarking how
Federal money is used.
Mr. Weller. Mr. Secretary, reclaiming my time, I would
point out that our Budget Act provides more money for our
schools than the President's budget.
But getting back to my question here for little Casey
Hulshof, your proposal, Social Security goes bankrupt 16 years
before she is eligible. And if the President's goal is to have
a plan that keeps Social Security solvent for 75 years, why did
you not come forward today with a proposal to keep Social
Security solvent for 75 years so that little Casey Hulshof will
have it when it is her turn?
Secretary Summers. We would like to work together in a
bipartisan way to achieve full 75-year solvency. We believe
that the steps contained in the President's--in the President's
proposal provide a very useful foundation for such efforts in
strengthening the national economy so that Social Security will
be stronger in the out years.
I think if it were possible to find bipartisan consensus on
this set of starting measures, which would be a significant
contribution to the Social Security system, I am confident that
we would be prepared to build on that agreement and progress to
see if it were possible to go the rest of the way.
Before we contemplate whole new approaches, or before we
contemplate changes in benefit formulas, or before we
contemplate raising burdens on subsequent generations of
workers, I would hope that not as a final step, but that as a
first step we could all find agreement on the idea of using the
progress we are making in reducing the national debt to
strengthen Social Security, and I think if we could all come
together on that idea, that would be a powerful spur to taking
the various other kinds of steps that are important to assure
that we can pay promised benefits.
Mr. Weller. Mr. Secretary, I noticed in your response
there, you said that before you contemplate benefit changes,
are you saying that after the end--after the year 2050 that
there may need to be reductions in benefits for Casey Hulshof
and her peers in order to extend it? Is that why you did not go
beyond 50 years?
Secretary Summers. I think that clearly there are a variety
of steps that can be explored, changes in investment policy.
Mr. Weller. So you are considering benefit cuts? Or are you
are considering----.
Secretary Summers. We have laid out our proposal, which we
believe is the right basis as we go forward, for subsequent
discussion. Other measures would have to be explored and
debated on their own terms with respect to commitments of
general revenues that go beyond the savings in interest; with
respect to any consequences they might have, positive or
negative, for benefits or subsequent taxes. But we believe this
approach that the President has put forth provides a useful
forward step and a foundation for future efforts.
Chairman Archer. The gentleman's time has expired.
Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman. I think all the good
lines have been taken, so I am going to be brief.
I commend the President for at least making us all talk
about Social Security. It has been a rather sensitive political
subject over the years, and so I think he is to be commended
for at least putting it out front and encouraging us all to
talk about it.
Mr. Archer and Mr. Shaw are certainly to be commended, as
are Mr. Kolbe and Mr. Stenholm, for going even further than the
President has, not just tiptoeing up to the edge of the Social
Security swamp, but actually diving into the swamp.
Our job, though, is to try to reconcile all of these
differences and how we would approach saving this very
important program.
I would hope that we would look at the offerings that you
have made and take them for what they are, and it really is no
more than just a temporary approach to really solving the
problem.
When you look at the numbers provided by the Social
Security Administration, the bottom line is the President's
proposal over 75 years costs $13 trillion more than the Archer-
Shaw proposal. So I would hope we could agree that maybe we
should look at something like Archer-Shaw for the long term of
the country and not just put these short-term blinders on and
say, well, what can get through the next 10 or 20 years. Let's
look longer term.
As to Mr. McDermott's point about the stock market being so
unreliable. If it were so unreliable, why are all the labor
unions' pension funds invested so heavily in the stock market?
They must think it is a pretty good investment, and they have
got the responsibility to provide pensions for their members
forever.
As you have pointed out, State and local governments invest
in the stock market. So, again, I would hope that we could all
agree that we have got to figure out a way to get a higher rate
of return for the investment that the American citizens are
making through their payroll taxes to Social Security.
The President's own proposal, initially at least, held out
that option of investing, in his case directly into the stock
market. Archer-Shaw would have an indirect investment. But,
look, if we don't do something like that, if we don't get a
higher rate of return for Americans' investment, we are going
to have to cut benefits or raise taxes. That's it. Let's get it
out on the table.
So if we don't want to raise taxes, and you said you don't
want to cut benefits, and we don't want to cut benefits, then
let's cut through all of that and say, how can we get a higher
rate of return? We are going to have to sit down and figure
that out.
I am encouraged by the President's proposal. I am
encouraged by his initial proposal. We have wasted a lot of
time, in my view, in not sitting down and excluding what we all
know to be politically unpalatable and figure out what we can
do, what we should do, to save this system over the long haul.
With that, Mr. Chairman, I will let the Secretary make any
comments he wishes on my time.
Secretary Summers. If I could just briefly, Congressman,
let me first say that we are comfortable with the idea, if an
appropriate formula can be found, for taking advantage of
higher returns that equity markets would provide. And if there
could be agreement on taking the President's proposal as
described, with the single modification of modifying--of
investing a portion of the Trust Fund contribution in equities
so that further solvency was achieved with a defined benefit
structure, I would expect that that could be an agreement that
could be worked out very quickly.
Mr. McCrery. Let's try that. Archer-Shaw does exactly that.
It is a defined benefit, it is a defined benefit, just as you
have said, so let's get together and work on it and see if we
cannot come up with that. I mean, we are very close, I think.
Secretary Summers. Well, let me say also--let me say also
that while obviously in a setting like this, it is the nature
of what we do that we point up flaws in approaches, I think it
is important to recognize that there are some common elements,
defined benefits, uses of the surpluses, and those are very
important common elements.
I do have the concern that with respect to the Archer-Shaw
proposal, as I understand it, and I am certainly not the
authority on it that its authors are, that one does face the
question of its financing and where it is to be financed from,
and it isn't clear to me whether it is envisioned that it would
force the on-budget into a deficit, which would represent a
rather substantial contradiction between the objectives of the
lockbox legislation that many have stressed this year, or
whether it is instead contemplated that somehow the Social
Security Trust Fund revenues would be recycled multiple times,
which might get into the area that had raised concerns
surrounding double counting.
We would like to take advantage of the surpluses to achieve
75-year solvency, too, but in putting forward our proposals, we
have been constrained by the imperative of assuring that we
don't multiply use the Social Security Trust Fund, and the
imperative that we use general revenues only to the extent that
we have provided the fiscal space by achieving interest
reductions, and if a way can be found of respecting those two
principles and extending solvency further, that would certainly
be something we would be very interested in looking at and
discussing.
Chairman Archer. The gentleman's time has expired.
Mr. Watkins.
Mr. Watkins. Thank you, Mr. Chairman, Mr. Summers, Members
of the Committee. I guess I was one of the last ones here, but
I don't apologize. I was with a friend of Mrs. Robinson's and
mine that has terminal cancer, and I spent some time with him
during the first part of this, and so I got here late. And he
was also probably most concerned about his family and all in
the future.
Let me say, Mr. Summers, I think that the President erred
in his State of the Union message. He realizes it. I think he
realizes--I first will say I think we are making progress. The
President has realized he made the error in the State of the
Union message where he said, you know, that he is going to use
60 percent of the Social Security funds--or 40 percent of it
will be used, be spent. If you look back at that statement and
all, I have to say that thanks to this Committee, Mr. Archer
and Mr. Shaw, that I think this ship has helped keep the
President's feet to the fire where now he has moved in our
direction.
Instead of spending 40 percent of the Social Security
surplus, now we are going to be applying it to the future of
Social Security and making it much more solvent. So I want to
say, from his first proposal to his second one, he has
definitely come a long way. I want to say I think this
Committee and this leadership of the Congress has helped
protect that money.
Also being kind of a farm boy, I know what it means by low-
lying fruit. It is easier to pick, and it is easier to waste,
and I am concerned about if from the--paying down the debt,
yes, I want to pay down the debt, but how is that savings going
to be utilized?
I realize exactly the steps that are being taken there, but
that is also dollars or fruit that can easily go into spending.
The President, as handed to him, the first proposal he realized
that the American people didn't want that 40 percent spent that
way, and he moved in the right direction. I am concerned about
how we spend that other savings.
But I think we are making some headway, and we are
investing in the future, and I don't want us to be partisan,
but when you bring up COPS and education, as my friend from
Illinois said, you know, we do propose more money for
education, but it is going back to the local school boards and
the local school administrators to be utilized in order to meet
the needs of those areas, and I think that is the way it should
be.
Let me say for Archer-Shaw, I have tried to look into that
and study it a big deal. We have been to Chile to talk to Jose
Linear about that proposal, along with a lot of other people.
Let me say it does several things. There is money left
available to pay Medicare. I don't know where the President
went with Medicare. The bipartisan commission was squelched.
Ask Senator Breaux about that, Bill Thomas, and even the
commission members. But where is the revenue going to come from
to meet those needs for Medicare? Archer-Shaw helps solve that
problem along the way.
We look at the individual retirement accounts. I was kind
of--are you saying, Mr. Summers--I know you must not be--that
everybody who has got their money in thrift savings accounts is
at great risk? Should they be taking it out, as Mr. McDermott's
proposal? I don't think you meant that. You left, I think, a
great deal of risk there in the minds of a lot of people. I
don't think it is that alarming.
But also we have got the lowest--you know this better than
anybody else, I think, probably, or most, Mr. Rubin and
Greenspan and others, we have got the lowest savings of any
industrialized country in the world, and we need to increase
savings. That is what the Archer-Shaw plan--one of the great
things it would do. It would be definitely increasing that and
building that up. So we can have that kind of investment there
to move our country forward.
I would just like to say, I think we have--the President's
second proposal, and let's give him credit for making that
shift, and the Archer-Shaw proposal, have moved forward and
come closer together. But you have been around here, and you
didn't come in on a load of watermelons last night, and I
didn't, but it is positioning. It is the bickering there.
I think the President should stand up, and I think you
should advise him to stand up and take the lead in a very
bipartisan way and sit down together and look at the great
possible benefits we have there so we can resolve it, not only
for our, yes, grandparents, our generation, children and our
grandchildren. And I hope we won't be alarming the American
people about one of the plans, because I think both of them are
so much more sound today than they were when the President
proposed his in the State of the Union message.
That is all I have to say.
Secretary Summers. I am not sure I have--I am not sure that
I have a response to that. I think we can all agree on the
desirability of increasing national savings, as you suggested.
As I tried to make clear, I think there is a lot that is very
interesting in the plan that Chairman Archer and Mr. Shaw have
put forward, and I raised some rather specific questions having
to do with the ultimate fiscal impact of that plan, which may
be worthy of further examination.
I welcome what seems to be a growing consensus on the
desirability of using surpluses and the desirability of
assuring benefits, and certainly I know that you can agree with
me on the importance of individuals being able to rely on an
assured benefit, and I can agree with you on individuals being
able to accept that a certain amount of their wealth--whether
this should be their Social Security wealth, I think, is a very
much open question, and I would be rather skeptical--but a
certain portion of their wealth invested in markets that are
subject to fluctuation.
Chairman Archer. The gentleman's time has expired. The
Chair welcomes the comments by the Secretary that we should be
able to find some common ground to ultimately solve this
problem. The Chair wishes very much to be able to find that
ground, and I think the Secretary knows that.
Mr. Cardin.
Mr. Cardin. Thank you, Mr. Chairman.
Mr. Summers, despite the administration's best efforts to
point out the urgency for us to move forward with a Social
Security bill in 1999, at the end of the day this year when
Congress adjourns sine die, we will not have done anything to
extend the solvency of the Social Security Trust Fund, and I
find that incredible.
I support the administration's proposal. I think we need to
dedicate some of the surplus to Social Security solvency, and I
have heard some of my colleagues point out this is just moving
money around or using general funds, but the one thing that it
does is it permanently dedicates some of the surplus to
extending the solvency of the Social Security Trust Fund, as
you point out, by an additional 16 years or 50-year solvency.
If we don't do that, I am afraid that your comment about first
doing no harm won't happen.
There are many proposals in this Congress--in fact that
have passed this Congress--that do not just spend more money
for appropriation programs, but to do it in a way that is not
good accounting. We have developed more different accounting
gimmicks including calling things emergency spending that
aren't emergency spending, creating a 13th month, doing some
type of creative scorekeeping, all of which I don't think bodes
well for the Social Security system to get a fair shake out of
the surplus monies.
And then we have--we seem to conveniently have forgotten a
tax bill that is sitting out there that still has not been
brought, up by the way--the President has vetoed it, but for
some reason it has not been brought back to the House--that
would spend about $900 billion that obviously would compromise
our ability to deal with the Social Security Trust Fund.
So I guess I would start out by underscoring the urgency
for us to do something. I applaud the administration's effort
to at least put some of this money away permanently to deal
with the Social Security system as well as to pay down the
debt. If I felt that Congress wasn't going to spend the money
on either spending programs or tax programs, I wouldn't be
quite as concerned, but I think this session does not bode well
in that direction.
And then I want to mention one other thing. I agree with
you that we need to work in a bipartisan effort to go even
beyond the President's proposal so we can get to 75-year
solvency, and I also believe that we need to do more for
private savings and retirement. I support your USA proposal. I
think it was a good step towards private savings.
I also, as you know, am a cosponsor with Congressman
Portman on a bill to reform our pension laws. If I might make a
plea to you in that regard. I agree with you that our priority
must be to get people who are not currently putting money away
for their retirement to put money away for their retirement.
That is a prime goal of our--the Portman-Cardin--legislation,
but we also should adjust the caps so that those that do put
money away, at least those limits keep up with inflation. They
haven't. We are actually taking steps backward in that
direction. I think we can do both.
So I guess I would urge you as you look over what we can do
to improve private retirement in this Nation, how we can
improve retirement security, both Social Security and private
retirement, that we try to find a way to come together on this
retirement proposal. I think we can. I think we are very close.
I am not happy, by the way, that we are proceeding in
attaching it to bills that have no chance of becoming law. I do
think at the end of the day we should be working together to
improve retirement opportunities, both the Social Security and
the private retirement plans, and I would be glad to yield my
remaining time for your comment.
Secretary Summers. I think we agree on the importance of
strengthening the retirement security system, Congressman
Cardin, and certainly I think that if there could be an
agreement on the principle that legislation in this area should
devote a substantial majority of its resources to expanding
access to those who do not have pensions while perhaps making
some room for some adjustments of limits, if there could be an
agreement on that principle, I think that would be an agreement
with which we could work.
My understanding is that the legislative vehicles that have
been discussed have devoted the lion's share of their costs to
increasing the limits that apply to a small fraction of the
population.
Mr. Cardin. I am not sure that is true. We might want to
sit down and review that.
Secretary Summers. That would be useful for us all to look
at.
Mr. Shaw [presiding]. Mr. Johnson.
Mr. Johnson of Texas. Mr. Secretary, you know, you have
done an exemplary job on dodging the question on Social
Security's earning limit, and I would just like to refresh you.
Maybe you have forgotten what the President said. I know it has
been brought up, but his quote is from his State of the Union
address is, ``We should eliminate the limits on what seniors on
Social Security can earn.'' And I might refresh you on your own
testimony before this Committee on March 3 this year. You
stated personally, and I quote, ``We should also find room to
eliminate the earnings test, which is widely misunderstood,
difficult to administer, and perceived by many older citizens
as providing a significant disincentive to work. In addition,
it is critical that we not lose sight of the important role
that Social Security plays as an insurance program for widows
and children and for the disabled.'' end quote. You said that.
And you have said a couple of times this morning that this
legislation doesn't contain any repeal of the earnings limit;
instead, I would presume, it favors discriminating against
seniors who choose to work. I wonder if you can answer more
directly why you didn't include that.
Secretary Summers. This legislation coming at this point in
the year was an amendment to provide a foundation for
addressing Social Security, not an attempt to do everything
that was desirable. The President continues to be absolutely
committed to elimination of the earnings test and measures to
reduce poverty among elderly women. Those are desirable changes
in Social Security. Those are changes we support. Those are
changes we believe should be worked out as part of any overall
Social Security agreement.
Mr. Johnson of Texas. Well, I might tell you I believe that
Archer-Shaw does include that.
Let me ask you another question if I may. You talk about
debt reduction and interest reduction, and yet, according to
the numbers I see, the Social Security program is still going
to run a deficit of about $252 billion in 2030 and $516 billion
in 2070. How can we be paying down debt and still running
deficits without increasing debt?
Secretary Summers. Of course the President's proposal
addresses that in two ways. By augmenting the size of the trust
fund with the general revenue contribution, it provides for
more interest income and therefore reduces the deficit that
there otherwise would be, and it provides a larger stock of
assets that can be reduced, as is always true when you
accumulate a trust fund for a purpose, and then the moment of
purpose arises, the trust fund is depleted, is drawn down. That
is why that shows up as a deficit. So by augmenting the size of
the trust fund and its earning power, the President's proposal
makes it possible to handle what is the challenging situation
we face, a rising old-age population that will rise more
rapidly than the income growth among the younger earners,
thereby giving rise to the deficit.
Mr. Johnson of Texas. OK. Thank you very much, Mr.
Chairman. I yield back the balance of my time.
Mr. Shaw. Mr. Lewis.
Mr. Lewis of Georgia. Thank you, Mr. Secretary. Mr.
Secretary, you have been here a long time, and I think I am
bringing up maybe the end, I guess, Mr. Chairman, and so I want
to be very brief and agree with you in responding to two of my
colleagues from the other side of the aisle. We do need
additional police officers. We do need the 100,000 teachers. We
do need to save and apply private land for the public and the
common good. That is the role--one of the functions and the
role of our national government should be, but I know you are
here to talk about the President's proposal and Social
Security.
Let me just ask you, Mr. Secretary, is it true or am I
misreading something. Does the President's Social Security plan
set up a Medicare reserve fund?
Secretary Summers. Yes.
Mr. Lewis of Georgia. Could you explain it and tell us how
it will work?
Secretary Summers. The President's proposal establishes,
supported by various points of order and a sequester mechanism,
a framework for using the on-budget surpluses that are in our
fiscal future. One element of the use of those surpluses is the
dedication of approximately $300 billion over the next 10 years
to be preserved for use in the context of possible Medicare
reforms. The President recognizes that there is a great deal of
controversy about the future of the Medicare program. He has
proposed his own competitive model of reform, including also
pharmaceutical drug coverage. Others have different approaches
and the judgment here is not an attempt to prejudge that issue.
Rather, it reflects the judgment of the vast majority of
experts that whatever approach is pursued, there is likely to
be a need for some revenue augmentation and to assure that
those resources are available.
There is an understandable concern with committing those
resources before the reform takes place, and that is why all
the President's proposal does is to assure that those resources
are maintained and not depleted until such time as Medicare
reforms can be agreed. We hope that will be next year.
Mr. Lewis of Georgia. Does the Republican plan offer
anything similar for Medicare to the best of your knowledge?
Secretary Summers. Not to my knowledge.
Mr. Lewis of Georgia. How does the President's plan affect
minorities and women, low-income women and minority recipients
of Social Security?
Secretary Summers. The President has made clear his
commitment to measures to strengthen survivor benefits,
measures to assure the maintenance of the progressivity of the
Social Security system, and he has made clear that that is one
of his bedrock principles. And I am not in a position at this
point to compare different plans on that score, but I can tell
you absolutely that a bedrock principle for the President is
the maintenance of progressivity and addressing in particular
the needs of minorities and women.
Mr. Lewis of Georgia. To the best of your knowledge, can
you tell us whether any other plan offers additional benefits
for women and for minorities?
Secretary Summers. I am not familiar. Honestly, Mr. Lewis,
I am not familiar in detail with the provisions that are
contained in a number of the other proposals that are directed
at those concerns but I wouldn't want my lack of familiarity to
be taken as a judgment one way or the other with respect to
that issue.
Mr. Lewis of Georgia. Thank you very much, Mr. Secretary.
Thank you, Mr. Chairman.
Chairman Archer [presiding]. Thank you, Mr. Lewis.
Mr. Secretary, thank you for your patience and the time
that you have given to the Members of the Committee today. I
will say to you that I hope that I will be seeing you again
today, before the day is out, on the matter of other concern
before we conclude this Congress.
I had just a couple of follow-up comments and questions to
make on the Social Security program. Number one, I am pleased
to know that there is an opening on the part of the
administration for further negotiation as to how we harness the
returns from the private sector to help solve the Social
Security problem. There are only two ways to do it. One is to
have the government directly invest in the market and the other
is to find a way to create personal accounts for every working
American. And in the end we've got a bridge-sized gap if we
want to harness the returns in the private sector.
I am curious as to why you stopped in your salvation scheme
for Social Security in the year 2044; why you did not just
continue to infuse general Treasury monies thereafter.
Secretary Summers. Because of a--Mr. Chairman, one of the
principles I established which was we only wanted to infuse
general revenues to the extent that that infusion was justified
by savings that we had achieved through debt reduction, and we
wanted to assure that even with our infusions of general
revenues, that the on-budget surplus would continue to be in
surplus and those two constraints led to the path that we
described.
Our concern for the reasons that I thought were rather well
articulated on your side of the aisle here today would be with
an approach that either created an on-budget deficit or with an
approach that infused general revenue savings that were not
earned through the reduction of debt. That was obviously the
concern that I was also trying to raise with respect to the
proposal that you had put forward.
Chairman Archer. Well, if I understand your proposal,
though, your infusions of general Treasury funds are not tied
into the interest savings on any debt. There are arbitrary
amounts of money that do not directly relate to the interest
savings.
Secretary Summers. No, I think, Mr. Chairman, that the
proposal is based on the allocation of the savings and interest
that result from the accumulation of the Social Security
surplus and the resulting transfer of what had been a debt
obligation to the public to an internal debt obligation of the
government; and it is that which constrains the size that we
regard as appropriate of the general revenue transfers, along
with the additional constraint that we are desirous of avoiding
an on-budget deficit, a protected on-budget deficit at any
point in the future. We think those are important principles
that programs should strive to achieve.
Chairman Archer. But the actual dollar amounts that are
provided in your program on an annual basis do not tie into the
interest savings. That just happens to be a reality if you read
your proposal. They do not tie into the interest savings. They
are an arbitrary amount of money annually in order to reach
your desired goal.
Secretary Summers. Mr. Chairman, on the contrary, they are
calculated directly on the basis of the projected interest
savings, constrained by the projected interest savings, and the
imperative, as we saw it, of maintaining on-budget surplus. If,
as I suspect is implicit in your proposal, you are prepared to
commit general revenues beyond interest savings or to accept
projected on-budget deficits, then it is possible to achieve
longer expansions of solvency through greater contributions.
That was a step that we were reluctant to take.
Chairman Archer. I understand the premise that you are
building your scheme on, but the actuaries have evaluated your
plan and they say in their report, transfers are not contingent
on the actual amount of reduction in debt held by the public,
which means that the transfers are not contingent on the
interest savings.
Secretary Summers. I think in context, Mr. Chairman--and if
I am speaking inaccurately, I will correct the record--the
actuaries' statement is correct, as is mine. My statement was
that the interest savings were based--that the contributions
were based on the projected interest savings and I think that
is a correct statement. The actuaries' statement about
contingency referenced the fact that we are making the
commitment today based on today's projection, and there is
obviously uncertainty about what will happen in the future with
respect to the public debt. That is the basis of the actuaries'
statement.
Chairman Archer. That is well stated. But for your plan to
be fiscally responsible, as you said earlier, it should be that
the amount of money will be the amount of interest savings
rather than a specific amount that may not be the amount of
interest savings in reality. But rather than belaboring that,
because I think we have explored it and understand it now, let
me ask you why you delay until the year 2011 to make any
infusion of general Treasury funds into the Social Security
trust fund?
Secretary Summers. Because we are very focused on what is
the common objective this year, I think, of assuring the
maintenance of on-budget surpluses so that the Social Security
Trust Fund is neither raided nor double-counted. And therefore
we believe, given the imperative of setting aside resources for
Medicare as we see it, given the imperative of providing a
realistic discretionary spending path, that it is desirable to
delay making those transfers so that we don't find ourselves in
a situation where we are either--``raid'' is a pejorative
word----.
Chairman Archer. That was just a discretionary decision
based on what you have just mentioned. I was just curious as to
why that was.
Let me just say one thing finally and that is relative to
the President's scheme for Social Security, the savings in debt
reduction are already in the baseline. Your scheme will not
change that. Do you agree with that?
Secretary Summers. No.
Chairman Archer. The interest savings from debt reduction
as a result of the projected surplus are already in the
baseline because both CBO and OMB assume that all of this money
will be used to pay down the debt.
Secretary Summers. Mr. Chairman, in an arithmetic sense,
what you are saying is, of course, exactly correct. What we see
as one of the major virtues of the President's plan is that by
establishing a link between the idea of debt reduction and the
contributions to the trust fund, we make it more likely that
along with the other procedural protections that are included,
we make it more likely that the savings will in fact be
realized and the debt reduction will, in fact, materialize.
So it is the safeguards which are an integral part of a
proposal to transfer the benefits of debt reduction to the
trust fund that mean that our plan is making it much more
likely in our judgment that those projections will in fact
materialize rather than be used to finance large new
expenditure programs of an imprudent kind or large unfinanced
tax cuts that we feel would reduce the Nation's ability to meet
this obligation.
Chairman Archer. It is unfortunate we haven't had the
opportunity today to pursue some of those technical aspects of
your plan, but those so-called procedural safeguards are the
very same safeguards that have been criticized severely on the
Democrat side of this Committee relative to the Herger Social
Security protection plan. And if they could be criticized
there, they would likely be criticized here too.
I don't want to spend a lot of time on this but what I do
want to get into is the fact that irrespective of how you
present it, these savings are already in the baseline. The law
of the land provides for the spending caps and the spending is
therefore determined in advance and into the baseline, and all
of the interest savings from paying down the debt are already
in the baseline and your plan does not change those
projections. And I don't think there is any change in the
projections based on your procedural safeguards or all the
other things that you just mentioned. The projections are still
the same.
Now, you are therefore taking money out of the general
Treasury that is already going to be there irrespective of your
scheme and you are transferring it into the Social Security
Trust Fund. Now, that is a massive demarcation from the way
Social Security has always been structured. Massive. In fact,
Franklin Roosevelt would probably roll over in his grave to
hear this proposal. It destroys the direct connection between
the worker and their benefits that the payroll tax has
guaranteed them over the years. Our paths regularly, year after
year, oppose the simple infusion of general Treasury funds into
the trust fund, and this is a massive infusion of general
Treasury funds which temporarily keeps the program afloat; and
in doing so, it now relies on income taxes into the trust fund
for the first time and destroys the relationship to the payroll
tax.
So the taxes will be increased to take care of this on
Casey Hulshof, on my grandchildren who are older. They will be
obligated to pay more taxes in order to be able to infuse this
general Treasury money into the fund, but it will be income
taxes instead of payroll taxes. Now, that is the reality of
your program.
Now, all of the programs are going to require some infusion
of general Treasury money so we are not absent the same
criticism on any other program. But I would simply say that
before we start comparing programs, they should be compared on
a level playing field, which is, no program should be treated
the same unless it saves for 75 years and beyond the Social
Security program.
Now, I was on the 1982 Commission for Social Security
reform and I opposed--I wrote Minority views against that
proposal and I voted against them in 1983, and the reason I did
is I said it doesn't really save Social Security for 75 years
and beyond. But what it did is it saved it, projected by the
actuaries, for 75 years. But if you looked at the last few
years, you were on a glide path to disaster, and the minute you
got into the 76th and 77th year, you were over the cliff, and
that is why we have a problem today. And if we don't have an
ultimate plan that goes not just 75 years but extends beyond
that, within reason and believability, we will be right back in
the soup again.
God help us if we don't do it right this time. So the door
is open, Mr. Secretary, for us to try to get together, but it
needs to be 75 and beyond, not just 50 with a cliff. And I
think as a man of goodwill, which you are, and I believe myself
to be, I hope we can get together and figure out a way that we
can do this for the long term and be sure that our
grandchildren really have been accommodated.
And I thank you for listening to me and I thank you for
being here today.
Mr. Rangel. Mr. Chairman.
Chairman Archer. Mr. Rangel.
Mr. Rangel. Mr. Chairman, I just wanted to be a part of
this bipartisan dialogue. I didn't want it to conclude without
me indicating that it is very difficult for the administration
to be critical of your proposal because it is not in
legislative form, and God knows where it is going to end up.
Chairman Archer. If the gentleman will yield. The
administration is well aware of all the details of this
proposal. There is not anything that has been left to doubt. So
it is easy for us to have an exchange on it.
Mr. Rangel. There was a time when you were well aware of
the administration's proposal, but you insisted on them
proposing a bill--for reasons which I don't understand.
In any event, to get back to my original point, I think
what we want to do is to make certain that the administration
is on board with a Ways and Means proposal. I don't expect that
this President, or any other President, would just dictate to
this historic Committee what we are obligated to do to repair
Social Security.
The President has provided leadership and guidance in this
area, but I don't expect that they will be writing the bill
that we will sign on to as the conference report. So whatever
differences we have with their proposal, it would seem to me
that we might reconsider the bill that you and Mr. Shaw have,
to see whether or not we can get some Democrats on board after
conferring with the administration, and collectively, not by
just pointing fingers at each other, to see the areas of
agreement and how we could improve upon what we are doing.
In any event, to show my willingness to be bipartisan, I
want to support and encourage the President in working with the
Republican leadership to try to get us out of this budget
disaster that they have placed us in and to try to work out the
differences, rather than to have them close the government down
as they did before.
While the President and administration are working with
them, I hope you don't forget who took the President to the
dance, so that we all will leave here happier. Thank you for
your testimony and your patience.
Chairman Archer. Thank you again, Mr. Secretary. I am
looking forward to seeing you later today.
Secretary Summers. Thank you very much. I look forward to
working closely with all the Members of this Committee,
representing both sides of the aisle, on the challenges facing
us both in the near term as this session winds down, and over
the longer term with respect to the very important issues that
we have been discussing today. I am grateful to you and to
Ranking Member Rangel for the opportunity to testify before you
today.
Chairman Archer. Thank you, Mr. Secretary.
Our next witnesses will testify as a panel. The honorable
David Walker, Comptroller General of the GAO, and Dr. Dan
Crippen, the Director of the Congressional Budget Office.
Gentlemen, welcome.
Mr. Walker, would you lead off?
STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL OF THE
UNITED STATES, U.S. GENERAL ACCOUNTING OFFICE
Mr. Walker. Thank you, Mr. Chairman. It is a pleasure to be
here today to discuss the President's most recent proposal for
addressing Social Security and the use of the unified budget
surplus. I have a full statement that I would like to be
entered into the record, Mr. Chairman.
Chairman Archer. Without objection, your full statement
will be inserted in the record.
Mr. Walker. Thank you, Mr. Chairman. In testimony before
this Committee's Subcommittee on Social Security this past
spring, we at the GAO offered an analytic framework for
assessing Social Security reform proposals. That framework
consists of three basic criteria: first, the extent to which
the proposal achieves sustainable solvency and how the proposal
would affect the economy and the Federal budget; second, the
balance struck between the twin goals of income adequacy and
individual equity; and third, how readily such changes could be
implemented, administered, and explained to the public.
Mr. Chairman, as you requested, my testimony today will
discuss the President's current proposal for Social Security
financing in the context of this framework. Importantly, just
last week, we issued a report applying these same criteria to
several pending Social Security reform proposals, including the
President's Social Security financing proposal. I holding up a
copy of that now. I would seriously commend to you and to every
Member this report. I think it is ``must'' reading.
I might also note, Mr. Chairman, that we issued in May of
this year a primer on debt, which I think I would also commend
to the members in light of the budget surplus situation. Some
of the questions that came up today are answered in this
document. My remarks today about the President's proposal are
based primarily on our analysis of his proposal contained in
our report. We also analyzed the USA proposal in our report,
but I am not going to cover that in my summary testimony.
Before I get into our analysis of the President's proposal,
I think it is important to put things in a longer-term context.
It is important to look at the President's proposal in the
context of the fiscal situation in which we find ourselves.
After nearly 30 years of unified budget deficits, we look ahead
to projections of surpluses as far as the eye can see. At the
same time, we know that we face a demographic tidal wave that
poses significant challenges to the future of the Social
Security system, Medicare, and our economy as a whole.
In this context, we commend the President's use of a
longer-term framework for resource allocation than has normally
been customary in the Federal budgeting process and for
proposing that a significant portion of the projected budget
surplus be used for debt reduction.
We further note that the Congress is also concerned with
the future and has committed to save a significant portion of
the current surplus for debt reduction.
Although all projections are uncertain and they get more
uncertain the farther out that you go, we have long held that
from a long-term perspective, it is important to look beyond 5
years, 10 years, even in some cases beyond 50 years in
establishing fiscal policy and assuring solvency and
sustainability of entitlement programs.
Each generation is in part the custodian for the economy it
hands to the next. The Nation's long-term economic future
depends in part on today's budget decisions. This perspective
is particularly important because our long-term economic model
and that of the Congressional Budget Office continue to show
that absent a change in policy, the changing demographics to
which I referred above will lead to renewed deficits.
Unlike in prior years, demographic trends are now working
against us rather than for us. This longer-term fiscal
challenge provides the critical backdrop for making decisions
about today's unified surpluses. Stated differently, if we fail
to make prudent decisions about the disposition of the budget
surpluses or fail to engage in meaningful entitlement reform,
the Nation's fiscal future and the standard of living for
future generations of Americans will likely decline.
Now, with regard to the President's proposal. According to
administration officials, the President's proposal would
constitute a significant down payment on Social Security reform
while contributing to achieving the administration's goal of
eliminating publicly held debt by the year 2015. The proposal
would significantly reduce debt held by the public from current
levels by both the amount of Social Security surplus and a
portion of the on-budget surplus equivalent to the general fund
transfer. The proposal would not, however, reform the basic
Social Security program in any way. Rather, the
administration's proposal seeks to increase the likelihood that
projected unified surpluses would be preserved for Social
Security and debt reduction.
The President's current proposal for addressing Social
Security now embodied in legislative language differs in some
respects from his proposal in the July mid-season review
primarily in dropping the proposal to invest a portion of the
surpluses in equities. What remains is the proposal to provide
additional program financing by transferring general funds to
the OASDI trust funds. This transfer represents an unearned
grant of future general revenues to Social Security. Stated
differently, it represents an increase in funded benefit
commitments--and hence future general funds--as compared to
current law.
The Office of the Chief Actuary of the Social Security
Administration, which provides estimates on how proposals would
affect the OASDI trust funds based on the trustee's
assumptions, has stated that the President's transfer proposal
would extend the solvency of trust funds from 2034 to 2050. It
would not, however, restore the program's long-range, 75-year
actuarial balance. This has been the traditional long-range
test of solvency used by the Social Security trustees.
As you know, Mr. Chairman, I was a trustee for 5 years from
1990 to 1995.
Let me turn now to a few bottom-line comments about the
proposal. Our first criterion deals with financing sustainable
solvency. And here we evaluate whether or not it achieves
solvency over a 75-year projection period and beyond. The
bottom line is while the President is to be commended for the
amount of debt reduction he is proposing, and that clearly
would confer a number of economic benefits on the Nation as
well as help with the budgetary situation, the proposal does
not address the program's sustainability in any way. It
addresses solvency but it does not address sustainability.
We believe it is critical that both have to be addressed.
The system's cash flow still turns negative in 2014 and Social
Security becomes a draw on general fund revenues as it must
redeem the securities beginning in 2014 to pay that down. That
means you either have to increase taxes, reduce spending or
otherwise achieve some type of incremental rate of return on
invested funds through compounding in order to meet those
obligations.
Again, 2014 is a critical date, not just 2034, the date
that the trust fund assets run out, or 2050, or frankly even 75
years from now, because we need to assure the program's
sustainability over the long term. In this regard there is a
the risk that transfers in the President's proposal may induce
an unwarranted complacency about the financial health of the
Social Security program.
From a macroeconomic perspective, the critical question is
not how much in trust fund assets there are--or solvency--but
whether the government as a whole has the economic capacity to
finance benefits both now and in the future; namely,
sustainability. Nothing in the President's transfer proposal
changes these pictures. Social Security as a share of the
economy and a share of Federal revenues remains unchanged under
the President's proposal.
The administration acknowledges the need for further
reform, but it is critical that we engage in such further
reforms. The President's proposal does not make any changes in
current Social Security benefits and as a result would not have
any effect on adequacy. There would be a need to try to address
a potential expectation gap about whether or not there has been
meaningful reform here, which would have to be addressed. There
would not, however, be any implementation issues because it
does not change the system in any way.
So in summary, Mr. Chairman, I agree with Secretary Summers
that unified budget surpluses present us with an opportunity
but they also present us with an obligation. We have an
opportunity to use our unprecedented economic wealth and fiscal
good fortune to address today's needs but an obligation to do
so in a way that improves the prospects for future generations.
Restoring solvency to the Social Security system is a
formidable challenge, but we have an obligation to meet that
challenge before Social Security begins to squeeze out other
spending on other national priorities or places an unbearable
burden on future generations. And solvency alone is not enough.
The health of our economy and projected budget unified
surpluses offer a historic opportunity to meet these challenges
from a position of financial and economic strength. Such good
fortune can indeed help us to meet a historic responsibility, a
fiduciary obligation, if you will, to leave our Nation's future
generations a financially stable system and to retain our
commitment to the elderly.
The transfer of surplus resources to the OASDI trust funds,
which the administration argues is necessary to lock in
projected unified surpluses in the future, would constitute a
fundamental shift in the financing of the Social Security
program. Such an approach would have a significant beneficial
result of reducing debt held by the public. However, it would
not constitute real programmatic reform because it does not
modify the program's underlying commitments and cash flows in
any way.
Moreover, the proposed transfer, even though it would
extend the program's solvency, could create complacency or a
false sense of security about the program's long-term
sustainability. This could actually make it more difficult to
engage in substantive program reform needed to assure the
program's long-range sustainability.
There is increasing recognition that the time has come for
meaningful Social Security reform. No single proposal is likely
to be the answer. Therefore, it is important for the Congress
and the President to build on the dialogue engendered by these
proposals.
Further, in deliberating Social Security reform, it is
important to keep in mind Medicare. Medicare is in much worse
shape than Social Security. In addition, Medicare reform is
much more likely to need general revenue infusions to assure
the sustainability of that program. We cannot look at these
programs in a vacuum. Social Security reform is not easy, but
it is not impossible. I might add, Mr. Chairman, I think there
is much more in common between the President's proposal and
some of the ones that have been talked about, than has been
focused on today. There is a lot of common ground when you look
at substance rather than form.
Further, meaningful reform in a timely fashion can enable
us to exceed the expectations of all generations of Americans.
Mr. Chairman, I have been in town hall meetings with the
President, the Vice President, Senators and House Members, of
both parties, and all over the country. I am absolutely
convinced that we can effectuate Social Security reform that
will exceed the expectations of all generations of Americans.
We need to get on with real reform before the demographic tidal
wave hits and while our economic and budget sun is shining. We
must deliver on the promise to save Social Security.
Thank you, Mr. Chairman. We at GAO stand ready to help the
Congress in a professional, objective, nonpartisan and
nonideological way to address this formidable challenge.
Chairman Archer. Thank you, Dr. Walker.
[The prepared statement follows:]
[An attachment is being retained in the Committee files.]
Statement of the Hon. David M. Walker, Comptroller General of the
United States, U.S. General Accounting Office
Mr. Chairman and Members of the Committee:
It is a pleasure to be here today to discuss the
President's most recent proposal for addressing Social Security
and use of the unified budget surplus. This proposal concerns
one of the most important issues facing the nation, both now
and over the longer term. Social Security forms the foundation
for our retirement income system and, in so doing, provides
benefits that are critical to the well-being of millions of
Americans. Current unified budget surpluses provide a valuable
opportunity to improve the nation's capacity to address the
looming fiscal challenges arising from the retirement of the
baby boom generation and transition to a more sustainable
Social Security program. As you know, Mr. Chairman, a wide
array of proposals have been put forth to restore Social
Security's solvency, and the Congress will need to determine
which proposals or elements thereof best reflect our country's
goals for this retirement income program.
In testimony before this Committee's Subcommittee on Social
Security this past spring,\1\ we offered an analytic framework
for assessing reform proposals. That framework consists of
three basic criteria:
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\1\ Social Security: Criteria for Evaluating Social Security Reform
Proposals (GAO/T-HEHS-99-94, March 25, 1999).
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the extent to which the proposal achieves
sustainable solvency and how the proposal would affect the
economy and the federal budget;
the balance struck between the twin goals of
income adequacy (level and certainty of benefits) and
individual equity (rates of return on individual
contributions); and
how readily such changes could be implemented,
administered, and explained to the public.
Mr. Chairman, as you requested, my testimony today will
discuss the President's current proposal for Social Security
financing in the context of this framework. Importantly, last
week we issued a report applying these same criteria to several
pending Social Security reform proposals, including the
President's Social Security financing proposal.\2\ My remarks
today about the President's proposal are based primarily on our
analysis in that report. Our report also analyzes the
President's Universal Savings Account (USA) proposal for
individual savings accounts, and I will also touch briefly on
this proposal. While I understand that the subject of this
hearing is the President's most recent proposal, I would be
happy to answer questions on any of the proposals included in
our report.
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\2\ Social Security: Evaluating Reform Proposals (GAO/AIMD/HEHS-00-
29, November 4, 1999). In addition to analyzing the President's
transfer proposal, this report also presents an analysis of the
President's proposal for Universal Savings Accounts (USA) accounts. The
Administration considers the USA proposal, which would establish
individual retirement savings accounts, separate from its Social
Security proposal. Besides the President's, the proposals we considered
are: (1) the Social Security Guarantee Act outlined by Ways and Means
Committee Chairman Bill Archer and Social Security Subcommittee
Chairman Clay Shaw; (2) H.R. 1793, The 21st Century Retirement Security
Act, (3) the Senate Bipartisan bill, S. 1383, announced by Senators
Judd Gregg, Bob Kerrey, John Breaux, and Chuck Grassley, and (4) the
Social Security plan outlined by House Budget Committee Chairman John
Kasich.
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Context: Long-Term Outlook is Important
It is important to look at the President's proposal in the
context of the fiscal situation in which we find ourselves.
After nearly 30 years of unified budget deficits, we look ahead
to projections for ``surpluses as far as the eye can see.'' At
the same time, we know that we face a demographic tidal wave in
the future that poses significant challenges for the Social
Security system, Medicare, and our economy as a whole. In this
context, we commend the President's use of a longer-term
framework for resource allocation than has been customary in
federal budgeting. We would further note that the Congress is
also concerned with the future and has committed to save a
significant portion of the current surplus for debt reduction.
Although all projections are uncertain--and they get more
uncertain the farther out they go--we have long held that a
long-term perspective is important in formulating fiscal policy
for the nation. Each generation is in part the custodian for
the economy it hands the next and the nation's long-term
economic future depends in large part on today's budget
decisions. This perspective is particularly important because
our long-term economic model and that of the Congressional
Budget Office (CBO) continue to show that, absent a change in
policy, the changing demographics to which I referred above
will lead to renewed deficits. Unlike in prior periods when we
entered a period of surpluses after years of deficits,
demographic trends are now working against us rather than for
us. This longer-term fiscal challenge provides the critical
backdrop for making decisions about today's unified surpluses.
Budget surpluses are the result of a good economy and
difficult policy decisions. They also provide a unique
opportunity to put our nation on a more sustainable path for
the long term, both for fiscal policy and the Social Security
program itself. Current decisions can help in several important
respects: (1) current fiscal policy decisions can help expand
the future capacity of our economy by increasing national
savings and investment, (2) engaging in substantive reforms of
retirement and health programs can reduce future claims or
better permit their financing, (3) by acting now, we have the
opportunity of phasing in changes to Social Security and health
programs over a sufficient period of time to enable our
citizens to adjust, and (4) failure to achieve needed reforms
in the Social Security and Medicare programs will drive future
spending to unsustainable levels and eventually ``squeeze out''
most or all discretionary spending. If we let the achievement
of the current unified budget surplus lull us into complacency
about the budget, then in the middle of the 21st century, the
nation could face daunting demographic challenges without
having built the economic capacity or program/policy reforms to
handle them. Stated differently, if we fail to make prudent
decisions about the disposition of budget surpluses or fail to
engage in meaningful entitlement reform, the nation's fiscal
future and the standard of living for future generations of
Americans will likely decline.
The President's Social Security Proposal
According to Administration officials, the President's proposal
would constitute a ``significant down payment'' on Social Security
reform while contributing to achieving the Administration's goal of
eliminating publicly held debt by 2015. The proposal would reduce debt
held by the public from current levels by both the amount of the Social
Security surplus and a portion of the on-budget surplus equivalent to
the general fund transfer. The proposal would not, however, reform the
basic Social Security program in any way. Rather, the Administration's
proposal seeks to increase the likelihood that projected unified
surpluses would be preserved for Social Security and debt reduction.
Officials have also explained that the Administration remains committed
to long-term Social Security reform that would extend the solvency of
the Old Age and Survivors Insurance and Disability Insurance (OASDI)
trust funds at least through 2075. The Administration has expressed a
desire to work on a bipartisan basis to enact both its current proposal
and long-term Social Security reform.
The President's current proposal for addressing Social Security,
now embodied in legislative language contained in S. 1831 and H.R.
3165,\3\ differs in some respects from the proposal put forth in his
July 1999 Midsession Review. One important difference concerns the
President's previous intention to increase future revenues to the OASDI
trust funds by investing a portion in equities. This part of the
proposal has now been dropped.
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\3\ Those bills contain other provisions in addition to the
transfer of general funds to Social Security. These provisions extend
the discretionary caps through 2014, clarify and extend through 2014
the pay-as-you-go requirement for direct spending and receipts, and set
aside as a Medicare surplus reserve one-third of any on-budget surplus
for fiscal years 2000 through 2009.
---------------------------------------------------------------------------
What remains is the proposal to provide additional program
financing by transferring general funds to the OASDI trust funds. It is
this transfer proposal that we analyzed in our recent report and that I
will discuss in this testimony. As in the Midsession Review, the
President proposes to use the entire Social Security surplus and a
portion of the projected on-budget surplus to reduce debt held by the
public. The President projects that his proposal would reduce debt held
by the public by $3.6 trillion over the next 15 years, eliminating
publicly held debt by 2015. Beginning in 2011, the President proposes
to transfer additional Treasury securities to the OASDI trust funds in
an amount equal to the ``fiscal dividend''--i.e., interest savings that
result from lower publicly held debt. In effect, the President proposes
to reduce publicly held debt by increasing government-held debt. Unlike
the Midsession, the transfers are not open-ended but end at 2044. The
Office of the Chief Actuary at the Social Security Administration
(SSA), which provides estimates of how proposals would affect the OASDI
trust funds based on the Trustees' intermediate assumptions, has stated
that the President's transfer proposal would extend the solvency of the
trust funds from 2034 to 2050. It would not, however, restore the
program's long-range (75-year) actuarial balance. This has been the
traditional long-range test of solvency used by the Social Security
Trustees.
Let me turn now to our analysis of the President's proposal based
on the three criteria we have developed--financing sustainable
solvency, balancing individual equity and income adequacy, and how
readily changes could be implemented, administered, and explained to
the public. I would like to note at the outset that these criteria
represent certain trade-offs that policymakers will need to weigh in
considering changes. It is virtually impossible for any proposal to
rate perfectly on all criteria. As I have said in earlier testimony, it
is critically important to evaluate the effects of an entire package
before considering whether these proposed changes add up to acceptable
program reform. If a comprehensive package of reforms meets
policymakers' most important goals for Social Security, individual
elements of the package may be more acceptable. In addition interactive
effects may tend to smooth the rough edges of individual elements.
Financing Sustainable Solvency
Our first criterion evaluates the extent to which the
proposal achieves sustainable solvency over the 75-year
projection period and more broadly, how the proposal would
affect the economy and the federal budget. While the
President's current proposal for Social Security financing
differs in some respects from his earlier proposals--for
example, the President no longer proposes to invest a portion
of the OASDI trust funds in equities--in other respects, the
bottom line of the proposal with respect to sustainable
solvency is unchanged. The Administration acknowledges that its
proposal is not a comprehensive reform package, describing it
as a first step.
In summary, the proposal:
Reduces debt held by the public from current
levels, which reduces net interest costs, and raises national
saving, thereby contributing to future economic growth.
Provides general revenues to the OASDI trust
funds in the future, thereby representing a fundamental change
in Social Security financing.
Has no effect on the projected cash flow
imbalance in the Social Security program's taxes and benefits,
which begins in 2014.
As a result, the President's proposal represents
a financing, rather than a Social Security reform proposal.
In our recent report, we used our long-term economic model
to help us assess the potential fiscal and economic impacts of
Social Security reform proposals. In analyzing the President's
transfer proposal in our report and in this testimony, we
considered its budgetary and economic effects in isolation from
all other Administration proposals, including those in his
Midsession update and also the non-Social Security related
provisions of S. 1831 and H.R. 3165. This treatment is
consistent with our analyses of the other proposals discussed
in our report.
We compared these proposals, including the
President's transfer proposal, to three alternative fiscal
policy paths developed in our ongoing model work. Implicitly
all paths assume that Social Security and Medicare benefits are
paid even when the trust funds no longer hold sufficient assets
to cover benefits.\4\
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\4\ The Social Security Act specifies that Social Security benefits
may be paid ``only'' from the trust funds. As a result, absent a change
in law, benefits would not be paid at the point when assets were
insufficient to cover those benefits.
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A ``No Action'' path that assumes no changes in
current policies and thus results in saving the unified
surpluses. This path, which I have sometimes called ``Save the
Unified Surplus,'' assumes that actual discretionary spending--
including for emergencies--remains within the existing
discretionary caps.
An ``Eliminate non-Social Security surpluses''
path that assumes that permanent unspecified policy actions
(i.e., spending increases and/or tax cuts) are taken that
eliminate projected on-budget surpluses through 2009.
A ``Long-term on-budget balance'' path that
assumes that projected on-budget surpluses are eliminated
through 2009. Thereafter, the on-budget portion of the unified
budget is kept in balance for the rest of the simulation period
by actions that cut spending and/or raise revenue.
Since 1992 we have provided the Congress with a long-term
perspective by modeling the implications of differing fiscal
policy paths for the nation's economy. We offer these
simulation results not as precise forecasts but rather as
illustrations of the relative fiscal and economic outcomes
associated with alternative policy paths. That is, our long-
term simulations provide a useful way to compare the potential
outcomes of alternative policies within a common economic
framework. Our model reflects the key interaction between the
budget and the economy--the effect of the unified federal
deficit/surplus on the amount of national saving available for
investment, which influences long-term economic growth.
Our analysis shows that the President's Social Security
transfer proposal has the same effect on the economy and the
federal budget as a policy of ``No Action'' that would simply
continue spending and revenue along its current path while
making no change in Social Security or Medicare benefit
payments. In effect, the President's Social Security transfer
proposal does not address sustainable solvency. While it
extends the solvency of the OASDI trust funds by 16 years to
2050, it does this without substantive reform of the program.
Stated differently, the President's proposal does not directly
address the sustainability issue. The Administration
acknowledges this saying that it is a down payment that we can
make on Social Security reform this year.
The following two figures compare the three fiscal policy
paths--No Action, Eliminate on-budget surpluses, and Long-term
on-budget balance--to the President's transfer proposal,
showing the impact of each on the unified surplus/deficit and
debt held by the public. In modeling the President's transfer
proposal, we maintained all of the No Action assumptions about
compliance with existing discretionary caps and no changes in
current policy. Thus, the only difference between simulations
of No Action and the President's transfer proposal are the
explicit general fund transfers to Social Security.
As a result, the graphs show three lines--not four--because
the President's proposal, from an overall fiscal perspective,
is identical in its effect with a policy of ``No Action.'' This
is because, in essence, the proposal transfers funds from one
part of the budget (the on-budget, or non-Social Security
portion) to another (the off-budget, or OASDI trust funds). On
a unified basis, the transfers net out. Although they increase
debt held by the trust funds, they have no effect on the
unified fiscal position and no effect on levels of debt held by
the public compared to No Action. The Administration has
stated, however, that its proposal would reinforce the resolve
to stay, in effect, on a No Action course by linking debt
reduction to the transfer of new resources to Social Security.
[GRAPHIC] [TIFF OMITTED] T5744.001
According to Administration statements, the President's
proposal seeks to provide a mechanism to increase the
likelihood that projected unified surpluses would be preserved
for Social Security and debt reduction. No Action assumes that
the entire unified surplus would be used for debt reduction.
Although this reflects current law, the current debate suggests
it is increasingly unlikely that the on-budget surplus will be
used for debt reduction. The President's transfer proposal
would reserve the Social Security surplus and a portion of the
projected on-budget surplus for debt reduction, articulating in
law what has been generally agreed by both the President and
the Congress in principle. Such debt reduction would confer
significant short-and long-term benefits to the budget and the
economy.
Our work on the long-term budget outlook has illustrated
the benefits of maintaining surpluses for debt reduction.
Interest on publicly held debt today represents the third
largest program in the federal budget, representing about 15
percent of federal spending. Reducing the publicly held debt
reduces these costs, freeing up budgetary resources for other
programmatic priorities. For the economy, running unified
surpluses and reducing debt increases national saving and frees
up resources for private investment. As shown in figures 1 and
2, compared to spending the on-budget surpluses under
``Eliminate non-Social Security surpluses,'' the President's
transfer proposal would result in higher unified surpluses,
lower unified deficits, and lower debt held by the public.
Our long-term simulations have consistently shown that any
path saving all or a major share of projected unified budget
surpluses ultimately leads to a stronger fiscal position and a
stronger economy. GDP per capita would more than double from
present levels by saving most or all of projected unified
surpluses, while incomes would actually fall in the long term
if we fail to sustain any of the unified surplus. Although
rising income is always important, it is especially critical
for the 21st century, for it can increase the economic capacity
of a slowly growing workforce to maintain a good standard of
living as well as to finance future government programs and the
commitments for the baby boomers' retirement.
While reducing debt held by the public appears to be a
centerpiece of the proposal--and has significant benefits--the
general fund transfer is a separate issue. The transfer is not
technically necessary: whenever revenue exceeds outlays and the
cash needs of the Treasury--whenever there is an actual unified
surplus--debt held by the public falls. The President's
proposal appears to be premised on the belief that the only way
to sustain unified surpluses is to tie them to Social Security.
He has merged two separate questions: (1) how much of the
unified surplus should be devoted to reducing debt held by the
public; and (2) how should the nation finance the Social
Security program in the future.
While providing the OASDI trust funds with additional
Treasury securities equal to the projected ``fiscal dividend''
from debt reduction may be intended to help preserve projected
unified surpluses, we have several concerns about this aspect
of the President's proposal. The trust funds already earn
interest on their surpluses. Under the President's current
proposal the trust funds will receive, in effect, a second
interest payment equal to interest savings that result from
paying down publicly held debt. This is simply a grant of
future general revenues to Social Security--which brings me to
my second concern. As the SSA Deputy Chief Actuary has stated,
while the transfers are intended to be roughly equal to the
expected reduction in interest on debt held by the public as a
result of the Social Security surpluses in fiscal years through
2000 through 2015, the transfers are not contingent on the
actual amount of debt reduction. In other words, under the
President's current proposal, the transfers would occur whether
or not debt reduction actually takes place and the interest
saving is realized.
We are also concerned about the implications of the general
fund transfer for Social Security financing. As in the earlier
proposals, the President's current proposal in effect trades
debt held by the public for debt held by the trust funds. It
thereby commits future general revenues to the Social Security
program. This is true because the transfers would be in
addition to any buildup of payroll tax surpluses. Securities
held by the OASDI trust funds have always represented annual
cash flows in excess of benefits and expenses, plus
interest.\5\ Under the President's proposal, this would no
longer continue to be true. The value of the securities held by
the trust funds would be greater than the amount by which
annual revenues plus interest exceed annual benefits and
expenditures.
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\5\ Cash flow into the Social Security trust funds is composed of
payroll taxes and a portion of the income taxes paid on Social Security
benefits. Income taxes make up a relatively small component of the
surplus. Interest paid to Social Security is analogous to interest paid
on publicly held debt in that both come from the general fund. Interest
on publicly held debt is recorded as an outlay. Interest to the trust
funds is credited in the form of additional Treasury securities.
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This means that for the first time there would be an
explicit general fund subsidy. All of the proposals we analyzed
in our report make some use of general funds and, as I have
said before, there are legitimate arguments on both sides of
the question of bringing some general fund financing to Social
Security--but the issue should be debated openly and on its
merits.
An explicit general fund subsidy would be a major change in
the underlying theoretical design of the Social Security
program. Whether you believe it is a major change in reality
depends on what you assume about the likely future use of
general revenues to meet expected shortfalls in program
financing. For example, current projections are that in 2034
the OASDI trust funds will lack sufficient resources to pay the
full promised benefits. The Social Security Act specifies that
Social Security benefits may only be paid from the trust funds.
If you believe that the expected shortfall would--when the time
came--be addressed by legislation that would authorize the use
of general funds to pay Social Security benefits, then the
shift embedded in the President's proposal merely makes that
explicit. If, however, you believe that there would be changes
in the benefit or tax structure of the fund instead, then the
President's proposal represents a very big change. By
increasing the securities in the trust funds, the President's
transfer gives the Social Security program an explicit claim on
future general fund revenues. In either case, the question of
bringing significant general revenues into the financing of
Social Security is a question that deserves full and open
debate.
While the President is to be commended for the amount of
debt reduction he is proposing, we remain concerned about the
consequences for trust fund financing and Social Security
program reform. It is fair to note that nothing in his proposal
changes the fundamental structural imbalance in Social
Security. The system's cash flow still turns negative in 2014
and Social Security becomes a draw on the general fund as it
redeems its Treasury securities to pay promised benefits. When
unified deficits re-emerge, however, baby boomers will still be
retiring with long expected lifespans in retirement. If the
President's proposal to transfer interest savings to the OASDI
trust funds is adopted, their solvency on paper is extended,
but the structural imbalance will remain. The new Treasury
securities will be redeemed and constitute a new claim on the
general fund until they run out in 2050. Cash to redeem these
securities can only come from some combination of cuts in other
spending, increases in taxes, or increases in borrowing from
the public. Absent substantive program reform, our children and
grandchildren will be saddled with a budget heavily burdened by
commitments to fund entitlement programs for the elderly. (See
figures 3 and 4.)
The risk is that the transfers in the President's proposal
would induce an unwarranted complacency about the financial
health of the Social Security program. From a macro
perspective, the critical question is not how much a trust fund
has in assets--or solvency--but whether the government as a
whole has the economic capacity to finance benefits now and in
the future--namely sustainability. This is illustrated in
figures 3 and 4. These figures show the composition of federal
spending as a percent of gross domestic product (GDP) and
Social Security spending as a percent of federal revenue over
the 75-year simulation period under the No Action path. Nothing
in the President's transfer proposal changes these pictures.
Social Security as a share of the economy and as a share of
federal revenue remains unchanged under the President's
proposal. The Administration acknowledges the need for further
reform, but we are concerned that the proposed transfers will
reduce the perceived need to do so until well into the next
century.
[GRAPHIC] [TIFF OMITTED] T5744.002
Balancing Adequacy and Equity in the Benefit Structure
This criterion evaluates the balance struck between the
twin goals of income adequacy and individual equity. Income
adequacy refers to the level and certainty of benefits provided
to retirees, the disabled, dependents and survivors. It is
particularly important for low-income workers who are most
reliant on the program, and may be achieved, in part, through a
progressive benefit formula. Individual equity refers to rates
of return on individual contributions. That is, it concerns the
relationship between the benefits individuals receive and the
contributions they have made to the Social Security system.
Individual equity also implies greater choice and control for
workers over their contributions to the system. It applies not
only to equity within a generation, but across generations as
well.
The current Social Security system makes certain tradeoffs
between the degree of income adequacy and individual equity
provided by its benefit structure. Redistributive transfers
embedded in the current system create an implicit ``safety
net'' for workers and their families.\6\ At the same time,
linking benefits to contributions invokes the standard of
individual equity.
---------------------------------------------------------------------------
\6\ While there is no minimum benefit guarantee in the current
Social Security program, the earnings-related structure of the program
ensures that all eligible workers receive a benefit.
---------------------------------------------------------------------------
Because the President proposes no changes to the structure
of the current Social Security system, his proposal does not
affect income adequacy. It retains the existing safety net and
the linkage between contributions and benefits. Specifically,
the President's proposal maintains current-law benefits for
current and future retirees, including low-income workers and
others most reliant on Social Security, and makes no changes to
disabled, dependent, or survivor benefits. The proposal also
makes no changes from the current Social Security structure in
the way workers are covered, and it preserves the progressivity
of the system. Additionally, it retains the compulsory nature
of the current payroll tax.
To the degree that the President's transfer proposal uses
general revenue to fund the Social Security program it will
have an impact on future contributions and benefits and
therefore intergenerational equity may be adversely affected.
Other proposals address the intergenerational equity issue by
introducing individual accounts as an advance funding
mechanism. These accounts may lead to increased retirement
income for future retirees, thereby reducing their reliance on
the Social Security program, and relieving the burden on future
generations.\7\ However, the way these proposals would handle
the current long-term financing shortfall and the costs of
making a transition to a new system could have negative effects
on intergenerational equity.
---------------------------------------------------------------------------
\7\ See Social Security: Evaluating Reform Proposals (GAO/AIMD/
HEHS-00-29, November 4, 1999).
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Implementing and Administering Reforms
This criterion evaluates how readily proposed changes could
be implemented, administered, and explained to the public.
Implementation and administration issues are important because
they have the potential to delay--if not derail--reform if they
are not considered early enough for planning purposes.
Moreover, such issues can influence policy choices--feasibility
and cost should be integral factors in the ultimate decisions
regarding the Social Security program. In addition, potential
transparency and public education needs associated with various
proposals should be considered. Reforms that are not well
understood could face difficulties in achieving broad public
acceptance and support.
Because the President's transfer proposal does not alter
the current Social Security program in any way, there are no
implementation costs, and the program's current administrative
costs will remain less than 1 percent of benefit outlays.
Without programmatic change, there are no changes that must be
explained to the public and no risk of an ``expectations gap''
with respect to benefits. It is important to note, however,
that the mechanics of the proposed transfer of general funds to
the OASDI trust funds are complex and difficult to follow.
Public understanding of the financing of Social Security is
necessary in order to retain broad-based support for, and
confidence in, the program. In particular, it will be important
for the public to understand that this transfer proposal is
only one part of the solution to the OASDI trust funds' long-
term solvency problem. For that reason, public education would
still be necessary in order to avoid either unwarranted
complacency or skepticism about the financial health of the
program.
The USA Proposal
Let me turn, for a moment, to the President's other
relevant proposal. Although the President considers his
proposal for USAs \8\ to be separate from Social Security,
these accounts are aimed at increasing the ability of Americans
to fund their own retirement. The President has proposed that a
USA be established for each worker with family earnings of at
least $5,000 annually. Low-and moderate-income workers would
receive a flat annual general tax credit of up to $300 and a
50-100 percent government match on voluntary contributions,
also financed by income tax credits. Total contributions could
not exceed $1,000 annually, including the match. Low-income
workers would get a one-to-one match to their contributions,
while higher income workers would receive a lower percentage
match or none at all. Both the credit and the match would
ensure that most people would have some savings for retirement.
---------------------------------------------------------------------------
\8\ The proposal was described in administration statements made on
April 14, 1999.
---------------------------------------------------------------------------
Because the administration has yet to fully develop the USA
proposal, our assessment of it against our criteria is
necessarily limited. With regard to the sustainable solvency
criterion, the tax credit would increase private saving and
reduce government saving with no net effect on national saving.
The incentive provided by the government match of voluntary
contributions to USAs could result in some increase in national
saving. However, there is no expert consensus on the effect the
USA proposal or any of the proposals that establish individual
accounts would have on the saving behavior of individuals. The
tax credit financing of USA accounts would either decrease
projected unified surpluses or increase projected unified
deficits.
As a savings vehicle independent of the Social Security
program, the USA proposal addresses the concepts of adequacy
and equity differently. Progressivity is built into the USA
structure through the government match, which provides a higher
match for lower income workers and eliminates the match
altogether for higher income workers. With USAs, workers could
earn market returns but would bear the risk of market losses as
well. In terms of individual choice and control over the
accounts, workers could expect to have some investment choice,
subject to certain limitations. Intergenerational equity is
promoted by USAs to the extent that current workers save for
their own retirement.
Costs associated with implementation and administration
necessarily depend on the design of the program, which has not
yet been detailed. However, some administrative costs would be
expected, at least in starting the program and in educating the
public on how it works. As the specifics of the program are
developed, a public education program will be especially
important to explain the USA structure as well as its
significant elements, such as the matching funds provided by
the government to low-income workers. For example, individuals
would need information on basic investment principles, the
risks associated with available choices, and the effect of
choosing among alternatives that may be offered for annuitizing
the accounts. Like any of the other individual account
proposals, the USA proposal would need to be assessed on how it
addresses the preservation of account balances for retirement
purposes. We understand the President's USA proposal would not
permit workers to make withdrawals from their individual
accounts prior to retirement, thus seeking to ensure that funds
will be available in retirement.
Other program details will need to be evaluated when the
proposal is fully developed, such as the amount of individual
choice to be permitted in making investment decisions. The
existing description of the USA proposal does not specify what
safeguards, if any, would be put in place to prevent
politically motivated investing.
Conclusions
Unified budget surpluses represent both an opportunity and
an obligation. We have an opportunity to use our unprecedented
economic wealth and fiscal good fortune to address today's
needs but an obligation to do so in a way that improves the
prospects for future generations. This generation has a
stewardship responsibility to future generations to reduce the
debt burden they inherit, to provide a strong foundation for
future economic growth, and to ensure that future commitments
are both adequate and affordable. Prudence requires making the
tough choices today while the economy is healthy and the
workforce is relatively large--before we are hit by the baby
boom's demographic tidal wave.
Restoring solvency to the Social Security system is a
formidable challenge. But we have an obligation to meet that
challenge before Social Security begins to squeeze out spending
on other national priorities and places an unbearable burden on
future generations. The health of our economy and projected
budget unified surpluses offer an historic opportunity to meet
these challenges from a position of financial and economic
strength. Such good fortune can indeed help us meet our
historic responsibility--a fiduciary obligation, if you will--
to leave our nation's future generations a financially stable
system and retain our commitment to the elderly.
The transfer of surplus resources to the OASDI trust funds,
which the administration argues is necessary to lock in
projected unified surpluses for the future, would constitute a
shift in financing for the Social Security program. Such an
approach would have the significant beneficial result of
reducing debt held by the public. However, it would not
constitute real programmatic reform because it does not modify
the program's underlying commitments for the future. Moreover,
the proposed transfer, by extending the solvency of the trust
funds, could create complacency about the program's financing;
this could make it more difficult to engage in the substantive
program reform needed to reduce the unsustainable burden on the
future economy.
The framework we have put forward is intended to help
clarify the debate on various proposals in order to support the
Congress in addressing this important national issue. The use
of our criteria to evaluate all of the various reform proposals
highlights the trade-offs that exist between efforts to achieve
solvency for the OASDI trust funds and to maintain adequate
retirement income for current and future beneficiaries. If
comprehensive proposals are evaluated as to (1) their
financing, fiscal, and economic effects, (2) their effects on
individuals, and (3) their feasibility, we will have a good
foundation for devising an overall reform package that will
meet the most important objectives.
There is increasing recognition that the time has come for
meaningful Social Security reform. No single existing proposal
is likely to be the answer. Therefore it is important for
Congress and the President to build on the dialogue engendered
by these proposals. Further, in deliberating Social Security
reform, it is important to keep Medicare in mind. Medicare
insolvency looms sooner--and Medicare reform presents an even
more formidable challenge than does Social Security reform.
Social Security reform is not easy--but it is not impossible.
Further, meaningful reform in a timely fashion can enable us to
exceed the expectations of all generations.
We at GAO stand ready to help you address both Social
Security reform and other critical national challenges. Working
together, we can make a positive and lasting difference for our
nation and the American people.
Mr. Chairman, this concludes my remarks. I would be happy
to answer any questions you or other Members of the Committee
may have.
Chairman Archer. Dr. Crippen, you may proceed.
STATEMENT OF DAN L. CRIPPEN, PH.D., DIRECTOR, CONGRESSIONAL
BUDGET OFFICE
Mr. Crippen. Thank you.
Chairman Archer. Without objection, your entire written
statement will be inserted in the record.
Mr. Crippen. Thank you. At the risk of starting a swearing
contest, let me stipulate that I care a lot about Casey
Hulshof. Make sure we all understand, Mr. Chairman, that this
morning's discussion, not unlike many others in Social
Security, has really been a mixture of economics, policy,
polemics--kind of glued together with differing objectives,
assumptions, and numbers.
What I am going to try to do in looking at the President's
proposal is also return to some of the basic economics that we
need to be mindful of as we talk about reforming Social
Security as well as trust fund accounting and what it does or
does not do.
The President's most recent Social Security proposal
extends the apparent solvency of the Social Security Trust Fund
by adding general funds. The proposal does not include any
changes in the program's tax or benefit provisions. It
maintains the earlier mechanism of transfers to trust funds as
a means to pay down debt.
The proposal suggests further changes in congressional
rules but imposes no additional requirements on the executive
branch such as the submission of a budget with on-budget
balance. Critically, it includes no enforcement mechanisms such
as sequestration or debt limits, as the Chairman suggested
earlier this morning. Indeed, the amount of the transfer is
arbitrary and not even conditioned on achieving surpluses
either in the on-budget portion or in the total budget. The
Congressional Budget Office (CBO) concludes, therefore, that
the proposal does not address the challenges posed by the
impending retirement of baby boomers. Between 2010 and 2030,
the number of retirees will increase by 80 percent. At the same
time, the work force will grow by only 2 percent. As a result,
there will be only two workers to support each retiree.
The best way to view the economic implications of this
change is to analyze the fraction of the economy dedicated to
Federal programs that benefit retirees. Figure 2 in my prepared
statment, Mr. Chairman, illustrates the actuaries projections
of costs of the Social Security and Medicare programs as a
percentage of gross domestic product (GDP) over the next few
decades. Spending for those programs is expected to rise from 7
percent of GDP in 1998 to almost 12 percent in 2030.
The concept embedded in this chart is important because
ultimately it is not the form of financial transfer--a public
or private pension, equities, or government debt--that matters.
What is important is the amount of real resources, food,
clothes, cars, and housing that those financial assets
provide--real resources that will be consumed by the retired
population. What matters is whether the economy will have
expanded enough to meet the needs of retirees as well as the
needs of the working population.
Obviously it is possible to change the outlook shown in
this chart by making the numerator (the program benefits)
smaller or the denominator (the size of the economy) larger.
Social Security reform can affect the size of the numerator,
the size of the denominator, or both. One test you might want
to impose on any proposal to determine whether it is real
reform is to see whether it changes either of those numbers.
Indeed, we suspect the President's proposal does not.
Many of the current proposals for reform, including the
President's, do not include fundamental reductions in Social
Security or Medicare benefits. Therefore, the numerator will
stay the same. The President, in transmitting his latest plan
to the Congress, stressed the importance of reducing the debt
and contributing to the growth of the overall economy. It is an
application of what we have all been taught: If you save today
and forgo consumption, you will be better off in the future.
That tenet is as true for the country as a whole as it is for
each of us.
Savings for the country include savings and borrowing by
individuals, governments, and business--what we economists call
net national savings. Simply moving the same resources from one
pocket to another won't help. The larger the economy, the
easier it will be for the working population to pay for the
benefits expected by retirees. This statement doesn't require
adherence to any particular strain of economic thought or
political philosophy. Nor is it an attempt to make a case for
any particular approach to reform.
In speaking about the importance of economic growth in the
context of Social Security, Dr. Alice Rivlin--at a recent
roundtable discussion at the Urban Institute--said that this is
``a terribly fundamental point. And. . . not everybody gets it.
. . it's is a question of everybody's pension plan, public and
private, when those bills come due to the elderly and have to
be paid out of the GDP that's being produced at that particular
moment. Whatever it is, going to be much harder if that GDP
isn't bigger. And the only way to make it easier is to make the
GDP bigger. I mean, there isn't any other solution to this.''
As straightforward as that may seem, the current debate on
Social Security is replete with confusion. Perhaps the murkiest
corner of the debate can be found in the discussions of the
meaning of the trust fund in the Federal budget and its
economic implications.
The first thing to understand is that the government trust
funds may have important political, maybe even moral,
implications, but they have very few real economic
implications. Trust funds are simply accounting devices. They
facilitate long-term projections of cash commitments to help
maintain an essentially pay-as-you-go system, but they have
virtually nothing to do with whether obligations will be met or
payments made.
More fundamentally, the balance in the Social Security
Trust Funds tells us nothing about the economy's ability to pay
for the benefits expected by retirees. The President's latest
budget states that the trust fund balances are claims on the
Treasury that, when redeemed, will have to be financed by
raising taxes, borrowing from the public, or reducing other
expenditures. The existence of large trust fund balances
therefore does not by itself have any impact on the
government's ability to pay benefits.
That is the primary problem with the President's proposal.
It does not change the fundamentals. The transfers do not
assure debt reduction, and the proposal contains no
programmatic reforms. The transfers could, however, interfere
with the one function the trust fund serves: assessing the
financial balance in the program, whether dedicated taxes meet
the program's promised benefits.
The point of all this is simple, Mr. Chairman. The larger
the economy, the easier it will be for the working population
to meet its obligations to retirees. Similarly, policies that
diminish economic growth will make that job more difficult.
Trust funds matter little in this economic context. Social
Security reform, and perhaps other proposed policies as well,
should therefore meet at least the criterion of helping, not
hurting, future economic growth. There is no assurance that the
President's latest proposal would meet that criterion or that
it would change the fundamental nature of the trend shown in
figure 2. Thank you, Mr. Chairman.
Chairman Archer. Thank you, Dr. Crippen.
[The prepared statement follows:]
Statement of Dan L. Crippen, Ph.D., Director, Congressional Budget
Office
Mr. Chairman, Congressman Rangel, and Members of the
Committee, I appreciate this opportunity to appear before you
today to discuss Social Security financing and the President's
recent proposal to extend the solvency of the Social Security
trust funds.
My testimony focuses on several major themes:
Financing the nation's current promises to the
elderly will require a major reallocation of society's
resources once the baby-boom generation has retired.
A strong and growing economy will make it easier
to fulfill pledges to Social Security and Medicare recipients,
but it is not the entire solution.
Although government trust funds arguably have
some value as an accounting mechanism, their projected solvency
does nothing to ensure that economic resources are available to
cover program costs.
The President's proposal to transfer general
revenues to the Social Security trust funds would extend the
funds' solvency from an accounting point of view but would not
alter the underlying long-run imbalance between total federal
revenues and spending.
Changes in the budget process do not eliminate
the need for substantive policy action.
The Current Outlook
This past summer, the Congressional Budget Office (CBO)
projected that under current law, the federal government would
accumulate total surpluses of about $3 trillion over the next
10 years. About two-thirds of those surpluses come from Social
Security revenues that exceed the program's spending. Two
important caveats apply to these projections:
First, demographic and economic forces already in
place are expected to erode the surpluses, renewing the federal
government's fiscal imbalance of previous years. CBO's long-
term projections indicate that under current policies, federal
deficits will return by the time the baby boomers have fully
retired, causing the federal debt and its corresponding
interest costs to escalate rapidly as a percentage of national
income.
Second, deficits will reappear even earlier if
the government spends more or taxes less than CBO projects.
Developments since CBO's July update to The Economic and Budget
Outlook: Fiscal Years 2000-2009 suggest that the Congress and
the Administration may identify more pressing priorities--
increasing spending or reducing taxes--that conflict with
devoting the entire projected surplus to retiring the federal
debt.
The projected long-range fiscal shortfall is associated
with three phenomena: the aging and eventual retirement of the
baby-boom generation; increased life expectancy, which will
lengthen the time people spend in retirement; and escalating
per capita medical costs. Under the intermediate assumptions of
the Social Security trustees, the number of elderly Americans
increases by 80 percent over the 2010-2030 period while the
population ages 20 to 64 grows by only about 2 percent. Those
diverging growth rates mean that by 2030, there will be only
two workers for every Social Security recipient compared with
today's ratio of 3.4 to 1 (see Figure 1).
With demographic trends such as those, federal programs for
the elderly will consume a sharply increasing share of national
income and the federal budget (see Figure 2). The trustees
project that spending for Social Security and Medicare as a
percentage of gross domestic product (GDP) will rise from 7
percent in 1998 to almost 12 percent in 2030. Using similar
projections, CBO expects that in 2030, the programs will
constitute about 55 percent of total federal spending excluding
interest, compared with about 35 percent in 1998 (see Figure
3). In addition, the Medicaid program will experience severe
budgetary pressures in meeting the long-term care needs of
increasing numbers of elderly people. Indeed, the ramifications
of such demographics extend well beyond the federal budget to
labor markets, private pensions, housing, and other sectors of
the economy.
Social Security and Medicare compete with other federal
programs for the government's resources, and that competition
will become more acute over time. By 2014, Social Security
benefits will outstrip payroll tax collections. Twenty years
later, annual earmarked revenues will cover only about 70
percent of promised payments. The gap between revenues and
benefits in 2030 is estimated at 1.8 percent of GDP, or about
$160 billion in today's economy. An even larger shortfall--2.7
percent of GDP--is estimated for Medicare in that year.
Addressing projected deficits of those magnitudes will require
some combination of tax increases, benefit reductions, and cuts
in other federal spending.
If left unchecked over many years, the budgetary pressures
posed by an increasingly elderly population and burgeoning
medical costs will lead to economic problems, because the
resulting deficits crowd out private investment, slowing the
growth of capital and output. High deficits would retard long-
term economic expansion beyond the slowing of labor and capital
growth that would occur in any case as people retire and draw
down their savings. Thus, inaction on the budgetary problems
associated with the population's aging risks a future drop in
U.S. living standards.
Preparing for the Future
A strong and growing economy provides funds for the
services that the federal government supplies. To fulfill the
nation's promises to Social Security and Medicare
beneficiaries, the government must acquire resources (through
taxation or borrowing repaid by future taxation) from existing
production when benefits are due. That is, in 2030, as in any
year, pledges to the elderly as well as other federal
priorities such as national defense, assistance to state and
local educational agencies, public health services, and
transportation projects will require the government to draw on
economic production available at that time.
Additional capital accumulation, enhanced productivity, and
increased work effort could help build a larger economy in the
future. By implementing policies that promote capital
accumulation, the nation could boost both its productive
capacity and its wealth and essentially help prefund future
consumption. But adding to the supply of capital requires less
current consumption in exchange for more national saving and
investment. One direct approach to increasing national saving
is for the federal government to run annual budget surpluses.
Strategies to encourage private saving might accomplish the
same objective.
Economic growth would expand the capacity to fund future
Social Security benefits and other federal commitments, and a
larger economy could ease the transfer of additional resources
to retirees. Strong growth swells revenues and reduces interest
costs, improving the overall outlook for government budgets.
Yet despite those benefits, growth is unlikely to eliminate
fully the imbalances of the current Social Security program.
The reason is that economic growth generally increases real
(adjusted for inflation) wages, and under the current benefit
formula, higher wages subsequently translate into higher Social
Security benefits. Therefore, although the nation might be
wealthier, it would still face a sharp increase in the
budgetary resources necessary to pay for the Social Security
and health care costs of the baby-boom generation during
retirement.
Trust Fund Accounting
The federal government's trust funds, including Social Security,
are not trust funds in the usual sense but accounting mechanisms. They
record the income from Social Security taxes, the expenditures for
Social Security benefits, and interest that accrues on the difference.
Private trust funds preserve assets for future use. Government trust
funds do not do that because the government does not have financial
assets to preserve. On the contrary, it currently owes the public $3.6
trillion. The government's ability to pay Social Security benefits
depends ultimately on the total financial resources of the government--
not on the balances attributed to the trust funds.
For much of its history, Social Security has been financed on a
pay-as-you-go basis--current payroll tax collections fund current
benefits. In recent years, however, tax collections have exceeded
outlays, and trust fund balances have begun to mount. The Treasury
credits a trust fund with nonmarketable special-issue bonds whenever
the fund's income exceeds outgo; it redeems those securities whenever
the fund's current income cannot cover current expenditures. To get
cash for redemptions, the Treasury uses tax revenues or borrows money
from the public.
In 1999, Social Security tax revenues exceeded benefits by about 14
percent. Moreover, interest and other intergovernmental payments
boosted trust fund income so that the funds' total holdings grew by
$125 billion, bringing total Social Security balances to $865 billion.
Projections show those balances rising steadily over the next two
decades, peaking at $4.5 trillion at the beginning of 2022 and then
diminishing until the balances are exhausted in 2034. But the existence
or absence of trust fund balances bears no relationship to Social
Security's obligations or to the country's ability to fund benefits.
The true obligations of the program are defined by its benefit
structure and what the nation has promised to provide. As the
President's budget states, ``[T]he existence of large trust fund
balances . . . does not, by itself, have any impact on the government's
ability to pay any benefits.''
Even as an accounting device, the Social Security trust funds leave
much to be desired because the assets credited to those funds would
cover only a small share of the future benefits promised under Social
Security's current benefit structure. By contrast, a private pension
plan is required to fund benefits on an accrual basis (as the benefit
rights are earned); otherwise, solvency of the plan would depend on the
uncertain viability of the plan's sponsor. Arguably, government
retirement programs need not be held to the same standard because the
government may extract the resources it needs to pay benefits by
exercising its sovereign power to tax. If Social Security operated like
a private pension plan--that is, it kept enough reserves on hand so
that if the plan terminated and no new contributions were received, it
could still pay all accrued benefits--its unfunded liability would
total $10.4 trillion.
Another frequently cited measure bases the Social Security
program's unfunded liability on the future revenue from and benefits to
the population currently 15 years of age or older. The unfunded
liability in that case would be $8.7 trillion. However, if the
calculation assumed that revenues and benefits over the next 75 years
continued as under current law, the estimated unfunded liability would
be $3.1 trillion. From the narrow perspective of trust fund accounting,
crediting the Social Security trust funds with a one-time infusion of
government securities could eliminate the fund's solvency problem. But
such an action does nothing to resolve the long-term problem of
acquiring the resources necessary to meet benefit commitments.
Trust fund accounting practices have exerted an important influence
on program financing and have at times signaled the need for corrective
action. In 1983, the imminent depletion of the Old-Age and Survivors
Insurance Trust Fund compelled the Congress and the Administration to
agree on tax and benefit changes that restored balance in the program
into the 21st century. Similarly, projected shortfalls in the Hospital
Insurance portion of Medicare have spurred legislative action over the
past two decades, with the Balanced Budget Act of 1997 being the latest
installment. In contrast, growing trust fund balances could provide a
sense of security unwarranted by underlying long-range fiscal
conditions.
The President's Social Security Proposal
President Clinton recently proposed extending the solvency of the
Social Security trust funds through 2050 by providing transfers from
the general fund. The plan, which does not change the program's tax or
benefit structures, differs from the Social Security framework in the
President's budget because it does not include equity investments,
Universal Savings Accounts, additional discretionary spending, or
specific transfers to Medicare. It contains changes in Congressional
procedural rules to make it more difficult to create on-budget deficits
or to diminish on-budget surpluses. The proposal would impose no
requirements on the Administration, such as submitting a federal budget
without an on-budget deficit. Nor does it include any enforcement
mechanisms such as sequestration. The plan also does not make the new
Social Security transfers conditional on achieving actual surpluses,
either in the on-budget portion or in the total budget.
The President's plan has been introduced as H.R. 3165 and contains the
following main provisions:
An amount equal to the interest on the cumulative Social
Security surpluses from 2000 to each year during the 2011-2016 period
would be credited to the Social Security trust funds. Those transfers
would be added to the interest credited to the trust funds under
current law. Social Security program actuaries estimate that such
credits for the six-year period would total $951 billion.
For each year from 2017 to 2044, the annual credit would
equal the amount transferred in 2016.
The points of order relating to Social Security in the
Deficit Control Act would be extended through 2014.
Any future legislation that decreased the new transfers
to Social Security could not be credited as savings in pay-as-you-go
calculations.
A new point of order would be created to discourage any
legislation that reduced on-budget surpluses or increased on-budget
deficits.
The President proposes to reserve one-third of the on-
budget surplus that CBO projects for the 2000-2009 period to enhance
Medicare solvency or provide a Medicare prescription drug benefit. A
new point of order would be established to further that goal.
The discretionary spending caps, with some increases,
would be extended through 2014. Pay-as-you-go enforcement procedures
would be extended through that year as well.
The Social Security actuaries estimate that on paper, the credits
proposed by the President would postpone the trust funds' exhaustion
from 2034 to 2050. The proposal would achieve that extended solvency
without changing outlays or revenues of either Social Security or the
budget as a whole. The President argues that the new accounting will
reserve a portion of the on-budget surplus and make it more difficult
to use those funds for most other purposes. (The two exceptions are
transfers to Medicare and a new Medicare prescription drug benefit.) In
effect, the proposal would commit future general revenues--to redeem
the additional trust fund balances--when the funds are needed to meet
obligations to future retirees.
Using general revenues to fund a portion of Social Security costs
is not a new idea. The Social Security Amendments of 1983 contained a
number of transfers, including payments for military wage credits and
temporary payroll tax credits for wage earners and the self-employed.
The general fund transfers under the President's plan, however, would
be much larger than previous transfers, equaling one-sixth of total
Social Security outlays during the 2011-2015 period.
Nor are the proposed transfers under the President's plan unique
among recent Social Security proposals. Many other plans include
general revenues as an element of a more fundamental restructuring of
the Social Security program. For example, H.R. 1793, sponsored by
Representatives Kolbe and Stenholm, would gradually scale back benefits
but would also create payments from the Treasury to the trust funds.
Under recent proposals by Martin Feldstein of Harvard University, the
Treasury would transfer funds on the basis of assumptions about
corporate income taxes. Another proposal earlier this year by Chairman
Archer and Representative Shaw would essentially introduce general
revenue funding for Social Security. Under that plan, income taxes
equal to 2 percent of wages would go to individual accounts; when
people were ready to collect benefits, the government would recoup
those revenues and transfer them to the Social Security trust funds.
(The proposals would redirect general funds much sooner than the
President's plan.)
Shoring up government accounts such as the Social Security trust
funds is often confused with maintaining fiscal soundness. For example,
Medicare's Supplementary Medical Insurance (SMI) Trust Fund is
frequently referred to as ``actuarially sound'' because the underlying
law requires payments from the general fund of the Treasury to cover
any costs not financed by enrollees' premiums. Thus, SMI may meet
certain accounting standards for soundness, but those measures may have
little relevance to the program's viability in the long run.
Assessing viability requires examining a program's resource
requirements and society's willingness to provide those resources out
of future production. Proposals like the President's to redirect
general revenues to the Social Security trust funds address the narrow
issue of trust fund solvency but not the broader one of overall fiscal
soundness. Adding to the trust fund balances does nothing to ensure
that the necessary economic resources will be there to support the
programs; it simply shifts money from one government pocket to another.
In fact, by relieving the most visible symptom of the program's fiscal
distress, additional transfers from the general fund may lull the
nation into overlooking the funds' less obvious problems. Such
transfers could reduce the fiscal discipline imposed by the trust fund
accounting mechanism and make it easier to delay the spending and
revenue changes necessary to sustain the program in the long run.
Budget-Process Changes and Social Security
The President's Social Security legislation is the latest
in a set of proposals designed to ensure that publicly held
federal debt shrinks by at least the amount of the Social
Security surpluses. Like the other budgetary mechanisms
proposed during this Congress--the so-called lockboxes--the new
procedural hurdles that the President proposes would limit
Congressional action on future legislation that might reduce
projected on-budget surpluses. Advocates of such mechanisms
argue that making it more difficult for future Congresses to
increase spending or reduce taxes would help prevent the
erosion of recent improvements in the budget's bottom line. The
perceived need for such constraints reflects the view that the
federal government finds it difficult to operate effectively
with persistent surpluses. Unless the mechanisms actually
influenced behavior, however, they would have no direct effect
on taxes and spending or on the economy. Nor would they ensure
that the stated goal of debt reduction was, in fact, achieved.
Conclusion
Addressing the long-term budgetary impact of Social
Security and Medicare outlays requires making difficult choices
about the federal government's tax and spending policies. What
are fair and appropriate levels of benefits for the elderly?
How are the costs for those benefits best allocated among
workers of different generations? Should benefit formulas for
Social Security be scaled back, should eligibility criteria be
tightened, or should Medicare reimbursement practices be made
less generous? Should tax increases be scheduled to raise
additional revenue? Plans that shift funds from one government
pocket to another do nothing to address those programs' actual
financing problem--the underlying imbalance between federal
spending and taxes--and in fact could postpone corrective
action.
Such a postponement would have implications beyond those
for the federal budget. Changes enacted in the near future need
not be as drastic as the changes that would be necessary if
action was delayed. The promises made under such programs as
Social Security and Medicare are often a substantial part of
people's financial arrangements for the future. By announcing
significant policy changes well before their actual effects
would be felt, the federal government would allow people to
plan more effectively for their retirement.
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Chairman Archer. The Chair thanks both of you for, I
believe, an objective analysis of where we are and where we are
going.
Dr. Crippen, I am fascinated by your chart over here which
is really the telling point over the long term for our
grandchildren, and that is what percent of GDP are we
committing? And that is why I mentioned in my last comment to
the Secretary that I think that we have to be very, very
concerned about these obligations and we also have to have 75-
year plans to compare one to another as to where we are going
to be in these outyears.
Now, if you were to overlay on your Social Security
presentation the Archer-Shaw plan, what would be the percentage
of GDP in the 75th year?
Mr. Crippen. I can't make a definitive statement because,
as you know, we haven't priced that plan specifically. But my
best assessment at the moment is that the numerator would stay
the same but the denominator would grow. Because the plan would
increase net national savings, productivity and economic growth
would be higher, consequently, Social Security would account
for a smaller fraction of GDP.
Chairman Archer. The obligation of the Social Security
Trust Fund would be reduced without cutting benefits?
Mr. Crippen. Correct.
Chairman Archer. And that would therefore, according to
your analysis, increase the denominator? Is that what you are
saying? Or do you decrease?
Mr. Crippen. It would increase the denominator. The economy
would grow.
Chairman Archer. Which would mean that we would be taking a
smaller percentage of GDP. All right.
Mr. Walker.
Mr. Walker. Mr. Chairman, there are two ways to look at it.
One, as you know, in your proposal you maintain a commitment to
the current benefit structure. It is the way that you fund that
commitment, that is changed, but the gross benefit commitment
as percentage of GDP is the same. The government's net
commitment would, however, be less in your proposal because of
the increased rates of return that would be achieved through a
diversified portfolio investment.
Chairman Archer. That is just another way to put it. The
obligation of dollars that have to flow out of the trust fund
would be reduced.
Mr. Walker. The net, correct. The gross would be the same,
but the net would be lower. The net is what matters to the
trust fund but the gross is what matters to the economy.
Chairman Archer. And that is the dollars that the trust
fund would be obligated to pay, even though we don't cut
benefits.
Mrs. Johnson.
Mrs. Johnson of Connecticut. Thank you. This is an
extremely important point that the Chairman has just made and
that your chart, Dr. Crippen, makes. In your testimony, instead
of looking at percent of GDP, you also look at it from the
point of view of a percent of total spending that it would take
to fund Medicare and Social Security if we do nothing to either
program. Now, that is no prescription drugs, right?
Mr. Crippen. Right.
Mrs. Johnson of Connecticut. That is no change in current
spending, no enlargement, no coverage of cancer clinical trials
which I have been fighting for, no change; and yet in just 31
years, 2030, in 31 years Medicare and Social Security would
consume 55 percent of our national revenues. Now, you mentioned
in the next line that Medicaid would add to that. Do you have
any figure how much Medicaid would add to that because, of
course, that is all the long-term care costs?
Mr. Crippen. I think we have a chart that shows that as
well. It is another----.
Mrs. Johnson of Connecticut. In terms of percent of Federal
revenues as opposed to GDP. I think GDP is harder for people to
understand.
Mr. Crippen. The Federal Government's revenues are
currently about 20 percent of GDP. If you assume they stay at
about that level, we are using well over half of revenues (12
percent of the 20 percent) for Social Security and Medicare.
Mrs. Johnson of Connecticut. Well over half. So with
Medicare----.
Mr. Crippen. With Medicaid, it is 15.7 percent; 16 percent,
roughly, of GDP--compared with 20 percent total government
revenues.
Mrs. Johnson of Connecticut. So 55 percent of general
revenues would probably go up to at least 60 percent. I think
that is a very serious matter. And in looking at all of the
plans, Mr. Walker, did you look at the plans from the point of
view of their impact on generational equity?
Mr. Walker. Yes, we did.
Mrs. Johnson of Connecticut. Which plans had the biggest--
the least impact on generational equity?
Mr. Walker. I think what you have to look at is a package.
You can't just look at one element because there are pros and
cons to every plan. Obviously to the extent that you don't
change the benefit structure at all, there is no impact on
generational equity. The President doesn't change the benefit
structure whatsoever. His plan represents a financing proposal
and it basically doesn't do anything about the generational
equity.
Mrs. Johnson of Connecticut. Except what you say, those
financing proposals that depended on general revenues aggravate
the general equity problem because they make the workers pay
more for the same benefits, and more of the budget goes for
people over 65 and less is available.
I mean, the difference between what is available in 31
years for education and day care and all of those things, it is
about 20 percent less.
Mr. Walker. An important point here, Mrs. Johnson, we have
done a projection as to what the Federal budget would look
like, a simulation, in the year 2030 if we did not save the
surplus.
Now, keep in mind the no-action scenario, we believe, is
unrealistic because it assumes that the caps hold, that we have
no emergency spending and that every dime of the projected
surplus is saved.
If we didn't save the surplus, there would be no money left
for any discretionary spending at all in the year 2030. That
means national defense, the infrastructure, education, the
environment, children's, programs, and our judicial system.
Now, that is not going to happen but it just remphasizes the
importance of being prudent about what we do with the surplus
and to get on with entitlement reform because it is going to
crowd out other spending if we don't.
Mrs. Johnson of Connecticut. I guess what I am trying to
get at is if we solve the Social Security problem, say,
entirely with general revenues, then--I mean, without any
change in the plan, Social Security and Medicare are going to
absorb 60 percent of our general revenues by the year 2030. If
we solve Social Security entirely by adding new general
revenues, then what percent of our public resources would be
absorbed then?
In other words, if it is 60 now, would it be 70? Would it
be 75?
Mr. Walker. I don't have the exact number but I think the
bottom line is this: We need to look at it differently, not
just at the trust fund level. The trust fund is an accounting
mechanism. It has legal significance, but it doesn't have
economic significance. We need to look at percentage of the
economy, the percentage of the budget, and other important
milestones to gauge these programs.
Mrs. Johnson of Connecticut. So there is--it is important
for us to look at where do the resources come from? Do they
come from restructuring the program to reduce its costs and
better distribute the benefits, perhaps, as in some of the
proposals before the Congress; or if we generate them from
investment in the market, as also some of the proposals do, so
it comes from outside the tax revenues. All of those things
will matter in terms of whether or not we will have the
resources necessary to meet the needs of the next generation in
terms of public program and public support.
Mr. Walker. That is correct.
Chairman Archer. The gentlelady's time has expired.
Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman.
Gentlemen, I would like to explore one of the principles of
the President's plan on Social Security, and it was reiterated
time and again by Mr. Summers, and that is we cannot use--we
cannot run an on-budget deficit; in other words, we can't use
any of the Social Security surplus.
We have got to sock away, we have got to retire publicly
held debt, with every penny of the Social Security surplus. We
can't use any of that because if we did we would have an on-
budget deficit.
If we do that, if we subscribe to that, then you would have
to say that we can't use any of the Social Security surplus to
save Social Security. In other words, we couldn't use any of
the Social Security surplus to finance a transition to a
different Social Security system that might avert these kinds
of numbers in the outyears.
That doesn't make a whole lot of sense to me, unless you
say the best way to save Social Security is to plow every penny
of the Social Security surplus into buying down the publicly
held debt, and that is going to somehow create an atmosphere
that will grow the economy enough to save Social Security.
Now, maybe that is a plausible scenario, but I think it is
essential that we as policymakers, along with the
administration, consider alternatives to that scenario. If the
Archer-Shaw plan, which does use some of the Social Security
surplus to finance the transition to their plan and in effect
runs an on-budget deficit for some years, does a better job of
getting those numbers on your charts down, saving Social
Security, providing a defined benefit for seniors that we think
now is substantial and adequate, then we ought to choose that
over the administration's proposal to just sock it all away
into buying down the debt.
Am I wrong? Have I missed something in that analysis or is
that essentially what we are looking at?
Mr. Crippen. I think there are two points to be made, Mr.
McCrery. One is that there is no guarantee under the
President's proposal that the debt will be reduced in the first
instance.
Second, though, and to your fundamental point, even if
Federal debt is reduced, it will help economic growth, but it
is not the whole solution. You can't grow your way out of this
problem. Particularly with the current benefit structure,
Social Security tends to grow along with real wages and the
economy. So economic growth will help alleviate the problem
some, but fundamental reforms will be needed to solve the
problem completely.
Mr. Walker. The least risk in approach is a combination of
two things, paying down debt and engaging in real program
reform. Ultimately, you need to do both. You can't just pay
down the debt. And most reform proposals require some use of
general revenues. It is a matter of how much and when they use
general revenues, and I think you need to look at the economic
substance of it. That is what is most important.
Mr. McCrery. So are you both saying that the administration
is not necessarily correct in their approach; that perhaps we
should examine, using some of the Social Security surplus,
spending some of the surplus, on a transition to a different
Social Security system rather than just buying down debt with
it?
Mr. Crippen. Obviously neither of us can speak for them. I
don't know that they would have that as a condition or not. As
with the Medicare reserve, they say we don't want to spend this
part of the surplus for Medicare--or for anything other than
Medicare--so it would be available for prescription drug
coverage or other reforms. They may have the same attitude
about Social Security. I just don't know.
Mr. McCrery. It doesn't sound like it. That is not their
proposal. Their proposal is to put every penny of the Social
Security surplus into buying down debt held by the public, and
then transferring some portion of the general revenues, the on-
budget surplus, into the Social Security Trust Fund. So then
that is----.
Mr. Walker. The original plan is to pay down debt and then
in addition to paying down debt, crediting to the Social
Security Trust Funds an unearned grant equal to a portion of
what they paid down the debt.
Mr. McCrery. Right.
Mr. Walker. Their belief is--and you can agree or disagree
with it--is that this increases the likelihood that debt will
be paid down. They don't have to be linked and, frankly, one of
the things that we have to do as a Nation is we have to look at
how are we going to approach fiscal policy in light of budget
surpluses instead of deficits.
We have just issued a report on how other nations have
approached this because you have to think differently. You have
to think in terms of how much debt you have as a percentage of
GDP; the size of certain programs as a percentage of the
overall economy and as a percentage of the budget, which are
fundamentally different. But there are several different ways
you can accomplish the objective.
Mr. McCrery. Thank you.
Chairman Archer. Mr. Shaw.
Mr. Shaw. Thank you, Mr. Chairman.
Mr. Walker, there is a word that has been thrown around all
over the place through the course of this hearing. That word is
``solvency,'' and it concerned me to the extent that I got the
Webster dictionary out and looked it up. From an accounting
standpoint, what is your definition of solvency? And then I
will tell you what Webster says.
Mr. Walker. Well, the way that it has been used in the
Social Security context is to what extent are there trust fund
assets available to be able to pay promised benefits.
Mr. Shaw. All right, let's stop there. Are the Treasury
bills that are in the trust fund an economic asset?
Mr. Walker. They are not a hard asset. They are a promise-
to-pay. They are backed by the full faith and credit of the
United States Government. They represent a first claim on
future generations'----.
Mr. Shaw. Right.
Mr. Walker [continuing.]--General revenues. Nothing more,
nothing less.
Mr. Shaw. Then I would submit, using that definition and
going forward, that we are facing an insolvency problem in the
year 2014 when at which time there are going to be insufficient
FICA taxes going into the Social Security Administration to
take care of the obligation to pay benefits.
Mr. Walker. I think your point, Mr. Shaw, is that in 2014
we turn a negative cash flow, and typically solvency is
something that is associated with cash flow in the private
sector. We have different definitions in the public sector. But
2014 has economic substance, there is no doubt about it.
Mr. Shaw. What really worries me about this whole thing is
when you start talking about 2035 and 2050, everyone's eyes
glaze over and they say, what is the problem?
Well, the problem is that the taxpayer is going to get
skinned starting in 2014 unless this Congress and this White
House act together to solve this problem. And this is what
concerns me. It is the cash flow that we need to really
concentrate on, because that cash flow, as soon as that cash
flow is insufficient and we have no Social Security surplus and
as a matter of fact we start a huge deficit, at that point it
is going to be up to the Congress to levy sufficient taxes or
cut something in order to take care of its obligation to pay
the benefits, because that wonderful FICA surplus that we have
had for the last 60, 70 years, all of a sudden goes away.
I think it is very important to all of us to realize and to
face the fact that Social Security, as it was set up as a pay-
as-you-go system, was a wonderful system and there wasn't
anything wrong with it the way it was originally set up because
you had over 40 workers for each retiree. Now we are down just
a little over 3. Soon we are going to be down to a little over
2, and at that point you are going to have a huge, huge problem
because you are just going to have a disproportionate enough
number of seniors that the workers will be really struggling to
try to support.
The problem is, and what we have to talk about is cash
flow, and that is what I think is most important and I think we
need to concentrate on.
Mr. Walker. Cash is key. In addition, we have to look at
what percentage of the budget and what percentage of the
economy is represented by mandatory spending programs. Those
are very real challenges.
Even if the President's proposal is adopted and debt held
by the public went down to zero, total debt is not zero and
debt held by the public will go up eventually. We have to be
prudent about the surplus and we have to reform these programs.
Mr. Shaw. There is nothing wrong with paying down the debt,
and I would be willing--I would be willing to take a look at
that and take a sharp look at that, trying to find a solution.
But the problem is we have got to build up some real wealth,
some real economic assets, if we are going to get over this
system as a pay-as-you-go system, because with the demographics
out there today, with the population--we are living longer,
which is a wonderful thing, but the problem is also that we are
having less kids and we have got this huge group of baby
boomers that is coming through the system that is going to
absolutely knock the cash flow in the head and there will be no
cash flow, and that is when we are going to have just a huge
problem.
According to our projections under existing law, if we do
nothing we are going to be running up about a $20 trillion
deficit. That is a terrible thing to leave to our kids.
This is what really concerns me so much. So we really need
to develop a hybrid system. You can't do away with the existing
system because we have got too many people that depend upon it.
So when you have an opportunity to leave the existing system
alone, change nothing about it but just put together something
on the side that is going to come to the rescue of the system,
and where we can find, even though it is going to take some
general revenue for a few years, starting in about 2014, 2015,
but we can see that we have put in place a solution that is
going to save Social Security for all time.
I think it is very important that people listening to this
debate realize that when we are talking about 75 years, that is
just because that is as far as the Social Security
Administration will score these plans, but actually it is for
all time. The surplus that we create under the Archer-Shaw bill
continues to accumulate a huge surplus. So I think it can
certainly be said that it saved Social Security for all time,
and that would be a legacy that this White House and that this
Congress could leave to the American people and to our kids and
grandkids, and I think that is our responsibility to move
forward.
Chairman Archer. It sounds like a good place to end this
hearing, unless you two gentlemen want to make any further
comments.
Mr. Rangel. Mr. Chairman.
Chairman Archer. Mr. Rangel.
Mr. Rangel. I would just like to make two comments.
First, I want to thank both of you for the good work you do
for the Congress. We appreciate it. And Mr. Walker, I just want
to make certain that your testimony is consistent with a
statement that was attributed to you in your report. That is:
that the Archer-Shaw proposal reduces the projected unified
surplus and increases the projected unified deficit as a share
of the GDP through the middle of the next century.
Is that accurate?
Mr. Walker. Yes, through 2046. Beyond that it helps.
Mr. Rangel. You also say that it results in higher levels
of debt held by the public until the final years of the
assimilation period.
Mr. Walker. Yes. If it is all right, Ranking Member Rangel,
I think that--let me mention four good things and four
concerns, with regard to the Archer-Shaw proposal.
First, it achieves long-term solvency and sustainability of
the program as far as you can evaluate it.
Second, it maintains current law benefits. Third, has
possible payroll tax reductions in the outyears without tax
increases. Fourth, it advance-funds, which could have some
positive effect on intergenerational equity and on long-term
savings.
On the concern side, it has major increases in publicly
held debt and uses general revenues over the next 45-50 years.
Over the very long range, it works out; it captures better
rates of return. Third, it creates contingent liabilities if
individual accounts perform poorly.
Finally, the offset structure could create an expectation
gap among people who have these individual accounts, and there
is not a time frame for implementation.
So, like every proposal, including the President's, there
are pros and cons. But what is remarkable, Mr. Rangel, if you
look at the substance of what the President has proposed,
including his USA accounts, and Archer-Shaw and other
proposals, there are a lot of common denominators here. There
are a lot of common denominators.
Mr. Rangel. That is where I hope that we can pick the ball
up and move forward.
Dr. Crippen, to make sure that we are reading from the same
set of books, and since there always appears to be a
controversy about this--it appears that you indicated that the
Republican budget actually is $17 billion into the Social
Security Trust Funds. In response, the Republicans always pull
out a letter where they suggested to you certain things you
could say to show that their plan would not really violate the
Social Security Trust Fund.
Having said all of that, with all of the information that
you have available and with your responsibility to the
Congress, both Republicans and Democrats, could you say with
any degree of accuracy whether you believe that the Republican
budget proposals violate or go into the Social Security Trust
Fund?
Mr. Crippen. Certainly, Mr. Rangel. Let me preface this by
saying that these are all estimates of a $1.8 trillion budget
in a $9 trillion economy. But by our lights, both the
President's budget and the congressional actions to date have
been about the same. That is, they blow the spending caps by
over $30 billion and could end up borrowing from Social
Security as much as $16 billion or $17 billion. That is the
current state of affairs.
Again, these are estimates of what is going to happen over
the next 12 months, and those estimates may not prove to be
accurate.
Mr. Rangel. Let me say, since you are the Congressional
Budget Office and not the Presidential budget office, and since
the President proposes and we make the final decisions, are you
saying that what has been legislated, not proposed, in the
Republican budget is about $17 billion over?
I mean, and you can bring anybody else you want in to help
answer, in terms of legislation what is the answer?
Mr. Crippen. Part of the conflict or controversy has been
on keeping everything on the same basis. If we score the
President's budget and congressional action on the same basis,
the President and the Congress have both advocated and enacted
spending--the President signed some of it already--that by our
accounting could end up requiring the government borrow some
money from the Social Security Trust Fund.
Mr. Rangel. Listen, what is good for the Republicans is
good for the President, too. With you being the Congressional
Budget Office, I thought maybe that your primary concern would
be what the Congress is doing, and that OMB and other
administration people would be able to point out what the
President is doing.
So I am not here in defense of the President because he may
be doing worse than the Republicans, I don't know. Ultimately,
we should ask you for your advice in terms of what he is
proposing. But since we are legislating and since we have a
Budget Committee, it is very important that we have it made
clear that this legislative body, under the leadership of the
Republicans, is $17 billion into the Social Security Trust
Fund. Who knows what the President is, but one thing we do
know, is that CBO is saying that with your estimates the
leadership is $17 billion over.
This doesn't give the President a clean bill of health.
That is not what I am trying to do. It is just that certain
people recently on television are saying that you are saying
this is just not so.
I am not prepared to say what you are saying about the
President is not so. I am just saying that since you have a job
and since your job has always had the support of a bipartisan
Congress, I don't want on your watch for your position to be
distorted, because we depend on you. We don't always like
hearing what you have to say, as Democrats or Republicans, but
we depend on you and you do a good job. I want to thank you.
Chairman Archer. Dr. Crippen, you mentioned exceeding the
spending caps. Is emergency spending included----.
Mr. Crippen. In the caps?
Chairman Archer [continuing.] Under law?
Mr. Crippen. Under the law, the caps are adjusted upward to
accommodate emergency spending.
Chairman Archer. All right. So are you then saying that
even in correspondence with the law that adjust the caps for
emergency spending, that we will be spending more than the caps
this year?
Mr. Crippen. With the adjustments, we are likely to be
pretty close. There is about $25 billion in there.
Chairman Archer. Is it not also true that if the amount of
spending exceeds the caps, that there is automatic
sequestration by OMB?
Mr. Crippen. Yes, and they use their numbers.
Chairman Archer. So if, in fact, we do exceed the caps,
that spending will automatically be cut back by OMB and will
not be permitted to exceed the caps?
Mr. Crippen. Yes, if that's what OMB determines.
Chairman Archer. That is the law?
Mr. Crippen. Yes.
Chairman Archer. OK. I think we have to be awfully careful
as we state these figures, that we will spend a certain amount
above the caps, which cannot happen under the law.Is that not
correct?
Mr. Crippen. Right, based on OMB calculations.
Chairman Archer. All right.
Mr. Rangel. If the gentleman would yield on that. That
would mean, if what you say is correct, that anything that they
labeled as emergency doesn't count. So if they say the census
which occurs every 10 years is an emergency, as far as you are
concerned, it is an emergency.
Chairman Archer. The gentleman is correct. That is provided
in the law, and the President----.
Mr. Rangel. And the second thing that you are saying----.
Chairman Archer. When the President--I am not going to
yield anymore because I want to close this hearing down.
Mr. Rangel. Well, that sounds unfair, Mr. Chairman.
Chairman Archer. But second, under the law, the President
and the Congress have to agree to the emergency designation.
Mr. Walker, how would you evaluate a dollar invested as to
a dollar of debt reduced, comparatively?
Mr. Walker. Well, first, in the context of the debate that
we are having here, if you end up reducing debt, that has a
sure-fire, absolute, positive effect on increasing net savings.
You know you have accomplished something.
If you are investing it, you might be investing it in lieu
of paying down debt. And then it depends upon what, if any,
incremental rate of return you might be able to get. So it is
possible that it could be better for the government and the
budget to invest, but not for the economy.
Chairman Archer. The basis of my question was to make a
comparison between the paying down of government debt to the
public and having money in private savings accounts that would
be invested, and that is a part of the puzzle that you did not
mention.
First, paying down debt also means paying down a lot of
foreign-held debt, which does not flow back into the United
States necessarily to help our economy. It is not a dollar-for-
dollar help to our economy.
On the other hand, if you take dollar for dollar and you
put it into a personal savings account, that increases the
personal private savings of this country, dollar for dollar.
None of it is drained off into the foreign-held debt that is
paid down.
In your analysis, I think you have got to also refer to the
fact that it is not just the paying down the debt that helps
the economy, but what we do in the Archer-Shaw bill is for
every dollar that the President would pay down in debt, we see
goes into personal savings accounts that are put into our
economy.
Is that not at least an equal offset, if not a better
offset, to the economy?
Mr. Walker. A couple of things, Mr. Chairman.
First, I think both your proposal, as well as the President
in his earlier proposal, acknowledged that there could be
incremental benefits for the government through equity
investing of some of the surplus. Yours does it through
individual accounts. His would do it collectively.
Chairman Archer. No, no, but this is a different issue that
I am talking about now.
Mr. Walker. OK.
Chairman Archer. This is the macroissue of how you help the
economy.
Mr. Walker. I understand.
Chairman Archer. Paying down debt or saving and investing.
Mr. Walker. I understand. The real question, Mr. Chairman,
is how much, if any, offset might there be for individuals who
are saving individually, where that might affect their behavior
on whether or not they might save otherwise through personal
savings or through private pension plans? You have to look at
what, if any, effect that might have.
Now, the way that you have designed your proposal, as I
understand it, you basically are maintaining the defined
benefit promise under Social Security so people will get the
same--they could get more but they won't get less--but you are
using individual accounts as a way to try to use a financing
mechanism to meet that defined benefit promise.
There could be incremental rates of return that would
benefit the trust fund and the budget and, in fact, there
should be incremental rates of return to the government that
would reduce the net cost of Social Security benefits to the
government.
Chairman Archer. But if you only take one side of the
equation and you only talk about the benefit of paying down the
debt and you ignore the fact that for every dollar that you
would pay down the debt you are creating a dollar of personal
savings accounts, which is wealth and investment, and you
ignore that as any benefit to the economy, I don't think that
you are properly evaluating the situation.
Mr. Walker. I don't think we do ignore it. Nor do I think
we should ignore it. I mean, it is a different element. In
other words, one is dealing with the Federal budget. The other
is dealing with savings and investment. For the budget, the
higher returns would offset the government's cost of promised
Social Security benefits. For the economy, however--excluding
behavioral and other second-order effects--there is no
difference between using a dollar of surplus to reduce debt
held by the public and using a dollar of the surplus to fund
individuals savings accounts.
Chairman Archer. OK. But the impression was created that
because the President pays down the debt, that that is superior
and ignores what is happening, which is a dollar-for-dollar
offset of money that is being put into personal savings
accounts, and then invest it in creating wealth. And that has
to be a big, big plus that at least would offset, if not be
better than paying down the debt, particularly inasmuch as a
portion of the debt is held by foreigners.
Mr. Walker. I understand what you are saying, Mr. Chairman.
Chairman Archer. OK. Thank you very much.
Gentlemen, thank you for coming and giving us the benefit
of your input. The hearing is concluded and the Committee is
adjourned.
[Whereupon, at 2:25 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of American Farm Bureau Federation
Preserve Integrity of Social Security
Farmers and ranchers support the preservation of the Social
Security system as a safety net to provide workers and their
families retirement income, disability protection or assistance
because of the early death of a family wage earner. Farmers and
ranchers are concerned, however, about the future and financial
soundness of the Social Security system. Farm Bureau believes
that reform is needed to preserve the integrity of Social
Security for retirees and workers paying into the system.
Ninety-nine percent of farms are operated by sole-
proprietors and or by family partnerships. As self-employed
individuals, agricultural producers pay the full 12.4 percent
payroll tax, usually as one lump sum along with their income
tax payment. They are painfully aware of the high taxes needed
to fund the current system and realize the urgency of saving
the Social Security system.
Concerns About the President's Plan
Farm Bureau opposes President Clinton's proposal for two
major reasons.
First, it does not allow for an evolution of the current
pay-as-you-go system to one that is pre-funded with a choice of
remaining in the current system or shifting to one with
personal accounts. While Farm Bureau supports preserving the
Social Security system, we believe people should have the
option of contributing to personal retirement systems. For
years we have recognized each individual's right to participate
in pension plans in addition to Social Security. We believe
that people should also be able to invest in private plans
within the Social Security framework using the same deposit
percentages and withdrawal age rules as the regular Social
Security program. People should have the right to choose to
stay in the standard Social Security program or shift their
Social Security taxes into personal retirement accounts.
Second, we are opposed to general revenue funding of the
current system or increased taxes to fund the current system.
We oppose any proposal to finance Social Security retirement
income benefits out of general revenue. We oppose an increase
in Social Security taxes. Social Security, either the standard
plan or new private retirement plans, should be funded by
payroll taxes. Social Security taxes should continue to appear
as a separate deduction of Federal Insurance Contribution Act
(FICA) taxes to make them clearly identifiable.
All employees, both in the private and public sector,
should be included in the Social Security program. Employers
and employees should continue to share equally in the payment
of Social Security taxes. Low-income taxpayers should not be
exempted from paying Social Security taxes because of their
level of incomes.
Social Security Surplus
Social Security taxes collected should be placed in a
restricted interest-bearing fund to be used only for Social
Security purposes. Because we support placing Social Security
funds in interest bearing accounts and private retirement
accounts, we oppose government investment of Social Security
Trust Fund money in stocks of private companies. We support
President Clinton's decision to no longer recommend investing
in stocks of private companies in his Social Security plan.
Benefits
While the President's plan does not specifically address
benefits, they have to be considered in any reform plan.
Benefit levels should be preserved for retirees and those that
are near retirement and, when in need of adjustment, should be
changed based on a percentage of the annual decrease or
increase in average wages. Benefits, both in the standard plan
and in alternative private plans, should be based on an
individual's contribution to the system. We oppose means
testing as a way to limiting Social Security benefits for those
that have contributed to the system. We oppose earned income
restrictions for those receiving Social Security benefits.
The average age of farmers and ranchers is now 54 years
old. This means that almost half of them are at, or near,
retirement age. They are very concerned about the return they
will receive on a lifetime's worth of Social Security taxes.
The current system is a major portion of their retirement
program. They must be able to rely upon Social Security in
their retirement years.
Summary
Farm Bureau supports reforms to the Social Security system.
The integrity of the system must be maintained for retirees and
near retirees while giving workers the opportunity to invest
their Social Security taxes in personal retirement accounts. We
oppose general revenue funding of the current system, tax
increases and government investment of Social Security Trust
Funds in equities markets.
Statement of Hon. Jim Ramstad, a Representative in Congress from the
State of Minnesota
Mr. Chairman, thank you for calling this important hearing
to review the President's legislation to preserve the Social
Security program.
Seniors in Minnesota always remind me that as we address
the financial concerns facing the Social Security program, we
must strive to secure the long-term financial solvency of this
vital program in a bipartisan, pragmatic way. I completely
agree, and I appreciate this opportunity to thoroughly review
the President's proposal and identify ways in which we may work
with him to keep Social Security solvent for another 75 years.
My constituents have told me at town meetings, and through
calls and letters, that they want real improvements to be made
so Social Security is operating as promised for current and
future beneficiaries. They do not want taxes raised or benefits
cut, and they want reforms to ensure the solvency and viability
of the program both for current and future beneficiaries -
especially their children and grandchildren.
Most importantly, they believe financial soundness is
paramount in the design of any new system. They don't want any
more budget gimmicks. They don't want more IOUs in the Trust
Fund.
These are some of the basic elements I will be looking for
in the President's plan today.
Again, Mr. Chairman, thank you for holding this hearing
today. I know we are all committed to saving this important
program and I look forward to learning more today from our
witnesses about the President's plan.
Statement of Hon. Nick Smith, a Representative in Congress from the
State of Michigan
Since the 1998 State of the Union Address, the President
has spoken of putting Social Security first. I applaud this
sentiment, which has gone a long way toward elevating the
Social Security issue and bringing it to the attention of the
American people. There is mounting evidence, however, that the
President's Social Security proposal does not put Social
Security first and will not keep it solvent for current and
future retirees.
The Social Security Problem
Actuaries at the Social Security Administration now
estimate that our Social Security system faces an unfunded
liability of $9 trillion. The fact is that there will be only
two workers paying taxes to support each retiree early in the
next century--down from seventeen in 1950 and three today.
These demographics will eventually force a restructuring of the
program. Because of these demographic trends, the current
Social Security system will collapse unless Congress takes
steps to address the expected shortfall.
Social Security also faces another more fundamental
problem. Changing demographics wouldn't be a problem if
benefits were paid for with savings. That, however, is not the
case. Congress needs to replace Social Security's current pay-
as-you-go financing system--the cause of our present problems--
with a system based on worker-owned and--controlled savings
which is not subject to shocks caused by demographics.
The federal government guarantees Social Security benefits
under law. That said, the government has no resources available
to fulfill the promises it has made. This leads to the
inescapable conclusion that unless we reform Social Security,
the government will be forced to raise taxes or cut benefits to
cover the $9 trillion shortfall. Further, the looming problem
becomes increasing urgent and the potential solutions
increasingly wrenching as time is wasted.
The President's Proposal
How does the President propose to close the $9 trillion gap
between revenues and benefits and honor the government's
promises? The essence of the President's proposal is to credit
budget surplus monies plus savings from reductions in public
debt to the Social Security Trust Fund.
This sounds good, but actually does little or nothing to
improve the situation. The government securities in the Trust
Fund cannot be sold. Therefore, they are fundamentally promises
that the government will provide money at some future time. It
is, in effect, a commitment to increase taxes or borrowing in
the future.
The point must be made that this proposal does nothing to
ensure the government will be able to honor its promises. The
law already guarantees benefits, so the addition of government
account securities to the Trust Funds is redundant. The real
questions
--which involve what the government will have to do to
honor its promises--have been neatly sidestepped. The
President's plan attempts to redeem government promises with
more promises, all of which will have to be fulfilled by some
future President and Congress starting in about fifteen years.
The likely result will be tax increases on workers, which is
the same solution that Congress imposed when it began to run
short of tax revenues in 1977 and again in 1983.
The Key: Private Investment
The President's proposal is also unfortunate because it
distracts attention from the demographic crisis and the fatal
weakness of Social Security's pay-as-you-go financing system. A
genuine solution to Social Security's problems has to address
these issues. Fortunately, a variety of sound solutions have
been proposed in Congress.
One thing that all these solutions have in common is
worker-owned investment accounts. This aspect is fundamental
because it dismantles the pay-as-you-go financing system.
Instead of transferring money from people who are working to
people who are retired, individual accounts allow workers to
save for themselves.
Worker-accounts have additional advantages in that they
raise the rate of return on Social Security taxes. Money held
in the Social Security Trust Funds earns a paltry return, much
lower than the long-term return we can expect on conservative
investments in the bond and stock markets. This makes it
possible to cover much of the $9 trillion shortfall without
having to make painful choices of raising taxes or cutting
benefits.
Although I will focus on my proposal (H.R. 3206) because I
know it best, there are a number of sound proposals based on
worker-owned accounts which are now pending in Congress. In
particular, I would like to point to those offered by Reps.
Kolbe and Stenholm, Budget Committee Chairman Kasich, and
Chairman Archer and Rep. Shaw of this Committee.
My Solution: The Social Security Solvency Act
Today, each worker contributes 6.2% of his salary to Social
Security which is matched by 6.2% from his employer for a total
tax equal to 12.4% of the worker's salary. Under my proposal,
workers would get back 2.5% of their paychecks starting in 2001
to put into an investment account for retirement. Over time,
this contribution rate will rise.
The account will generate a hearty sum. Let's consider the
case of a high school graduate who starts working on January 1,
2001 and has a typical career. He starts work at $20,000 a year
and he gets a cost-of-living raise plus 2% a year. Let's assume
he earns a 7% rate of return, after inflation, in his
retirement account invested in equities. Seven percent may seem
conservative in light of the 25% and more returned in the stock
market over the past few years. However, this is the rate many
experts use (including the members of the recent Social
Security Advisory Committee) to reflect average returns over
long periods of time.
Given these assumptions, this worker would have about
$1,000,000 in his private account under the Social Security
Solvency Act when he retires in 2046. He would also receive a
reduced Social Security check from the government. His wife
would have a private account of her own (whether or not she
works) and a monthly Social Security check. The couple would
also own and control the money in their accounts and would not
have to rely entirely on government promises.
A worker earning less would still accumulate significant
funds over a lifetime while retaining a large government Social
Security benefit. For example, a worker earning the minimum
wage--$5.15 an hour--would retire with $514,000 under this
proposal.
We've talked about 18 and 20 year olds. What happens to
those who've worked for a while? Like the younger workers, they
will have two sources of retirement income: private accounts
and government benefits. But because their personal accounts
will be smaller because they've made fewer contributions and
their savings have less time to compound and accumulate, they
will receive higher government benefits. The precise level of
benefits is dependent upon these factors and the worker'
income. This proposal, though complicated, aims to treat
workers equitably based on work and contribution histories.
Protecting Seniors and Taxpayers
Some have suggested that current retirees should accept
lower benefits to facilitate the change to a new system.
Frankly, I disagree. The Social Security Solvency Act maintains
promised benefits for current retirees, including full cost-of-
living increases. Retirees, many of whom have made retirement
plans and cannot return to work, should not see their benefits
cut.
I also believe that payroll taxes are already too high.
Social Security taxes have been raised 38 times in rate or base
since 1971. I want no part in raising them even higher. My plan
also avoids the issuance of any new debt. We have already piled
too much debt on future generations.
Paying for Change
Maintaining benefits for current retirees while building a
stable Social Security system based on worker savings will have
a cost. These changes are made gradually under the Social
Security Solvency Act.
The best choice for financing the new system is to dedicate
budget surpluses to this purpose. The bill would transfer $829
billion from projected government surpluses to Social Security
over the next ten years. There is no better purpose for these
surpluses than to build a brighter future for all American
workers. The bill also includes stringent budgetary controls to
help ensure that Congress doesn't spend those surpluses before
they can be transferred.
In addition, the proposal slows down the growth rate in
Social Security benefits. The average monthly Social Security
check is now around $750. Because these benefits are adjusted
to reflect wage growth--which has outstripped the Consumer
Price Index--the average Social Security benefit will rise to
between $1,100 and $1,400 in 1999 dollars depending upon the
economy's performance by 2048. The Social Security Solvency Act
will slow down this growth in benefits in exchange for private
savings. Further, the changes in the benefit formulas are
designed to spare our least affluent workers.
Will it Work?
To answer this question, I submitted the plan to the
actuaries at the Social Security Administration. They have
analyzed my plan and have certified that it would restore the
system's solvency for at least the next 75 years.
The Social Security Solvency Act is a comprehensive reform
that will create a more secure retirement system for American
workers. Its features include:
personal retirement security accounts (PRSAs) to
give workers control over their own retirement plans while
increasing income and wealth at retirement;
protections for women that include shared PRSAs
for nonworking spouses and increased widow's and widower's
benefits;
the repeal of the Social Security earnings test;
a safety net for low income and disabled workers;
no benefit or COLA reductions for current
retirees;
no new taxes or new debt; and
the restoration of Social Security's long-term
solvency.
A wide variety of interested individuals and organizations
have also looked at the proposal and lent their support.
Federal Reserve Chairman Alan Greenspan, who also chaired the
1983 Social Security Reform Commission, has written me and
expressed support for my approach. Organizations supporting the
Social Security Solvency Act include the U.S. Junior Chamber of
Commerce, the Seniors Coalition, and 60+.
This legislation is the culmination of six years of study
since I came to Congress. Hundreds of experts and thinkers have
contributed to it, many of whom I spoke to as I chaired the
Budget Committee's Social Security Task Force. This is a
proposal that can strengthen this vital program for the 21st
century.