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




 
               IMPROVING SOCIAL SECURITY WORK INCENTIVES

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED SIXTH CONGRESS

                             SECOND SESSION

                               __________

                           FEBRUARY 15, 2000

                               __________

                             Serial 106-46

                               __________

         Printed for the use of the Committee on Ways and Means

                     U.S. GOVERNMENT PRINTING OFFICE
66-309 CC                    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

                                 ______

                    Subcommittee on Social Security

                  E. CLAY SHAW, Jr., Florida, Chairman

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


Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.


                            C O N T E N T S

                               __________

                                                                   Page

Advisories announcing the hearing................................     2

                               WITNESSES

Social Security Administration, Hon. Kenneth S. Apfel, 
  Commissioner of Social Security................................    12

                                 ______

American Association of Retired Persons, Jane Baumgarten.........    48
Center on Budget and Policy Priorities, Robert Greenstein........    83
Institute for Policy Innovation, and Fiscal Associates, Aldona 
  Robbins........................................................    87
Johnson, Hon. Sam, a Representative in Congress from the State of 
  Texas..........................................................     7
National Association of the Home Builders, Tom Woods.............    53
National Bureau of Economic Research, Leora Friedberg............    70
National Center for Policy Analysis, Bruce Bartlett..............    78
National Committee to Preserve Social Security and Medicare, 
  Martha A. McSteen..............................................    60
Peterson, Hon. Collin C., a Representative in Congress from the 
  State of Minnesota.............................................     9
60 Plus Association:
    James L. Martin..............................................    56
    Henry A. Hough...............................................    58
Zed's Ethiopian Cuisine, and National Restaurant Association, Zed 
  Wondemu........................................................    64

                                 ______

                       SUBMISSIONS FOR THE RECORD

American Bar Association, Senior Lawyers Division, Chicago, IL, 
  Edward E. Kallgren, letter.....................................    96
American Farm Bureau Federation, statement.......................    96
Capitol Watch, Andrew F. Quinlan, statement......................    97
Salmon, Richard J., Jacksonville, FL, letter.....................    98


               IMPROVING SOCIAL SECURITY WORK INCENTIVES

                              ----------                              


                       TUESDAY, FEBRUARY 15, 2000

                  House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                   Washington, D.C.
    The Subcommittee met, pursuant to notice, at 9:07 a.m., in 
room 1100 Longworth House Office Building, Hon. E. Clay Shaw, 
Jr. (Chairman of the Subcommittee) presiding.
    [Advisories announcing the hearing follow:]

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                                CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE

February 8, 2000

No. SS-10

                       Shaw Announces Hearing on

               Improving Social Security Work Incentives

    Congressman E. Clay Shaw, Jr., (R-FL), Chairman, Subcommittee on 
Social Security of the Committee on Ways and Means, announced today 
that the Subcommittee will hold a hearing on improving Social Security 
work incentives. The hearing will take place on Tuesday, February 15, 
2000, in room B-318 of the Rayburn House Office Building, beginning at 
10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include academics and policy experts who have studied 
Social Security work disincentives, including the current Social 
Security earnings test; other witnesses will include seniors affected 
by this earnings test. 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:

      
    Social Security has included a retirement earnings test since the 
1930s. Under this provision, working seniors with earnings above a 
certain threshold lose part or all of their Social Security benefits in 
the year of the earnings.
      
    In calendar year 2000, recipients aged 65 (currently the normal 
retirement age) through 69 can earn up to $17,000 without penalty; 
seniors earning more than that amount lose $1 of benefits for every $3 
of earnings above the limit. Some people believe that this provision 
discourages work, especially among seniors who reach the normal 
retirement age. A separate earnings test applies to beneficiaries under 
the age of 65; which reduces benefits by $1 for every $2 of earnings 
above $10,080 in 2000.
      
    The aging of the population has implications for productivity and 
economic growth. Providing seniors with the appropriate incentives and 
opportunities to work will be important to the future prosperity of the 
country.
      
    In announcing the hearing, Chairman Shaw stated: ``Welfare Reform 
and the new Ticket to Work law cleared the path to work for millions of 
poor parents and disabled individuals. This hearing will investigate 
remaining Social Security barriers to work, including the earnings 
penalty affecting some 400,000 hardworking seniors each year. 
Especially in a strong economy, Social Security rules should encourage 
seniors' contributions, not force them to the sidelines.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on work disincentives in Social Security 
programs, including the current Social Security earnings penalty.
      

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 or MS Word format, with their name, address, 
and hearing date noted on a label, by the close of business, Tuesday, 
February 29, 2000, to A.L. Singleton, Chief of Staff, Committee on Ways 
and Means, U.S. House of Representatives, 1102 Longworth House Office 
Building, Washington, D.C. 20515. If those filing written statements 
wish to have their statements distributed to the press and interested 
public at the hearing, they may deliver 200 additional copies for this 
purpose to the Subcommittee on Social Security office, room B-316 
Rayburn House Office Building, by close of business the day before the 
hearing.
      

FORMATTING REQUIREMENTS:

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

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

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

                                


***NOTICE-CHANGE IN TIME AND LOCATION ***

ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                                CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE

February 11, 2000

No. SS-10-Revised

   Change in Time and Location for Subcommittee Hearing on Improving 
                    Social Security Work Incentives

                       Tuesday, February 15, 2000

    Congressman Clay Shaw, Jr., (R-FL), Chairman of the Ways and Means 
Subcommittee on Social Security, today announced that the Subcommittee 
hearing on improving Social Security work incentives, previously 
scheduled for Tuesday, February 15, 2000, at 10:00 a.m., in room B-318 
of the Rayburn House Office Building, will now begin at 9:00 a.m. in 
the main Committee hearing room, 1100 Longworth House Office Building.
      
    All other details for the hearing remain the same. (See 
Subcommittee press release No. SS-10, dated February 8, 2000.)
      

                                


    Chairman Shaw. If everybody could take their seats, we will 
proceed with what I think is going to be a most fruitful and 
successful hearing for everybody, and particularly for American 
seniors.
    Good morning. In recent years, this Committee has focused a 
great deal of energy on reforming government programs to 
encourage work. That was the focus of the historic welfare 
reforms we passed in 1996. It was also the point of Ticket to 
Work bill that passed last year to help disabled Americans 
enter the work force in greater numbers. Today we will explore 
how Social Security rules actually discourage work for some 
seniors.
    Currently, Social Security takes away benefits from hard-
working seniors who make more than the annual limits allow. 
Those are limits arbitrarily set by government. This earnings 
penalty has been in place since Social Security started in the 
thirties, but that does not make it right.
    Many of you will recall that in 1996 we eased this penalty 
for seniors who reached the full retirement age. As a result, 
seniors 65 through 69 now can earn up to $17,000 a year without 
experiencing a cut in their benefits. While that certainly was 
a positive step, many of us have long felt that it is wrong to 
punish hard-working seniors, period.
    What message does this send? That senior contributions are 
no longer needed? That seniors should head for the sidelines of 
the economy due to age alone? That seniors don't deserve the 
benefits that they paid for simply because they continued 
working?
    I don't think any of us feels that way on any of those 
questions. So today we will hear from a broad spectrum of 
witnesses, including Social Security's Commissioner and AARP, 
who support repealing the earnings penalty for seniors who have 
reached the full retirement age. Tomorrow we will mark up H.R. 
5, which is a bipartisan bill that eliminates this penalty.
    We are pleased today to welcome Sam Johnson, the bill's 
author, and Collin Peterson, the lead Democrat cosponsor, who 
are here, and they will testify at our hearing.
    We were encouraged to hear the President say yesterday that 
he would sign a bill similar to H.R. 5 if it reaches his desk. 
I have a feeling that it is going to reach his desk. We intend 
to hold him to that pledge.
    Eliminating the earnings penalty is the right thing to do 
for seniors. They have spent a lifetime working for their 
Social Security benefits, and they should not be deprived of 
one penny. They should get all the benefits they earn and all 
the benefits that they paid for, regardless of whether they 
keep working or not. Hopefully, before too much longer, Social 
Security rules will reflect as much.
    I was asked yesterday at a news conference in which we 
unveiled the hearing process by a reporter that said: Isn't 
this taking away one of the sweeteners that will lead 
eventually to Social Security reform? Well, I am disappointed 
that we are not getting fully to Social Security reform. 
However, it is wrong to hold back something as important as 
this where we take a dollar out of each $3 that a senior earns 
simply because they decided to work. That is simply wrong. And 
whereas I would like this to be part of a larger bill, I have 
no intention of holding it hostage and holding those seniors 
hostage until we finish the political wrangling and political 
bickering across the aisle and down Pennsylvania Avenue with 
the President.
    Again, I would say that the President knows my phone 
number. He can find me readily if he would like to broaden this 
to a wider reform. However, I think that it is time that we 
expedite this bill, that we move it forward, get it to the 
President's desk, get it signed, and say that the seniors now 
beginning the first of this year are no longer penalized 
because they choose to or, in many instances, they have to work 
to support their families and take care of their loved ones.
    With that, I will yield to my friend, Mr. Matsui. It is 
going to be a great pleasure to work in a very positive way 
with you on this bill, as I would certainly anticipate that you 
are going to be joining with us on the Republican side in order 
to get this done.
    Mr. Matsui. Thank you, Mr. Chairman. I appreciate your 
comments, and I appreciate the fact you are holding the hearing 
on this bill today and a quick markup tomorrow. I believe it is 
at 4 o'clock in the afternoon, if I am not mistaken. And I 
would imagine it would go to the Full Committee soon, and I 
doubt if a vote could be taken this week, but perhaps as soon 
as we get back from the recess, we will be able to get this to 
the floor.
    As all of us know, the earning limitation issue has been a 
thorn in the side of senior citizens for quite a number of 
years. My father, when he was past 65, was actually told by his 
employer, whom he had worked with for almost 50 years, that he 
is going to be penalized significantly if, in fact, he was 
making the same income. And so they actually cut his hours way 
back and dropped his salary at that time down to $14,000, what 
the earning limit was. And he put in probably the same number 
of hours that he always did, but he was obviously paid at a 
much, much significantly lower rate.
    And so this earnings limitation has really affected senior 
citizens in a number of perverse ways. Many retire--in fact, we 
have had a report by Leora Friedberg from the University of 
California at San Diego, that says that by eliminating the 
earnings test, you will probably see an increase of seniors in 
the work force by 5.3 percent. And, in addition, I think some 
employers would not suggest to employees that they take a wage 
cut and have the employees continue to work for the same number 
of hours that they had.
    This legislation is much needed. The President has endorsed 
it. Leader Gephardt has endorsed. The entire Republican 
leadership has endorsed it. And so it has very, very strong and 
wonderful bipartisan support.
    It is my hope that in the days ahead--and I still speak in 
the spirit of bipartisanship--perhaps the Senate could do this, 
the other body, or perhaps the House could do it before it hits 
the floor, perhaps it could be taken under separate 
legislation. But we do have the problem of senior citizen women 
who are single. Married women, their poverty rate when they 
receive Social Security is 5 percent. Married women on Social 
Security is 5 percent. Overall, seniors over 65 have a 10 
percent poverty rate. But single women on Social Security have 
between 18 and 20 percent as their poverty rate. And, 
undoubtedly, we need to do something about this. Maybe that 
will be a comprehensive bill. Perhaps it could be looked at 
some time later this year.
    Another issue is, a few years ago in the midnineties we 
decoupled the threshold on the earnings test, which was at 
$14,000. We raised it to $17,000 for seniors, but we did not do 
it for the blind, who at that time were coupled with seniors. 
And with the minimum wage going up--we hope it will go up again 
this year--undoubtedly that has an impact on the ability of 
seniors to earn a livable wage by continuing the earnings limit 
to $14,000.
    I understand that the costs over a 5-year period by raising 
the earnings limit on the blind from $14,000 to $17,000 would 
be in the range of $1 billion to $2 billion over 5 years. And 
it would be my hope that we can find some way to deal with this 
problem. It is not a significant revenue item, but deal with 
this problem and really give the incentive not only for seniors 
but also the blind as well.
    Mr. Apfel will testify that this earnings test for the 
blind and for senior citizens adds a great deal of complexity 
to the Code and certainly to the Social Security 
Administration, I think he will testify in the range of $750, 
$760 million a year additional administrative costs. And so 
obviously this is an issue that all of us from a fiscal point 
of view have to be aware of.
    One other comment I would like to make is that this bill 
must remain clean. The President has indicated he wanted a 
clean bill. My understanding was that last week when we moved 
the marriage penalty relief bill, there were some other items 
on it that we are finding out about now--I could be wrong about 
that; these are only rumors--pension benefit changes, and we 
are checking into that right now. Thank goodness the bill 
hasn't been moved in the Senate and sent to the President. We 
want to keep these bills as clean as possible so that there is 
no misunderstanding about what members are voting for. It is 
very important that we keep this legislation clean as well.
    So, Mr. Chairman, I want to thank you in the spirit of 
bipartisanship. Certainly we want to work with all of you, and 
we look forward to getting this to the President so that the 
President and all members can be part of a signing ceremony.
    Thank you.
    Chairman Shaw. Thank you. It took us a year to get here, 
but we are here and we are here together.
    I would like to welcome our first panel: Sam Johnson, 
esteemed Member of this Committee, and Collin Peterson, who has 
also been a leader with regard to getting rid of the earnings 
penalty on Social Security. We have both of your full 
statements. You may proceed as you see fit, and you are welcome 
before this Committee. Mr. Johnson?

  STATEMENT OF HON. SAM JOHNSON, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF TEXAS

    Mr. Johnson. Thank you, Mr. Chairman, and if Mr. Matsui 
will listen, I will tell him, we have a clean bill filed. We 
have a clean bill filed, and that is the way we want it, too.
    Last year Collin Peterson and I introduced H.R. 5, the 
``Senior Citizens' Freedom to Work Act of 1999,'' to eliminate 
the Social Security earnings penalty. Under current law, senior 
citizens age 65 through 69 can earn only $17,000 before they 
lose $1 in Social Security benefits for every $3 of earnings. 
This limit is unfair, outdated, and bad for our economy. The 
Social Security earnings penalty must be eliminated.
    As we all know, our seniors have earned Social Security 
benefits through a lifetime of contributions to the program, 
and seniors are entitled, in my view, to their full benefits. 
It is their money. It doesn't belong to Washington, D.C. It 
should not be taken away from them just because they choose to 
work after their normal retirement age.
    This Social Security earnings penalty is simply unfair, un-
American, and plain wrong. CBO estimates that nearly 500,000 
seniors who reach the normal retirement age will lose benefits 
because of the earnings penalty just this year. It 
discriminates against our senior citizens who must work in 
order to supplement their benefits, and that is just not right.
    The earnings penalty is also outdated and bad for the 
economy. It is a Depression-era law whose time has long since 
come and gone. In the thirties, the earnings penalty was used 
to force seniors out of the work force. Today, with 
unemployment at record lows, seniors are needed in the work 
force.
    The disincentive effect is magnified when viewed in light 
of other taxes. Senior citizens who work not only lose a large 
percentage of their Social Security benefits due to the Social 
Security earnings penalty, but they must continue to pay Social 
Security, Medicare, Federal tax, and State tax as well. 
Combined, the earnings penalty and these taxes force our 
seniors to face a total marginal tax rate as high as 80 percent 
in some cases.
    In addition to being complicated and difficult for the 
individual senior citizen to understand, the Social Security 
earnings penalty is complex and costly for the Federal 
Government to administer. For example, the earnings penalty is 
responsible for more than one-half of the retirement and 
survivor program overpayments. Social Security estimates that 
administering it costs $150 million a year. Therefore, an 
earnings penalty repeal would help minimize the administrative 
expenses and help our seniors better understand their benefits.
    I firmly believe that repealing the Social Security 
earnings penalty will aid our country's economy. Our senior 
citizens would be more likely to continue to work, and the 
American economy would benefit from their experience and 
skills. The combined increase in the amounts that they would 
pay in Social Security and other taxes, as well as the 
additional contribution to our gross national product, will 
quickly offset any temporary cost. In fact, according to the 
Social Security Administration actuaries, the repeal of the 
Social Security penalty will not affect Social Security's 
financial status over the long run.
    Yesterday, the President agreed to sign this bill, and I am 
pleased that he has decided to help us remedy this blight on 
our Social Security system.
    You know, I fought for freedom in two wars, and I believe 
that freedom entitles our seniors to the freedom to work 
without a penalty. America's seniors want, need, and deserve 
the repeal of this outmoded Social Security earnings penalty.
    Thank you, Mr. Chairman.
    [The prepared statement follows:]

Statement of Hon. Sam Johnson, a Representatives in Congress from the 
State of Texas

    Mr. Chairman, last year, Collin Peterson and I introduced 
H.R. 5, the ``Senior Citizens'; Freedom to Work Act of 1999.'' 
This legislation will eliminate the Social Security earnings 
penalty. Under current law, our senior citizens aged 65-69 can 
earn only $17,000 before they lose $1 in Social Security 
benefits for each additional $3 of earnings. This limit is 
unfair, outdated, and bad for our economy. The Social Security 
earnings penalty must be eliminated.
    As we all know, our seniors have earned Social Security 
benefits through a lifetime of contributions to the program. 
Seniors are entitled to their full benefits. It's their money. 
It should not be taken away from them just because they choose 
to work after their normal retirement age.
    This Social Security earnings penalty is simply unfair. CBO 
estimates that nearly 500,000 seniors who reach the normal 
retirement age will lose benefits because of the earnings 
penalty in 2000. It discriminates against our senior citizens 
who must work in order to supplement their benefits. That's 
just not right.
    The earnings penalty is also outdated and bad for the 
economy. It is a Depression-era law whose time has long since 
come and gone. In the 1930's, the earnings limit was used to 
force seniors out of the workforce. Today, with unemployment at 
record lows, seniors are needed in the workforce.
    The disincentive effect is magnified when viewed in light 
of other taxes. Senior citizens, who work, not only lose a 
large percentage of their Social Security benefits due to the 
Social Security earnings penalty, but they must also continue 
to pay Social Security, Medicare, federal taxes and probably 
state income taxes as well. Combined, the earnings penalty and 
these taxes force our seniors to face total marginal tax rates 
as high as 80%.
    In addition to being complicated and difficult for the 
individual senior citizen to understand, the Social Security 
earnings penalty is complex and costly for the federal 
government to administer. For example, the earnings penalty is 
responsible for more than one-half of retirement and survivor 
program overpayments. SSA estimates that administering it costs 
$150 million a year. Therefore, an earnings penalty repeal 
would help minimize administrative expenses and help our 
seniors better understand their benefits.
    I firmly believe that repealing the Social Security 
earnings penalty will aid our country's economy. Our senior 
citizens would be likely to work more and the American economy 
would benefit from their experience and skills. The combined 
increase in the amounts that they would pay in Social Security 
and other taxes, as well as the additional contribution to our 
Gross National Product, will quickly offset any temporary cost. 
In fact, according to the Social Security Administration's 
actuaries, the repeal of the earnings penalty will not affect 
Social Security's financial status over the long run.
    Yesterday, the President agreed to sign this bill. I am 
pleased that he has decided to help us remedy this blight on 
our Social Security system.
    I fought for freedom in two wars and, I believe that 
freedom entitles our seniors the ability to work without a 
penalty.America's seniors want, need and deserve the repeal of 
the Social Security earnings penalty.
      

                                


    Chairman Shaw. Thank you, Sam.
    Collin.

   STATEMENT OF HON. COLLIN C. PETERSON, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MINNESOTA

    Mr. Peterson. Thank you, Mr. Chairman, and I want to thank 
you and the Subcommittee for inviting me to be with you today 
to go over this important issue.
    The Social Security earnings limit is a law that America's 
seniors love to hate, and for good reason. About 1.4 million 
retirees lose part or all of their current Social Security 
payments each year because they earn more than this law allows. 
And you have all done a good job of pointing out how it works.
    The earnings test, as you know, has been a part of the 
Social Security program since its inception. You know, with the 
backdrop of the Great Depression and unemployment, the 
rationale for this test probably made some sense. Social 
Security was viewed to protect worker from certain risks, 
specifically loss of income due to retirement. Therefore, their 
benefits were withheld from workers who made a significant 
income and reserved for those who actually retired.
    Additionally, earnings limits were included to encourage 
retirees to leave the work force, making more jobs available to 
young people and to the unemployed.
    However, today's economy bears no resemblance to the 
American economy of the mid20th century, and Social Security 
earning limits have outlived their time.
    Mr. Chairman, I am here today to say in unequivocal terms 
that the earnings limits are a bad policy and should be 
repealed. H.R. 5, which eliminates the earnings limits for 
retired workers between 65 and 69 just makes good economic 
sense.
    As I stated, today's economy is drastically different than 
when Social Security became law. For instance, currently 
American cities and rural areas alike are experiencing historic 
labor shortages, and that includes my district where, in spite 
of the fact that we have got a tremendous farm economic 
disaster, we have got shortages in all of our little cities. 
Seniors are living longer and are more skilled than in the past 
and could help this labor shortage significantly. However, as 
you know, this limit prevents or discourages a lot of seniors 
from playing a critical role in that economy.
    In 1930, 54 percent of males continued working after 65, 
and in 1997, only 18 percent of senior males continued that 
work. And I think that is in large part because of this law.
    When I asked the folks back home if repealing the Social 
Security earnings limit would help the economy in St. Cloud, 
Minnesota, in my district, Teresa Bowman, the president of the 
St. Cloud Chamber, responded with a resounding ``yes.'' She 
added that the St. Cloud Chamber of Commerce views the work 
force shortage as the number one problem in their area, and 
they think H.R. 5 would be of significant help in providing 
them relief of that problem.
    David Martin, who represents the Chamber of Commerce of 
Fargo-Moorhead, a community that is a bit more rural than St. 
Cloud up on the Minnesota-North Dakota, David also stressed the 
problems they are experiencing due to the labor shortage. Last 
year, according to a Newsweek article, the Fargo-Moorhead area 
had the highest labor shortage rate in the country. David said 
that the chamber of commerce is concerned that the tight labor 
pool will make it very difficult for their economy to grow, and 
he believes H.R. 5 would give their area and areas like it a 
big boost so their economy could continue to grow into the 21st 
century.
    In addition to being sound economic policy, eliminating the 
Social Security earnings limit I think is a matter of fairness. 
Social Security benefits have been earned by a lifetime of work 
and contributions to this program, and I think seniors should 
expect that they should get those benefits when they retire.
    Also, as Mr. Johnson pointed out, these seniors are paying 
some of the highest, maybe the highest marginal tax rates of 
any of our taxpayers, and that is something that clearly we 
should solve.
    Last, I would like to talk about two other things that are 
not really in this bill, but I think I want considered by this 
Committee. One of them is kind of related to this. The IRS--and 
they have been kind of doing this ever since I was back 
practicing accounting and doing tax returns--have got an 
interpretation that if a farmer rents his land to somebody, to 
his son or neighbor, that they are considering that rent to be 
earned income, self-employment income. And when they audit some 
of these farmers, they are going in and making them pay self-
employment tax on the farm rent, saying that they are 
significantly contributing to the decisionmaking and, 
therefore, you know, they are having earned income.
    You can write it up any way you want, and they will come in 
and interpret that if you sit at the kitchen table and give 
your son advice, that triggers this all being self-employment 
income. So not only do they have to pay the 15.3 percent, they 
get tied up in this earnings limit problem because that then 
becomes earned income.
    So I would like this Committee to look at that. I have co-
sponsored a bill, introduced by Mr. Nussle, to address this 
issue. This is an interpretation that has been made by the IRS, 
and I think it is something that we ought to look at and 
correct because it is driving a lot of farmers crazy. And right 
now they do not need this kind of a hassle with all the other 
problems that they are having and they don't need to have to 
pay that extra tax. So I wish you would look at that.
    Then, last--and this is not related to this bill either, 
but the National Federation for the Blind has talked to me, and 
I think to others, about that they have got some concerns with 
the earnings limit as it affects those folks. As I understand 
it, there is some revenue implication from that, but I think 
that is something else that we ought to look at because these 
folks, a lot of them are trying to work and be productive 
members of society, and we ought not penalize them the way we 
do either.
    So thank you very much, Mr. Chairman. I hope that we can 
work together on this and have a successful outcome and all be 
at the White House someday at a signing ceremony.
    Thank you.
    Chairman Shaw. Thank you. Thank you both.
    Do any of the members seek recognition for questioning? Mr. 
Collins?
    Mr. Collins. Mr. Peterson, I would like for you to go back 
to the issue of the blind. What would you recommend in that 
area?
    Mr. Peterson. On the what?
    Mr. Collins. What would you recommend the Congress do in 
the area of the blind and the earnings limit?
    Mr. Peterson. Well, if I had my way, I think I would take 
the earnings limit off.
    Mr. Collins. Totally off? No ceiling, just totally off?
    Mr. Peterson. Let them work.
    Mr. Collins. I am sorry?
    Mr. Peterson. I said let them work.
    Mr. Collins. Yes, I understand.
    Mr. Peterson. But it would be costly. But I think, as Mr. 
Johnson said, these earnings limits create a lot of 
bureaucracy, a lot of complications in the system. That is one 
reason why it would be easier if you just took it off rather 
than try to adjust it up. You know, that would be my 
suggestion. But, you know, anything that we could do to improve 
it, of course, would be helpful.
    Mr. Collins. Well, I have had some suggestions both ways, 
some to totally take it off and some to maybe still leave some 
type of ceiling in place where there would not be a cliff added 
that would stop.
    Thank you.
    Chairman Shaw. Mr. Matsui?
    Mr. Matsui. I just want to thank the panel for their 
testimony. Thank you.
    Chairman Shaw. Did anyone seek recognition on the 
Republican side or the Democrat side?
    [No response.]
    Chairman Shaw. Well, I would like to thank you and, Collin, 
to comment on part of the issue that you raised with regard to 
parents handing down the business, the farming business to 
their youngsters.
    Perhaps since we have the Commissioner here, we should 
question him with regard to that--you could take the same 
argument with regard to voting proxies. That doesn't make any 
sense at all.
    Mr. Peterson. Right.
    Chairman Shaw. And, of course, as far as the earnings 
limit, that will become history at a very early date, I am 
hopeful. But I can tell you that if we can't get some 
satisfaction with regard to that problem, we will certainly 
look into it, because that is flat wrong.
    As a father, I hope my kids do listen to me, and I have a 
lot of advice, as all fathers do. And I think that the ability 
to tap into our matured population to get advice as to how to 
run businesses and what to do from an economic standpoint is 
tremendously important and should never be discouraged. Because 
I have seen so many instances where kids have taken over 
businesses and run them right into the ground, and I think it 
is very important that their parents keep tabs on what is going 
on with the businesses that they helped to create. So our 
Committee will look into that.
    Mr. Peterson. Well, that would be great because I can tell 
you that this is driving the farmers crazy, and my old partners 
in my CPA firm, every time I talk to them, this is the number 
one thing they bring up. They do a lot of farm work, and, you 
know, if the IRS gets more auditors, this is going to be a 
bigger problem. The only thing that is saving them now is that 
they don't have enough people out there to audit enough people 
to catch them. But it is a big issue, and as I said, it is not 
a law that was passed by Congress. This is just an 
interpretation. They have been after this for a long time, but 
since 1996, they have really stepped up the effort to try to 
turn all of this rental income into self-employment.
    Chairman Shaw. Well, you can tell your farmers that you got 
the attention of the Ways and Means Committee.
    Mr. Peterson. Great.
    Chairman Shaw. Thank you both for testifying.
    Chairman Shaw. Now we are pleased to invite our second 
witness, who is Hon. Kenneth Apfel, who is the Commissioner of 
the Social Security Administration, and, Commissioner, I would 
ask that as part of your remarks if you would comment on the 
point that Mr. Peterson made if you are prepared to do so. If 
not, you could come back to us in writing and make a note of 
his concern.

  STATEMENT OF HON. KENNETH S. APFEL, COMMISSIONER OF SOCIAL 
            SECURITY, SOCIAL SECURITY ADMINISTRATION

    Mr. Apfel. Good morning, Mr. Chairman, Congressman Matsui, 
and Members of the Committee.
    You indicated the importance of individuals listening to 
their parents. Well, I must tell you that my father told me, 
``Get rid of that earnings test.'' So I do listen to my father, 
and it is one of the reasons why I feel so strongly about 
eliminating the earnings test.
    On the issue of the farm situation, I must say I was 
unaware of the entire issue, so we will have to respond to that 
in the record. I will be talking to the IRS about that because 
it is brand-new information to me.
    To begin with, Mr. Chairman, the President's budget 
provides a framework for locking away the entire Social 
Security surplus each and every year. An estimated $1.7 
trillion over the next 10 years, under Social Security 
Trustees' assumptions, would be devoted solely to improving the 
balance sheet of the Federal Government and strengthening 
Social Security.
    The President's framework provides for transfers in years 
2011 through 2050 of the interest savings that would result 
from setting aside the Social Security surpluses. Under Social 
Security actuary projections, these transfers would total $99 
billion in 2011 and grow to $205 billion by 2016. The transfers 
would extend the solvency of the trust funds to about 2050.
    Also, beginning in 2011, the framework calls for investing 
a sensible and measured proportion of the transfers in broad 
equity market indexes by private managers and not the 
government. This would further extend trust fund solvency to 
2054, compared to the current projected date of 2034.
    Solvency of Social Security is vitally important to the 
economic security of everybody, particularly older women.
    In this regard, we need to be aware that Social Security 
reform proposals can have very different effects on the 
benefits received by women compared to men. Women tend to have 
lower lifetime earnings, work fewer years, and live longer in 
retirement than men. Elderly women often are more dependent on 
Social Security because they are less likely to have pensions 
and more likely to outlive assets. The specific issues faced by 
elderly women need to be addressed within the framework of 
Social Security reform.
    Which brings me to the retirement earnings test. Under 
current law, for beneficiaries age 65 to 69 in 2000, benefits 
are reduced $1 for every $3 of earnings above $17,000 a year. 
For those between 62 and 65, benefits are reduced $1 for every 
$2 of earnings above $10,080 annually. Workers are exempt when 
they reach age 70, and delayed retirement credits are provided 
to compensate workers age 65 to 69 whose benefits are withheld 
under the RET.
    The President has said that we should eliminate the 
retirement earnings test. The retirement earnings test is both 
confusing to beneficiaries and difficult to administer.
    Eliminating the retirement earnings test could affect the 
choice of older workers regarding whether and how much to work. 
Although the benefit withholdings under the RET are roughly 
offset by higher benefits later on, many people perceive the 
retirement earnings test as a tax on their labor income.
    Eliminating this perceived disincentive would have two 
effects: One, some people would choose to remain in the labor 
force or continue to work full-time because they would not face 
the same reduction in their current Social Security benefits; 
and, two, some people would choose to work less, making up for 
lower earnings with higher current Social Security benefits.
    With a limited amount of evidence on the overall effect of 
the RET on labor supply, it is impossible to form a definitive 
conclusion. However, it seems very plausible that eliminating 
the retirement earnings test would lead to a modest increase in 
work activity.
    And, additionally, widows of workers who retire before full 
benefit retirement age also get permanently reduced benefits. 
Thus, elimination of the retirement earnings test at 62 could 
negatively impact the number of elderly women living in 
poverty. And my written statement, which I would ask to be 
included in the record, goes into more detail on this point.
    The Administration, therefore, believes that we can make a 
substantial downpayment on Social Security reform with two 
simple, clear bipartisan steps.
    The first step is to pass a straightforward bill to repeal 
the retirement earnings test at the normal retirement age. If 
Congress sends the President a clean bill to repeal the 
retirement earnings test at the normal retirement age, with no 
extraneous, non-Social Security matters whatsoever, he will 
sign it.
    The second simple step is for Congress to pass and send a 
bill to the President that would extend the solvency of Social 
Security to at least 2050 and include significant measures to 
reduce poverty among elderly women. The President has given 
Congress straightforward legislation that would simply assure 
that we devote the interest savings earned by paying down the 
publicly held debt to making Social Security stronger. By 
agreeing to this simple step, we can extend the life of Social 
Security to the middle of the next century.
    Just as the administration and the Congress worked together 
to successfully tackle the economic challenges facing this 
Nation and put our fiscal house in order, we can also work 
together to eliminate the retirement earnings test in the right 
way. And I believe that we can work together to resolve the 
long-term Social Security solvency issues as well.
    I will be happy to answer any questions the members may 
have at this time.
    [The prepared statement and attachment follow:]

Statement of Hon. Kenneth S. Apfel, Commissioner of Social Security, 
Social Security Administration

    Good morning, Mr. Chairman and Members of the Subcommittee. 
Thank you for inviting me to appear this morning to discuss 
issues related to the Social Security retirement earnings test 
(RET). First, I would like to discuss the President's framework 
for Social Security reform. Then, I will discuss another major 
concern of the Administration; the importance of Social 
Security to the economic well-being of elderly women and the 
need to improve their protection under the program. Finally, I 
will explain how the Social Security retirement earnings test 
has changed over the years and discuss the implications of 
eliminating the test.
    The President believes that it is important to modernize 
the system by eliminating the outdated retirement earnings test 
at normal retirement age (NRA). The President would also like 
to work together to use the benefits of debt reduction to 
extend the solvency of Social Security to about 2050 and 
improve the effectiveness of Social Security in combating 
poverty among elderly women. He remains committed to working 
together with Congress on a bipartisan basis to enact reforms 
that make Social Security solvent for at least 75 years.

President's Budget Framework

    Let me begin today by discussing the President's budget 
proposal as it pertains to Social Security reform. I strongly 
support the President's proposal. Maintaining fiscal discipline 
and paying down the debt gives us an historic opportunity to 
meet the challenges of the future. The President proposes to 
devote the Social Security surpluses to improving the balance 
sheet of the Federal government, and to transfer the resulting 
interest savings to the Social Security trust fund. In 
addition, his plan calls for investing a limited amount of the 
trust fund in equities as a prudent and workable solution for 
extending the life of the trust fund yet further into the 
future. This budget proposal is an important first step towards 
crafting a bipartisan agreement between the President and 
Congress that will keep faith with future generations of 
Americans.
    As you know, the Social Security program faces a long-range 
deficit of 2.07 percent of taxable payroll under the 
intermediate assumptions of the 1999 Trustees Report. Because 
Social Security is fundamental to the economic well being of 
our aged population, ensuring the long-range solvency of the 
Social Security program must be one of our highest priorities. 
That is why the President's budget framework to preserve and 
strengthen Social Security is so very important. The President 
has proposed the following specific actions:

        First, the President's framework provides for locking away the 
        entire Social Security surplus each and every year. All Social 
        Security surpluses, an estimated $1.7 trillion over the next 10 
        years under Social Security Trustees assumptions, would be 
        devoted solely to improving the balance sheet of the Federal 
        government and strengthening Social Security (under 
        Administration assumptions, the Office of Management and Budget 
        projects a $2.2 trillion Social Security surplus over 10 
        years). This framework will ensure that we achieve substantial 
        public debt reduction, helping to prepare the government and 
        the Nation for the retirement of the baby boomers.
        The framework provides for the transfer of interest savings 
        based on the cumulative amount of Social Security surpluses we 
        actually experience over the next 15 years. The President's 
        framework provides for transfers in years 2011 through 2050 to 
        Social Security. The Social Security actuaries project that the 
        interest savings that would result from setting aside the 
        Social Security surpluses (assuming all the new resources are 
        invested in government securities) would total $99 billion in 
        2011 and grow to $205 billion by 2016. Total transfers between 
        2011 and 2015 would be $690 billion. The transfers would extend 
        the solvency of the trust funds until 2050.
        Also, beginning in 2011, the framework calls for investing a 
        sensible and measured proportion of the transfers in the equity 
        market to achieve higher returns for Social Security. The 
        equity investment would be limited to 50 percent of the 
        cumulative transfer amounts, to the degree that these did not 
        exceed 15 percent of the trust funds. The Social Security 
        actuaries project that the Trust Fund's equity holdings would 
        represent, on average, about 3 percent of the stock market over 
        the 30-year period 2011-2040. Funds would be invested in broad 
        market indexes by private managers, not the government. This 
        would further extend the solvency of the trust funds to 2054, 
        compared to the current projected exhaustion date of 2034.

    Now is the time for action. If we act now, before there is 
a Social Security financing crisis, and while we enjoy the 
first budget surpluses in a generation, we can prevent a 
financing crisis from ever occurring. If we delay action for a 
generation, the size of the financing problem will grow. We 
have an historic window of opportunity to meet the challenge 
facing Social Security. . . and we must not let this 
opportunity slip away.

Importance of Social Security for Women

    I now want to talk about the importance of Social Security 
in the economic security of women and why any comprehensive 
reform of Social Security must address the high incidence of 
poverty among elderly women.
    For 60 years, Social Security has provided a solid floor of 
financial protection in the event of a worker's retirement, 
death, or disability. It has allowed the great majority of 
Americans to retire with the dignity that comes from financial 
independence, without fear of poverty or reliance on others.
    No government program has had a more positive impact on the 
lives of older women than Social Security. There can be no 
doubt--Social Security is a vitally important element in the 
retirement income security of our sisters, our mothers, our 
grandmothers, and our great grandmothers.
    The President is committed to helping elderly women, who 
typically have higher poverty rates than other elderly. On 
numerous occasions, the President has made it clear that he 
wants to address their situation as part of the effort to close 
the long-range deficit in Social Security. He has stated that 
``We should reduce poverty among elderly women who are nearly 
twice as likely to be poor as our other seniors.''
    Even though Social Security does a good job of keeping most 
elderly families above the poverty threshold, poverty rates 
vary greatly between different groups. For example, poverty 
rates are higher among nonmarried women than married women 
beneficiaries.

        Only 5 percent of aged married women are poor; in contrast, 22 
        percent of divorced, 20 percent of never-married, and 18 
        percent of widowed women age 65 and older are poor.
        Widows account for the largest proportion (66 percent) of poor 
        aged beneficiary women. There are 1.2 million aged widows who 
        receive Social Security benefits and have incomes below the 
        poverty line ($7,818 for an aged individual in 1998).

Social Security Reform and Women

    We need to be aware that Social Security reform proposals 
can have very different effects on the benefits received by 
women compared to those received by men. These differences stem 
from the fact that, although Social Security program rules are 
gender neutral, individuals are affected differently because of 
their lifetime earnings patterns and life expectancies differ.
    Women tend to have lower lifetime earnings and work fewer 
years in covered employment than men and, because of their 
longer life expectancies, will spend more time than men in 
retirement. Therefore, the possible differential effects of any 
proposed program changes on women need to be closely reviewed 
as we discuss the options and trade-offs of ways to ensure the 
solvency of Social Security.
    Income security remains an elusive goal for many elderly 
women. This is why a comprehensive Social Security reform 
package must not only achieve solvency but include provisions 
to protect elderly women. Elderly women often are more 
dependent on Social Security because they are less likely to 
have pensions and sometimes outlive their assets. Almost three-
quarters of Social Security beneficiaries over age 85 are 
women. It is essential that we work together in a bipartisan 
effort to ensure that they have the best protection that 
society can provide.

The Retirement Earnings Test

    Now, I will discuss the issue of the retirement earnings 
test (RET). Let me begin by briefly reviewing the philosophy 
behind the earnings test and how that philosophy, and the test 
itself, have changed over the years.
    Social Security was designed as a social insurance program 
under which workers and their dependents were to be insured 
against the loss of earnings as a result of retirement, 
disability, or death of the worker. Benefits are intended to 
partially replace the earnings that are actually lost due to 
these events. In that context, the retirement earnings test was 
designed as an objective measure of the extent to which 
earnings are lost due to retirement.
    The Social Security program has always had an earnings 
test. However, the ``all-or-nothing'' test in the original 1935 
Social Security Act has been modified numerous times to allow 
retirees to supplement benefits with earnings up to a specified 
level. Even before the first benefits were paid in 1940, the 
test of retirement was modified so that a beneficiary could 
earn up to $14.99 in covered earnings before losing benefits 
for that month.
    Since 1940, many other changes to the retirement earnings 
test have been made. The Social Security Amendments of 1950, 
for example, exempted people age 75 and over from the earnings 
test. In 1954, the retirement test was broadened to include 
non-covered wages, and the age at which the test no longer 
applied was lowered from 75 to 72. The concept of reducing 
benefits by $1 for each $2 of earnings above the exempt amount 
was introduced in the Social Security Amendments of 1960, and 
the 1972 Amendments provided for the earnings test exempt 
amount to be increased automatically with increases in average 
wage levels. In 1983, the age at which the test no longer 
applies was lowered to 70. In 1990, the withholding rate of $1 
of benefits for each $2 of earnings was changed to $1 for $3 
for beneficiaries aged 65 to 69.
    The most recent change to the retirement earnings test 
occurred in 1996. With the strong support and leadership from 
the President, the annual exempt amounts for beneficiaries aged 
65 to 69 was legislated to rise annually. This year the annual 
exempt amount is $17,000; in 2001, it will be $25,000, and by 
2002, it will reach $30,000. This increase gives many older 
Americans the opportunity to supplement their Social Security 
benefits while remaining productive members of the workforce.

The Current Retirement Test

    Under current law, for beneficiaries age 65-69 in 2000, 
benefits are reduced $1 for every $3 of earnings above $17,000 
per year. For beneficiaries between the ages of 62 and 65, 
benefits are reduced $1 for every $2 of earnings above $10,080 
per year. Unearned income, such as interest income, dividend 
payments, private pensions and the like, is not counted for 
purposes of the retirement earnings test.
    In addition, workers are exempt from the test when they 
reach age 70. For a worker below age 70, his or her earnings 
above the exempt amount affect not only his or her own 
benefits, but also the benefits of family members receiving 
benefits on the worker's earnings record. However, if a 
dependent or survivor beneficiary has earnings above the exempt 
amount, those earnings can affect only that individual's 
payments.
    Delayed retirement credits (DRCs) are provided to 
compensate workers age 65-69 whose benefits are withheld under 
the retirement earnings test. The DRC increases the worker's 
retirement benefit for each month that benefits are fully 
withheld after the full benefit retirement age, now age 65 but 
scheduled to rise to 67 by 2022. The DRC is currently 6-percent 
per year for workers age 65 in 2000. The DRC percentage will 
increase 0.5 percentage point every two years until it reaches 
8 percent per year for workers reaching age 65 in 2008 and 
later. When the DRC is 8 percent per year, benefits lost due to 
the retirement earnings test and/or delayed retirement 
generally will be offset in an actuarially fair manner by the 
increase in benefits resulting from DRCs.
    The present-law actuarial reduction provisions, in 
conjunction with the earnings test for workers aged 62-to 65, 
are designed to provide the early benefit claimant who works, 
on average, with the same total lifetime benefits as would be 
received if benefits had started at age 65. A person who files 
a Social Security claim before reaching the full benefit 
retirement age receives a reduced benefit. However, once the 
person reaches age 65, the benefit payment is adjusted upward 
to account for any benefit amounts withheld due to earnings 
prior to age 65. The effect of this procedure is that whenever 
a monthly check, otherwise payable to someone between 62 and 
65, is partially or totally withheld under the earnings test, 
the amount ``lost'' is repaid, on average, over the course of 
the beneficiary's remaining lifetime beginning at 65.
    In 1999, an estimated 1.2 million beneficiaries had some or 
all of their benefits withheld for some portion of the year 
under the earnings test due to work at age 62 or above. About 
800,000 beneficiaries lost some or all of their benefits under 
the test as a result of their work at ages 65-69. The benefits 
of 150,000 auxiliary beneficiaries are also limited or withheld 
due to the earnings of the primary beneficiary. With respect to 
beneficiaries aged 62-64, about 230,000 working beneficiaries 
had all or part of their benefits withheld, and 25,000 
auxiliary beneficiaries are affected.

Issues Associated with Eliminating the Retirement Earnings Test

    As I indicated earlier, the President has said that we 
should eliminate the retirement earnings test. However, an 
important issue is whether the RET should be eliminated at age 
62 or at the normal retirement age, currently age 65, scheduled 
to gradually rise to 67. (For example, workers born in 1938 and 
eligible for early retirement at age 62 this year, have a 
normal retirement age of 65 and two months.) This issue 
involves important trade-offs. On one hand, the RET is 
confusing to beneficiaries, and probably reduces their work 
effort to some degree. It is also difficult to administer. 
Eliminating the test would end these problems. On the other 
hand, eliminating the RET at age 62, by itself with no other 
changes, would likely increase poverty for many older 
beneficiaries--particularly elderly women--and would increase 
the long-range program deficit by a small, but measurable 
amount. Eliminating the test at the normal retirement age would 
have a negligible impact on poverty for older beneficiaries and 
would not result in a long-range program cost. Let me elaborate 
on these points.
    Eliminating the RET could have an effect on the choice of 
older Americans of whether and how much to work. Although the 
benefit witholdings under the RET are roughly offset by higher 
benefits later on, many people perceive the RET as a tax on 
their labor income. Eliminating this perceived disincentive 
would have two effects: (1) some people would choose to remain 
in the workforce or to continue to work full-time because they 
would not face the same reduction in their current Social 
Security benefits; and (2) some people would choose to work 
less, making up for lower earnings with higher current Social 
Security benefits.
    There is only a limited amount of evidence on the overall 
effect of the RET on labor supply and it is impossible to form 
a definitive conclusion. It does, however, seem plausible that 
eliminating the RET would lead to a modest increase in work 
activity, an assumption that is reflected in the Social 
Security actuaries' estimates of the impact of eliminating the 
RET on Social Security solvency.
    Eliminating the RET below the normal retirement age might 
also change the risks that older Americans face down the road. 
Eliminating the earnings test would result in more workers 
electing to receive benefits as soon as they become eligible 
(about 60 percent of workers already claim benefits at age 62). 
The decision to claim benefits earlier reduces these 
individuals' monthly Social Security benefits. The lower 
benefit is intended to be actuarially fair so that, over their 
lifetimes, beneficiaries receive, on average, the same total 
benefits. However, many people do not perceive that these 
benefits are paid back to them over their lifetime. Once 
beneficiaries who claimed reduced benefits stop working, they 
may not have sufficient outside resources to offset this 
reduction in Social Security benefits.
    And I want to emphasize this point: the widow(er)s of 
workers who retire before full benefit retirement age also get 
permanently reduced benefits due to the worker decision to 
retire early. Thus, elimination of the RET at 62 could also 
have a negative impact on the number of elderly women living in 
poverty in the future. The poverty impact of eliminating the 
RET between age 62 and the NRA is dependent on changes in 
filing behavior and changes in work/retirement decisions, and 
cannot be predicted exactly.
    At present, most women who have ever been married 
ultimately receive benefits based on their deceased husband's 
earnings record. Age reductions in the deceased worker's 
benefit are generally passed on to the widow(er)'s benefit. 
Thus the worker's decision to take benefits at 62 would result 
in lower, perhaps inadequate, benefits for his survivor many 
years later. A very likely consequence of eliminating the 
earnings test for those below NRA, if no other changes were 
made, would be an increase in the number of elderly widows who 
are poor.
    The Administration believes that the best policy is to 
eliminate the earnings test at NRA. Eliminating the RET at age 
62 raises serious concerns about increasing poverty among 
elderly women, and we would not want to consider it without at 
least making sizeable changes to the program to mitigate these 
deleterious effects.

Next Steps

    The Administration believes that we can make a substantial 
down payment on Social Security reform with two simple, clear 
bipartisan steps:
    The first step is to pass a straightforward bill to repeal 
the RET. If Congress sends the President a clean bill to repeal 
the RET at NRA, with no extraneous, non-Social Security matters 
whatsoever, he will sign it.
    The second simple step is for Congress to pass and send a 
bill to the President that would extend the solvency of Social 
Security to about 2050 and include significant measures to 
reduce poverty among elderly women. The President has given 
Congress straightforward legislation that would simply ensure 
that we devote the interest savings earned by paying down the 
publicly-held debt to making Social Security stronger. By 
agreeing to this simple step, we can extend the life of Social 
Security to the middle of the next century.

Conclusion

    The President has shown strong leadership in providing a 
framework for preserving the financial well-being of the Social 
Security program. If adopted, this framework would take us a 
long way towards closing the long-range actuarial gap of 2.07 
percent of taxable payroll. It gives us a solid foundation on 
which to preserve our social insurance program throughout this 
century. And it does much more: President Clinton's approach 
would pay down the publicly held debt, thereby increasing 
national savings and promoting economic growth, which will 
reduce burdens on future generations.
    Just as the Administration and the Congress worked together 
successfully to tackle the economic challenges facing this 
nation and put our fiscal house in order, we can also work 
together to eliminate the RET in the right way. And I believe 
that we can work together to resolve the long-term Social 
Security solvency issues as well. We have an opportunity that 
we could not have imagined just a few years ago. We can begin 
to deal with the future, and address long-term generational 
challenges. We must seize this moment and focus on 
strengthening and protecting the Social Security system for 
future generations of Americans.
    I will be happy to answer any questions the Members may 
have.

        Treatment of Self-Employment Income for Farmer Landlords

Present Law:

    The Internal Revenue Code and the Social Security Act 
provide that rental income from real estate shall be excluded 
from net earnings from self employment (NESE) unless it is 
income (1) derived under an ``arrangement'' (between the owner 
and another individual) that provides that such other 
individual shall produce agricultural or horticultural products 
on the land AND (2) that there be material participation by the 
owner in the production of these products, and that such 
participation actually occurs.

Background:

     In 1954, the Social Security Act first covered 
self-employed farmers but rental income from crop shares was 
excluded. In 1956, Congress included the ``material 
participation'' exception to the exclusion of real estate 
rental income, so that such rental income would become NESE if 
the owner participated in a substantial way in the farm 
activities.
     The elements for material participation were set 
forth in the 1956 Senate report and are still used in making 
determinations as to the landowner's participation. Material 
participation is met only if the owner performs at least 3 of 
the following:

        Periodically advises and consults with his/her tenants;
        Periodically inspects the production activities;
        Furnishes a substantial portion of the machinery, equipment and 
        livestock; or
        Assumes responsibility for a substantial portion of the 
        production expenses.

Issue:

     Representative Peterson's earlier remarks 
reference a bill, which he supports, that was introduced by 
Representative Nussle (H.R. 1044). This bill would exclude 
certain farm rental income from NESE if the taxpayer enters 
into a ``lease agreement'' relating to such income that is 
silent on the question of material participation.

        In the statement Representative Nussle made when he introduced 
        H.R. 1044, he expressed concern that ``IRS is using a 1995 Tax 
        Court Ruling and one of its own nonbinding memorandums to make 
        a farmer liable for SE tax on income derived from an 
        arrangement between the tenant farmer and his landlord. That 
        means that IRS is levying the SE tax not only on the cash 
        rental income from the land, but also on any partnership or 
        corporation a farmer has established to manage the farm with 
        their spouse, children or other relatives.''

     The treatment of rental income in these cases is 
consistent with its treatment in other cases--that is, income 
is subject to SECA tax only if it is derived in the course of a 
person's trade or business. That is why rental income is 
generally not subject to Social Security tax. However, if the 
person does more than merely rent the land--if the person 
materially participates in the farming activity--then the 
income is subject to SECA tax.
     Representative Nussle's bill would reduce the 
amount of NESE that certain farmers would report--provided they 
have a lease agreement that is silent regarding material 
participation of the farmer. From a Social Security coverage 
standpoint, the effect would be lower taxable earnings, which 
in turn would decrease the amount of Social Security benefits 
payable to the farmer and his/her dependents.
      

                                


    Chairman Shaw. Mr. Johnson, do you have any questions?
    Mr. Johnson. Maybe one. Thank you, Mr. Chairman.
    Good morning. Thanks for being here.
    Mr. Apfel. Good morning.
    Mr. Johnson. We are glad you support this. I know you have 
a relative that was affected by this from what we read from 
last year.
    Mr. Apfel. That is correct.
    Mr. Johnson. And I think that this is an important step in 
making the Social Security Administration easier for you to 
operate, maybe. Would you care to comment on that?
    Mr. Apfel. Yes. I think that repeal of the retirement 
earnings test would simplify the program administratively for 
the Social Security Administration and also simplify the 
program for individuals who are already receiving benefits.
    There is a lot of misunderstanding about the Social 
Security retirement earnings test and its implications over the 
long term for individuals. So eliminating the retirement 
earnings test would make it simpler for beneficiaries to be 
able to continue to work.
    Mr. Johnson. Yes, but you have had some overpayments as a 
result of that, haven't you?
    Mr. Apfel. Yes.
    Mr. Johnson. What is the cost of that?
    Mr. Apfel. I was going to continue to point that out. 
Administratively, it costs us somewhere in the vicinity of 
1,500 workyears each year to administer the retirement earnings 
test for working beneficiaries age 62-69. We also have 
overpayments of about $780 million a year. These overpayments 
occur because we learn about the accurate amounts of earnings 
after the fact, so there is always a lot of administrative work 
that needs to be done. Eliminating the retirement earnings test 
at the normal retirement age would eliminate the vast amount of 
that work for us. So it would simplify the administration of 
the program and I think simplify it for the American public as 
well.
    Mr. Johnson. Does that mean you can downsize your agency?
    Mr. Apfel. Well, Mr. Chairman, I----
    [Laughter.]
    Mr. Apfel. Mr. Johnson, I would say the answer to that is 
no. The Social Security Administration faces enormous 
pressures, particularly as we look to the long-term future and 
the retirement of the baby-boom generation. There are areas 
that we could improve service delivery if we had more 
resources. If we could free up 1,000 work years from 
administering the RET for those age 65-69, we could provide 
better service to the American public with that activity, which 
I think would be very important to do.
    Mr. Johnson. Eliminate the backlog, right?
    Mr. Apfel. Pardon me, sir?
    Mr. Johnson. Eliminate the backlog?
    Mr. Apfel. That is what we are aiming toward doing, and we 
would be able to do more activities both in disability but also 
in our field offices.
    Mr. Johnson. Good for you.
    Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Matsui?
    Mr. Matsui. Thank you, Mr. Chairman.
    Thank you very much, Mr. Apfel, for your testimony. If we 
eliminate the earnings test for seniors--and I am venturing out 
here, and maybe I am getting into an area I shouldn't. But I 
would imagine you are going to have to coordinate more with the 
Internal Revenue Service--obviously there is a privacy issue--
because there will be perhaps--people who now might be avoiding 
their earnings test by receiving cash and other forms of 
income. And it is my hope that you coordinate with Mr. Rossotti 
and others in the Service and Treasury Department because there 
may be some way then to recapture some of that lost income in 
terms of within the stream of total GDP in the economy, and 
obviously the implications in terms of tax collection and 
making sure that average citizens who pay their taxes don't get 
penalized because others avoid the system.
    I think that is an issue we really have to get into, and I 
know the Service right now is going through some--they don't 
know whether they are a customer service agency or collection 
agency, and they think they can do both, which hopefully they 
will be able to do. But I would hope that there is some level 
of coordination there. I have to believe there is a lot of 
avoidance going on because of that earnings test.
    Second, I understand that there is a revenue implication 
for the first 5 or 10 years of $23 billion--10 years, I 
believe; is that correct? Or 5 years?
    Mr. Apfel. Eliminating the retirement earnings test at the 
normal retirement age would cost $17 billion over the first 5 
years and $26 billion over the 10 years. But I should point----
    Mr. Matsui. Well, let me ask you, this delayed retirement 
credit which they receive when they retire to make up for the 
amount that they have been paying in under the earnings test, a 
lot of folks don't even know about that. My father didn't know 
about that.
    Mr. Apfel. Neither did mine.
    Mr. Matsui. Yes. Had he known about it, he might have just 
said, no, keep the same income level, I will continue the same 
hours, and then obviously when he reached 70, he would have 
been able to collect significantly more benefits.
    But it is my understanding that after a period of time, 
this proposal essentially, because you will eliminate the 
delayed retirement credit, will be revenue neutral. Is that 
correct?
    Mr. Apfel. It is roughly revenue neutral over the long 
term. If we go back to the last time that we raised the 
retirement earnings test age, we were dealing at that point in 
time within the context of needing short-term offsets for those 
added costs. In other words, there were changes made to Social 
Security to make it budget neutral in the short term, and we 
don't need to do that now given the change in the fiscal 
picture. But it is also very important, Mr. Matsui, that the 
cost in the long term is negligible. It is virtually zero. 
Because of the changes to the delayed retirement credit, an 
individual will receive basically the same total lifetime 
benefits and the system will receive the same amount of 
resources over the long term, and it does not have a negative 
impact on Social Security's solvency.
    Mr. Matsui. And I appreciate that comment. Just so that 
everyone really understands that, this is not an issue of 
taking from the general account or even from the Social 
Security money that will be walled off, because essentially 
this is a revenue-neutral proposal over the life that we are 
talking about in terms of dealing with the solvency issue of 
Social Security. Is that correct?
    Mr. Apfel. That is absolutely correct, Mr. Matsui.
    Mr. Matsui. Thank you.
    Let me ask one more question, Mr. Chairman. I don't want to 
take too much time. There is a long schedule today. But in 
terms of the issue of the blind and other disabled receiving 
SSI disability benefits, they were decoupled--or at least the 
blind were decoupled in the mid-nineties. They are still 
receiving at $14,000 and not at $17,000.
    Is there a way--and I ask this question sincerely because I 
think it is a legitimate issue that those that have concerns 
about the issue of moving the blind up from $14,000 to $17,000, 
it is a legitimate issue, but what about the other disabled 
that are in the work force? How would one distinguish that and 
treat the blind separately than the other disabled? Do you have 
a response to that?
    Mr. Apfel. Well, yes, under current law we have two 
different income thresholds--one for the disabled and one for 
the blind. The blind receive a higher income threshold before 
their benefits are reduced than other disabled individuals on 
the disability rolls. And one of the issues is whether the 
income that a person on disability can receive from outside 
sources, from work, could be higher before losing their Social 
Security benefits. A separate issue is whether the blind should 
be able to work more without losing their Social Security 
benefits.
    Both of those issues do have long-term and short-term costs 
associated with them. I know that eliminating the level of 
substantial gainful employment for the blind would cost $2.5 
billion over 5 years, and it would reduce the long-term 
solvency of Social Security.
    So I think within the context of looking at an overall 
long-term solvency package, I think these are options that need 
to be considered, but they do have long-term costs to the 
system.
    Mr. Matsui. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shaw. Mr. Collins?
    Mr. Collins. Thank you, Mr. Chairman.
    Commissioner, I found with interest that you said you have 
about 1,200 staff that deal with the earnings limit?
    Mr. Apfel. About 1,000 have to administer the RET provision 
for those age 65-69, that is correct.
    Mr. Collins. Then you followed that up saying if we could 
free up 800 of them. What would you do with the other 400?
    Mr. Apfel. The other roughly 500, these are estimates--are 
involved in administering the retirement earnings test for 
those age 62 through 64. Remember there are two retirement 
earnings tests, and the proposal before us, which I strongly 
support, is to eliminate the retirement earnings test at the 
normal retirement age. We would still have administrative 
implications for those age 62 through 64 where we have a 
separate retirement earnings test and one that eliminating 
would have a significant poverty impact, I might point out. So 
those other 500 people, somewhere in that vicinity, would be 
working on the retirement earnings test for those age 62 
through 64.
    Mr. Collins. Well, I appreciate your explaining that. We 
had a hearing last week and had a report on the future needs of 
the Social Security Administration and how you are going to 
handle the influx of those of us who were born during or right 
after World War II, because there are a lot of us. And it was 
brought up, too, in that same hearing that--maybe it was in the 
103d Congress--we passed the independent act dealing with the 
Social Security agency and that there was to be a report in 2 
years on the work force analysis by the administration.
    I think you need to follow up on that because, if I 
remember correctly, we have not received that report, and that 
would help explain a lot of the needs and also the question 
that I just asked you about the difference in the 1,200 and the 
800 or the 400 or the 300, or whatever it is. You know, we seem 
to be kind of scrambling for the number there.
    So I think it would be helpful if you would follow up on 
that work force analysis report that was supposed to have been 
submitted about 3 or 4 years ago, and we need to take a look at 
that based on the fact of the needs of Social Security and how 
you are going to handle the baby boomers.
    Mr. Apfel. Well, Mr. Collins, I am unaware of a requirement 
for a time-certain specific report, but I will say we need to 
do just what you just said. We are in the process of developing 
a long-term framework as well as what the implications are for 
our work force over the medium term.
    I will be testifying, I would assume, within the next week 
or two on that, and I will provide more details at that time. 
But overall we clearly have sizable long-term challenges that 
we face as an agency as the baby boomers retire and as the baby 
boomers enter the disability-prone years of their fifties. So, 
clearly, dealing with this issue now is the right thing to do, 
and we will provide more detail.
    Mr. Collins. Well, as they went through some of the 
problems that exist today, current problems, and how those 
current problems are going to escalate over the next few years, 
I mean, it was just as plain as the nose on your face it is a 
people problem. You know, a lot of people recognize that, and 
the management at Social Security needs to also recognize that 
and work with the Congress and give us some reports on it.
    We thank you. Thank you for your work.
    Mr. Apfel. Thank you, Mr. Collins. And I would point out 
that it is not only a people problem, it is also an automation 
problem. It seems to me that the two areas that are going to 
take a tremendous amount of work in the course of the next 3 to 
4 years is the retirement of our own work force as well as the 
importance of moving aggressively in the automation area so 
that we are able to deal with these added workload challenges 
in the long term. I think those are the two critical issues 
that I will be coming before the Committee on in the future.
    Mr. Collins. Good. Thank you.
    Chairman Shaw. Mr. Tanner?
    Mr. Tanner. Thank you, Mr. Chairman.
    Commissioner, I just have one question, and I will be 
brief. I think Mr. Matsui touched on it, but since this 
proposal is one that moves the timing of the effect the law has 
on the Social Security benefits across the board, this proposal 
does not have an adverse effect on the solvency of the Social 
Security system. Am I correct in that?
    Mr. Apfel. That is correct, Mr. Tanner.
    Mr. Tanner. Thank you, Mr. Chairman. I told you I would be 
brief. Thank you.
    Chairman Shaw. Thank you.
    Mr. Hayworth.
    Mr. Hayworth. Thank you, Mr. Chairman. And I would like to 
thank my friend from Texas for introducing this legislation. It 
is something we have been talking about for a long time, and I 
am pleased to be a cosponsor of this bill. And I, too, have 
heard from the homefront, from my folks and others in the 
community concerned about what is patently unfair to people who 
remain productive members of society, much valued, much honored 
members of the work force, and I believe it is imperative that 
we eliminate this earnings limit for all working seniors.
    But I would like to highlight the importance of this 
legislation for small businesses and self-employed seniors. The 
Social Security earnings limit hits small business really on 
both ends:
    First, when labor is in such short supply, the earnings 
limit restricts the abilities of a small business to acquire 
and retain qualified workers. It discourages qualified seniors 
from either seeking employment or from working additional hours 
once they reach the statutory caps. Finding qualified help 
ranks with rising health insurance costs as the most difficult 
challenges facing small business owners today. It seems to me 
that Federal laws should encourage work and productivity, not 
discourage it.
    Second, many seniors are self-employed and are subject to 
both the dollar caps under the earnings limit and a more 
subjective and invasive self-employment test. This substantial 
services test audits self-employed workers to determine how 
many hours they work each month, the type of work they do, the 
depth of their business involvement, and other subjective 
factors designed to determine the value of their work.
    If they run up against either the wage caps or the self-
employment restrictions, well, then, their Social Security 
benefits are reduced or eliminated.
    In other words, small business owners face an earnings 
limit squeeze. The situation is made worse when you consider 
that self-employed workers pay a higher rate into Social 
Security than do other workers. They pay more into the system, 
they face a more stringent limit, and they endure a worker 
squeeze.
    I want to make sure that this legislation addresses self-
employed seniors. Sir, does the current language in this 
legislation apply to self-employed seniors of full retirement 
age so their benefits will no longer be reduced due to their 
earnings?
    Mr. Apfel. Yes.
    Mr. Hayworth. That is good to know, and I am glad we have 
it in the record, and it comes as good news for so many seniors 
in the 6th District of Arizona and across America who are 
working hard. And I thank you for that brief answer, and, Mr. 
Chairman, I thank you for the time.
    Chairman Shaw. Mr. Hulshof?
    Mr. Hulshof. Thank you, Mr. Chairman.
    Mr. Apfel, welcome. I think, as you can sense from the 
questions, there is a lot of unanimity regarding the repeal of 
the earnings limit, and I, too, am proud to be a cosponsor of 
Mr. Johnson's bill.
    Essentially, I think it is useful, especially as Mr. 
Hayworth mentioned those town meetings back home, it is useful 
to remind folks that Social Security was not intended to be a 
welfare program; that you pay into the system, you play by the 
rules, you know, that you are entitled to get out of that 
system what you put in. And yet because of the earnings limit, 
what the system is telling seniors is that it is OK if you are 
semi-retired, if you have a low-paying job, or if you work 
part-time, but if you use those skills that you have used a 
lifetime to develop, look out because your benefits are going 
to be reduced. And so I think, you know, this is clearly the 
right step forward, very much like this Subcommittee took in 
the Ticket to Work and work incentives program, again, looking 
for ways to remove those barriers, those disincentives that 
hinder people from returning to work because we want them all 
to be productive.
    Along that vein, Mr. Commissioner, I want to follow up on 
what Mr. Matsui inquired of and maybe where there is a little 
more difficulty in the issue, and that is regarding the blind 
and the non-blind disabled. I guess first I want to ask you 
regarding the disability benefits, what is substantial gain 
activity?
    Mr. Apfel. Well, under regulations that existed before I 
became Commissioner, an individual could earn up to $500 a 
month before losing their benefits, and we changed that through 
regulation to $700 a month, a very significant increase, to 
enable individuals to continue to work more before they started 
losing their benefits, as a greater incentive to work. I think 
it was a very important change, and it is one that we should 
maybe even do more on in the future.
    Mr. Hulshof. But specifically regarding the population of 
disabled, is that right?
    Mr. Apfel. Yes, that is the overall disabled population.
    There is a separate--and I don't have the specific number; 
I will provide that for the record. For the blind, there is an 
SGA limit as well that is higher than it is for the other 
disabled population.
    Mr. Hulshof. And, if you would, Mr. Apfel----
    Mr. Apfel. For the blind, it is $1,170 a month.
    Mr. Hulshof. Thank you.
    Mr. Apfel. It is $700 a month for the non-blind disabled.
    Mr. Hulshof. OK. And, if you would, could you contrast that 
definition you have just given on substantial gain activity and 
how that differs from the earnings limit that we are discussing 
here today?
    Mr. Apfel. Well, the earnings limit, again, applies to the 
retired population, not the disabled population, and under 
current law the level of $17,000 in 2000 is somewhat higher 
than it is for the blind which is applied on a monthly basis. 
The RET is on an annual basis, $17,000 for those age 65-69 in 
2000. And the proposal before this Committee that we strongly 
support would eliminate the earnings test entirely for those 
individuals above the normal retirement age.
    Mr. Hulshof. Mr. Apfel, you have already indicated that the 
way the system is presently, the blind beneficiaries qualify, I 
guess, for higher income thresholds that non-blind disability 
beneficiaries do not receive. Are there any other benefits that 
blind beneficiaries receive that the non-blind do not other 
than that income?
    Mr. Apfel. I am unaware--in the title II Social Security 
program, I believe that is the only special work incentive all 
blind beneficiaries receive. It is a higher level of earnings 
that is available to the blind than for the non-blind disabled. 
There are other work incentives that apply to blind SSI 
beneficiaries
    Mr. Hulshof. A question that I have had, and I have asked 
constituents of mine, blind constituents, the Americans with 
Disabilities Act--I was not here then, either, Mr. Apfel, when 
the ADA was passed. But didn't the ADA essentially say that we 
want to treat all those with disabilities the same? And is this 
something that squares with or doesn't square with what we have 
been talking about as far as the higher income thresholds?
    Mr. Apfel. I think the ADA was aimed at ensuring those with 
disabilities' entry into the labor force, and I support there 
being a higher threshold of income for the blind disabled than 
for all disabled. I think it would be a mistake to roll back 
the differential so that the blind would receive the same 
threshold as all disabled. I think that it is appropriate to 
have a separate and a higher threshold for the blind. And I 
don't think that is inconsistent with the ADA.
    Mr. Hulshof. Well, let me ask a final question if the 
chairman will indulge me, probably the toughest question. What 
are your views on re-linking blind substantial gainful activity 
with the age 65 and older earnings limit?
    Mr. Apfel. If we link it back up to the age 65--to the 
normal retirement age, it would eliminate the threshold 
entirely. Such an impact would cost about $7 billion over 10 
years, and it would lead to lower long-term solvency in Social 
Security.
    The difference between the proposal that is before this 
Committee for those at normal retirement age and the blind is 
that the normal retirement age elimination has a negligible 
impact on the long-term solvency of Social Security. If we link 
the blind or the disabled groups to this, it would have a long-
term cost. So I think we would have to view that within the 
context of a broader reform endeavor to be able to look at 
those issues.
    Mr. Hulshof. So I guess the answer--I understand the 
implications of re-linking as far as the budgetary impact, but 
do I take it from your answer that you don't have a position as 
to re-linking? I understand the consequences, but----
    Mr. Apfel. Well, I think that within the context of this 
piece of legislation, which is a straightforward piece of 
legislation that has a negligible cost to the Social Security 
system over the long term, that is the right way to go at this 
time.
    If we are going to address the long-term solvency issue, I 
think these are very legitimate issues to be viewed within that 
context. But because they do have costs--also, if we look at, 
say, widow poverty, there is a tremendously compelling need to 
be able to do something, but it has cost to the system. We are 
not here today to add a widow poverty proposal into this 
legislation because it would have that long-term cost.
    Mr. Hulshof. Right.
    Mr. Apfel. So what we ought to do is view that issue of the 
blind and the disabled within the context of the broader reform 
endeavors.
    Mr. Hulshof. Thank you, Mr. Apfel.
    Mr. Chairman, thanks for the additional minute or so.
    Chairman Shaw. Just very briefly, you and I have worked 
together, and I think we have had a very good relationship 
since you have become Commissioner and I have become chairman. 
And looking at the complexity of the Code and the regulations--
and it is interesting to watch these questions evolve as to the 
complexity of the regulations. And then you compound that by 
seeing that seniors are confronted with this and trying to 
figure out what they are doing. I noticed your answer with 
regard to what is going to happen to the 1,200 employees, in 
reply to Mr. Johnson's question. I would preface this by saying 
that the Congress has carved out your agency as an independent 
agency to try to depoliticize as much as we possibly could. And 
I think it is paying off. Obviously we have disagreements on 
some things, and you certainly have a certain allegiance to the 
President who made your appointment. But I think our working 
relationship has been very good.
    But talking about the complexity of the Code the way it is, 
how many pages are there in the regulations that you work with?
    Mr. Apfel. Our Social Security regulations?
    Chairman Shaw. Does anybody have that answer? I understand 
it is about that thick.
    Mr. Apfel. There are a lot--about 1,000 pages. There are 
lots--one of the issues here is that the Social Security law is 
quite a complex law, and benefits are very tightly prescribed 
by law. And, clearly, there is a lot of need for very detailed 
regulations to carry out those laws, particularly in the area 
of disability. So it is a very large document. And our 
interpretations of those are even larger.
    Chairman Shaw. I think that the Members certainly up here 
realize this, but the Commissioner's term may transcend to 
whoever the next President is. It is not a question of your 
dropping off the edge of the Earth with the end of the 
administration.
    Mr. Apfel. Well, actually, my particular term as 
Commissioner ends in 1 year. The next Commissioner, whether 
that be me or someone else, has a 6-year term that does go 
beyond individual Presidencies. The next Commissioner, whoever 
that may be, if serving their full term, will serve two--could 
serve potentially two different Presidents from two different 
parties.
    Chairman Shaw. The independence of your agency and the 
definition of the Commissioner's term--in your opinion, what 
effect does that have as far as your getting involved in the 
political struggle that certainly is going to take a lot of our 
time between now and November?
    Mr. Apfel. Well, one of the important aspects of the Social 
Security independence legislation was the creation of a 6-year 
term within Social Security, so Commissioners serve across 
Presidential terms. Because of that, I think it is 
inappropriate for the Commissioner to engage in direct 
political activities or to endorse individual political 
candidates. I think it is important to keep that degree of 
separateness from the political process.
    At the same time, that does not mean that the Commissioner 
of Social Security should not be voicing his views on the 
appropriateness of certain policy actions that relate to Social 
Security.
    Chairman Shaw. I understand that.
    Mr. Apfel. So if there was a proposal to fully privatize 
the Social Security system, I would say that I think that would 
be wrong for the country, a wrong step for the country. But I 
do think it is important for the commissionership and the 
agency that the Commissioner not engage in direct political 
activities or endorse candidates.
    Chairman Shaw. I would like to work with you and your staff 
to try to simplify that code. In looking at this and seeing the 
complexity of what we were dealing with, it is very difficult 
to understand exactly all the complexities, and I am sure that 
the fact that you have to have such long regulations would 
certainly say that the present code is up to some 
interpretation which is not the best way to go.
    So perhaps, with your good office and our staff here on 
Ways and Means, we can work to try to take a step which is 
going to take us a long time in order to simplify the entire 
code.
    Mr. Apfel. We will be looking forward to working with you, 
Mr. Chairman, in those endeavors to try to simplify the 
program.
    Chairman Shaw. OK. Thank you.
    Mr. Doggett.
    Mr. Doggett. Commissioner, I support this legislation, but 
like you, I am disappointed that it is not part of a broader 
reform package, and I have a few questions about that.
    On December 15 of this past year, just a couple months ago, 
Speaker Hastert and Majority Leader Dick Armey wrote the 
President and asked him to ``lock away 100 percent of the 
Social Security surplus in your 2001 budget proposal and commit 
those surplus funds to reducing the national debt.''
    Now, this bill conflicts and is contradictory with that 
letter of 2 months ago, isn't it?
    Mr. Johnson. Will the gentleman yield?
    Mr. Doggett. I will as soon as I get the Commissioner's 
response as to whether this bill conflicts with the request 
that we ``lock away 100 percent of the Social Security surplus 
in your 2001 budget and commit those funds to reducing the 
national debt.''
    Mr. Apfel. Mr. Doggett, the costs of this are costs to the 
Social Security trust fund, so part of the Social Security 
surpluses would be, in the short term, used to pay for the 
short term costs of this legislation.
    I would point out that all of those costs come back to the 
Social Security system over the life of the program.
    Mr. Doggett. Sure, and I understand your testimony to be 
that over 75 years it is neutral. But whether it is neutral or 
plus or minus----
    Mr. Apfel. It is a minus for about twenty-eight years.
    Mr. Doggett [continuing]. It is inconsistent with and 
contradictory of the request made by the Republican leadership 
within the last 2 months, that instead of using it to put more 
money in the pockets of Social Security recipients, we should, 
as they say, commit 100 percent--``lock away 100 percent'' is 
their words--of the Social Security surplus and use it all to 
pay down the debt. This doesn't do that, does it?
    Chairman Shaw. Would the gentleman yield?
    Mr. Doggett. As soon as I get the answers, I will be glad 
to yield and within the limits of my time.
    Mr. Apfel. Mr. Doggett, it is true that this would reduce 
in the short term the amount of Social Security surpluses, and 
if we did not get back that money in the long term to the 
system, it would fully violate the notion of reserving all that 
money. But because it does come back to Social Security over 
the long term so that it is a negligible cost over the long 
term, I think it lives within----
    Mr. Doggett. And I understand that goal as far as to save 
Social Security first is an appropriate conclusion, and as I 
said, I support the bill. But it does not use 100 percent of 
the money to pay down the national debt, does it? It is 
inconsistent with that statement.
    Mr. Apfel. It does not use 100 percent to pay down the debt 
in the short term. That is correct.
    Mr. Doggett. And----
    Mr. Apfel. But in the long term, it does.
    Mr. Doggett. OK. And with reference to the overall issue of 
how we address reform and what our priorities are, we have 
among our retiree population a wide range of individuals in 
terms of their health and in terms of their wealth, do we not?
    Mr. Apfel. Yes, we do, sir.
    Mr. Doggett. Some are single women who are not in very good 
health and millions who rely on essentially nothing but their 
Social Security check to get by.
    Mr. Apfel. That is absolutely the case.
    Mr. Doggett. And some are--fortunately, an increasing 
number--relatively healthy, especially in their early ages, and 
they are able to be much more productive and be involved in the 
work force.
    Mr. Apfel. Very much so.
    Mr. Doggett. And as far as which group this particular part 
of the reform helps, while it is a desirable reform, basically 
this is an approach of beginning the reform to help from the 
top and work down whether than to begin at the bottom and work 
up, isn't it?
    Mr. Apfel. Well, I think it is a very important question, 
and I would like to spend a minute answering that because I 
think it is a very, very important question.
    Does the elimination of the retirement earnings test affect 
different income groups differently? And the answer is yes. In 
the short term, those in the top quintile of income would 
receive added resources in the short term from such a repeal.
    Over the long term, it has no differential impact because 
individuals that receive their Social Security benefits because 
of RET elimination will receive lower Social Security benefits 
later in life and the same total benefits over their lifetime. 
So while it is true in the short term that it affects upper-
income elderly positively, in the long term it has zero impact 
on the elderly at the upper-income.
    I would also point out, because I think it is an important 
part of this, that if we look beyond the repeal at the normal 
retirement age and look to repeal earlier, say at 62, which is 
one of the other proposals, that would have a very significant 
differential and a major poverty impact.
    If we repeal the retirement earnings test at age 62, we 
don't know how many people would change their behavior, would 
file for benefits earlier. If all persons over age 62 had 
started filing at age 62 for benefits, upward of 700,000 
additional people would have been put in poverty for 1993 
because their benefits would have been lower for subsequent 
years. So if no one changed their behavior, the effect would be 
zero. But we believe that somewhere in between those two 
extremes of zero to 700,000 would be the poverty effect of 
changing the retirement earnings test at age 62. For cost 
purposes, the actuaries assume that about half of the people 
would change their behavior, which corresponds to about 350,000 
additional people moving into poverty.
    I think this is a very critical point. Eliminating the 
retirement earnings test at age 62, which this legislation does 
not do, would have a sizable poverty impact. It is not clear 
exactly how much it would be, but the only way to deal with 
this issue would be in the context of women.
    You asked about women. About three-quarters of the people 
who would be affected negatively by being put into poverty due 
to RET elimination at 62 would be women, and about half are 
widows. So, clearly, there would be a sizable poverty impact 
from eliminating the RET at 62. It is a negligible poverty 
implication at age 65 and at the normal retirement age.
    But, again, the last point, to go back to the first one, 
there is a short-term benefit for those at the highest quintile 
over the course of the first few years, but because of the 
delayed retirement credit and the loss of the delayed 
retirement credit when benefits are paid, it has a zero impact 
on benefit income over a lifetime for those at the top.
    Mr. Doggett. Mr. Chairman, may I ask just one more 
question?
    Chairman Shaw. One more, and then we will move on.
    Mr. Doggett. Many commentators looking at the long-term 
Social Security solvency issue have emphasized how painful it 
may be to resolve that hard choices will have to be made, and 
they have raised a variety of alternatives about how to 
minimize the hurt.
    Doesn't beginning at this place in terms of Social Security 
reform where you actually put more money in the pockets of some 
Social Security recipients, as desirable as that may be, 
represent kind of an eat-dessert-first approach to reform?
    Mr. Apfel. Mr. Doggett, I would certainly prefer and I 
think many would prefer that we were dealing with the entire 
universe of reforms to ensure Social Security's long-term 
solvency. That hasn't been easy, and I have little scars that 
have come through that process, and we continue to work for it.
    I would have serious reservations if the long-term costs of 
this proposal were not negligible. But because they are 
negligible, I find it very acceptable to see this as a 
downpayment on the long-term efforts that we need to do. I 
would prefer, in other words, to see us deal with the entire 
panoply of issues before us. But I don't think it is 
inconsistent to deal with this issue separately because it does 
not have an effect on the long-term solvency of the system. And 
I would certainly have a different opinion if the earnings test 
was being eliminated at age 62 because of that poverty impact, 
which is very major. And we can provide more for the record on 
that, if you would like. But because it is at the normal 
retirement age and because the costs are virtually zero, I 
think this is a legitimate separate step.
    [The following was subsequently received:]

   The Impact of Repealing the Retirement Earnings Test on Rates of 
                                Poverty

    This paper summarizes an analysis of the implications of 
potential changes in filing behavior that might result from 
changes in the retirement earnings test (RET). In general, the 
earlier one files for Social Security benefits the lower his or 
her monthly benefit. Elimination of the RET might lead to some 
individuals filing for Social Security benefits at an earlier 
age than they otherwise might, and thus could lead to 
reductions in individual incomes and increases in the number of 
people in poverty. Using matched 1994 Current Population Survey 
and Social Security Administration administrative data, this 
analysis examines the potential changes in individual income 
and the number of people in poverty that could have resulted 
for beneficiaries in 1993 from earlier elimination of the RET 
at either the normal retirement age (NRA), which is currently 
age 65, or at age 62.
    In general, we find that even if individuals accelerate 
their filing for Social Security benefits as a result of 
elimination of the RET at age 65, there would be little or no 
change in the number of people below the poverty line. However, 
if the RET were eliminated at age 62 and individuals accelerate 
their filing for Social Security benefits, the number of people 
below the poverty line would increase. This analysis provides a 
range of estimates for the impact of eliminating the RET on 
rates of poverty, which illustrates the implications of 
potential changes in the RET.
Specifically, this paper:

     Explains how the RET works, focusing on the 
differences between the test for beneficiaries at the NRA and 
above and for beneficiaries aged 62 through NRA;
     Describes the approach used to estimate the 
poverty effects of repealing the RET;
     Provides poverty estimates for repealing the RET 
at NRA and the RET at 62; and
     Provides detailed demographic profiles on the 
population likely to get moved into poverty if the RET at 62 
were eliminated.

              How the Retirement Earnings Test (RET) Works

    The Social Security Act of 1935 specified that beneficiaries would 
lose all their benefits if they had any earnings. Over the years, 
however, Congress has eased the RET's restrictions (allowing 
beneficiaries to supplement their benefits with earnings) by increasing 
the amount of exempted earnings, reducing the age of exempted 
beneficiaries, and liberalizing the formulas for reducing benefits.
    The RET affects the timing of a person's benefits but has little 
effect on total benefits received over a lifetime. The details differ 
depending on whether a beneficiary is above or below the NRA (It does 
not apply to beneficiaries aged 70 and above). In both cases, however, 
the earlier a person begins to draw benefits, the smaller his or her 
monthly benefit will be.

Retirement Earnings Test at the Normal Retirement Age

    Under current law, beneficiaries aged 65 through 69 in 2000 have $1 
in benefits withheld for every $3 earned above $17,000. This threshold 
will increase in stages to $30,000 in 2002 and increase automatically 
thereafter with the average wage in the U.S. economy.
    Delayed retirement credits (DRCs) are provided to compensate 
workers at the NRA through age 69 whose benefits are withheld under the 
RET. The DRC increases the worker's retirement benefit for each month 
that benefits are fully withheld after the NRA. The DRC is 6 percent 
per year for workers age 65 in 2000, and it will increase 0.5 
percentage points every two years until it reaches 8 percent per year 
for workers reaching age 65 in 2008 and later. At that time, benefits 
lost due to the RET and/or delayed retirement generally will be offset 
in an actuarially fair manner by the increase in benefits resulting 
from DRCs. (See example 1.)

Example 1

 How the Retirement Earnings Test Affects Beneficiaries at the Normal 
                        Retirement Age and Above

    In 2000, a worker files for benefits at age 65 (the normal 
retirement age) and receives his/her full benefit of $1,000 per 
month. If this worker had delayed filing for benefits for one 
additional year, his/her benefit would have been increased by 6 
percent to $1,060 per month. This increase reflects the fact 
that he/she had not received benefits for one full year for 
which he/she was entitled. This ``delayed retirement credit'' 
amounts to 6 percent of the full annual benefit amount each 
year in 2001 and later.
    If this beneficiary files for benefits at age 65 and 
continues to work, he/she may be affected by the RET as 
follows:
    Scenario 1: His/her earnings never exceed the RET earnings 
threshold, so the RET has no effect on his/her benefit and he/
she continues to receive his/her full benefit amount of $1,000 
per month for the rest of his/her life.
    Scenario 2: His/her earnings exceed the RET earnings 
threshold to the extent that all his/her benefits at age 65 are 
withheld. As a result, he/she receives a delayed retirement 
credit of 6 percent, which increases his/her benefit to $1,060 
per month, accounting for the fact that he/she received no 
benefits at age 65 due to the RET.
    These scenarios represent the extreme cases. If the worker 
receives partial benefits, then the delayed retirement credit 
adjusts his/her benefit accordingly. Also, a worker could have 
earnings after age 65, which could increase his/her full 
benefit. Annual cost-of-living adjustments would also raise 
his/her benefit.
Retirement Earnings Test at Age 62

    In 2000, beneficiaries between age 62 and the NRA have $1 
in benefits withheld for every $2 earned above $10,080. (This 
amount is adjusted annually to reflect the growth in the 
average wage in the U.S. economy.) Beneficiaries also have 
their benefits actuarially reduced for each month that they 
receive benefits before the NRA. For example, a person born in 
1938, who starts to collect benefits at age 62, receives 79.2 
percent of what he or she would have received at age 65 and 2 
months (his or her NRA). If benefits are withheld before the 
NRA because of the RET, the actuarial reduction is adjusted at 
the NRA to exclude those months, so there would be no permanent 
reduction for those months. (See example 2.)

Example 2

 How the Retirement Earnings Test Affects Beneficiaries Age 62 through 
                       the Normal Retirement Age

    In 2000, a worker files for Social Security retirement 
benefits at age 62 rather than waiting until age 65 and 2 
months (his/her normal retirement age). Had he/she waited to 
file until age 65 and 2 months, his/her full benefit amount 
would have been $1,000 per month. Because he/she chose early 
retirement benefits at age 62, his/her benefits are reduced by 
20.8 percent to $792 per month.
    This reduction accounts for the fact that this beneficiary 
will receive benefits for 38 additional months. However, over 
his/her lifetime, he/she is expected to receive the same total 
amount of benefits (based on actuarial projections of life 
expectancy and adjustments for interest).
    If this beneficiary continues to work after filing for 
benefits at age 62, he/she may be affected by the RET as 
follows:
    Scenario 1: His/her earnings never exceed the RET earnings 
threshold, so the RET has no effect on his/her benefits, and 
he/she continues to receive 79.2 percent of his/her full 
monthly benefit amount for the rest of his/her life--$792.
    Scenario 2: His/her earnings exceed the RET earnings 
threshold to the extent that his/her benefits are partially or 
fully withheld in every month before reaching his/her NRA. As a 
result, his/her benefits are recomputed at age 65 and 2 months 
as 100 percent of his/her full benefit amount of $1,000 per 
month, accounting for the fact that he/she never received full 
benefits earlier due to the RET.
    These scenarios represent the extreme cases. If the worker 
receives partial benefits before he/she reaches age 65, then 
the adjustment to his/her benefit at age 65 will reflect that 
benefit payment in an actuarially fair manner. Also, a worker 
could have earnings after age 62, which could increase his/her 
full benefit. Annual cost-of-living adjustments would also 
raise his/her benefit.

    Approach Used to Estimate Poverty Effects of Eliminating the RET

    To analyze the poverty effects of eliminating the RET, data 
from the March 1994 Current Population Survey--a nationally 
representative survey--are matched with Social Security 
Administration administrative records. These data indicate how 
much each person received in Social Security and other income 
in 1993.
    These data are used to determine the Social Security 
benefit amount the person would have received in 1993 had there 
never been an RET at 62 and over or an RET at NRA and over. 
Essentially, this approach calculates the effects of changes in 
filing behavior on poverty. It is assumed that many people 
would have claimed benefits earlier had the RET never existed 
and that, for many, this would mean lower Social Security 
income (because, for example, benefits claimed before the NRA 
are permanently reduced). Once the difference in Social 
Security income is estimated, it is possible to determine 
whether this would change the person's poverty status and to 
report how many more people would be in poverty if the RET had 
never been in effect.

Historical Approach

    This is an historical approach, which examines the Social 
Security population at a point in time in the recent past and 
asks how Social Security income and poverty status would be 
different assuming that the RET had never existed. It does not 
take a cohort of people approaching their retirement years and 
forecast the poverty effects from repealing the RET at 62 or 
the RET at NRA.
    There are limitations and advantages to using an historical 
approach. Limitations include not fully reflecting the recent 
increases in women's labor force participation, real increases 
in Social Security benefits, or increases in the number of 
beneficiaries retiring earlier--suggesting that estimates for 
1993 may be somewhat larger than for future years. Advantages 
include being able to know definitively at what age people in 
the sample claimed benefits and to determine how their Social 
Security income would have been different if benefits had been 
claimed earlier. Another advantage of using an historical 
approach is that it measures effects on people of all ages 
within the Social Security population. This is important 
because, as beneficiaries age, they exhaust other income 
sources, and the importance of Social Security to total income 
rises (See chart 1 for cross-sectional data on the importance 
of Social Security by age).
[GRAPHIC] [TIFF OMITTED] T6309.001


Only Accounts for Changes in Social Security Income

    This approach does not measure changes in income (other 
than Social Security) that could have occurred if the RET at 62 
or the RET at NRA had never existed. For example, it is 
plausible that people would choose to work and earn more in the 
absence of an earnings test. However, economic research has 
found that the RET has only modest effects on aggregate labor 
supply. This could be because workers take account of a number 
of factors when making work and retirement decisions (the 
availability and size of private pensions, health status, job 
characteristics, personal preferences, etc.).

Assumes Benefits Received Early Will Not be Saved

    The elimination of RET at 62 is likely to cause people to 
file for permanently reduced benefits. However, it is not known 
what such people would do with these reduced benefits. They may 
save or invest a portion of them and have higher asset income 
later in life. While this analysis does not take such effects 
into account, economic research suggests that individuals at or 
near the poverty level are not likely to save this additional 
income.

     Poverty Estimates for Eliminating the Retirement Earnings Test

    Eliminating the RET is likely to encourage some beneficiaries to 
apply earlier for benefits and, as a result, receive a lower monthly 
benefit in the long run. Depending on the amount of a beneficiary's 
income from other sources, this reduction in monthly benefits may 
reduce his or her total income below the poverty threshold ($7,990 a 
year for an aged individual and $10,070 for an aged couple in 1999).
    If the RET were eliminated at the NRA (currently age 65), the 
increase in the incidence of poverty would be small for several 
reasons: Few people currently delay receipt of Social Security benefits 
beyond age 65; those who do typically have incomes well above the 
poverty level; and accelerating the receipt of a worker's benefit to 
age 65 would generally not lower benefits enough to cause the 
beneficiary (or the beneficiary's survivor) to become poor. Eliminating 
the RET at age 62, however, would cause the income of some 
beneficiaries to fall below the poverty level.

Retirement Earnings Test at the Normal Retirement Age

    Elimination of the RET at NRA may encourage some who now plan to 
retire later than the NRA to file for benefits at the NRA, but the 
poverty effects stemming from elimination of the RET at NRA are 
estimated to be minimal. The most important reason for this is that 
benefits to a surviving spouse (widow or widower) would not generally 
be reduced below the deceased worker's full benefit as a result of 
eliminating the RET at the NRA.
    In 1998, 9 percent of insured workers started receiving retired 
worker benefits at age 65 and 1 month or later. It is unclear to what 
extent insured workers would change their filing behavior, so poverty 
estimates are provided based on four separate filing scenarios (See 
table 1).

Table 1

  Filing Scenarios for Repeal of the Retirement Earnings Test at the 
                  Normal Retirement Age through Age 69


------------------------------------------------------------------------
                                 Assumed Percentage of People Currently
       Filing Scenarios         Filing for Benefits after Age 65 Opting
                                     to File by Age 65 and 0 Months
------------------------------------------------------------------------
Scenario A                                                           0%
Scenario B                                                          20%
Scenario C                                                          50%
Scenario D                                                         100%
------------------------------------------------------------------------

    There would be a negligible effect on poverty under 
Scenario A, and only about 2,000 people aged 62 and older would 
be moved into poverty under Scenario D in 1993 (See table 2).

Table 2

 Poverty Estimates Based on Different Filing Scenarios for Eliminating 
         the Retirement Earnings Test at Normal Retirement Age


------------------------------------------------------------------------
                                            Aged 62+ Poverty Rate Before
   Number of People Age 62+ Moved into            and After Change
                 Poverty                  ------------------------------
                                                    Before 12.0%
------------------------------------------------------------------------
Alternative Scenario                              Alternative Scenarios
A Negligible effect                                             A 12.0%
B 500                                                           B 12.0%
C 1,000                                                                C 12.0%
D 2,000                                                        D 12.0%
------------------------------------------------------------------------
Source: Social Security Administration, Office of Policy, February 2000.


Eliminating the Retirement Earnings Test at 62

    Eliminating the RET at ages 62 through 69 could raise the 
number of beneficiaries in poverty. Much of this effect would 
be due to more workers filing for benefits earlier and 
receiving benefits permanently reduced below the full-benefit 
level. Evidence suggests that the effects of increased work 
efforts would be unlikely to offset these reductions.
    Filing for benefits before the NRA is advantageous in the 
short run for workers, but it can be disadvantageous later on--
particularly for their surviving spouses. The lower benefit for 
a worker filing at age 62 in 2000 rather than waiting until his 
or her NRA (reduced 20.8 percent in 2000 and 30 percent when 
the NRA increases to 67 in 2022) is intended to be actuarially 
fair so that beneficiaries, on average, will receive the same 
total lifetime benefits as they would have received if they 
filed for benefits at the NRA. In the future, however, much of 
this reduction below the full-benefit level would pass through 
to surviving spouses and could make their benefits inadequate.
    In 1998, 48 percent of insured workers opted for benefits 
at either 62 and 0 months or 62 and 1 month, and 79 percent of 
insured workers opted for benefits before age 65. It is unclear 
how the 52 percent of individuals who currently file for 
benefits after age 62 and 1 month would change their filing 
behavior, so estimates are provided under four scenarios. (See 
table 1 for scenarios. These scenarios are based on the 
percentage of people who currently file for benefits after age 
""62 and 1 month who are assumed to file by age 62 and 1 
month).
    Based on these assumptions about how filing behavior would 
be affected, eliminating the RET at age 62 could have moved up 
to about 700,000 people aged 62 and older into poverty and 
increased their poverty rate from 12.0 percent up to 13.9 
percent in 1993 (See table 3).

Table 3

 Poverty Estimates Based on Different Filing Scenarios for Eliminating 
                 the Retirement Earnings Test at Age 62


------------------------------------------------------------------------
                                            Aged 62+ Poverty Rate Before
   Number of People Age 62+ Moved into            and After Change
                 Poverty                  ------------------------------
                                                    Before 12.0%
------------------------------------------------------------------------
Alternative Scenario                              Alternative Scenarios
A Negligible effect                                             A 12.0%
B 140,400                                                       B 12.4%
C 351,100                                                              C 12.9%
D 702,200                                                      D 13.9%
------------------------------------------------------------------------
Source: Social Security Administration, Office of Policy, February 2000.

    Demographic Profiles of Poverty Effects of Eliminating RET at 62

    Detailed demographic breakouts of who could have been affected in 
1993 by eliminating the RET at 62 are summarized below.
    Gender--Up to 500,000 women could be moved into poverty, accounting 
for 71 percent of the total moved into poverty. Their poverty rate 
could increase from 14.8 percent up to 17.1 percent (See table 4).
    Marital Status--Widow(er)s could account for 55 percent of the 
total moved into poverty (up to 387,000). The poverty rate for 
widow(er)s is 19.6 percent; it could increase to 23.2 percent. Married 
couples could account for 34 percent of the total moved into poverty 
(235,000), and their poverty rate could increase from 5.8 percent up to 
6.9 percent (See table 4).
    Benefit Type--Beneficiaries receiving worker-only benefits could 
account for 55 percent of the total moved into poverty. Up to 238,000 
surviving-spouse beneficiaries could be moved into poverty (34 percent 
of the total), and their poverty rate could rise from 19.2 percent up 
to 22.9 percent (See table 4).
    Age--Fifty percent of the total moved into poverty could be aged 
70-79. The poverty rate for this group could rise from 11.4 percent up 
to 13.8 percent. Beneficiaries aged 80-89 could account for 36 percent 
of the total moved into poverty. Their poverty rate could increase from 
17.5 percent up to 21.9 percent (See table 4).

Table 4

     Estimated Poverty Effects of Eliminating the Retirement Earnings Test at Age 62 and Above, by Selected
                                           Demographic Characteristics
----------------------------------------------------------------------------------------------------------------
                              Number Moved into Poverty                             Poverty Rate After
                      -----------------------------------------          ---------------------------------------
                        Percentage of People Currently Filing              Percentage of People Currently Filing
     Demographic         for Benefits after Age 62 Opting to     Poverty    for Benefits after Age 62 Opting to
   Characteristics     File at Age 62  (Alternative Scenarios)    Rate         File at Age 62  (Alternative
                      -----------------------------------------  Before                 Scenarios)
                        A                                                ---------------------------------------
                        0%     B 20%       C 50%      D 100%                A 0%      B 20%     C 50%    D 100%
----------------------------------------------------------------------------------------------------------------
Total                   1     140,400     351,100     702,200     12.0%     12.0%     12.4%     12.9%     13.9%
Gender
Men                     1      40,400     100,900     201,800      8.2%      8.2%      8.5%      8.8%      9.5%
Women                   1     100,100     250,200     500,400     14.8%     14.8%     15.2%     16.0%     17.1%
Marital Status2
Married                 1      47,000     117,600     235,200      5.8%      5.8%      6.1%      6.4%      6.9%
Widowed                 1      77,300     193,300     386,700     19.6%     19.6%     20.3%     21.4%     23.2%
Divorced/Separated      1      10,200      25,500      51,000     23.7%     23.7%     24.1%     24.7%     25.6%
Never Married           1       5,900      14,600      29,300     22.5%     22.5%     22.8%     23.4%     24.3%
Benefit Type3
Worker-Only             1      76,600     191,400     382,900      9.1%      9.1%      9.4%     10.0%     11.0%
Spouse                  1      13,100      32,800      65,500      8.1%      8.1%      8.3%      8.7%      9.4%
Surviving Spouse        1      47,600     119,000     237,900     19.2%     19.2%     20.0%     21.1%     22.9%
Age
62-69                   1      12,300      30,900      61,700     10.0%     10.0%     10.1%     10.2%     10.4%
70-79                   1      69,700     174,200     348,400     11.4%     11.4%     11.9%     12.6%     13.8%
80-89                   1      50,900     127,300     254,600     17.5%     17.5%     18.3%     19.7%     21.9%
90+                     1       7,500      18,700      37,500     19.1%     19.1%     19.9%     21.0%     22.8%
----------------------------------------------------------------------------------------------------------------
Source: Social Security Administration, Office of Policy, February 2000.
Notes:
1 The effect would be negligible.
2 Respondents to the Current Population Survey indicated their marital status at the time of the survey. These
  individuals may or may not be receiving a benefit based on their marital status.
3 Some people affected by this proposal are not beneficiaries (they share a household with a beneficiary), so
  rows do not add up to the total number of people affected. The ``Spouse'' category includes divorced spouse
  beneficiaries and dually-entitled spouse beneficiaries, and the ``Surviving Spouse'' category includes
  surviving divorced spouse beneficiaries and dually-entitled surviving spouse beneficiaries.

      

                                


    Mr. Doggett. Thank you.
    Thank you, Mr. Chairman.
    Chairman Shaw. There are a couple of points I think that 
should be made at this point: One, that the leadership on the 
Republican side clearly set aside the surplus and locked it 
away and said that it can be used, however, for Social Security 
reform. This is a small part of Social Security reform. But it 
is reform. It is bringing fairness to the system, and this was 
a very unfair situation that we had.
    In fact, when Social Security originally was put into law, 
that earnings test grabbed hold, I believe, after $15 of 
earnings.
    Mr. Apfel. It was actually at zero in the beginning.
    Chairman Shaw. We have been chipping away on that, and now 
it is the time to absolutely eliminate it.
    There are a couple of other things that I think need to be 
brought to light here. One, I think the Commissioner made it 
very clear that it is revenue-neutral because you start getting 
those benefits that you lost back after 70 and beyond. But I 
think more than that, look at the effects it is going to have 
on certain parts of the population. Life expectancies, to take 
an example, for African-Americans are less. So if you are 
whacked with the earnings penalty and then don't live long 
enough, you never get back what you were penalized. And that is 
something that I think we have to also think about.
    Absolutely this present system is terribly unfair, and we 
are going to get rid of it once and for all, and I am pleased 
to hear that everybody--even you, Mr. Doggett, though you have 
some criticism--is going to vote for it because I think this is 
a most important bill.
    Mr. McCrery.
    Mr. McCrery. Thank you, Mr. Chairman. And my friend from 
Texas, Mr. Doggett, I sure am glad you are for this bill; 
otherwise, the questioning would have been real tough.
    Mr. Commissioner, you said a few minutes ago that you 
support the disparity between the earnings limit, if you will, 
for non-blind disabled and blind disabled. What is the 
rationale for that differential?
    Mr. Apfel. The rationale--which goes back to the 1977 
Social Security Amendments--is that the problems facing the 
blind are very severe in terms of employment and a higher 
incentive was viewed back then and always has been to provide 
employment opportunities for the blind. And I think that is 
right and it should continue.
    Mr. McCrery. We shouldn't try to provide employment 
opportunities for non-blind disabled?
    Mr. Apfel. Oh, I think we should as well, but I believe the 
history here of a more liberalized system for the blind makes 
sense because of their intense employment needs.
    Now, again, my recent regulation for the non-blind disabled 
was to greatly expand the amount of income that that group 
could continue to earn without losing benefits. I think that we 
need to--as I testified before this Committee earlier this 
year--we need a whole lot of thinking about what steps are 
going to be necessary to assure more of the disabled enter into 
the work force. The Ticket-to-Work legislation I think, was a 
very important first step. I am not here to make a series of 
new proposals yet. The ink is still drying on the new one.
    Mr. McCrery. So you are considering the possibility of 
bringing the non-blind disabled up to the level of the blind 
disabled?
    Mr. Apfel. I am considering whether we should find some way 
to raise somewhat higher the levels for the disabled, and there 
is no definitive decision on that yet, but it is one of the 
areas that I am considering to provide greater incentives yet 
again.
    Mr. McCrery. How much would it cost to bring the non-blind 
disabled up to the same income level as the blind disabled?
    Mr. Apfel. If we brought the non-blind disabled up to the 
blind disabled--I am going to have to provide that for the 
record, sir. I don't have that information, but we will provide 
that.
    [The information follows:]

Proposal:

    Raise the SGA level for non-blind disabled to the SGA level 
for the blind disabled.
      Cost over First 5 Years: $2 billion
      Long-Range Cost: 0.09 percent of taxable payroll
      

                                


    Mr. McCrery. OK. I think it is worth looking at. We do want 
to try to encourage work in this country, and we have gone to 
great lengths with welfare reform and Ticket to Work and now 
this legislation to encourage work. So I think that we ought to 
look at----
    Mr. Apfel. Mr. McCrery, I would love to work with you on 
that. The reality is that we need to create greater incentives 
for work, and that is true in the disability community, it is 
true in the welfare population, and I think the steps that were 
taken last year by this Committee were very important. But we 
need to do more, and we would love to work with you on that in 
the years ahead.
    Mr. McCrery. Thank you.
    Yesterday the President endorsed this legislation, 
basically, but he also mentioned a couple of other things. One 
would be overall Social Security reform and the other, he 
talked a bit about bringing women out of poverty. But would you 
clarify that he did not make his approval or his decision to 
sign this legislation that is before the Committee today 
contingent upon our acting upon the other two items, did he?
    Mr. Apfel. No. What the President said--and I support this 
endeavor--is a two-step process. Step one would be the 
elimination of the retirement earnings test at the normal 
retirement age, a simple, straightforward bill without a lot of 
extraneous activities around it; and, two, moving to the next 
step on the long-term solvency of Social Security. The 
President has proposed transferring on-budget surpluses, based 
on the interest savings to Social Security, as well as benefits 
for women.
    I would very much like to see those done this year as well. 
Certainly that is what the President said yesterday.
    Mr. McCrery. But he is not going to hold up signing this 
bill until----
    Mr. Apfel. He absolutely did not say that that would be 
held up from this legislation. He has supported the retirement 
earnings test repeal for some time, as Mr. Johnson knows. And 
we can do this separately, but we ought to also do the other 
steps that are necessary to move us closer to long-term reform.
    Mr. McCrery. Do you know what the President's proposal is 
on women on Social Security?
    Mr. Apfel. Well, the specific proposal has not been 
articulated in terms of one particular piece of legislation. 
There are a series of options that have been discussed before 
this Committee and other places about whether to expand 
benefits for women, whether to find ways to provide stronger 
spousal benefits. We could provide for the record a listing of 
four or five potential inclusions--not only in Social Security 
but also in the SSI Program. SSI is another program provides a 
very important poverty benefit, and there could be 
liberalizations in that as well.
    There is not one specific proposal, Mr. McCrery, but I will 
provide for the record a listing of a half-dozen proposals that 
all should be considered.
    [The information follows:]

    While the Administration has not endorsed any specific 
proposal designed to improve the economic condition of elderly 
women at this time, we are examining a variety of proposals 
that have been developed by numerous groups, including:

1. Increasing Social Security Benefits for Widow(er)s

    Under current law, survivors receive the higher of their 
own worker benefit or a surviving spouse benefit based on their 
deceased spouse's primary benefit. This benefit generally 
ranges from 50 percent to 67 percent of the amount the couple 
would be receiving if both were still alive. Recent research 
shows that a single person needs about three-quarters of a 
couple's income to maintain the same standard of living. While 
Social Security is generally only one part of retirement 
income, it accounts for a much larger proportion of the 
retirement income (in some cases all) of the poorest 
individuals.
    The widow(er)'s benefit could be increased in many ways. 
One way is by making it a larger percentage of the couple's 
benefit. This increase could be limited to a specific threshold 
to control costs and to target it more effectively. For 
example, it could be limited to the benefit paid to steady 
maximum earners or to the average retired worker benefit. In 
addition, it could be effective immediately for all current 
beneficiaries or phased in gradually for newly-eligible 
beneficiaries. Examples of these types of options include:
     Increasing widow(er)'s benefits to 67 percent of 
the couple's benefit, effective for all widow(er) beneficiaries 
immediately, and limited to the benefit paid to steady maximum 
earners or limited to the average retired worker benefit (see 
attached memorandum).
     Increasing widow(er)'s benefits to 67 percent of 
the couple's benefit, gradually phased in for new eligibles, 
and limited to the benefit paid to steady maximum earners or 
limited to the average retired worker benefit (see attached 
memorandum).
     Increasing widow(er)'s benefits to 75 percent of 
the couple's benefit, effective for all widow(er) beneficiaries 
immediately, and limited to the benefit paid to steady maximum 
earners or limited to the average retired worker benefit (see 
attached memorandum).
     Increasing widow(er)'s benefits to 75 percent of 
the couple's benefit, gradually phased in for new eligibles, 
and limited to the benefit paid to steady maximum earners or 
limited to the average retired worker benefit (see attached 
memorandum).
    Widows are at risk of poverty in later life, especially 
when their spouse files for benefits before the normal 
retirement age (NRA) and receives an actuarially reduced 
benefit. A provision of current law--the widow(er)'s limit--
operates as a ceiling on widow(er)'s benefits. Under the 
widow(er)'s limit, the widow(er)'s benefit can not exceed the 
greater of the reduced benefit the deceased worker was 
receiving or 82 of the deceased worker's primary insurance 
amount (PIA). For example, a married man who filed for benefits 
at age 63 in 1999 would have received 86.7 percent of his PIA. 
If he dies after she reaches the NRA, her widow(er)'s benefit 
will be 86.7 percent of his PIA. Without the limit, she would 
have received 100 percent of his PIA, because she began to 
receive widow(er)'s benefits after the NRA.
    For example, one option would be to abolish the widow(er)'s 
limit ceiling and permit widow(er)s, whose spouse retired 
before the NRA, to receive up to 100 percent of their spouse's 
PIA, depending on when the widow(er) filed for benefits.

2. Increasing Social Security Benefits for Low Earners--Most of 
whom are Women

    Under current law, a special minimum benefit exists that 
provides a guaranteed minimum benefit for persons who worked at 
least 11 years in covered employment. Workers must meet a 
minimum earnings amount to qualify for a year of covered 
earnings ($8,505 in 2000). The current minimum benefit would 
pay a worker with 30 years of covered earnings a monthly 
benefit of $580.60 (in December 1999), while the all-ages 
poverty threshold was $722.20 in that same year.
    Only 143,390 retired workers (0.50 percent of all retired 
worker beneficiaries) received special minimum benefits in 
December 1999; 76 percent were women.
    There are various ways to increase the special minimum 
benefit, including 1) revising the indexing mechanism so the 
real amount of the benefit grows in the future or 2) 
structurally changing the benefit. Examples of these types of 
options include:
     Indexing the special minimum benefit to wage 
growth rather than inflation. (Benefits under the regular 
benefit formula are wage-indexed before eligibility and thus 
reflect wage growth.)
     Increase the benefit payment to workers with many 
years of low earnings by changing the existing special minimum 
benefit so that 30 years of covered earnings results in a 
benefit at 100% of poverty threshold; 40+ years results in a 
benefit at 130% of poverty threshold, scaled between 30 and 40, 
and scaled down to 10 years.

3. Making Changes to the Supplemental Security Income (SSI) 
Program

    Under current law, the dollar amount of monthly Social 
Security benefits excluded in the computation of SSI benefits 
(the general income exclusion) has remained constant at $20 
since 1974. If the $20 had been raised to its inflation-
adjusted equivalent in January 2000, the dollar amount would be 
$80.
    Women are especially affected by this exclusion because 
they are far more likely to have low enough retirement benefits 
to qualify for SSI. In December 1998, 34 percent of women 
retirees received less than $500 per month in Social Security 
benefits compared to 12 percent of men.
    The general income exclusion could be raised in any 
increment above the current $20. For example, one option would 
be to increase the SSI general income exclusion from $20 up to 
$80 and possibly adjusting it annually thereafter to keep pace 
with inflation.
                                            Social Security
                                                       May 28, 1999

                               Memorandum

Harry C. Ballantyne, Chief Actuary
    Subject: Estimated Long-Range OASDI Financial Effects of 
Provisions to Increase Benefits Paid to a Widow(er)--
INFORMATION

Background

    Under current law, a surviving aged spouse (age 62 or 
older) may be eligible to receive either (1) an aged surviving 
spouse benefit based on the earnings of the deceased spouse, 
(2) a retired worker benefit based on his/her own earnings, or 
(3) his/her own retired worker benefit plus a dual entitlement 
excess benefit equal to the excess (if any) of the aged 
surviving spouse benefit over his/her own retired worker 
benefit. Effectively, a surviving aged spouse is eligible for a 
Social Security monthly benefit equal to the higher of his/her 
own retired worker benefit and the aged spouse benefit payable 
based on the earnings of the deceased spouse.
    The 1994-6 Advisory Council on Social Security considered 
provisions to modify the nature of the benefit payable to an 
aged surviving spouse of a married couple. The Individual 
Account (IA) Plan and the Personal Security Account (PSA) Plan 
both included a provision to pay an aged surviving spouse 75 
percent of the benefit that would be payable to the couple if 
they were both still alive, if higher than the benefit 
otherwise available. The 75-percent benefit amount was limited 
in both cases based on the retired worker benefit that would be 
payable to the survivor had she/he been a steady worker with 
earnings consistently at or above the OASDI contribution and 
benefit base. The IA plan, in addition, included a provision to 
reduce the benefit payable to an aged spouse based on their 
spouses earnings from 50 percent to 33 percent of the spouses 
primary insurance amount (PIA).
    The PSA provision would increase the benefit payable to 
survivors of both one-earner and two-earner couples, with a 
larger increase for two-earner couples. The benefit for the 
survivor of a one-earner couple would be about 112.5 percent of 
the worker's retirement benefit (0.75 x 1.50 = 1.125), compared 
with 100 percent of the worker's retirement benefit under 
current law. For a two-earner couple where both spouses had the 
same PIA, the benefit would be 150 percent of the survivor's 
retired worker benefit, compared with 100 percent of the 
retired worker benefit under current law.
    The IA plan combined this provision with a reduced spouse 
benefit (both spouses alive) so that the survivor of a one-
earner couple would not be helped (0.75 x 1.33 = 1.0).

Description of Provision

    Provisions currently being considered focus on the proposal 
to provide an aged surviving spouse benefit equal to 67 
percent, 75 percent, or more of the benefit payable to the 
couple if they were still both alive without any reduction in 
the benefit payable to the spouse of a living worker.
    The table below provides estimates of the effect on the 
long-range OASDI actuarial balance of provisions to increase 
the benefit of an aged surviving spouse to 67 or 75 percent of 
the amount that would be payable to the couple if they were 
both still alive. This benefit option would be available as of 
the date upon which both the surviving spouse has attained age 
62 and the deceased spouse would have attained age 62 (i.e., 
the date at which both could have been eligible for retired 
worker or aged spouse benefits). The couple benefit for this 
purpose would reflect any actuarial reductions (or DRC) earned 
by either spouse up to the date of death of the deceased 
spouse. If the deceased spouse had not yet become entitled to a 
retired worker or aged spouse benefit, then the deceased would 
be deemed to have become entitled at the date of death, or at 
the date age 62 would have been attained, whichever would occur 
later. Reduction (or DRC) for the survivor would be based on 
the age of first entitlement to a retired worker, aged spouse, 
or aged surviving spouse benefit (but not less than 62).



                                             Estimated change in OASDI
                Provision                  actuarial balance (percent of
                                                  taxable payroll)

67 Percent of Couple Benefit--Effective
 for all in 2000+........................
  Limit to Steady Maximum Earner.........                         -0.12
  Limit to Average Retired Worker Benefit                         -0.03
67 Percent of Couple Benefit--Phased in
 for New Elig 2000-09
  Limit to Steady Maximum Earner.........                         -0.09
  Limit to Average Retired Worker Benefit                         -0.02
75 Percent of Couple Benefit--Effective
 for all in 2000+
  Limit to Steady Maximum Earner.........                         -0.46
  Limit to Average Retired Worker Benefit                         -0.10
75 Percent of Couple Benefit--Phased in
 for New Elig 2000-09
  Limit to Steady Maximum Earner.........                         -0.33
  Limit to Average Retired Worker Benefit                         -0.07


    Based on intermediate assumptions of the 1999 Trustees 
Report.
    The table provides estimates for two possible limits on the 
amount that the provision may increase the benefit of a 
surviving spouse. First, the retired worker benefit that would 
be payable to the surviving spouse if he/she had earnings 
consistently at or above the OASDI contribution and benefit 
base (from age 22 through age 61). Second, the retired worker 
benefit that would be payable to the survivor if she/he had a 
PIA equal to the average PIA for all retired worker 
beneficiaries in current payment status for December of the 
year prior to the year in which the survivor first exercises 
this benefit option. In both cases, the limit reflects any 
actuarial reduction (but not DRC) that would apply to the 
survivor's retired worker benefit with initial entitlement at 
the age of first entitlement to a retired worker, aged spouse, 
or aged surviving spouse benefit (but not less than 62).
    The table also provides estimates for two possible 
effective dates. First, all persons eligible for this benefit 
option as of January 2000 are affected. This means that all 
persons eligible for an aged surviving spouse benefit who 
otherwise qualify, would receive the benefit of this option for 
all benefits payable for January 2000 and later. Second, the 
benefit option would be phased in over 10 years for persons 
newly eligible for the option. Persons first eligible for the 
option in 2000 would receive 10 percent of the potential 
increase under the full provision, 20 percent for those first 
eligible in 2001, and 100 percent for those first eligible in 
2009 and later. First eligibility occurs when the survivor 
could qualify for the benefit option, regardless of whether the 
individual has filed for any OASDI benefit at that time or not. 
This gradual phase in for newly eligible beneficiaries is 
intended to minimize the extent to which individuals newly 
eligible in any year will benefit less from this provision than 
do individuals newly eligible in the following year.

                                           Stephen C. Goss,
                                               Deputy Chief Actuary
      

                                


    Mr. McCrery. Thank you.
    Chairman Shaw. Mr. Weller?
    Mr. Weller. Thank you, Mr. Chairman.
    Commissioner, good to see you. Good morning.
    Mr. Apfel. Good to see you.
    Mr. Weller. First, let me just begin by commending my 
colleague, Sam Johnson, as well as the Speaker of the House, 
Dennis Hastert, for their leadership--and Clay Shaw, our 
chairman, for their leadership repealing the earnings limit, 
the earnings penalty on seniors who want to continue working 
after they turn 65. It is a fairness issue, and I am very, very 
pleased that the President has made a decision to support the 
legislation as well.
    Now, it is interesting that 800,000 Americans over the age 
of 65 lose $1 of their Social Security for every $3 in outside 
income that they earn above $17,000. I think of seniors that I 
know back home, some who may not have been able to save a lot 
for their retirement or their pension income isn't quite what 
they thought it would be, and so they are forced to work. And, 
of course, this legislation will help them in their later 
years. So I really am very, very pleased that this is a 
bipartisan effort today.
    I also note the President's comments that he says he will 
sign a bill to repeal the earnings penalty as long as it is not 
littered with a lot of unrelated other things. And I hope that 
the President's friends in the Senate will keep that in mind as 
we move our legislation to address another issue of fairness, 
the marriage tax penalty. There are threats by some in the 
Senate, of course, to put extraneous provisions on our effort 
to wipe out the marriage tax penalty for 25 million married 
working couples.
    We have had the leadership here in the House send a stand-
alone bill, a clean bill that only does one things, to the 
Senate and we hope we can keep it that way and put it on the 
President's desk and that he will sign that legislation into 
law.
    Commissioner, a lot of times during debate and a lot of the 
rhetoric, there is always the rich versus poor, what is the 
definition of middle class. Last week I was told by some of my 
friends that a married couple making $62,000 who happen to own 
a home are rich. And that was their definition of wealthy.
    The L.A. Times today has on the front page a couple 
examples of a couple seniors who are forced to work or want to 
work after they are 65, and I just want to kind of get a feel 
what your thoughts are about where they stand on the economic 
ladder.
    You have Ida, 66. She works as a cashier. Her monthly 
benefit from Social Security is $417. She has annual earnings 
of $18,500, and, of course, this year the earnings limit is 
$17,000 So her earnings in excess of the limit are $1,500, and 
according to this example of the L.A. Times, under the current 
system, under the current earnings penalty, she will lose $500 
as a result of the earnings penalty.
    Is Ida wealthy making $18,500?
    Mr. Apfel. Well, I don't know what her other income is, but 
if that is her only income, she is certainly not wealthy, and 
the reason we need to repeal the earnings test is to provide a 
greater work incentive for that individual because she would be 
able to keep her Social Security benefits.
    Mr. Weller. Then the second example that they give is a 
gentleman by the name of Fred. He is 67 years old. He is an 
auto mechanic, and he currently has a monthly benefit of 
$1,000. He has annual earnings of $32,000, and after the 
$17,000 earnings penalty for this year, his earnings in excess 
are $15,000. And the current earnings penalty costs Fred, who 
is 67 years old, working as an auto mechanic, $5,000 a year.
    Now, under the administration's definition of rich, is 
Fred, who makes $30,000 and suffers a $5,000 earnings penalty, 
is he defined as rich by your administration?
    Mr. Apfel. I am not sure where we are going, Mr. Weller. 
The administration proposes to eliminate the retirement 
earnings test so that that individual could continue to work 
without losing Social Security benefits.
    From what you have described, this does not appear to be an 
affluent individual. The repeal of the retirement earnings 
test, once it phases fully up to $30,000, will, among others, 
affect the top quintile of earners in this country, in other 
words, the top fifth of earners, as I was pointing out to Mr. 
Doggett.
    However, those individuals will receive, therefore, lower 
Social Security benefits later on over their lifetime. So the 
elimination of the retirement earnings test would affect those 
in the top quintiles.
    Mr. Weller. So this auto mechanic making $32,000, suffering 
a $5,000 penalty, is not rich. You believe that he is not a 
wealth individual.
    Mr. Apfel. It doesn't sound like a rich----
    Mr. Weller. Because I remember back in 1993 the 
administration pushed through a tax increase on seniors making 
about $33,000. You may recall that tax increase on their Social 
Security benefits, and they were defined as rich at that time. 
So that definition has changed. So I hope this is----
    Mr. Apfel. Well, Mr. Weller, I am not certain that I 
would--if you remember the history on that legislation, that 
was made to help strengthen the Medicare Program, and those 
were resources that were provided to the Medicare Program--just 
as back in 1983 with the bipartisan support of this Committee 
changes were made to provide for taxation of benefits to help 
strengthen the Social Security system. So I don't know whether 
that person is rich or not, but those were changes that were 
made to help strengthen both the Social Security system back in 
1983 and the Medicare system in 1993.
    Mr. Weller. Just quickly in response, reclaiming my time, 
Commissioner, back in the South Side of Chicago and the south 
suburbs in Illinois, an auto mechanic making $32,000 or $35,000 
struggles to get by, even with their Social Security benefits. 
And that is why this legislation is so important, to help 
seniors in their later years live a quality lifestyle. They 
have health care concerns at that age. Of course, we want to 
address that this year. And, of course, Bill Thomas is doing a 
terrific job as he works to put together a prescription drugs 
component for Medicare. And I look forward to working with you.
    But thank you, Commissioner, and thank you, Chairman.
    Mr. Apfel. Well, I think it is a very important piece of 
legislation, and we strongly want to see it enacted.
    Chairman Shaw. Mr. Levin?
    Mr. Levin. I was just trying to refresh my recollection of 
whether the House and the Senate have passed bills since 1994 
to reverse the 1993 provision on taxation of Social Security 
benefits. I forget. Has that been acted on by both the House 
and the Senate, sent to the President?
    Mr. Apfel. I do not believe it has, sir.
    Mr. Levin. I don't think so.
    Mr. Apfel. If legislation was enacted to do it, it would 
reduce Medicare solvency and would reduce Social Security 
solvency.
    Mr. Levin. So I am a bit mystified why Mr. Weller would 
raise that, since there was control of this Congress and no 
effort on both sides to repeal it. But, anyway, I guess we 
fight old battles around here. But let's concentrate on the new 
one.
    We support the provision proposed here. In your testimony, 
though--and I had a chance to read it, though I am sorry I 
missed some of the earlier back and forth. In your testimony, 
you talk about the need to be aware that Social Security reform 
proposals can have very different effects on the benefits 
received by women compared to men.
    Just elaborate a bit about this issue, if you would.
    Mr. Apfel. Any one of the reform proposals will have a 
differential effect on men and women, as it will individuals in 
different income groups. With respect to the effect of 
eliminating the retirement earnings test at the normal 
retirement age, about 40 percent of those individuals are women 
and about 60 percent are men. And the impact on poverty is 
negligible from such a change at the normal retirement age.
    That is not the case, as I indicated to Mr. Doggett, for 
eliminating the test at age 62. If the proposal were to 
eliminate the retirement earnings test at an earlier age, at 
62, the poverty impact would be substantial, and primarily for 
women. If we look at the statistics on this, the effect of 
eliminating the retirement earnings test at age 62, is that if 
everyone retired at age 62, the long-term poverty effect could 
be as high as 700,000 people.
    Now, clearly, not everyone would retire at age 62, although 
about 60 percent now do. If no one changed their behavior, the 
effect would be zero. Some will change their behavior, and 
there will be some poverty impact. The actuaries have assumed 
somewhere about one-half will change their behavior, which 
corresponds to about 350,000 additional people moving into 
poverty.
    If we look at the individuals who might potentially be 
affected by poverty, about three-quarters of those are women 
and about half are widows, a few widowers. So there would be a 
significant impact for women to eliminate the retirement 
earnings test at age 62.
    If the RET is eliminated at the normal retirement age, 
again, which this legislation does, there is really a 
negligible impact. And it also creates some modest incentives 
to work, which I think are good.
    So I think we need to look at all of the proposals before 
us in the future for Social Security, both in terms of 
differential for women and men, as well as different income 
groups. And Mr. Doggett talked about the implications for 
upper-income for this particular piece of legislation, and in 
the short term it would provide a benefit for primarily men, 
primarily upper-income or those in the top quintiles. But over 
the long term, because their benefits would not be as high, it 
has a zero income effect.
    So there is a very big difference between the elimination 
of the retirement earnings test at the normal retirement age 
and if it were eliminated at the early retirement age. And so I 
am pleased that the bill before the Congress deals with it at 
the normal retirement age and not the early retirement age.
    Mr. Levin. Thank you, and we are proud of all your talented 
efforts, Mr. Commissioner. Thank you.
    Chairman Shaw. Mr. Matsui, you indicated that you had 
another question.
    Mr. Matsui. Thank you very much, Mr. Chairman, for allowing 
me to ask this one question.
    I don't think there is, but is there a notch problem here 
at all? Would there be? Not at all?
    Mr. Apfel. No, sir.
    Mr. Matsui. OK.
    Mr. Apfel. If an individual, say, turns 65 halfway through 
the year, the benefit income would be affected by the earnings 
test for the first half of the year by the lower earnings test, 
and by the last half of the year not at all. So there is not a 
notch effect that is created by this legislation.
    Mr. Matsui. OK. Thank you.
    Mr. Levin. It is the magic word.
    Mr. Apfel. I know. It is a magic word. I don't need another 
notch.
    Chairman Shaw. Thank you, Commissioner. You are always 
welcome before this Committee, and it is nice to have you 
again.
    Mr. Collins. May I ask a question?
    Chairman Shaw. Oh, Commissioner, we have one more question 
for you. I am sorry.
    Go ahead, Mr. Collins.
    Mr. Collins. Thank you, Mr. Chairman, and we won't hold you 
long, Commissioner.
    There has been a lot of reference to the Social Security 
surplus. I have some concern about using the word ``surplus.'' 
Having been in small business for about 35 years, knowing that 
I had a lot of obligations facing me as far as amortizations 
and such, I considered the very similar situation that we have 
with the payroll tax today to be more of a positive cash flow 
at this point in time than I do a surplus, because is it not 
true that within the next 14, 15 years that positive cash flow 
will reverse and we will have a negative cash flow, and we will 
need all of the positive aspects of the payroll tax today to 
meet that obligation?
    Mr. Apfel. I think that is a fair way to look at it, Mr. 
Collins. I think the Social Security surplus is a very 
important asset for the long term for Social Security. We have 
a positive cash flow in the Social Security system for about 
the next 13 to 14 years; then we do go negative. And it is 
very, very important how we handle this issue over the short 
term to ensure that we can pay benefits in the long term.
    I think it is very appropriate to lock away those Social 
Security surpluses and pay down the debt with them, because 
that is real savings. That is real savings for the economy. I 
would also think an important step would be when the Congress 
decides what to do about that non-Social Security surplus, I 
would certainly hate to see us have all of that resource be 
gone before we have figured out the share for Social Security. 
I think the Social Security system and the President's proposal 
to provide on-budget transfers to Social Security is very 
important to meet those long-term obligations that we have.
    So the Social Security surplus is important, but also the 
on-budget surplus is very important. And I am going to be 
watching how that money gets used because I would hope that we 
are in a position where some of that on-budget surplus is used 
as well to strengthen Social Security for the long term.
    Mr. Collins. Well, there have been a lot of ideas expressed 
as to how any type of positive cash flow should be used. In 
fact, we heard quite a bit of that the other night.
    But, now, this earnings test that we are addressing here 
with Mr. Johnson's bill, it doesn't affect payroll tax, does 
it, in a negative way?
    Mr. Apfel. No. Actually, it affects the payroll tax income 
in a slightly positive way.
    Mr. Collins. That is right. So this positive cash flow/
surplus won't be affected by this.
    Mr. Apfel. The outlays from the Social Security trust fund 
increase in the short term from this proposal. But those 
revenues come back in over the long term into the system 
because of lower benefits that individuals receive by not 
receiving delayed retirement credits.
    Mr. Collins. But those are not FICA taxes. This is actually 
a penalty. The earnings test is a penalty. It is a tax in the 
form of a penalty, not a tax in the form of payroll taxes.
    Mr. Apfel. That is a fair assessment. It is very much a 
perceived penalty because individuals do not realize that if 
they do take this penalty in the short term, then under the 
current law their benefits are higher in the future. So it is 
perceived in the short term very much as a penalty, and 
elimination of that will mean that individuals have higher 
benefits in the short term but somewhat lower benefits in the 
long term. But that is how it stays cost-neutral.
    But I would also point out, Mr. Collins, that there is some 
payroll tax increase to this. I had given the figures of $17 
billion over 5 years and $26 billion over 10 years as the cost 
of this proposal. That is really the gross cost. Some offsets 
will occur. Somewhere on the order of 25 percent will come back 
in, and that will come back in through added payroll tax 
income.
    Mr. Collins. It has a positive effect on the payroll tax.
    Mr. Apfel. A positive effect on the payroll tax. There are 
three----
    Mr. Collins. I have one quick hypothetical question for 
you. That is a big word for me. Supposing--and that is a good 
Southern word for ``suppose.'' Supposing there was no need to 
borrow the Social Security FICA tax cash flow by the general 
fund--in other words, all of the public debt was retired and 
there is no need to continue to build debt, because when we do 
build debt, we have a tendency to spend it. What interest-
bearing account would you suggest those funds be deposited in?
    Mr. Apfel. You are now projecting out 10 and 15 years?
    Mr. Collins. Yes.
    Mr. Apfel. Well, ultimately----
    Mr. Collins. Now, I didn't say stock market or mutual 
funds. What interest-bearing account----
    Mr. Apfel. But, Mr. Collins, I would. It seems to me that 
in the long term we need to be investing part of these 
surpluses in not only government securities but also in the 
equity market.
    If we look at State and local pensions systems--and Social 
Security is not a perfect analogy to State and local pensions, 
but it does have many of the same similarities. State and local 
pensions now invest about 60 to 70 percent of their assets in 
equities to ensure a higher rate of return. But higher rate of 
return means that taxes don't have to be raised or benefits cut 
to provide for those obligations.
    I think this is an area that we should look at. I think 
there is quite a bit of resistance to such a proposal right now 
in the Congress that I have heard, a very significant----
    Mr. Collins. Yes, I understand that, and we don't want to 
get into that debate because--and I think it should be looked 
at, too. But what interest-bearing account? Very similar to 
what Galveston does in Texas. They put theirs in interest-
bearing accounts. What interest-bearing account would you----
    Mr. Apfel. Interest-bearing bonds and government 
securities, as well as in the market itself. I think all of 
them are legitimate options and we should be doing all of them 
in the long term.
    If I could just finish up on the question that you asked a 
minute ago, Mr. Collins, about the gross cost and the fact that 
there are offsets to the overall cost, about 25 percent, that 
is due to three things, really: Higher payroll taxes because 
people will be working more; somewhat higher taxation of 
benefits; and, three, lower Medicare costs. This is something 
that many people are unaware of, but if people are working 
more, they have third-party insurance that will be paying some 
of those health care costs that are now being paid for by 
Medicare. So there is potentially--there will be a positive 
impact on Medicare as well as some positive income to the 
system from payroll taxes.
    Mr. Collins. Thank you, Mr. Chairman.
    Chairman Shaw. If I could just follow up on just a couple 
of things here that you unearthed, which really is going beyond 
the scope of this hearing, but I think it is necessary to be 
sure that the record is clear.
    As we pay off the publicly owned debt, the debt that is out 
there that people are holding, a lot of it is foreign owned, 
but we are paying that down. But that is counterbalanced within 
the Social Security trust fund is that for every dollar that 
goes out of the surplus, it is replaced with a Treasury bill, 
which is debt. It is debt by the government to the Social 
Security Administration or debt by the government to itself, 
but it certainly represents a liability in that it stands for 
the resolve that the Congress and the administration have to 
future generations. But when that starts going down, we 
obviously have to go to the taxpayer or the general fund in 
order to get the money to pay that off. There is no arguing in 
that arena.
    When we start talking about privatization of the Social 
Security system, and you made remarks that you weren't for 
privatization, but you are for investment in the private 
sector. Now we can say, as far as the investment is concerned, 
that it is privatized, but as far as who controls it, it is 
government controlled. But I think that that's a dangerous road 
to go down. I would hope that, whereas equities are important, 
they should be invested outside of the Social Security system.
    The Social Security system should be left totally alone. It 
is presently invested in the government securities, and it 
should continue to go that way. Any investment in the private 
sector should be outside of the Social Security system, but 
used at a later date to come and help out. I think this is of 
concern to us.
    I think that every poll that I have seen says that they do 
not want, that the American people do not want the Social 
Security Administration playing the stock market. I agree with 
the American people on that. And I would be very much opposed 
to any privatization of the Social Security system, whether it 
be through the privatization of investment or whether it would 
be the taxes, FICA taxes, going outside for investment in the 
private sector. It is not necessary, and it should not happen, 
and we should not privatize the Social Security system at all.
    If you would like to comment on that.
    Mr. Apfel. Well, Mr. Shaw, this whole issue is one that we 
have yet to get to consensus on. I think that is fair to say.
    From my perspective, I believe that as the Social Security 
system develops larger surpluses in the future, that a very 
legitimate option is to diversify the portfolio. I don't think 
that the consensus has emerged on that yet. But if we look at 
State and local pensions, which used to be invested very low in 
equities, they are now quite high in equities, to help increase 
rates of return and also to increase--to obviate tax increases 
and to obviate benefit cuts for State and local pensioners.
    I think that this is an issue that needs a whole lot more 
debate and will continue to be debated. But I must tell you, 
where I sit on this issue, I think that it is the right thing 
to do in the long term. I think that the potential of a 
consensus on this this year is unlikely on the issue of equity 
investments, either individually or collectively. But I do 
believe it is the right thing in the long term for the system, 
and that debate will continue, sir.
    Chairman Shaw. We understand each other.
    Thank you. Thank you, Commissioner.
    Mr. Apfel. Thank you.
    Chairman Shaw. We now have our next panel, and we are 
actually going a lot slower than I had anticipated. We have 
Jane Baumgarten, who is a member of the board of directors of 
the American Association of Retired Persons, North Bend, 
Oregon; we have Tom Woods, who is the president of T.E. Woods 
Construction in Kansas City, Missouri. He is chairman of the 
board of trustees of the National Association of Home Builders; 
Jim Martin, president of The 60 Plus Association, down in 
Arlington, Virginia; we have Colonel Henry A. Hough, who is a 
member of The 60 Plus Association, in Arlington, Virginia; 
Martha McSteen, who is the president of the National Committee 
to Preserve Social Security and Medicare; and Zed Wondemu of 
Zed's Ethiopian Cuisine in Georgetown and the National 
Restaurant Association.
    Welcome. We have all of your full testimony, which will 
become a part of the permanent record, and we would welcome you 
to proceed as you see fit, and please feel free to summarize.
    Ms. Baumgarten.

   STATEMENT OF JANE BAUMGARTEN, MEMBER, BOARD OF DIRECTORS, 
            AMERICAN ASSOCIATION OF RETIRED PERSONS

    Ms. Baumgarten. Thank you, Mr. Chairman. I am Jane 
Baumgarten, a member of AARP's board of directors. The 
Association appreciates the opportunity to present our views 
regarding the Social Security earnings limit.
    AARP supports increasing, as well as eliminating, the 
earnings limit for beneficiaries ages 65 through 69. This would 
enable many beneficiaries to work and supplement their Social 
Security, just as other recipients do with pensions and 
unearned income. With a change, beneficiaries will be able to 
earn more without penalty. AARP is pleased to have worked on a 
bipartisan basis with this Committee and other Members of 
Congress to increase the earnings limit for beneficiaries ages 
65 through 69.
    We support the legislation enacted in 1996 that phases in 
an increase. It provided needed relief, while maintaining the 
integrity of the Social Security trust funds. Given the 
increased longevity and improved health of many older people, 
as well as the changing definition of retirement, it is time 
once again to look at the earnings limit for those who work 
past age 65.
    The economy today is different than it was when Social 
Security began. With labor shortages looming on the horizon, we 
ought not to discourage older works from remaining in the labor 
force. At a time when the law prohibits age discrimination in 
the work force, we should not be sending mixed signals to older 
workers.
    Raising or eliminating the earnings limit would mean less 
frustration and inconvenience for beneficiaries and the Social 
Security Administration. SSA spends between $100- and $150 
million annually monitoring excess earnings and updating 
workers' wage records. Over 60 percent of the agency's 
overpayment errors result from the earnings limit. As we hear 
from our members, working beneficiaries ages 65 through 69 are 
perplexed by the earnings limit and feel punished for their 
work initiative.
    Misunderstandings result not only in overpayments that have 
to be recouped, but also in underpayments because beneficiaries 
overestimate their earnings in the report. They file annually 
with SSA. Even a temporary loss in income can have immediate 
economic consequences for those who work out of necessity.
    Despite the fact that many older persons need extra income 
and are willing to work, some oppose increasing or repealing 
the earnings test for those who work past age 65. They argue 
that the change would be costly to the Social Security trust 
funds. While there are short-term costs, the Social Security 
actuaries estimate that the long-term cost to the trust funds 
is negligible.
    Others suggest that any change would be benefit higher 
income individuals. Many middle-income beneficiaries also work 
to supplement their Social Security in order to meet current 
expenses or to set something aside for the future. If they are 
willing to work, they ought to be able to earn more than the 
current law allows, particularly if they do not have much in 
addition to Social Security.
    Of course, higher income working beneficiaries will also 
benefit from the change, but they will pay higher income taxes, 
more payroll taxes, as well as additional income taxes on up to 
85 percent of their Social Security.
    AARP firmly believes that now is the time to change the 
earnings limit. It is good labor, it is good social, and it is 
good economic policy. We need to find ways to better tap the 
valuable and still underutilized skills of our older workers. 
One of the best ways to do this is by removing the penalty that 
discourages workers, ages 65 through 69, from working and 
contributing to the economy.
    The Association is pleased that Congress and the 
administration are revisiting the Social Security earnings 
limit. AARP looks forward to working with this Committee and 
other interested policy makers on a bipartisan basis to let 
older workers know their contributions to our economy are 
needed and are appreciated.
    And I thank you very much for this opportunity, gentlemen.
    [The prepared statement follows:]

Statement of Jane Baumgarten, Member, Board of Directors, American 
Association of Retired Persons

    AARP appreciates this opportunity to present its views on 
the Social Security earnings limit or ``retirement test.'' The 
Association has long supported increasing the earnings limit 
and has been pleased to have worked with this committee and 
other Members of Congress to allow beneficiaries ages 65 
through 69 to earn more without losing any earned Social 
Security benefits. AARP supported the legislation enacted in 
1996 that phases in an increase in the earnings limit. That 
change will enable beneficiaries ages 65 to 69 to earn up to 
$30,000 in 2002 before their Social Security is reduced. The 
legislation not only helps older Americans who work in order to 
supplement their Social Security, but it also maintains the 
financial integrity of the Social Security trust funds.
    The earnings limit discourages older people from remaining 
in the work force and contributing to the country's economic 
growth. Given the increased longevity and generally improved 
health of many retirees, the prospect of an aging society, and 
a slower-growing work force, it is critical that we find ways 
to better tap the valuable and still underutilized skills of 
older workers. It is equally important that we enable more 
beneficiaries to supplement their income without a penalty, 
just as many do with employer provided pensions and other non-
wage income.

                   I. The Earnings Limit in Practice

    The earnings limit reduces the Social Security benefits of 
working beneficiaries up to age 70 whose earnings exceed an 
annually adjusted threshold. The retirement test is different 
for beneficiaries under age 65 than for those ages 65 through 
69, and no longer applies when a beneficiary reaches age 70. In 
2000, beneficiaries ages 62 through 64 lose $1 in benefits for 
every $2 in earnings above $10,080. Those ages 65 through 69 
lose $1 in benefits for every $3 in earnings above the $17,000 
limit in 2000. The earnings limit not only restricts the amount 
a beneficiary can earn from employment without losing any 
Social Security retirement benefits, but it also can affect 
spousal and dependent benefits.
    Although Social Security has always had a retirement test, 
it has been modified over time by narrowing its applicability. 
For example, the age at which the test no longer applies was 
reduced to 75 in 1950, then to 72 in 1954, and in 1977 was 
lowered to age 70. The test was changed from measuring only 
monthly wages to one that measures monthly and yearly earnings. 
In 1960, the penalty for earnings above the threshold was 
altered from a total loss of monthly benefits to a reduction in 
benefits. Since 1972, the law has provided for an automatic, 
annual updating of the threshold in accordance with changes in 
average annual wages. The 1983 Social Security Amendments 
further eased the penalty for those ages 65 through 69 to a $1 
benefit reduction for every $3 of excess earnings. In 1996, an 
increase was enacted that gradually raises the earnings 
threshold for beneficiaries ages 65 through 69 to $30,000 in 
2002.
    AARP believes we should continue to modify the retirement 
test to accommodate the aging of our population, evolving 
retirement patterns, and the needs of our labor market and our 
economy.

                         II. Reasons for Change

    Members of Congress and the Administration have proposed 
additional improvements in the earnings limit. Changes 
currently being considered include increasing or repealing the 
threshold for working beneficiaries ages 65 through 69 as well 
as adjusting the limit for those ages 62 through 64. Interest 
in additional improvements reflects a legitimate concern about 
the effect of current law on working beneficiaries, the 
administrative burdens imposed on the Social Security 
Administration (SSA), and the overall economic and societal 
benefits of encouraging older Americans to continue working.
    AARP supports further liberalization, including repeal, of 
the earnings limit for those beneficiaries who continue working 
beyond the Normal Retirement Age. We recognize that there is a 
short-term cost to the trust funds and urge that the impact be 
minimized. However, the long-term financial impact on the 
program is negligible.

A. Effect on Beneficiaries

    Most Social Security beneficiaries are not in the paid 
labor force and will not be affected by changing the earnings 
limit. Last year, Social Security Commissioner Apfel testified 
that during 1999, nearly 1.1 million beneficiaries had some or 
all of their benefits withheld because of work at or after age 
62. (Statement before the Senate Democratic Task Force on 
Social Security, September 13, 1999) About 690,000 
beneficiaries ages 65 through 69 lost some or all of their 
benefits because of excess earnings. In addition, 103,000 
dependent and spousal beneficiaries were affected. Among 
beneficiaries ages 62-64, about 221,000 lost some or all of 
their Social Security because they worked, and 38,000 dependent 
and spousal beneficiaries were also affected.
    In addition to those who lose benefits, many others who 
deliberately hold their earnings below the threshold in order 
to preserve their full benefit and maximize their retirement 
income are adversely affected by the earnings limit. Many in 
this group rely heavily on Social Security and are likely to 
have less in savings and/or pension income. For those who are 
capable and have the desire to earn more than the current 
earnings limit, the additional income from raising the limit 
can make a difference. Continued or increased employment may be 
the only option many working beneficiaries have to meet current 
expenses, repay debts, or set aside some income for a time when 
they will no longer be able to work.
    Many affected older workers are perplexed by a penalty on 
earnings because non-working beneficiaries with the same or 
even larger incomes generated from other sources, such as 
pensions or capital gains, do not have to forego any benefits. 
They feel punished for their work initiative. The argument that 
Social Security was designed as a partial replacement for 
income lost due to retirement, and that the earnings limit is 
designed to measure whether a worker is retired, often does not 
resonate with beneficiaries who need income today and must work 
to augment their Social Security.

B. Administrative Problems

    The retirement test creates administrative problems for the 
Social Security Administration. It spends $100 -$150 million 
annually to monitor excess earnings and update workers' wage 
records. The agency estimates that sixty-eight percent of its 
overpayments are due to the earnings limit. Changing the limit 
would ease Social Security's administrative burdens.
    A substantially higher or repealed earnings limit also 
would mean less frustration and inconvenience for working 
beneficiaries. Misunderstanding about the earnings limit 
creates financial and emotional hardships when overpayments are 
recouped, especially from beneficiaries who depend on their 
earnings to supplement their Social Security. Beneficiaries who 
overestimate earnings will have more benefits withheld than 
necessary. These lost benefits may be restored, but a temporary 
reduction in income could have immediate economic consequences. 
In addition, some beneficiaries forfeit a month of benefits for 
failing to file a report of estimated earnings in a timely 
manner. They may be unaware of this annual filing requirement, 
especially if they return to the labor force some time after 
having filed for benefits. (Generally, beneficiaries receive 
information about filing an annual earnings estimate when they 
apply for Social Security.)

C. Effect on the Economy

    While Social Security is intended as a partial replacement 
for income lost due to retirement, disability, or death of the 
worker, the definition of retirement has evolved to accommodate 
changing work patterns, labor shortages, and increased 
longevity. Some older individuals choose to gradually ease out 
of the work force rather than drop out entirely, and many 
continue working full-time or part-time because they need 
additional income. As our society continues to age and the pool 
of knowledgeable and willing workers lags behind demand, older 
workers will be needed in the work force more than ever.
    If older Americans can earn more without penalty, there 
could be a greater incentive for them to work. Working 
beneficiaries will have additional money to contribute to the 
economy and will pay additional tax dollars into the federal 
treasury. Moreover, employed older people tend to remain 
healthy longer, suggesting the prospects for lower costs for 
the Medicare program.

D. Additional Costs

    Working beneficiaries ages 65-69 who exceed the limit 
resent having to return 33 \1/3\ cents of their benefits to the 
government for each dollar earned. When the returned benefits 
are combined with payroll taxes, federal income taxes, state 
taxes, and income taxes on up to 85 percent of benefits, the 
cost of working can be quite high and acts as a strong 
disincentive to work. Those ages 65 through 69 who lose some of 
their benefits will receive a delayed retirement credit (DRC) 
that partially compensates for lost benefits. They are not made 
whole, however, because the current 6 percent DRC is not 
actuarially equivalent to the lost income. (The credit is being 
increased to the actuarially fair level of 8 percent by the 
year 2008, on a phased-in basis.)

            III. Concerns About Changing the Earnings Limit

    While many policymakers and analysts recognize the value in 
changing the earnings limit for those who work past the Normal 
Retirement Age, some concerns remain. The most widely mentioned 
are the impact on the trust funds and the economic status of 
those who would benefit from the change.

A. The Cost Concern

    Some oppose changing current law because it creates a 
modest cost to the trust funds over the short term. While this 
is true, SSA actuaries estimate that the long-term cost to the 
trust funds is negligible since the value of the total benefits 
paid to the individual over a lifetime does not change 
significantly. This results from the fact that those whose 
post-65 earnings cause a benefit loss will receive a delayed 
retirement credit, which currently does not fully compensate 
for the lost Social Security. With further liberalization (or 
elimination), the individual can earn more and receive a 
benefit now instead of getting a larger benefit later that 
includes a DRC. Once the DRC reaches 8 percent, the trust funds 
pay the individual roughly the same amount of lifetime total 
benefits; it is simply that the payout schedule differs.
    The Congressional Budget Office (CBO) suggests that the 
overall costs associated with raising the limit may be 
overstated because the revenue generated by additional work is 
often disregarded. (SSA estimates the additional revenue would 
offset between 10 and 15 percent of the cost of repeal.) While 
the revenue gained from increased work force participation may 
be difficult to project because of uncertainties about the 
number of retirees who will increase their work effort and 
their earnings level, it is clear that some additional federal 
revenues will be collected. The primary revenue sources are the 
income tax, the payroll tax, and increased taxation of Social 
Security benefits.

B. Benefit Distribution Concern

    Raising the earnings limit will have little impact on low 
and moderate income older Americans since many of them do not 
work or have earnings below current law thresholds. Middle 
income working beneficiaries, however, may be trying to cope 
with a smaller income, modest assets, and the prospect of 
increased longevity. Should we penalize beneficiaries who work 
to supplement their Social Security while other beneficiaries 
with the same or even higher incomes from pensions and non-wage 
income do not have a benefit reduction? What other options do 
these working beneficiaries have to increase their income and 
prepare for a time when ill health and/or advanced age may 
force them out of the work force?
    Some oppose further improvements because they believe that 
only those with higher incomes would benefit. If the earnings 
limit is changed, many older Americans will benefit, including 
those with higher incomes. Higher income beneficiaries, 
however, will pay additional income and payroll taxes, as well 
as higher income taxes on their Social Security benefits. In 
any event, all beneficiaries age 70 and over regardless of 
earnings receive their full Social Security benefit without 
penalty.

  IV. Changing the Earnings Limit for Beneficiaries Age 62 Through 64

    There is widespread agreement on raising, if not 
eliminating, the earnings test for those ages 65 through 69, 
but there is no consensus about what changes should be made for 
the age 62-64 group.
    Supporters of liberalization (or elimination) note that 
beneficiaries ages 62 through 64 may continue working or 
increase their work effort and thus continue to contribute to 
our economy. Some policy analysts observe that the earnings 
test for the younger group is a greater deterrent than many 
realize. They believe that if older workers withdraw from the 
labor force at age 62 because of the earnings test, they would 
be less inclined to enter the workforce at age 65 even if, at 
that age, there are no earnings restrictions.
    Those who oppose eliminating the test for beneficiaries 
ages 62 through 64 cite the added short-term costs to the trust 
funds and the potential impact on the long-term economic well-
being of those who would start collecting Social Security at 62 
instead of waiting. The adverse impact will be greatest for the 
survivors of poor and modest income older beneficiaries who 
have less income from other sources to augment their Social 
Security. Workers who currently file for benefits at age 62 
experience a twenty percent actuarial reduction because they 
begin receiving benefits before the Normal Retirement Age. As 
the age for collecting full benefits moves to age 67, future 
beneficiaries who collect benefits at 62 will face a thirty 
percent reduction. The effect of these substantially reduced 
benefits will not be apparent immediately while earnings 
supplement the Social Security benefit. The impact of a 
permanently reduced benefit, however, could be more pronounced 
later in life as older beneficiaries, particularly their 
survivors, become more reliant on Social Security income. Older 
beneficiaries have a greater chance of being poor, of having 
consumed their other assets, and of not being able to 
supplement their Social Security.
    Opponents of repeal argue that if the earnings test remains 
in place, more people will continue to work and not collect 
benefits. As a result, upon retirement they and their survivors 
will receive a larger benefit.
    AARP believes that because of the added trade-offs, further 
evaluation of the impact of any change for the age 62-64 group 
is necessary. While we should remove disincentives to continued 
work where possible, we must also ensure the long-term adequacy 
of Social Security benefits.

                             V. Conclusion

    AARP is pleased that Congress and the Administration are 
revisiting the earnings limit. We strongly support removing 
penalties that discourage workers ages 65 through 69 from 
remaining in the workforce and contributing to the economy. 
This is good public policy. We look forward to working with 
this committee on a bipartisan basis to achieve this goal.
      

                                


    Chairman Shaw. Thank you.
    Mr. Woods.

 STATEMENT OF TOM WOODS, CHAIRMAN OF THE BOARD, HOME BUILDERS 
        INSTITUTE, NATIONAL ASSOCIATION OF HOME BUILDERS

    Mr. Woods. Good morning, Mr. Chairman, and Members of the 
Committee. I am Tom Woods, and I am a small business owner and 
a homebuilder from Kansas City, Missouri. And I come to you 
today not only representing my 25 years of experience as a 
small business owner, but also representing the perspective of 
the 200,000 business members of the National Association of 
Home Builders and their 8 million employees. I also serve as 
the chairman of the board of the Home Builders Institute, which 
is the educational arm of the National Association of Home 
Builders.
    Mr. Chairman, before I get into my testimony and all of the 
facts and the figures that are so important to this complicated 
issue, I would like to share a very brief anecdote with you. It 
put a very human face on the Social Security earnings test 
issue for me. This is not part of my formal written testimony 
that I submit to the record, but I feel it is important.
    Just before I flew here, I took the time to stop at a 
coffee shop that is frequented by a lot of the men that I have 
known over the years who have worked for and with me building 
homes, and I asked them, as a group, flat out: If you could 
come back to work, even part time, or come back to work to help 
me teach the young people that are now on our job sites, the 
young men and women, would you? Every single one of them said 
they wished they could, but they couldn't afford to.
    Mr. Chairman, they may be older, but they are fit, and they 
are strong, and they know things, with 30 or 40 years' of 
experience, that the young people have yet to even imagine or 
learn. They have the experience to know, but they cannot afford 
to come back to work because of the Social Security earnings 
test. Mr. Chairman, these people are hardly millionaires, and 
they want to know since when in America does it cost you to 
want to work hard?
    Today, Mr. Chairman, my colleagues in the home building 
industry are experiencing a severe shortage of skilled workers. 
It is not a short-term phenomenon. For the last 3 years, it has 
been the number one issue among NAHB members in our quarterly 
surveys. It has become even more important than things like 
dealing with permit process or material costs and the like. And 
with most young people looking for their future in the high-
tech industry, we do not expect the trend to go away any time 
soon.
    To put the problem in perspective, last year, there were 
1.7 million permits issued for the construction of new homes. I 
employ about 300 workers on each house, either through my own 
crews or contractors or subcontractors. The math is staggering. 
The need for skilled workers is great. And this is especially 
so in an industry accounting for 4.7 percent of the gross 
domestic product.
    The Labor Department tells us that we need 240,000 new 
workers each year, that they must be recruited and trained 
every year to meet America's building needs. And, Mr. Chairman, 
it is just not happening. We are experiencing shortages across 
the Nation in every occupation in the home building industry.
    The National Association of Home Builders, through the Home 
Builders Institute, is training thousands of young adults every 
year in the construction trades, but we don't come close to 
making up for those lost through retirement. And the people we 
are losing are the men and women with the best knowledge base, 
the ones who would make the very best teachers because of their 
years of experience.
    Mr. Chairman, the Social Security earnings test robs our 
Nation of the contributions that our vibrant, healthy seniors 
want to contribute and continue making. It robs them of the 
ability to be part of our strong, growing economy. And perhaps 
worst of all, the Social Security earnings limit robs them of 
what researchers tell us American seniors need most: physical 
activity, a purpose in life, and the socialization that goes 
along with working and teaching and sharing knowledge on a day-
to-day basis.
    Let me just conclude with this: The Social Security 
earnings limit was created when our economy wasn't stable 
enough to support both young workers and older workers, and we 
weren't living as long, and we weren't as healthy in our later 
years as we are now. It made sense then, but times have 
changed. Instead of helping solve a problem, it is creating 
one. That is the shortages that I talked about, the work force 
that we are not able to sustain. It is robbing our younger 
workers of the incredible knowledge base older workers have and 
want to share.
    Please let me go back to Kansas City, go back to the coffee 
shop, go back and tell these men who want to come back to work 
that I won't break their budget.
    Thank you very much for your time, and I look forward to 
working with you.
    [The prepared statement follows:]

Statement of Tom Woods, Chairman of the Board, Home Builders Institute, 
National Association of Home Builders

    Good morning, Mr. Chairman and members of the Ways and 
Means Subcommittee on Social Security. My name is Tom Woods, 
and I am a small business owner and home builder from Kansas 
City, Missouri. I am here today to talk to you about how the 
Social Security earnings test deprives the home building 
industry of many of its best and most experienced workers. And 
also to tell you that the Social Security earnings test robs 
our vibrant and healthy senior citizens of the opportunity to 
contribute to the economic vitality of this country and share 
their expertise and positive work ethic with younger workers.
    I am not only representing my personal experiences of more 
than 25 years in the home building business, but also the 
perspective of the 200,000 business members of the National 
Association of Home Builders (NAHB) and their more than 8 
million employees.
    I have a strong commitment to the issue of worker 
development and retention. I currently chair the Association's 
Task Force on Labor Shortages and concurrently serve as Chair 
of the Board of Trustees of the Home Builders Institute (HBI), 
an organization solely dedicated to educating and training 
workers for the home building industry. And I am pleased to say 
that I am accompanied today by Frank Riggs, the recently 
appointed President of the Home Builders Institute and your 
former colleague from Northern California.
    Today the home building industry is experiencing a severe 
shortage of skilled workers. This shortage of workers is so 
severe that for the past three years labor availability has 
ranked as the number one industry issue across the country in 
NAHB quarterly surveys of twenty critical issues. For the home 
building industry, labor availability is proving to be more 
important than all of the more traditional issues that one 
might associate with construction, such as cost and supply of 
materials, development costs, and the entire development and 
permitting process.
    And far from being a temporary situation, a strong economy 
and changing demographics, coupled with occupational trends, 
suggest that this shortage of skilled workers in the home 
building industry will continue well into the future. To give 
you a perspective on this, please consider the following:
     Last year there were 1.71 million permits issued 
to build new homes. To give you an example of what this means 
in terms of numbers of workers, I estimate that for each of the 
homes I build I employ about 300 workers, either directly or 
through sub-contracts. If you multiply that by even 1 million 
new homes, it is easy to see how significant a skilled 
workforce is to this important industry that represents more 
than 4.7% of the Gross Domestic Product.
     In terms of demographics, aging Baby Boomers in 
the construction industry are already beginning to retire, and 
in part because of the Baby Bust of the 1970s, there is a much 
smaller pool from which to draw new workers. Currently, the 
United States Department of Labor estimates that some 240,000 
new workers must be recruited and trained each year to meet the 
nation's building needs, and it is just not happening. Today we 
are experiencing a shortage of skilled workers in virtually 
every occupation in the home building industry.
     And we find that we are also challenged in our 
recruitment efforts by the draw of competing occupations, 
particularly new technology jobs that are such an attraction 
for younger workers.
    While NAHB, through HBI and its state and local affiliates, 
trains thousands of young adults each year in the construction 
trades, these efforts do not compensate for the loss that the 
industry suffers each year in retirements.
    From our industry's standpoint, the current Social Security 
earnings limit deprives the industry of an important segment of 
its knowledge base--craft skills workers with years of 
experience who face a very real financial disincentive if they 
want to continue working beyond retirement age. And with those 
retirements, we also lose the best teachers that we have to 
transfer craft skills to younger generations, the high quality 
workmanship that goes along with many years of experience, and 
a work ethic that sets standards for high productivity.
    The Social Security earnings test allows recipients under 
age 65 to earn up to $10,080 a year in wages or self-employment 
income without having their benefits affected. After this 
``earnings limit,'' retired workers lose $1 in benefits for 
every $2 in earnings. If retired workers are between ages 65 
and 69, they can only earn up to $17,000 a year before losing 
$1 in benefits for every $3 in earnings. For most workers, 
including those whom I use to build my homes in Kansas City, 
this substantial reduction in benefits is entirely too much to 
justify working beyond the earnings limit.
    As you know, the earnings test has been part of the Social 
Security program since its inception. And early on, when the 
American economy was not stable enough to sustain great numbers 
of both older and younger workers, and when we were not living 
longer, healthier lives as we are now, it made sense. But now 
that America has the opposite problem of insufficient numbers 
of workers, and many, many vital senior citizens who very much 
want to work, its sole function is to force, and keep, our 
older citizens out of the workforce.
    From our perspective, this is unfair, as Social Security is 
a retirement benefit that is earned through a lifetime of 
contributions, and as such should not be taken away because an 
individual continues to work beyond the traditional retirement 
age. And what about retired individuals who must continue to 
work in order to survive?
    Social Security benefits are oftentimes meager and, alone, 
do not provide for the quality of life that hard-working 
Americans deserve in their golden years. And for some older 
individuals, continuing to work is an absolute necessity, as 
they have no other source of income to cover basic necessities 
and pay their bills. Continuing to maintain the Social Security 
earnings limit unduly hurts poorer retired workers. The limit 
should be eliminated to encourage their participation in the 
workforce.
    A recent study published by the Institute for Policy 
Innovation (IPI) estimates that someone between 65 and 69, 
paying no income tax but earning over the limit, could face a 
marginal tax rate of forty-one percent. ``For people who also 
pay federal income tax, the marginal tax rate on wages can be 
well over 80 percent. . .such high, punitive tax rates on 
working individuals may help explain why only 16.5 percent of 
men age 65 and over are in the workforce today, compared to 47 
percent fifty years ago.''
    For our nation's home builders, retention of skilled 
workers plays an important role in meeting our workforce needs. 
Because the skills of decades ago are no longer taught in 
current education and training programs, home builders 
especially recognize the need to keep and utilize the unique 
talents of retirees. And study after study confirms the 
importance of physical activity, having a purpose in life, and 
the opportunity for socialization, to the continued health and 
mental vitality of senior citizens.
    Mr. Chairman, NAHB believes that it is time to retire the 
Social Security earnings test. We thank you for giving us the 
opportunity to share our views with you, and we commend you for 
your efforts to encourage older Americans to stay in the 
workforce longer and remain productive members of society. We 
look forward to working with you, and members on both sides of 
the aisle, to lift the Social Security earnings limit and help 
diminish the labor shortage problem confronting the home home 
building industry today.
      

                                


    Chairman Shaw. Thank you, Mr. Woods. And you can bring that 
message back to the coffee shop.
    Mr. Martin.

 STATEMENT OF JAMES L. MARTIN, PRESIDENT, 60 PLUS ASSOCIATION, 
                      ARLINGTON, VIRGINIA

    Mr. Martin. Thank you, Mr. Chairman. The 60 Plus 
Association is a nonpartisan seniors group that honors Members 
of Congress in both parties who are senior friendly, and we 
look forward to honoring everybody on this panel that is going 
to vote for repeal of this particular bill.
    Having worked on Capitol Hill 35 years ago as chief of 
staff to the late Senator Ed Gurney of Florida, I have seen a 
lot of taxes come, but I haven't seen very many go. But if 
today's headline is accurate in this paper, with the President 
of the United States, no less, endorsing today's efforts, then 
here is a tax whose time to go has come.
    The earnings limitation was imposed, as was said before, 
during Depression times, 25-percent unemployment, to free up 
jobs for younger workers. But the Chairman himself was widely 
quoted today as saying, ``While it may have made sense then, it 
sure doesn't make much sense today.''
    And Congressman Sam Johnson, who is chief sponsor of this 
bill, this former Marine looks at him in awe, he was quoted 
this morning, after having fought in two World Wars, he also 
fought for the freedom to work.
    We shouldn't penalize those who not only want to work, but 
need to work to supplement their Social Security, and that 
includes my favorite senior citizen, my mom, my sainted mom, 
who still works part time down in Florida. The 60 Plus 
Association strongly endorses repeal of this tax. It is a major 
step toward fulfilling our slogan, ``Tax Fairness for 
Seniors.''
    On behalf of the 60 Plus chairman, former Congressman Roger 
Zion, who served on this body well in the sixties and 
seventies, it is my pleasure to introduce our coworker at 60 
Plus, Colonel Hank Huff, who has a personal story to tell about 
this particular tax.
    Thank you.
    [The prepared statement follows:]

Statement of James L. Martin, President, 60 Plus Association, 
Arlington, Virgnia

    Mr. Chairman, Members of the Subcommittee,
    I'm Jim Martin, President of the 60 Plus Association, an 
eight-year national nonpartisan seniors' advocacy organization 
of over half a million members.
    Having worked on Capitol Hill more than 35 years ago as 
press secretary and administrative assistant to the late 
Senator Edward J. Gurney of Florida, I'm well aware of the long 
hours and hard work that go into these hearings.
    Our slogan at the 60 Plus Association is ``tax fairness for 
seniors.''
    There are many unfair taxes on seniors, notably the federal 
estate or death tax. We are dealing with another unfair tax 
today, the earnings limitation imposed on senior citizens 
between the ages of 65 and 69.
    This earnings limitation was imposed at a different time in 
a different era to meet very different conditions.
    It was imposed in the early days of the Social Security 
Act. At that time, seniors were fortunate to live to 65 years 
of age. There was concern that those who lived 65 and beyond 
and wanted to work or had to work would take jobs away from 
others. Therefore, a penalty was imposed.
    Today is a much different situation. More seniors are 
living not only to 65, but many into their 70s, 80s, 90s and 
beyond.
    We also are living in prosperous times where there is a 
shortage of workers, rather than of jobs.
    We should be encouraging seniors to continue work. It helps 
them. It helps the economy.
    We should reward those who want to work, not penalize them. 
This should be the case whether they choose to work or to spend 
full-time in leisure and other pursuits.
    The 60 Plus Association commends this Subcommittee, its 
Chairman and its Members, for holding hearings on repeal of 
this tax. Removing it will be a major step toward tax fairness 
for seniors.
    I'd now like to turn to my co-worker at the 60 Plus 
Association, Hank Hough, who has his own story to tell 
regarding this tax and its personal effect.
---------------------------------------------------------------------------
    60 Plus is a seven-year-old non-profit, nonpartisan group with a 
less government, less taxes approach to seniors' issues. 60 Plus is 
supported by voluntary donations from its 500,000 citizen lobbyists to 
print and mail millions of letters, petitions and voting indexes. 60 
Plus publishes a newsletter, SENIOR VOICE, and a SCORECARD, bestowing a 
GUARDIAN OF SENIORS' RIGHTS award on lawmakers in both parties who vote 
``pro-senior.'' 60 Plus has been called ``an increasingly influential 
lobbying group for the elderly.''
---------------------------------------------------------------------------
      

                                


    Chairman Shaw. Thank you.
    Colonel.

    STATEMENT OF RETIRED LIEUTENANT COLONEL HENRY A. HOUGH, 
   EXECUTIVE VICE PRESIDENT, 60 PLUS ASSOCIATION, ARLINGTON, 
                            VIRGINIA

    Lt. Colonel Hough. Mr. Chairman, Committee members. My name 
is Henry A. Hough. I am 72 years old and am executive vice 
president of The 60 Plus Association and work for Jim Martin. I 
retired from the Army as a Lieutenant Colonel in July 1974 and 
have worked full time as a civilian since then in a variety of 
careers.
    From 1974 to 1977, I worked for Amtrak here in Washington. 
And for the next 17 years, I was involved in Air Defense 
Command Control and Communications projects in Saudi Arabia, 
working for full time for Litton, Boeing and Westinghouse.
    I certainly don't claim to be a tax expert. However, I am 
something of an expert on the negative personal impact of this 
egregious legislation. As a result, I paid back $11,452 over 
the 3 years that I worked when I was 67, 68 and 69; $3,245 in 
1995; $4,621 in 1996; and $3,586 in 1997. Understandably, this 
is an emotional issue with me. Even though my loss is 
unrecoverable, I am highly pleased by the Committee's efforts, 
headed by Chairman Shaw, to eliminate this tax to correct a 
gross injustice to older Americans, 65 through 69, who want to 
work or, in some cases, may have to work.
    Furthermore, I submit to the Committee not only is the law 
wrong, but the administration of it by the Social Security 
Administration is all fouled up. While I certainly don't fault 
the Social Security employees who are doing their best under 
the circumstances, repaying the Social Security earnings limit 
has been a bureaucratic nightmare. The details are in my 
prepared statement. But it suffices to say that the notices 
were delayed for as long as a year and a quarter. It is 
difficult to develop a viable personal budget when you don't 
know when the other shoe will drop.
    The economic and employment picture has changed drastically 
since the earnings limit was established, as has been pointed 
out here today. Today, there is a tight labor market with firms 
having to go abroad to get qualified workers, particularly in 
professions and highly technical areas. That says something 
about our educational system, but that is another matter. Older 
workers have the experience, qualifications, work ethic and 
good judgment to fulfill these labor shortages, provided there 
are economic incentives for them to do so.
    I am not advocating, by any means, that all of us older 
workers should rush into the labor market. It should be an 
individual choice. Many seniors have hobbies, family and other 
interests which favor full retirement, precluding working. 
Others may want to work part time. But those of us seniors who 
want to or have to work full time, should have an unfettered 
choice to do so. As Senator Dole asks, why retire? And look at 
Chairman Greenspan and, I might add, certain Members of 
Congress who pursue active careers as bona fide seniors.
    There are favorable psychological factors to having an 
opportunity to work. For one thing, work contributes to 
seniors' self-esteem. Instead of older people being regarded as 
a burden on society, they can make a positive contribution to 
the economy and society and feel good about themselves. Another 
factor is the changing demographics, with seniors representing 
an increasing percentage of the U.S. population, based on 
greater numbers entering the retirement age pool, or baby 
boomers, and increased life expectancy.
    The real issue is are seniors going to be a burden or an 
asset to society? If you work, you pay taxes and contribute to 
economic growth. If you don't work, you don't pay taxes. Also, 
the more older workers contribute to the economy, the less 
strain on the rapidly emerging problems of the Social Security 
system.
    And, finally, I believe there is widespread support amongst 
all seniors to remove this egregious inequity.
    Thank you very much.
    [The prepared statement follows:]

Statement of Retired Lieutenant Colonel Henry A. Hough, Executive Vice 
President, 60 Plus Association, Arlington, Virginia

    My name is Henry A. Hough and I am 72 years old. I am 
Executive Vice President of the 60 Plus Association located in 
Arlington, Virginia. This matter of the earnings limit on older 
Americans in the 65-69 age group has been a major issue of the 
60 Plus Association.
    I retired from the US Army as a lieutenant colonel, July 1, 
1974, and have worked full time as a civilian since then in a 
variety of careers. From 1974 to 1977 I worked for Amtrak here 
in Washington with extensive traveling around the USA. For the 
next 17 years, 1977 to 1994, I was involved in various Air 
Defense Command, Control and Communications projects in Saudi 
Arabia working for Litton, Boeing and Westinghouse, working 
full time, both in Saudi Arabia and in the United States.
    When I returned from Saudi Arabia in 1994, I decided to 
start yet another career as a political activist; rather than 
just talking about what's wrong with the country, try to do 
something about it. At the age of 67, I started working for 60 
Plus in April 1995.
    I certainly don't claim to be a tax expert which I most 
emphatically am not. However, I am something of an expert on 
the negative personal impact of this egregious legislation, the 
Social Security Earnings Limit, which has resulted in a loss of 
$11,452 to me for working when I was 67, 68 and 69, broken down 
as follows:





1995.............................       $3,245.00   (Support Data
                                                     Enclosed)
1996.............................        4,621.00   (Support Data
                                                     Enclosed)
1997.............................        3,586.00   (Support Data
                                                     Enclosed)
 Grand Total.....................      $11,352.00


    Understandably, this is an emotional issue with me. Even 
though my loss is unrecoverable, I am highly pleased by the 
committee's efforts, headed by Chairman Shaw, to eliminate this 
tax to correct a gross injustice to older Americans, 65 through 
69, who want to, or in some cases, may have to work.
    Furthermore, I submit to the committee not only is the law 
wrong, but the administration of it by the Social Security 
Administration is all fouled up. While I certainly don't fault 
the Social Security employees who are doing their job as best 
they can under the circumstances, repaying the Social Security 
Earnings Limit has been a bureaucratic nightmare. I knew about 
the law and starting before April 15, 1996, for tax year 1995, 
I started inquiring about the procedures for repayment and got 
no response after repeated inquiries. I explained I was trying 
to do the right thing,. Finally, I got the notice for tax year 
1995 dated October 31,1996, followed by a penalty assessment of 
$1150.00 dated February 18, 1997. I received the payment notice 
for tax year 1996 dated July 31, 1997 in a fairly timely 
manner. However, I did not receive the notice for tax year 1997 
until March 21, 1999. It's difficult to develop a viable 
personal budget when you don't know when the other shoe will 
drop.
    The economic and employment picture has changed drastically 
since the EarningsLimit was established in 1935. Today, there 
is a tight labor market with firms having to go abroad to get 
qualified workers, particularly in professions and highly 
technical areas, that says something about our educational 
system, which is another matter. Older workers have the 
experience, qualifications, work ethic and good judgment to 
fulfill these labor shortages providing there are economic 
incentives for them to do so. The progressive increases of the 
earnings limit starting in 1996 up to the current $17,000 were 
a step in the right direction, but, as my experience indicates 
it certainly is a disincentive. You may ask, why am I working? 
Well, for one thing I started working at 60 Plus closer to the 
threshold age of 70 after which there are, of course, no limits 
on earnings. For a person continuing to work after 65, that 
five year gap to 70 can really be a whopper, much larger than 
the loss I experienced. Another reason I'm still working is a 
sense of fulfillment, but even here there are limits to 
economic obstacles like the Earnings Limit.
    I am not advocating, by any means, that all of us older 
workers should rush into the labor market. It should be an 
individual choice. Many seniors may have hobbies, family and 
other interests which favor full retirement, precluding 
working. Others may want to work part time. But those of us 
seniors who want to, or have to, work full time should have an 
unfettered choice to do so. As Senator Dole asks, why retire? 
And look at Chairman Greenspan and, I might add, certain 
members of Congress who pursue active careers as bonafide 
seniors. There are favorable psychological factors to having an 
opportunity to work. For one thing, work contributes to 
seniors' self esteem. Instead of older people being regarded as 
a burden on society, they can make a positive contribution to 
the economy and society and feel good about themselves.
    Another factor showing the impracticability of the Earnings 
Limit is the changing demographics with seniors representing an 
increasing percentage of the U.S. population, based on greater 
numbers entering the retirement age pool (baby boomers) and 
increased life expectancy. The real issue is: ``Are seniors 
going to be a burden or an asset to society?'' If you work, you 
pay taxes and contribute to economic growth. If you don't work 
you don't pay taxes. As I said, I'm not a tax expert, but I'm 
willing to bet that a study would show that the projected 
revenue gains from more seniors working would more than offset 
revenues from paying back under current legislation. Also, the 
more older workers contribute to the economy, the less strain 
on the rapidly emerging problems of the Social Security system.
    And finally, I believe there is widespread support amongst 
all seniors to remove this egregious inequity. Whether or not 
they are working, they recognize the inequity of this terrible 
legislation which I believe, they overwhelmingly want repealed. 
Even if they are not working, they know somebody who has been 
adversely affected by it.
    Thank you very much.
      

                                


    Chairman Shaw. Thank you, Colonel.
    Ms. McSteen.

 STATEMENT OF MARTHA A. McSTEEN, PRESIDENT, NATIONAL COMMITTEE 
            TO PRESERVE SOCIAL SECURITY AND MEDICARE

    Ms. McSteen. Thank you, Mr. Chairman. I am Martha McSteen, 
president of the National Committee to Preserve Social Security 
and Medicare, a grassroots education and advocacy organization 
representing millions of senior Americans. The members and 
supporters of the National Committee strongly support enactment 
of H.R. 5.
    Many National Committee members need to remain in the work 
force because of such factors as increased cost of living and 
expensive prescription drug bills. Others work because they 
receive satisfaction from continuing to be productive and 
creative. And increasingly, ``retirees'' must help support an 
80- or 90-year-old parent.
    As we all know, the intent of the original legislation was 
to preclude workers from returning to a crowded work force. 
Today, unemployment is at a 30-year low, and our Nation faces 
an acute labor shortage. It is, indeed, time to retire the 
Social Security earnings limitation.
    I commend you for your actions in 1996 and urge you to now 
take the final step and eliminate the earnings test. About one 
in three people between the ages of 65 and 69 and eligible for 
retired worker benefits is employed at some point during the 
year. In 1999, about 800,000 beneficiaries in this age group 
lost some or all of their benefits because of the earnings 
limitation. The Social Security Administration withheld about 
$3.9 billion in benefits from these beneficiaries in 1999. 
These statistics do not factor in the number of individuals 
dissuaded from applying for benefits because they realized the 
earnings limit would consume most or all of their earned 
benefits. The impact of the earnings limitation may explain 
why, despite improved health among seniors, only 16.5 percent 
of men 65 and over are in the work force today. That is 
compared to about 47 percent 50 years ago.
    Maintaining independence in retirement is important to 
today's seniors. Not all seniors work because they need the 
money. Many receive satisfaction from continuing to be 
productive and creative. Instead of a national policy to 
encourage the continuing use of the talent, energy and wisdom 
America's seniors bring to the workplace, the earnings 
limitation serves as an active disincentive to work. Others who 
do work find ways of avoiding paying Social Security taxes so 
their benefits will be protected. At the same time, the trust 
funds lose those rightful contributions.
    Opponents of eliminating the earnings limit, argue that 
such policy would primarily benefit the wealthy who, ``Don't 
need Social Security.'' However, Social Security is not a 
needs-based program. Upper-income workers have earned their 
benefits. They are also more likely than low- or middle-income 
workers to have substantial unearned income from savings and 
investments. Since unearned income is not subject to the 
earnings limitation, the question of equity exists. Whether or 
not the senior works out of necessity or for enjoyment, the 
combination of FICA payroll taxes, income tax and loss of 
Social Security benefit if the earnings exceed the limitation 
exact a high price.
    Over the years, the main obstacle to eliminating the 
earnings limitation has been the cost. True, there would be a 
short-run budgetary cost. Removing the earning test for those 
at the full benefit age and above would raise Social Security 
expenditures by about $21 billion over the first 9 years. 
However, since elimination of the earnings test reduces the 
subsequent benefit increases that would have occurred through 
the actuarial adjustments, the cost of repeal declines as the 
years pass. Over the long run, we are told there is very 
little, if any, actuarial impact.
    In addition to being one of the least-popular features of 
Social Security, the earnings limitation is also one of the 
most widely misunderstood and confusing. Reductions in current 
benefits are offset by an increase in future benefits, the so-
called delayed retirement credit. Although the actuarial 
adjustments are fair, on average, for the population as a 
whole, they are not always accurate for specific population 
groups. Even if delayed retirement credit balances out over the 
long run, it does not help those seniors who are working 
because they need all of their benefits and earned income for 
immediate needs.
    Finally, I would note that administering the test is a 
resource-intensive administrative operation. Repeal of the test 
would mean that claims representatives would no longer have to 
calculate benefit withholding based on the earning estimates 
under our overpayments. The many appeals that result from the 
misunderstanding of the retirement test and the waivers of 
repayment from those who can't pay back the overpayments would 
also be eliminated.
    Let us acknowledge that the earnings test is an outdated 
relic from the Depression era. Given today's booming economy 
and record low unemployment, it makes sense to encourage 
seniors to continue to use their wisdom, skills and work ethic 
to benefit American business rather than penalize them for 
working.
    Mr. Chairman and Members of the Subcommittee, I commend you 
for holding these hearings on this important issue and urge you 
to continue to work to eliminate the Social Security earnings 
limitation.
    Thank you very much.
    [The prepared statement follows:]

Statement of Martha A. McSteen, President, National Committee to 
Preserve Social Security and Medicare

    Thank you Mr. Chairman for giving me the opportunity to 
come before the Subcommittee and talk about the need to repeal 
the Social Security earnings limitation for those individuals 
who have reached the normal retirement age. Thank you, too, for 
your ongoing interest in issues affecting our nation's seniors.
    I am Martha McSteen, President of the National Committee to 
Preserve Social Security and Medicare, a grassroots, education 
and advocacy organization representing millions of seniors 
Americans. The about five million members and supporters of the 
National Committee strongly support enactment of H.R. 5.
    Many National Committee members need to remain in the work 
force, because of such factors as increased costs of living and 
expensive prescription drug bills. Others work because they 
receive satisfaction from continuing to be productive and 
creative. Whatever the reason they chose to continue paid 
employment, America's seniors also deserve to receive their 
full retirement benefits earned through a lifetime of 
contributions. Seniors cannot see why they should lose part or 
all of their benefits for continuing to work or the rationale 
behind penalizing retirees at 68 or 69 but not at 70.
    The Social Security earnings limitation dates back to the 
establishment of Social Security. In 1935, the Committee on 
Economic Security appointed by President Franklin D. Roosevelt 
recommended that no benefits be paid before a person had 
``retired from gainful employment.'' Initially, the Social 
Security Act provided that benefits would not be paid for any 
month in which the individual had received ``wages with respect 
to regular employment.''
    The intent of this limitation was to preclude workers from 
returning to the workforce. This was deemed necessary because 
of the high unemployment rate our nation was experiencing at 
the time. Today, though, our situation is very different. 
Unemployment is at a 30 year low and our nation faces an acute 
labor shortage. It is indeed time to retire the Social Security 
earnings limitation.
    In 1996 Congress enacted legislation (P.L. 104-121) to 
allow a faster increase in the earnings limit for retired 
workers between ages 65 to 69. In 2000, senior citizens aged 65 
to 69 lose $1 in benefits for every $3 they earn over $17,000 
annually. By 2002 those seniors will be able to earn up to 
$30,000 annually without penalty. I commend you all for your 
actions in 1996, and urge you to now take the final step and 
eliminate the earnings test.
    About one in three people between the ages of 65 and 69, 
and eligible for retired worker benefits, is employed at some 
point during the year. In 1999, about 800,000 beneficiaries in 
this age group lost some or all of their benefits because of 
the earnings limitation and the Social Security Administration 
withheld about $3.9 billion in benefits from these recipients. 
Of course, these statistics do not factor in the number of 
individuals dissuaded from applying for benefits because they 
realized the earnings limit would consume most or all of their 
earned benefits.
    The impact of the earnings limitation may explain why, 
despite improved health among seniors, only 16.5 percent of men 
age 65 and over are in the workforce today compared to 47 
percent 50 years ago.
    Social Security benefits are often described as being one 
leg of a three-legged stool. The other legs are made up of 
private savings and pensions. It is important to note that 
fewer than half of all seniors have their Social Security 
benefits supplemented by a pension. For those who do have 
pension income, lack of cost-of-living adjustments after 
retirement results in a continuing decline in their purchasing 
power.
    Savings can be equally elusive. Even those seniors who have 
accumulated respectable nest eggs, can see them quickly eroded 
by the high costs of nursing home care, exorbitant prescription 
drug costs, or other major medical expenses not covered by 
Medicare. And, as life spans increase, more and more retirees 
find themselves responsible for the care of an aged parent.
    Maintaining independence in retirement is important to 
today's seniors. Not all seniors work because they need the 
money. Many receive satisfaction from continuing to be 
productive and creative. Instead of a national policy to 
encourage the continuing use of the talent and energy and 
wisdom America's seniors bring to the workplace, the earnings 
limitation serves as an active disincentive to work.
    Opponents of eliminating the earnings limit argue that such 
policy would primarily benefit the wealthy who ``don't need 
Social Security.'' However, Social Security is not a needs 
based program. Upper income workers have earned their benefits. 
They are also more likely than low or middle-income workers to 
have substantial unearned income from savings and investments. 
Since unearned income is not subject to the earnings 
limitation, a question of equity exists.
    Whether the senior works out of the need for extra income 
or the pleasure of working, the combination of FICA payroll 
taxes, income tax and the loss of Social Security if earnings 
exceed the limitation exact a high price.
    Over the years, the main obstacle to eliminating the 
earnings limitation has been the cost. It is true that there 
would be short-run budgetary costs. Removing the earnings test 
for those at the full benefit age and above would raise Social 
Security expenditures by about $21 billion over the first nine 
years. However, since elimination of the earnings test reduces 
the subsequent benefit increases that would have occurred 
through the actuarial adjustments, the costs of repeal required 
declines as the years pass. Over the long run, there is very 
little actuarial impact.
    In addition to being one of the least popular features of 
Social Security, the earnings limitation is also one of the 
most widely misunderstood and confusing. Reductions in current 
benefits are offset by an increase in future benefits (the 
delayed retirement credit).
    However, although the actuarial adjustments are fair on 
average for the population as a whole, they are not always 
accurate for specific population groups. For example, cohorts 
with shorter-than-average life expectancies generally do not 
recover all of their lost benefits. Because of differences in 
life expectancies, the earnings test works to the disadvantage 
of lower-income beneficiaries in particular. Also, even if the 
delayed retirement credit balances out over the long run, it 
does not help those seniors who are working because they need 
ALL of their benefits and earned income for immediate needs.
    Finally, I would note that administering the test is a 
resource intensive administrative operation. Repeal of the test 
would mean that claims representatives would no longer have to 
calculate benefit withholding based on earnings estimates, 
under or overpayments at the end of the year based on actual 
earnings or the new benefit amount taking into account both new 
earnings and months of benefits withheld. The many appeals that 
result from the misunderstanding of the retirement test and the 
waivers of repayment from those who can't pay back the 
overpayments would also be eliminated.
    Mr. Chairman and Members of the Subcommittee, I commend you 
for holding hearings on this important issue, and I urge you to 
continue your work to eliminate the Social Security earnings 
limitation for those seniors who have achieved the normal 
retirement age.
    The earnings test is an outdated relic from the depression 
era. Given today's booming economy and record low unemployment, 
it makes sense to encourage seniors to continue to use their 
wisdom, skills and work ethic to benefit American business 
rather than penalize them for working.
      

                                


    Chairman Shaw. Thank you. Ms. Wondemu?

   STATEMENT OF ZED WONDEMU, OWNER, ZED'S ETHIOPIAN CUISINE, 
GEORGETOWN, WASHINGTON, D.C., ON BEHALF OF NATIONAL RESTAURANT 
                          ASSOCIATION

    Ms. Wondemu. Mr. Chairman and Members of the Subcommittee, 
thank you for the chance to testify on the impact of the Social 
Security earnings test. My name is Zed Wondemu and I own and 
run Zed's Ethiopian Cuisine in Georgetown.
    This issue has long been a frustration of mine and it is my 
sincere hope that you, as lawmakers, will eliminate the 
earnings test and allow more older Americans to work without 
fear of losing their benefits.
    I know that when people think of restaurant employees they 
think of younger adults. But as the nation's largest private 
sector employer, the food service industry also employs tens of 
thousands of individuals between the ages of 65 and 70.
    Although I am testifying today on behalf of the National 
Restaurant Association, I am here to tell my own story. As a 
small business person, I see firsthand how the Social Security 
earnings test changes the choices people make. My restaurant, 
which offers excellent cuisine with quality service, employs 
only ten individuals. Clearly, I rely on the quality of 
employees, not the quantity, to uphold my restaurant's 
reputation.
    I take great pride in the fact that, for several years 
running, my restaurant has been recognized by Washingtonian 
Magazine as one of Washington's 100 very best restaurants.
    In addition to my restaurant, I also own a small apartment 
building, with just seven units. Given the size of the building 
I do not need, and cannot afford, a management company. To help 
out with the upkeep of the building, I wanted to hire an older 
gentleman who lives in one of the apartments. Prior to his 
retiring, the tenant was a maintenance worker for a company in 
this area. At the age of 69, he is in excellent health. In 
fact, I would say he is still very strong and vibrant for any 
age. However, because of his concern over losing his Social 
Security benefits if he works too many hours, I am unable to 
hire him to be an on-site manager.
    I do not understand the need to continue this limitation. 
There may have been a reason in the past, but times are 
different. We are in a changing society. I do not need to tell 
you how the population is changing. I know the point has been 
overemphasized here today, but I hope the baby-boom generation 
will change the way this culture thinks about its senior 
citizens.
    This is not the time to prevent people from working. You 
can figure out there is a big labor shortage today by just 
taking a quick drive around this town. Everyone is looking for 
help. In my business, we place a premium on the type of help 
that older employees offer, dependability, experience, a 
certain knowledge of the world, a work ethic, and a cultural 
history.
    In a small restaurant, the ability to employ quality 
workers is critical. To me, the highest quality employees are 
the more ``seasoned'' individuals, the ones who do not need all 
the training, the ones who provide a chance for us to learn 
from them.
    Coming to this country at the age of 15 to go to school, it 
is obvious that I have lost some of the real tradition and 
habits of cooking from the ancient nation of Ethiopia. Now, my 
adopted country's free enterprise system allows me to transport 
this fine cuisine to this beautiful country of ours. In doing 
so, I constantly depend on the older generation's advice and 
consultation to preserve the true cooking and tradition. I 
believe there is much to be learned from the older generation. 
But policies such as the earnings test send a strange message 
to our senior citizens about how much they ``should'' work.
    As the number of older Americans grows, this country will 
need to tap into this resource. For this reason, I hope this 
Congress is successful in eliminating the Social Security 
earnings test so we can truly take advantage of the experience 
and the skills that older Americans contribute to this 
country's economic future.
    Again, thank you for the chance to address this 
distinguished Subcommittee and, most of all, for listening to 
those of us on the frontlines of this issue.
    Thank you.
    [The prepared statement follows:]

Statement of Zed Wondemu, Owner, Zed's Ethiopian Cuisine, Georgetown, 
Washington, D.C., on behalf of National Restaurant Association

    Mr. Chairman and members of this subcommittee, thank you 
for the opportunity to testify on the impact of the Social 
Security earnings test. My name is Zed Wondemu and I own and 
operate Zed's Ethiopian Cuisine in Georgetown. This issue has 
long been a frustration of mine and it is my sincere hope that 
you, as lawmakers, will eliminate the earnings test and allow 
more older Americans to work without fear of losing their 
benefits.
    I know that when people think of restaurant employees they 
think of younger adults. But as the nation's largest private-
sector employer, the foodservice industry also employs tens of 
thousands of individuals between the ages of 65 and 70.
    Although I am testifying today on behalf of the National 
Restaurant Association, I am here to tell my own story. Because 
as a small businessperson, I see firsthand how the Social 
Security earnings test changes the choices people make.
    My restaurant, which offers excellent cuisine with quality 
service, employs only ten individuals. Clearly, I rely on the 
quality of employees, not the quantity, to uphold my 
restaurant's reputation. I take great pride in the fact that, 
for several years running, my restaurant has been recognized by 
Washingtonian Magazine as ``one of Washington's 100 very best 
restaurants.''
    In addition to my restaurant, I also own a small apartment 
building, with just seven units. To help out with the upkeep of 
the building, I wanted to hire an older gentleman who lives in 
one of the apartments. It only has seven units, so I do not 
need, and can not afford, a management company. I just need 
someone to help out. Prior to his retiring, this tenant was a 
maintenance worker for a company in the area. At the age of 69, 
he is in excellent health, in fact, I would say he is still 
very strong and vibrant for any age. However, because of his 
concern over the losing his Social Security benefits if he 
works too many hours, I am unable to hire him to be an on-site 
manager.
    I do not understand the need to continue this limitation. 
There may have been a reason in the past, but times are 
different. I don't need to tell you how the population is 
changing. I know the point has been overemphasized here today, 
but I hope the baby-boom generation will change the way this 
culture thinks about its senior citizens.
    This is not the time to prevent people from working. You 
can figure out there's a big labor shortage today just by 
taking a quick drive around this town. Everyone is looking for 
help. In my business, we place a premium on the type of help 
that older employees offer -dependability, experience, a 
certain knowledge of the world, a work ethic, and a cultural 
history. In a small restaurant, the ability to employ quality 
workers is critical. To me, the highest-quality employees are 
the more ``seasoned'' individuals -the ones who don't need all 
the training, the ones who provide an opportunity for us to 
learn from them.
    Coming to this country at the age of 15 to go to school, it 
is obvious that I have lost some of the real tradition and 
habits of cooking from this ancient nation of Ethiopia. Now, my 
adopted country's free enterprise system allows me to transport 
this fine cuisine to this beautiful country of ours. In doing 
so, I constantly depend on the older generation's advice and 
consultation to preserve the true cooking and tradition. I 
believe there is much to be learned from the older generation, 
but policies such as the earnings test send a strange message 
to our senior citizens about how much they ``should'' work.
    As the number of older Americans grows, this country will 
need to tap into this resource. For this reason, I hope this 
Congress is successful in eliminating the Social Security 
earnings test so we can truly take advantage of the experience 
and skills that older Americans contribute to this country's 
economic future.
    Again, thank for the opportunity to address this 
distinguished subcommittee, and most of all, for listening to 
those of us on the frontlines of this issue.
      

                                


    Chairman Shaw. Thank you, and thank all of the witnesses. 
Mr. Johnson?
    Mr. Johnson. Thank you, Mr. Chairman.
    Tom, I was in the construction business and I know, like 
the restaurateurs, that they lean on some of the more 
experienced elderly to teach them the profession. I think you 
do that in the building business, too. Is it not true that some 
of your, especially plumbers, electricians, and even 
carpenters, learn the trade from the older guys and you need 
them around to help you out? Is that true or false?
    Mr. Woods. That is very true. You know, across the country, 
in HBI, the group that I work with, the education arm, and I am 
a homebuilder, the very best programs that we have are the 
programs where we have people with years and years of 
experience and understanding, and we have them involved.
    Numerous people on this panel have said, our older citizens 
today are in better health. Some of the reasons they are in 
better health is they have stayed active, they have worked 
hard. To take that away, you know I gave an example and 
unfortunately today this man would have probably been here with 
me, but he is having both knees replaced this morning in Kansas 
City. And he is doing that, quite frankly, because of his 
activity level. He is in excellent health. He retired, I would 
guess a year ago, maybe a little more.
    He still comes by the job site to check on the kids, as he 
says. He was one of those at that coffee shop and he was one of 
those that I asked would you come back? And his comment to me 
was in a minute. So I think there is a real need for that.
    Mr. Johnson. Thank you so much for your answer. I do not 
have any further questions, Mr. Chairman.
    Chairman Shaw. Just to add to that, I think it's improvment 
to consider not only the questions of the skills, but the work 
ethics. I used to work as a forester with a lumber company down 
in the woods. And I will tell you, when you go down to Alabama, 
down in the swamp, in August and you see an old man, you say I 
have got to keep up with this guy.
    There is really a lot to learn, not only from the technical 
skills, but also the work ethic.
    Mr. Woods. It is an amazing thing, if I might say, we talk 
about the fact that sometimes the generations do not have all 
that much in common. But if you really look at that, there is 
an interesting thought. I have heard it said the reason that 
grandparents and grandchildren get along so well is they have a 
common enemy.
    And I think that sometimes works in the industry, too, 
because I think sometimes I see it with the youngest, most 
spirited sometimes, they really build a kinship to some of the 
older, well experienced, and when you look back, they might 
just see a reflection there, I think.
    Chairman Shaw. Thank you. Do any other members have further 
questions? Mr. Hulshof?
    Mr. Hulshof. Mr. Chairman, just briefly, to follow up with 
you, Mr. Woods, it is always great to have another resident 
from the Show-me State. Welcome to Washington.
    As I understand your testimony, in following up on what Mr. 
Johnson said, it is not just that older workers would be 
retained to help train younger workers, but they are there 
swinging hammers and climbing ladders and doing the manual 
labor, just like the younger guys. Is that a fair statement?
    Mr. Woods. I think it is a fair statement. I am not trying 
to indicate to you that that is everybody, but I will tell you 
there are individuals there who I will put up against the best 
of them. They may not be as physically quick as maybe they once 
were, or whatever, but wisdom will make up an awful lot for 
that. They are certainly not to be sold short.
    And I certainly do not want to be in the position, nor do I 
think you want to be in that position, to tell someone who has 
the ability and has the desire to be involved at that level, 
that they cannot do it. And I think a couple of these people 
said it best.
    In some cases, they simply have to do it, whatever those 
circumstances may be. It may be taking care of a parent. It may 
be because of other medical experiences or circumstances we do 
not know. And I just think it should not be our decision to put 
any more obstacles in their way than some of them may have 
experienced already.
    Mr. Hulshof. What is the real impact? I do not know what 
the number would be, but let us say that an older worker 
recognizes the earnings limit and then maybe works up to that 
and says I am going to leave the job site? I am not sure what 
the number of people would be who fall in that category, but 
how does that affect maybe a construction site that you are the 
supervisor on and somebody is no longer there? What is the 
real-life impact of some decision like that, Mr. Woods?
    Mr. Woods. Well, any time you build a team, and that is 
what home building, that is what construction is, it is a team 
effort. As Mr. Johnson said, it takes the plumbers, the 
electricians, and carpenters. And as you get to where you work 
within that team and you build together, you become very 
dependent on each other. And any time you take one person out 
of that mix, no matter what their job, and no matter what 
level, you have to rebuild that team.
    While I would not call any of these people rich, by any 
stretch of the imagination, the gentleman that was here earlier 
from Chicago, a lot of these guys will make $35,000 or $40,000 
a year, or easily could. But I certainly do not think they are 
rich. But if you take them out when they have reached that 
$17,000 limit, it means that we have lost them for half the 
year, and they are just very, very hard to replace.
    I see the young people in many of our programs, and when I 
speak to this I am speaking of HBI, who works with a lot of 
disadvantaged youth. In some cases, these older people are the 
only real role models they have ever been introduced to. And 
when you take that out of the situation, you have got another 
problem to overcome.
    So I do not know that you can put a number on to it. But in 
some cases, it is devastating.
    The other thing it does, it creates the situation where the 
employer, whether it is myself or the plumber or whatever, in 
many cases simply cannot hire that young person because we do 
not have the personnel to put him with to be able to supervise 
or to teach him. And so from that line, in many cases, it 
simply means that it is a house that does not get built, a 
dream that does not get fulfilled.
    Mr. Hulshof. Thanks, Mr. Woods.
    A final comment, Ms. McSteen, or really not a question but 
a comment. I really do appreciate your statement and position, 
very succinctly and powerfully put, that eliminating the 
earnings penalty for seniors who have reached full retirement 
age would not primarily benefit the wealthy. We often hear, 
when we try to take limits off and remove disincentives, that 
we cannot do it, and you can follow along with the mantra, 
because it would only benefit the wealthy.
    It appears that, at least on this issue, and I know Mr. 
Weller was inquiring of the Commissioner about the 1993 tax 
increase from 50 percent to 85 percent, maybe there is hope for 
the future that we can even roll that back.
    But I do appreciate your statement that this is not a 
needs-based program. This is a retirement system people have 
worked for and played by the rules, and they are entitled to 
these benefits. I appreciate your statement.
    Thank you, Mr. Chairman.
    Chairman Shaw. Thank you. Mr. Matsui?
    Mr. Matsui. Thank you. Mr. Chairman, I just want to thank 
the panel. The lack of asking a question does not indicate at 
all disinterest. We just agree with you so much. So we want to 
thank you all for your testimony with you today. Thank you.
    Chairman Shaw. Mr. Portman?
    Mr. Portman. Thank you, Mr. Chairman.
    I would like to start by saying, as a father of young kids, 
I am the common enemy. They get along well with their 
grandparents. They also get along well with their great-
grandmother. And increasingly we have family situations where, 
because of longevity, you are going to have great-grandparents 
out there who are part of this conspiracy against us parents.
    I am just delighted that we are here today. Sam Johnson 
deserves a lot of credit, and others here, for getting us to 
this point. This is really exciting for me.
    I have a dear friend who is a nurse care giver. She took 
care of my grandfather before his death at 97 a couple of years 
ago, and she is in her late sixties. She wants to work and she 
is able to work, and she is someone who can give a lot to our 
society, and particularly to our elderly right now. Yet her 
effective tax rate, as I have helped her figure out, is about 
80 percent.
    Because when you add up all these taxes, including what is 
about a 33 percent marginal tax rate on work because of the 
earnings limit, it is just not worth it for her to work. 
Everybody is advising her just do not work. She wants to work 
and she has a lot to give.
    So I have just been delighted over the last 24 hours even 
to see people come together on this issue from both sides of 
the aisle, and to finally begin to talk about putting this into 
place. Over the long-term, as I understand, it is not going to 
have an impact on the solvency of Social Security because of 
the delayed credits in any case.
    The one issue I get some feedback on back home, that I want 
to have somebody address if they would, and Ms. McSteen I know 
you talked about this, and AARP, Ms. Baumgarten, you have 
addressed this as well. Some people have said gee, the earnings 
limit really is not unfair because there is a delayed increase 
in benefits over time to those people like my friend, the care 
giver.
    Can you address why it is indeed unfair to my friend the 
care giver, and other older Americans out there who want to 
work, even though over the younger term theoretically, using 
the actuarial data, they would get an increased benefit or get 
the same benefit?
    Ms. McSteen. In the case you mentioned, I would think that 
the urgency is for the moment, that she needs to be able to 
work now, and she does not need to be worried about the future. 
So she will gain in the long run by continuing to work and to 
contribute and be able to draw her Social Security. It is the 
right thing.
    Mr. Portman. Ms. Baumgarten?
    Ms. Baumgarten. The fact that the money is taken out now, 
up front, when they are working because they need it hurts. 
Looking at something down the road just does not register. A 
lot of them are working because they need the extra money. And 
if you need the extra money, you need it now, not in an 
actuarial equivalency down the road.
    Mr. Portman. I appreciate the response and I agree with 
that. I think this is about behavior and it is about what 
people will do when faced with again, what I have calculated 
from my friend, about an 80 percent marginal tax rate.
    It also is a risk. In other words, the actuaries can come 
in and say gee, over time, on average you are going to end up 
getting a delayed credit for this. But, unfortunately, not 
everybody is going to live that long. So for individuals, it is 
a risk to delay the benefit, rather than getting the benefit of 
the Social Security you have worked all your life for while you 
need it. And at the same time, again contributing to our work 
force, contributing to society.
    We have got about a 3 percent unemployment rate in my area. 
I think nationally it is about 4 percent. These are wonderful 
workers to have out in the work force, the mentoring you talked 
about, just adding that maturity to the work force and letting 
people do what they want to do, and to give so much back. Ms. 
McSteen?
    Ms. McSteen. There is one additional thing that we really 
have not talked that much about this morning. That is we must 
recognize that there are many individuals who may, in fact, die 
early. That is something that, particularly minorities, are 
faced with because of their early death rate overall. And the 
delayed retirement credit may make up for lost benefits over 
time for some people, but not for all.
    Mr. Portman. Thank you, that is an excellent point.
    Mr. Chairman, again I commend you for having this hearing, 
and I yield back the time.
    Chairman Shaw. Thank you, and I want to thank this panel 
for putting a very human face on the task that is before us. I 
think that, from the last line of questions by Mr. Portman, the 
question that comes to my mind is who in the world said that it 
is up to the Congress to decide when someone gets the benefits 
that they have earned? That is just flat wrong.
    We are going to put the record straight. We are going to 
put the law straight. We are going to deal with everybody 
fairly on this. I am delighted to see the wonderful 
bipartisanship that we have here. In dealing with this 
wonderful part of our population, it is wonderful to know that 
we can leave our partisan hats at home and work together.
    Thank you very much.
    We now have our final panel, Leora Friedberg, Ph.D., 
Assistant Professor of Economics at the University of 
California, San Diego, and the National Bureau of Economic 
Research in Cambridge, Massachusetts; Bruce Bartlett, who is a 
Senior Fellow at the National Center for Political Analysis; 
Robert Greenstein, who is the Executive Director of the Center 
on Budget and Policy Priorities; and Aldona Robbins, Ph.D., 
Senior Research Fellow, Institute for Policy Innovation, 
Lewisville, Texas.
    Dr. Friedberg? As the previous panels, we have the full 
text of your statements that will be made a part of the 
permanent record. You may proceed.

  STATEMENT OF LEORA FRIEDBERG, PH.D. ASSISTANT PROFESSOR OF 
  ECONOMICS, UNIVERSITY OF CALIFORNIA, SAN DIEGO, AND FACULTY 
    RESEARCH FELLOW, NATIONAL BUREAU OF ECONOMIC RESEARCH, 
                    CAMBRIDGE, MASSACHUSETTS

    Ms. Friedberg. My name is Leora Friedberg. I am an 
economist and, as you said, a professor at the University of 
California, San Diego. This summer I am moving to the 
University of Virginia.
    I have been invited here to summarize my research findings. 
In my research I have analyzed how beneficiaries have changed 
their hours of work in response to past changes in the earnings 
test. And then I used this past evidence to develop predictions 
if the earnings test were changed or removed today.
    These predictions directly pertain to a particular subset 
of beneficiaries, men aged 65 to 69, already working a fair 
amount. For technical reasons, this is the group for which I 
can make the most precise predictions. This is also the group 
losing the most benefits to the earnings test. But I will be 
happy to discuss later what might happen with other groups.
    In my research I use large data files collected by the 
Bureau of Labor Statistics in which people reported their 
earnings and hours of work during the previous year. Many 
workers in those surveys responded noticeably to past changes 
in the earnings test.
    For example, in 1983 the earnings test was eliminated for 
people age 70 and 71. In the data, we can see the cluster of 
workers with earnings just below the earnings limit, and we can 
see them smooth out their earnings after the earnings test was 
eliminated for this age group. So we can conclude that they had 
been changing their work hours because of the earnings test 
beforehand.
    In 1978, the earnings limit was raised from $3,000 to 
$4,000 for people aged 65 to 71. You see this cluster of 
workers move their earnings just up to the new earnings limit 
after that change.
    Based on these past responses, I have developed predictions 
if the earnings test is changed today. These predictions focus 
on the hours of work among people who are already working, and 
there are three important subgroups to consider. The first 
group is low earners, people who keep their earnings just at or 
below the earnings limit. We have heard many examples of that 
today.
    This group is reacting most visibly to the earnings test 
and will be the most responsive to a change. Compared to their 
actual hours of work in 1995, they would be predicted to work 
50 percent more, on average as a group, if the earnings test is 
eliminated.
    The second group to consider are medium earners, people who 
are working a little more initially, losing some but not all of 
their benefits to the earnings test. In theory, we do not know 
if this group would work more or less when the earnings test is 
eliminated. They might work more because this effective 
marginal tax rate from the earnings test declines or they might 
work less because they have extra income. The evidence from 
past changes is that this group would work 18 percent more on 
average.
    The third group are high earners, people working so much 
that they lose all of their benefits now. This group would not 
work more because now they would be getting extra income and 
they would face no actual change in their effective tax rate. 
Responses in the past suggest that they would work 4 percent 
less on average because of this extra income.
    There is an important caveat for this group in particular. 
It consists mostly of full-time workers who may have less 
flexibility to change their work hours, compared to the part-
time workers who are already showing a flexible response to the 
earnings test. So these high earners may not be able to change 
their work hours just a little. They may not change their hours 
at all. So the prediction for this group is somewhat less 
certain.
    The same consideration is important with regards to 
retirement. I have not addressed the question of whether the 
earnings test causes some people to retire completely and thus 
whether eliminating the earnings test will lead them to 
postpone retirement. If jobs are not perfectly flexible and 
people cannot find part-time work that lets them keep their 
earnings just below the limit and avoid the earnings test, then 
it might cause some people to retire.
    It is difficult to analyze this because it depends on these 
constraints on work hours. Indirect evidence supports the 
notion that jobs are not perfectly flexible, that people cannot 
control their hours precisely, and therefore we might expect 
that eliminating the earnings test would cause some people to 
delay retirement. But I do not have direct evidence about this.
    So to sum up, my past research suggests that among men age 
65 to 69 who are earning at least up to the earnings limit, 
they would be predicted overall to work 5 percent more. The low 
earners would work 50 percent more. Medium earners would work 
18 percent more, and the high earners would work 4 percent 
less.
    So that is what the evidence suggests from past changes in 
the earnings test. I will be happy to answer questions about 
other groups and how they might respond to the earnings test or 
how they might respond to raising the earnings limit in the 
next couple of years. Thank you.
    [The prepared statement follows:]

Statement of Leora Friedberg, Ph.D., Assistant Professor of Economics, 
University of California, San Diego, and Faculty Research Fellow, 
National Bureau of Economic Research

Summary

    The Social Security earnings test produces some of the 
highest tax rates in the economy. A beneficiary aged 62-64 
loses $1 in benefits for every $2 earnings above an earnings 
limit of $10,800 this year, in effect a 50% marginal tax rate. 
A beneficiary aged 65-69 faces a 33% marginal tax rate for 
earnings above $17,000. The tighter rules for younger 
beneficiaries will apply for longer as the normal retirement 
age is gradually raised from 65 to 67, beginning this year. 
Many beneficiaries appear unresponsive to the additional 
provision that lost current benefits are returned as a small 
percentage increase in benefits forever after they retire. If 
beneficiaries are unaware of this provision, even as many 
economists and journalists reporting on Social Security have 
been then we have a perverse policy that distorts people's 
choices as if they were taxed yet raises virtually no revenue.
    I have been invited here to summarize my research findings. 
In my research I have analyzed how beneficiaries changed their 
hours of work in response to past changes in the earnings test. 
I use this past evidence to develop predictions if the earnings 
test were removed today. These predictions directly pertain to 
a particular subset of beneficiaries--men aged 65-69 who are 
already working a fair amount. For technical reasons, this is 
the group for which I can make the most precise predictions. 
This is also the group losing the most benefits to the earnings 
test.
    In my research I use large data files collected by the 
Bureau of Labor Statistics in which people report their 
earnings and hours of work during the previous year. Many 
workers in these surveys responded noticeably to past changes 
in the earnings test.
     For example, in 1983 the earnings test was 
eliminated for people aged 70-71. Before that, many of them 
kept their earnings just at the earnings limit. Afterwards, 
their earnings smoothed out, so we can concluded that they had 
been changing their work hours because of the earnings test.
     In 1978, the earnings limit was raised from $3000 
to $4000 for people aged 65-71. In the data, we can see the 
cluster of workers with earnings just below the earnings limit 
move their earnings up to the new higher limit.
    Based on these past responses, I have developed predictions 
if the earnings test is changed today. These predictions focus 
on the hours of work among people who are already working. 
There are three important subgroups to consider.
     Low earners, people who keep their earnings just 
at or below the earnings limit. This group is reacting most 
visibly to the earnings test and will be the most responsive to 
a change; compared to their actual hours of work in 1995, they 
would be predicted to work 50% more on average, if the earnings 
test is eliminated.
     Medium earners, people working a little more 
initially, losing some but not all of their benefits to the 
earnings test. In theory we do not know if this group would 
work more or less when the earnings test is eliminated--they 
might work more because the marginal tax rate declines, or they 
might work less because they have extra income. The evidence 
from past changes is that this group would work 18% more on 
average.
     High earners, people working so much that they 
lose all of their benefits. This group will not work more, 
because they get extra income but face no actual change in 
their marginal tax rate. Responses in the past suggest that 
they would work 4% less on average. An important caveat for 
this group: it consists mostly of full-time workers who may 
have less flexibility to change their work hours, compared to 
the part-time workers who are already showing a flexible 
response to the earnings test. The high earners may not be able 
to reduce their work hours a little, so their work hours may 
not change at all, and the prediction for this group is less 
certain.
    This is also an important consideration for retirement. I 
have not addressed the question of whether the earnings test 
causes some people to retire completely, and thus whether 
eliminating the earnings test will lead them to postpone 
retirement. If jobs are not perfectly flexible, and people 
cannot find part-time work that lets them keep their earnings 
below the limit and avoid the earnings test, then it depends on 
the structure of jobs, not just on their observable work hours. 
Indirect evidence supports the notion that jobs are not 
perfectly flexible, so we might expect that eliminating the 
earnings test would cause some people to delay retirement. But, 
I have not found direct evidence of this.
    To sum up, all of the men aged 65-69 who were earning at 
least up to the earnings limit in 1995 would be predicted to 
work 5% more, in total. The lower earners would work 50% more, 
the medium earners would work 18% more, and the high earners 
would work 4% less.
    The same type of analysis yields predictions about the how 
people would respond to the gradual increase to a $30,000 
earnings limit for people aged 65-69, legislated in 1996. In 
comparison, people will not increase their work hours as much 
or will reduce their work hours more. The low earners would 
work 34% more, not 50% more. The middle earners would work 7% 
more, not 18% more. The high earners would work 10% less, not 
5% less. The differences arise because the tax rate is not 
eliminated, but gets pushed up into higher earners.
    While the short-run costs of relaxing or eliminating the 
earnings test will be substantial, the long-run costs approach 
zero, since future benefits will not be raised as they are 
today to make up for current benefits lost to the earnings 
test.
    Now I will briefly discuss what we might expect with other 
groups if the earnings test is changed.
     Working women respond to the earnings test 
similarly to men, suggesting a similar change in work hours if 
the earnings test is eliminated. A significantly smaller 
proportion of women work at these ages, however.
     People aged 62-64, and eventually aged 65-66 as 
well, face much more restrictive earnings test rules, almost 
unchanged since the early 1970s. How do younger workers respond 
to the earnings test? Some also hold their earnings down, just 
below the limit, but more continue to work full-time. 
Therefore, more workers in this age range may reduce their 
hours, relative to the number who increase their hours. 
However, of this age group in particular, the ``retirement 
effect'' of the earnings test, which I discussed earlier, could 
be substantial. In other words, people in this age range may 
choose to postpone retirement if the earnings test is 
eliminated.
    I will be happy to answer questions about my research on 
the expected response of workers aged 65-69 to changing the 
earnings test, and about the potential response of other 
groups, for example younger workers who continue to face more 
restrictive earnings test rules.

Background

    Introduction. When Social Security was established during 
the Great Depression, one motive was to encourage older workers 
to leave the labor force and make way for younger workers. 
Thus, the system was designed not simply to give benefits to 
older workers, but also to condition benefits on retirement.
    In the decades since, the typical retirement age of older 
workers has plummeted. The proportion of men aged 65 and over 
working or looking for work fell from 46% in 1950 to 17% last 
year. With life expectancy continuing to rise, the work force 
shrinking, and savings rates at an all-time low, the increasing 
length of retirement has come to be viewed as unsustainable.
    To ease the penalty against working, the earning test was 
gradually liberalized beginning in the 1950s, principally for 
people aged 65 and over. In 2000, a beneficiary aged 65-69 
earning more than a limit of $17,000 loses $1 in benefits for 
every $3 in additional earnings--which functions as a 33% tax 
on wages. March 1996 legislation will raise this exempt amount 
to $30,000 by 2002, the tighter earnings test rules for people 
aged 62-64 will be extended to ages 65 and 66 as the normal 
retirement age gradually rises.
    Moreover, beneficiaries do not appear to respond to the 
provision that they will be compensated later, in the form of a 
small percentage increase in benefits forever after they 
retire. If beneficiaries are indeed unaware of this provision, 
as suggested by some evidence, then the earnings test has the 
perverse effect of distorting people's choices as if they were 
taxed, yet raising virtually no revenue.
    Some researchers have concluded that gradual liberalization 
of the earnings test rules means that the earnings test no 
longer leads people to retire and has little effect on their 
hours of work. Two major problems arise with past studies. No 
one has analyzed data from after the 1970s, so previous results 
may be outdated. Also, not major changes in the earnings test 
rules occurred during the period studied in earlier research.
    My strategy is to investigate several recent changes in the 
earnings test rules. It is easy to understand how people are 
influenced by the earnings test by observing how they respond 
when it is altered; otherwise it can be more difficult, since 
work decisions are shaped by many factors which we cannot 
observe and which change over time. The data I use show a 
strong response among workers to past changes in the earnings 
test, suggesting similar reactions if the earnings test were 
eliminated today. While the short-run costs of relaxing the 
earnings test would be substantial, the long-run costs are 
close to zero, since future benefits will not be raised as they 
are today to make up for current benefits lost to the earnings 
test.
    The impact of the earnings test on hours of work. In my 
research, I studied the response of workers to the earnings 
test by analyzing data on how much people work, and earn, and 
how their behavior changed when the earnings test rules 
changed.\1\,\2\ Three important changes have 
occurred in the last twenty-five years. In 1978, the earnings 
limit was raised from $3,000 to $4,000 for workers aged 65-71, 
while it did not change for workers aged 62-64. In 1983, the 
earnings test was eliminated for workers aged 70-71, while it 
remained in place for workers aged 62-69. Lastly, in 1990 the 
earnings test tax rate was lowered from 50% to 33% for workers 
aged 65-69, but not for workers aged 62-64. The structure of 
each of these rule changes, affecting people of some ages and 
not other similar ages, is extremely useful. It allows us to 
control for other potential shifts in work hours by comparing 
earnings and hours of the affected and the unaffected age 
groups over the period when the rules changed.
---------------------------------------------------------------------------
    \1\ In 1989 the Social Security Administration estimated that 
almost one million retired-worker beneficiaries lost some or all of 
their benefits to the earnings test, accounting for over one-third of 
people aged 65-69. In addition, about a couple hundred thousand 
beneficiaries kept their earnings just at or below the earnings limit. 
See Leonesio (1990) and Bondar (1993).
    \2\ The analysis is based on large data files collected by the 
Bureau of Labor Statistics in its Current Population Survey (CPS). 
People surveyed in the March CPS report their earnings and hours of 
work during the previous year. The data and methods are described in 
detail in Friedberg (2000).
---------------------------------------------------------------------------
    The earnings data show that a significant proportion of 
workers respond to the earnings test and that they shifted 
their earnings when the rules changed. Figure 1 begins by 
showing earnings distributions relative to the earnings limit 
before and after the limit was raised for 65-71 year olds in 
1978. The graphs compare the earnings of affected 67-69 year 
old men and of unaffected 63-64 year old men. Figure 1-A shows, 
before 1978, the number of older and younger workers with 
earnings in each $1000 interval above and below the earnings 
limit, as a proportion of the total number of people in the age 
group.
    Figure 1-A demonstrates a strong response to earnings test 
before any change in the rules. Many people in both age groups 
were clustered just at or below the limit--over 20% of 67-69 
year old workers have earnings within $1000 below the limit, 
along the almost 10% of 63-64 year old workers. Roughly the 
same number of people appeared in each increment for several 
intervals, followed by a big drop from the interval just below 
to just above the limit.
    After 1978, the clustered 67-69 year olds moved up to the 
new earnings limit. First, Figure 1-B shows earnings of both 
age group in relation to the unchanged earnings limit of the 
younger group. The 63-64 year olds keep their earnings at the 
same point, but the 67-69 year olds clearly shifted their 
earnings higher. Figure 1-C shows them clustered at their new 
higher limit. These changes were large and statistically 
significant.
[GRAPHIC] [TIFF OMITTED] T6309.002

    Figure 2 makes the same comparisons around the earnings 
limit before and after 1983, when the earnings test was 
eliminated for 70-71 year olds. Figures 2-A illustrates 
earnings patterns before 1983 of the affected age group.\3\ 
They are juxtaposed with 73-75 year olds who do not face the 
earnings test and whose earnings decline smoothly over the same 
range. Figure 2-B shows the same comparisons after 1983. Now, 
the earnings of the affected 71-72 year olds decline smoothly 
over the range of the earnings limit, resembling the older 
group.
---------------------------------------------------------------------------
    \3\ Figures 2-A and 2-B actually show 71-72 year olds, since they 
were 70-71 when the reported earnings were earned.
---------------------------------------------------------------------------
    There was no noticeable reaction to the 1990 reduction in 
the earnings test tax rate. This is not inconsistent with the 
other strong reactions, however, because the 1990 change was 
smaller. The tax rate declined 17 percentage points from 50% to 
33%, rather than falling to zero as it effectively did earlier. 
Predictions based on those earlier response suggest a small, 
ambiguous change in earnings when the tax rate declines.
[GRAPHIC] [TIFF OMITTED] T6309.003

    The data above show one particular reaction to the earnings 
test, among people keeping their earnings just at the earnings 
limit. Others working more and losing some or all their 
benefits to the earnings test will also react, but that 
reaction is more ambiguous and is thus difficult to observe 
above. The reasons are as follows.
    The earnings test alters the incentive to work in two 
different ways. It changes the net wage and also the total 
income of beneficiaries, depending on how much a beneficiary 
works. Although intuition suggests the earnings test causes 
beneficiaries to work less, this is not unambiguously true. 
Facing a higher marginal tax rate will cause people to work 
less, but reducing income may cause people to work more. 
Similarly, eliminating the earnings test will not lead all 
beneficiaries to work more. There are three different subgroups 
we have to consider, depending on how much someone is working 
when the earnings test is in place.
     The first group is the one discussed above, 
consisting of people who hold their earnings just at or below 
the earnings limit. They will unambiguously work more when the 
earnings limit is raised, the earnings test tax rate lowered, 
or the earnings test eliminated.
     The second group consists of people earning 
somewhat more than the limit and losing some but not all their 
benefits. In theory, we cannot unambiguously predict whether 
they will work more or less if the earnings test is relaxed or 
eliminated. They may work more because their marginal tax rate 
falls or less because they have extra income. My research shows 
that on average people in this group will work more.
     The third group consists of people earning 
considerable more than the limit and losing all their benefits. 
Their marginal tax rate will not change when the earnings test 
is eliminated, but their income will rise. This will induce 
them to work less, if they can adjust their hours of work.
    What about the increase in benefits later on? Just as 
people are rewarded with higher benefits in the future if they 
delay claiming benefits today, beneficiaries also receive an 
increase in all future benefits for current benefits lost to 
the earnings test. Someone under age 65 gets a 6\2/3\% increase 
in future benefits for each year's worth of benefits foregone. 
Someone aged 65-69 gets an adjustment that is gradually 
approaching 8%. These credits establish a tradeoff, actuarially 
fair for a person with average life expectancy, between a 
year's worth of benefits at present and a percentage increase 
in all future benefits.
    However, there is no evidence that the credits are taken 
into account with regards to the earnings test. In all 
likelihood, many fewer people would respond to the earnings 
test and restrict their earnings, as we observe them doing in 
Figures 1 and 2.\4\ Furthermore, descriptions of the earnings 
test in the popular press generally fail to mention the 
adjustment. When both Money (Simon 1996) and the Los Angeles 
Times (Kristof 1997) have described how the earnings test 
works, neither mentioned that higher future benefits compensate 
for lost benefits today. The perverse result is that people 
respond to the earnings test as if it were a tax, yet it raises 
virtually no revenue over the long-run.
---------------------------------------------------------------------------
    \4\ We would still expect a reaction among people with less than 
average life expectancy and people who are more impatient than average. 
Other evidence shows that more people claim benefits at age 62 then 
either of these factors predict, however, suggesting that people either 
do not know or do not care about the future adjustments.
---------------------------------------------------------------------------
    The predicted impact of eliminating the earnings test. I 
used the information implicit in the response of workers to 
past changes in the earnings test to develop predictions about 
changes today, such as eliminating the earnings test or raising 
the earnings limit to $30,000.
    Low earners, who keep their earnings just at or below the 
earnings limit are reacting most visibly to the earnings test 
and will be the most responsive to a change. Compared to their 
actual hours of work in 1995, they would be predicted to work 
50% more on average, if the earnings test is eliminated. In 
comparison, medium earners would be predicted to work 18% more 
on average. As discussed earlier, they may work either more or 
less in theory because their marginal tax rate falls but their 
income rises. Thus, the evidence from past changes suggests 
that the tax rate effect dominates. Lastly, high earners would 
be predicted to work 4% less on average, because they have more 
income and their marginal tax rate does not change. In total, 
men aged 65-69 who were earning at least up to the earnings 
limit in 1995 would be predicted to work 5% more.
    At this point, it is important to mention a caveat 
affecting high earners the most. These predictions have assumed 
that everyone can adjust their work hours flexible. However, 
while those at the earnings limit do appear to have a lot of 
control over their hours, other who work full-time and earn 
more may have less flexibility. Thus, it is somewhat less 
likely that the group of high earners will actually change 
their hours, even though they are predicted to, compared to the 
low earners. This issue will also determine whether the 
earnings test affects retirement, as I discuss later.
    It is interesting to compare the predications of work hours 
if the earnings test is eliminated to the predictions when the 
earnings limit is raised to $30,000. Because this change is not 
as dramatic, people will not increase their work hours as much 
or will reduce their work hours more. The low earners would be 
predicted to work 34% more and the middle earners 7% more, 
while the high earners would be predicted to work 10% less. The 
differences arise because the tax rate gets pushed up onto 
higher earners. Raising the earnings limit removes the burden 
of the earnings test for many low earners but makes it bind 
more strongly for higher earners.
    One argument made against changing the earnings test is the 
fiscal cost. However, while the initial costs is relatively 
high, the long-run cost is declining towards zero, because 
benefits will not be lost today to the earnings test and thus 
future benefits will not be raised.\5\ As these adjustments are 
approximately actuarially fair on average, the fiscal cost of 
eliminating the earnings test today will be virtually canceled 
out within a number of years.
---------------------------------------------------------------------------
    \5\ Leonesio (1993) reported Social Security Administration 
forecasts that eliminating the earnings test for ages 65-69 would raise 
payouts by $4.3 billion in the first year. Income, payroll and benefits 
taxes due to higher earnings would offset 14.8% of the cost. That 
forecast was based on a very small predicted change in work hours. My 
research results suggest a larger offset through taxes paid as people 
work more.
---------------------------------------------------------------------------
    Another possible argument against relaxing the earnings 
test is that it would primarily benefit high income 
beneficiaries. It is true that total income would rise more for 
higher earners, but the data show that most of the distortions 
to behavior are observed among low and medium earners. Their 
work hours would rise the most if the earnings test were 
lifted.
    Other potential effects. My research pertains directly to 
men aged 65-69 who are already working. Several other groups 
may be affected as well. I cannot offer as precise conclusions 
in their regard, but I will discuss some important 
considerations.
     It is essential to consider whether the earnings 
test induces people to retire. If jobs are perfectly flexible, 
then someone who wants to work but not lose benefits can limit 
their hours to keep their earnings below the limit. In the 
case, the earnings test will not cause anyone to retire 
completely. However, if jobs are not perfectly flexible, or if 
a part-time job involves a substantial cut in the hourly wage, 
then it may not be feasible to earn less than the limit, and 
retirement may be preferred to facing the earnings test. It is 
difficult to analyze the potential magnitude of such effects 
which depend on unobserved conditions of jobs, rather than on 
their observable work hours. Indirect evidence supports the 
notion that jobs are not perfectly flexible, so we might expect 
that eliminating the earnings test would cause some people to 
delay retirement.
     While my research focused on men, older women 
react similarly to the earnings test. Thus, we can expect a 
similar change in work hours if the earnings test is 
eliminated. A significantly smaller proportion of women work at 
these ages, though, so a small number will be affected.
     People aged 62-64, and eventually 65-66 as well, 
face much more restrictive earnings test rules, almost 
unchanged since the early 1970s. How do these younger workers 
respond? The data show that some hold their earnings just below 
the limit, as do older workers, while a greater proportion 
continue to work full-time. Therefore, more workers at these 
ages might reduce their hours, relative to older workers, if 
the earnings test is eliminated. However, it is among this 
group that the ``retirement effect'' of the earnings test is 
crucial. If the earnings test causes some 62-64 year olds to 
retire, eliminating it would have an extra punch because they 
are likely to continue working longer than 65-69 year olds.
    Conclusions. The earnings test has been the subject of a 
great deal of popular attention, but less academic interest in 
recent years. I have used a new empirical strategy, analyzing 
the reactions to past changes in the earnings test rules, to 
arrive at several conclusions.
    The data reveal a significant number of workers clustered 
just at the earnings limit. The clustering demonstrates that 
the earnings test leads some beneficiaries to hold down their 
hours of work. The clustering moved when the earnings limit 
moved and disappeared when the earnings test was eliminated for 
some ages. Thus, beneficiaries react promptly and flexibly to 
changes in the earnings test.
    The past reactions indicate how people might respond if the 
earnings test is changed today. According to my estimates, men 
aged 65-69 who were earning at least up to the earnings limit 
in 1995 would be predicted to work 5% more, in total. Low 
earners, just at or below the earnings limit, would work 50% 
more, medium earners would work 18% more, and high earners 
would work 4% less. In comparison, people would be predicted to 
increase their work hours less or reduce them more when the 
earnings limit is raised to $30,000. These differences arise 
because the tax rate is not eliminated, but gets pushed up onto 
higher earners. Lastly, it is important to recognize that the 
long-run cost of eliminating the eliminating the earnings test 
is virtually zero.

References

    Bondar, Joseph. 1993. ``Beneficiaries Affected by the 
Annual Earnings Test, 1989.'' Social Security Bulletin 56: 20-
8.
    Friedberg, Leora. 2000. ``The Labor Supply Effects of the 
Social Security Earnings Test.'' The Review of Economics and 
Statistics 82(1): 1-16.
    Kristof, Kathy, 1997. ``Personal Finance.'' Los Angeles 
Times. September 5, 1997; D5.
    Leonesio, Michael V. 1990. ``Effects of the Social Security 
Earnings Test on the Labor Market Activity of Older Americans: 
A Review of the Evidence.'' Social Security Bulletin 53: 2-21.
    Simon, Ruth. 1996. ``How To Be Sure You Never Go Broke.'' 
Money25, October: 100-114.
      

                                


    Chairman Shaw. Thank you.
    Mr. Bartlett.

STATEMENT OF BRUCE BARTLETT, SENIOR FELLOW, NATIONAL CENTER FOR 
                        POLICY ANALYSIS

    Mr. Bartlett. Thank you, Mr. Chairman.
    The Social Security earnings test is among the most unfair 
and counterproductive policies ever imposed by the Federal 
Government. On the one hand, we are continually told that 
workers have a right to Social Security whenever there is a 
proposal to modify cost of living adjustments. But on the other 
hand, we take away benefits from many seniors simply because 
they have chosen to work past the normal retirement age. And 
historically, it has been those most vocal about Social 
Security rights who have resisted most strenuously any 
elimination of the earnings test.
    This is a massive injustice, in my opinion. If people have, 
in fact, earned their Social Security benefits, then they are 
entitled to them. No one takes away anyone's private pension or 
annuity if that person continues to work after they have become 
entitled to benefits. This disparate treatment makes a mockery 
of the notion that Social Security is an earned benefit that 
people are entitled to by virtue of long years of work. It 
makes Social Security equivalent to a welfare program where 
benefits are rightly withdrawn from people who no longer need 
them.
    A further element of unfairness results from the fact that 
the earnings test applies only to wage income. One can receive 
millions of dollars a year in interest, dividends and capital 
gains without losing a penny of Social Security benefits.
    The earnings test was originally imposed for a reason that 
now makes no economic sense. Its purpose was to get workers out 
of the labor force during the Great Depression in order to open 
up jobs for younger workers. Today however, one of the biggest 
problems facing the country is not a lack of jobs, but a lack 
of workers. The earnings test is not only depriving American 
businesses of labor they desperately need, but is keeping out 
of the labor force some of our best educated and most 
experienced workers.
    The withholding of benefits acts like an additional tax on 
earnings. In the case of retirees between the ages of 65 and 69 
it is a 33 percent tax rate, and for those between the ages of 
62 and 64 it is an even worse 50 percent tax rate. And these 
implicit tax rates come on top of explicit taxes such as 
Federal, State, and local taxes, including taxes on Social 
Security benefits for some people.
    These high effective tax rates have a major impact on the 
employment status of older workers. They are a major reason why 
in 1999 only 16.9 percent of men over age 65 were in the labor 
force, either by working or seeking work. 50 years ago, 47 
percent of such men were still in the labor force. At the turn 
of the century the figure was better than 60 percent.
    It is my view that the earnings test should be scrapped in 
its entirety. Either people have earned their benefits or they 
have not, and singling out those who continue to work after 
retirement age is a violation of that principle. The only 
possible justification for keeping the earnings test is 
budgetary. Obviously, elimination of the test would lead to 
payment of benefits that are now not paid, increasing Federal 
outlays for Social Security.
    However, I believe this cost is often grossly overestimated 
because it does not take into account the impact of the delayed 
retirement credit. The delayed retirement credit raises 
benefits for retirees when they put off drawing Social Security 
benefits, even though they are eligible for them. For workers 
turning 65 this year, they will receive a 6-percent increase in 
their Social Security benefits for each year they delay drawing 
benefits. Thus, if their work history entitled them to $1,000 
per month in benefits at age 65, but they did not begin drawing 
benefits until age 66, they would get $1,060 per month.
    In future years, the gain will increase. That is because 
the delayed retirement credit will rise to 8 percent in the 
year 2008. This means that someone waiting until age 70 before 
drawing benefits would get 40 percent more than if they started 
at age 65. After age 70 there is no further increase in 
benefits and also no earnings test. At that point, the Social 
Security actuaries estimate that the lifetime benefits people 
receive from Social Security will be about the same in the 
aggregate regardless of whether they retire at age 65 or age 
70.
    The delayed retirement credit is extremely important in 
calculating the long term budgetary impact of eliminating the 
earnings test. That is because those people who now lose 
benefits because of the earnings test are receiving higher 
future benefits. Because the DRC is supposed to cause lifetime 
benefits to be the same regardless of when people begin to draw 
benefits, the long term cost of eliminating the earnings test 
should in theory be zero. Higher benefits paid out in the short 
run to people who would otherwise lose benefits because of the 
earnings test will be offset by lower future benefits because 
they will no longer claim the delayed retirement credit.
    In conclusion, I believe that all arguments against 
abolishing the earnings test are spurious. In fact, my 
suspicion is that the true barrier to doing so is simply class 
envy. Those who would benefit most in the short run from 
abolition of the earnings test are relatively high income 
earners. But in the longer run, especially given the rise in 
life expectancy, I would expect to see many more moderate 
income workers stay in the labor force if the earnings test 
were repealed.
    Mr. Chairman, this is not a partisan issue President 
Clinton proposed eliminating the earnings test in his State of 
the Union address in 1999 and has reiterated his desire to do 
so as recently as yesterday. I urge the Committee to support 
him.
    [The prepared statement follows:]

Statement of Bruce Bartlett, Senior Fellow, National Center for Policy 
Analysis

    Mr. Chairman, the Social Security earnings test is among 
the most unfair and counterproductive policies ever imposed by 
the Federal Government. On the one hand, we are continually 
told that workers have a ``right'' to Social Security whenever 
there is a proposal to modify cost of living adjustments. But 
on the other hand, we take away benefits from many seniors 
simply because they have chosen to work past the normal 
retirement age. And historically it has been those most vocal 
about Social Security rights who have resisted most strenuously 
any elimination of the earnings test.\1\
---------------------------------------------------------------------------
    \1\ For example, the Washington Post routinely decries any 
modification of the earnings test while strenuously defending a 
worker's right to benefits. See its editorials on March 15, 1996; 
December 3, 1995; January 17, 1995; January 17, 1991; December 2, 1989; 
and April 19, 1989.
---------------------------------------------------------------------------
    This is a massive injustice. If people have in fact earned 
their Social Security benefits, then they are entitled to them. 
No one takes away someone's private pension or annuity if that 
person continues to work after they have become entitled to 
benefits. This disparate treatment makes a mockery of the 
notion that Social Security is an earned benefit that people 
are entitled to by virtue of long years of work. It makes 
Social Security equivalent to a welfare program where benefits 
are rightly withdrawn from people who no longer need them.
    A further element of unfairness results from the fact that 
the earnings test applies only to wage income. One can receive 
millions of dollars per year in interest, dividends and capital 
gains without losing a penny of Social Security benefits. But 
someone who has invested in human capital rather than financial 
capital is punished when he or she seeks a return on that 
investment by continuing to work.
    The earnings test was originally imposed for a reason that 
now makes no economic sense. Its purpose was to get workers out 
of the labor force during the Great Depression in order to open 
up jobs for younger workers.\2\ Today, however, one of the 
biggest problems facing the country is not a lack of jobs, but 
a lack of workers. The earnings test is not only depriving 
American businesses of labor they desperately need, but is 
keeping out of the labor force some of our best educated and 
most experienced workers.\3\ As a nation we cannot afford to 
keep doing this.
---------------------------------------------------------------------------
    \2\ Marshall R. Colberg, The Social Security Retirement Test: Right 
or Wrong? (Washington: American Enterprise Institute, 1978), p. 2; C. 
Eugene Steuerle and Jon M. Bakija, Retooling Social Security for the 
21st Century (Washington: Urban Institute Press, 1994), p. 226.
    \3\ See ``Brain Drain,'' Business Week (September 20, 1999), pp. 
112-126.
---------------------------------------------------------------------------
    Keeping older workers out of the labor force is also 
harmful to them. When they are forced into idleness by 
retirement, it often impacts negatively on their health and 
self-esteem.\4\ And the notion that older workers are not 
healthy enough to continue working is simply no longer valid. 
Rising life expectancy and improved medicine mean that today's 
average 65 year old is probably in better physical shape than a 
40 year old worker was before World War II.\5\ Of course, no 
retiree should be forced to work if they prefer leisure, but 
actively penalizing those who want to work and are able to work 
is harmful both to them and the economy.
---------------------------------------------------------------------------
    \4\ See Committee for Economic Development, New Opportunities for 
Older Workers (1999), available at www.ced.org/pdf/OLDER.PDF.
    \5\ Eugene Steuerle, Christopher Spiro, and Richard W. Johnson, 
``Can Americans Work Longer?'' Straight Talk on Social Security and 
Retirement Policy No. 5 (Washington: Urban Institute, 15 August 1999), 
available at www.urban.org/retirement/st/Straight5.pdf. A recent 
government report also suggests that estimates of rising life 
expectancy in the future may be understated. See Social Security 
Advisory Board, The 1999 Technical Panel on Assumptions and Methods, 
available at www.ssab.gov/reports.html.
---------------------------------------------------------------------------
    According to the Social Security Administration, 3.5 
million people between the ages of 62 and 69 have some earned 
income, about 37 percent of all retirees under the age of 
70.\6\ In 1995, 743,000 workers aged 65 to 70 had their Social 
Security benefits reduced because their earnings exceeded the 
allowed amount, 8.5 percent of all retired worker 
beneficiaries. Twenty-nine percent of those losing benefits 
received no Social Security benefits at all that year. The 
total amount of benefits lost was $4.3 billion and the median 
benefits lost per recipient was $3,596.\7\
---------------------------------------------------------------------------
    \6\ House Ways & Means Committee, 1998 Green Book (Washington: U.S. 
Government Printing Office, 1998), p. 33.
    \7\ Bertram Kestenbaum, Michael Shakleford, and Chris Champlain, 
``Effect on Benefits of Earnings at Ages 65 or Older, 1995,'' Social 
Security Bulletin, vol. 62, no. 1 (1999), pp. 4-9. For data on earlier 
years, see Joseph Bondar, ``Beneficiaries Affected by the Annual 
Earnings Test, 1989,'' Social Security Bulletin, vol. 56, no. 1 (Spring 
1993), pp. 20-28.
---------------------------------------------------------------------------
    It should be noted that the earnings test also creates a 
kind of marriage penalty, because earnings by the primary 
Social Security recipient above the threshold can also reduce 
the benefits of auxiliary recipients. In 1995, secondary 
recipients losing benefits were primarily female. Only 2,000 
males receiving secondary benefits lost benefits, while 62,000 
females did.
    Inclusion of secondary beneficiaries raises the number of 
those losing benefits in 1995 to 806,000. And because 154,000 
other family members--nonworking spouses and children--are also 
affected by the reduction in benefits, the total number of 
people harmed by the earnings test rises to 960,000. But even 
this number understates the impact of the earnings test, 
because about 152,000 additional workers did not apply for 
benefits because their earnings were above the threshold.\8\
---------------------------------------------------------------------------
    \8\ Kestenbaum, Shakleford and Chaplain, op. cit.
---------------------------------------------------------------------------
    The withholding of benefits acts like an additional tax on 
earnings. In the case of retirees between the ages of 65 and 69 
it is a 33 percent tax rate, and for those between the ages of 
62 and 64 it is a 50 percent tax rate.\9\ And these implicit 
tax rates come on top of explicit taxes such as federal and 
state income taxes, including taxes on Social Security benefits 
for those whose incomes are high enough. Of course, older 
workers also continue to pay Social Security taxes as well.\10\
---------------------------------------------------------------------------
    \9\ Policymakers often overlook the more punitive earnings test for 
those taking early retirement. See Eugene Steuerle and Christopher 
Spiro, ``Are Policymakers Overlooking a Second Earnings Test?'' 
Straight Talk on Social Security and Retirement Policy No. 9 
(Washington: Urban Institute, 15 October 1999), available at 
www.urban.org/retirement/st/Straight9.pdf. The authors note that under 
current law, this more punitive earnings test will apply to more people 
as the normal retirement age is raised to 67. This will make workers 
between the ages of 65 and 66 subject to the high de facto tax rates 
that now apply only to those aged 62 to 64.
    \10\ One study found that the marginal tax bite, both explicit and 
implicit, can reach more than 100 percent in some cases. See John 
Goodman, ``Raising the Earnings Limit,'' National Center for Policy 
Analysis Brief Analysis No. 149 (January 31, 1995), available at 
www.ncpa.org/ba/ba149.html. Another study put the top rate at 96 
percent just at the federal level. See Nathan Oestreich, Howard Toole, 
and Oliver Galbraith, ``Restoring the Incentive for the Elderly to 
Work,'' Tax Notes, vol. 49, no. 4 (October 22, 1990), pp. 469-471. And 
the incidence of high de facto marginal tax rates is not limited to 
just a few of the elderly. One study found that 30 percent of the 
single elderly and 12 percent of married elderly faced marginal tax 
rates exceeding 60 percent. John R. Gist and Janemarie Mulvey, 
``Marginal Tax Rates and Older Workers,'' Tax Notes, vol. 49, no. 6 
(November 5, 1990), pp. 679-694.
---------------------------------------------------------------------------
    These high effective tax rates have a major impact on the 
employment status of older workers. They are a major reason why 
in 1999 only 16.9 percent of men over age 65 were in the labor 
force, either by working or seeking work.\11\ Fifty years ago, 
47 percent of such men were still in the labor force. At the 
turn of the century the figure was better than 60 percent.\12\ 
This sharp decline is all the more remarkable given the 
significant rise in life expectancy over this period.\13\
---------------------------------------------------------------------------
    \11\ Bureau of Labor Statistics data available at http://
stats.bls.gov.
    \12\ Bureau of the Census, Historical Statistics of the United 
States: Colonial Times to 1970 (Washington: U.S. Government Printing 
Office, 1975), part 1, p. 132. See also Roger L. Ransom and Richard 
Sutch, ``The Labor of Older Americans: Retirement of Men On and Off the 
Job, 1870-1937,'' Journal of Economic History, vol. 46, no. 1 (March 
1986), pp. 1-30.
    \13\ It is worth noting that when Social Security was first 
established, age 65 was greater than the male life expectancy at birth. 
See Historical Statistics, pt. 1, p. 56.
---------------------------------------------------------------------------
    It is my view that the earnings test should be scrapped in 
its entirety. Either people have earned their benefits or they 
haven't, and singling out those who continue to work after 
retirement age is a violation of that principle. The only 
possible justification for keeping the earnings test is 
budgetary.\14\ Obviously, elimination of the test would lead to 
the payment of benefits that are now not paid, increasing 
federal outlays for Social Security. However, I believe this 
cost is often grossly overestimated because estimates do not 
take into account the impact of the delayed retirement credit 
(DRC).
---------------------------------------------------------------------------
    \14\ Historically, this has been the greatest political barrier to 
elimination of the earnings test despite broad bipartisan support for 
doing so. See Helen Dewar, ``Senate Blocks Rise in Social Security 
Earning Limit,'' Washington Post (November 3, 1995); Kitty Dumas, 
``Budget-Buster Hot Potato: The Earnings Test,'' Congressional 
Quarterly (January 11, 1992), pp. 52-55; Julie Kosterlitz, ``Working 
for a Price,'' National Journal (February 6, 1988), pp. 318-321.
---------------------------------------------------------------------------
    The DRC raises benefits for retirees when they put off 
drawing Social Security benefits, even though they are eligible 
for them. Workers turning 65 this year will receive a 6 percent 
increase in their Social Security benefits for each year they 
delay drawing benefits. Thus, if their work history entitled 
them to $1,000 per month in benefits at age 65, but they did 
not begin drawing benefits until age 66, they would get $1,060 
per month.\15\
---------------------------------------------------------------------------
    \15\ Actually, the DRC is calculated on a monthly basis, meaning 
that those who lose benefits because of the earnings test get some of 
it back.
---------------------------------------------------------------------------
    The idea of the credit is to encourage workers to stay in 
the labor force and not retire the minute they become eligible 
for benefits. But many workers are under the mistaken belief 
that any benefits they fail to draw simply are lost. Hence, 
many workers are retiring too soon for their own good. A recent 
study from the National Bureau of Economic Research says that 
most workers would be better off by delaying their first Social 
Security benefit check by up to 3 years.\16\
---------------------------------------------------------------------------
    \16\ Courtney Coile et. al., ``Delays in Claiming Social Security 
Benefits,'' National Bureau of Economic Research Working Paper No. 7318 
(August 1999), available at www.nber.org/papers/ w7318.
---------------------------------------------------------------------------
    In future years, the gain will increase. That is because 
the delayed retirement credit will rise to 8 percent in the 
year 2008 (for workers born in 1943).\17\ This means that 
someone waiting until age 70 before drawing benefits would get 
40 percent more than if they started at age 65. (After age 70 
there is no further increase in benefits and also no earnings 
test.\18\) At that point, the Social Security actuaries 
estimate that the lifetime benefits people receive from Social 
Security will be about the same in the aggregate regardless of 
whether they retire at age 65 or age 70.
---------------------------------------------------------------------------
    \17\ The DRC was only 3 percent until 1989. Thus any studies based 
on this lower figure will grossly overestimate the budgetary cost of 
eliminating the earnings test, compared with a 6 percent or 8 percent 
rate.
    \18\ Note that in 2008, when the DRC is fully phased-in, the age at 
which one may receive full benefits will be 66, and will continue 
rising to age 67 thereafter. This suggests a need to change the age at 
which the DRC is capped from 70 to age 72, or else future workers will 
not get as much value from the DRC as current workers do.
---------------------------------------------------------------------------
    The DRC is extremely important in calculating the long term 
budgetary impact of eliminating the earnings test. That is 
because those people who now lose benefits because of the 
earnings test are receiving higher future benefits. They also 
receive higher benefits because earnings past age 65 can cause 
their benefits to be recomputed. That is because Social 
Security uses a 35-year earnings history to calculate benefits. 
If post-65 annual earnings are greater than the lowest of these 
years, they can lead to higher benefits.
    Because the DRC is supposed to cause lifetime benefits to 
be the same regardless of when people begin to draw benefits, 
the long term cost of eliminating the earnings test should in 
theory be zero. Higher benefits paid out in the short-run to 
people who would otherwise lose benefits because of the 
earnings test will be offset by lower future benefits because 
they will no longer claim the DRC. This fact is admitted even 
by those who oppose elimination of the earnings test.\19\
---------------------------------------------------------------------------
    \19\ Jonathan Gruber and Peter Orszag, ``What To Do About the 
Social Security Earnings Test?'' Issue in Brief No. 1 (Boston: Center 
for Retirement Research, Boston College, July 1999), available at 
www.bc.edu/bc--org/aup/csom/executive/crr/issuebriefs/ issuebrief1.pdf.
---------------------------------------------------------------------------
    Another problem is that estimates of the net cost of 
eliminating the earnings test sometimes look only at increased 
payroll taxes that will result from expanded labor supply, as 
those now forced out of the labor market by the test remain in 
it or reenter.\20\ These estimates tend to overlook higher 
income tax revenues and reduced outlays for Medicare due to 
older workers having employer-provided health benefits. One 
study that did take all of the relevant factors into account 
found that after about 8 years, the net increase in federal 
outlays is just $1 billion per year.\21\
---------------------------------------------------------------------------
    \20\ Recent estimates of how much the labor supply would rise from 
elimination of the earnings test suggest that the magnitude could be 
fairly large. See Leora Friedberg, ``The Labor Supply Effects of the 
Social Security Earnings Test,'' National Bureau of Economic Research 
Working Paper No. 7200 (June 1999); idem, ``The Social Security 
Earnings Test and Labor Supply of Older Men,'' in James M. Poterba, 
ed., Tax Policy and the Economy, vol. 12 (Cambridge: MIT Press, 1998), 
pp. 121-150. Earlier studies generally found much lower labor 
responses. See Marjorie Honig and Cordelia Reimers, ``Is It Worth 
Eliminating the Retirement Test?'' American Economic Review, vol. 79, 
no. 2 (May 1989), pp. 103-107; Michael V. Leonesio, ``The Effects of 
the Social Security Earnings Test on the Labor-Market Activity of Older 
Americans: A Review of the Evidence,'' Social Security Bulletin, vol. 
53, no. 5 (May 1990), pp. 2-21; Michael D. Packard, ``The Earnings Test 
and the Short-Run Work Response to Its Elimination,'' Social Security 
Bulletin, vol. 53, no. 9 (September 1990), pp. 3-16. Two early studies 
that did find a high labor response to reduction of the earnings 
penalty are Michael J. Boskin, ``Social Security and Retirement 
Decisions,'' Economic Inquiry, vol. 15, no. 1 (January 1977), pp. 1-25; 
and Anthony J. Pellechio, ``The Social Security Earnings Test, Labor 
Supply Distortions, and Foregone Payroll Tax Revenue,'' National Bureau 
of Economic Research Working Paper No. 272 (August 1978).
    \21\ Gary Robbins and Aldona Robbins, ``Retiring the Social 
Security Earnings Test,'' Institute for Policy Innovation Issue Brief 
(May 6, 1999), available at www.ipi.org. Another study found that the 
main long-run cost from eliminating the earnings test came from the 
recomputation of benefits. See Alan L. Gustman and Thomas L. 
Steinmeier, ``Changing the Social Security Rules for Work After 65,'' 
Industrial & Labor Relations Review, vol. 44, no. 4 (July 1991), pp. 
733-745. My guess is that most seniors would happily give up any 
recomputation of benefits for work after age 65 in return for abolition 
of the earnings test.
---------------------------------------------------------------------------
    In conclusion, I believe that all arguments against 
abolishing the earnings limit are spurious. In fact, my 
suspicion is that the true barrier to doing so is simply class 
envy. Those who would benefit most in the short run from 
abolition of the earnings test are relatively high income 
earners. But in the longer run, especially given the rise in 
life expectancy, I would expect to see many more moderate 
income workers stay in the labor force if the earnings test 
were repealed.\22\
---------------------------------------------------------------------------
    \22\ Press reports indicate that many Baby Boomers don't wish to 
ever retire. See ``So Who Wants to Retire?'' Business Week (November 8, 
1999), p. 8; Gene Epstein, ``A Big New Wrinkle,'' Barron's (September 
6, 1999), pp. 27-29; John Authers, ``Boomers Want to Work For Ever,'' 
Financial Times (October 30, 1998).
---------------------------------------------------------------------------
    Mr. Chairman, this is not a partisan issue. President 
Clinton proposed eliminating the earnings test in his State of 
the Union Address in 1999, and has reiterated his desire to do 
so again this year.\23\ I urge the Committee to support him.
---------------------------------------------------------------------------
    \23\ The President said, ``we should eliminate the limits on what 
seniors on Social Security can earn.'' Congressional Record (January 
19, 1999), p. H259. His latest comment came in an interview with 
reporters on February 1, 2000. He said, ``I think that something that 
costs money in the short run, but makes you money in the long run is 
lifting the earnings limits. And we plainly ought to do that.'' 
Accessed at www.nytimes.com/yr/mo/ day/news/financial/clinton-text.html 
on February 2, 2000.
---------------------------------------------------------------------------
      

                                


    Chairman Shaw. Thank you, Mr. Bartlett.
    Mr. Greenstein.

 STATEMENT OF ROBERT GREENSTEIN, EXECUTIVE DIRECTOR, CENTER ON 
                  BUDGET AND POLICY PRIORITIES

    Mr. Greenstein. Thank you, Mr. Chairman.
    As you have heard today, there is a case for eliminating 
the earnings test applied to people who have reached the normal 
retirement age, as H.R. 5 does.
    My one reservation is, as you know, long term solvency 
legislation is controversial, eliminating the earnings test is 
popular. My preference would be to do it as part of long term 
solvency legislation to make it easier pass. My concern is that 
without this, getting that agreement on long term solvency 
legislation is even a little harder.
    Having said that, I recognize that a decision seems to have 
been made to move forward this year with it, so I will proceed 
to discuss the earnings test questions themselves.
    There are various ways to change the earnings test, some 
wise and some unsound. Fortunately, you have before you, I 
think, a very sound way to change the earnings test in H.R. 5 
so that if you do more forward this year, I think passing H.R. 
5 is the way to do it.
    Before going a little further into why, I would like to 
make two observations. One is I tend to think we really should 
not talk about the earnings test as imposing a tax on the 
earnings because, as Congressman Portman just mentioned, if you 
lose benefits due to the earnings test, you get them back after 
you cease having the earnings test apply through higher monthly 
benefit for the rest of your life and, on average, you fully 
get back what you lost in the earnings test.
    This means the earnings test is not really a tax on 
lifetime benefits, which is the very reason why you can 
eliminate it without worsening Social Security solvency. If it 
really were a big tax on lifetime benefits, then eliminating it 
would increase benefits and worsen solvency. But eliminating it 
does not worsen solvency, it means more benefits now instead of 
benefits later.
    The second observation I want to make is that we should 
think very differently about the separate test that applies to 
those who begin receiving Social Security benefits early. For 
them eliminating that test, which H.R. 5 wisely does not do, 
would significantly increase poverty among the very old. People 
who begin to draw benefits at 62, as you know, receive a 20 
percent lower monthly benefit for the rest of their lives, and 
that affects their widows, as well.
    If we eliminated the test as it applies to the early 
benefit receivers, many more people would likely begin to claim 
benefits at 62, with the result that more beneficiaries and 
ultimately more widows would be receiving the lower benefits 
when they were very old. As Commissioner Apfel stated here this 
morning, that could increase the number of elderly poor by up 
to 700,000 people.
    So what are the policy conclusions that I would draw? 
First, the research suggests that among those who have reached 
the normal retirement age, eliminating the earnings test may 
cause a modest increase in work effort. The Social Security 
actuaries report that eliminating that earnings test would have 
no effect on solvency. Eliminating the earnings test for people 
who have reached the normal retirement age therefore seems a 
sensible step and that is what H.R. 5 does.
    The separate test that applies to early retirees is a 
different story. There is no evidence in the research 
literature that eliminating it would cause a significant 
increase in work effort. But eliminating it would cause a 
significant increase in poverty among the very old, especially 
among widows in their eighties and nineties.
    In addition, the Social Security actuaries report that 
eliminating the earnings test for early retirees would move the 
date of insolvency forward from 2034 to 2033 and modestly 
reduce the trust fund's assets.
    Eliminating the test for early retirees would have one 
other adverse effect. It would encourage increased claiming of 
benefits at age 62. Mr. Chairman, as we move forward into the 
difficult demographic decades ahead, when the population will 
age and Americans will live longer, encouraging more people to 
start claiming at 62 is one of the last things we should be 
doing.
    In conclusion, if Congress does decide to move forward this 
year with earnings test legislation outside of larger solvency 
legislation, then H.R. 5 would be the way to go.
    Thank you.
    [The prepared statement follows:]

Statement of Robert Greenstein, Executive Director, Center on Budget 
and Policy Priorities

    I appreciate the opportunity to testify before the 
Subcommittee today. I am Robert Greenstein, executive director 
of the Center on Budget and Policy Priorities here in 
Washington, D.C. The Center is a nonprofit policy institute 
that works on an array of public policy issues, with a 
particular interest in matters of fiscal policy and policy 
impacts on low-and moderate-income families. The Center 
receives no federal grants or contracts.

              The Earnings Test and Social Security Reform

    I approach the topic of today's hearing with some ambivalence. On 
the one hand, as explained below, there is a case for eliminating the 
Social Security earnings test as it is applied to individuals who have 
reached the age at which full Social Security benefits are paid 
(sometimes known as the ``normal retirement age''). On the other hand, 
the best course would be to deal with the earnings test as part of 
broader Social Security reform legislation, rather than to move 
legislation eliminating this test separate from--and ahead of--a 
broader reform package that restores long-term solvency.
    Restoring long-term solvency to Social Security will necessarily 
entail some reductions in benefits or increases in payroll taxes unless 
policymakers pour in so much money from the rest of the budget for a 
number of decades as to make any hard choices unnecessary, a course of 
action that would likely cause serious fiscal problems a few decades 
from now. This point holds true for both privatization and non-
privatization approaches to restoring long-term Social Security 
solvency.
    Eventually, we will have to make some tough choices. Doing so will 
not be easy politically. Having elimination of the earnings test as 
part of such a long-term solvency package would make the package more 
politically palatable. By contrast, separate action now to eliminate 
the earnings test, outside of a long-term solvency package, would 
likely make such a package somewhat less attractive and still harder to 
pass. It also is difficult to argue that changes in the earnings test 
should be made on their own but that other changes for which the 
evidence may be more compelling--such as changes in the Social Security 
widows' benefit to reduce the high rates of poverty that old widows 
face--must wait for long-term solvency legislation.
    I recognize, however, that Congress may wish to proceed nonetheless 
to address the earnings test this year. Accordingly, the main body of 
this testimony addresses various issues related to the earnings test 
and to potential legislation to eliminate it.

                Should the Earnings Test Be Eliminated?

    I believe the answer to this question depends on how the 
earnings test is eliminated. Done in a sound way, elimination 
of the earnings test is likely to represent a positive, if 
modest, improvement. Done in an unsound manner, eliminating the 
earnings test would likely turn out to be a net negative, 
causing a significant increase in poverty among elderly widows.
    Fortunately, the Ways and Means Committee has before it a 
piece of legislation that eliminates the earnings test in an 
appropriate manner. This is H.R. 5, introduced by Rep. Sam 
Johnson. If the Subcommittee resolves to move forward this year 
with earnings test legislation, H.R. 5 would be the bill to 
pass.

               Misunderstandings About the Earnings Test

    The earnings test is one of the most misunderstood aspects 
of Social Security. There are three common sources of 
misunderstanding about the earnings test:
    1. Although many refer to the Social Security earnings 
test, there are, in fact, two earnings tests, not one. Separate 
tests apply for individuals who have reached the normal 
retirement age and for individuals who begin to draw benefits 
early (i.e., before the normal retirement age, most commonly at 
62). As discussed below, the two earnings tests raise very 
different issues. Decisions need to be made separately about 
what to do regarding each of the earnings tests.
    2. The earnings tests do not impose a tax on earnings. To 
be sure, a beneficiary's earnings do cause his or her Social 
Security benefits to be reduced. But on average, the Social 
Security benefits that are reduced while a beneficiary is 
working are restored after the beneficiary stops working or 
reaches age 70, whichever occurs first. Once the earnings test 
ceases to apply to a beneficiary, the monthly Social Security 
benefit the beneficiary receives for the rest of his or her 
life is increased above the level the beneficiary would have 
received if he or she had not been subject to the earnings 
test. For a beneficiary with average life expectancy, the extra 
benefits received after the earnings test ceases to apply will 
about exactly equal the benefits lost due to the earnings 
test.\1\ The Social Security benefit structure is purposely 
designed to produce this result. (Technically, this result will 
be achieved for the earnings test above the normal retirement 
age starting in 2005, when legislation Congress passed to 
achieve this result is phased in fully. Today, the subsequent 
benefit increases compensate for most, but not all, of the 
benefits that a beneficiary with average life expectancy loses 
as a result of the earnings test.)
---------------------------------------------------------------------------
    \1\ Those with above average life expectancies are somewhat over-
compensated; the application of the earnings test actually increases 
their lifetime benefits. Those with below-average life expectancies are 
somewhat under-compensated.
---------------------------------------------------------------------------
    The fact that the earnings test is not a tax on lifetime 
benefits--and does not reduce benefits on average--is the 
reason why eliminating it has no effect on long-term Social 
Security solvency. If the earnings test truly were a tax on 
benefits, eliminating it would increase total Social Security 
benefits paid and hence worsen Social Security's long-term 
financial picture.
    3. Elimination of the separate test that applies to those 
who begin receiving Social Security benefits early (i.e., 
before the normal retirement age) would significantly increase 
poverty among the very old. People who begin to draw Social 
Security benefits at age 62 now receive about a 20 percent 
lower monthly benefit for the rest of their lives than the 
benefit they would receive if they began drawing benefits at 
the normal retirement age. This actuarial reduction affects the 
benefits their widows later receive, as well. If the earnings 
test for early benefit receipt is eliminated, more people will 
begin claiming benefits at age 62, with the result that more 
beneficiaries--and ultimately more widows--will be receiving 
reduced monthly benefits while they are very old. Those who are 
very old often no longer have other income sources and may have 
largely exhausted their assets; many such individuals must live 
largely or entirely on their monthly Social Security check.
    There is little question that early claiming of Social 
Security benefits at age 62 increases poverty. Economists 
Jonathan Gruber of M.I.T. and Peter Orszag of the University of 
California at Berkeley recently looked at the average Social 
Security benefits of very old widows. They found the average 
benefits of widows whose spouses had begun claiming Social 
Security benefits before 65 were below the poverty line, while 
the average benefits of widows whose spouses waited until the 
normal retirement age to collect benefits were nearly $2,000 
above the poverty line. They also found that a significant 
portion of this difference in average benefits was due to the 
decision regarding whether to begin receiving benefits early or 
to wait until the normal retirement age.\2\ Some preliminary 
work indicates that eliminating the earnings test for people 
who draw benefits early would increase the number of elderly 
poor people by some hundreds of thousands.
---------------------------------------------------------------------------
    \2\Jonathan Gruber and Peter Orszag, ``What to do about the Social 
Security Earnings Test?,'' Center for Retirement Research, July 1999.
---------------------------------------------------------------------------

       Research on the Effect of the Earnings Test on Work Effort

    Economists Gruber and Orszag also recently completed a review of 
the research literature on the effect of the earnings test on decisions 
about whether to work. They reported that most of the academic 
literature ``suggests that, contrary to popular impression, the test 
has little effect'' on the degree to which seniors work. They noted, 
however, that one recent study suggests the earnings test does have a 
more significant effect on the work decisions of individuals who have 
passed the normal retirement age, although they cautioned that this 
study has methodological limitations. Their overall conclusion is that, 
based on the available research, ``The earnings test has some, but a 
relatively modest, effect on overall work activity'' for those above 
the normal retirement age.\3\ Their review found no evidence in the 
research literature of any significant effect on work activity of the 
earnings test that applies to early retirees.
---------------------------------------------------------------------------
    \3\ Gruber and Orszag, op. cit. Gruber and Orszag observe that one 
study (by Robbins and Robbins) concludes that the earnings test for 
beneficiaries who have reached the normal retirement age has very large 
effects on work effort. Gruber and Orszag note, however, that this 
study has been sharply criticized by Social Security experts, most 
notably in a critique published by the Office of Research and 
Statistics of the Social Security Administration, for a series of 
errors that make its results unreliable.
---------------------------------------------------------------------------

                          Policy Implications

    The research suggests that among those who have reached the 
normal retirement age, eliminating the earnings test may cause 
a modest increase in work effort. The Social Security actuaries 
report that eliminating this earnings test would have no effect 
on long-term Social Security solvency. Eliminating this 
earnings test therefore seems a sensible policy step. That is 
what H.R. 5 does.
    The separate test that applies to early retirees is a 
different story. There is no evidence that eliminating it would 
cause an increase in work effort. But eliminating this test 
would cause a significant increase in poverty among the very 
old, especially among widows in their 80s and 90s. In addition, 
the Social Security actuaries have reported that eliminating 
the earnings test for early retirees would move the date of 
Social Security insolvency forward from 2034 to 2033 and 
modestly reduce the trust fund's projected assets.
    Eliminating the test for early retirees also would have one 
other adverse effect--it would encourage increased claiming of 
Social Security benefits at age 62. As we move toward the 
difficult demographic decades that lie ahead, when the U.S. 
population will be aging and Americans will be living longer, 
encouraging more people to start claiming Social Security at 
age 62 is one of the last things we should be doing.

                               Conclusion

    Elimination of the earnings test is not so pressing a 
national need that it must be accomplished immediately. The 
more pressing need is fashioning Social Security solvency 
legislation. Solvency legislation inevitably will entail tough 
choices. Fashioning and enacting such legislation will be 
easier if earnings test elimination can be packaged with it. 
For this reason, the most prudent course is to wait.
    If, however, Congress is intent on moving forward this 
year, it should adopt H.R. 5, which eliminates the earnings 
test for those reaching the normal retirement age. It would be 
most unwise also to scrap the earnings test that applies to 
early retirees, a step that H.R. 5 wisely does not take.
      

                                


    Chairman Shaw. Thank you.
    Dr. Robbins.

  STATEMENT OF ALDONA ROBBINS, PH.D., VICE PRESIDENT, FISCAL 
 ASSOCIATES, AND SENIOR RESEARCH FELLOW, INSTITUTE FOR POLICY 
                INNOVATION, ARLINGTON, VIRGINIA

    Ms. Robbins. Thank you, Mr. Chairman and Members of the 
Committee.
    As we have heard today, the Social Security retirement 
earnings test can lead to very high tax rates on wage income. 
Its elimination would be one of the best ways to improve work 
incentives.
    The earnings test itself is a 33 percent marginal tax on 
the next dollar of wages over the limit. Payroll taxes tack on 
another 7.65 percent which makes the marginal tax rate at least 
41 percent. And then depending on the retirees Federal income 
tax bracket and whether he or she must include Social Security 
benefits in adjusted gross income, the marginal tax rate on 
wages can reach over 80 percent. In the face of such high 
punitive tax rates, retirees may well decide to work fewer 
hours or not bother working at all.
    There are at least two reasons that the earnings test 
should be eliminated all together. The first has to do with 
fairness and the second with economic common sense. The matter 
of fairness has to do with the delayed retirement credit. As we 
have heard today, retired workers who lose benefits for a month 
or more because of the earnings test will have them boosted 
later, thanks to the delayed retirement credit. Because men at 
age 70 have a life expectancy of roughly 12 years, for women it 
is about 16, the present value of benefits withheld between the 
normal retirement age and 69 due to the earnings test will be 
about the same as the higher benefits paid out after age 70 due 
to the delayed retirement credit.
    So that is why the Social Security actuaries estimate that 
the long run cost of eliminating the earnings test is next to 
nothing. But while the government breaks even, individual 
retired workers may not. Because benefits withheld today are 
given back after age 70, the earnings test is essentially a 
forced loan from retired workers to the Federal Government at 
the government borrowing rate. But on average retirees fare 
worse because the market interest rate they face to replace 
benefits withheld is higher.
    And of course, the actuarial calculations are based on life 
expectancies which mean that only half of the people will 
survive long enough to even break even. In other words, roughly 
half of those who lose benefits to the earnings test will never 
receive sufficient benefits from the delayed retirement credit.
    Doing away with the earnings test also makes good economic 
sense. Stock and bond markets hold their collective breaths the 
first Friday of every month as they wait for the Bureau of 
Labor statistics report on job creation and unemployment. Last 
January the economy added an unexpectedly large 387,000 new 
jobs and the unemployment rate dipped to 4 percent, which is 
just a tick off a 30 year low.
    With a population that is growing by less than 1 percent a 
year, there are continuing worries about tight labor markets. 
Congress is presently addressing this issue by looking at 
raising immigration limits for skilled workers in technology. 
But there is a skilled labor pool at home just waiting to be 
tapped.
    Only one in three people between the ages of 65 and 69 who 
are eligible for retired worker benefits work sometime during 
the year. And about two-thirds of those who do work keep their 
earnings under the limit. Doing away with the earnings test 
would make more labor resources available.
    The change that Congress enacted in 1996 in raising the 
earnings limit has already had a positive effect. Labor force 
participation rates of men ages 65 to 69 have increased by 8 
percent and the rates of women have increased by 6 percent. 
Completely removing the penalty against work should encourage 
even more seniors to reenter the labor market.
    Many jobs go begging in this tight labor market. Increasing 
numbers of older workers will find it much easier to get jobs, 
jobs that will otherwise go unfilled. But the revenue losses 
computed under normal budget scoring rules assume that these 
new workers would not lead to more jobs or output overall. In 
fact, on average each additional dollar of labor compensation 
earned by these workers would lead to about $1.50 more in gross 
domestic product.
    In other words, while the combination of the earnings test 
and the delayed retirement credit may net the government a few 
pennies at best, it probably costs society $1.50 and this seems 
like a poor trade.
    Thank you.
    [The prepared statement follows:]

Statement of Aldona Robbins, Ph.D., Vice President of Fiscal 
Associates, and Senior Research Fellow, Institute for Policy 
Innovation, Arlington, Virginia

    Mr. Chairman and members of the Committee, I am Aldona 
Robbins, Vice President of Fiscal Associates and Senior 
Research Fellow at the Institute for Policy Innovation (IPI). 
Thank you for the invitation to appear at this hearing on 
``Improving Social Security Work Incentives.'' \1\
---------------------------------------------------------------------------
    \1\ Much of the material in this statement is adapted from Aldona 
and Gary Robbins, Retiring the Social Security Earnings Test, The 
Institute for Policy Innovation, Issue Brief, May 6, 1999. Copies are 
available on IPI's website--www.ipi.org.
---------------------------------------------------------------------------
    Social Security's retirement earnings test can lead to very 
high marginal tax rates on wage income. Its elimination would 
be one of the best ways to improve work incentives.
    Between the normal retirement age through age 69, workers 
who earn too much lose $1 in benefits for every $3 in wages and 
salaries over the earnings limit.\2\ In other words, the 
earnings test itself is a 33.3 percent marginal tax on the next 
dollar of wages over the limit. Payroll taxes tack on another 
7.65 percent raising the marginal rate on wages to at least 41 
percent. Depending on the retiree's federal income tax bracket 
and whether he or she must include some Social Security 
benefits in adjusted gross income, the marginal tax rate on 
wages can reach over 80 percent.
---------------------------------------------------------------------------
    \2\ Currently normal retirement age is 65. However, starting with 
people born in 1938 (and who turn 62 this year), the retirement age 
will gradually be raised to 67 for people born in 1960 and after.
---------------------------------------------------------------------------
    In the face of such high, punitive tax rates retirees may 
well decide to work fewer hours or not bother working at all. 
The earnings test may help explain why only 16.5 percent of men 
age 65 and over are in the labor force today compared to 47 
percent fifty years ago.
    Recently, older workers have gotten some relief from these 
punitive marginal rates. The ``Senior Citizens'' Right To Work 
Act of 1996 temporarily allowed a faster increase in the 
earnings limit for retired workers between 65 and 69. This year 
the earnings limit is $17,000 versus $13,200 under old law. By 
2002, retirees will be able earn up to $30,000 without penalty. 
After that, the earnings limit will go up more slowly, rising 
with average wages.
    While this temporary relief is laudable, there are at least 
two reasons that the earnings test should be eliminated 
altogether. The first has to do with fairness and the second 
with economic common sense.
    Why do I say that doing away with the retirement earnings 
test is a matter of fairness? Retired workers who lose benefits 
for a month or more because of the earnings test have them 
boosted later thanks to the delayed retirement credit. The 
credit increases the benefit amount to which a retired worker 
is entitled by a fixed percentage for every year he or she 
postpones retirement past the normal retirement age. Starting 
in 1986, the delayed retirement credit has been increased by 
half a percent every other year from its original 3 percent 
until it reaches its final value of 8 percent for everyone born 
in 1943 and after. For example, a retired worker born in 1945 
who will lose a year's worth of benefits because of the 
earnings test will receive an 8 percent increase in his or her 
Social Security benefit at age 70. (A retired worker who will 
have two year's worth of benefits withheld will receive a 16 
percent increase and so forth.)
    Because men at age 70 have a life expectancy of a little 
over 12 years (women about 16 years), the present value of 
benefits withheld between normal retirement age and 69 due to 
the earnings test will be about the same as the higher benefits 
paid out after age 70 due to the delayed retirement credit. 
That is why the Social Security actuaries estimate the long-run 
costs of eliminating the earnings test as next to nothing. In 
other words, the combination of the earnings test and the 
delayed retirement credit means the government breaks even.
    But retired workers may not. Because benefits withheld 
today are given back after age 70, the earnings test is a 
forced loan from retired workers to the federal government at 
the government borrowing rate. On average, retirees make out 
worse because the interest rate they face to replace benefits 
withheld today is higher. Of course, the actuarial calculations 
are based on life expectancies, which mean that only half the 
people will survive long enough to break even. In other words, 
roughly half those who lose benefits due to the earnings test 
will never receive sufficient benefits from the delayed 
retirement credit.
    The other reason to do away with the earnings test is that 
it makes good economic sense. Stock and bond markets hold their 
collective breaths the first Friday of every month waiting for 
the Bureau of Labor Statistics report on job creation and the 
unemployment rate. Last January the economy added an 
unexpectedly large 387,000 new jobs and the unemployment rate 
dipped to 4 percent, just a tick off a 30-year low. With a 
population that is growing by less than one percent a year, 
there are continuing worries about tight labor markets. 
Congress is presently addressing this issue by looking at 
raising immigration limits for skilled workers in technology.
    But there is a skilled labor pool at home just waiting to 
be tapped. Only one in three people between the ages of 65 and 
69 who are eligible for retired worker benefits work sometime 
during the year. About two-thirds of those who do work keep 
their earnings under the limit. Doing away with the earnings 
test would make more labor resources available. The change 
Congress enacted in 1996 has already had a positive effect. 
Labor force participation rates of men ages 65 to 69 have 
increased by 8 percent and those of women by 6 percent.\3\ 
Completely removing Social Security's penalty against work 
should encourage even more seniors to reenter the labor market.
---------------------------------------------------------------------------
    \3\ BLS data show that the labor force participation rate of men 
averaged 26.3 percent between 1990 and 1996 versus 28.3 percent from 
1997 through 1999. The averages for women are 17.1 percent versus 18.1 
percent, respectively.
---------------------------------------------------------------------------
    Many jobs go begging in this tight labor market. Increasing 
numbers of older workers will find it much easier to get jobs 
``B jobs that will otherwise go unfilled. But, the revenue 
losses computed under normal budget scoring rules assume that 
these new workers would not lead to more jobs or output 
overall. In fact, on average, each additional dollar of labor 
compensation earned by these new workers would lead to $1.50 
more gross domestic product. In other words, while the 
combination of the earnings test and the delayed retirement 
credit nets the government a few pennies at best, it probably 
costs society a dollar and a half. This seems a poor trade.
    With a low price tag, burgeoning federal budget surpluses 
and the economy's need for talented workers, now is the time to 
finish the job and repeal the earnings test.
      

                                


    Chairman Shaw. Thank you.
    Mr. Portman.
    Mr. Portman. Thank you, Mr. Chairman. I appreciate the 
testimony and all the thought that has gone into it.
    My first question is for Dr. Friedberg. I just wanted to 
ask you why you think your research is indicating more 
behavioral shifts than other research? I know there is some 
other research that indicated the labor supply would not be 
affected much by the earnings limit being appealed, and yet you 
indicate that it would. I wonder if you can talk about maybe 
some of the assumptions you use, as compared to some other 
research in this area.
    Ms. Friedberg. That is a good question. The reason that I 
did some new research on the earnings test was that most of the 
previous research was based on data from the seventies. So it 
is not a question that I brought new assumptions to my 
research. I was using more recent data, so that the old 
conclusion might be somewhat outdated.
    And also, during the seventies there were no changes in the 
earnings test, so we had no easy way to see exactly how people 
were responding. I used data following people through later 
changes that showed a strong response.
    Mr. Portman. So you have been able to actually look at 
behavior changes as a result of actual changes in law, raising 
the earnings limit in particular, and extrapolated from that as 
to what the impact might be if there were a repeal of the 
limit, particularly for those ages 65 and older.
    Ms. Friedberg. That is correct.
    Mr. Portman. Your research has shown that there would 
indeed be more folks who would be working, as compared to now, 
in that age group?
    Ms. Friedberg. That is precisely right. For example, in 
1983 the earnings test was eliminated for 70 and 71 year olds, 
much as the proposal today focuses on a slightly younger group. 
And you see an increase in work hours, so those are the 
conclusions I got.
    Mr. Portman. Thank you for your research work.
    Bob Greenstein, we have a lot to talk about on Social 
Security generally. I agree with you, it would be great if we 
had comprehensive Social Security reform, and this would be a 
nice way to compliment some other Social Security reform 
measures that would be necessary to increase the solvency. As 
you know, there are proposals out there. Archer-Shaw is one I 
think is very innovative, to look at that.
    But the reality is, unless you feel otherwise, I think we 
would agree it is not going to happen this year. Major Social 
Security reform will probably have to wait until the new 
Congress and the next president, and I guess that is why I feel 
so strongly that we need to go ahead and clean up what is 
currently in the system which is counterproductive, and this 
would be one of them.
    I would only encourage you to think broadly, too, about 
retirement security. I know we have differed sometimes on the 
pension reforms, but I really think we are missing a huge 
opportunity, not just to focus on Social Security, a government 
program, but to focus on the need for all Americans to have 
retirement security through private savings. Particularly in 
the pension area, where only half of America's workers have any 
kind of pension at all now. So you have 70 to 75 million 
workers with no defined benefit plan, 401(k) or any other 
pension.
    I would look forward to working with you on that in the 
future and perhaps we need to have a discussion at another time 
about some of the behavior changes that Dr. Friedberg talked 
about as it relates to retirement security generally, that if 
you let people save more for their own retirement and give 
people incentives who own small businesses to offer plans, you 
are going to see a lot of those lower and middle income workers 
get real security through their private savings.
    My question to you is, with regard to early retirement and 
your concern that if you allow the earnings limit to be 
eliminated for people who are 62 to 65 you are going to have 
poverty rates which will increase for older people, 
particularly women. One could take that to the next step which 
would be that early retirement, in general, is a bad idea.
    If you believe that this will be counterproductive because 
it will encourage more people to retire at 62, not having an 
earnings limit at 62, as compared to the current situation, 
then would you also not believe that we should do other things 
to discourage people from retiring at age 62? Or even change 
that option all together so that retirement becomes, with life 
expectancy increasing, 65 and not 62?
    Mr. Greenstein. I think the particular concern with regard 
to the earnings test as it goes down to age 62 is encouraging 
not so much retirement as drawing benefits, encouraging people 
to start drawing benefits at age 62, to a larger degree, which 
then automatically triggers the actuarial reduction that lasts 
the rest of their life.
    And of course, as the normal retirement age moves up over 
the next 20 years from 65 to 67, the actuarial reduction at age 
62 becomes deeper. I really do have concerns even about the 
current numbers of people who draw at 62, and I certainly would 
not want there to be more of them.
    Now you are absolutely right, a question that leads to is 
should the early eligibility age, now age 62, be raised a bit? 
I actually think, when you look across the research, the 
effects on more work effort of eliminating the earnings test 
above the normal retirement age, the research seems to indicate 
there are effects, but they are pretty modest.
    If you wanted to get the biggest effect on increased work 
effort, increasing that early eligibility age above 62 probably 
would be the thing that would get you that biggest effect. But 
it would be enormously controversial and it would raise issues 
of people who really cannot keep working beyond age 62 but are 
not sufficiently disabled to quality for disability benefits.
    For that reason, as you know, the standard view among most 
liberals in Washington is to say that age cannot move beyond 
62, that early eligibility age. I actually think it is worth 
looking at as part of comprehensive Social Security reform. If 
we moved it up a little bit beyond 62 people would not get a 30 
percent actuarial reduction at age 62, as they will when the 
full age goes to 67.
    But if we did that we would need some mechanisms to take 
care of those people who really cannot keep working beyond 62, 
who are not quite disabled enough to meet the disability 
definition. Maybe there is something we could do to modestly 
revise the disability definition, just starting at 62. But I do 
think it is an area to look at and something that is worth 
considering as part of larger Social Security solvency 
legislation.
    Mr. Portman. I appreciate your candid response and I just 
would make the point, as you did, that the legislation before 
us today, Sam Johnson's bill, does not deal with the 62 to 65 
earnings limit, and therefore I know that you are supportive of 
the legislation. But I know that on the other side of the 
Capitol there is interest in total elimination of the penalty, 
which would include early retirement. And I know that this will 
be an issue that we will be addressing over the next few weeks 
as we work through the process.
    Mr. Greenstein. Could I add one more point? I know this is 
not something members of either party talk about publicly, but 
privately there is some view that some year, some way, some 
how, we may have to look at some of the issues on retirement 
ages in Social Security. I would just urge you to think about 
the fact that if you eliminate the early earnings test, then we 
go to who knows, 70 or 80 percent, some huge percentage of 
Social Security beneficiaries starting to claim at 62.
    Mr. Portman. Let us be clear, so people who are watching 
this would know, do not about 60 percent of retirees now retire 
at age 62?
    Mr. Greenstein. That is correct. So we are talking about, 
if you can start at 62, there is no reduction whatsoever for 
the earnings you have, maybe some people will understand, what 
I think most do not, all of the actuarial consequences.
    If the 60 percent goes significantly higher, politically 
that will make it even more difficult in the future to ever 
move that age 62, should it be deemed wise to do so.
    See the point I am getting at? I think, in some ways, if 
you do that you actually foreclose politically some options you 
might want to think about when you get to long term solvency.
    Mr. Portman. Thank you for your testimony.
    Mr. Bartlett. Mr. Portman, would it be all right if I made 
a comment here?
    Mr. Portman. With the indulgence of the Chair, he has the 
time.
    Chairman Shaw. Mr. Bartlett, go ahead.
    Mr. Bartlett. Thank you. With regard to this question of 
early retirement, I think it is extremely important that the 
Committee take into account the fact that with the increase in 
the retirement age to 66 and then to 67, more and more retirees 
are going to be affected by the more punitive earnings test 
that applies to early retirees. It will then, in the future, 
affect those who are 65, 66, and 67 who now have the lower 
test.
    And so I think it would be a good idea to make it 
symmetrical so that you move up the age at early retirement, 
although I recognize the political problems there.
    The other problem is that the delayed retirement credit now 
is capped at age 70. You do not get any further increase, and 
so you are also squeezing that period of time in which the 
delayed retirement credit would apply. So you might need to 
raise that 70 age up to 72, so that people would be able to get 
the same benefit in the future when the retirement age rises as 
they get today from the delayed retirement credit.
    Mr. Portman. Good point.
    Chairman Shaw. Mr. Matsui?
    Mr. Matsui. I want to thank the panel, but let me follow up 
very briefly, Mr. Chairman. I know that we need to move quickly 
on this.
    What percentage of the 60 percent that retire at 62, Bob, 
are women and men?
    Mr. Greenstein. I do not have those figures with me. I 
would have to go back to my office.
    Mr. Matsui. Does anyone have that figure?
    Ms. Robbins. My recollection is that it is about even. 
Women might be a slightly bigger percentage.
    Mr. Matsui. I would imagine the reason that the poverty 
rate for single women on Social Security is 18 percent is that 
they have low earnings throughout their lifetime. And that is a 
principal cause. Is that right, Bob?
    Mr. Greenstein. That is a large part of it. It is actually 
aggravated by early claiming of benefits. There was a very 
interesting piece of research done last year by economists John 
Gruber and Peter Orszag. They looked at very old widows and 
they looked at their Social Security benefits. What was 
interesting was they found that for very old widows whose 
spouses had begun to claim benefits early, when those widows 
were in very old age, their average Social Security benefit was 
below the poverty line.
    When they looked at very old widows, same age group, whose 
spouses had not begun to draw Social Security benefits before 
the normal retirement age, their average Social Security 
benefit was about $2,000 above the poverty line.
    Now part of the difference was because one group had a 
higher earnings profile than the other. But they found that a 
significant factor in this difference was simply the actuarial 
reduction for claiming benefits early.
    I feel like I am repeating myself here but the point I am 
trying to make is we should not be encouraging more people to 
claim benefits early. We should be concerned, as the full 
benefit age goes from 65 to 67 and the early age stays at 62, 
the 30-percent reduction people are going to get at age 62 is a 
real whopper and we are going to see effects on widow poverty 
and old age there. It is one of the things, when we do Social 
Security reform, I think both parties have indicated that there 
is a concern on the widow poverty issue. It is something we 
really need to pay attention to.
    Mr. Matsui. Did the study point out whether they were 
mainly low income women who were retiring at 62 or was there 
any distinction between income groups?
    Mr. Greenstein. If I remember correctly, the group where 
the spouse drew benefits early on average had a lower earnings 
profile than the group where the spouse did not begin to draw 
benefits until the normal retirement age. Or that even despite 
that the difference in when they drew benefits itself 
aggravated the poverty of the poor group.
    Chairman Shaw. Just to follow up, those that least could 
afford it were taking the early retirement.
    Mr. Greenstein. Yes, they might also have been those who 
had the least job opportunities at that period, as well.
    Chairman Shaw. That is true.
    Mr. Matsui. Dr. Robbins?
    Ms. Robbins. I was just going to make an observation that 
it is inevitable that the longer one lives, if you are 
depending on Social Security, that relative to the rest of 
society you are going to end up losing ground because once you 
receive a benefit level, that is going to be increased only 
with the cost of living. And what is happening around you is 
the benefits of economic growth.
    So part of it is simply because the widows are living 
longer lives and if it is their husbands who made the decision 
to retire early, women are outliving men by three to 5 years, 
as well.
    Mr. Matsui. I appreciate your testimony. In 1983 when we 
revised Social Security and increased that age from 65 to 67, I 
do not believe that we discussed any of this at all. I regret 
it. I supported it, but I regret it now.
    Thank you very much for your testimony.
    Chairman Shaw. Mr. Johnson?
    Mr. Johnson. Thank you, Mr. Chairman.
    Dr. Robbins, you described the earnings penalty as a forced 
loan from retired workers. Do you want to explain that a little 
bit?
    Ms. Robbins. Simply that what is happening is the 
government faces a government borrowing rate but you are 
telling retirees we are going to take this money from you today 
and we are going to give it back to you later. In the 
calculations, if you use the government borrowing rate, in 
terms of present value, the benefits withheld today versus the 
delayed retirement credit, it works out to be about the same.
    The problem is individuals generally, if they go to borrow, 
cannot get the government borrowing rate. They have to borrow 
at something higher.
    Mr. Johnson. They do not pay interest do they? When they 
pay you back, they do not pay interest do they?
    Thank you very much.
    Chairman Shaw. I would like to thank this entire panel. It 
has been very helpful and very enlightening.
    Mr. Greenstein, I too would have liked this to be a part of 
a larger package with general reform of the Social Security 
system to be sure that it is going to be out there and be 
strong for our kids and our grandkids. However, when it became 
increasingly clear that we were not going to have general 
Social Security reform this year because of some of the late 
announcements from the White House, it did not seem at all 
reasonable to hold back the seniors that are being 
unnecessarily punished with this unjust penalty.
    So at that point the determination was made to go ahead and 
move this part of the bill. I am very pleased to see that the 
President has stepped out in front at a very early time, just 
yesterday at a news conference, that he indicated that he would 
sign this bill as long as it was in the general form of H.R. 5. 
I can assure him, unless some disaster happens over in the 
Senate, that it will be. We are going to pass this tomorrow--
about four o'clock we are going to start our markup. I would 
anticipate the markup is going to go very, very quickly.
    Mr. Matsui and I have been discussing this and we are in 
general agreement that we need a clean bill, we do not want it 
cluttered. And I would hope that all the members would support 
a closed rule going to the House, and we can bring it up as 
early as March 2nd, and that is our intention. From some of the 
early comments we are getting from the Senate, I think they 
will work on it rather quickly and we can get it to the 
President's desk.
    In any event, the effective date of the bill that is before 
us is January 1, 2000 which means that it will retroactively, 
in a very positive way, affect those that are presently working 
and having to endure this penalty.
    Thank you very much, and this hearing is concluded.
    [Whereupon, at 4 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
                                   American Bar Association
                                          Chicago, IL 60611
                                                  February 28, 2000

The Honorable E. Clay Shaw, Jr.
Chairman
Subcommittee on Social Security
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515

Dear Mr. Chairman:
    I am writing to you regarding the hearings your Subcommittee held 
February 15, 2000 relating to the Social Security Earnings test.
    The ABA supports the elimination or the substantial liberalization 
of the retirement earnings test in Social Security. The retirement 
earnings test coupled with other taxes imposes a very large marginal 
tax rate on certain elderly Americans. We believe that such a high tax 
rate discourages work effort by these elderly workers, many of whom 
have the very skills America needs to continue to be competitive in the 
coming years.
    Different individuals and groups have conflicting views as to how 
many elderly individuals aged 65 and over would either return to work 
or continue to work depending on whether the test were repealed or 
liberalized. We cannot say with certainty what the results would be. 
However, we believe that if even a modest number of individuals in this 
group is encouraged to continue working, the effect on the economy can 
only be positive. The addition of skilled and experienced employees 
will enhance the competitiveness of the American economy and supplement 
the tax revenues derived from employment.
    Moreover, any projected revenue loss from changing the test will be 
offset, in whole or in part, by income taxes on the earnings of workers 
who are motivated to remain in the workforce, including income taxes on 
earnings past age 70 of workers who are not encouraged by this earnings 
penalty to retire at 65.
    From the standpoint of tax policy, we believe that the current 
restrictions result in a most regressive tax. The changing patterns of 
compensation and employment have outdated and thwarted the original 
effects and objectives of the law.
    The ABA understands the importance to the individual of being given 
the option to continue to work in one's field of interest. A marginal 
tax rate as high as this one creates a substantial barrier to continued 
employment.
    We would appreciate it if you would include this letter in the 
record of the your Subcommittee's hearing on the Social Security 
Earnings Test.

            Sincerely,

                                         Edward E. Kallgren
                                     Chair, Senior Lawyers Division

    cc: Robert D. Evans, Director, Governmental Affairs Office
    Joseph E. Ross, Chair, Committee on Legislation and Administrative 
Regulations, ABA
    Senior Lawyers Division
      

                                


STATEMENT OF AMERICAN FARM BUREAU FEDERATION

    The American Farm Bureau Federation supports the 
abolishment of the Social Security retirement earnings test.
    The retirement earnings test is an original feature of 
Social Security. Under the provision this year, working seniors 
ages 65-69 with earnings above $17,000 lose $1 of benefits for 
every $3 they earn over the limit. For those under age 65, 
benefits are reduced by $1 for every $2 dollars above a $10,080 
threshold. In addition, Social Security benefits become subject 
to taxation once the limitation has been exceeded.
    The retirement earning test was created during the 1930s to 
keep older workers out of the labor force so that jobs would be 
available for younger workers. Today's situation is much 
different than it was during the depression. Unemployment is 
low and there are fewer younger workers. People are living 
longer and should be encouraged to work longer, not discouraged 
by an obsolete retirement earnings test.
    The threshold creates special problems for farmers and 
ranchers who do not normally pick a retirement date and stop 
farming. Farms and ranches are businesses that must undergo an 
orderly transition to the next generation of agricultural 
producers. The retirement earning test wrongly imposes a 
penalty on senior partners as they phase-out of agricultural 
operations.
    Farm Bureau urges Congress to eliminate the Social Security 
retirement earnings test.
      

                                


Statement of Andrew F. Quinlan, Executive Director, Capitol Watch

     ``Earnings Test Reform: A Small Step in the Right Direction''

    Capitol Hill and the White House have been arguing over the 
best way to ``save'' Social Security. Unfortunately, the result 
has been gridlock; largely because there is no way of 
reconciling the differences between those who want to modernize 
the program with personal retirement accounts and those who 
think the problem can be solved by adding more IOUs to the 
Trust Fund.
    This does not mean, however, that nothing good can happen. 
The President, for instance, recently endorsed a Republican-led 
effort to get rid of the Social Security ``earnings test,'' a 
Depression-era law that penalizes working seniors by deducting 
money from their Social Security checks for every dollar they 
earn over a certain amount. This modest and long-overdue reform 
would, in effect, dramatically reduce marginal tax rates on 
working seniors and eliminate a barrier to continued employment 
for America's seniors.
    For instance, workers between the ages of 62 and 64 can 
earn up to $10,080, with no reduction in their Social Security 
benefits. However, for every $2 they earn over the $10,080 
threshold, they lose $1 in Social Security benefits. The 
threshold is increased to $17,000 for those between 65 and 69. 
They lose ``only'' $1 for every $3 earned over the limit.
    In effect, the earnings test imposes the equivalent of a 
very steep marginal tax rate. Recall the essential insight of 
supply-side economics: high tax rates reduce productive 
behavior by lowering incentives to work, save, invest, and take 
risks. More specifically, people work to increase their 
disposable income, and policies that result in less disposable 
income will discourage employment. This in a nutshell is what 
the earnings test does. As mentioned before, seniors between 
age 62 and age 64 lose 50 cents in Social Security benefits for 
every dollar that they earn over the limit while seniors 
between age 65 and age 69 lose more than 33 cents of benefits 
for every dollar of ``excess'' earnings. This means that the 
benefit of working--more disposable income--is sliced by a huge 
percentage. And to add insult to injury, the worker must also 
pay a host of taxes on their income.
    Let's take a 64 year-old Social Security recipient who 
works to balance the family budget and has annual earnings of 
$15,080. Since his earnings are $5,000 over the limit he must 
forgo $2,500 in Social Security benefits. A 65 year-old worker 
will not be penalized quite as heavily, but will still lose 
$1,667 in benefits if he or she has $5,000 of earnings above 
the limit. Moreover, once federal and state income taxes, 
payroll taxes, and other levies are added to the equation, 
elderly workers are facing an effective marginal tax rate that 
is far in excess of the confiscatory rates facing professional 
sports stars and Wall Street hotshots. It is not hard to 
understand why this person would decide to stop working before 
he passes the earnings limit.
    At first glance, this type of law seems preposterous. What 
would motivate politicians to enact super-high tax rates on 
senior citizens who are trying to earn extra income to make 
ends meet? It turns out that the earnings limit on Social 
Security benefits was part of the original Social Security 
program. During the debate of the 1930's, Congress wanted to 
entice seniors out of the workforce and free up scarce jobs for 
younger workers.
    With the benefit of hindsight, we now know that the Great 
Depression was not caused by too many seniors in the workforce, 
but rather by misguided monetary policy, high tax rates, trade 
protectionism, and other government policy mistakes. 
Nonetheless, one can understand how panicky politicians at the 
time adopted a zero-sum mentality. Today, there is no excuse 
for this kind of thinking. Jobs are plentiful and individuals 
are living and working longer than ever before. Older workers 
have valuable years of experience and can be productive well 
into their retirement years.
    The earning test creates a whole range of individual 
tragedies by effectively forcing seniors out of the workforce. 
But the earnings test is also bad news for the overall U.S. 
economy. In a 1997 report entitled Earnings Limit Penalizes 
Working Seniors, the National Center for Policy Analysis argued 
that abolishing the earnings limit would increase federal tax 
revenues because of additional economic output. NCPA also 
estimated that the elderly work force would increase by 38 
percent, that wage income for the elderly would increase, and 
that the additional taxes paid by the elderly would more than 
offset the Social Security benefits paid to these workers.
    Some progress has been made. This Committee as well as 
Congressional Leaders and the President have agreed to repeal 
the earnings test on seniors who have reached the normal 
retirement age. The only shortcoming is that the legislation 
leaves in place the penalty on Social Security recipients who 
have not reached retirement age. The earnings test should not 
exist at all. Congress and the American people should seize 
this rare opportunity and extend a good idea to its logical 
conclusion.
---------------------------------------------------------------------------
     Andrew F. Quinlan is the Executive Director of CapitolWatch a 
national, nonprofit, nonpartisan taxpayer advocacy organization with 
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                                    Richard J. Salmon, P.E.
                                     Jacksonville, FL 32258
                                                  February 26, 2000

Honorable E. Clay Shaw, Jr.,
Congressman (R-FL), Chairman
Subcommittee on Social Security
Committee on Ways and Means
U.S. House of Representatives
Washington, D.C. 20515

RE: Hearing on Improving Social Security Work Incentives
    I commend and urge the Subcommittee on Social Security to stay the 
course charted for support of and enaction of H.R. 5 by the 106th 
Congress.
    My reason for this statement is personal. I am 66 years and five 
months of age and have worked full time since completing my formal 
education in 1956. My employer has asked me to continue working as a 
structural engineer and manager of a small office in North Florida. My 
employer feels that my experience in industry and in consulting 
engineering and my influence on young entry level and junior 
engineering staff is of significant continuing benefit to our firm and 
its objectives.
    Last year, calendar 1999, my gross wages were $73,400.00. This 
amount is our gross household income. My Federal Income Tax withheld 
was $10,066.00. My Social Security Tax Withheld was $4,501.00. The 
figures cited are from my 1999 W-2 Wage and Tax Statement. I am 
married. My wife stopped working in May of 1997.
    I accepted a re-assignment with my company from New England to 
North Florida, which gave me an opportunity to continue working. We 
purchased a modest home with a 30 year mortgage. Our combined 
retirement savings are less than our mortgage principal balance. Our 
one automobile is five years old.
    I consider the current retirement earnings test to be highly 
punitive. My eligibility for Social Security Benefits between the ages 
of 65 through 70 were recently estimated to be approximately $85,200.00 
total over the five year period. By virtue of the fact that I am 
working and paying taxes, under the current regulations (the retirement 
earnings test) I am forfeiting that entire amount of income by 
continuing to work and continuing to make a contribution to our nations 
economic well-being.
    The after tax residue of those earned benefits would allow me to 
better provide for our retirement years, perhaps pay down our mortgage 
somewhat to a manageable retirement years expense.

            Respectfully Submitted,

                                    Richard J. Salmon, P.E.

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