[Senate Hearing 107-790]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 107-790
 
                        PLANNING FOR RETIREMENT
         PROMOTING SECURITY AND DIGNITY OF AMERICAN RETIREMENT
=======================================================================


                             FIELD HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                               BOISE, ID

                               __________

                            AUGUST 23, 2002

                               __________

                           Serial No. 107-34

         Printed for the use of the Special Committee on Aging


                           U.S. GOVERNMENT PRINTING OFFICE
83-252                          WASHINGTON : 2003
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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           JOHN ENSIGN, Nevada
DEBBIE STABENOW, Michigan            CHUCK HAGEL, Nebraska
JEAN CARNAHAN, Missouri              GORDON SMITH, Oregon
                    Michelle Easton, Staff Director
               Lupe Wissel, Ranking Member Staff Director

                                  (ii)








                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Larry Craig.........................     1

                           Panel of Witnesses

Alan Winkle, Executive Director, Public Employee Retirement 
  System, State of Idaho.........................................     4
Doug Dorn, Investment Advisor, Kuna, ID..........................     8
James Hamilton, Expert on Retirement Issues......................    10

                                 (iii)














  PLANNING FOR RETIREMENT PROMOTING SECURITY AND DIGNITY OF AMERICAN 
                               RETIREMENT

                              ----------                              


                        FRIDAY, AUGUST 23, 2002

                                       U.S. Senate,
                                Special Committee on Aging,
                                                          Boise, ID
    The committee met, pursuant to Notice, at 10:07 a.m., in 
the MK Auditorium, 720 Park Boulevard, Boise, ID, Hon. Larry E. 
Craig presiding.
    Present: Senator Craig.

          OPENING STATEMENT OF SENATOR LARRY E. CRAIG

    Senator Craig. Let me call this U.S. Senate Special 
Committee on Aging hearing together this morning, and thank you 
all very much for coming out. It's a distinct pleasure to be 
chairing this hearing on planning for retirement here in Boise 
and to be with some of my friends, including those who have 
represented Idaho on an important cause: Promoting the security 
and dignity of American retirement.
    Discussing retirement security is essential for Idahoans 
and Americans of all ages. It's never too early and never too 
late to plan and to save. The traditional way of looking at 
retirement income security has been to picture a three-legged 
stool consisting of personal savings and employer-sponsored 
pension and Social Security.
    Essentially, in light of today's concern, it's important to 
examine the way current rules are working to support this 
three-legged stool. A great deal has already been accomplished 
by President Bush and the Congress in a bipartisan fashion to 
help Americans plan for a better retirement, including the 50 
billion in bipartisan tax relief for Americans to invest in 
their retirement security, phasing out the death tax, 
substantial increases in contribution limits on individual 
retirement accounts and 401(k) plans, catch-up IRA and 401(k) 
contributions for those age 50 and older--this especially will 
help women who have taken time away from paid work forces to 
raise a family, to be a caregiver--new tax credits to help 
small businesses offer their employees pension plans, and 
faster vesting to give workers earlier ownership of their 
retirement assets.
    Earlier this year, President Bush called on Congress to 
pass a corporate accountability law to act against those who 
had shaken confidence in our markets.
    Just last month, Congress responded with a bipartisan bill 
which the President signed on July 30. For those of you who 
watch the market closely, I would like to think that what the 
Dow did yesterday is beginning to reflect some of the actions 
we have taken as it broke 9000. The new laws call for more 
complete disclosure, accounting reforms, and new and stiffer 
penalties. Its purpose is to expose and punish misstatements 
and misconduct, and defend the interest of all Americans who 
have worked, saved, and invested.
    In Congress and the White House, unwavering commitment 
continues to safeguarding Social Security. We must and we will 
keep the promises of Social Security and that have been made, 
and protect the beneficiaries who depend on it.
    Social Security taxes more than cover benefits. Benefits 
are safe and will not be cut a penny. This generation of 
seniors and those near retirement can count on and continue to 
believe that Social Security is a strong, well-funded system.
    There is more that we can do and I think more that we must 
do. Already the House of Representatives has passed the Pension 
Security Act of 2002. This bill will ensure that workers are 
informed, protected, and empowered, and would apply the same 
standards of fairness and management and to rank-and-file 
workers. I cosponsored a similar bill in the Senate. The Senate 
is expected to turn to pension protection legislation in the 
coming weeks as we return.
    It is my hope that we can work again in a responsible, 
bipartisan spirit to build on the reforms in the House bill and 
create a more solid foundation for employee pension plans.
    Next, to protect Social Security for the long term, 
Congress needs to get other spending under control and return 
to balanced budgets and running surpluses. That really is key 
to a stronger Social Security and a reformed Social Security. 
For a record 4 years, Republican Congress has succeeded in 
balancing the budget. Today's budget deficits have been caused, 
in part, by the war on terrorism and the current recession 
we're in, but we will beat this recession. We hope we see the 
signs of recovery now on the horizon. We must do whatever is 
necessary, of course, to win the war on terrorism and to create 
a stable homeland security program for all citizens.
    Beyond that, we must have the spending discipline to 
balance the budget once again, to build the surpluses that will 
protect Social Security. Government must support policies that 
promote and protect savings and planning for retirement.
    There is another side to the story. The most important step 
in a secure retirement is for each and every one of us to take 
stock of our current situation, our future needs, and start 
putting money aside.
    Savings is the path to true independence and a secure 
future for all Americans, certainly for all Idahoans.
    I want to call your attention to several charts that I have 
here, but chart one that shows the recent dramatic decline in 
personal savings in our country.
    Americans now save at a rate very near an all-time low. 
Savings is hard work and we all know it. There's always a 
priority for the money in our hand or in our check. But, the 
time we spend today thinking about our future is time well 
spent.
    I think also this savings chart is probably reflective of 
other reactions and realities. When you have rapid growth in 
investments or equity in a home, that quickly translates 
through in your mind to a form of savings, as it is, or assets 
gained, and you're probably inclined to save a little less. Or 
you could see a higher rate of return by investing in the stock 
market, and of course it just so happens that the period of 
time reflected on that chart was a period of time of rapid 
growth in the stock market, and that may have also reflected 
upon a decline of savings. But we still recognize savings to be 
a very important part of an overall retirement plan.
    I want to call attention now to two pie charts, and these 
are probably the most important. They show the relative 
strength of the parts of the three-legged stool, both for 
retirees today and in another generation, if we do nothing 
further to prepare. On these charts you'll notice that the 
three legs of savings, pension, and Social Security are 
included, but there is also a fourth part, the space that fills 
in a gap left by the other three. This represents earnings, 
reflecting the fact that many seniors do continue to work along 
with living on their retirement investments, some because they 
want to, but too many because they have to. If you look at the 
earnings pie in that chart, over the time, if you do nothing 
now to prepare for the future, it is clear that in the future 
and by 2040, you'll have to be anticipating that you'll need to 
be back in the work force working more than you might otherwise 
have expected to if you have not planned appropriately.
    The share of seniors' income that must be supplied by 
earnings has shrunk over the last generation, owing to the past 
success of Social Security and growing pension income, but if 
personal savings remains at their historic lows and if we fail 
to prepare for Social Security running out of money after the 
year 2040, seniors will have to work more hours and more years 
to make up the difference. To build a better future, we need to 
plan ahead, become better educated, and save more as 
individuals here in Idaho and across the Nation.
    As a ranking member of the Senate Special Committee on 
Aging, I have instructed the committee staff to conduct five 
retirement income security forums this coming week across our 
State: One in Lewiston, one in Coeur d'Alene, Idaho Falls, 
Pocatello, and Twin Falls.
    This hearing and that series of forums are what I think is 
a good start for helping to raise the importance of saving and 
planning for retirement security. It's an issue that I believe 
in strongly. It's an issue that I will work over the next 6 
years to draw greater awareness to here in Idaho and across the 
country as either the Chairman or the ranking member of the 
Special Committee on Aging.
    Today we're going to hear from Idaho's delegates to the 
National Summit on Retirement Savings meetings in Washington 
held earlier this year at the U.S. Department of Labor. So I 
now turn to the panel who I'm pleased that have joined with me 
today, and we will take testimony and comment from them, and 
I'll ask them some questions, and then we will turn to you in 
the audience for any questions that you might have or comments 
that you would wish to make.
    First let me introduce to you Alan Winkle. Alan is the 
Executive Director of the State of Idaho's Public Employee 
Retirement System, and as you've watched that over the most 
difficult times of the last year, it has, in general, survived 
very well and been managed well, with good judgment by all 
appearances, to create stability at a time when others were 
taking substantial losses in investments in the market.
    The other delegate, a friend of mine of longstanding and 
someone who advises citizens as an investment advisor from 
Kuna, Doug Dorn. Doug has helped a good many people over the 
years plan for their future and for their retirement.
    We've added to the panel an expert, a perspective that I 
think is critically important as we look at Social Security, 
and this is James Hamilton who has worked with several national 
organizations, and as a Congressional staffer on retirement 
issues is really viewed as an expert in this field.
    So to all of our witnesses today, I wish to express my 
thanks for you coming and spending some time with us. For all 
of those of you who have chosen to take time out of your 
schedules to spend time with us today, let me once again 
express my appreciation.
    So with that, let me turn to our panelists, and first to 
you, Alan. Again, thank you for being with us.
    We hope you will pull that mike down so that everyone can 
clearly hear you, and we would ask you to begin your testimony.

 STATEMENT OF ALAN WINKLE, EXECUTIVE DIRECTOR, PUBLIC EMPLOYEE 
               RETIREMENT SYSTEM, STATE OF IDAHO

    Mr. Winkle. Thank you, Senator Craig, and also thank you 
for sponsoring me as a delegate to the 2002 National Summit on 
Retirement Savings. It really was a great experience to hear 
the many distinguished speakers: President Bush, Alan 
Greenspan, Senators Kennedy and Johnson, and of course Senator 
Craig, Congressmen Pomeroy and Johnson. They really are leaders 
in the pension field and the examination of our current 
situation. Some of it was sponsored by the Secretary of Labor 
Elaine Chao, and her staff put on a very informative conference 
and good, thought-provoking sessions on retirement in general 
and planning for that retirement.
    I'd like to also recognize members of the PERSI staff that 
are with us today and thank them for their support.
    I came away from the Saver's Summit I think with several 
messages. The first one is the reality that we are in a 
retirement savings crisis. The boomers are fast approaching 
retirement, and they really are ill-prepared for providing that 
secure income for the rest of their lives. They will be living 
considerably longer than their grandparents, will be in better 
health throughout their retirement years. This means, however, 
that the boomers will be more active, but will they have the 
retirement income to support that lifestyle. There are some 
estimates that retirees will need more than 100 percent of 
their current income to support them in retirement because of 
this active lifestyle.
    Second, as Senator Craig pointed out, the U.S. savings rate 
is at an all-time low, and if you recall a couple of years ago 
it actually dipped to a negative savings rate for a short 
period of time. Many Americans don't have access to an 
employer-sponsored retirement plan. Those that do don't take 
advantage of that savings vehicle. Workers tend to wait to save 
and they lose that value of compound interest. According to the 
President's speech, the average 50-year-old has less than 
$43,000 saved for retirement.
    Third, it isn't easy to plan or save for retirement. I 
think Dr. Alan Greenspan put it best in his lead statement that 
he made, and if you listen to it, it's complex as probably Alan 
Greenspan is, but it does hit all of the elements I think that 
you need to consider.
    He says: One of the most complex economic calculations that 
most workers will ever undertake is, without a doubt, deciding 
how much to save for retirement. At every stage of life 
individuals ought to make judgments about their likely earnings 
before retirement and their desired lifestyle in retirement. 
Also implicit in such decisions are assumptions about 
respective rates of return, life expectancy, and the possible 
accumulation of a nest egg for one's children. The difficulty 
that faces individuals in making these projections and choices 
is compounded by the need to forecast personal and economic 
events many years into the future.
    Just think of all the variables that are in that statement 
and what needs to happen for an individual to plan for their 
retirement successfully. It simply is not easy.
    The delegates were given a task to design programs to 
motivate employees to save now. The slogan our particular group 
selected was ``It's never too late to save,'' and that was 
specifically targeted at boomers who may think that it simply 
is too late; therefore, I'm going to do nothing.
    We really believe that a strong education program and 
support for the saver is needed, and in the summit, we learned 
how to approach the various generations to incentivise their 
savings. An idea is to use our education system for possibly 
one of the most vital areas: Preparing our children for future 
life and personal financial literacy. The Federal Government or 
other organizations are in a position to help develop 
curriculum for teachers to teach such financial literacy 
courses. I have a private interest there because hopefully as a 
teacher, which represents a large portion of our work force, as 
they would get more involved in teaching financial literacy, 
hopefully they would get more involved in their own financial 
literacy.
    So in schools though, I've seen recently a computerized 
doll that gives high school students a good dose of reality in 
raising a baby. It wakes up in the middle of the night, it 
cries, it needs to be held or whatever. A similar reality check 
for financial literacy may be a progression of courses that 
addresses the financial life of a student: Balancing a 
checkbook, managing credit cards, smart shopping, paying bills, 
investment interest, those kinds of things that may be common 
sense approaches to the appropriate topics.
    I've probably had more than my share of experience with 
people who have not saved sufficiently for retirement. I have 
staff members who deal daily with PERSI members who have to 
make choices whether they can eat or whether they can purchase 
medications. PERSI is a good retirement system; however, it 
cannot make up for poor choices and poor planning by employees 
early on in their career.
    Public employees in Idaho have a very good plan that offers 
a defined benefit plan and a 401(k) plan for voluntary 
contribution, as well as an outstanding education program. We 
put considerable effort into motivating our members to become 
engaged in planning for their own retirement.
    As I learned from the other delegates at the conference, 
education is a never-ending process. People must be constantly 
reminded to save, to plan, and to monitor the process. At PERSI 
we have somewhat of a captive audience with about 65,000 
members at our 650 employers across the State. It is apparent 
from the data at the summit that the need for education is much 
greater in the general population. Workers need to start by 
doing something:
    Putting a small amount in an IRA. If they have access to a 
401(k), put in something, start now. Take courses on financial 
planning through the community schools, at BSU, at junior 
colleges, from the Internet, anywhere. Maybe start an 
investment club with your friends. Simply, become informed.
    The need for savings is becoming more and more complex. As 
you have heard, the three-legged stool that has been the model 
for savings for many decades:
    Employer-sponsored pensions, personal savings, and Social 
Security.
    According to a recent AARP study, entitled ``Beyond 50''--
the three-legged stool may be replaced by a four-legged stool. 
It has the four legs as: Savings, and that includes both the 
corporate company savings and personal savings; Social 
Security, a very necessary leg to the stool; Medical insurance, 
a new leg we have not heard from before. Medical expenses are 
becoming such an important part of retirees' financial plan 
that they must be considered seriously.
    Finally, working as a fourth leg to the stool. More 
retirees are continuing or returning to work in some fashion. 
They either work because they have to for the income or for the 
medical benefits, or maybe because they want to for the social 
activity and the self-worth.
    The new phrase that we're contending with is called 
``phased retirement.'' It embodies that issue. It's a 
transition now from retirement, to employment, to retirement, 
and that concept of simple retirement as before is now blurred. 
There is no bright line.
    As I mentioned, PERSI is a very good retirement system. 
Most State and local plans provide this defined benefit payment 
which does provide a lifetime of payments to a member who 
retires based on their salary and service. We're also very 
fortunate to have a defined contribution plan, a 401(k). We 
believe we've captured the benefits of both plans. The 401(k) 
is funded by a unique gain-sharing concept where you gain in 
good years. Excess assets from the defined benefit plan can go 
to member accounts as well as be apportioned to the employers 
and retirees.
    Employees can also make voluntary contributions to their 
accounts and employers can contribute also. We have about 
53,000 employees who have accounts in the 401(k).
    Currently, about 5,000 employees are contributing over a 
million dollars per month to the 401(k). We worked very closely 
with an interim legislative committee and the IRS to make this 
program a success. I think we have an advantage over private 
industry plans primarily because we're not covered by ERISA, 
which gives us some more flexibility in how our plans are 
designed and administered.
    In talking to one Congressional staffer, he says he looks 
to the public sector as sort of an incubator to see what 
happens in a more deregulated environment. On the other hand, 
by nature of government, our whole operation is in the public 
eye. Our board of trustees takes their fiduciary 
responsibilities very seriously in the management of our plan 
for the sole benefit of the beneficiaries and no other party. 
Our board meetings are open to the public and members at all 
time. Documents are generally public records. All of our audits 
and actuarial evaluations are open to the public.
    Maybe in both cases this type of deregulation and openness 
could be a model for private sector plans to address some of 
the problems we have seen recently.
    However, we too struggle with our education and getting 
members engaged in the retirement process. For the long term, 
they need to be engaged in the market trends, be it up or down. 
We have found that the more personal the education and more 
frequent, the better. Of course, that means it's more 
expensive, but we have a very creative staff of trainers who 
keep the message exciting, engaging, and appropriate for the 
audience.
    We also provide a list of fund options that includes a what 
we call total return fund, and actually about 75 percent of the 
401(k) money is in this total return fund. It is co-invested 
along with the PERSI assets, which means we offer an option 
that makes it very easy for the beginning saver to get invested 
in the market. Although it is a single option, it provides 
members with a fully diversified portfolio among some 26 
professional investment managers.
    We also have ten other options that cover both active and 
passive asset classes. However, with much of the assets 
invested in a total return fund, we feel that our employees are 
very well diversified and have made a good step forward in 
planning for their retirement.
    To sum up, I thought the Saver's Summit brought home to all 
of us how critical it is for government, employers, and workers 
to participate together in finding solutions to the savings 
crisis. The recent increases in the deferred savings limits by 
EGTRRA legislation, the Federal Government has made a good step 
forward in allowing workers to save more for their retirement. 
Human nature appears to be our next challenge. The goal would 
be to educate and motivate citizens at all points in their life 
to save for retirement. PERSI is certainly willing and ready to 
help in this effort by sharing what we do and providing 
services that may help accomplish this goal.
    Thank you, and I would certainly stand for any questions at 
the appropriate time.
    Senator Craig. Alan, thank you very much for that analysis 
and your recollection to your experience in Washington.
    Now let me turn to Doug Dorn. I mentioned he has been a 
senior consultant, is at this time, and has spent 30 years in 
the investment community and in the consulting field, and I 
think that brings to this audience a real opportunity.
    Doug, we look forward to your comments. Please proceed.

      STATEMENT OF DOUG DORN, INVESTMENT ADVISOR, KUNA, ID

    Mr. Dorn. Thank you, Senator Craig. I shared that 
experience with Alan Winkle at the Saver's Summit and it was 
very enlightening. I won't go through the details, because Alan 
has done a wonderful job of doing that. I kept thinking, 
however, there was a little bit of preaching to the choir, as 
there were 400-plus people as delegates, all from the 
retirement industry, whether they be actuaries or investment 
managers or insurance people. The speeches were wonderful, very 
enlightening, but really the highlight of that type of a 
meeting is that you have the nonprescribed times when you sit 
down to have dinner and there may be four or five or six people 
at the table, many of which or all of which you don't know, so 
the conversation's informal, is very, very enlightening, and 
you find that the ideas that are running around in your head 
and your experience are shared by others.
    There were lots of programs that were discussed. I tended 
to focus on one, and it goes back to my background and my 
personal experience. I was talking to some friends the other 
day and all of a sudden it dawned on me when we were talking 
about the stock and bond market and this is my fifth decade in 
dealing with this, because I started in the 1960's, so I get to 
count all of the decades. But it's a marvelous place where 
people can invest their moneys, but we've lost sight of the 
goal. Some people think it's a place to get rich.
    It's not a place to get rich. The stock market is the place 
to get a little higher return than normal for a little higher 
risk than normal, and if you treat it anything other than that 
with greater expectations, you will fall under Mr. Greenspan's 
trap of unsustainable expectations. Those we have seen in the 
last 2\1/2\ years are very well adjusted for.
    The particular area that I have been interested in is the 
conversion of corporate ERISA plans into, a smaller extent, 
some Taft-Hartley joint-negotiated plans, and to a much smaller 
extent than that some government plans; the conversion from 
defined benefit plans where you work a prescribed number of 
years and earn certain scores and then you get to retire on a 
guaranteed income, the conversion of those kinds of plans to 
401(k)s, 457s, et cetera, generally known as defined 
contribution plans.
    Now, in the industry these are called, these kinds of 
plans, the defined contribution plans, are called ``shoot-
yourself-in-the-foot plans.'' Folks, we've shot ourself in both 
big toes in the last 2 years and the problems are coming home 
to roost.
    Now, if you are a participant in a 401(k) or other type of 
defined contribution plan is your only vehicle for retirement, 
there are two factors that will explain 90 percent of the level 
that you have at the point of retirement to generate income to 
buy groceries with, and I'll tell you what those two factors 
are. One is the year your mother chose to get pregnant, to have 
you. The second one is the level of the stock market and the 
bond market 65 years later. I suspect that you, as an 
individual, have very little control over either of them. 
Therein lies the problem.
    If you retired in 1974 on a defined contribution plan, you 
had about 50 cents on the dollar; in 1981, about 65 cents on 
the dollar; 1991, about 65 cents on the dollar; and 2001 or 
2002, it's not unusual for people to have 50 cents on the 
dollar. Now, all through ERISA, when our Federal legislation 
passed that, all through the conference's notes you will--
believe it or not, Senator, I read them cover to cover, but it 
was almost 30 years ago--but there was one phrase in there that 
just stuck in my mind because in 1974 I was a junior portfolio 
manager in a great, big organization, and everything that we 
did for 2 years was wrong and everything we bought went down. 
It was a tough time in doing that. I always remembered that 
experience. The phrase in the conference notes was ``retirement 
with dignity.'' Fifty cents on the dollar does not mean living 
in a tent in the Owyhee Desert and eating cat food. That is a 
very important thing.
    Now, I do believe--and I am not a behavioral psychologist--
but I think that there are a lot of folks out there in the work 
force who choose a particular career in a particular industry 
and company because one of the features of working in that 
industry and that company is that they offer a defined benefit 
plan. I do believe that people will work and they will stay in 
their job because they know at a certain point in time they 
will have a guaranteed benefit to them.
    When we passed ERISA in 1974--President Johnson signed it 
on Labor Day--that was in response, if you recall, Senator, to 
the failure of the Studebaker corporation when they just closed 
their retirement window, they just shut their window and said, 
Sorry, we're out of money. The Congress decided this was not a 
proper thing to be doing; hence, we got ERISA.
    We've now had ERISA for 28 years and I do believe it has 
gone a long, long way in securing millions of people's 
benefits. But we're now 28 years later and there are certain 
facets that have happened. Many corporations that have offered 
defined benefit plans have chosen to terminate those plans and 
they have done it for a myriad of reasons.
    They are most often heard to be the ease of Administration. 
Yes, it's easier to turn everything over to somebody that 
administers a 401(k) plan. That's easy, and I understand that.
    They say the lower cost of running the plan. Depending upon 
how you do your arithmetic and who is paying the cost, it could 
be a lower cost, but I do believe there's a shift from the 
corporate sponsor to the participant.
    One big item and I'm sorry for the accounting jargon for 
you, but there's a thing called unfunded vested liability which 
becomes a liability on the corporate balance sheet. That is a 
big number. I've often joked that U.S. Steel Company really is 
a giant pension fund that runs a steel company to support it.
    When you make pension contributions, it runs through the 
accounting and it becomes a hit on the income statement, and 
that affects earnings per share.
    People in the financial, people in corporations, worry 
about that kind of thing. There is tremendous fiduciary 
liability placed upon the directors and the officers of the 
company, and there is an onous payment now of twenty some 
dollars per head that started out at $2 a head in 1974, payment 
to the Pension Benefit Guarantee Corporation which guarantees 
these pension benefits. So it's become very expensive to run 
these plans, so corporations, for whatever reason--and I don't 
believe that it was some kind of a evil thing to get at their 
employees; it was a function of the regulations--they have 
terminated these plans, substituted 401(k)s, and now we have 
the circumstances we're in as we sit today.
    I sincerely believe that we should provide some type of 
mechanism that tries to get to the bottom of the motivation of 
why these conversions happened, whether or not we can do 
something with the regulations and the onus in running these 
plans that would curtail that conversion and promote the 
combination of plans such that Alan explained at PERSI, which 
is a combination of a floor plan defined benefit and over the 
top of that a savings plan. That makes a lot of sense. But to 
run solely on the defined contribution plan is just too full of 
pitfalls. You cannot control the markets and the markets will 
determine how you live.
    One of the other factors that goes into that discussion is 
participants have said, We don't want to be part of your 
defined benefit plan. We want to have our own plan so we can be 
the master of our own destiny.
    Well, you just did it, folks. Four bits on the dollar and 
that doesn't make it. That's not saying that we should be 
everybody's keeper, but availability of plans is another item. 
So to those folks that wanted to be the master of their own 
destiny, I would only remind them of Mr. Greenspan's wonderful 
comment--and then, incidentally, the Dow was at 6000 and change 
when he said that we are maybe in a period of ``unsustainable 
exuberance.''
    So, thank you, Mr. Chairman.
    Senator Craig. Doug, thank you very much. We appreciate 
your comments and your observations that obviously have come 
from years of experience.
    Now let me turn to James Hamilton, a consultant on Social 
Security and general retirement issues in Washington, DC., and 
thanks for being a part of our hearing this morning.

    STATEMENT OF JAMES HAMILTON, EXPERT ON RETIREMENT ISSUES

    Mr. Hamilton. Thank you, Senator. It's great to be here. I 
appreciate the opportunity to visit your State again, so it's 
good to be back.
    Over the last 11 years I've worked on Social Security 
retirement issues, first as a staff member for a Democratic 
member of the U.S. House of Representatives, and subsequently 
as project manager at a number of nationally renowned public 
policy organizations in DC., and over the last decade I've 
developed a little bit of an expertise on the Social Security 
retirement program. I've spoken to audiences around the 
country, primarily trying to raise awareness about the long-
term solvency issues surrounding the program and how we can do 
things now to protect current retirees and those who will 
retire in the future.
    I want to make one thing clear at the outset here, that 
those of us who have worked for or with Members of Congress and 
those of us who have worked with or for the Administration know 
for a fact that benefits for today's seniors and those who are 
approaching retirement are in no danger of being cut. No one 
would tolerate such cuts, and no current trend or policy would 
cause them. It's very important to make that clear up front. 
President Bush actually instructed his Commission on Social 
Security that began meeting a little over a year ago, 
bipartisan commission actually entitled the Commission to 
Strengthen Social Security, President Bush specifically 
instructed the commission members to only consider proposals 
that would keep current benefits safe.
    While the system is solid for today's seniors and near-
retirees, we do need to talk about the longer term. Today, the 
average Social Security retirement beneficiary receives about 
$900 per month. Combined with the low savings rates that we've 
talked about earlier that's across all demographic groups and 
low or nonexistent pensions from work, the average retiree is 
getting by but not doing well in retirement. That's why efforts 
need to move forward now to strengthen the program for today's 
retirees to make sure it will still be around for today's 
workers and their children when they begin their own 
retirements in the future.
    Senator, it was 67 years ago this month that Congress first 
enacted the Social Security retirement program. It was a time 
when one might hear Fibber McGee and Molly, or Amos and Andy, 
or Kate Smith on the radio, but it was also a time when, as 
President Roosevelt noted in his 1937 inaugural address, one 
could see one-third of the Nation ill-housed, ill-clad, and 
ill-nourished. It was a time when Americans needed the 
assurance that they would not spend the last years of their 
lives in poverty.
    Oddly enough, the United States was the last of the Western 
nations to establish an old-age pension program. Its operation 
was relatively simple. Workers would pay a small tax at that 
time, it was no more than $30 per year and that would be 
matched by their employer. When it came time for them to 
retire, the workers could depend on a government pension that 
would be there for them until they died. Interestly, the 
program could have been funded by general revenues, but 
President Roosevelt insisted that the payroll tax be included 
from the beginning to give Americans a sense of ownership in 
the program. His actual words were: We put the payroll tax in 
so that no damn politician could ever change the program.
    Since 1935, the program has kept millions of seniors out of 
poverty, and in doing so it has become one of the most 
successful government programs ever put into operation. Now, 
the government's dirty little secret in 1935 and something that 
most Americans don't know even today is that most of the 
revenues generated from the payroll tax, from FICA taxes, are 
paid out immediately as benefits to current retirees. There are 
no individual Social Security accounts owned by or set aside 
for individuals accumulating cash balances out there somewhere, 
nor have there ever been. The program has never operated that 
way. Social Security has always been a pay-as-you-go system of 
transfer payments, not a true pension system.
    The program operated in this way since 1930's, and as long 
as there were many workers paying taxes to provide benefits to 
a small number of retirees, the program worked well. The 
country has changed dramatically over the last seven decades, 
and the program, the Social Security retirement program, has 
not kept pace.
    In 1935, the technical experts who advised the President 
and Congress on the creation of the retirement program believed 
that the United States population would level off at 150 
million by 1980. They believed life expectancy would stay 
around 64 years of age, as it was in 1935. They believed the 
cost of living would increase slowly over time.
    Just as it would be difficult today to find George Burns or 
Gracie Allen broadcasting live on the radio, it would be 
difficult to find anyone who would tell you our population 
growth has been stagnant. The Census Bureau reports that we are 
currently approaching 290 million Americans. Life expectancy 
for most Americans is near 80, and the fastest-growing age 
group is the over-85 group. Of course, we all know the cost of 
living, particularly costs associated with health care, are 
sometimes more than seniors can bear.
    But these changes didn't happen over night. In 1955, 8.6 
workers paid their FICA taxes, paid their payroll taxes, to 
provide benefits for each retiree, so taxes could remain fairly 
low.
    In 1999, 3.4 workers were needed to provide benefits for 
one retiree. So the payroll tax has continued to increase over 
the years.
    In 2034, the ratio will be two workers for each retiree.
    On the face of it this might not seem very bad, but 
remember for the first several years of the program, a worker 
would never be asked to pay more than $30 in their payroll 
taxes to support the program. As more people retired and fewer 
people entered the work force, maintaining a constant level of 
benefits required the payroll taxes be increased from time to 
time. Today, the average earner has to pay almost $2,000 per 
year, and that's the worker's share only, to support the 
program. Now, adjusting for inflation, $30 in 1935 equals $391 
today. So, clearly, the demands of the program have far 
outpaced inflation.
    The tax burden hits low and moderate income Americans the 
hardest, the very ones FDR most wanted to help, and sadly 
three-quarters of Americans actually pay more in FICA taxes, 
more in payroll taxes, than they do in Federal income tax. Put 
simply, the retirement program has been a success and will 
continue to provide for today's seniors, but for today's 
younger workers it has failed to keep pace with the changes in 
American life. Under current law, unless major tax increases 
and benefit cuts are enacted, benefit payments will outpace 
income from payroll taxes in about 15 years. At that time, the 
system will start becoming dependent on the repayment of 
accumulated IOUs from the Federal Treasury. In a generation, 
the current system will be completely unsustainable.
    This ever-increasing tax burden is one of the main reasons 
various individuals and organizations have sought changes over 
the last decade to strengthen and modernize the program. 
Americans will only stand for so much when their taxes are 
concerned. So to think about the future of Social Security and 
ways to strengthen it, I cite Senator--a letter or actually an 
opinion piece from your former colleagues Bob Kerrey and Warren 
Rudman, former Senators, in the Washington Post from last 
Monday, August 12.
    The Senators said, ``In just 6 years, the baby boomers will 
begin receiving Social Security checks. Then, the number of 
workers whose wages are taxed relative to the number of 
beneficiaries who receive the proceeds of the tax will begin to 
decline sharply. Before Tiger Woods turns 50, they say, the 
number of beneficiaries will grow by at least two-thirds while 
the number of workers will barely budge.
    Doing nothing means deep benefit cuts or steep payroll tax 
increases for future generations, which is why the Social 
Security trustees warn that prompt action is essential.''
    In the past, Congress consistently has proposed raising 
taxes, lowering benefits, or some combination of the two to 
address funding shortfalls. Because we agree that we don't want 
current or near retirees to suffer benefit cuts, we further can 
see that tax increases will only prevent low and moderate 
workers from participating in the American dream. Our options 
are pretty limited. But, as Senators Kerrey and Rudman noted in 
their piece last week, if we do not have the political will to 
solve the Social Security problem now, we can't hope to do so 
when the baby boomers start collecting benefits, not just for 
Social Security, but for Medicare and Medicaid as well.
    The problems facing our health care programs are much more 
daunting than Social Security. These three programs together 
are expected to double as a share of the economy within 30 
years, putting unthinkable pressure on tax rates, the economy, 
and the budget.
    Now, discussions like this one today are the first step to 
finding workable solutions to the problem. Please note that I 
said ``problem'' and not ``crisis'', because, clearly, the 
diminished confidence Americans have for the Social Security 
program is a problem, but the longer we wait to address the 
questions that I've raised here, the closer we come to general 
economic crisis.
    Now, over the last decade, many individuals and 
organizations have begun an effort to strengthen the current 
Social Security retirement program by adding personal 
retirement accounts to the program. More than two dozen 
countries around the world are already doing this with mostly 
positive results, and if Australia, Chile, the United Kingdom, 
Sweden, many of the former Soviet republics and even the 
People's Republic of China are in agreement on this issue, 
perhaps it's something the American people should spend some 
time examining as well.
    I won't go into a lot of detail, we can talk about it 
during the question and answer time, but when we look at the 
three-legged stool that all of us have mentioned, when personal 
savings are at such a low rate, when income from a company 
pension, a 401(k), is not something that all of us share in, 
and again, the average monthly benefit for Social Security 
retiree is $900, we can see that the golden years of retirement 
might turn into years of brass and tin for many Americans.
    If we start letting current workers put a portion of their 
Social Security taxes into personal accounts that they own, we 
can expect markedly positive results over a person's working 
lifetime. Such accounts, by the way, made up of a mixed 
portfolio of half stocks and half super-safe government bonds, 
earn an average of 5 percent per year. Even Series I U.S. 
savings bonds earn 3.4 percent after inflation. That's far 
better than what the current Social Security program pays, as a 
matter of fact. Wealthy Americans earn this kind of return 
every day, and it's time we let workers of all income levels 
share in this.
    I'd say two things by way of closure, Senator: Many will 
tell you that the addition of optional personal retirement 
accounts to the program is a risky scheme, that most Americans 
aren't smart enough to manage their own accounts, or that an 
economic downturn will hurt low and moderate income Americans 
hardest.
    Some will say that there's nothing wrong with a Social 
Security retirement program that a good tax increase won't fix.
    I disagree. It's easy to scare senior citizens by telling 
them that efforts to strengthen Social Security could reduce 
their benefits. It's equally easy to cause panic among 
Americans by playing on their fears, especially during economic 
times like we're facing right now. But if we tell Americans the 
truth, I believe they will recognize it and figure things out 
for themselves.
    Finally, there have been any number of polls over the last 
many years that have tested the public's willingness to look at 
optional personal retirement plans. One of the most recent 
polls was taken, actually, it was released July 29, less than a 
month ago, by the Cato Institute back in Washington. It shows 
that even with a downturn in the stock market and its corporate 
accounting scandals, 68 percent of likely voters continue to 
support allowing workers to invest a portion of their Social 
Security taxes in personal retirement accounts. The survey's 
findings were particularly revealing because the poll was 
conducted during a week when the Dow Jones stock index dropped 
almost 700 points.
    Apparently, retirement accounts are not a panacea, but they 
offer the promise of financial security to millions of 
Americans who currently have no hope of retiring to any level 
of comfort. They are accounts controlled by the individual, 
owned by the individual, and upon reaching retirement, that 
individual will have more to show for a lifetime of work than 
$900 a month.
    The current Social Security retirement program promises a 
basic level of support. Building on this program, personal 
retirement accounts will give workers the option of doing a 
little bit better and perhaps go farther in giving them the 
kind of assistance that FDR hoped for back in 1935.
    Thank you, Senator. I'd be happy to take questions at your 
leisure.
    Senator Craig. James, thank you very much for those 
observations and your experience over the years working with 
Congress on a piece of public policy that is near and dear to 
everyone, our Social Security system. Ladies and gentlemen, I 
would ask a few questions and then I want to open it up for you 
to have the opportunity to ask questions of me and/or the 
panelists before we adjourn here, because I think that's an 
important part of this kind of dialog as we begin to, I hope as 
a country, focus more attention on retirement needs and plans.
    Let me ask this generic question of all of you witnesses: 
With your experience and the work you've done, if I ask you 
what would be the single most important piece of advice you 
would offer of those in the audience today, what might it be?
    Mr. Hamilton. I think you said it very well in your opening 
remarks: It's never too late to start saving.
    Senator Craig. OK.
    Mr. Dorn. That's an absolute truism. I think it's 
relatively obvious to everybody that that needs to be done.
    I will, if I might, Senator, follow that up with an axiom 
of economics, and it says that you will get more of what is 
subsidized and you will get less of what is taxed.
    Senator Craig. All right. I think I understand that 
message.
    Mr. Winkle. I would agree also. It's to start saving now. I 
think with the Federal Government advances, there are many 
vehicles available to almost anyone, so tax-deferred savings is 
available in some form, be it a SEP, be it an IRA, be it 
something. So people can do something now.
    Second, I would add to that educate yourself. Be a planner. 
It's not necessarily that people need to be an investment guru 
to enter the market. There are a lot of index funds out there, 
very simple, very easy to get into. But educate yourself as a 
planner. Be your own best retirement planner.
    Senator Craig. OK. Keep the mike, if you will, Alan. Let me 
ask this question of you: As you mentioned, public sector 
retirement plans are different from ERISA type plans, and for a 
good reason. Much of the legislation now being considered in 
Congress is inspired by a need to respond to problems that have 
appeared in the private sector plans, but it's unclear how much 
distinction will be drawn between public and private sector 
plans as these bills move forward. How much of a concern should 
this be to Congress?
    Mr. Winkle. Thank you, Senator. Yes, this is of great 
concern as a pension administrator to us, and I believe it 
should be to the Congress.
    First, public pension plans don't hold their own company 
stock by nature. They can't go bankrupt as has been experienced 
in the private sector.
    Second, I think State and local plans are developed, 
they're monitored in an open, public environment. Unlike the 
private pension plans who are solely regulated by the Federal 
Government, public pensions are an array of State and local 
laws that really provide rigorous regulation, public 
accountability, and I think strong protections for the 
participants.
    Last, I think the public plans are crafted around unique 
needs of the members, the taxpayers, and the sponsoring units, 
which are much closer to local issues than the Federal 
Government.
    Therefore, I guess I encourage the Congress and 
particularly the Senate as they look at these protections they 
are adding, that really public plans are different, have 
different levels of protections already, and are responding to 
a different constituent group than private plans. We would 
request that the manager's agreement that is resulting from the 
Enron legislation, Senate bill 1971 and 1992, apply only to 
ERISA plans and not to the public plans.
    Senator Craig. OK. Appreciate that.
    Doug, you mentioned several reasons why you believe the use 
of defined benefit plans has declined, so let me ask a couple 
of questions off of that comment.
    Are there government disincentives to use defined benefit 
plans that could be reduced?
    Mr. Dorn. Yes, sir.
    Senator Craig. And they might be?
    Mr. Dorn. I think you would categorize as hassle factor.
    Senator Craig. Yes.
    Mr. Dorn. But it is a hassle factor.
    Senator Craig. Single greatest problem?
    Mr. Dorn. I think reporting, the form 5500's. They're 
redundant, they're expensive to prepare.
    Senator Craig. OK. Over the past 20 years employer health 
insurance spending as a share of total benefit spending has 
gone from 27 percent to 42 percent.
    Is the rise in cost of health care another possible reason 
why employers might be more likely to provide what they believe 
is a lower-cost defined contribution plan rather than a defined 
benefit plan?
    Mr. Dorn. I believe that that does come into play.
    Senator Craig. Yes.
    Mr. Dorn. There is one very, very large problem which was 
pointed out to me by an actuary that I've known for years the 
other day. Take a person who is 10 years from retirement and 
they have a retirement health care plan. One of the provisions 
is you have to retire before you're eligible for that plan, and 
this person gets sick and this person has a disease that 
requires constant care, and expensive medication. That person 
has only one choice, and that is to stay in that job. So for 10 
years that person sits there and warms the chair, is probably 
unhappy in their job, which isn't good for them and is not a 
very useful and productive employee for the employer, but he 
has no choice so he sits there. That is an item that really 
should be addressed because it hurts everybody all the way 
around.
    Senator Craig. Good advice. Probably spells for fairly high 
degrees of nonproductivity.
    Mr. Dorn. I would expect very, very high.
    Senator Craig. Do you have any other recommendations for 
encouraging employers to offer both let's say defined benefit 
and defined contribution retirement plans?
    Mr. Dorn. Well, now, here's the libertarian in me that's 
going to come out.
    Senator Craig. I knew it was there somewhere, Doug.
    Mr. Dorn. Yes. I think there's a certain amount of 
responsibility we all have to take for ourselves, but as I not 
jokingly suggested to you that when you subsidize, you get more 
out of it; what you get taxed, it's less.
    It's very, very difficult. I'm 63, I'm retired, but I don't 
take Social Security because if I earn any money, I have to 
give it all back. What kind of deal is that? I worked hard to 
get this benefit and I want it, but you're penalizing me if I 
do something constructive. So that's a bad issue.
    But in terms of the retirement itself, when one asks 
themselves why, if you're an employer and I was the chairman of 
the board of my company for 22 years, so I know, I've been 
there. I have people that come to me and they say, I have 
skills and I want to come to work for you; and we settle on a 
salary level, but to that salary level I have to add 30 percent 
because that's the cost of providing benefits; whereas I, if I, 
being self-employed now, I earn any money, I get to give the 
government 15 percent right off the top in employment taxes 
even though I no sooner withdraw it. So that's just 
inequitable.
    The libertarian in me says why should employers have to 
provide retirement benefits? Why should they be providing 
health care benefits when their primary notion is to have a 
productive worker and have them produce a widget and pay them 
for their production of the widget?
    Give them a paycheck and then say, Take care of yourself. I 
don't mean that in a harsh way, Take care of yourself. If you 
have the money and the tax system is such that you are able to 
do that, you will take care of yourself.
    If you take the little model, take the dentist down on the 
corner. If he gets out of dental school and decides that he 
wants to be a sole practitioner, he's subject to one set of 
rules that say how much he can set aside for retirement. If 
he's in a partnership, it's a different set at a different 
level. If he chooses to be an S corporation, that's a different 
level. A C corporation, that's a different level. They all come 
under different rules. So what you end up doing is you end up 
organizing your own professional activity around a tax code so 
that you can fund a retirement benefit, all at different 
levels. To me, that makes no sense. An individual is an 
individual.
    Who does it matter who he works for as to how much he ought 
to be able to put away for retirement? That should be 
simplified.
    Senator Craig. Point's well made. Of course as James knows, 
once the government does something and health care benefits is 
a product of World War II, and benefits with frozen wages and 
all that began to grow out of that, we have constituencies 
built and it's very difficult to begin to backtrack from those 
until you're at near crisis and the public senses that a need 
is necessary.
    James, a couple of questions of you: I'm pleased that we 
agree that for today's seniors and those near retirement, 
nothing in the Social Security system will change, nor does it 
need to change.
    You know, in this case, promises made to these hard-working 
Americans and Idahoans is being kept and will be kept, and I am 
one of those that says to a certain age group and when I am 
asked these questions, I say, How old are you?
    And then they tell me.
    I say, OK, the check's in the mail. If they're younger than 
that age, I say, Well, let's talk about it. Maybe we have a 
concern here.
    What I hear you saying is today's younger workers need to 
be given the option of changing some of how they will 
participate in Social Security. Do I hear you right?
    Mr. Hamilton. Yes, sir. That is correct. It's something 
that for most Americans 40 and under, 45 and under--I choose 45 
to hesitate. As I get closer to my 40th birthday, I'm more 
mindful of saying 45.
    Senator Craig. Right.
    Mr. Hamilton. But there's something that I believe. There 
was a poll that was done a few years ago that asked workers 45 
and older if they had the opportunity to get back, to give up, 
just give up all claim to all of their Social Security 
retirement benefits but then had the opportunity to start 
paying into a personal retirement account, would they do it, 
and the majority said, ``Yes.''
    Folks that are in the tail end of the baby boom as I am, 
and the Generation X and Generation Y and whatever the next 
generation is going to be called, we need the opportunity to do 
a little bit better. The rate of return for me on what I will 
pay in during my working lifetime, Social Security retirement, 
is negative point six, and the younger person is the worse that 
rate of return is going to be. But again, I'd stress that that 
should never have anything to do with current retirees.
    My parents in their late 1970's are very dependent, 
actually as most seniors are, on their Social Security.
    Senator Craig. Getting a phenomenal return on their 
investment.
    Mr. Hamilton. Absolutely.
    Senator Craig. When we're talking about Social Security 
survivor benefits are a safety for the poor and we discuss a 
future program, how do we, in your mind, shape those out?
    Mr. Hamilton. There are certainly financial concerns about 
the long-term sustainability of survivors' benefits and 
disability benefits and so on, but the current debate actually 
is not about those at all. In none of the legislation that has 
been introduced over the last several years, none of the 
legislation that has been introduced in this Congress would 
touch the disability or survivors' programs or any of the other 
Social Security programs.
    So a lot of opponents of personal retirement accounts say 
that the personal retirements accounts would cut into that. 
It's just not the case.
    Senator Craig. Uh-huh. Uh-huh. Other expressions I've heard 
in the last good number of months of course with the focus 
we've had post-9/11 and the amount of money spent by Congress 
on, if you will, antiterrorism or terrorist-related activities 
and the cost of those and the deficit that is emerging out of 
that, do you have any express concern about Social Security and 
Social Security benefits?
    Mr. Hamilton. None. The Federal Government will continue 
paying the Social Security benefits that are promised. It's 
something that it would be better for the United States, for 
all of us, if we can get back into a situation where we're 
balancing the budget and running surpluses.
    I point out in conversation that I am a Democrat, but I'm a 
Jeffersonian Democrat.
    Senator Craig. That's why you're here.
    Mr. Hamilton. That's why I'm still here.
    Senator Craig. Not true.
    Mr. Hamilton. But it's something that I feel very strongly, 
that fiscal responsibility is our first responsibility.
    Senator Craig. Thank you. Well, I think all of us are 
frustrated at this moment and I think what you will see next 
year coming out of a new Congress, no matter who's at the helm 
of both Houses, is a redirection in spending because of what's 
happened and the economy and the post-9/11 activities.
    Ladies and gentlemen, let me turn to you now for the 
balance of our time together, and you can make a comment if you 
wish but I would trust you would keep it brief; but most 
importantly, if you have questions of myself or these three 
panelists, I think the auditorium is such that we can all be 
heard reasonably well, but please speak up. I would appreciate 
it if you would state your name and your comment and/or 
question. Thanks. We have a mobile mike.
    Thank you. Please.
    A Voice. Thank you, Senator. I appreciate your holding 
these. My compliments to Mr. Winkle and PERSI. My wife is a 
member and it's a very good plan. I appreciated Mr. Dorn's 
comments and Mr. Hamilton's comments.
    I have a comment: I had a decision, and thanks to Congress, 
they helped me make that decision a couple of years ago when 
they took away the penalty for retiring and drawing Social 
Security. I'm taxed on my Social Security, but I don't lose 50 
cents on the dollar. I think that was a good move on the part 
of Congress and the President to sign that into law, because 
now as a consequence, I not only draw Social Security, but I 
also pay in to it.
    Senator Craig. Pay in to it, that's right.
    A Voice. So as our Nation gets older, our health is much 
better at this age than our forbearers were, and I think you'll 
see more people continue to work, which will contribute back 
into that Social Security system.
    I guess my real concern, Senator, is the corruption that 
we've seen with corporations and it's now coming to light. Is 
it possible that that could also extend into the pension plans?
    As an example, I'm a retiree of U S WEST which is now 
Qwest, and I don't know how they were able to do this, but they 
took $100 million from the pension plan last year and put it 
over somehow into their bottom line. Maybe Arthur Andersen was 
their accountant, I don't know.
    But I guess the question I have, Senator, is as you look 
into cleaning up and making accountable those who are 
responsible for the corporations, are you going to also get 
involved at all with the pension plans and so forth to make 
sure that those can't be corrupted as we've seen happen with 
Enron and WorldCom, et cetera, et cetera? That's my question.
    Senator Craig. Let me turn to my professionals here to 
react to that. I will make this comment, and I think it's 
reflective of the concern you might have: Depending on the 
companies that have the bad actors--we've got about 16,000 
registered, publicly held companies with the SEC--my guess is 
you're going to be able to count on maybe both hands and your 
toes the bad actors. The rest of them are working pretty hard 
to do things right, and I think that's going to prove out.
    But about 3 months ago I was at a gathering of energy 
groups in California. I went down to speak to all of the energy 
producers in California, and there were three Enron 
subsidiaries at that table, still openly functioning, 
profitable, cash-flowing companies, and were still doing so. 
They were under the umbrella of bankruptcy and openly thinking 
they would be spun off in time. They did make one comment and 
maybe you all can react to it better than I because I'm not an 
expert in this area at all. I said, You're an Enron subsidiary. 
How are you doing?
    They said, Well, frankly, we're doing very well.
    We've got to where we're still producing power, we're still 
collecting bills, we've got a cash-flow. Our problem was that 
when we went under the Enron umbrella, we became part of their 
financial structure, they sucked our retirement systems and all 
of that, so we have employees without retirement systems, and 
that's what we've got to get back and that's where you could 
probably help us, Senator, so on, so on, so on.
    Now, that alarmed me some, but it was part of that 
financial rearranging that Enron leveraged and/or played with 
and/or mismanaged.
    Reaction, gentlemen, and what is your understanding of the 
question?
    Mr. Dorn. Well, to specifically answer your question, I'll 
start this out. ERISA's full of regulations that protect you 
when you're backed up by the Pension Benefit Guarantee 
Corporation for which you will be guaranteed a minimum benefit. 
Now, unless you're a very, very highly compensated person 
within the company, more than likely your benefit is covered by 
the PBGC, so personally you probably ought not worry about 
that.
    There is the big question that's going on in terms of 
earnings that are from pension fund returns, and this is being 
discussed. This is an extraordinarily complicated accounting 
factor, but there is opportunity to play shell games 
particularly when you get acquisitions and mergers, because you 
get an asset-rich company and really they buy the company for 
the pension fund assets, which they can then take back out 
again.
    Senator Craig. OK.
    Mr. Dorn. This is extremely complicated, but within ERISA 
the rules are very strong, and be mindful that ERISA created a 
new level of fiduciary responsibility, and that responsibility 
does not stop at the corporate veil for the directors and the 
officers.
    It goes right through to the picture hanging over the 
fireplace in their living room. So that has a lot of teeth in 
it. You can play the Enron games, that's one thing. You start 
playing with a pension fund, that's a different set of rules. 
But that certainly is something that we need to look and see 
what the experience over the last 28 years has been.
    Now, I would suggest to you that for a person who wants to 
play a game and create a big liability, an unfunded pension 
liability in their company even though they know they're going 
bankrupt, then bankrupt the company, they put that pension 
liability to the PBGC.
    I look at Jones and Laughlin Steel and there's a whole list 
of them that it's almost bankrupted, and that is an accounting 
practice that's come out where you have that option as an 
employer, and it seems to me that the fairness of that is up to 
question.
    Senator Craig. Any other comment to that question?
    Mr. Winkle. Just a quick, Senator. I think we're seeing 
several areas. Disclosure is one of the primary areas where the 
new legislation that you're considering is coming out, far more 
disclosure on pension fund benefits, funding, and all of that. 
I would highly recommend that.
    Second, the separation of the pension fund and the 
fiduciary responsibility to the members from the corporate 
bottom line, and that is coming through a different mode of 
accounting practices and those are being approved also.
    So I think those types of things are very heartening but 
they're being addressed, and hopefully we'll see some of those 
come through that will protect the assets much better, and as I 
said before, hopefully the openness can be modeled somewhat 
after the public sector.
    Senator Craig. Another comment, Doug?
    Mr. Dorn. Yes, sir. I've been aware of a circumstance when 
you have a defined benefit pension plan in the corporation, the 
ultimate fiduciaries are the pension committee of the board.
    There's been a lot of discussion lately about outside 
directors, being a majority of the board versus a minority of 
the board. I would think that if one were to loosen up some of 
the onerous features of running a defined benefit pension plan 
and make it easier to run, the tradeoff may be that you have 
the pension committee which is dominated by outside people. If 
you have that, outside people on the pension committee, then 
these games can't get played, but typically those people are 
inside people. Would be a good tradeoff.
    Senator Craig. Further questions? Yes, sir.
    A Voice. Yes, I have a question.
    Senator Craig. Just a moment. Let's go here and then we'll 
come to you. Go right ahead, sir.
    Mr. Mentzer. Do I stand?
    Senator Craig. Don't need to.
    Mr. Mentzer. My name is Terry Mentzer and I'll get my first 
Social Security check on September 11, and unlike Doug Dorn, 
why, I will be able to keep it all, so I have a couple of just 
real quick comments to make.
    I instinctively recoil against allowing Social Security 
trust funds to be invested in the stock market, particularly 
when the P/E ratios of both the Dow and the NASDAQ remain at 
almost twice historic levels. Just seems like that's a one-way 
path down the toilet.
    Second is that I would encourage the government to try to 
find ways to stop raiding Social Security trust funds.
    Third, Alan Winkle's comment about teaching kids to be wise 
consumers ought to be a major national priority. All you have 
to do is watch TV and see More Furniture For Less and Nexium 
ads and just tidal waves of this stuff. They're marketing to 
morons with money, and I find it offensive that, as Americans, 
we even tolerate that. I wish there was some rating system to 
get people to look at savings and put their money into other 
things, rather than responding to these type of temptations.
    My last comment would be to Senator Craig: You could run 
for president and win, I think, if you would introduce 
legislation to require all Federal telephones to be answered by 
a live human being. [Laughter and applause.]
    Senator Craig. Before I turn to James, who's our authority 
on Social Security, I will do that if we will demand that all 
private corporate telephones be answered by a live person too.
    Mr. Mentzer. Yes.
    Senator Craig. I hate running through the system to get to 
a computer, only to get to a computer.
    James, respond to those concerns about Social Security if 
you would, please.
    Mr. Hamilton. The trust funds are--it's such a 
controversial topic, it really is.
    First of all, there are a lot of organizations out there 
all across the political spectrum--liberal, conservative, 
whatever--that will game the system, trying to scare people 
that trust funds are being raided and that if you will send us 
money, we will fight that.
    The thing is that since 1935 and you can go back and read 
the original legislation, the law requires surplus funds to be 
invested in special government treasury bonds. What that, in 
essence, is, it's an accounting tool to keep track of the 
money. I'm not an accountant, I don't follow the funds very 
closely that way, but the bottom line is that last year, for 
example, sir, the Social Security program ran $140 billion 
surplus. More payroll taxes came in than were paid out.
    Something has to be done with the funds, and it is 
basically credited to the Social Security trust funds and that 
money is used for other purposes, and----
    Senator Craig. Within government.
    Mr. Hamilton. Within government, thank you, Senator. There 
are bonds that are literally printed out saying that the Social 
Security trust funds are owed X number of billion dollars, and 
I've seen pictures of the bonds that are printed out. It is 
something where that the full faith and credit of the Federal 
Government is back there to pay back those funds.
    Now, is that the best way of handling it? I personally 
don't think so, but that's the way the law was written in 1935, 
and it's been that way ever since.
    Now, as far as investing the trust funds in the stock 
market, such as that, oddly enough, in the last Presidential 
election there was some talk about this very thing and actually 
the idea has been circulated for quite some time, and right 
now, none of the legislation that has made any headway would do 
that at all. It would be a matter of your personal retirement 
account being managed much like a 401(k) or an IRA where you're 
not playing, by the way, you're not playing the stock market. 
You're not day trading, sitting at your computer with your 
personal retirement account, which is another concern that you 
didn't raise but I think it's important to stress that, that it 
would be managed by professional managers of Fidelity or Smith 
Barney or whomever. That would not be something that I'd be 
sitting at my computer back home, seeing what the stock market 
did that day, and do I need to move my funds real quickly.
    I don't know if I addressed all your questions there or 
not, sir.
    Senator Craig. One of the design concepts that's being 
talked about now for plugging in at, say, 45 years and younger 
if we were to reshape the Social Security system is not unlike 
what we do with Federal retirement systems: While you have a 
personally named account, it's yours, and a certain percentage 
of your income or, taxes in this instance, would go into it. It 
would then be invested by a team, if you will, a professional 
board of mixed and diverse talents, into categories. It could 
be a high-risk category which would be predominantly stocks; it 
could be a medium-risk category which would be a blend of let's 
say government instruments and CDs and some stocks; or it would 
be a very conservative category which would be all CDs or 
government bonds. At least the experience in the Federal 
retirement system is that that not only is good and has 
security, but you get a much higher rate of return.
    Now, only a piece of that would be--you wouldn't be playing 
it, but you would have times in which you could say, I want to 
move categories, into different categories. To the guy that 
played it conservative all the years until a few years ago when 
I put half of it into a more vulnerable market, I've lost a 
little money out of my 401(k) program within the Federal system 
over the last year, but it's also a long-term annuity, if you 
will, and you can't look at it for a short-term.
    Historically, the other advantage to that that we're 
talking about, if you are 60 years of age and you die, that's 
it. All that money you put into Social Security is gone. You 
can't retrieve it for your wife or for your children. It was 
not an asset. But, in time out there, 30, 50, 60 years down the 
line as we work our way into a system with the kinds that are 
being looked at today, it, in fact, would be your asset, and if 
you die at 60, it becomes a part of your estate which is then 
available to your heirs.
    So that's another concept that we're looking at, and so 
there are a variety of areas, but again, it's not standing now 
and saying we're going to do it tomorrow.
    It's literally standing on a peak and looking down the road 
30 years and saying what is, by far, the better approach.
    Last, let me also say when I became your representative and 
now your senator and started dealing with the Social Security 
issue, and I literally went out and read the law and 
backtracked and studied it to try to respond to the numerous 
questions asked about Social Security, I must tell you this: I 
have always been constantly surprised at what the public's 
perception is of Social Security and what, in reality, it 
really is by law and by character. Most all of that perception 
has been driven by special interest groups over decades of time 
that have been out there for a purpose of either trying to 
guard the system and/or play the emotion to make money for 
their own incomes and to sustain their own interests. I've 
always been amazed.
    Enough said. Question here.
    A Voice. You asked what's the most important item for the 
panel, and I would say vote Republican in the form of 
Congressman Ron Paul.
    Senator Craig. I don't think Ron Paul's a Republican.
    A Voice. He is.
    Senator Craig. No, I know. I'm teasing you. I think he's a 
libertarian. Now, Dorn might vote for him.
    A Voice. Now listen, there's a Supreme Court ruling within 
the last 15 years or so that stated that the FICA taxpayer for 
Social Security has no legal right to that money at all, none 
whatsoever. It's been a slush fund, as you know, for 45 years, 
and it's been used any way they want; and when they need more 
money, they either tax or monetize the whole system to give us 
funny money.
    I think with regard to retirement, I have a good example 
that I had myself. I retired from a successful surgical 
practice in Fidels County, FL, about 7 or 8 years ago, but I 
took my retirement benefits when I was only 50 years old. There 
was a provision in the tax code which waived 10 percent 
premature distribution penalty if you had in your ERISA plan an 
amount in excess of a certain amount--it was about seven or 
eight hundred thousand, $700,000--and thanks to President 
Reagan, I then paid my maximum tax of 28 percent.
    The point I'm trying to make is that it's all right to 
save, but you don't know what kind of a tax hit you're going to 
get when you save. You have to have some predictability of what 
you're going to have to pay the Federal Government when you 
finally take your benefit. I was able to take a large lump sum 
distribution at 28 percent. If I were to do the exact same 
thing today, I would pay more than double that amount. I'd be 
paying--when Jimmy Carter left office, it was 71 percent I 
would have had to pay just at the time Jimmy Carter left 
office.
    When Ronald Reagan left office, I paid 28 percent. So we've 
got a difference of 71 percent on my lump sum distribution, all 
the way down in 1989 to 28 percent. I tell you, that's a big 
difference.
    Senator Craig. Right. Your question?
    A Voice. Properly invested, it was able to allow me to 
retire early.
    The question is why don't we put some kind of a cap on the 
tax that can be hit on Social Security to provide an incentive 
for people to put more money either in Social Security or in 
their retirement benefits? If you know at the end of the tunnel 
you're going to pay, say, 10 percent or 15 percent or some 
solid amount, say, on your retirement benefit, whether it's an 
ERISA, a 401, or whatever, if you know there's a cap on it, it 
will provide you the incentive to save. What good does it do to 
save if you have to pay 71 percent?
    Senator Craig. Let me respond to your question, and then 
because I want to pick up a couple of more and we're running 
out of time here.
    We could do that.
    A Voice. The other thing you see----
    Senator Craig. No. Let me answer your question. I'm sorry. 
We've got a time factor here.
    We could put a cap on, and it would be good for just the 
length of that Congress and just that vote. Taxes are 
statements of law, and what one Congress does another Congress 
can change immediately with a 50-plus-one vote at the House 
and/or the Senate.
    Now, what we hope we can do and what we should be doing as 
it relates to taxes that relate to your retirement or anyone's 
retirement, we ought to create stability in those so that you 
can plan against them or plan with them, if you will. Obviously 
you were fortunate enough, you recognized it, you made a 
judgment call and did what you did at the time, clearly to your 
benefit, and those taxes since that time have obviously crept 
upward again. But that is, in fact, the reality of what we deal 
with.
    Folks like permanency when they're planning and look 
outwards at mileposts in which they make judgment calls against 
to direct their income and/or their investments. While we 
strive for that, look what we did June before last when we 
passed the tax package. It's not permanent; it's, by 
definition, temporary. So as to say that, instead of making it 
permanent, we always view a tax law as a permanent law until 
changed, even if it's changed next year, and we create I think 
instability or indecision as it relates to those kinds of 
investment reactions. But, again, I never prejudge a future 
Congress, because they always change and attitudes change.
    Yes.
    A Voice. Senator, Craig Naylor.
    Senator Craig. I think it was on. Was it? OK.
    A Voice. As a member of the Idaho Financial Literacy 
Coalition, I'd just like to make a real brief comment in that 
any strategies or, you know, expected outcomes that we would 
like to see with respect to retirement goes back to the ability 
for each and every one of us to make our own decisions and to 
be financially literate.
    I think that whatever we think about, that we need to go 
back on a comment that was made earlier, that we start 
educating our young people in our schools about the processes 
of, you know, whether it's retirement, whether it's credit 
management, whether it's home buying process, to enable them to 
have the tools to be able to make decisions. I would venture to 
guess that the majority of us in this room today never had that 
kind of training, and the best place to do it is in our 
schools, and if we started there, then it will enable us to 
make decisions that we can go ahead and secure our future.
    But as you know, the Financial Literacy Coalition of Idaho 
is one of the most active in the country in terms of offering 
this kind of training, and we work hard with the State 
education system to embed this and continue to grow it in our 
school system. I think it's vital.
    Senator Craig. I so much agree, and of course while we can 
promote it at the Federal level, it really is a State 
initiative that needs to be addressed because education is, 
without a doubt, critical here.
    Another question, and I'm afraid time wise we're going to 
have to make this our last question. Yes. Ms. Seitz-Hart. Mary 
Ann Seitz-Hart.
    Senator Craig. Yes, please.
    Ms. Seitz-Hart. I'm representing myself today and glad to 
be here, and it's a struggle for me to be here. I've done a lot 
of work around my anger, and one of the things that I want to 
say is once again I notice the panel is all the same sex and 
pretty much not from the far end of the spectrum.
    Thank God, I have spent time in aging, 14 to 17 years as a 
professional, and did preretirement planning, or I don't know 
where I'd be today.
    One of the things that I'd want to say is does the idea 
that retirement is more than about money ever come up in these 
discussions? I'm delighted today to hear of the emphasis on 
education, but I would say one more time the chief educators 
are parents, and I don't know why either, but I forced my kids 
to learn about how the household ran so they'd be ready for 
life. I having spent time in aging, I believe I'm ready for 
retirement but not about money: Because I spent time with 
people who had a life experience and we had a process of 
sharing that with younger people which has been squelched in 
the name of insurance, which I believe is an industry based in 
fear.
    I also have strong feelings about health care is really 
illness management.
    Senator Craig. Sure.
    Ms. Seitz-Hart. I have seen people who are connected to 
their benefits stay in their jobs become very sick.
    Senator Craig. Let me respond to your question if I can, 
and the panel certainly can. Certainly retirement is not all 
about money, but if you are without money in retirement, it 
becomes all about money. You do have to feed yourself, you do 
have to clothe yourself, and most people like to provide their 
own shelter. Most assuredly, retirement is more about money 
depending upon the individual's dreams, choices, wishes, and 
aspirations, but that's really within the mind of the 
individual and what they wish to achieve with themselves. I'm 
not sure that we can instruct that through public policy.
    Public law is to create safeguards and hopefully some 
direction as it relates to investment within both the private 
and public pension arenas, but beyond that, I'm not quite sure 
that I want to craft public policy that talks about dreams and 
aspirations. I think that's really within the mind of the 
individual, and certainly we all have different ones.
    Health care, different story. We ought to be advocates of 
holistic approaches to health care and looking at wellness 
versus repairing broken parts, and I think health care is 
moving us in that direction, and public policy can be a part of 
that and should be.
    That's how I would react. Would anyone else wish to make 
comment on that?
    Mr. Hamilton. I'll make it very quickly.
    I'm pinch-hitting today in that another panelist that 
actually wanted to be here, Leanne Abdnor, who was a member of 
the President's Commission to Strengthen Social Security, and a 
leading spokesperson on women and retirement. I would say that 
I cannot be an expert as a woman, but I can certainly talk to 
the issue of women's issues regarding Social Security and that 
aspect of retirement security, and there are very special 
issues there.
    Among them are survivors benefits. Women tend to live 
longer than men, and as a result, the quality of life issues--
and it does come back to are you able to have enough money to 
provide health care. Are you able to not eat cat food. We 
always talk about that, but we talk about cat food because 
people have had to turn to that at different points, not 
everyone by any means, but it's something that is of grave 
concern.
    The Social Security retirement program largely has lifted 
more women out of poverty than men, largely because more women 
live to reach retirement, live to retirement age.
    So there are a whole host of the special issues, you're 
exactly right, ma'am, but I know if Leanne were here today, she 
would be able to maybe speak a little bit more knowledgeably 
perhaps, but there are a lot of concerns that need to be 
addressed and I think we could certainly speak to that if you 
would like afterwards.
    Senator Craig. Please, anyone else?
    Mr. Dorn. Oh, I just briefly, and I don't mean to be 
sarcastic at all but we're speaking of cat food, and that comes 
from Dr. Maslow's theory of hierarchy of needs; and I suspect 
if you're sitting in a tent eating cat food, self-actualization 
is really not high on your order of thinking.
    Senator Craig. We did hold a hearing and we will pursue the 
concepts that you're talking about in general. We held a 
hearing on women and women's retirement and women's retirement 
capability. I chaired that hearing a couple of months ago. We 
have a pamphlet out on it. We'll continue to pursue that as a 
part of the overall aspect of pensions.
    Last question, gentleman up there, and then we must close 
it out. Yes, sir.
    Mr. Arden. Thank you. I'm Jim Arden from Eagle, ID, and 
I've been retired for 10 years comfortably and I welcome all 
the information you have given us, but it's not new. I've heard 
this stuff years ago. My question is this: When are we going to 
start doing something about it instead of just talking about 
it?
    Example, one final thing, is that I, 25 years ago, offered 
myself to the Boise School Board and the Meridian School Board 
to give free presentations of education on finances, insurance, 
everything. Guess what? They refused and they have never asked 
me to come by.
    Thank you.
    Senator Craig. Well, I thank you, and pursue them again. 
Maybe school boards of today are listening.
    Mr. Arden. I'm retired now.
    Senator Craig. Oh, all right. Then you would have more time 
to do it. No, most retirement people are more busy.
    Mr. Arden. I have no time.
    Senator Craig. That's what I thought you were going to say. 
That's what every retired person tells me. All of a sudden, 
their times are now consumed in more ways than they realize.
    What we do here today really is threshold in the sense of 
trying to open up a dialog. Is the information new? No, it 
isn't new. Fundamental principles don't necessarily change. 
Honesty, transparency, openness, that's always been a part of 
good investing, and knowing what you're investing in, so that 
hasn't changed. Clearly, Congress's role in it in the immediate 
has changed some and public policy will sharpen a good deal, 
but as it relates as Doug had mentioned to ERISA laws, there's 
been a substantial protocol there and a legalness to it, and 
defined rules and regulations for a good, long while.
    But I do believe what is important, and the reason that 
this has stimulated me is based on a variety of premises, but 
one dominant one: There are 50 thousand plus 100-year-old 
citizens in our country today. By the end of this century, 
based on current health trends, there could be as many as five 
million. Now, if that's true, then our current public 
institutions that relate to retirement and annuities are 
woefully underprogrammed and undershaped and misdirected. That 
will be true of health care, it will be true of private plans 
also.
    Most people currently are outliving their retirement 
expectations, and this is just the beginning.
    So while some of you may have heard nothing new, the one 
thing that you should hear is that you're probably going to 
live a good deal longer than your parents, and your children 
are probably going to live longer than you; and if you have 
parents that live to be 100 years old and you've taken care of 
your health, then you may well live to be 110 or whatever.
    My point is quite simply this: It is time to once again as 
a public revisit the realities of the demographics of the aging 
processes in America and the institutions that support it, the 
institutions that help it, and most importantly, the private 
side of it that makes for that time on this earth a little 
better, at least from a financial point of view and hopefully 
from a personal perspective and a social point of view.
    Gentlemen, let me thank you, all of you, for your time with 
us, for your willingness to go to Washington and listen and 
participate and contribute. James, thanks for coming out.
    Mr. Hamilton. Thank you, sir.
    Senator Craig. We truly appreciate it to all of you. Thank 
you.
    I will, and as will others, continue to pursue this area 
for the next long while, because we do think it is tremendously 
important. Whether it is simply the educational part or 
something that we might produce that sets you to thinking about 
your own pattern of activity and what you might do to improve 
your life and your life style, then it's been successful.
    Let me thank my staff of the Aging Committee and those that 
work with us in shaping these. We'll do, as we mentioned in my 
opening statement, a series of these kinds of hearing and 
informational gathering sessions across the State. They will 
become a part of our public record in Washington as we move 
toward in the out years reform of the Social Security system, 
and as we look at all other avenues that public policy involves 
itself in as it shapes pensions and retirement plans.
    Thank you all for coming out this morning. I appreciate it.
    This hearing will stand adjourned.
    [Whereupon, at 11:48 a.m., the committee was adjourned.]

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