[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]





                   RETIREMENT SECURITY: WHAT SENIORS
                     NEED TO KNOW ABOUT PROTECTING
                             THEIR FUTURES

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                    CAPITAL MARKETS, INSURANCE, AND 
                    GOVERNMENT SPONSORED ENTERPRISES

                                 OF THE

                              COMMITTEE ON
                           FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 15, 2003

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 108-29



89-632              U.S. GOVERNMENT PRINTING OFFICE
                            WASHINGTON : 2003
____________________________________________________________________________
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
DOUG BEREUTER, Nebraska              PAUL E. KANJORSKI, Pennsylvania
RICHARD H. BAKER, Louisiana          MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice         JULIA CARSON, Indiana
    Chairman                         BRAD SHERMAN, California
RON PAUL, Texas                      GREGORY W. MEEKS, New York
PAUL E. GILLMOR, Ohio                BARBARA LEE, California
JIM RYUN, Kansas                     JAY INSLEE, Washington
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         CHARLES A. GONZALEZ, Texas
WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
    Carolina                         HAROLD E. FORD, Jr., Tennessee
DOUG OSE, California                 RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                JOSEPH CROWLEY, New York
PATRICK J. TOOMEY, Pennsylvania      WM. LACY CLAY, Missouri
CHRISTOPHER SHAYS, Connecticut       STEVE ISRAEL, New York
JOHN B. SHADEGG, Arizona             MIKE ROSS, Arkansas
VITO FOSELLA, New York               CAROLYN McCARTHY, New York
GARY G. MILLER, California           JOE BACA, California
MELISSA A. HART, Pennsylvania        JIM MATHESON, Utah
SHELLEY MOORE CAPITO, West Virginia  STEPHEN F. LYNCH, Massachusetts
PATRICK J. TIBERI, Ohio              BRAD MILLER, North Carolina
MARK R. KENNEDY, Minnesota           RAHM EMANUEL, Illinois
TOM FEENEY, Florida                  DAVID SCOTT, Georgia
JEB HENSARLING, Texas                ARTUR DAVIS, Alabama
SCOTT GARRETT, New Jersey             
TIM MURPHY, Pennsylvania             BERNARD SANDERS, Vermont
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
KATHERINE HARRIS, Florida
RICK RENZI, Arizona

                 Robert U. Foster, III, Staff Director
            Subcommittee on Capital Markets, Insurance, and 
                    Government Sponsored Enterprises

                 RICHARD H. BAKER, Louisiana, Chairman

DOUG OSE, California, Vice Chairman  PAUL E. KANJORSKI, Pennsylvania
CHRISTOPHER SHAYS, Connecticut       GARY L. ACKERMAN, New York
PAUL E. GILLMOR, Ohio                DARLENE HOOLEY, Oregon
SPENCER BACHUS, Alabama              BRAD SHERMAN, California
MICHAEL N. CASTLE, Delaware          GREGORY W. MEEKS, New York
PETER T. KING, New York              JAY INSLEE, Washington
FRANK D. LUCAS, Oklahoma             DENNIS MOORE, Kansas
EDWARD R. ROYCE, California          CHARLES A. GONZALEZ, Texas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
SUE W. KELLY, New York               HAROLD E. FORD, Jr., Tennessee
ROBERT W. NEY, Ohio                  RUBEN HINOJOSA, Texas
JOHN B. SHADEGG, Arizona             KEN LUCAS, Kentucky
JIM RYUN, Kansas                     JOSEPH CROWLEY, New York
VITO FOSSELLA, New York              STEVE ISRAEL, New York
JUDY BIGGERT, Illinois               MIKE ROSS, Arkansas
MARK GREEN, Wisconsin                WM. LACY CLAY, Missouri
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TOOMEY, Pennsylvania      JOE BACA, California
SHELLEY MOORE CAPITO, West Virginia  JIM MATHESON, Utah
MELISSA A. HART, Pennsylvania        STEPHEN F. LYNCH, Massachusetts
MARK R. KENNEDY, Minnesota           BRAD MILLER, North Carolina
PATRICK J. TIBERI, Ohio              RAHM EMANUEL, Illinois
GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
KATHERINE HARRIS, Florida
RICK RENZI, Arizona
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 15, 2003.................................................     1
Appendix:
    May 15, 2003.................................................    31

                               WITNESSES
                         Thursday, May 15, 2003

DeSalles, Lavada, Member, Board of Directors, AARP...............    10
Gallagher, Hon. Tom, Chief Financial Officer, Florida Department 
  of Financial Services on behalf of the National Association of 
  Insurance Commissioners........................................    14
Hounsell, M. Cindy, Executive Director, Women's Institute For a 
  Secure Retirement..............................................    11
Keating, Hon. Frank, President & CEO, American Council of Life 
  Insurers.......................................................     7
Woods, David F., CEO, National Association of Insurance & 
  Financial Advisors, President, Life and Health Insurance 
  Foundation for Education.......................................     9

                                APPENDIX

Prepared Statements:
    Oxley, Hon. Michael G........................................    32
    Clay, Hon. Wm. Lacy..........................................    34
    Emanuel, Hon. Rahm...........................................    35
    Fossella, Hon. Vito..........................................    37
    Gillmor, Hon. Paul E.........................................    38
    Kanjorski, Hon. Paul E.......................................    39
    Kelly, Hon. Sue W............................................    41
    DeSalles, Lavada.............................................    42
    Gallagher, Hon. Tom..........................................    77
    Hounsell, M. Cindy...........................................    90
    Keating, Hon. Frank..........................................    99
    Woods, David F...............................................   104

              Additional Material Submitted for the Record

DeSalles, Lavada:
    Written response to questions from Hon. Ruben Hinojosa.......   125
American Health Care Association (AHCA) and National Center for 
  Assisted Living (NCAL), prepared statement.....................   129

 
                   RETIREMENT SECURITY: WHAT SENIORS
                     NEED TO KNOW ABOUT PROTECTING
                             THEIR FUTURES

                              ----------                              


                         Thursday, May 15, 2003

             U.S. House of Representatives,
        Subcommittee on Capital Markets, Insurance,
               And Government Sponsored Enterprises
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:08 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Richard Baker 
[chairman of the subcommittee] presiding.
    Present: Representatives Baker, Lucas of Oklahoma, Kelly, 
Ryun, Tiberi, Brown-Waite, Harris, Kanjorski, Inslee, Lucas of 
Kentucky, Clay, Baca, Emanuel and Scott.
    Chairman Baker. [Presiding.] I would like to call this 
meeting of the Subcommittee on Capital Markets to order. This 
morning our purpose is to examine the subject of retirement 
security and what seniors do or do not know about the 
availability of retirement products in making their planning.
    As those of us who are baby boomers are realizing when we 
begin to retire, we present a unique problem to the country. 
There are more of us than any other model ever manufactured. We 
are going to live a longer time. We are going to demand higher 
levels of care and we are going to sue more. So we probably 
need to examine what the landscape will look like when this 
significant group of retirees begins to avail themselves of 
that opportunity.
    Retirement security is very essential for everyone, but 
especially important for those who face it in the near term. It 
has taken particular urgency for 77 million baby boomers who 
will turn 60 by 2006. Traditionally, securing retirement income 
depended on three sources, from Social Security, income from an 
employer pension plan, and individual savings. Over the last 
decade, experts have begun to alter this strategy by adding 
medical insurance and even a fifth alternative, earnings from 
retirees' continued employment. As a result, a number of 
innovative products have been introduced in an attempt to fill 
seniors' changing needs.
    But few consumers know that private long-term care 
insurance has the potential to protect the policyholder and, 
equally important, the policyholder's family from the 
extraordinary costs of long-term care of nursing home care that 
is often not covered by government security programs. Few 
seniors are aware of how annuitization, the trading of assets 
for a guaranteed stream of payouts, can help guard against 
outliving the planned asset program. And it is necessary to 
increase consumer awareness of how long-term care, annuities 
and other financial products can fit with a sound retirement 
strategy. That is the reason why we are here this morning, is 
to first gain understanding, but secondly look at the 
regulatory oversight of the current State structures and to 
examine whether or not any actions are required by Congress to 
assure seniors of long-term income stability with adequate 
planning.
    To that end, I welcome all our witnesses here this morning, 
and recognize Mr. Kanjorski for any opening statement he may 
choose.
    Mr. Kanjorski. Mr. Chairman, today we will explore the 
issues that individuals should consider as they plan for 
retirement. Because investor protection and financial literacy 
are top priorities for my work on this panel, I am therefore 
very pleased that we are meeting to examine matters like 
annuities, life insurance and long-term care insurance, among 
others.
    The aging of the American population has made retirement 
planning an issue of increasing concern for our nation's 
policymakers and we should review a number of trends before 
hearing from the witnesses. Today, 12.4 percent of the 
population is 65 years of age or older. By 2025, according to 
Census Bureau projections, this statistic will rise to 18.5 
percent. Moreover, over the next 30 years as baby boomers reach 
retirement age, America's elderly population will likely 
double, rising from 35 million to nearly 75 million. Life 
expectancy rates also continue to increase. Someone who lives 
to age 65 can now expect to live an additional 18 years, up 
from an extra 13 years in 1940. Although Americans are living 
longer than ever before, many are retiring earlier. For many of 
these individuals, retirement will last 20 or 30 years or even 
longer.
    In light of these trends, individuals must plan prudently 
and early in order to ensure a secure retirement with a steady 
stream of income to cover expenses. While retirement planning 
is important for everyone, it is especially important for 
women. Women, after all, generally live longer and with less 
income when compared to men. For many years, we have described 
retirement planning as a three-legged stool based on Social 
Security, employer-provided pensions and personal savings and 
investments. In reality, it consists of more than these three 
supports. Genuine retirement planning should also incorporate 
insurance products, including medical, long-term care and 
annuities. Experts also advise that really effective retirement 
preparations should include either a will or, if appropriate, 
an estate plan to protect one's loved ones.
    With more Americans living longer and retiring earlier, 
pensions and Social Security benefits will have to be paid over 
even longer periods of time. Personal savings and investments 
must also be stretched out. The troubles of the stock market 
over the last three years, however, has resulted unfortunately 
in significant declines in pension plans and retirement 
investments. Today, the sagging economy has produced an under-
funding of pension plans of more than $300 billion. It also 
disturbs me that the retirement plan participation rates have 
recently dropped for full-time employees, standing at just 55.8 
percent in 2001. Savings for retirement is just one step toward 
achieving financial security.
    I am therefore pleased that we are examining the issue of 
annuities. Annuities can help seniors to manage their savings 
so that they will not out-live their assets. In today's complex 
financial marketplace, we also need to ensure that individuals 
preparing for retirement understand the benefits of receiving a 
guaranteed stream of payouts via an annuity, instead of taking 
a lump-sum payment. As the American population continues to 
age, experts predict that the number of individuals requiring 
long-term care will greatly rise. At some point, one in five 
seniors will require nursing home care for at least a year. The 
costs of such care now average $55,000 annually, but by 2030, 
according to at least one estimate, these services could cost 
or $200,000. To reduce the burden on Medicare and Medicaid, we 
have worked in recent years to adopt policies aimed at 
encouraging individuals to purchase long-term care insurance. 
Today's hearing will help us to understand what else we can do 
through the private sector to meet this growing need.
    Finally, Mr. Chairman, because we are talking about 
retirement planning, I feel it is important to raise the issue 
of Social Security. This program presently covers about 160 
million workers, providing them with a safe, secure and steady 
stream of income in retirement. As a result of Social Security, 
the poverty rate among America's elderly has dropped 
dramatically, and without this vital retirement program the 
poverty rate among older women would increase from 12 percent 
to more than 50 percent. Social Security is a success. We 
should not tinker with this program with proposals to privatize 
the system. I will be particularly interested to hear what our 
witnesses have to say about this issue.
    Mr. Chairman, I want to thank you for bringing these 
matters to our attention. Retirement planning is an issue of 
utmost importance. I look forward to working with you on these 
endeavors.
    [The prepared statement of Hon. Paul E. Kanjorski can be 
found on page 39 in the appendix.]
    Chairman Baker. Thank you, Mr. Kanjorski.
    Ms. Kelly?
    Mrs. Kelly. Thank you, Mr. Chairman. Good morning, and I 
thank you very much for holding this important hearing on 
retirement security. It is an issue that is of great concern to 
today's seniors and tomorrow's retirees.
    With tens of millions of baby boomers approaching 
retirement, the need to focus on proper planning and financial 
literacy continues to grow. The cornerstone of retirement 
security is the consumers' ability to anticipate their future 
financial needs and adjust their assets, using several diverse 
financial products, from investments and pension funds to life 
insurance policies and long-term care insurance, annuities and 
Social Security. As more sophisticated financial products are 
introduced to fill the evolving retirement needs of seniors, we 
need to ensure that consumers have a clear and objective base 
of information. The arrival of new and improved products for 
seniors is welcome, but it also comes with an additional 
responsibility that financial regulators keep pace with the 
changes in the marketplace to protect consumers.
    Last year, my Subcommittee on Oversight and Investigations 
held a hearing on one product known as a viatical settlement, 
the practice of buying life insurance policies from the elderly 
or terminally ill at a discount, and then marketing them as 
investments. A properly conducted viatical transaction can be a 
benefit to all parties involved. Sick individuals can access 
much-needed cash to pay for medical expenses. Companies that 
sold the original policies receive premiums that are important 
to market stability, and investors and settlement companies who 
buy policies are able to make a return on their investment. 
Unfortunately, as we learned at that hearing, bad actors have 
taken advantage of these arrangements to create or buy phony 
policies and fraudulently bilk unsuspecting investors. While it 
is extremely unacceptable, it is no surprise, given the complex 
nature and inconsistent State of regulation of viaticals. The 
State regulation is inconsistent. I strongly believe that we 
have to address the lack of uniformity and regulatory gaps 
among the States in regulating life and viatical settlements 
that leave some citizens, particularly elderly Americans, at 
the risk of being defrauded.
    I thank the witnesses for appearing here today before the 
subcommittee and I look forward to hearing their testimony on 
these issues.
    Thank you, Mr. Chairman. I yield back.
    [The prepared statement of Hon. Sue W. Kelly can be found 
on page 41 in the appendix.]
    Chairman Baker. Thank you, Ms. Kelly.
    Mr. Scott, do you have an opening statement?
    Mr. Scott. Thank you very much, Chairman Baker.
    Chairman Baker and Ranking Member Kanjorski, I want to 
thank you for holding this important hearing, and thank the 
witnesses for coming today regarding the retirement security 
for seniors. Of course, I want to also thank this distinguished 
panel of witnesses today for their testimony on this important 
subject.
    This hearing is held at an opportune time, given that this 
past Sunday was Mother's Day. Of course, when you consider the 
average age of those of us on this committee, you can 
accurately say that many of our mothers are either retired or 
certainly close to retirement. We should honor them by taking a 
serious, serious look at retirement and security for seniors. 
My own mother just retired this past year.
    Of the many issues related to a secure retirement, two 
stand out in my mind. One is the exploding Federal deficits 
which threaten Social Security and Medicare. The other is the 
lack of basic savings among African Americans. These two 
concerns relate to traditional retirement planning, which 
includes Social Security benefits, employer pension plans, and 
individual savings and investments. Since future retirees 
cannot depend on Social Security or basic savings for 
retirement income, they must begin to consider additional 
financial planning tools. For example, promotion of financial 
literacy is of utmost importance. In that regard, I have 
introduced legislation which is entitled The Prevention of 
Predatory Lending Through Education Act, that uses financial 
literacy and a 1-800 number as tools to fight predatory 
lending, so that families can keep more of their money and 
invest it for their retirement use.
    In today's paper of the Washington Afro, there is a 
headline story that shows the timeliness of this hearing. If I 
may share the first paragraph, there is a picture of four 
elderly African American retired women. The headline is, ``The 
Victims Fight Back, Predatory Lender Pays Elderly Women $4.3 
million.'' It starts out by simply saying, if I may add this 
into my record, ``It all started with a telephone call. Eugene 
Duncan says her husband Vincent was recovering from a stroke, 
confined to a wheelchair, when a representative from a company 
called First Government Mortgage made an unsolicited offer for 
a secondary mortgage loan. The representative then came to the 
elderly retired couple's home and smooth-talked them into 
signing a loan application. Then without their knowledge or 
consent, according to court documents, he prepared fictitious 
documents that helped them to get the loan. The couple got the 
loan, but between the high interest rates and payments they 
could not afford, they almost lost their home,'' this pattern 
of predatory lending targeting the elderly and the retired.
    That is why I am so excited to work on this committee in 
such a bipartisan way with my colleagues in addressing the 
needs for our retirees. I will work with the committee to 
discuss ways to increase basic savings and investment rates 
through financial education and predatory lending.
    I just want to take this opportunity, Mr. Chairman, to 
thank you personally for your encouragement for us in support 
of this effort; certainly, Chairman Ney, Chairman Oxley and our 
Ranking Member, Representative Frank, for addressing this very, 
very important issue as we approach ways to help our seniors to 
save their money and live more productive lives.
    Thank you.
    Chairman Baker. Thank you, Mr. Scott.
    Mr. Lucas? Ms. Harris?
    Ms. Harris. Thank you, Mr. Chairman. Thanks for holding 
this very important hearing, and I wanted to thank all the 
members of the distinguished panel for their testimony today.
    As Congress debates how we can most effectively revitalize 
our nation's economy, we must address the concerns of the 
people who built our prosperity in the first place, our 
seniors. We cannot truly restore economic security without 
bolstering Social Security as well. We must all have the same 
goal, both the Federal and the State level, to protect and help 
our seniors. In recent years, our seniors have borne the 
consequences of the greed of corporate executives who rocked 
markets and robbed shareholders, suffering through undeserved 
sleepless nights after a lifetime of hard work, saving and 
thrift.
    Moreover, they have endured the continued uncertainties 
surrounding whether we will keep our nation's moral obligation 
to protect Social Security, strengthen Medicare and provide a 
prescription drug benefit. While we address issues that impact 
today's seniors, we must also plan for the retirement of 
tomorrow's seniors. During the next decade, 77 million baby 
boomers will reach the age of retirement, thus we must marshal 
the resources, creativity and courage to address an array of 
challenges. While a large part of this effort involves the 
development and the refinement of policies and programs, we 
still must focus a significant portion of our energies upon 
helping our seniors understand their rights and choices in 
today's financial services marketplace. I look forward to our 
continued consideration of this critical matter.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Ms. Harris.
    Mr. Baca?
    Mr. Baca. Thank you very much, Mr. Chairman. I am glad to 
be here and to hear the panelists discuss what is very 
important to us in terms of retirement Social Security for our 
seniors and for our future, not only as we look at the seniors, 
but the baby boomers looking at the long effects, too, as well, 
because many of our seniors are on fixed income, and we have to 
look in terms of long-range. What is actually going to happen? 
What kind of retirement plan are they going to have? What are 
they relying on in reference to Social Security? Where is their 
income coming from? And especially as we look at Hispanics, 
Social Security is made up 75 percent of their annual income, 
especially for retirement for Hispanics, so they rely on Social 
Security, compared to 63 percent of other retirees.
    I am very much concerned about the effect Social Security 
will have and what the president's Social Security 
privatization plan will have on the Hispanic community and 
impact, so we are very much concerned there. And also as we 
look at Social Security, we have to look at health insurance, 
what are the affects it is going to have on future plans for 
the ability to pay for health insurance, prescription drugs, 
and then the ability to save plans, too, as well.
    So hopefully the panelists will begin to look at the 
overall generic. As we look at the diversity within our 
communities right now, we are seeing many individuals that will 
be retiring and would like to retire. We want to make sure that 
they are protected and their pension plans will be there. And 
then if there is privatization, what affects will it have on 
our seniors in the long run, too, as well; what affects will it 
have on Medicare and the ability to have health coverage. Many 
of our seniors right now, when we look at Social Security as 
their only form of income, if in fact they have any kind of 
medical problems they end up losing their homes because they do 
not have the income to provide, they do not have the insurance 
to provide, they do not have the planning to survive, and they 
do not have the pension plans that is in place too, as well.
    So I am very much concerned with hopefully coming up with 
some kind of a Social Security pension plan that will safeguard 
them now and in the future, and also protecting out baby 
boomers that will be following into this category. That is all 
of us here right now and those future ones to come too, as 
well. Hopefully, the deficit will not be on them or anybody 
else, based on what we are proposing even right now through the 
president's tax initiative that he has just passed.
    Thank you very much, Mr. Chairman.
    Chairman Baker. Thank you, sir.
    Mr. Ken Lucas?
    Mr. Lucas of Kentucky. Thank you, Mr. Chairman. I will be 
brief.
    In my prior life before coming to Congress, I spent 32 
years as a financial planner and a CLU and a ChFC. I was 
surprised that there are not that many of us up here with that 
background. Again, we spent a lot of time preserving people's 
net worth and protecting their retirement assets. I look 
forward to hearing your testimony today.
    Thank you.
    Chairman Baker. Thank you very much, Mr. Lucas.
    I would certainly like to welcome our witnesses to this 
hearing this morning. I look forward to your insights and 
perspectives. I certainly want to welcome our first witness. I 
think for the purposes of introductions, I would yield to Mr. 
Lucas for appropriate comment.
    Mr. Lucas of Oklahoma. Thank you, Mr. Chairman. I 
appreciate that yield.
    Nine years ago this week, I was elected in a special 
election to serve in this fine body. At that time, as I worked 
my way up and down one-third of the State in the old Sixth 
Congressional District, then-citizen Keating was working all 
over the entire State in preparation for a run for governor 
that fall. And much, I suppose, to the chagrin of a lot of 
people back home, not only did I get reelected that fall, but 
so did Governor Keating, a fellow who in his eight years as 
governor not only accomplished something that is rarely done in 
Oklahoma, and that is to be reelected governor, but he 
stewarded us through some very, very difficult times, both man-
made, in essence, and by mother nature. His leadership helped 
propel, I think, Oklahoma rather dramatically along in a 
progressive way towards both economic and political reform. His 
career there could best be summarized as enabling, I think, my 
fellow Oklahomans, his fellow Oklahomans, the opportunity to 
better live up to their potential.
    So I am particularly pleased, Mr. Chairman, that in his 
role now as president and CEO of the American Council of Life 
Insurers, he is here today to testify before us again, I 
suspect with a focus on how to enhance the quality of life for 
all of our fellow Americans.
    Thank you, Mr. Chairman, and thank you, Governor Keating, 
for being here today.
    Chairman Baker. Thank you, Mr. Lucas.
    Welcome, Governor Keating. We are pleased to have you here 
this morning.

    STATEMENT OF GOVERNOR FRANK KEATING, PRESIDENT AND CEO, 
               AMERICAN COUNCIL OF LIFE INSURERS

    Mr. Keating. Mr. Chairman and members of the subcommittee, 
after Congressman Lucas' very kind and undeserved introduction, 
I think I will not say another word.
    [Laughter.]
    I have a formal statement that I have submitted for the 
record. I would appreciate the committee at their leisure to 
examine that statement, because some of the things in there I 
think are very important. First off, as a citizen, I want to 
thank Chairman Baker and the members of the subcommittee, for 
examining these issues. As the ranking member said and as the 
other members of this subcommittee have pointed out, this is a 
very serious business.
    As an older baby boomer, those of us between the ages of 55 
and 64, unfortunately most of us do not have enough money to 
retire on. That is a demographic time bomb which is ready to go 
off. The average cash assets of the older baby boomer is 
$47,000. If you add in a house and if you add in retirement 
assets, maybe, maybe $100,000, which at $40,000 a year is a 
couple of years of income. If you consider a point and a half 
in interest, that is not a significant income as a companion 
income to Social Security.
    So as Congressman Scott mentioned, the importance of 
retirement planning; the importance of the state-regulated 
industry which I represent, the life insurance industry, and 
members of Congress, and the private sector working together to 
sensitize people to the important of retirement security and 
retirement planning is extremely significant. As Congressman 
Kanjorski noted, the cost of nursing home today alone is 
$55,000 a year. The cost of having someone come to your home if 
you do not have a meals-on-wheels program, but to come to your 
home and attend to your needs just on an ad hoc basis is some 
$16,000 per year. The fact of the matter is, for the first time 
ever, financial magazines and newspapers are beginning to speak 
in terms of people outliving their assets. This is remarkable, 
the fact that today people are thinking about stopping the 
accumulation part of their life, and looking at fixed income 
when they reach about 75. And yet just two or three generations 
ago, 60 was considered old.
    So we do have this very serious demographic challenge. We 
have a very serious education challenge. For those of us who 
represent, as ACLI does, some 400 life insurance companies, 
there is sensitization toward long-term care and the need to 
examine at an early age long-term care policies and what they 
will do for your own financial security and the financial 
security of your family. The need for us to examine our own 
life insurance needs, so that if we have dependents and 
something were to happen to us even at a later age, if we are 
taking care of grandchildren; if we are taking care of step-
children, or even children who have returned home, to have life 
insurance is important across all age groups. And of course, 
the issue of annuities. After the challenge of the stock market 
over the course of the last three years, don't we all like 
defined benefits? An annuity is in effect a defined benefit to 
provide a companion investment for Social Security.
    So Mr. Chairman, we see this industry and this organization 
as advocacy and research, obviously of assistance to the 
Congress on tax matters, but most importantly assistance to our 
citizens, our fellow citizens on the sensitization of the need 
for income for life; the sensitization of need for retirement 
security and life security for our children and in many cases 
our children's children. We do not do enough of it. We do not 
have enough money saved for retirement, and we welcome this 
debate and discussion because it is long overdue.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Frank Keating can be found 
on page 99 in the appendix.]
    Chairman Baker. I want to thank the governor. We appreciate 
your participation this morning.
    Our next witness is Mr. David F. Woods, CEO of the National 
Association of Insurance and Financial Advisors. Welcome, Mr. 
Woods.

   STATEMENT OF DAVID F. WOODS, CEO, NATIONAL ASSOCIATION OF 
 INSURANCE AND FINANCIAL ADVISORS, PRESIDENT, LIFE AND HEALTH 
                           INSURANCE

    Mr. Woods. Thank you, Chairman Baker. I am probably the 
only card-carrying person in the room today, that is, Medicare 
card-carrying person in the room. I am a senior. I understand 
very well the concerns of seniors and the needs of seniors.
    I represent the National Association of Insurance and 
Financial Advisors. I am the brand-new CEO. We have 800 local 
associations across the country representing 325,000 insurance 
agents, financial advisers and their staffs. Our mission is to 
provide professional education and support to our members, to 
establish and to maintain ethical standards for them, and to 
provide help to committees like yours, members of the various 
legislative bodies as you and we together try to wrestle with 
the response that we collectively can make not only of seniors, 
but to all citizens in various aspects of their financial 
lives.
    I also represent the Life and Health Insurance Foundation 
for Education. We are a nonprofit organization founded about 10 
years ago to address the need of the population at large for 
more education about the role that insurance and insurance 
products play in their financial lives, and to help them 
understand that a financial plan without these insurance 
products at its base is really nothing more than a savings and 
investment program that really dies or becomes disabled or 
grows old and disappears when they do.
    So I am privileged to be here today. My primary purpose is 
to really introduce myself to the members of the committee. My 
hope is to be with you on a number of future occasions, not 
only on the issue of seniors, but other issues that may come 
before this committee where we can be, either or both of my 
organizations, can be helpful. I am also privileged to be here 
with Governor Keating. We both started our new jobs together in 
January and really have renewed a longstanding partnership 
between the National Association of Insurance and Financial 
Advisors and the ACLI, to bring the help, support, dues, 
resources of the life insurance industry to this and other 
committees which may be interested.
    Let me if I can just give you a very brief overview of the 
role that an agent-adviser plays. I know Mr. Lucas has long 
experience in doing that, so you may correct me if I miss 
anything. My written testimony covers it in full detail, but 
let me just give you a thumbnail. I was an insurance agent for 
30-plus years; still carry a license; still do a tiny bit of 
business when I have some time. The role of the agent-adviser, 
financial adviser, has several aspects to it, first and 
foremost, to understand the needs of our clients and our 
prospects. Not just in terms of how much money do you have, how 
much money do you need, but understand them as human beings; 
understand what their personal needs are; what their cares, 
what their concerns are, so that not only can we make the 
numbers add up, but we can make them add up in terms of what is 
important to them in their lives. And then to do the research, 
to find the appropriate products that may address those needs, 
and to bring those needs to their attention; to help them 
evaluate them; to provide competitive analysis for them, so 
that they can make an informed and intelligent decision about 
the products that are important in their lives.
    As it applies to seniors particularly, I think the members 
here have mentioned all of them, annuities, long-term care, 
life insurance being the most prominent and important among 
them, for seniors, and then to provide ongoing service to our 
clients over a long period of time. Seniors particularly find 
their needs changing. The early years of retirement are much 
more active than the later years. Money begins to run out as 
time passes, typically, the longer people live. Long-term care 
needs become critically important, nursing home care, home 
care: frightening prospects, frightening prospects for seniors. 
Some of you may have had your own parents in that situation, as 
I have. It is a terrible prospect. So the role of the agent-
adviser is to constantly work with our clients to help them 
understand their changing needs, to evaluate their options for 
them, and to help them work through those options and take 
advantage of whatever may be there for them.
    I appreciate the opportunity to spend some time with you 
today. I am more than happy to answer any questions you have. I 
particularly applaud the committee for addressing this issue. 
All of you have pointed out the needs of this burgeoning crop 
of baby boomers, but I would submit that there are millions and 
millions of people who are already retired who have the same 
concerns and the same issues. So I am looking forward to 
working with you as together we address these problems.
    Thank you, Mr. Chairman.
    [The prepared statement of David F. Woods can be found on 
page 104 in the appendix.]
    Chairman Baker. Thank you very much, sir. We appreciate 
your testimony.
    Is it Mrs. Lavada DeSalles, is that correct, Ms. DeSalles, 
who is a member of the board of directors of AARP? Welcome.

 STATEMENT OF LAVADA DESALLES, MEMBER, BOARD OF DIRECTORS, AARP

    Ms. DeSalles. Thank you. It is Lavada DeSalles. You were 
close.
    [Laughter.]
    Good morning, Chairman Baker, Ranking Member Kanjorski, and 
other distinguished members of the Subcommittee on Capital 
Markets, Insurance and Government Sponsored Enterprises. I am a 
member of AARP's board of directors, and I appreciate this 
opportunity to offer our views regarding what seniors need to 
know about protecting their economic security.
    Today, my testimony will focus primarily on the role that 
private insurance can play in financially securing retirement 
for older Americans. Private insurance products can and 
frequently do play an important and valuable role in 
accumulating, managing and protecting the financial assets 
necessary for having a secure retirement. We believe that 
privately financed insurance products have the potential for 
playing a more integral, but supplemental role to Social 
Security, if the marketplace includes, first, strengthened 
enforcement of consumer protection statutes and regulations; 
second, ready access by consumers to well-qualified, 
independent and affordable financial planning resources; third, 
reliable and accurate measures for comparing insurance 
products. Lastly, additional progress should be made in the 
standardization and licensing of insurers, their agents, and in 
the way products are approved.
    Also important is that these products be integrated as 
supplementary options for what we at AARP describe as the four 
basic pillars of retirement income security for the 21st 
century. That is, Social Security, pensions and savings, 
investments, health care insurance coverage, and increasingly 
earnings from working during one's retirement years. 
Unsurprisingly, commercially offered personal insurance 
products pose the very same cost, availability and 
sustainability challenges for individuals that are so familiar 
to policymakers in addressing national issues.
    However, the responsibility for the selection among a 
complex array of insurance companies, policy options, shifts to 
the individuals and their families when they are at the same 
time attempting to manage their daily financial affairs. We do 
not view this challenge as an unbreachable barrier, but rather 
one that will require a concerted effort by policymakers, the 
insurance industry, consumer advocates, and consumers to 
address.
    Chairman Baker, today's hearing represents an important 
first step in launching this effort. AARP has long been active 
in efforts to assist mid-life and older Americans to improve 
their prospects for achieving personal financial security. In 
this regard, we have conducted research; designed, tested and 
provided financial education and counseling services to our 
members, as well as mid-life and older adults in general. But 
because of the rapidly growing population of retirement-age 
Americans, the demand for high quality, non-conflicted 
financial literacy programs will continue to grow.
    In conclusion, we believe that efforts should continue to 
be made to increase consumer awareness of insurance options; 
options for assembling and managing the necessary financial 
assets for a secure retirement. At the same time, we believe 
that changes in a number of public policies and insurer 
practices would be useful for improving the insurance 
marketplace and the products and services it provides. We 
commend you, Chairman Baker, for beginning this important 
discussion. We look forward to working with the subcommittee to 
further improve prospects for a secure retirement for all 
Americans.
    I will be happy to answer any questions you may have.
    [The prepared statement of Lavada DeSalles can be found on 
page 42 in the appendix.]
    Chairman Baker. Thank you very much.
    Our next participants is Mrs. Cindy Hounsell, Executive 
Director, Women's Institute for a Secure Retirement. Did I get 
that close?
    Ms. Hounsell. Yes.
    Chairman Baker. Thank you.

  STATEMENT OF M. CINDY HOUNSELL, EXECUTIVE DIRECTOR, WOMEN'S 
               INSTITUTE FOR A SECURE RETIREMENT

    Ms. Hounsell. Good morning. We very much appreciate the 
opportunity to be here and to focus on women's issues.
    I thought I would start by saying why we call ourselves 
WISER. I have been working on this issue for 15 years, and I 
realized that I had made every financial mistake that you could 
make throughout your working life. So I thought, well, we do 
not want to call ourselves STUPIDER, so we will have to find a 
better acronym and sort of work through the name WISER. People 
often say to me, well, why don't you include men? I say, well, 
then we would have to have been MISER, so that would not have 
worked well either.
    But as mentioned, I have been working on this issue for 15 
years, and I would just like to emphasize that one of the 
things that I think is so important for the committee to hear 
is that people just do not have the financial basics. One of 
the things I find is that if you throw out the word ``annuity'' 
at somebody, they are already knocked over on the table falling 
asleep, because they do not even understand why they need to 
understand what an annuity is. People just do not have the very 
basic foundation of financial planning. I find this to be true, 
and it does not matter what the education level is. I can talk 
to people that do not even have jobs and they could understand 
the need for it just as well as people who are professionals, 
or like people in this room. I probably did not know what an 
annuity was myself until about six or seven years ago, when I 
became very interested in insurance products. Of course, that 
was prompted by the fact that my house burned down. So all of a 
sudden, I was loving insurance, and I thought, boy, this is 
really key, and where are the other areas in my life, like 
long-term care insurance that will really help women when they 
get older.
    As the statistics show, and I have all this in my 
statement, but I would like to just briefly breeze through some 
of it. Women live longer. They earn less. They have different 
needs because of those factors. The major point I would like to 
make is that women need information to make the best financial 
decisions because they can least afford to make mistakes with 
their money. They need this information early in their working 
lives.
    Women face a host of obstacles that jeopardize their 
economic security. One of them is pay. Two-thirds of today's 
full-time working women earn less than $30,000. Care-giving 
responsibilities cause women to spend about nine years out of 
the job market or working part-time or making other 
accommodations for their families' lives. Fewer years at work 
mean they are less likely to be eligible for employer benefits, 
and combined with lower pay, smaller Social Security benefits 
and less money in savings. These factors are coupled with the 
general lack of knowledge about money management, as well as 
the financial products that could help them in the future.
    Older women are much more likely to live alone than older 
men. Living alone means you are much more likely to be poor. As 
Mr. Scott mentioned in his statement, the poverty rate among 
older minority women is just astounding. For single black women 
over age 65, it is 43 percent; and for Hispanic women, it is 49 
percent, which is nearly twice the rate of white women. We hear 
all the time from women who are convinced they will never be 
able to stop working and they will never be able to retire.
    As women tend to outlive their husbands, they face a 
greater risk of requiring long-term care, either in their own 
homes or in nursing homes. We know that there is a great need 
to educate younger and middle-aged people because we have found 
that the major fact is that people do not understand that age 
is the significant reason to buy long-term care insurance 
earlier; that it is more expensive as you age. People think 
that it is just something to do when you get older or as you 
reach retirement age. So we have got to change that, also 
because then it is more expensive, and they do not understand 
that. We happen to have access through one of the foundations 
that funds us to long-term care insurance. There is a women 
that works with me who is in her late 30s. She signed up for 
the long-term care insurance.
    Another fact is that many employers offer adult children 
the opportunity to sign up their parents for long-term care 
insurance. If families were better educated about the 
availability of the provisions such as in-home care, services 
at assisted living facilities, they would be capable of taking 
the needed steps to talk about these issues, resulting in much 
better financial planning decisions for both the adult children 
and for their elderly parents.
    And then there is the other consequence of living longer, 
which is that women have greater concerns about outliving their 
income. Many older people are living longer than ever, and yet 
most financial education focuses on getting people to save and 
invest, while there is very little information available on 
what to do when you reach retirement age to make sure the money 
lasts for as long as you need it. Few of those who are retiring 
realize that the money may have to last for perhaps 20 or 30 
years after we stop working. We did a booklet which has become 
very popular with the Society of Actuaries. It is available on 
Web sites, and we would hope that people would look at the 
booklet, or maybe include it on your Web site. We have a couple 
of good stories in there. One of them I love to use, and I 
won't take time to do it here because my time is running out, 
but Ron Gebhardtsbauer, who is an actuary, actually we included 
in our prepared statement the story, talked his mother into 
buying an annuity because every year she was taking out little 
bits of money and knew she was going to run out of money by the 
time she probably reached 90. He convinced her to buy an 
annuity and now she will get the same amount of money whether 
she lives to be 90 or 100.
    I will end here because I think my time is just about up. I 
thank the committee for what you are doing, and we would love 
to continue working with you.
    [The prepared statement of M. Cindy Hounsell can be found 
on page 90 in the appendix.]
    Chairman Baker. Thank you very much.
    For the introduction of our final participant, I would like 
to turn to Ms. Harris for her particular words. Ms. Harris?
    Ms. Harris. Thank you, Mr. Chairman.
    Our final panelist today has served the great State of 
Florida in an amazing variety of capacities. Today, as 
Florida's first Chief Financial Officer, Tom Gallagher 
continues to display the creative, skilled and determined 
leadership that has distinguished his three decades of public 
service. As Chief Financial Officer, Tom Gallagher leads the 
new Department of Financial Services, which was created in 
January of this year as the result of a 1998 constitutional 
amendment that has merged the Office of the State Treasurer, 
Insurance Commissioner, Fire Marshal, and Office of the 
Controller.
    Prior to his election to this post last November, Tom 
Gallagher had served as State Treasurer, Insurance Commissioner 
and Fire Marshal for a total of 12 years, beginning with his 
election to that position in 1988. He has also served two years 
as education commissioner, two years as secretary of the 
Department of Professional Regulation, and 13 years as a member 
of the Florida House of Representatives. Tom Gallagher 
established his reputation as tough, courageous and an 
effective leader following Hurricane Andrew, when as Insurance 
Commissioner, he guided Florida through the trauma of its most 
costly natural disaster.
    Moreover, he has demonstrated his extraordinary talent for 
shaping innovative solutions to seemingly intractable problems 
on many occasions, such as when he spurred the creation of a 
program that offers health insurance to more than 300,000 
uninsured children in Florida. Just last year, he played a 
vital role in the Florida legislature's passage of a windstorm 
bill that is saving Floridians nearly $100 million annually.
    Tom Gallagher has dedicated his career to helping the 
people of Florida untangle the knots that often accompany their 
use of financial service products. I particularly look forward 
to hearing the comments of this fierce protector of consumer 
rights regarding the State of Florida's efforts to protect our 
seniors from fraud and abuse.
    It is with great pleasure I introduce my friend and former 
colleague in Florida's executive cabinet, the Chief Financial 
Officer, Tom Gallagher.
    Chairman Baker. Thank you, Ms. Harris.
    Welcome, Mr. Gallagher.

  STATEMENT OF HON. TOM GALLAGHER, CFO, FLORIDA DEPARTMENT OF 
  FINANCIAL SERVICES ON BEHALF OF THE NATIONAL ASSOCIATION OF 
                    INSURANCE COMMISSIONERS

    Mr. Gallagher. Thank you very much, Mr. Chairman and 
members of the committee. I have also submitted written 
testimony.
    I am very proud that Florida is considered the head of the 
curve in protecting consumers from fraud. We have actively been 
involved with the NAIC's Viatical Settlements Working Group. 
The viatical business emerged in 1989, and by 1992 the NAIC had 
determined that a model law was needed. It was basically set up 
to help people that had AIDS. The initial model required 
companies and brokers to obtain a license before entering into 
the viatical settlement agreements, giving regulators authority 
to refuse or revoke a license and approve provider contracts. 
The first model also required disclosure, payment of proceeds 
into an escrow account, and confidentiality of the medical 
information. The model was recently updated to broaden the 
definition of a viatical settlement and new protections against 
fraud have been added. The new model also enabled States to 
consider the security aspect of the viatical transaction, that 
is the sales to investors. We in Florida provided a substantial 
input. Florida, along with several other States, have adopted 
the new model and we are of course encouraging other States to 
follow suit.
    In Florida, we have a tough law on the books and 
aggressively enforce the provisions of that law. Our Viatical 
Settlement Act of 1996 focused on protecting insured 
individuals or the viator. The Act has been amended to consider 
the investor and to curtail investor abuses. The enforcement 
results in Florida, 35 viatical providers have applied for 
licensure; 17 of them withdrew; 4 were denied. There are eight 
currently licensed; three have surrendered their license; and 
three licenses have been revoked. Since 1996, 14,017 life 
insurance policies have been purchased from viators, having a 
face value of $2.9 billion, for which viators were paid $953-
plus million. The average amount an investor has made has been 
$43,744, and the average age of investors into these viatical 
settlements is about 70.5 years old.
    The regulatory actions we have taken by the department 
since 1996 have been 21. We have done eight against providers; 
two against brokers; three against agents; five against 
officer-employees; and three against unlicensed entities. As 
far as viatical criminal cases affecting Florida, these cases 
have encompassed 38 indictments against individuals. The 
companies are Future First, who was a provider; Kelco was a 
provider; Justus Viatical, an unlicensed provider; Financial 
Federated Title and Trust, Asset Security Corporation, an 
unlicensed entity; Life Benefit Services, a broker; and a 
doctor providing fraudulent life expectations was also 
indicted; and 11 viators themselves for fraudulent acts.
    The Department of Financial Services continues to work with 
the Federal Viatical Task Force, with the FBI, the U.S. Postal 
Service, the SEC and other law enforcement agencies. Our Fraud 
Division has executed nine search warrants on viatical-related 
companies and seized more than 1,000 files representing in 
excess of $76 million in fraudulent policies. Potential 
criminal violations commonly reviewed are theft, 
misrepresentation, investor fraud, and securities and 
investment issues. The estimated losses to investors in 
Florida, $2 million from Justus Viatical Group; criminal 
charges have been filed, American Benefit Services, Financial 
Federated Title and Trust, $117 million, principals of both 
companies are serving lengthy prison sentences; Future First 
Financial Corporation, $203 million, licenses revoked, criminal 
charges were filed, the companies placed into a court-appointed 
conservatorship, the former president was just arrested and now 
resides in a county jail with a $10 million bond; Accelerated 
Benefits Corporation, $114.5 million, license revoked; and 
William Page and Associates has paid fines and are on a two-
year probation.
    The anti-fraud network that was talked about on March 6, 
2001 by Terri Vaughan, who testified in support of establishing 
a national anti-fraud network among the State and Federal 
regulatory agencies. We have the technical infrastructure at 
the NAIC to place and share information among State regulators 
that can easily be expanded to Federal agencies. We are capable 
of receiving and handling both public and confidential 
information. We believe that the anti-fraud network should have 
information-sharing agreements; standards should be in place 
for how information is shared; and the important link to 
current databases, not start new ones. We believe that the 
participants should be given legal immunity for good-faith 
reporting.
    We also believe that insurance regulators would benefit 
from access to the FBI's fingerprint database. State insurance 
regulators are the only functional regulators who do not have 
access. The best way to weed out wrongdoers is before they get 
a chance to commit fraud. State regulators would benefit from 
the access to the NASD's enforcement database. In return, the 
NAIC could share information on insurance agents and companies. 
Financial products are becoming intertwined. Sharing of 
information is more important than ever, and preserving 
regulatory confidence is also very important.
    In conclusion, State regulators fully support congressional 
efforts to fight the viatical settlement fraud and to create a 
nationwide anti-fraud network on information-sharing among 
regulators. We at the NAIC and in the State of Florida stand 
ready to offer you our assistance and expertise and technical 
infrastructure to do this.
    I thank you very much for the opportunity to be here, Mr. 
Chairman.
    [The prepared statement of Hon. Tom Gallagher can be found 
on page 77 in the appendix.]
    Chairman Baker. Thank you, Mr. Gallagher.
    Mr. Woods, my question needs to be set up appropriately. 
Education is obviously the first answer; making conscious, 
informed decisions is always an appropriate remedy almost for 
any problem. But secondly, even if someone engages in an 
activity, there is a likelihood as individuals become older and 
abilities become impaired in some cases, that there be a 
mechanism for appropriate oversight and enforcement. Listening 
to Mr. Gallagher's recitation of Florida's action, it would 
appear that adopting the NAIC viatical model law is not only 
appropriate, but necessary. Do you think we need to do 
something nationally, or are we in a position to rely on each 
State to take their own course of action?
    Mr. Woods. Well, it is always a challenge, the tension 
between State regulation and Federal regulation. It seems to me 
that Mr. Gallagher has appropriately pointed out the kind of 
oversight that States can provide in the viatical settlement 
area. Information, as you have indicated; understanding; 
education; full disclosure, all of those things are critically 
important. It is my belief that the States can do that 
appropriately and through the NAIC model, we believe they 
should.
    Chairman Baker. Governor Keating, do you feel that leaving 
this issue to state resolution is appropriate? Given the 
concern with the numbers of baby boomers about to retire, and 
the asset base which they represent, that seems to be an 
awfully ripe target for a lot of folks who do not have pure 
motives.
    Mr. Keating. Mr. Chairman, as you know, the argument rages 
in the State regulatory environment on the question of 
suitability for a number of these financial services products. 
I must confess, though, as a Federalist, to have 50 hot-houses 
of experimentation, some expressing more serious problems than 
others, sharing ideas, having ideas compete with each other, is 
always the best place to begin. It may well be the best place 
to end. But to have a very aggressive leader in a State as Mr. 
Gallagher is in Florida is a symbol to States like mine and 
other States. Well, go in there and find out what the problem 
is with viaticals, and see if we need a regulatory or a 
statutory change to make our citizens, our seniors safe. I 
really think at this juncture it is far wiser, and perhaps the 
Congress can help by having public hearings on the subject, or 
even hearings in districts or States, but I think it is a lot 
better to let the States try to work through it together, 
sharing and competing with ideas, as opposed to having a 
Federal fix at this time.
    Chairman Baker. What about the concept of either act by a 
date certain or this becomes the rule. For example, States 
which are consumed by budgetary difficulties, other matters of 
importance, whether it be in Oklahoma or Texas. Simply holding 
out a standard, you can do whatever you like, but if absent any 
action on your part, this becomes the standard for those States 
who choose not to act. I am concerned about the inevitability 
of the numbers and the economic assets at risk if there is a 
State which simply chooses not to act, and the consequences of 
a large group of defrauded seniors coming to the Congress 
asking us then to respond to an identifiable crisis. This is 
just my perspective only, but generally the Congress' finest 
hours do not occur when we are pressed to act quickly.
    Mr. Keating. I think those of us who served at the State 
level would certainly agree that the commerce clause would 
cover the Congress' jurisdiction. The Congress could do that if 
it wished. Secondly, I think as it has been done in many 
instances in the past, for the Congress to set a bar and to say 
this is a serious interstate problem and here is the bar that 
we really want to be reached; we are going to attempt to reach 
it with you in a spirit of comity and brotherhood and 
sisterhood. It is probably better than a stick. I think it is 
better to have a carrot. But I agree with you, I think the 
purpose of this hearing is not only to anticipate running out 
of money; to anticipate the need for more financial security 
and more financial assets, but also to anticipate as a result 
of the longer-lived population those abuses, those criminal 
abuses that could and do occur within and to the senior 
population. So I think that bar-setting, consistent with the 
jurisdiction of the Congress, is not inappropriate.
    Mr. Woods. Mr. Chairman, could I add something to that?
    Chairman Baker. Sure.
    Mr. Woods. I think we certainly agree with the governor. 
This is a major problem, as you have pointed out. There are 
millions of people in this situation; millions more to come 
there. If the States do not act by some point, it seems to us 
that we would support a default position that they would 
naturally fall back to, because it is a critical issue. Mr. 
Gallagher has pointed out some of the issues that can occur if 
there isn't appropriate oversight and regulation. So I think we 
would support that.
    Chairman Baker. Well, it is good to hear a financial 
adviser telling us to plan ahead. I like that.
    [Laughter.]
    My time has expired. Mr. Kanjorski?
    Mr. Kanjorski. Thank you, Mr. Chairman.
    I was struck by your testimony, Ms. Hounsell, in terms of 
the gap of income that women experience. I guess if we look out 
over the future, the next 40 years, that gap of income probably 
should materially close, if not completely close. Wouldn't you 
agree? So we are just dealing there with a 40-year problem.
    Ms. Hounsell. I think the issues that I talked about, the 
care-giving, all of those things, they have not changed and 
they will not change. I know Newsweek just did a big article 
saying that there are women that earn more than their spouses, 
but it is a very small percentage of the whole work force. So I 
do not think it will change. I think that is why it is really 
important for women to understand early on in their careers.
    Mr. Kanjorski. I tend to agree. That is what I was going to 
get to. Listening to testimony and everything, from Mr. 
Gallagher to Governor Keating, and Mr. Woods about the 
potential fraud. How much fraud is out there? Are we talking 
about 3 percent, 10 percent, 20 percent? Because it seems to me 
that it be sometimes more expensive, both at the State level 
and the Federal level, to try and prevent fraud, and maybe 
those assets could be utilized in financial education. I am one 
that is quite convinced that Americans across the board are 
financially illiterate to a large extent. I think that probably 
the best evidence of that is how they bought some of the stocks 
they did when they did and where they went to. Maybe I would 
even go beyond that and say, what I am worried about is we have 
substantial people that are engaged in financial planning, the 
sale of insurance products, these are very complicated. I know 
when I talk to people in the insurance business, sometimes I 
walk away spinning, not quite understanding what is the best 
proposition, and yet here I have the benefit of 70 of my 
colleagues who are the most educated on all these propositions 
in the world.
    The reality is that we do not have an educated electorate. 
Should we just standardize situations, and then discourage or 
prevent someone who fails a financial literacy test from 
getting into those markets, the selling of those products that 
you talked about Mr. Gallagher, and take the money that we are 
spending to prevent fraud and spend it on education, or include 
a large segment of education and put it into our school 
systems, and literally encourage people to get smart.
    I just want to add one caveat to that. When the market goes 
wrong or people lose money on investments, they always want to 
find fraud, misrepresentation and abuse, but I am struck with 
the fact that right now in Washington, those of us who are 
elected officials, and our two parties are in a tremendous 
struggle to determine what is the best tax policy for the 
United States, or recovery stimulation policy for the economy. 
I would venture to say probably some of us could be indicted 
for fraud because we cannot all be right, and we area almost 
diametrically opposed. I listen to my good friend Alan 
Greenspan and to Warren Buffett, and he tells us to do one 
thing and what the effect will be, or the Committee on Taxation 
that tells us what is going to happen if we pursue a certain 
policy. On the other hand, I listen to some of the highest 
officials in the nation who enjoy tremendous credibility with 
the American people, and they will recommend completely 
something diametrically opposite; and then I look at the 
electorate, and they are dead split probably on the issue, 
indicating that they are not making the best analysis of 
understanding either.
    If we cannot do that in national economic policy, national 
financial policy, how can we expect the average constituent to 
have the literacy necessary in financial understanding to 
really protect themselves? And then the role is, how much 
should government get involved? Wouldn't it be better to say if 
you do not qualify in a certain way, you cannot get into that 
product, and it is on the basis of the seller to qualify the 
person and prove that they are literate enough to participate?
    Mr. Gallagher. I will touch on that. That is one issue that 
you did hear Mr. Woods mention, that the NAIC is looking at 
ways to set up a qualification as to what product is right for 
the person that is buying it. It is not an easy thing to do, 
because certain products fit some people. I think the national 
argument is that some people see one way of stimulating the 
economy as totally different than the other sees it. Both will 
probably stimulate it; the question is, which one is going to 
do it in a way that the person sees it to benefit them better, 
I guess.
    That happens in investments all the time. There are a 
myriad of investments because they fit different people's 
needs. Mr. Scott mentioned the problem of people in predatory 
lending. We have a major education going on in Florida on 
predatory lending. Certain lending processes that go on are fit 
for certain people. A person that has really excellent credit 
should not get mortgages that cost a lot of money and have a 
bunch of points. But yet, there are some people who because of 
their credit problems might have to get a mortgage like that, 
so it might be the only thing they can do and it might fit 
them.
    So different things fit different people. I certainly do 
not think we ought to have a police force going out and saying, 
and government should be involved in making the decision on 
what is good for who. But I do believe that there are two 
sides. One, enforcement of people that do abuse the laws that 
we have to prevent fraud, that has to be a strong side. And the 
other side is education. You also have to have the ability to 
have people educated in what is right for them. I think you 
have to have both.
    Mr. Kanjorski. You know, I am struck, one of our fine 
senators, I cannot recall his name right now, but he talked 
about compound interest and what a small portion of the 
American population understands the ramification of compound 
interest. Maybe we ought to develop a Florida-type test that 
you have to take, and if you cannot pass the test of 
understanding compound interest, you are just disqualified from 
the field. Would you recommend that we take that up with your 
governor and include that as part of that final test down 
there?
    Mr. Gallagher. I would recommend you take it up with 
somebody else other than me. I am not dealing with it.
    [Laughter.]
    Chairman Baker. Especially as long as it does not apply to 
members of Congress.
    Mr. Kanjorski. Alright. Thank you very much.
    Mr. Woods. Mr. Chairman, could I add something to that 
statement? You cannot legislate morality. That is a truism. 
Education is the best defense against fraud and things like 
that. That is the reason why the life insurance industry about 
10 years ago created the Life and Health Insurance Foundation 
for Education to provide that kind of financial literacy, which 
is our word and your word. It is a good term. One of our major 
programs is a high school education program, so that as these 
consumers come into the marketplace, they have an understanding 
of financial issues and how to address them and how to think 
about them, and the kind of questions to answer. So I do not 
think it is an either-or issue. I think it really is a 
combination of both regulation and education.
    Chairman Baker. Thank you.
    Ms. Kelly?
    Mrs. Kelly. Thank you, Mr. Chairman.
    Mr. Woods, as I mentioned in my opening, my Subcommittee on 
Oversight and Investigations held a hearing on viaticals last 
year. I was really troubled by the complete lack of adequate 
consumer protections for viaticals that there are in many 
States, something that I thought was very surprising because of 
the good work that has been done by the NAIC in developing a 
consensus model of viatical law. At that time, it became clear 
that Florida had an A-plus level of viatical protection. I 
understand now that 12 States have implemented the new NAIC 
model. Don't you think we need to make sure that more States 
update their law so that everybody can be an A-plus in terms of 
protecting the consumers? How would you recommend we try to 
push that?
    Mr. Woods. Well, the answer to the first question is easier 
than the answer to the second. We do agree with that. We do 
think that proper protection for consumers, disclosure, all of 
those issues, are tremendously important. As the chairman said 
earlier, they are at a vulnerable time in their lives. As far 
as how to do it is concerned, that is a bigger challenge. 
Perhaps a default mechanism that the chairman mentioned is one 
way to do that; education of the legislators themselves and of 
the commissioners themselves about the critical importance of 
this process. I would not call it a product, but this process, 
and how it can be abused and yet how it can also be very 
helpful to people at an important time in their lives. It is a 
challenge, but I think you are right to address it. The role of 
this committee, it seems to me, is to continue to raise the 
issue in the minds of the public and also regulators across the 
country. I cannot give you a better answer. I wish I could.
    Mrs. Kelly. Mr. Gallagher, I want to switch gears a little 
and talk about your testimony, which I found very interesting. 
It notes that allowing States to run a national fingerprint 
background check on insurance producers and the company 
personnel is probably the best way to weed out what we know are 
wrongdoers before they get a chance to commit fraud. I was 
interested in the kind of coalitions you were talking about 
building here. Specifically, you talked about this 
fingerprinting. It seems to me that you talk about how critical 
it is if States expect us to establish a national agent's 
licensing system like we did in NARAB. I helped to write that 
NARAB legislation. I am interesting in how you perceive that as 
working in light of, if it is the same way that we built the 
NARAB legislation, or how you see that working.
    Mr. Gallagher. I can tell you in a way how it does not 
work, but also tell how it does. Let me just mention that we do 
have in Florida fingerprinting for licenses. If you look at, 
when I talked about viaticals, 35 basically applied; 17 
withdrew. There is a reason they withdrew. They withdrew 
because we do fingerprint background checks and they realized 
they were not going to get a license in Florida because of who 
they were. So many other States are unable to do this. That is 
why I am pushing very hard for you all to allow us as State 
regulators, especially on the insurance side, to have access to 
the FBI database. Certain of us can because of our specific 
laws and the way we operate; most of the States cannot. So 
there are about four or five States, I think four that require 
fingerprints before they allow an agent to be licensed in that 
State; other States do not.
    We believe that it is a very important consumer protection, 
and the ability to stop things before they start by having that 
fingerprint background check; and also share databases with 
Federal and other States to know who has done what before we 
give them a license, and wait until after they spend who knows 
how many years before they get caught abusing someone again 
with fraud, when they have already maybe been busted in another 
State.
    Mrs. Kelly. So if I understanding your testimony clearly, 
what you are asking for is a Federal statute that would give 
all States some kind of a uniform access to compare notes with 
the FBI's fingerprint database. Is that correct?
    Mr. Gallagher. That is correct. We believe that it would be 
worthy. Insurance regulators are the only ones that don't. 
Banking regulators and banks themselves have access to the 
database, whereas insurance regulators do not. We believe the 
fastest way for all insurance regulators to get that access and 
to be able to compare with each other the information from NASD 
as well as NAIC and other States would be to have the database 
work out as well as have the access to the FBI fingerprint 
files. It is a very simple access now. It used to take us six 
weeks to get returns. We now do it all electronic. There are 
electronically taken; they are sent in; we get 24-hour 
turnaround. So this is not a time-consuming thing. The FBI has 
updated their fingerprint process. We have done it in most of 
the States. So it is electronically done, so it really is a 
very smooth, easy thing to do, as opposed to what it used to be 
with the cards.
    Mrs. Kelly. But you need a Federal statute to do it?
    Mr. Gallagher. We believe that is the fastest and best way 
to get it done, and have us up and running. You in the Congress 
in 2001 did the bill that would allow that. The Senate has not 
quite gotten to it yet, but we encourage you to keep it moving, 
and maybe even let that go by itself. Sometimes it gets so many 
other things attached that it does not move. But just allowing 
that access we believe for insurance regulators would make a 
major difference.
    Mrs. Kelly. Thank you, Mr. Chairman.
    Chairman Baker. Thank you very much.
    Mr. Gallagher, just to clarify, I should not interpret your 
remarks representing NAIC today for a national standard to in 
any way be inferred or any implications with regard to national 
charter. Is that correct?
    Mr. Gallagher. We have been pretty strong in our stand on 
the problems that could come by that, but we are willing to 
work with you on any ideas you may have.
    Chairman Baker. I am sorry. I just could not pass up the 
opportunity.
    Mr. Gallagher. I understand.
    [Laughter.]
    Chairman Baker. Mr. Scott?
    Mr. Scott. Thank you, Mr. Chairman.
    This has been a very invigorating discussion and such a 
distinguished panel. I would like to ask a series of questions, 
first to you, Governor Keating. It seems to me that as a former 
governor and now the head of the American Council of Life 
Insurers, you represent over 380 individual companies. You 
mentioned two areas that I would like to examine a little 
further and get your thoughts on, that I find challenging. One 
is the strains that we are faced with in our economic 
infrastructure, with the baby boomers. You mentioned that their 
average age is between 55 and 64, and their average savings is 
only $47,000. We have got the strains on Social Security and 
Medicaid.
    My first question is, given this, what do you recommend 
that we in Congress do in reference to the stability of 
Medicaid and Social Security? That is the first part of my 
question, what we can do here, and what further impact is this 
going to have if we do not do something. And what do you 
recommend that we do in these two specific areas, given your 
position not only now as the head of the life insurers, but as 
a former governor?
    Mr. Keating. Congressman Scott, that requires a Solomaic 
answer, and I am not sure that I am in a position to provide 
it. Obviously, if I were able to tell you how to solve Social 
Security once and for all and Medicare once and for all, I 
would probably be on the talk show circuit and in every living 
room in America, because all of us are groping for that answer. 
The reality is, as you know, that the country made a 
commitment, our nation made a bipartisan commitment to have a 
Medicare system to care for the elderly, long-lived now, more 
than ever before, for their health care needs. The burden 
obviously on the States and on taxpayers is very large to do 
that.
    The same is true of Social Security. My children, and I am 
a grandfather for the first time last July, on the fourth of 
July, by the way, and expect to have another grandchild by 
another daughter this July, though probably not the fourth, 
they do not think they are going to have Social Security. They 
just simply do not anticipate that they will. Well, that 
commitment that they will have Social Security and what is 
assured them will be paid I think is very important. How do you 
get there, with the lengthening life spans? Obviously, here in 
the Congress you debate older retirement ages, older ages for 
access to Medicare, as well as to Social Security, and that 
debate should continue.
    I think at the same time, as Mr. Woods said and as I know 
the chairman mentioned in the discussion of education, people 
have to understand that that is not the only thing. Whatever 
robust Social Security or Medicare system there is out there, 
or whatever diminished Medicare or Social Security system is 
out there, people have to have personal responsibility; they 
have to have personal knowledge of their finances; they have to 
have a personal commitment to take care of themselves. That is 
very difficult. I cannot over-emphasize the significance of 
congressional investigative subcommittees or committees going 
into the States. They are covered by all the newspapers, all 
the television, all the radio. You can in one hearing sensitize 
the entire population of a State about an issue. To take these 
issues and go into the States and debate Social Security and 
Medicare at the same time, and get ideas from citizens and from 
elected officials to solve a problem that is a serious problem 
20 years from now, if not perhaps even 10 years from now, I 
think is very, very meritorious.
    To have joint discussions with State leaders and with State 
policymakers, especially those of us on the State level that 
are charged to pay out of State resources a large bit of the 
Medicaid bill, that is very important. And that is very 
bipartisan and very essential. But there is simply no way, as 
you know, to say in one sentence how to fix Social Security or 
Medicare. It is just that in one sentence, I think the average 
American would say to us, those of us who have been elected and 
those of you who are now elected, that we expect for that 
contract to be honored.
    Mr. Scott. Let me just ask another question. That was one 
area. The other is, as I mentioned in my opening statement, we 
are working in this committee on financial literacy. I have 
introduced a bill, working with other members of this 
committee, to find a way to target information. One of the 
tools that we plan to use is the establishment of a nationwide 
toll-free number, because it is a two-way street. You can have 
it available, but if we can find some kind of way to have a 
lifeline out for these individuals to get information back and 
to target it.
    Ms. Hounsell, I think you hit my point a little bit. There 
are targeted groups. I think there is probably no group, quite 
honestly, in more need of this than African American women. I 
would like to hear what you recommend, and if there are others 
here, I would like to know what specifically each of you all 
are doing in the areas of getting financial education, 
financial literacy to some of these most impacted communities. 
Again, Governor Keating, I think you hit it on the head when 
you said that financial literacy is more than just knowing the 
difference between stocks and bonds; it is more than knowing 
enough about saving money. It is the responsibility of managing 
those assets over a lifetime. I think if we do nothing else in 
this committee, to deal with financial literacy and arm our 
people with the information they need, if no more than just 
simply say before you sign on the bottom line, call this 
number.
    That is the approach that we are hearing. I would like to 
hear from you what each of you are doing, if you would care to 
comment, and have anything that you are moving in the area of 
providing financial literacy, especially for the most impacted 
and vulnerable groups like African American women.
    Ms. Hounsell. We have a grant from the administration on 
aging, and one of the things we have tried to do is really get 
into the communities, so we work with a lot of different 
groups. In fact, two weeks ago, I was at the National 
Conference of Black Mayors where we do a workshop every year 
with the women mayors. A number of them are taking our program 
and then doing it in their community, whether they do it in the 
churches or wherever they can, a library. That is where people 
are willing to do. They need to hear it in their home base. One 
of the reasons I think we have had so much success is because 
we then have somebody in the community bring us in, and we 
train them. One woman that we trained about six years ago in 
Atlanta has done over 90 trainings, and she has hit more than 
5,000 people. A lot of these people then take the information 
to other people. I think that you need more than just giving 
people a Web site. I am always saying that to people. You know, 
you go home, I mean to do a lot of things when I go home, and 
the last thing, you know, there are things I could learn on the 
Web site myself, but the last thing I am doing when I go home 
is turning on the computer and trying to do that. When you have 
working people with so many other demands on their time, they 
just do not get to doing it. But if there is a program at the 
library or at the church on a Tuesday night, and somebody says 
you have to come hear this, they will come.
    Ms. DeSalles. And we at AARP have long been active in the 
area of providing financial education through sophisticated 
means such as research that we do and our very excellent Web 
site, all the way down to individual workshops out in the 
community and in the churches. One of our very successful local 
efforts was a financial education series called ``Women, it is 
time.'' We concentrated on the fact that women typically, 
particularly lower-income women, do not bring with them the 
financial expertise that other groups do.
    There is absolutely a need for as much financial education 
and increased financial literacy as we can provide, but we need 
a level playing field. People have to be responsible and make 
their own decisions, but they should do so in an area that 
protects them. That is why we are also pushing for changes in 
the regulatory environment so that when people get the 
wherewithal to make those decisions, then they are making the 
decisions in an area that is protected somewhat, if you want. 
It is necessary to have them both. I believe Mr. Woods talked 
about the needs for the equal thrust, and we agree with that.
    Chairman Baker. Mr. Scott, a couple of our witnesses have 
to leave in the next few minutes, and I would like to afford 
the opportunity.
    Mr. Scott. Sure.
    Chairman Baker. Thank you, Mr. Scott.
    Ms. Harris?
    Ms. Harris. Thank you, Mr. Chairman.
    This question is for Mr. Woods. In your testimony, you 
mentioned the role that the insurance agents are the first line 
of contact for many of our seniors, in terms of their adviser 
or their educator on various insurance products. Bearing in 
mind that the agents have to rely on their commissions, what 
other types of information does your organization provide in 
education to help protect the consumer?
    Mr. Woods. The Life and Health Insurance Foundation for 
Education provides, this really gets to Mr. Scott's question as 
well, several levels of education. We have a broad-based 
education program for high school students, primarily juniors 
and seniors. Last year in 2002, 25 percent of the high school 
juniors and seniors in the country were exposed to this 
program. In the State of Utah, it is a mandated program. We 
have a very large Web site. We are adding a big section on 
long-term care, which will be up in July, as well as life 
insurance, disability insurance, health insurance, all of the 
other kinds of insurance coverages.
    We also are part of a couple of coalitions, Jump Start 
coalition, which some of you may be familiar with, is a 
coalition of many organizations dedicated to providing 
financial literacy, particularly at the early stages of life. 
We are also a part of an effort on the part of the National 
Endowment for Financial Education to provide financial literacy 
across the country in various venues. It is a massive job. We 
have not done this very well or at all forever, I suspect, and 
really the effort has begun in the last five or ten years. We 
are very proud that the insurance industry has made this 
investment in this effort.
    The other thing is, and Congressman Lucas can attest to 
this, he pointed out his credentials in the insurance industry, 
the best teacher of all, the best educator of all is a 
knowledgeable and qualified life insurance agent. Consumer 
study after consumer study indicates that that is where people 
get their information, and they want to get their information 
from them.
    Ms. Harris. Certainly. And I think the programs for young 
people that you mentioned are laudable. We are just concerned 
about seniors as well. Again, it is just the perception that as 
these well-qualified planners are dependent on commissions, 
just that there are other opportunities for seniors to evaluate 
versus that specific information, that they are the only 
source.
    Following up on that with regard to AARP, we have heard a 
lot of discussion about the need for a financially literate 
senior population. Based on your research, where do most 
seniors turn for that information?
    Ms. DeSalles. I am sorry, the last part of the question?
    Ms. Harris. Where do most of your seniors turn for 
financial information?
    Ms. DeSalles. They turn to a variety of sources, 
newspapers, magazines, friends and families. Our research, and 
I do not have those percentages right in front of me; it is in 
the written statement, but they get that information from a 
variety of sources. The problem is, they do not get enough 
information at an age when they need to start planning. The 
information is out there if you are savvy enough to look for it 
and seek it out, whether on the Web or magazines and newspapers 
or financial planners, but people just are not getting it.
    Ms. Harris. As the largest advocacy group, do you launch 
that type of information when they first join? Do you have 
other opportunities for them to educate themselves concerning 
fraud and abuse?
    Ms. DeSalles. We take advantage of every opportunity we 
can. Primarily, our biggest method of communicating with our 
members, of course, is our AARP magazine, as well as the 
Bulletin, which goes to over 20 million households, reaching 
our 35 million members. But we use not only those articles, but 
we use an extensive volunteer network to provide in many cases 
one-on-one information to people. We have pamphlets, booklets 
that we make available not only to individuals, but to groups, 
to other people that want to avail themselves of our research. 
We are noted for the quality of the research that we provide, 
and we are very proud of it. We make it available to other 
researchers and institutions, private individuals. We cover the 
waterfront.
    Ms. Harris. You certainly are one of the first lines of 
defense with regard to information to so many of our seniors.
    Mr. Chairman, one final question to Mr. Gallagher. You 
testified that the average age for the viatical investor is 
over 70, and the majority of viatical provider applications in 
Florida have failed to gain approval. Notwithstanding the 
national charter that you mentioned earlier and discussed with 
the chairman, since viatical fraud is a growing problem, and 
you have discussed the fingerprinting, the use of FBI databases 
and also cross-checking with other States, what else can 
Congress do to make it easier to protect our seniors?
    Mr. Gallagher. I think if we did that, we would go a long 
way. I don't like to repeat myself, but I think if you try to 
do too many things, nothing gets done.
    Ms. Harris. This database information is the first line of 
defense, you say that is the single most important thing we 
could do?
    Mr. Gallagher. The most important thing is having that 
database. The fraud database is certainly number one. And 
access by State insurance regulators to the FBI fingerprints 
can help the States do what Florida does, and we also can do it 
better when other States have the ability to get in there and 
do theirs.
    Ms. Harris. So there is no wish list, that is the main 
thing?
    Mr. Gallagher. I would like to just keep it in and keep it 
real simple, and we believe that that would have a lot of good 
things to help the elderly and protect them before the fraud 
happens, than go arrest somebody afterwards.
    Ms. Harris. Thank you.
    Thank you, Mr. Chairman.
    Chairman Baker. Thank you, Ms. Harris.
    Mr. Lucas?
    Mr. Lucas of Kentucky. Thank you, Mr. Chairman.
    Mr. Woods, I want you to know that you are not alone being 
on Medicare. I probably preceded you there by a few years.
    Mr. Woods. I could not tell by looking at you.
    [Laughter.]
    Mr. Lucas of Kentucky. You ought to be in politics.
    Mr. Kanjorski was talking about education against consumer 
fraud, but from my limited experience, I think we have got to 
protect the people. There are a lot of naive folks out there, 
and there are a lot of intelligent people in their certain 
fields, but I like the idea, Mr. Baker, that we have a Federal 
default position, give the States some time to do something 
about this, but if they do not, then I think we need to step 
in. I would like to hear from the panel about that, but I will 
make a couple of other comments, and then I would like for you 
to answer that.
    I think unfortunately by the time people get to be members 
of the AARP, it is a little late for savings. You have got to 
protect what you have, because I think the key to saving is as 
we all know the magic of compounding. If we could get people to 
save a little bit earlier with the compounding and dollar-cost 
averaging, I think that would be it. Also, I think the old 
adage of put all your eggs in one basket and watch that basket, 
is a very dangerous example to set, talking about the people of 
Enron and others who put all their eggs in one basket and where 
that basket went. I was a great believer in functional 
allocation and trying to get people to do something early.
    I would commend Mr. Gallagher for what the State of Florida 
has done in this viatical transactions problem, and I would 
hope, Mr. Baker, that we might come up with some legislation 
that would protect people in those States where the States have 
failed to take action. I think that would be very meaningful 
and very helpful to our people. But I would be interested in 
any of you folks on the panel making your comments about that 
particular issue. Should we come up with a default position as 
the Federal government for States who fail to act?
    Ms. DeSalles. I am not a technical expert on that, but 
certainly AARP would be willing to, our staff that are experts 
on this, work closely with the subcommittee in exploring that 
issue. That offer just stands for us.
    Mr. Lucas of Kentucky. Anybody else? Does it make sense?
    Mr. Woods. Yes, certainly from the National Association of 
Insurance and Financial Advisors' standpoint, Congressman 
Lucas, we are already working actively with the States to get 
them to adopt the model, but we would support the default 
position for the very reasons the chairman and others have 
indicated. It is a critical issue for seniors at a very 
vulnerable time in their lives. I think they would be 
supportive of that.
    Mr. Lucas of Kentucky. Thank you.
    Chairman Baker. Thank you, Mr. Lucas.
    Mr. Tiberi?
    Mr. Tiberi. Thank you, Mr. Chairman. I apologize for coming 
in late. I had another markup, and I apologize I missed the 
testimony from the panel.
    Governor Keating, the issue of annuities has kind of 
bubbled up and made some news lately. Can you talk to us, and I 
apologize if it was in your testimony, about the differences 
between variable and fixed annuities, and how one is preferable 
to another for seniors to choose from?
    Mr. Keating. It is difficult for me to give any specific 
financial advice because you do not know, as David Woods said, 
the circumstances of each individual, their age, their 
financial knowledge, their dependents, their financial 
challenges, and obviously their assets. But a fixed annuity 
provides a set steady stream of income. A variable obviously 
varies with the market, and most particularly the stock market. 
I know recently, after seeing three years of calamity in the 
stock market, and living in public housing in a State residence 
for eight years, I bought from my brother, who is a financial 
planner, a variable annuity. To be honest with you, I feel 
pretty good about it. We bought my mother-in-law a long-term 
care policy, and she feels 20 years younger.
    So as Congressman Lucas pointed out, to put many different 
eggs in many different baskets; to have something that is 
fixed; to have something that rides with the market tide; to 
have real estate and the like, whatever you can do to make 
yourself more diverse and make yourself more knowledgeable 
about your assets and do not keep everything frozen forever, 
that is wise financial planning. But an annuity is a wing-man 
relationship to the Social Security system. I think you can get 
them for very little money or a lot of money, but to have a 
defined benefit check from Social Security and a defined 
benefit check from your annuity that you cannot out-live is 
very sound planning. Hopefully in my own case, I have done 
something wise for once.
    Mr. Tiberi. Following up on that, Governor, is there 
something that we can do in Congress to help people purchase 
annuities, tax advantages? Is there something we can do to help 
seniors?
    Mr. Keating. Remember that the annuity has a tax-free 
buildup. The reason for that is you cannot get anything out 
until you're 59 1/2, and you have by law and by practice, a lot 
of serious penalties if you do so. It is the only product out 
there that encourages people to save long term to provide for 
their retirement, in effect, that wing-man or companion 
investment to Social Security. Obviously, we feel that whatever 
comes through the Congress to provide for the goose equally to 
the gander is very important. If I have 100 shares of General 
Electric, for example, in my annuity, if the Congress sees fit 
to provide that 100 shares outside of the annuity with tax-free 
treatment, it is only wise to provide the 100 shares within the 
annuity for tax-free treatment as well.
    This is not just, Congressman, an issue of fairness, but of 
good social policy, because if all of us become consumers only; 
if all of us become spenders only, we do not think about 20 
years from now. We don't care about it. If I have to pay taxes 
right now on whatever I invest in an annuity, for example, or a 
savings retirement vehicle, I will not do it. I will not do it. 
I will buy a boat or I will take a vacation. But to the extent 
that those products can continue to have fair, equal tax 
treatment and not tax the build-up, and when we take out, of 
course, we would love to see capital gains treatment, that is 
the way to have more people buy annuities. There are about 57 
million annuity contracts out there in existence.
    Mr. Tiberi. You mentioned long-term care insurance. One of 
the things, I was in the State legislature in Ohio, and one of 
the things that we tussled with was how to encourage 
particularly baby boomers at this point in time to purchase 
long-term care insurance. Is there something Congress can do to 
encourage more people to purchase long-term care insurance?
    Mr. Keating. There are a number of bipartisan measures to 
provide an above-the-line deduction for long-term care. Realize 
that for you writing the checks, from us and yourselves as 
taxpayers, to provide an opportunity for Medicare to be secure 
in the future should also include an opportunity for an 
alternative to Medicare if you wish, a supplement, a companion 
to Medicare, which is long-term care. So that an individual can 
stay in their home, something Medicare does not permit, and 
have an insurance policy help them be secure and be in a 
dignified environment in their home. To use tax policy to 
encourage that kind of very wise social policy is unfortunately 
the only way you are probably going to have a lot more people 
participate. For example, there are only eight million long-
term care policies in existence today. With a population of 280 
million people or whatever the figure is, it rises every month, 
that is an insignificant number of people buying what is in my 
judgment an extraordinarily important product.
    Mr. Tiberi. Thank you, Governor.
    Mr. Keating. Yes, sir.
    Chairman Baker. Thank you, Mr. Tiberi.
    Ms. Brown-Waite?
    Ms. Ginny Brown-Waite of Florida. Thank you, Mr. Chairman. 
I apologize, too. We had a markup in the Veterans Committee, or 
I would have been here sooner.
    The question is for Mr. Gallagher. Mr. Gallagher, you 
testified that the current 2001 NAIC model law on viaticals 
should be adopted by all States, and that State laws must 
change to recognize the changing marketplace. I have been 
actually working with the chairman of the committee to draft 
legislation that will address this issue. Both Chairman Oxley 
and Chairman Baker, along with the staff, have helped us work 
on a bill that will very closely follow the NAIC model law, and 
will set that as a default for States with little or no 
regulation on viaticals. Obviously, under this plan States with 
little or no regulation of the viatical industry will have a 
certain amount of time to adopt the model law. However, if a 
State would like to strengthen the law on an ongoing basis, the 
legislation would also include a specific provision to allow 
just that. Certainly, in the State of Florida, we have had the 
viatical law since I was there in 1996 when we passed it, and 
we had several amendments to that law to actually strengthen it 
and improve it. I know the great job that you have done, and 
the recovery that the State has been able to obtain as a result 
of abuses of our viatical law have been very pro-consumer and 
certainly have set an example for many other States.
    I just had a question, and that is, do you think that 
seniors and other consumers would be better protected if all 
States had used some updated version of a viatical law similar 
to what Florida has? I know that there are only about 11 now 
that actually have similar laws.
    Mr. Gallagher. I can say partially yes. But I say 
``partially'' because many States, even if they had the laws, 
do not have the ability to go into the FBI, get the 
fingerprints, and keep people from being able to get into the 
business and create the fraud. So you are much better off 
closing the door before they come in, as opposed to allowing 
them in to perpetrate a fraud, and then have the laws that 
allow you to go arrest them because they have carried out that 
fraud.
    Ms. Ginny Brown-Waite of Florida. Mr. Chairman, a follow-up 
question? I know that in Florida, one of the things that we did 
was we, for example nursing home employees and directors have 
to be fingerprinted and subject their names to the FBI. Would 
that be a good, I mean, that is at the beginning of the 
process? Would that be a good addition to this bill?
    Mr. Gallagher. Yes. I think any access that you can give to 
enable State regulators that have the responsibility to carry 
out viatical fraud regulation, because it is considered an 
insurance product. In my belief it is also a securities product 
because they are taking and making a security out of some of 
the products that they are selling, to see to it that there are 
the background checks of those individuals that are involved in 
it, as you have in nursing homes, yes, that should be done. And 
any help that you in Congress would do to allow the access to 
those files of fingerprints would certainly help the States.
    Ms. Ginny Brown-Waite of Florida. And you cannot do that on 
your own?
    Mr. Gallagher. Florida can, so that is why we are probably 
on the forefront of what we have been able to do in regards to 
keeping people out of the business. We have a lot of elderly 
and a lot of people like to come to Florida and commit fraud. 
We are strong on those that do it, but we have kept a lot of 
people from doing it because we did not let them in.
    Ms. Ginny Brown-Waite of Florida. Great.
    Mr. Gallagher. I think other States having that ability 
would be a real plus.
    Ms. Ginny Brown-Waite of Florida. Thank you, Mr. Chairman. 
Thank you very much, Mr. Gallagher.
    Chairman Baker. Thank you, Ms. Brown-Waite.
    I want to express my appreciation to each of you, and make 
a request. To the extent not contained in your submitted 
official testimony, which of course is made part of our 
official record, any brochures, informational material, the 
examples that you gave us during your presentations here this 
morning, if you have information that is for retail 
distribution to folks that are of an educational nature, the 
committee would like to get that for purposes of incorporating 
it into our own informational base. The subcommittee has 47 
members, each of whom represent in excess of 600,000 people. If 
just the members of this committee engage in some informational 
distribution, it would be extremely helpful, if it is nothing 
more than just a list of 1-800 numbers. So if nothing else were 
to come of the hearing this morning, that would be of 
significant help to the committee in understanding the scope of 
what is being done, and assimilating it into our own offices.
    Secondly, I think the issues raised and the perspectives 
given are very helpful to us. This is a beginning step. It is 
certainly not a conclusion. To the extent any member wishes to 
add additional comments or questions for the record, it will 
remain open for a period of time. We certainly appreciate your 
willingness to participate, and we look forward to working with 
you in the future.
    If there are no further comments, our meeting stands 
adjourned. Thank you.
    [Whereupon, at 11:49 a.m., the subcommittee was adjourned.]


                            A P P E N D I X



                              May 15, 2003

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