[Senate Hearing 107-347]
[From the U.S. Government Printing Office]



                                                        S. Hrg. 107-347

                 STRAIGHT SHOOTING ON SOCIAL SECURITY:
                        THE TRADE-OFFS OF REFORM

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                           DECEMBER 10, 2001

                               __________

                           Serial No. 107-16

         Printed for the use of the Special Committee on Aging

                                _______

                  U.S. GOVERNMENT PRINTING OFFICE
77-406                     WASHINGTON : 2002

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                       SPECIAL COMMITTEE ON AGING

                  JOHN B. BREAUX, Louisiana, Chairman
HARRY REID, Nevada                   LARRY CRAIG, Idaho, Ranking Member
HERB KOHL, Wisconsin                 CONRAD BURNS, Montana
JAMES M. JEFFORDS, Vermont           RICHARD SHELBY, Alabama
RUSSELL D. FEINGOLD, Wisconsin       RICK SANTORUM, Pennsylvania
RON WYDEN, Oregon                    SUSAN COLLINS, Maine
BLANCHE L. LINCOLN, Arkansas         MIKE ENZI, Wyoming
EVAN BAYH, Indiana                   TIM HUTCHINSON, Arkansas
THOMAS R. CARPER, Delaware           PETER G. FITZGERALD, Illinois
DEBBIE STABENOW, Michigan            JOHN ENSIGN, Nevada
JEAN CARNAHAN, Missouri              CHUCK HAGEL, Nebraska
                    Michelle Easton, Staff Director
               Lupe Wissel, Ranking Member Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator John Breaux.........................     1
Prepared statement of Senator Larry E. Craig.....................   162
Prepared statement of Senator Tom Carper.........................   162

                                Panel I

Dan Crippen, Director, Congressional Budget Office, Washington, 
  DC.............................................................     3
Barbara D. Bovbjerg, Director, Education, Workforce, and Income 
  Security Issues, U.S. General Accounting Office................   119
Geoffrey Kollman, Specialist on Social Legislation, Congressional 
  Research Service, Washington, DC...............................   153

                                 (iii)

  

 
     STRAIGHT SHOOTING ON SOCIAL SECURITY: THE TRADE-OFFS OF REFORM

                              ----------                              


                       MONDAY, DECEMBER 10, 2001

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 2:04 p.m., in 
room 385, Russell Senate Office Building, Hon. John Breaux 
(chairman of the committee) presiding.
    Present: Senator Breaux.

       OPENING STATEMENT OF SENATOR JOHN BREAUX, CHAIRMAN

    The Chairman. Good afternoon to everyone. Thanks for being 
with us. Thanks to our panel members for being with us, as 
well.
    We appreciate this opportunity to discuss a very important 
subject matter. The hearing today is for the purpose of giving 
our colleagues and the American public a concept of a framework 
in which we will be considering the very important subject of 
Social Security reform.
    First off, with the Presidential Social Security 
Commission's final meeting which will be held tomorrow, our 
hearing will weigh a number of proposals that are contained 
within the commission's recommendation, recommendations that we 
have already looked at in the press and had comments 
editorially even before the commission's final meeting.
    Second, I would like to use this hearing to draw attention 
to the need to get the Social Security debate back on track. I 
have been disturbed by the discussion over the past year and 
have grown increasingly concerned that we have taken a giant 
step backwards in the actual debate.
    Furthermore, I am also worried that we have confused the 
American people by muddling the real Social Security debate 
beyond recognition. We need a realistic and a nonpartisan 
reminder of the very serious problems that are facing Social 
Security and a substantive examination of the costs and the 
tradeoffs that are associated with real reform.
    Last, I think it is important to highlight how we as a 
nation will handle our domestic priorities following the 
tragedies of September 11. I think we all wonder what can we 
possibly do now? With major domestic issues like Social 
Security and Medicare, we may be tempted to merely say we 
cannot handle this now or that not enough money exists to 
confront such big issues. I think we may hear from our experts 
that pushing these big issues aside and ignoring them is simply 
not an option.
    I have asked three congressional arms who provide us with 
objective analysis to come in this afternoon to remind us what 
led us to our current Social Security predicament, and the 
problems that are facing us.
    My first hearing as ranking member of this committee back 
in March 1997 dealt with preparing our nation's entitlement 
programs for the aging of 77 million baby boomers. We heard 
about Social Security in the context of the even bigger issue 
of overall entitlement reform and this included looking at 
Medicare and Medicaid and other mandatory spending programs 
that serve this country. That hearing was one of many long and 
eye-opening presentations that we have heard over the years, 
warning that the demographic changes in this country will soon 
cause an extraordinary collision of financial pressures.
    Social Security and Medicare are facing long-term 
insolvency. Medicaid is filling in for the lack of a long-term 
care system in this country and will put enormous pressure on 
both State and Federal budgets. We heard time and time again 
that unless we acted, entitlement spending would inevitably 
bear down on the Federal budget and crowd out dollars for other 
discretionary investments, including education and critical 
funding of our national security. We were also warned of 
spiraling deficits if we did not take action to control this 
unsustainable entitlement spending.
    Well, just as policymakers seem to be ready to tackle some 
of these issues, the budget surpluses began to disappear, 
presumably making reforms more difficult. So over the past 4 or 
5 years we have had an active debate on Social Security and 
Medicare and both issues have been prominently featured on 
Presidential and congressional agendas. Yet I firmly believe 
that in these rhetorical battles we seem to have lost sight of 
the big picture. The debate was more informed and realistic 
during our first Aging hearing back in 1997. Recent debates 
over lockboxes and surpluses and general revenue transfers have 
blurred the real issues.
    So here we are again today simply unable to agree on how to 
shore up Social Security. While our surpluses are now drying up 
and disappearing, national security has simultaneously become 
our top priority. So do we just throw up our hands and say that 
nothing can be done?
    We cannot do that. Everything seems to have changed about 
the Social Security debate except the problem; it is still 
there. Entitlement reform has now become more important than 
ever before. We must realize the seriousness of why we continue 
to debate Social Security and Medicare. After September 11 we 
now know that we will always need to be prepared for 
emergencies that strain our nation's financial resources. We 
simply cannot let Social Security and other entitlement 
programs go unaddressed.
    It is my understanding that the White House wants to use 
the commission's report to begin a Social Security dialog in 
this country over the next year. I hope that both parties will 
be honest with the American people. We all need to be honest 
that we have promised more in benefits than we can afford to 
pay under the current system.
    I also hope that the public takes the time to learn about 
Social Security. Everyone should know the critical role that 
Social Security plays in this country--that it helps keep 
retirees out of poverty and provides both survivor and 
disability benefits. I would also hope that Americans look at 
their pay stubs, look at what their projected benefits will be 
and ask themselves if they are willing to take less or are they 
willing to pay more.
    Today's hearing will hopefully give the American public a 
chance to hear an objective and honest assessment of the tough 
choices facing Social Security. The testimony we will hear 
allows us to take a step back from the political battles and 
remember that Social Security is heading for insolvency. The 
longer we want to address the issue the more difficult it 
becomes.
    With that, I am pleased to welcome our first presenter this 
afternoon, Mr. Dan Crippen, who is Director of the 
Congressional Budget Office here in Washington. Dan, thanks for 
being with us once again. Thanks for the excellent publication 
that I had an opportunity to review over the weekend. I think 
it really is a very worthwhile document that really helps 
everybody understand where we are and where we are headed and 
offers options as to how we need to approach solving this 
problem.
    So with that, Dan, we welcome you to the committee.

   STATEMENT OF DAN CRIPPEN, DIRECTOR, CONGRESSIONAL BUDGET 
                     OFFICE, WASHINGTON, DC

    Mr. Crippen. Thank you, Mr. Chairman. As you suggested in 
your opening remarks, it may be only the folks in this room who 
are thinking about Social Security these days but then, like 
growing older, it is better than the alternative. At least 
someone is still on the job.
    I am especially grateful for this opportunity, Mr. 
Chairman. As you mentioned, we are taking this opportunity to 
release a piece of work we have had under way for some time and 
indeed had planned to release back in September but, like many 
other things, got postponed. That is something we are calling a 
Social Security primer, which we hope, as you say, will be 
helpful to you, the committee, press, other policymakers, as a 
reference document and as a way to, we hope, set up some of the 
questions.
    The Chairman. Was this developed, Mr. Crippen, in 
connection with the commission?
    Mr. Crippen. No, it was not. We have been getting 
questions, of course, for the last several years along the 
lines of the kinds of things we put in here, so we decided it 
might be useful for everyone to compile some answers to those 
questions in a basic way.
    We think--I think, actually, the document is terse without 
being too dense. In 12 or 13 pages we review with pretty good 
detail how the program works, in another 10 or 12 pages what 
the demographics look like. So it does pretty quickly, I think, 
pull together a number of things.
    In my remarks today, Mr. Chairman, I want to just take a 
very few minutes and do a couple of things: review the 
demographics, as you suggested, and talk about how one might 
analyze Social Security and its reforms.
    There are at least three ways we believe that one could 
look at the program and any reform proposals. The first, of 
course, is actuarial analysis, which is the most common and 
widely used so far, that tells us what the trust fund looks 
like and what the expected income and outflows are. Second 
would be from the statement of the Federal budget, another 
approach you mentioned in your opening remarks--what role does 
Social Security play, what portion of the budget and how does 
that grow in the future? Third would be from the point of 
economics and the program's effect on the macroeconomy and, in 
turn, the economy's effect on the program.
    Because not surprisingly we at CBO are budget analysts and 
economists and not actuaries, we would encourage you to at 
least consider the second two approaches, but I will get back 
to those momentarily.
    The basic dilemma that we are facing, and I think that is a 
good word that you used--it is not necessarily a problem but it 
is certainly a dilemma and something that needs to be 
addressed--is driven by the demographics. We have a baby boom 
generation, our generation, that is about to retire and between 
2010 and 2020 will almost double the number of people in Social 
Security and other retirement programs. At the same time the 
workforce will barely grow, something less than 10 percent, 
resulting in the current three workers per retiree to drop to 
two.
    What that means, of course, is that it is our children who 
will be paying for our retirement, just as we are paying for 
our parents now, except there will be fewer of them paying for 
each of us. So while we may be somewhat uncertain of the 
economics of the future, we are fairly certain of these 
demographics. Everyone who will retire in this time period is 
certainly born today and most of the people who will be working 
in this time period have been born. We may change immigration 
policy and some other things that would increase the workforce, 
which could be salutary as far as the program is concerned, but 
we do know the basic demographics that underlie this dilemma.
    We also know what the program in its current form looks 
like relative to the rest of the budget. The second slide I 
brought along is just a basic point that Social Security is 
almost half of the current noninterest budget, along with 
Medicare and Medicaid, the other primary programs for retirees.
    I would, Mr. Chairman, urge, of course, as you have, and 
you know more about Medicare than almost anyone in this room, 
we need to, of course, consider these programs while not 
necessarily together in reform, we need to understand how they 
interrelate and clearly the more one pays for health care 
delivery, perhaps the less you can pay in Social Security and 
vice versa, but they are clearly related programs and we need 
to consider them in context. That is particularly true from the 
macroeconomic point of view.
    This picture, however, worsens dramatically over the time 
period 2010 to 2030 where Social Security, Medicare and 
Medicaid will make up at least two-thirds of the budget as we 
know it now. What that means then in an economic sense and the 
third way one would analyze these programs and the one I want 
to dwell on a bit today is that these three programs will go 
from consuming about 7 percent of GDP, our current economy, to 
15 percent by these relatively conservative projections. They 
are conservative for a number of reasons which I can get into 
but the point is quite simple. We will more than double the 
take out of the economy for our retirees while producing it 
with fewer workers.
    Relative to our current budget we are spending around 18 or 
19 percent, perhaps as much as 20 percent of GDP on Federal 
programs. If these three programs are taking 15 or 16 percent, 
it obviously suggests there are going to be some very dramatic 
changes in our fiscal policy. That means we will have to raise 
taxes by 8, 9 percent of GDP, borrow the equivalent of 10 
percent of GDP every year or cut other Federal spending.
    The Chairman. Let me interrupt you. Is there a percentage 
that would be an acceptable percentage? What is it running 
right now? Eight percent, 7 percent?
    Mr. Crippen. Seven, about 7 for all three programs.
    The Chairman. Seven percent now and you are pointing out 
that by the year 2030 if we keep the same program we will be 
running at about 15 percent?
    Mr. Crippen. Correct.
    The Chairman. Can we compare it to what other countries 
spend on health and retirement programs? Is there a magical 
number that is a good number and anything more than that is a 
bad number? What is the problem with 15 percent versus 7 
percent?
    Mr. Crippen. Well, it is not necessarily a problem. As I 
said, you pointed it out as a dilemma. We could choose to 
pursue this path but it is important that we recognize in doing 
it that we are going to have to make up the difference 
somewhere, the difference being what we are currently spending 
on the rest of the Federal budget and Social Security, relative 
to the economy. That means we need an increase in taxes or 
borrowing or cut other spending, as I said, as much as 10 
percent of GDP.
    In today's terms, since we have over a $10 trillion 
economy, what that means is you would have to raise a trillion 
in taxes every year, you would have to borrow a trillion 
dollars every year or cut other spending by a trillion dollars 
or half of the current budget, or some combination obviously of 
those.
    So there is no magic number. We have been running a pretty 
steady number on Social Security, a little over 4 percent of 
GDP, for the last couple of decades. At the same time we have 
had a workforce increase. So Social Security in and of itself 
has not been growing relative to the economy that much. 
Medicare has been more, as you know. But economists do not have 
any magic number.
    All we can do is suggest this means a lot of what our kids 
are producing in the future will be paying for our benefits, 
and that is really the point I want to make here today, Mr. 
Chairman, is that from the point of view of macroeconomics, it 
does not matter a great deal what the trust fund looks like, 
what the actuarial analysis shows you. What matters the most to 
economists and, in turn, to budget analysts is what impact a 
program has relative to the size of the economy. That is what 
this chart attempts to depict. Because no matter what we do, no 
matter what the balance is in the trust fund, we are going to 
be taking from our children some of their earnings and, in 
turn, buying with those earnings clothes, cars, food in 
competition with them. So we will be commanding a high percent 
in these years of economic output that our kids are making and 
it really does not matter what is in the trust fund.
    Let me give you an example of one way that that might make 
more sense, a more concrete example. Around the year 2016, as 
you know, payroll taxes will no longer be enough to pay current 
year benefits to retirees. Under the current law with the trust 
fund, interest payments on the outstanding bonds in the trust 
fund will be paid, which will be enough, that plus payroll 
taxes, to cover the benefit payments but you have to think 
about what happens. What we need to do at that point is 
generate cash. This is not a paper transfer. Those checks that 
we send to beneficiaries are going to be cashed and there will 
not be enough payroll taxes taken in.
    So how do we generate the cash? Well, the Social Security 
Administration goes to the Treasury and says, pay me interest. 
Treasury can only pay cash interest by raising taxes, borrowing 
or cutting spending. That is the only way it can come up with 
those dollars. So it does not matter what is in the fund; those 
dollars have to be raised in those three ways.
    Think for a minute if there were not a trust fund, if there 
were no balances in it or it did not exist at all. Then in 
order to make good on the payments when payroll taxes would not 
cover expenditures, the Federal Government, the Treasury would 
have the same three options--raising taxes, increasing debt or 
cutting spending.
    So from a budgetary and macroeconomic point of view, at 
that point the trust fund, its balances, even its existence, 
matters much less than how much the retirees and the elderly 
are removing, taking, consuming out of the economy.
    So our basic message today, Mr. Chairman, is that there are 
many ways one can analyze Social Security but we would suggest 
strongly that when you are looking at reform proposals one 
should not simply ask the question, what is the effect on the 
trust fund? You need to go beyond that and ask not only what is 
the effect on the Federal budget but how does it relate to this 
kind of portrayal of the dilemma?
    With that, with this fraction, if you will, there are only 
two moving parts. One is the Social Security expenditures, of 
course, the numerator, and the other is the denominator, which 
is the size of the economy. Those are the two things you 
really, at the end of the day, have to work on to make this 
future look better for us and our kids. There are really only 
those two moving parts.
    Let me close by referring to some remarks made by not only 
a predecessor of mine but the founder of CBO, Dr. Alice Rivlin, 
a couple of years ago while she was at the Federal Reserve 
Board. She reiterated some of these points, which I think 
deserve to be entered in the record.
    Dr. Rivlin said, ``I believe, however, that focussing too 
narrowly on the Social Security funding question in isolation 
from the more fundamental economic challenge of an aging 
population risks muddling the problem and perhaps picking a 
wrong answer. In any given future year a larger proportion of 
older people will be competing with the workforce and the rest 
of the population for shares of GDP in that year. Whatever is 
produced in the future will have to suffice for all the 
claimants. Societies cannot consume more than they produce for 
long; nor can consumer goods feasibly be stockpiled. The first 
question,'' Dr. Rivlin says, ``how to move to a higher economic 
growth path, is obviously the most important as well as the 
most urgent. If we can find ways to make the future workforce 
more productive, both they and future retirees will benefit. 
Its main urgency to pursue economic growth is that some 
solutions contribute to higher growth and some do not. It is 
important to choose a pro-growth solution and choose it soon.''
    One of the folks still obviously involved very much in this 
debate and who is thinking about it today is former Senator 
Moynihan. I have over the years written down a number of what I 
call Moynihan's laws and the first law, roughly translated, is 
if you do not ask the right question, you will not get the 
right answer. What I am suggesting, Mr. Chairman, is we need to 
ask a whole lot more than just what does the trust fund look 
like in order to get an answer that is sustainable for us and 
our kids.
    With that, I will close. Thank you.
    [The prepared statement of Mr. Crippen follows:]

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    The Chairman. Well, Mr. Crippen, thank you for your 
observations. Thank you for the publication which I thought was 
a very helpful document, the primer on Social Security. I think 
it would be good if all members would have a chance to review 
this as we begin this discussion.
    Let me talk a little bit about the commission. You 
mentioned Patrick Moynihan's memorable and very classic 
statements that he would make as a member of the Finance 
Committee and one of them, like you said, is if you do not ask 
the right question you are not going to get the right answer.
    It would seem to me that what the president was trying to 
do with the commission was to ask them a question and hopefully 
get the answer and it seems to me that in a certain way what 
they are going to give out tomorrow is not really an answer. In 
theory, commissions serve a purpose of making difficult 
political recommendations that Congress does not have the 
political courage to do. Having served on a couple of 
commissions, I know that was what we were supposed to do--come 
up with a recommendation.
    It seems like the Social Security Commission has come up 
with three recommendations. They are sort of sounding like 
Congress. You know, on one hand you can do this, on the other 
hand you can do that, but if you have a third hand, you have a 
third option. So they have given us three options. I was 
actually hoping that they would bite the bullet and come up 
with something that was nonpolitical and leave the politics of 
what we do to the Congress, where we are supposed to make the 
political decisions but have them make the recommendation as to 
what is the best policy, disregarding the politics, and we 
would handle that later on, which has always been, I thought, 
the role of a commission.
    I remember our CSIS Commission on Social Security with 
Senator Judd Gregg and myself and Jim Kolbe and Charlie 
Stenholm in the House and others made a recommendation on 
Social Security and our Medicare Commission attempted to make a 
single recommendation. A document was produced. Yet with the 
Social Security Presidential Commission it seems like we have 
three separate recommendations. Do you have any comment on 
that? One of them actually is the one that, as you pointed out, 
I think has no tax increases and no benefit cuts. I mean I hear 
what you are saying and that does not seem to be very realistic 
in solving the problem.
    Can you solve the problem in Social Security without doing 
any benefit cuts and without doing any tax cuts? I mean it 
would seem to me if we could solve the problem of solvency that 
way we would have done it a long time ago. That is easy. Is 
that realistic, though?
    Mr. Crippen. I suspect not, Mr. Chairman. We are, as you 
know, not in a position to make policy recommendations. On the 
other hand, we are around to try to help measure the effects of 
legislation and reforms.
    In an economic sense what needs to happen in order to 
change the outlook that I have presented here today, 
particularly with this last chart, what needs to happen is the 
current generation, the baby boomers, the current workers, will 
probably have to reduce consumption some, increase savings 
therefore in order to grow the economy more.
    If you want to think of it this way, maybe we should, as 
boomers, if we want to fix this problem, pay twice--once for 
our parents and once for ourselves. We are paying for our 
parents and a little more than they require and we have the 
surpluses in the Social Security system, at least. But if we 
are going to pay a second time for ourselves then we may want 
to save more now and we may want to take reduced benefits when 
we retire. That would allow us to pay twice but over the term 
of our entire lives, not just our working lives.
    So there are options that would help considerably but it 
does mean that this generation is probably going to consume 
less, consume less now and consume less in retirement, in order 
to change the outlook of this picture a great deal. Clearly, as 
I said, we need to worry about the effects of not only Social 
Security reform but everything else we do, be it Medicare or 
immigration policy and other things, on how the economy grows. 
Without that, this problem can become untenable. But clearly to 
grow the economy we need to reduce consumption. It is the 
classic stuff your parents told you--save now. Unless we do 
that as a country, we will not be growing the economy nearly as 
much as we could and make this a much easier situation for our 
kids.
    The Chairman. The general proposition that I have heard 
many members repeat and I was wondering if you think it is 
correct is that in order to fix Social Security you do not have 
a lot of options. I mean you can either reduce the benefits or 
increase the taxes or revenues to pay for those benefits. Is 
that pretty much a correct statement or is that an incorrect 
statement?
    Mr. Crippen. Well, if you define the problem as being the 
trust fund and the solvency of the trust fund, that is 
certainly the limit of your options. You need to increase 
revenue to the trust fund or cut outflow, period. I mean there 
are not a lot of other options. One, however, in addition, that 
we probably need to mention is that increasing the rate of 
return on the trust fund is used as a way to improve that 
outlook.
    I would suggest, however, none of those are necessary or 
sufficient. That is to say it is not the trust fund solvency or 
balances that worry us; it is, however, the impact of those 
expenditures and the economy. Therefore the operation of the 
trust fund may be important. If it generates surpluses that are 
saved and not spent in other areas, then indeed it might be 
helping that national savings and growing the economy.
    But just like the argument about rate of return, unless 
national savings are actually increased somehow and the capital 
stock is increased and the economy grows better, raising the 
rate of return does not do any good. It does not change this 
picture one iota. It makes the trust fund look better so 
instead of 2038 it may look like 2055 or pick a year when it 
grows insolvent but it does not change this picture.
    We could legislate a higher rate of return. We now pay a 
rate we make up based on Treasury rates. We could pay twice 
that. All we have to do is change the law. The trust fund will 
look a whole lot better but it would not have any impact on 
this view of the world. So many of these reforms that look only 
at solvency or look only at the trust fund itself, as I said, 
may not help this picture and could hurt it, as Dr. Rivlin 
said.
    So we need to be careful. Clearly to fix the trust fund 
problem there are not many options but we should not just fix 
that problem. We need to do that in the context, I would 
suggest, of the Federal budget and the effects on the economy.
    The Chairman. The first option that the commission is going 
to recommend, I take it, includes transferring general revenues 
into the program. Can you comment on that as a vehicle to help 
solve this problem? Is it workable, not workable? What do you 
think?
    Mr. Crippen. It depends on where those general funds come 
from. President Clinton actually proposed doing some pretty 
large transfers of general revenues into the Social Security 
program. In the case of his proposal, the funds essentially 
pass through the trust fund, leaving behind, of course, the 
government bonds, some called IOUs, but the cash came out the 
other side and was used for other government expenditures, in 
the main.
    So if general revenues are transferred through the trust 
fund, it gets borrowed back to the government and those funds 
get expended for other programs. All you have done in this 
first instance is raise the trust fund balances without doing 
anything to address this problem, if this is the way you want 
to address it. You have not changed economic growth. You have 
not changed the obligations to the elderly. And given those 
tests, it does not do much.
    Now if those general funds that are transferred into the 
trust fund are coming from surpluses that would otherwise be 
spent either by individuals or by the government, then you may 
have a net positive effect on savings, but it really depends on 
what you assume the source of those funds is as to whether it 
can help or hurt. It will make the trust fund look better but 
again the trust fund is less interesting, I would suggest, than 
looking at these kinds of effects.
    Does it affect how much Social Security is as a percent of 
the budget? No. Does it affect economic growth? It does not. 
Does it change the obligations to retirees? It does not do 
that, either. So unless it actually adds to national savings 
and helps us grow the capital stock, it is another one of 
those, like rate of return, that makes the trust fund look 
better but does not help the problem.
    The Chairman. Could you maybe give me a comment on the 
three recommendations or the examples that the commission is 
putting out tomorrow? The first one is a voluntary option to 
invest 2 percent of the payroll in a personal account, the 
second one is a voluntary option to invest 4 percent of the 
payroll in a personal account and the third example they give 
is a voluntary option to invest an additional 1 percent of 
payroll in a personal account with a 2.5 percent match from 
payroll taxes.
    Can you comment on those ideas? I take it they all are 
versions of trying to create individual retirement accounts but 
it is a question of whether the money to do that comes from the 
general revenues or whether it comes as a carve-out from the 
existing payroll taxes. Can you give me some discussions on the 
pluses and minuses of that?
    Mr. Crippen. Well, again the test that I would suggest that 
you want to look at is what effect do these reforms have on the 
obligations for the elderly in the future? What does our 
benefit structure look like? Second, what does it do to the 
economy? It depends critically upon where the funds come to 
finance those individual accounts.
    If, for example, we are taking a surplus, if there were a 
surplus today, and we were, instead of having the Federal 
Government pay down debt held by the public, that surplus was 
used to fund individual accounts, that would have a net in the 
first instance--it would be a net zero impact because we are 
taking savings of the Federal Government and making it savings 
of individuals. So net national savings would be the same.
    The Chairman. But isn't the argument that the individual 
savings would bring about a higher rate of return because it 
may be in the markets or a combination of the markets, as 
opposed to government investing it?
    Mr. Crippen. That is part of the argument. As I said, there 
are two real fallacies with that. The first is if you adjust 
for the risk, what economists or market analysts call the risk-
adjusted rate of return, the bond market, which is what we are 
essentially paying the funds now, and the equity market are 
roughly the same. So you are getting paid more but it is 
because you are taking more risk, so over time, the risk-
adjusted rates of return.
    But more importantly, the rate of return to the trust 
funds, again whether they are individually held or whether the 
government holds them, are much less important. It makes the 
trust fund look better but unless the economy is actually 
growing to reflect those higher returns, it does not help. We 
can, as I said, legislate higher rates of return. There is no 
reason would could not say that these bonds now held by the 
Social Security trust funds could be paid at the S&P 500 rate. 
There is absolutely no reason legislatively, morally, 
economically. Whatever you want to do, you can raise the rate 
of return on these funds but that will not help the problem, 
just as putting them in individual accounts and raising the 
rate of return will not necessarily help the problem. It 
depends on whether or not those monies are new and contributing 
to national savings. If you are just taking them from one pot, 
splitting them up and putting them in a million other pots, it 
does not matter. You have had no effect.
    Now the proponents certainly would argue that there may be 
ancillary effects, and we cannot deny that. If people have 
their individual accounts they may save more than they would 
otherwise. It may make a lot more people aware of their 
retirement, the lack of retirement funding. Those are all 
possible. But just in the first instance, from a macroeconomic 
point of view, that alone will not solve this dilemma. It may 
make the trust fund look better. We can do that by fiat.
    The Chairman. The argument has been that if you put more 
money into the trust fund, I guess because of investing it in a 
combination of markets, stocks and bonds or a combination, you 
are putting more money in there. You seem to be telling me that 
that does not really matter.
    Mr. Crippen. It matters only if it is new savings. Let us 
say, for example, that we have these individual accounts 
financed by raising Treasury debt. We issue bonds in order to 
raise the money to give to individuals and their accounts. We 
have the capital markets here giving you cash in return for 
bonds and we are giving individuals cash over here to buy 
bonds, or equities. So all we have done is move the money 
around but we have not increased the amount of money in the 
capital markets or in investment in capital stock. It washes 
because if you borrowed it and then gave it to individuals you 
would have a zero impact roughly on the capital markets and 
certainly no impact on economic growth.
    The Chairman. Well, what do you think? Can you comment from 
an economic standpoint on what we are going to be getting as a 
Congress tomorrow? Do you think it offers some realistic 
options or is it, as one editorial seemed to refer to it, 
really a punt on a recommendation to the Congress? I, for one, 
was kind of hoping we would get a recommendation and we could 
say this is great or this is not so great or it is terrible but 
we just got some things--I do not want to be critical. A lot of 
these people were good friends of mine and believe me, I know 
the difficult task of coming up with a single recommendation on 
anything but I was kind of hoping that the reason we had a 
commission was to come up with a single recommendation and yet 
now we seem to be coming back with a list of options. We knew 
the options. We know the choices. I was trying to get some kind 
of recommendation.
    Can you give me a comment on what we are going to get?
    Mr. Crippen. You know this history better than I. You were 
a participant and I have been an observer. But even when you 
have a recommendation and not a list of them, such as you did 
with CSIS or even with the Medicare Commission--you had a 
majority for a recommendation--trying to get that adopted is an 
uphill battle. When you have a range of options and a Chinese 
menu, that has to be harder. It just has to be.
    So I am afraid the task before you is perhaps improved some 
by the work of the commission but not made a lot easier.
    The Chairman. I guess the answer is obvious but since 
September 11 and the fact that surpluses have pretty much 
disappeared because of requirements that we are addressing 
which are important, does that affect the urgency of addressing 
Social Security reform?
    Mr. Crippen. First let me say that we do not know yet what 
the surplus picture looks like. We are in the midst of doing 
that, as we normally do, to produce for late January. Clearly 
with the economy the way it is and with more spending for 
homeland security, the surpluses are going to be diminished, 
even in the long run. In the short run they may be nonexistent.
    Nonetheless, the economy will, we believe, in the long run 
still perform relatively well over the next 10 years and 
produce a fair amount of Federal revenue, maybe even to the 
tune of having surpluses. But I think in either event it does 
not reduce the urgency of fixing or addressing Social Security. 
The sooner we do it, the more likely we are to change behavior 
of both our generation and that of our kids in a way that will 
grow the economy and maybe let us adjust. If our benefits are 
to be reduced, we can adjust ahead of time before we retire for 
that reduction; we might actually increase our own savings if 
our future benefits look worse. So we may have a double 
positive, if you will.
    But the sooner we do that, not looking to affect anybody 
who is currently on the rolls or close, the dilemma that we 
describe here has nothing to do current retirees. Therefore 
surpluses or not surpluses in the next year or two are not the 
important thing; it is making some changes now that can make 
this future look different and allow us all----
    The Chairman. That is the important point. I think it is 
very important that Congress continue to assure existing 
retirees that what we are doing today is not going to affect 
them. It is going to affect people like yourself and myself and 
a lot of people in the audience who are maybe part of the baby 
boom generation or generation X. That is what we are talking 
about legislating, a system for that group of people, not for 
the group that is there now. They are fine. They are going to 
have enough to take care of their needs. My father is a little 
over 80 years of age. That program is not going to be adversely 
affecting him one way or the other. But for my generation and 
my children's generation, unless we do something it is simply 
going to have some very big problems.
    Well, I appreciate it very much. Again thanks for staying 
on the subject. Again the primer is a very good document and it 
is very, very helpful. I look forward to continuing to work 
with CBO on these problems and thank you for being with us.
    Mr. Crippen. I want to report, Mr. Chairman, that this 
morning when I talked to my father he was more worried about 
whether the ice was thick enough to walk on to fish than he was 
about Social Security.
    The Chairman. That is probably very correct. That is a more 
imminent problem.
    Let me welcome up our second panel. Again you see that what 
we are doing here is trying to get some nonpartisan 
presentations on these issues. I am sure there will be plenty 
of time for every interest group in Washington to come up and 
say what they think about the commission's recommendation and 
pick it apart or agree with it or what have you but in trying 
to get the three presenters we have today, we are trying to 
keep it as nonpartisan as we can.
    I would like to welcome Barbara Bovbjerg, who is Director 
of Education, Workforce and Income Security Issues at GAO, our 
General Accounting Office, for making this presentation. Mr. 
Geoffrey Kollman over at CRS will be available, I take it, to 
answer maybe some questions we might have. He is a specialist 
on social legislation, including Social Security.
    So Ms. Bovbjerg, we welcome you back to the committee and 
look forward to your comments.

    STATEMENT OF BARBARA D. BOVBJERG, DIRECTOR, EDUCATION, 
WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GENERAL ACCOUNTING 
                     OFFICE, WASHINGTON, DC

    Ms. Bovbjerg. Thank you, Chairman Breaux. It is really a 
pleasure to be here and I thank you for inviting me to discuss 
the challenges of addressing Social Security reform.
    I hope you do not feel that I am raising my voice at you 
but I have been told I need to speak really loudly because 
people in the back cannot hear.
    Before I begin summarizing the substance of my statement I 
wanted to take this opportunity to convey to you Dave Walker, 
our Controller General's, personal commitment to assisting you 
in this endeavor. He very much wanted to be here today and was 
quite disappointed he could not be. As we speak he is at ground 
zero in New York.
    He asked me to express his strong interest in these issues 
we are addressing today and to let you know that he and GAO 
stand ready to support Congress and this committee in the 
coming months in considering how best to restore financial 
stability to Social Security.
    But let me return to the business at hand. Over the past 
few years a wide array of proposals have been put forth to 
restore Social Security's long-term solvency and now a 
commission appointed by the president is deliberating possible 
reform recommendations. As the debate over possible action 
begins anew, you asked me here to help clarify some of the key 
issues Congress and the public will face in considering options 
for Social Security reform. Accordingly, my testimony today 
discusses the nature and timing of the problem, GAO's framework 
for evaluating reform proposals, and findings from our recent 
report on Social Security's role in securing income adequacy.
    First let me address the nature and the urgency of the 
problem. I will do this only quite briefly, as Dr. Crippen has 
already discussed the fiscal and economic challenges Social 
Security presents. As he observed, the anticipated growth in 
Social Security, in combination with rapid growth in Medicare 
and Medicaid, will dominate the Federal Government's fiscal 
future and weaken the economy. Absent reform, the Nation will 
ultimately have to choose between persistent, escalating 
deficits and debt, significant tax increases, or dramatic 
budget cuts.
    I brought a picture with me that we have used many times 
before to illustrate this budgetary challenge. We call this the 
haircut graph because it illustrates the budgetary scalping the 
government could experience if we do not take action soon to 
rein in entitlement spending.
    The graph shows the actual composition of Federal spending 
in the year 2000 and what it could look like in 2030 and 2050. 
In our illustration we assume that the 10-year surpluses CBO 
projected in August are eliminated. Of course, we do not know 
what the next projections will be but we can guess they will be 
considerably less optimistic than they were prior to September 
11.
    But if we assume that they are eliminated and we make no 
changes to Social Security, Medicare or Medicaid, by 2030 under 
today's levels of taxation there will be virtually no room for 
any other Federal spending priorities. Those, of course, 
include national defense, education, law enforcement, among 
others. By 2050 we would be paying interest out of current tax 
receipts but little else.
    Failure to take remedial action will place unsustainable 
pressure on----
    The Chairman. Let me interrupt you. This is a very 
important statement. If we do not do anything--we are talking 
if we do not do anything, we keep it just like it is on the 
current path, by about 2030 there is not going to be any money 
left for anything other than----
    Ms. Bovbjerg. At current levels of taxation, yes.
    The Chairman. If we have no tax increases for these 
programs or no reductions in the benefits of these programs, 
just these three programs will be accounting for how much of 
our total Federal expenditures? 100 percent?
    Ms. Bovbjerg. These programs would represent about 60 
percent of total Federal spending at that point but more than 
100 percent of revenue collections if we kept them at the same 
rate.
    Now let me hasten to say that this is a picture that I can 
say with confidence absolutely will not happen. The President 
and the Congress will not let this happen. This would be a 
calamity and Dr. Crippen spoke in some detail about economic 
effects--this is just the fiscal side of it--but this is an 
illustration of what could happen under the current path, as 
you put it.
    The Chairman. You make the point that Congress will not let 
this happen. I am just wondering when are we going to do 
something to not let it happen? That is the question. It is 
going to take a while to get it done and you cannot wait till 
2030, obviously, to get it done.
    Ms. Bovbjerg. That is right. That is right. The time for 
action is still now and it is still urgent, September 11 
notwithstanding.
    The events of September 11 have indeed necessitated 
shifting our policy focus to national security and 
counterterrorism but they have not changed the need to focus on 
Social Security and Medicare. Instead, they have made it 
potentially harder by reducing the fiscal flexibility we were 
anticipating as recently as last summer.
    But the Social Security problem is about more than finance. 
Let me turn now to GAO's framework for evaluation. To assist 
Congress in its deliberations, we have developed criteria for 
evaluating Social Security reform proposals. The criteria are 
groups of questions to consider. The first measures the extent 
to which a proposal restores financial solvency and whether 
that approach presents the potential for being sustained. That 
is, would the proposal also restore structural stability to 
this program over the long term? Reforms that lead to 
sustainable solvency would avoid the need to revisit Social 
Security finances again and again.
    Our second criterion considers benefits, the balance 
between retirement income adequacy and individual equity. Let 
me explain.
    From the beginning, Social Security benefits addressed 
retirement income adequacy, in part through the program's 
progressive benefit structure, providing proportionately larger 
benefits to lower earners. Individual equity refers to the 
relationship between contributions made and benefits received 
and the program's focus on replacement of preretirement 
earnings seeks to address this element, which can also be 
thought of as rate of return on individual contributions. 
Balancing these seemingly conflicting objectives through the 
political process has resulted in the design of the current 
program and should be taken into account in any proposed 
reforms.
    Our third criterion focuses on administrability. Program 
complexity can make implementation and administration more 
difficult and make it harder to explain to the public. Some 
degree of complexity arises in virtually all proposed reforms 
to Social Security, even those representing only incremental 
changes.
    The greatest potential implementing and administrative 
challenges are not surprisingly associated with proposals that 
would create individual accounts. This is not to say that such 
proposals should not be considered but rather that the 
administrative challenges associated with them should be 
understood and included in any assessment of these approaches.
    Our criteria aim to balance financial and economic 
considerations with benefit adequacy and equity issues and 
administrative challenges and to facilitate evaluating 
proposals as packages. Focussing on the pros and cons of 
different individual pieces will not take interactive effects 
into consideration and will just make reaching consensus all 
the more difficult. But in the end, the overall assessment of a 
proposal will depend upon what weights individual 
decisionmakers assign to the different criteria. GAO can help 
explain and analyze potential impacts, but Congress will 
ultimately decide what value to place on different aspects of 
Social Security reform.
    Finally, let me turn to a discussion of our recent report 
on one aspect of these criteria--income adequacy. This report, 
which we prepared at the request of Congressman Shaw, chairman 
of the House Social Security Subcommittee, considers how 
adequacy may be measured and how varying approaches to solvency 
could affect it. We observe in this report that no single 
measure of adequacy presents a complete picture. Consequently, 
we used a number of measures, including dependency rates, 
poverty rates, and earnings replacement rates, to make 
comparisons in relative adequacy over time. We compared 
simulated, fully funded benefits for different cohorts and 
different earnings histories to these different adequacy 
measures.
    In short, we found the progressive benefit reductions, 
which reduced benefits by smaller proportions for lower 
earners, would result in a smaller percentage of beneficiaries 
receiving benefits below poverty thresholds than proportionate 
benefit reductions, which reduce benefits across the board.
    Raising the retirement age is an example of a proportionate 
reduction because unless people change their retirement 
behavior, it represents a reduction in monthly benefits that is 
applied regardless of earnings level. Indexing the initial 
benefit formula to prices rather than wages is another 
proportionate reduction. Of course, when such measures are 
accompanied by progressive changes to the program, these 
effects can be offset. Further, as I said earlier, the extent 
to which adequacy is preserved must be balanced against effects 
on individual equity and rates of return.
    In conclusion, changes to the Social Security program 
should be made sooner rather than later. Earlier action yields 
the highest fiscal dividends for the Federal budget and 
provides a longer period for affected future beneficiaries to 
adjust their retirement planning. The events of September 11 
and the need to respond to them do not change this and waiting 
only makes it harder.
    Today I described GAO's criteria against which reform 
proposals may be measured. These may not be the same criteria 
every analyst would suggest and certainly the weights different 
policymakers assign to them will vary, but we believe these 
criteria provide at least a foundation for devising agreeable 
and feasible solutions. In seeking such solutions, policymakers 
will be deciding, whether explicitly or implicitly, what 
purpose Social Security should serve and what benefit levels 
are adequate. Is Social Security's role to minimize the need 
for means-tested public assistance? Is it to minimize poverty? 
Or should the program seek simply to replace preretirement 
earnings? Should it seek to maintain a certain standard of 
living for beneficiaries or does it seek to preserve purchasing 
power? These are not easy questions but are the heart of 
assessing proposed solutions to this financial, economic and 
social challenge.
    Time is running out. The boomers are nearing retirement age 
and once they retire our flexibility to alter the program will 
begin to decline just as the financial pressures begin to 
intensify. And, as my boss is fond of saying, compared to 
health reform, Social Security is easy lifting. It is time to 
take action.
    Mr. Chairman, that concludes my statement. I have prepared 
a written statement to be submitted for the record if I may.
    [The prepared statement of Ms. Bovbjerg follows:]

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    The Chairman. Without objection we will make that part of 
our record. Thank you very much.
    Compared to Medicare, Social Security is easy to fix. I am 
not sure that means that Social Security is easy to fix, just 
that Medicare is very, very, very difficult to fix because of 
the policy changes and reinventing a medical delivery system 
for this whole country is indeed a real challenge and very, 
very difficult.
    Mr. Kollman, I take it you do not have a statement. Do you 
have any comment you want to make on what she said or a follow-
up?

      STATEMENT OF GEOFFREY KOLLMAN, SPECIALIST ON SOCIAL 
  LEGISLATION, CONGRESSIONAL RESEARCH SERVICE, WASHINGTON, DC

    Mr. Kollman. As the third support agency I think I would 
just like to reiterate some of the points that were made.
    The central issue and it is the one that Barbara just ended 
on is this question of urgency. Why should we do something now 
rather than later? I think there are several important reasons.
    One, the problem is not just going to be due to the 
retirement of the baby boom. It has often been said that Social 
Security's problem is you have this pig going through a python, 
likening the baby boom to the pig. But that implies that once 
the pig is digested the problem goes away. That is not true. 
What you have is a permanent aging of society, due not only to 
the size of the baby boom but the fact that people are living a 
lot longer and the number of workers supporting them is going 
to decline and it is a downward trend that continues. So it is 
a demographic phenomenon, as the director of CBO said.
    Second, and Barbara's chart to the right explicitly shows 
this, this is not just a Social Security issue. It is a much 
larger issue. It is a burden on government that goes way beyond 
Social Security.
    Third, the fact that the last four trustee's reports have 
tended to show some improvement, this does not alter the long-
range picture. In fact, until very recently there was a whole 
slew for 25 years of trustee's reports that showed a steadily 
deteriorating situation and that continues to this day. And if 
you look at the last four trustee's reports, even though they 
showed temporary improvements in the short range, postponing 
the date of insolvency by a few years, if you look at the last 
year of the projection period that has remained about the same 
magnitude of problem.
    Fourth, there is the looming political problem--the 
complication of having an aging society. If we wait till the 
baby boom is near retirement or retired, especially if all 77 
million of them are about to be on the rolls or on the rolls, 
then you have the problem that they have a tremendous vested 
interest in the status quo and it would be very difficult to 
make change at that point.
    Finally, as each year passes the timeframe in which the 
constraints can be imposed gradually get smaller and the longer 
we wait to enact them the more precipitous they have to be.
    Moreover, we need predictability in our retirement system 
so people working today can plan for their future accordingly. 
It is their future that is at stake.
    So I just wanted to reiterate what I know the chairman has 
alluded to several times as to what the urgency is here.
    The Chairman. Thank you very much. You referred to the 
aging of society and I have referred to it as good news/bad 
news. The good news is that people are living a lot longer. The 
bad news is that people are living a lot longer. Of course we, 
as a society, are very pleased that medical technology has 
allowed people to live longer than we did in 1935 when this 
program was instituted but at the same time, recognizing that 
that fact also creates a huge problem of trying to have fewer 
people pay for more and more people who live longer and longer 
every year.
    So that is the real challenge. So the good news/bad news is 
sort of the same thing and our challenge is to figure out how 
to achieve the change and keep the commitment that we have to 
the American people.
    I take it, Ms. Bovbjerg, you have seen or at least read 
some of the information about the recommendations that I take 
it the commission in their last meeting hopefully will be able 
to present. It seems to me, as I said to Mr. Crippen, I was 
sort of hoping that we would get a recommendation and it looks 
like we get a range of options with maybe three different 
recommendations.
    That is sort of what Congress has been doing. I mean we 
know what the options are. I was hoping that someone outside 
the boundary of political decisions would make a recommendation 
that would be rational and substantive and get the job done and 
let us worry about the politics of it.
    Can you describe, Ms. Bovbjerg, what you, or Mr. Kollman, 
what you consider to be the different approaches of the three 
recommendations that we hear we are getting ready to get?
    Ms. Bovbjerg. I wish I could.
    The Chairman. I find it to be very complicated, 
particularly No. 3. I do not quite understand it yet.
    Ms. Bovbjerg. I think what we have seen publicly has been 
very short on details so I would be really reluctant to try to 
guess exactly what the commission is thinking in each of the 
approaches that they have. I think we will be eagerly awaiting 
what they come out with and will be very interested in seeing 
the details in the actuarial scoring. We would also look 
forward to applying our criteria to the different options.
    But as we have said before, I think it is really important 
to look at these things as complete packages and while we see 
some outlines perhaps, it is difficult to know what is really 
in the options from what the Commission has released so far.
    The Chairman. Can you comment on one of the 
recommendations? One of their proposals to index the initial 
benefit determination, I take it, to growth in prices rather 
than to growth in wages. Can you comment on what is the 
difference in that? How would that affect what they are talking 
about doing if they started indexing the benefit determination 
to growth in prices rather than the growth in wages?
    Ms. Bovbjerg. Well, this is something that has been 
discussed before, I believe most notably in Congressman 
Kasich's proposal of the past, but it is important to 
understand first how Social Security benefits are calculated to 
really understand what they are talking about.
    When Social Security determines a recipient's initial 
benefit they first have to determine the average monthly 
earnings over a 35-year period and in order to do that they 
have to bring all the earnings from 35 years in the past, as 
well as just the last couple of years, onto the same basis. 
They do this by inflating for the growth in average wages.
    So then once they determine the initial benefit, that 
benefit is then, over the course of the person's retirement 
life, inflated for cost of living, which goes up with prices.
    So there are two different kinds of indexing that occur in 
Social Security--one for the initial benefit calculation and 
then the other to maintain purchasing power over the time that 
the person is retired.
    The Chairman. The CPI adjustment?
    Ms. Bovbjerg. Yes.
    Mr. Kollman. But the key factor is that wages are projected 
to, as they have in the past, rise more rapidly than prices. So 
by indexing not just the wages but the benefit formula to the 
increase in wages you have a more rapid growth in the level 
than you otherwise would if you indexed them to prices.
    The Chairman. So if their recommendation was put into 
effect making the initial determination based on prices, that 
initial determination, I take it, would be lower than under the 
current system?
    Mr. Kollman. Under the projections, that is correct.
    The Chairman. Can you give me an elaboration on the dates 
that we hear all the time between what happens, I guess, in 
year 2016 versus what happens to the current system in the year 
2038?
    Ms. Bovbjerg. I would be happy to do that. The year 2038, 
the one that I think a lot of people focus on, is when the 
trust fund will no longer have enough assets to pay current 
benefits. That means that when they collect payroll tax 
receipts there are not enough to pay out current levels of 
benefits and they do not have any more special Treasuries to 
cash in. That means that they have to reduce benefits until 
they have enough cash in hand to pay them out.
    But 2016 is the point when that first begins. SSA does not 
have enough current revenue to pay current benefits and they 
come back to the Treasury with their special Treasuries, their 
trust fund assets, and begin to cash them in. This means that 
the rest of government has to find the cash.
    So as we have been saying for a while now, the really 
important date to the Federal Government is 2016. That is when 
the cash from the general fund is going to have to come forward 
to support----
    The Chairman. The reason I asked that question is because I 
have heard some members say look, do not worry; you are talking 
about 2038; it is a long time from now. But actually in 2016 
when the benefits that we are paying out exceed the revenues 
that we are taking in--I mean the only way we are going to 
continue to pay those benefits is by taking money from some 
other function of government.
    Ms. Bovbjerg. Either that, raise taxes or borrow.
    The Chairman. Or back to cutting the benefits at that time. 
So really the real critical date we are looking at is really 
not 2038 but really is 2016.
    Ms. Bovbjerg. And something else to think about is that to 
the extent that we begin to use the Social Security cash 
surplus every year, the extent we begin to rely on it, by about 
2008 when the first of the boomers start to retire, that amount 
is going to start to shrink until it just runs out in 2016.
    So if we are reliant on the Social Security surplus, as 
with were for so many years in the past, we are going to begin 
to have to react to its diminishing after about 2008.
    Mr. Kollman. Just to reiterate that, when you say the 
problem is in 2016 there is a shortfall in that year of about 
$17 billion. There is the point----
    The Chairman. Excuse me. The shortfall in 2016 would be $17 
billion?
    Mr. Kollman. Right, between the actual revenue generated to 
the system versus its outgo. That in itself is not the issue. 
That has happened before in Social Security. It happened a lot 
in the late 1970's and early 1980's. The problem is it grows so 
rapidly from that point that just 4 years later you are up to 
$99 billion in shortfall in just 4 years.
    Again I want to reemphasize it is a long-term problem that 
just keeps accelerating downward.
    The Chairman. I would like some discussion from both of you 
perhaps, if you can, on the concept of individual retirement 
accounts. If we go about designing a program that would 
encourage workers to invest in individual retirement accounts I 
am concerned about if we do that, how do we do it? What do we 
have to look out for? What do we have to be cautious of? What 
do we have to make sure we are protecting?
    It seemed that Mr. Crippen's statement, and I am trying to 
evaluate everything he said, was that it does not really matter 
how much is in the trust fund. I am not sure I have understood 
what he was really talking about. And I think that for a rather 
simplistic approach for some of us, we are trying to maximize 
the amount of money that we have and some of us feel that 
investing the funds in general government bonds is giving us 
such a low rate of return that we ought to do something to 
increase that rate of return.
    One of the things that we've been suggesting is exactly 
what I have as a Federal employee and what everyone sitting up 
at this dias has as a Federal employee and that is the ability 
to invest a portion of our retirement benefits into a 
combination under the Federal retirement plan and a savings 
plan. We can invest it in government bonds or we can invest it 
in a combination of bonds and stocks or we can invest it in 
what we call a high-risk account, which is basically stocks. I 
think people feel that that gives us the ability to have a 
higher rate of return; therefore more money is being made 
available to us when we reach retirement age.
    Is there an economical or mathematical reason why that 
concept cannot work for the Social Security program, as well?
    Ms. Bovbjerg. As I understood Dr. Crippen's response, I 
thought what he was suggesting was that the important thing is 
to increase saving and that it is not always clear that simply 
shifting from one source of saving to another is going to 
achieve a net gain.
    The Chairman. But if one sort of savings--i.e., an 
investment in the market or a combination--gives you a better 
rate of return, does that not make more money available for the 
retiree than if he just invested in something that gives a 3 
percent rate of return?
    Ms. Bovbjerg. It could but the rate of return on Treasuries 
does not have an effect on what Social Security retirees are 
receiving as a rate of return. It has an effect on what the 
trust fund is receiving as a rate of return. It has an effect 
on trust fund finance but not specifically on individuals' 
rates of return.
    One of the things I was thinking about as I listened to you 
and Dr. Crippen speaking was that in my statement--I did not 
emphasize it in the oral statement--we talk a little bit about 
labor force growth and how really the big factor here is the 
slowdown and near leveling off of the size of the labor force. 
And we do talk about strategies to help people work longer, 
help increase the labor force, and that is such an important 
aspect of all this.
    Certainly if you have individual accounts it is something 
you would want to think about at the same time, because the 
longer people work, the longer their account contributions 
buildup----
    The Chairman. That is an argument for increasing the 
eligibility age for retirement is it not? I mean if people know 
they can retire at 65, why work till you are 75?
    Ms. Bovbjerg. It is also an argument for considering how we 
have structured all of our retirement programs, not just Social 
Security but our pension policies. What are the incentives for 
people? Do we encourage them to work longer or are the 
incentives for them to quit earlier?
    The Chairman. Let me see if I understand what I think you 
just said. I, as a Federal employee, do I not earn more in my 
retirement benefits than I get if I invest my contributions 
into the high-risk account and it turns out to be a very good 
investment than if I just put it all in government bonds? Is my 
retirement benefit the same no matter what I invest it in?
    Ms. Bovbjerg. No, that is not what I meant to say. I am 
sorry. What I was suggesting----
    The Chairman. In other words, do I not do better if I 
invest in something that gives me a better rate of return than 
if I invest in something that gives me the lowest rate of 
return?
    Ms. Bovbjerg. Yes, but you would have to consider the risk 
associated with both investments.
    The Chairman. I understand.
    Mr. Kollman. And I think that is what Dr. Crippen was 
suggesting is that when you talk about a large transfer of 
investments into the equity funds, that would not factor in the 
risk there is in investing in equities. I know he made the 
statement that he postulated, I believe, if I remember 
correctly, that you would end up with a rate of return, once it 
is risk-adjusted, so that what you would get from the equities 
really would not be that much different than you would get from 
the government long bond rate.
    I am not an economist. I am just trying to remember what he 
said. I believe that is the argument he made.
    The Chairman. I am just trying to understand what he said.
    Some of the proposals say look, we will let you invest in 
the market 2 percent or whatever and if you get a better rate 
of return out there, that is what you are going to get, but if 
the market goes to heck, we are always going to guarantee that 
you get at least what you would get under the existing Social 
Security program. What does that proposal do for the good of 
the system? If you say we are going to let you invest and if 
you do well, great, you get it, but if you do badly, you do not 
get any less than you would get under your regular Social 
Security retirement program, does that help the program? It 
sounds like it is a no-lose deal. That is like going to Las 
Vegas and giving me $100 and saying look, go bet it any way you 
want and if you win you get to keep it all but if you lose, we 
are still going to give you the $100 that you left with. I do 
not know that that accomplishes very much if we do that.
    Can you comment on that type of a concept that some have 
proposed?
    Ms. Bovbjerg. It assures people that they are going to get 
a certain level of benefit but, at the same time, as I recall, 
the plans of that nature require general fund transfers, as 
well. Actually, I think most of the proposals that we have 
looked at rely on general funds to some extent but this type of 
plan would require a fairly significant infusion.
    The Chairman. Do you all agree with the--I asked this of 
Dr. Crippen--with the general statement that I have heard? 
Look, Senator or Congressman, you do not have a lot of choices 
here. You are either going to decrease the benefits that we 
give or you are going to increase the revenues or taxes that 
are necessary to pay for those benefits because of what is 
about to happen out there with the larger number of people 
living a lot longer, fewer people paying the revenues to pay 
for the same amount of benefits for more and more people who 
live longer and longer. Is that pretty much our options or 
would you classify it in a different fashion than those being 
the two choices?
    Ms. Bovbjerg. When Dr. Crippen was talking about that, that 
is when I started thinking about helping people work longer, 
considering other ways to increase the labor force. I mean we 
have taken some measures to help people who have been on 
welfare join the labor force. We are trying to help people with 
disabilities join the labor force. We have had different 
debates about immigration policy.
    My guess is that Dr. Crippen would say that that was a 
benefit reduction because you are asking people to work longer 
and then spend less time in retirement, but that struck me as 
being of a little bit different nature than just strictly the 
changes within the system.
    The Chairman. Mr. Kollman, do you have a comment on that?
    Mr. Kollman. I think that is another way of saying there is 
no free lunch. Part of the dilemma, and I do not know if it 
would be eased or not but this gets to the issues of benefit 
adequacy is referring to, Social Security right now is designed 
as a wage replacement system so that over time, no matter what 
wages do, a retiree can count that he will get a certain 
proportion of his preretirement earnings replaced by Social 
Security.
    For example, right now if someone always earned an average 
wage, he gets about 42 percent of his preretirement earnings. 
Then, under the indexing system we have in place, the notion is 
that someone retiring 50 years in the future under the current 
system who always earned an average wage would also get 42 
percent of his wages replaced.
    The Chairman. How much?
    Mr. Kollman. Forty-two percent, the same percentage as 
today.
    Because wages rise faster than prices, this means that in 
the future what we are projecting is that people will have a 
higher standard of living. They can purchase a higher market 
basket of goods than today's retirees. On the other hand, their 
relative position to the rest of society is going to be about 
the same.
    One option that is sometimes mentioned as it relates to the 
price indexing option is if you portray the role of Social 
Security not as a wage replacement system but as a system that 
provides a certain market basket of goods to meet a person's 
needs, which would be very similar to saying you are going to 
look at it in its relationship to preventing people from being 
out of poverty, that is one of the reasons that supporters of 
some form of price indexing say look, you can portray this as 
we are not going to cut your benefits from what today's 
retirees are able to purchase, we are going to give you that 
same amount, but it will not be as much as promised under 
current law.
    Now the big criticism of such an approach is this means the 
role of Social Security in providing retirement income would go 
down a lot. Instead of replacing 42 percent it might be only 
replacing 27 percent of a person's earnings. And if people want 
to maintain their standard of living into retirement they would 
have to come up with other resources to make up that 
difference.
    But it is sometimes put that way and you cannot have a free 
lunch in terms of yes, we can pay you today's benefits without 
raising taxes or cutting benefits, but perhaps we can present 
this in such a way that it can be more palatable if you 
understand that we are doing something that may not be as bad 
in terms of your purchasing power as one would intuitively 
think.
    The Chairman. That suggestion to index the initial 
determination based on prices, as opposed to growth in wages, 
does that address some of what you are talking about?
    Mr. Kollman. Yes. The example No. 2 that the commission is 
considering is basically that approach.
    The Chairman. But that is just an initial determination. I 
guess the regular cost of livings after that are, in fact, 
earmarked to prices, as opposed to----
    Mr. Kollman. Yes, their market basket purchasing power 
would remain the same in retirement.
    The Chairman. So that would be a helpful suggestion in 
terms of what you are trying to reach.
    Mr. Kollman. It is judgmental to say whether it is helpful 
or not. I am just trying to point out that aside from you have 
to cut benefits and you have to raise taxes, all that may be 
true but in terms of are you going to do something that can be 
portrayed as throwing people into poverty, then that is not 
true because the poverty levels rise with prices and you are 
keeping them in the same relative position to that.
    The Chairman. Give me a comment. Where are we headed on the 
age adjustment now under current law for eligibility, when it 
is all factored in? Do you know when it would be factored in?
    Mr. Kollman. It is being factored in now. Anyone born after 
1937 through 1943 has had their age raised, their full 
retirement age raised to 66, and we are going to have then a 
hiatus until it starts going up to 67 and that occurs for 
people----
    The Chairman. I am in the hiatus group.
    Mr. Kollman. Right. Those born between 1955 and 1960. So 
anyone born after 1959 will be at the full retirement age of 
67.
    The Chairman. So the highest under current law that we have 
is an eligibility number of 67?
    Mr. Kollman. Not eligibility. That is the so-called full 
retirement age.
    The Chairman. For full retirement.
    Mr. Kollman. The age for eligibility remains at 62. It is 
just that someone retiring in the future will have more of a 
so-called actuarial reduction to their benefit compared to 
current law.
    The Chairman. An incentive to perhaps work longer, as we 
talked about.
    I guess from an actuarial standpoint or from your 
standpoint do you all feel that eligibility should be tied to 
life expectancy? What happens? Are we ever going to go higher 
than 67? Is this an option? Is it appropriate to try to tie the 
full eligibility age to life expectancy so you guarantee an 
individual a certain amount of time in which they will be 
guaranteed retirement benefits?
    I mean what are we saying to people now? Life expectancy is 
about 80, I guess, almost?
    Mr. Kollman. Depending on your sex.
    The Chairman. I understand. I am trying to combine the two 
here.
    Ms. Bovbjerg. It is about 85 for women, 82 for men.
    The Chairman. I think about 80 is a ballpark figure just 
for thinking. So if you become eligible at 65 you have 15 years 
of retirement. I was just wondering, do you have any thoughts 
about maintaining that 15 years of retirement that we have 
today? Certainly when we passed this program the average life 
expectancy was 65 so most people did not even become eligible 
under the initial determination of this program. Now it is 
about 15 years of retirement if you look at the life 
expectancy.
    Some would say that is a good number and we should continue 
that range as life expectancy moves up to 81, 82, 90 years, you 
know, should the eligibility age progress at the same rate? Do 
you have any thoughts on that concept?
    Ms. Bovbjerg. We did some work for you a couple of years 
ago on this issue and certainly it makes a great difference to 
the trust fund and it is not unreasonable to think about trying 
to hold retirement, the length of retirement roughly constant, 
but there will be people who cannot work longer.
    The Chairman. I understand.
    Ms. Bovbjerg. So one of the policy tasks is to think about 
how you structure other sources of support for them.
    The Chairman. That is something that we on the Aging 
Committee have looked at because obviously there is some manual 
work that cannot be done by an older person, even though life 
expectancy has increased. So the question is do you take a 
disability definition and expand it to cover people who are not 
really disabled but cannot perform the tasks that they were 
doing before? And I recognize that and want to be helpful in 
making sure that happens.
    Do you all think that this is an urgent issue that we 
should address, the reform issue of Social Security, or is it 
not urgent at all, since we can wait till 2038?
    Ms. Bovbjerg. We at GAO absolutely think it is urgent and I 
hope we have not left anyone in this room thinking that we 
believe we can wait.
    Mr. Kollman. That is why I tried to be somewhat forceful 
when I opened my mouth the first time, saying that as the third 
support agency, we definitely think that there should be a 
sense of urgency here, or at least that it is probably better 
to do something sooner rather than later.
    The Chairman. I appreciate both of you. Your offices have 
been very, very helpful and I thank you. What we tried to do 
today was to get some comments on this overall issue in light 
of the fact that the commission will have their final meeting 
tomorrow and I understand that they will make three different 
recommendations.
    I think that it is clear that all three what I would call 
objective arms of our government have said this afternoon that 
it is really urgently needed for Congress to address the 
problem of Social Security and do it in an urgent fashion 
because the need is very urgent to move toward solving this 
problem.
    And I think that all three have also said to this committee 
that there are obviously no easy answers, that there are no 
pain-free answers. What we have described is going to take 
political courage and it is not going to be easy to solve this 
very difficult problem with just easy answers. If it had been 
easy answers we would have done it a long time ago.
    It seems to me when I look at the three propositions that 
the commission is likely to put forward tomorrow, in my 
opinion, I think the first option really is not a real option. 
I think it is dead as far as this Senator is concerned because 
I don't think it really solves the problem. I think that is 
consistent with what I heard today from three branches of 
government, that that option really does not solve the problem. 
It may solve some political problems but it does not solve a 
problem that we were called upon to find a solution to. It does 
not fix it.
    So I think we should, when we get those recommendations, 
quickly look to options No. 2 and 3 to see if we cannot build 
on those options toward reaching a solution to this very 
important problem.
    I thank both of you and also Mr. Crippen for being with us. 
Senator Craig has asked that I include his statement in the 
record.
    [The prepared statement of Senator Craig and Senator Carper 
follows:]

                  Prepared Statement of Senator Craig

    Social Security turned 65 this year. This program has 
provided years of retirement security to Americans. However, 
Social Security has aged, and the world has changed. It is now 
time to modernize the program to adapt it to our growing 
Nation. We want to ensure that current retirees and those 
nearing retirement age continue to receive their promised 
benefits, the benefits they have earned. For future 
generations, I want to ensure that our children and 
grandchildren have a retirement program that reflects the 
magnificent prosperity of this country--a program that provides 
financial security, flexibility, opportunities for growth, and 
most of all, a program that future generations can depend upon.
    On May 3, of this year, President Bush established a Social 
Security Commission to study the future of our national 
retirement program. The President tasked this Commission with 
the responsibility of developing strategies to strengthen the 
program's foundation and ensure its financial viability. This 
Commission is truly an impressive bipartisan group of experts. 
I have had the great fortune to work with three commission 
members who were outstanding colleagues while serving in 
Congress. I commend the Commission for its hard work and look 
forward to its final report.
    Currently, Social Security, Medicare, and Medicaid taken 
together, consume 43 percent of the federal budget and 7.3 
percent of our total Gross Domestic Product (GDP). To put this 
in perspective, consider that all personal income taxes 
collected by the federal government add up to 9 percent of the 
GDP. Looking ahead, the picture becomes truly alarming: If we 
assume for a moment that if the federal government's spending 
were to remain at its current share of GDP, by 2030, Social 
Security, Medicare, and Medicaid would consume 90 percent of 
the federal budget, crowding out virtually all other government 
spending.
    In 1940, when benefits were first paid, there were 42 
workers per retiree. In 1960, there were five workers for every 
retiree. Now there are slightly more than three. This downward 
trend in the ratio of workers to retirees is alarming and 
requires us to consider new options for stabilizing this 
important retirement program.
    Just 15 years from now, Social Security payments to 
beneficiaries will begin to exceed incoming Social Security 
payroll taxes--and by 2038, if nothing is done, the Social 
Security trust fund will be depleted.
    If we do not take serious action soon, we may ultimately 
face a grim long-term future that could come down to choosing 
among the following: 1) massive tax increases, 2) widespread 
cuts in other federal programs, or 3) deep federal borrowing 
and budget deficits. To give you a basic idea of how dire these 
choices will be, consider that if, in the year 2025, the 
federal government chose to cover Social Security's shortfalls 
through cuts in other government spending, it would have to cut 
the equivalent of the entire combined budgets of the Department 
of Energy, the Department of Commerce, the EPA, NASA, veteran's 
programs, Head Start, and WIC.
    However, if we act soon, we have a much better chance of 
keeping Social Security solvent and a sound investment for our 
children and our grandchildren. We can choose to strengthen the 
program, provide citizens with the freedom to choose to invest, 
save, and provide Americans with ownership of their retirement 
funds. Indeed, a useful and essential beginning point toward 
long term modernization of Social Security is, I believe, the 
creation of a personal retirement account option.
    Back in 1999, I held a series of hearings across the great 
state of Idaho. These Senior-to-Senior forums enabled us to 
explore options for the Social Security program. At those 
hearings we discussed ideas that Idahoans had, the very ideas 
that the commission and the Nation are now talking about. Also, 
as the ranking member of the Senate Special Committee on Aging, 
I continue to be dedicated to making the modernization of 
Social Security a priority. Serious Social Security reform 
cannot occur overnight, but Congress must find the courage to 
act--and act soon. A Band-Aid will no longer be enough.
    We have the opportunity to make a difference in the lives 
of our children and our grandchildren. We have that ability so 
long as we are willing to make some important decisions soon. 
We can sit back and do nothing and leave our children with a 
grim future, or we can stand up, face the task at hand, and 
modernize Social Security so future generations can truly count 
on retirement security. A legacy worth leaving.
                                ------                                


                Prepared Statement of Senator Tom Carper

    I want to thank you, Chairman Breaux, for calling this 
hearing. It is such a truism that it is almost cliche to say, 
but with the possible exception of the war against terrorism 
there is truly no more important challenge that we face as a 
country today than strengthening Social Security. I, like 
everyone else in this room and across our country, want to 
ensure that Social Security will be there, not just for my 
mother's generation, not just for my generation, but for my 
children's generation and for future generations to come.
    Passage of the Social Security Act of 1935 was a landmark 
event in our nation's history. Social Security has become not 
only the largest, but one of the most significant and 
successful programs enacted by the United States Congress. 
Before the advent of Social Security, the vast majority of men 
who lived past the age of 65 continued to work until they died 
or until they became disabled. Large segments of the nation's 
elderly population lived in poverty. Even today, slightly less 
than half of our nation's seniors would be poor absent Social 
Security.
    As a result in part of the success of Social Security, we 
are confronted with what I would describe as a pleasant 
problem. We have to find a way to modernize Social Security to 
cope with a world in which most people not only don't expect to 
work until they die, but in which an increasing number can now 
expect to live for a quarter century or more in retirement. As 
the miracles of modern medicine continue to make it possible 
for more Americans to live well into their eighties and 
nineties, and in some cases beyond, and as the post-war baby 
boom generation approaches retirement, the financial pressures 
on the Social Security system will inevitably grow. The 
question is how we will manage to meet the demands of an aging 
population and do so in a way that is consistent with a 
balanced budget.
    I also want to take this opportunity to commend the 
President for calling attention to this issue by appointing his 
commission--a commission, I might add, with a very 
distinguished panel of public and private leaders. I want to 
note in particular two members of that commission--a favorite 
son of Delaware, Sam Beard, and a good friend of mine from my 
days in the House, Tim Penny. If the President wanted to ensure 
that I would take the recommendations of his commission under 
careful consideration, he did the right thing by bringing on 
board Sam Beard and Tim Penny.
    There are just two points that I would make here at the 
outset about the work of the President's commission. First, 
what the President's commission is proposing is a fundamental 
change, not just in the design of the Social Security program 
but also in its purpose. Since its inception, Social Security 
has been a social insurance program designed with the purpose 
of ensuring that all Americans enjoy basic income security in 
retirement. The President's commission is proposing to change 
Social Security to make it an individual investment program 
with the purpose of promoting individual risk-taking, wealth-
accumulation, and estate-building.
    Now there is a lot to be said, in general terms, for 
promoting individual risk taking, wealth-accumulation, and 
estate-building. They are the very engines that drive our 
entrepreneurial economy and feed our collective prosperity. The 
question posed by the recommendations of the President's 
commission, however, is whether this is the appropriate purpose 
for which we ought to use our Social Security system, even if 
it means sacrificing to some extent the effectiveness of the 
program if promoting its original, intended purpose. That is 
one of the central questions we need to ask ourselves in the 
course of this debate.
    The second point I would make is that finding a way to meet 
the demands of an aging population in a way that is consistent 
with a balanced budget invariably will involve tough choices. I 
think we need to be very clear with ourselves and with the 
public that plans to replace today's Social Security with 
individual private investment accounts do not magically relieve 
us of this burden. If anything, for the foreseeable future 
these plans will make the choices we face a great deal more 
difficult. Under all three of the plans that the President's 
commission has outlined, the large Social Security surpluses we 
currently enjoy will be transformed in rather short order into 
substantial Social Security deficits--as early as 2005 or 2006.
    Whether we like it or not, the context in which we now 
approach the question of Social Security reform has changed 
dramatically in just a few short months. When then-Governor 
Bush unveiled his plan during the presidential campaign to 
replace in part today's Social Security with private 
investments it was against a backdrop of budget surpluses that 
extended for as far as the eye could see. Under these 
circumstances, the idea of financing two separate pension 
systems at one and the same time--the traditional one for older 
workers and a new and, one might say, more sexy one for younger 
workers was a luxury we could afford to consider.
    Today, things are different. We face some exceedingly 
difficult choices if we have any intention of getting back to a 
balanced budget, let alone if we intend to get back in any 
serious way to paying down the national debt. The President's 
budget director announced last week that even with substantial 
Social Security surpluses under the current system he now 
expects the federal government as a whole to run deficits 
throughout the rest of the President's current term in office. 
Any Social Security reform plan that now, in the name of 
restoring solvency to the system, would turn Social Security 
surpluses into Social Security deficits as early as 2005 or 
2006 will dig ourselves into a ditch that we will not easily 
crawl out of. It might just ensure that the new string of 
budget deficits announced last week will ultimately run just as 
long as the old string of budget deficits--not for three years 
but for thirty years.
    I'm glad we are focusing today on the work of the 
commission and the fiscal challenge we face in seeking a way to 
finance Social Security in the years to come that will be 
consistent with a balanced budget. I hope this hearing will be 
just what the Chairman intends it to be; a chance for some 
``straight shooting on Social Security and the trade-offs of 
reform.''

    The Chairman. The committee will stand adjourned.
    [Whereupon, at 3:35 p.m., the committee was adjourned.]