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



 
     STRENGTHENING PENSION SECURITY FOR ALL AMERICANS: ARE WORKERS 
              PREPARED FOR A SAFE AND SECURE RETIREMENT?
=======================================================================

                                HEARING

                               before the

                         COMMITTEE ON EDUCATION
                           AND THE WORKFORCE
                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             SECOND SESSION

                               __________

                           February 25, 2004

                               __________

                           Serial No. 108-44

                               __________

  Printed for the use of the Committee on Education and the Workforce



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                COMMITTEE ON EDUCATION AND THE WORKFORCE

                    JOHN A. BOEHNER, Ohio, Chairman

Thomas E. Petri, Wisconsin, Vice     George Miller, California
    Chairman                         Dale E. Kildee, Michigan
Cass Ballenger, North Carolina       Major R. Owens, New York
Peter Hoekstra, Michigan             Donald M. Payne, New Jersey
Howard P. ``Buck'' McKeon,           Robert E. Andrews, New Jersey
    California                       Lynn C. Woolsey, California
Michael N. Castle, Delaware          Ruben Hinojosa, Texas
Sam Johnson, Texas                   Carolyn McCarthy, New York
James C. Greenwood, Pennsylvania     John F. Tierney, Massachusetts
Charlie Norwood, Georgia             Ron Kind, Wisconsin
Fred Upton, Michigan                 Dennis J. Kucinich, Ohio
Vernon J. Ehlers, Michigan           David Wu, Oregon
Jim DeMint, South Carolina           Rush D. Holt, New Jersey
Johnny Isakson, Georgia              Susan A. Davis, California
Judy Biggert, Illinois               Betty McCollum, Minnesota
Todd Russell Platts, Pennsylvania    Danny K. Davis, Illinois
Patrick J. Tiberi, Ohio              Ed Case, Hawaii
Ric Keller, Florida                  Raul M. Grijalva, Arizona
Tom Osborne, Nebraska                Denise L. Majette, Georgia
Joe Wilson, South Carolina           Chris Van Hollen, Maryland
Tom Cole, Oklahoma                   Tim Ryan, Ohio
Jon C. Porter, Nevada                Timothy H. Bishop, New York
John Kline, Minnesota
John R. Carter, Texas
Marilyn N. Musgrave, Colorado
Marsha Blackburn, Tennessee
Phil Gingrey, Georgia
Max Burns, Georgia

                    Paula Nowakowski, Staff Director
                 John Lawrence, Minority Staff Director
                                 ------                                













                            C O N T E N T S

                              ----------                              
                                                                   Page

Hearing held on February 25, 2004................................     1

Statement of Members:
    Boehner, Hon. John A., a Representative in Congress from the 
      State of Ohio..............................................     2
        Prepared statement of....................................     4
    Miller, Hon. George, a Representative in Congress from the 
      State of California........................................     5
    Norwood, Hon. Charlie, a Representative in Congress from the 
      State of Georgia, Statement submitted for the record.......    68
    Porter, Hon. Jon C., a Representative in Congress from the 
      State of Nevada............................................    68

Statement of Witnesses:
    Henrikson, C. Robert, President, U.S. Insurance and Financial 
      Services, MetLife, New York, NY............................    22
        Prepared statement of....................................    24
    McCaw, Dan, Chairman and CEO, Mercer Human Resource 
      Consulting, Washington, DC.................................    13
        Prepared statement of....................................    15
    Orszag, Peter R., Joseph A. Pechman Senior Fellow, The 
      Brookings Institution, Washington, DC......................    37
        Prepared statement of....................................    40
    Stein, Ben, Honorary Chairperson, The National Retirement 
      Planning Coalition, Washington, DC.........................     8
        Prepared statement of....................................    10

Additional materials supplied:
    American Council of Life Insurers, Washington, DC, Statement 
      submitted for the record...................................    70













STRENGTHENING PENSION SECURITY FOR ALL AMERICANS: ARE WORKERS PREPARED 
                   FOR A SAFE AND SECURE RETIREMENT?

                              ----------                              


                      Wednesday, February 25, 2004

                     U.S. House of Representatives

                Committee on Education and the Workforce

                             Washington, DC

                              ----------                              

    The Committee met, pursuant to notice, at 10:34 a.m., in 
room 2175, Rayburn House Office Building, Hon. John Boehner 
(Chairman of the Committee) presiding.
    Present: Representatives Boehner, Petri, McKeon, Johnson, 
Ehlers, Isakson, Platts, Tiberi, Osborne, Porter, Kline, Burns, 
Miller, Kildee, Payne, Woolsey, Tierney, Holt, Davis, McCollum, 
Grijalva, Van Hollen, Ryan, Wu and Bishop.
    Staff present: David Connolly, Jr., Professional Staff 
Member; Stacey Dion, Professional Staff Member; Kevin Frank, 
Professional Staff Member; Ed Gilroy, Director of Workforce 
Policy, Chris Jacobs, Staff Assistant; Alexa Marrero, Press 
Secretary; Greg Maurer, Coalitions Director for Workforce 
Policy; Jim Paretti, Professional Staff Member; Deborah L. 
Samantar, Committee Clerk/Intern Coordinator; Kevin Smith, 
Senior Communications Counselor; and Jo-Marie St. Martin, 
General Counsel.
    Michele Varnhagen, Labor Counsel/Coordinator; Peter 
Rutledge, Senior Legislative Associate/Labor; Jody Calemine, 
Counsel Employer-Employee Relations; Mark Zuckerman, General 
Counsel; Margo Hennigan, Legislative Assistant/Labor; and 
Daniel Weiss, Special Assistant to the Ranking Member.
    Chairman Boehner. A quorum being present, the Committee on 
Education and the Workforce will come to order. The chair 
recognizes the gentleman from California, Mr. Miller.
    Mr. Miller. Thank you, Mr. Chairman, and I request a minute 
of personal privilege. Yesterday in a meeting with the U.S. 
Senate with the Members of the Senate Committee on Education, I 
told Secretary Paige that I was deeply disappointed in his 
remarks calling the National Education Association a terrorist 
organization; that his remarks were harmful and polarizing at a 
time when we need to bring all people together to make sure 
that No Child Left Behind is a success.
    His remarks were hurtful and unfair and wrong, and I think 
that they strongly undermine his effectiveness as the 
President's leader on education.
    I am also deeply disturbed that during that meeting when 
Members of the Senate and myself asked the Secretary repeatedly 
about the context of a letter that we had sent him on January 
8th, that he told us that he would continue to discuss with us 
those items, and then of course at the end of the meeting, 
handed over the letter with his responses to our questions. I 
must say, he handed over a letter of general responses to our 
very specific questions, and it's very unfortunate. And I 
wanted to make sure that this was on the public record since 
that meeting was private.
    Thank you.
    Chairman Boehner. We're holding this hearing today to hear 
testimony on Strengthening Pension Security for All Americans: 
Are Workers Prepared for a Safe and Secure Retirement?``
    Opening statements are limited to the Chairman and Ranking 
Member, so if other Members have written opening statements, 
they can be submitted for the record. And with that, I ask 
unanimous consent for the hearing record to remain open for 14 
days to allow Members' statements and other extraneous material 
referenced during the hearing today to be submitted for the 
official record. Without objection, so ordered.

   STATEMENT OF HON. JOHN A. BOEHNER, CHAIRMAN, COMMITTEE ON 
                  EDUCATION AND THE WORKFORCE

    I want to welcome everyone and thank our distinguished 
witnesses for coming today. The issue of strengthening the 
pension security of American workers is a top priority for this 
Committee. Last year the Committee held four hearings on the 
future of defined benefit plans, and today's hearing is the 
first this year as we look to reform and strengthen retirement 
plans, particularly defined benefit plans, on behalf of workers 
and employers.
    We've taken a two-pronged approach to address defined 
benefit pension reform on a short-term and a long-term basis. 
Last October, the House passed on a bipartisan basis the 
Pension Funding Equity Act, a bill that would replace the 
current 30-year Treasury interest rate with a conservative 
corporate bond rate for 2 years through 2005. And while the 
Senate-approved version includes additional pension funding 
relief beyond what the House passed, I'm pleased that the 
Senate took action and we stand ready to work with our friends 
in the other chamber to craft a final bill that is limited and 
responsible. Now this measure will provide short-term help 
while we carefully consider more permanent solutions to the 
underfunding problems that are putting the pension benefits of 
working families at risk.
    And that's the reason we're here today. Because the Pension 
Benefit Guaranty Corporation has now accumulated an $11.2 
billion deficit, the need for long-term solutions to reform and 
strengthen the defined benefit system is greater now than ever 
before.
    Unfortunately, the PBGC may have to assume responsibility 
for more underfunded pension plans on behalf of numerous 
financially weak companies. And although the agency has enough 
resources to pay benefits for the foreseeable future, this 
poses a serious question of whether the PBGC will be looking 
for a taxpayer bailout down the road if the financial condition 
of the agency continues to deteriorate.
    We've already announced that we plan to use this year to 
put together a comprehensive legislative proposal to reform and 
strengthen the defined benefit system for workers and employers 
over the long term and put the PBGC on a sound financial 
footing so that it can protect the pension benefits of American 
workers.
    In future hearings that we are planning, we'll examine 
specific aspects of the defined benefit system in more detail, 
but today's hearing looks at broader questions that affect us 
all. Are workers taking the steps necessary to adequately plan 
for their retirement? How has the increasingly complex 
statutory and regulatory structure impacted employers' ability 
to provide retirement plans for the good of their workers? Will 
reforming and strengthening the defined benefit system help 
ensure that workers have a reliable and stable stream of 
retirement income during the life of their retirement?
    Study after study shows that many retirees and baby boomers 
now realize that they have not saved enough to retire and only 
have a short time to accumulate more money for retirement. 
Personal savings, IRAs and 401(k) accounts are important, but 
none of these options provide a stable stream of guaranteed 
monthly income that cannot be outlived.
    Reforming and strengthening the defined benefit pension 
system, which traditionally provides a lifetime stream of 
income or retirement insurance, is essential in preventing 
retiree poverty and helping solve the problems of retirees 
outliving their assets. Unfortunately, many employees 
underestimate how much money they should be saving compared to 
the recommendations by financial planners of how much they'll 
actually need in retirement.
    Today, workers have a heightened responsibility to set 
retirement goals and decide how to save sufficient funds to 
achieve their objectives. Yet studies show that many workers 
are not planning adequately for their retirement, and as a 
result, their retirement security is in jeopardy. For example, 
a study by the Employee Benefit Research Institute shows that 
American retirees will have approximately $45 billion less in 
retirement income in the year 2030 than they'll need to cover 
basic retirement expenses.
    Last year, the House took an important step when it passed 
the Pension Security Act, a bipartisan bill that would have 
allowed employers to provide workers with access to high 
quality, professional investment advice. This would help inform 
workers of the need to diversify their investments and 
adequately save for their retirement. Unfortunately, the Senate 
has yet to act on this measure.
    We should be providing Americans with meaningful retirement 
savings opportunities along with education and advice to help 
them protect and enhance their savings. What we shouldn't do is 
undermine employer-sponsored retirement programs. Indeed, we 
should be taking steps to strengthen these programs and 
increase participation by both employers and their employees. 
Saving for retirement may seem like a future goal, but workers 
need to know that retirement planning should be a lifelong 
effort. We have a lot of work ahead of us on this important 
issue, and I am anxious to hear from our witnesses, and I look 
forward to working with the Administration and my colleagues as 
we move ahead.
    With that, I yield to Mr. Miller.
    [The prepared statement of Chairman Boehner follows:]

Statement of Hon. John A. Boehner, Chairman, Committee on Education and 
                             the Workforce

    I'd like to welcome everyone and thank our distinguished witnesses 
for coming to testify today. The issue of strengthening the pension 
security of American workers is a top priority for the Education & the 
Workforce Committee. Last year, the Committee held four hearings on the 
future of defined benefit pension plans, and today's hearing is the 
first this year as we look to reform and strengthen retirement plans, 
particularly defined benefit plans, on behalf of workers and employers.
    We've taken a two-pronged approach to address defined benefit 
pension reform on a short- and long-term basis. Last October, the House 
acted on a bipartisan basis by passing the Pension Funding Equity Act, 
a bill that would replace the current 30-year Treasury interest rate 
with a conservative corporate bond rate for two years through 2005. 
While the Senate-approved version includes additional pension funding 
relief beyond what the House passed, I'm pleased the Senate took action 
and we stand ready to work with our friends in the other chamber to 
craft a final bill that is limited and responsible. This measure will 
provide short-term help while we carefully consider more permanent 
solutions to the underfunding problems that are putting the pension 
benefits of working families at risk.
    And that is the reason we are here today. Because the Pension 
Benefit Guaranty Corporation has now accumulated an $11.2 billion 
deficit, the need for long-term solutions to reform and strengthen the 
defined benefit system is greater now than ever before.
    Unfortunately, the PBGC may have to assume responsibility for more 
underfunded pension plans on behalf of numerous financially weak 
companies. Although the agency has enough resources to pay benefits for 
the near future, this poses a serious question of whether a PBGC 
taxpayer bailout would be necessary down the road if the financial 
condition of the agency continues to deteriorate.
    We have already announced that that we plan to use 2004 to put 
together a comprehensive legislative proposal to reform and strengthen 
the defined benefit system for workers and employers over the long-term 
and put the PBGC on sound financial footing so that it can protect the 
pension benefits of American workers.
    In future hearings we are planning, we'll examine specific aspects 
of the defined benefit system in more detail, but today's hearing looks 
at broader questions that affect us all. Are workers taking the steps 
necessary to adequately plan for their retirement? How has the 
increasingly complex statutory and regulatory structure impacted 
employers'' ability to provide retirement plans for the good of their 
workers? Will reforming and strengthening the defined benefit system 
help ensure that workers have a reliable and stable stream of 
retirement income during the life of their retirement?
    Study after study shows that many retirees and baby boomers now 
realize that they have not saved enough money to retire or have only a 
short time to accumulate more money for retirement. Personal savings, 
IRAs, and 401(k) accounts are important, but none of these options 
provide a stable stream of guaranteed monthly income that cannot be 
outlived.
    Reforming and strengthening the defined benefit pension system, 
which traditionally provides a lifetime stream of income or retirement 
insurance, is essential in preventing retiree poverty and helping solve 
the problem of retirees outliving their assets. Unfortunately, many 
employees underestimate how much money they should be saving compared 
to the recommendations by financial planners of how much they'll 
actually need in retirement.
    Today workers have a heightened responsibility to set retirement 
goals and decide how to save sufficient funds to achieve their 
objectives. Yet studies show that many workers are not planning 
adequately for their retirement, and as a result, their retirement 
security is put in jeopardy. For example, a study by the Employee 
Benefit Research Institute shows that American retirees will have 
approximately $45 billion less in retirement income in the year 2030 
than they'll need to cover basic retirement expenses.
    Last year, the House took an important step when it passed the 
Pension Security Act, a bipartisan bill that would allow employers to 
provide their workers with access to high-quality, professional 
investment advice. This would help inform workers of the need to 
diversify their investments and adequately save for retirement. 
Unfortunately, the Senate has yet to act on this measure.
    We should be providing Americans with meaningful retirement savings 
opportunities, along with education and advice to help them protect and 
enhance their savings. What we shouldn't do is undermine employer-
sponsored retirement programs. Indeed, we should be taking steps to 
strengthen these programs and increase participation by both employers 
and workers. Saving for retirement may seem like a future goal, but 
workers need to know that retirement planning should be a lifelong 
effort. We have a lot of work ahead of us on this important issue, and 
I am anxious to hear from our witnesses. I look forward to working with 
the administration and my colleagues as we move ahead.
                                 ______
                                 

 STATEMENT OF HON. GEORGE MILLER, RANKING MEMBER, COMMITTEE ON 
                  EDUCATION AND THE WORKFORCE

    Mr. Miller. Thank you, Mr. Chairman, and thank you very 
much for convening this hearing. You had told the Members of 
this Committee that when we considered the short-term 30-year 
fix, the 2-year bill, that you were going to commit this 
Committee to holding a series of comprehensive hearings and 
trying to work out some of the problems that you alluded to in 
your opening statement. I'm gratified that we have started this 
early to do this, and I look forward to working with you and 
the other members of the Committee, and I welcome to our panel, 
people who are testifying today who I think will start to set 
the stage for the kinds of decisions that we will have to make.
    Retirement security and the threat to retirement security 
for millions of Americans is one of the most pressing issues 
facing our country today. We are at a critical juncture. 
Between 2011 and 2030, over 75 million baby boomers will be 
eligible to retire. Globalization, changing tax incentives, 
rising health care costs, falling rates of unionization are 
reducing the willingness and the ability of employers to 
maintain their private pension plans. Employers are looking to 
cut costs, and pensions are on the cutting table. Many 
employers are only interested in funding their pension plans 
now when it reduces their corporate tax liability, it cooks 
their books, or it boosts their executive bonuses. Regrettably, 
the Bush Administration has failed to protect workers' pensions 
and have contributed to this problem. Since the Bush 
Administration has taken office, workers' retirement security 
has declined dramatically:
    Pension coverage has declined for three consecutive years, 
from 57 to 53 percent.
    Defined benefit pension funding has declined from 120 
percent to 80 percent.
    The PBGC, the agency which insures defined benefit pension 
plans, went from an $8 billion surplus to an $11.2 billion 
deficit.
    The private pension deficit is now estimated to be about 
$350 billion, the highest ever.
    401(k) plans lost over $60 billion and have been rocked by 
corporate scandals like Enron, when executives protect their 
pensions while letting workers lose everything.
    Mutual fund abuses such as late trading, market timing, 
secret insider deals, personal trades by fund managers 
victimized pension funds through millions of dollars in 
excessive management fees and fund losses.
    The GAO has put the PBGC on a watch list and recommended 
that Congress pass major pension reform.
    All during this time, the Bush Administration has done 
virtually nothing to address these problems and everything to 
increase pension instability.
    Over the past 2 years, the Bush Administration has ignored 
the repeated warnings that the private pension plans and the 
PBGC were becoming seriously underfunded.
    The Bush Administration has been promising to propose 
comprehensive funding reforms to shore up underfunded pension 
plans for over a year but have yet to do so.
    The Democrats had to force the Bush Administration to 
withdraw the cash balance regulations which would have 
permitted companies to slash pensions for older workers by up 
to 50 percent.
    The Administration continues to propose fanciful and costly 
schemes: Lifetime and Retirement Savings Accounts for the 
wealthiest taxpayers and privatization of Social Security, 
which would leave individuals at the mercy of the stock market.
    Democrats believe that the Congress needs to protect and 
strengthen Social Security. We need to ensure that Social 
Security is adequately funded for the long term, and stop 
diverting the Social Security trust fund to pay off this huge 
deficit;
    Improve disclosure of pension plan finances. Representative 
Doggett and I have introduced legislation to provide workers 
the information on their pension plan's funding status. We need 
to pen up these secret employer reports that affect the 
retirement security of millions of Americans.
    We need to adequately fund pension plans. We must require 
companies to adequately fund the pension plans on a timely 
basis. Representative Sanders, myself and 135 Members of 
Congress have introduced legislation that would ensure that 
employers may only convert traditional defined benefit plans to 
cash balance plans if older workers with 10 or more years of 
service do not lose promised benefits.
    The Congress must pass legislation to appeal special 
pension protections provided to executives at the expense of 
rank-and-file workers, let workers know when executives are 
dumping company stock, and let workers have a voice in how 
their money is being invested by representation on the pension 
boards.
    We have a very long agenda, Mr. Chairman, that I have 
outlined, that you have outlined. But I think it's most 
important on the eve of the retirement of the baby boomers, 
that we provide a secure system for those individuals for money 
that they have contributed, money that they have put aside, and 
money that they need to put aside. And I think these hearings 
can be the most important catalyst in bringing the Congress 
together around a policy to help protect and secure people's 
retirements.
    Mr. Johnson. Mr. Chairman?
    Chairman Boehner. Mr. Johnson.
    Mr. Johnson. May I respond?
    Chairman Boehner. The Chair recognizes the gentleman from 
Texas.
    Mr. Johnson. Thank you. I'd like to correct the record. The 
Bush Administration didn't cause this. As you know, we passed 
pension reform from this Committee with the President's 
support, the Bush Administration's support, and I believe it's 
the other body that's been our stumbling block in this matter.
    Thank you, Mr. Chairman.
    Chairman Boehner. Thank you. We've got a distinguished 
panel of witnesses today, and I'd like to take a moment to 
introduce them. Our first witness will be Mr. Ben Stein. He's 
the new Honorary Chairperson for the National Retirement 
Planning Coalition in addition to being a noted author, 
economist and actor/comedian.
    In 1973 and '74, he was a speech writer and lawyer in the 
Nixon and Ford White Houses. He served as an editorial writer 
for The Wall Street Journal, a syndicated columnist, and a 
frequent contributor to Barrons. He has also worked as a lawyer 
in Connecticut and Washington, and as an adjunct law professor.
    Mr. Stein grew up in Silver Spring, Maryland and holds 
degrees from Columbia University and Yale Law School.
    The second witness will be Mr. Dan McCaw, who is the 
president and chief executive officer of Mercer Human Resource 
Consulting. He serves on the Executive Committee of the Global 
Leadership Group and the board of Mercer Consulting Group. He 
joined Mercer in 1973, and in 2000 he assumed responsibility 
for Mercer's American operations and became the company's chief 
executive officer.
    Mr. McCaw has a bachelor of commerce degree with honors 
from the University of Manitoba, and we want to welcome him to 
our Committee today.
    Next is Mr. C. Robert Henrikson, President of the U.S. 
Insurance & Financial Services Businesses of Met Life, which 
includes group insurance and retirement savings business, as 
well as insurance, annuity and financial services. Mr. 
Henrikson currently serves as a member of the Executive 
Committee of the American Benefits Council and a member of 
CSIS's Commission on Global Aging. Mr. Henrikson received his 
B.A. from the University of Pennsylvania and his J.D. degree 
from Emory University School of Law. He is also a graduate of 
the Wharton School's Advanced Management Program.
    And last, we'll have Mr. Peter Orszag, a Senior Fellow with 
the Brookings Institution here in Washington. He previously 
served as Special Assistant to the President for Economic 
Policy, as Senior Economist and Senior Adviser on the 
President's Council of Economic Advisers, and as an economic 
adviser to the Russian government.
    His areas of expertise include fiscal and tax policy, 
Social Security, pensions, higher education, macroeconomics and 
homeland security. Dr. Orszag holds a bachelor's degree from 
Princeton University and master and doctoral degrees from the 
London School of economics.
    And before the witnesses begin, I just want to remind all 
the members, all the witnesses will testify, and then we'll 
have questions from the panel. And I heard those bells. I think 
we're in recess subject to the call of the chair. It usually 
means when we have votes, they always occur in the middle of 
our guests' testimony, but we got a reprieve today.
    So with that, Mr. Stein, we have a 5-minute rule. We won't 
bring the guillotine out if you go beyond it, but--and you want 
to push those little buttons when it's your turn right in front 
of you, on the bottom--on the base of the--on the base.

  STATEMENT OF BEN STEIN, HONORARY CHAIRPERSON, THE NATIONAL 
         RETIREMENT PLANNING COALITION, WASHINGTON, DC

    Mr. Stein. Thank you very much. It is an honor to be here 
to speak on behalf of the National Retirement Planning 
Coalition. I have testified a number of times before 
congressional Committees, and I am always mindful of the advice 
that my father gave me about this kind of testimony. His name 
was Herbert Stein, and he had testified before congressional 
Committees hundreds of times, starting from the days of Truman, 
and his main advice was these hearings can go on for a long 
time. If they put a big glass of water in front of you, don't 
drink it.
    [Laughter.]
    There is a crisis haunting this nation. It is the 
retirement planning crisis. At least 77 million Americans are 
in the baby boom generation racing toward retirement. Other 
millions are in the war baby cohort, already at retirement age. 
These men and women expect and want to have a decent, 
comfortable retirement, at least roughly similar to the way of 
life they have before retirement. Yet the amount that the 
ordinary, average American family has saved for retirement is 
less than $50,000. A startling largely percentage, perhaps as 
much as 40 percent, have almost nil savings for retirement. And 
we know that Social Security, which assume you in government 
will maintain in a vital, strong form, will not be able to pay 
for much more than a third of living costs for the average 
retiree, and much, much less for a large fraction of retirees.
    The defined benefit corporate retirement plan is rapidly 
becoming an endangered species. At this point, roughly 25 
percent of American workers will have defined benefit plans 
when they retire. In other words, there is a very large gap 
between what Americans have in the way of income for retirement 
and what they're going to need to retire on. In the aggregate, 
this amount is in the trillions. On a per family basis, it is 
in the hundreds of thousands of dollars.
    Our group, The National Retirement Planning Coalition, is 
traveling around the country teaching that the solution to this 
problem will come partly from individual action by tens of 
millions of American families, largely in fact--making a 
retirement savings plan, finding a competent, respectable 
financial adviser to help with the plan, and then substantially 
adding to savings to make the plan a reality, and sticking with 
the plan during and after retirement.
    We believe these plans should call for diversification of 
savings--mutual funds, bonds, real estate, stocks and 
annuities. I especially like variable annuities because I saw 
them work so incredibly well in my parents' lives, and because 
they shift the risk of outliving one's savings from the retiree 
to the insurer. And outliving your savings is a very 
undesirable situation to be in.
    The main requirement is to address the problem in one's 
head, then take action and to start now. Any amount of planning 
and preparation is better than none, and none is what far too 
many Americans are doing. People always ask me when I talk 
about this subject if it's too late to start when you're in 
your late forties or fifties. I always say it is never too late 
to do better than not starting at all. And for younger workers, 
the earlier they start, the easier the entire process will be. 
But it takes sacrifice and self-discipline. It is impossible 
for anyone but my wife or other people to spend as much as you 
want and save as much you want.
    We are a nation that is unmatched in spending. Now we have 
to learn about savings. And for baby boomers, we have to learn 
fast. The prospect of being old and without adequate funds 
should be more than sufficient inducement to all but the very 
most resistant boomers. The National Retirement Planning 
Coalition stands ready to help, especially with our web site, 
www.retireonyourterms.org. There's a wealth of information 
there, including an extremely ingenious retirement calculator 
that tells users how much they need to save to reach their 
goals. If you use it, no salesman will call. We hope people 
will use it and take heed of its numbers.
    In America, the greatest of free countries, we create our 
own reality in large measure. The National Retirement Planning 
Coalition's goal is to educate Americans to create the reality 
of a comfortable, secure retirement by planning and action to 
increase and diversify their retirement savings. Old age is 
hard enough, facing loneliness, illness and immortality. Older 
Americans should not have to face poverty and fear or both as 
well.
    Thank you very much, and I welcome any questions you might 
have.
    [The prepared statement of Mr. Stein follows:]

 Statement of Ben Stein, Honorary Chairperson, The National Retirement 
                   Planning Coalition, Washington, DC


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                                ------                                

    Chairman Boehner. Mr. Stein, thank you. Mr. McCaw, you may 
begin your testimony.

 STATEMENT OF DAN McCAW, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
        MERCER HUMAN RESOURCE CONSULTING, WASHINGTON, DC

    Mr. McCaw. Thank you, Mr. Chairman. While many Americans 
are prepared for a safe and secure retirement, the evidence is 
that many workers will not have sufficient retirement savings 
to meet their retirement needs.
    And the trends today are in the wrong direction. Retirement 
needs are increasing. Perhaps the best example of that is post-
retirement health care costs. Defined benefit plans are 
declining. Individual savings are certainly not sufficient for 
many Americans. We're living longer in our retirement years, 
and more of us are taking lump sum distributions rather than 
annuities as we go into retirement.
    We believe it's essential to consider all aspects of the 
traditional three-legged retirement stool: Social Security, 
employer plans, individual savings. First, given current 
projections, both financial and economic, around Social 
Security, we expect it will be a challenge enough to assure 
that the Social Security continues to provide base levels of 
retirement income.
    Second, encouraging more Americans to save more for their 
own retirement is very important. But given research on 
individuals' understanding of retirement needs, how much they 
have to save each year to meet those needs, how to invest their 
savings, how to manage against the longevity risk, and the 
competing demands they face today on salaries between saving 
and spending, we're really right concerned that the individual 
savings leg will not successfully close that retirement 
security gap sufficiently in the coming years.
    Employer 401(k) and defined benefit plans are the remaining 
leg of the stool, and it's this leg, and we would argue 
particularly defined benefit plans, that we believe holds the 
greatest promise for a significant closing of that gap.
    401(k) plans can and will continue to play an important 
role in workers' retirement security. But because many of these 
plans depend significantly on voluntary contributions by 
employees, we're concerned that these plans do suffer from many 
of the same challenges that face the individual savings of the 
three-legged stool.
    So in our view, employer funded defined benefit plans do 
hold a great promise of closing the gap between a base level of 
income through Social Security and an adequate level of income 
at retirement. And these plans provide several unique 
components and benefits:
    Covering more low income and middle income workers.
    Not linking retirement benefits to employee contributions.
    Providing for employer (not employee) funding of plans and 
the investment of those assets.
    Offering workers and spouses annuity options, lifetime 
monthly incomes.
    Pooling and managing workers' and spouses' longevity risks.
    And assisting workers in retiring when they choose, without 
regard to the current stock market.
    While all three legs have important roles to play, our 
focus is on strengthening defined benefit plans. And we'd like 
to focus on areas that would help create a growing and robust 
defined benefit system.
    There's a growing perception among senior executives that 
the open-ended nature of commitments that employers make to 
defined benefit plans imposes business risks that can 
unpredictably, uncontrollably, and unacceptably affect a 
company's business financial success.
    Our written testimony includes several recommendations for 
assisting employers in managing risks around defined benefit 
plans with respect to contribution stability, open legal issues 
that present major risks. The cash balance issue is one right 
now. And future legal and regulatory changes, such as PBGC 
reforms.
    But we're concerned that these items will not be enough to 
create growing and robust defined benefit plan systems. So we 
believe that Congress should consider additional incentives for 
defined benefit plans, and I'd just offer two quick 
possibilities: Excluding from taxable income some of the annual 
distributions under lifetime annuities in defined benefit 
plans, and extending the current law to allow employers with 
overfunded DB plans--that does happen on occasion--to use a 
portion of the assets for retiree health benefits and 
nonelective employer contributions under 401(k) plans.
    I want to thank the Committee for this opportunity. Mercer 
Human Resource Consulting stands ready to work with you to 
consider these and any other recommendations intended to 
improve the retirement income security of American workers.
    Thank you.
    [The prepared statement of Mr. McCaw follows:]

    Statement of Dan McCaw, Chairman and CEO, Mercer Human Resource 
                       Consulting, Washington, DC



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    Chairman Boehner. Mr. McCaw, thank you. Mr. Henrikson, you 
may begin.

 STATEMENT OF C. ROBERT HENRIKSON, PRESIDENT, U.S. INSURANCE & 
           FINANCIAL SERVICES, METLIFE, NEW YORK, NY

    Mr. Henrikson. Good morning, Chairman Boehner and members 
of the Committee. I want to thank you first for holding this 
Committee here today on what MetLife considers to be an 
extremely important issue.
    For the first time in our history, we are asking 
individuals to do something we have never asked of them before: 
To finance their own retirement and manage their retirement 
money to ensure that it lasts through the 20, 30, even 40 years 
they will live in retirement.
    We are asking people to determine how much they must save, 
invest that money appropriately, and then draw down that money 
and hope it does not run out prematurely. With continued 
increases in life expectancies and continuing shift from 
employer-managed and funded pension plans to individually 
controlled defined contribution plans, we are entering a period 
of great risk.
    This threat is magnified exponentially when you factor in 
that the 36 million Americans over the age of 65 will grow to 
62 million 20 years from now. If that sounds far off in the 
future, consider that the first baby boomer will turn 65 in 
2011. Believe me, I'm aware of that.
    While the number of defined contribution plans has 
increased rapidly, the number of defined benefit plans, more 
commonly known as pension plans, has fallen by 50 percent. We 
applaud the Committee for introducing defined benefit plan 
reforms that will help to maintain and perhaps even reverse the 
decline of these plans.
    Reforms must be put in place to ensure responsible funding 
of these plans while preserving employers' flexibility to make 
additional contributions during profitable periods.
    Despite the importance of pension plans, however, the 
reality is that defined contribution plans have become the 
primary retirement plan for many individuals. Employees 
generally like their 401(k)s. They are popular. But they have 
not yet proved to be successful, if success is defined as 
providing a secure retirement. The problem with overreliance on 
401(k) programs is that most are incomplete. Individuals are 
left on their own to replicate the lifetime security previously 
provided by traditional benefit plans, security that was 
created by teams of actuaries, pension experts, investment 
consultants, accountants, lawyers, and protected by the 
government through the PBGC. Stripped of this expertise and 
protection, today's employees need our help.
    Last June, MetLife created the retirement income IQ. Twelve 
hundred men and women within 5 years of retiring were asked 15 
questions to assess their level of retirement preparedness. 
Ninety-five percent of these respondents scored 60 percent or 
less. The average score was 33. Perhaps most unsettling was 
that they did not understand that a 65-year-old man has a 
chance of living beyond his average life expectancy of 85. 
That's what average life expectancy means. About half the 
population will live past that point, and the other half won't.
    A couple consisting of a 65-year-old man and woman have a 
25 percent chance that one of them will live beyond the age of 
97. It's no wonder that these respondents underestimate how 
much money they need and overestimate the rate at which they 
can safely withdraw. In short, Americans don't know what their 
retirement savings are really worth.
    What's the answer? Well, individuals value better 
retirement education at advice at the workforce--at the 
workplace. H.R. 1000 takes an important step in ensuring that 
individuals receive the investment advice they need to succeed.
    We also support the provision in the bill that would allow 
employees to set aside pre-tax money to pay for retirement 
planning services.
    There is one solution for retirees who have diligently 
saved during their working years and want their savings to last 
throughout their lifetime. That solution is to join a group of 
retirees and to share or pool mortality experience. The pooling 
concept is a powerful one, one that's at the heart of all 
insurance products. It's also the concept behind the 
traditional defined benefit pension plan.
    In a pool, the retiree who lives a long time is balanced by 
the retiree who dies early. Individuals who are not part of a 
group cannot self-insure the risk of outliving their money, 
because they cannot predict how long they will live. An income 
annuity is an insurance product that guarantees a stream of 
income throughout the lifetime of the policyholder. It is in 
effect a personal pension plan, and it works because the 
insurance company provides an individual access to a mortality 
pool just like a pension plan does. Funds from individuals who 
do not live to life expectancy are held and invested for those 
who live longer. Not only does an income annuity transfer 
longevity risks from an individual to an insurer, it does so in 
an extremely efficient manner. The annuity purchaser needs to 
save only 75 percent of what the person who tries to go it 
alone needs to save. What's more, the annuity purchaser has 100 
percent chance of not outliving his money, while the person 
without an annuity has no such guarantee.
    H.R. 1776 takes an important step in educating individuals 
about the value of income annuities by including a limited 
income tax exclusion for retirement plan distributions taken in 
the form of annuity payments. The bill also contains an 
important fiduciary safe harbor for employers that offer 
specific annuity or IRAs at the time of distribution.
    We are now seeing interest by employers to offer income 
annuities in a 401(k) distribution option because without this 
option, 401(k) plans are simply incomplete.
    I want to thank the Committee again for holding this 
hearing and allowing me to testify, and I'd be glad to answer 
any questions you might have.
    [The prepared statement of Mr. Henrikson follows:]

    Statement of C. Robert Henrikson, President, U.S. Insurance and 
               Financial Services, MetLife, New York, NY


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    Chairman Boehner. Thank you, Mr. Henrikson. Mr. Orszag, you 
may begin your testimony.

STATEMENT OF PETER R. ORSZAG, JOSEPH A. PECHMAN SENIOR FELLOW, 
           THE BROOKINGS INSTITUTION, WASHINGTON, DC

    Mr. Orszag. Thank you very much, Mr. Chairman. As the baby 
boomer generation nears retirement, the shortcomings in the 
nation's upside down system of incentives for retirement saving 
are becoming increasingly apparent. The existing structure, in 
my opinion, is upside down for two reasons:
    First, it gives the strongest incentives to participate to 
higher income households who least need help in saving for 
retirement and who are most likely to use the tax preferences 
as a mechanism to shift assets from other accounts rather than 
as a vehicle to raise overall saving.
    Second, the tax preferences are worth the least to 
households who most need to save more for retirement, and who 
if they did contribute, would be most likely to use the 
accounts to raise their overall net saving.
    In part reflecting this upside down set of incentives, the 
nation's broader pension system suffers from several serious 
shortcomings:
    First, only about half of the workforce participates in an 
employer-provided plan in any given year, and participation 
rates in IRAs are substantially lower than that.
    Second, even those workers who do participate in tax-
preferred retirement savings plans, rarely make the maximum 
allowable contribution. Only about 5 percent of 401(k) 
participants make the maximum allowable contribution permitted 
by law, and only about 5 percent of those eligible for IRAs 
make the maximum allowable contribution.
    Third, and despite the shift from defined benefit to 
defined contribution plans over the past several decades, most 
households approach retirement with meager defined contribution 
balances. The median defined contribution balance among all 
households age 55 to 59 in 2001 was only about $10,000. And 
even among those households with an account, the median balance 
was only about $50,000. That does not buy you very much in 
terms of a lifetime annuity in retirement.
    Given the current gaps in the system, sound pension reform 
in my view entails encouraging more participation by middle and 
lower income workers who currently are saving little if 
anything for retirement. Tax incentives to boost pension saving 
will raise national saving only if they encourage more private 
saving than the cost to the government. And you don't encourage 
private saving if you just induce asset shifting.
    The empirical evidence very strongly suggests that as you 
move up the income distribution, tax preferences for saving are 
much more likely to induce asset shifting than new saving.
    The bulk of the policy changes that have been enacted in 
recent years, however, moved the pension and broader saving 
system in the wrong direction. They provide disproportionate 
tax incentives to high income households who again already save 
adequately for retirement even in the absence of those 
additional tax breaks, while doing little to encourage lower 
and moderate income households to save more.
    The Administration's new Retirement Savings Account 
proposal would exacerbate this trend. The RSA proposal is 
basically a Roth IRA with no income limit. It would induce 
substantial asset shifting by high income households, do little 
to boost saving among moderate income households, and 
substantially reduce revenue over the long term.
    According to estimates from the Tax Policy Center, the RSA 
proposal would deliver more than 90 percent of its tax 
subsidies in present value to the top 2 percent of households, 
those with incomes of more than $200,000. It would also result 
in growing revenue losses over time. Over the next 75 years, 
the RSA and LSA proposals combined would reduce revenue by 
about a third of the Social Security deficit.
    A better strategy would encourage expanded pension coverage 
and participation among lower and moderate income households.
    First, the 2001 tax legislation created a saver's credit, 
which provides a matching tax credit for contributions made to 
401(k) plans and IRAs. IRS data indicate that 3.7 million tax 
filing units claimed the credit in 2002, the first year it was 
in effect.
    To strengthen the credit, policymakers should make it 
refundable, extend the 50 percent credit rate, up the income 
distribution so that more of the middle class can benefit from 
it, phase the credit rate down more smoothly so that you avoid 
the cliffs that are in the current system, and extend the 
credit beyond its 2006 sunset.
    Second, the rules under means tested benefit programs like 
foods stamps, SSI and Medicaid, create a large disincentive for 
low and moderate income households to save in defined 
contribution plans, because defined contribution plans count 
against those assets, whereas defined benefit assets don't. 
That's largely because when the rules were written, defined 
contribution plans were not that prevalent. It doesn't make any 
sense to have that kind of bias built into the system.
    A final prong of sound retirement saving reform should 
expand the use of inertia in favor of saving, not against it. 
The evidence very strongly suggests that if the default is a 
worker is in the saving plan unless he or she affirmatively has 
to opt out of it, savings rates are much higher, participation 
rates are much higher than if the opposite is true; that if you 
have to affirmatively sign up for the plan. And we should be 
encouraging those sorts of automatic enrollment plans much more 
than we already do.
    In addition, the Administration came forward in a little 
noticed part of its budget this year with a very helpful 
proposal to allow split refunds. This would allow you to check 
a box on your tax return and have part of your refund go into a 
checking or other account, and part go into an IRA. That would 
be a very helpful step to make it easier for households to 
save.
    And I know that I'm running out of time, but if I could 
just very briefly follow up on two of the themes that came up 
in earlier testimony.
    One is--and I know this won't be popular--but as the 
defined benefit--as the private pension system shifts from a 
defined benefit one to a defined contribution one, in my 
opinion it makes ever less sense to take the core layer of 
income security, Social Security, and also transform that from 
a defined benefit plan into a defined contribution plan, not 
just because it means workers will be accepting more risks in 
the core layer of their retirement income when they're facing 
more above that core layer, but also because many of the 
reasons that were already mentioned as to why we would prefer 
defined benefit plans for additional retirement income would 
equally apply to a Social Security reform, I worry about 
workers wanting the money before retirement, making bad 
investment decisions and not annuitizing their accumulated 
balances within the core layer of financial security.
    The final point has to do with tax preferences for 
annuities. I think promoting annuities is a very important 
step, and we should be looking at ways of doing it. But a tax 
preference for annuitized income is a mistake, in my opinion, 
and here's why. The budget outlook is already very bad. The 
budget outlook assumes trillions of dollars in taxes on 
withdrawals from 401(k)s and IRA plans that already had a tax 
break on the way in. If you start to provide tax breaks for the 
money that's coming out of those tax preferred accounts, even 
for worthy goals like annuitized income, you're going to make 
an already bad fiscal outlook that much worse.
    Given the fiscal outlook, we simply can't afford trillions 
of dollars more in revenue losses that are currently assumed in 
the baseline.
    And I know I've gone over, and I thank you for your 
accommodation, Mr. Chairman.
    [The prepared statement of Mr. Orszag follows:]

   Statement of Peter R. Orzag, Joseph A. Pechman Senior Fellow, The 
                 Brookings Institution, Washington, DC



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    Chairman Boehner. Mr. Orszag, thank you for your testimony. 
I want to thank all of our witnesses for your excellent 
testimony and your input into this very important subject.
    Let's begin with the basics. Retirement plans are 
voluntarily provided by employers. And as has been noted, about 
half of American employees have some coverage either through a 
defined benefit plan or a defined contribution plan.
    I'd like to ask Mr. McCaw or Mr. Henrikson what the biggest 
obstacles are in employers' willingness to offer defined 
benefit plans.
    Mr. Henrikson. I can take a shot at that. Defined benefit 
plans, over the years--I've been in this business for 31 years, 
and I think one way or another, the difficulty of maintaining a 
defined benefit plan because of perhaps a well meaning 
regulatory effects over the years has been very difficult.
    It's very difficult to maintain and commit to a defined 
benefit plan, particularly considering the fact that it is a 
liability of the corporation, and the corporations are looking 
for things that can smooth out their expected financials.
    So that's one thing. And the other thing, quite frankly, I 
think leads to lack of education in the population in general, 
because employees for a period of time back in certainly the 
'80's through the '90's, were not clamoring for defined benefit 
plans at all, and quite frankly seemed to be more focused on 
the idea of having financial freedom and investing the money 
any way they'd want to, being able to see their account 
balances and so forth. And I don't think people understood what 
they had in the defined benefit arena, an the employer was not 
being rewarded by sticking to those plans.
    Now of course people realize what's happened.
    Chairman Boehner. Mr. McCaw?
    Mr. McCaw. I would essentially agree with everything that 
Mr. Henrikson has said. Plus we've got, as we all realized in 
the last two or 3 years, some pretty difficult economic times 
that have a very dramatic impact on defined benefit plans, 
which of course the employer is insuring the employees against. 
He's taking the risk, providing the benefit. We've got more 
litigation. We've got legal uncertainties.
    We do have well meaning legislation, but I think some of 
the legislation makes it very difficult and very expensive to 
run a defined benefit plan in this country right now, despite 
the fact that the legislation by and large was very well 
meaning.
    And we've got some other outside influences that go beyond 
this room. We're looking at adopting international accounting 
standards for defined benefit plans in the U.S., which would 
bring the costing of pension plans to much more of a current 
market basis, which in my view does not take account of the 
long-term nature of both the assets and liabilities and 
provides inappropriately little ability to smooth and 
transition from good to bad economic times and back again.
    So there's all kinds of things that are putting enormous 
pressure on what we believe is a very important part of the 
system, as I said earlier.
    Chairman Boehner. Some believe that with the recent gains 
in the market over the last year that the need to replace the 
30-year Treasury rate is not as urgent as it once was. Do 
either of you have any comment with regard to the replacement 
of the 30-year Treasury rate?
    Mr. McCaw. The only comment I would make is good times or 
bad times, I personally don't believe that the 30-year Treasury 
rate is a reasonable representation of long-term yield rates as 
far as pension plans are concerned, and as a result, since it's 
somewhat lower, it puts significant pressure on funding, and 
you could argue in terms of cashouts, which are also based on 
that rate, it may be paying bonuses on cashout that are in 
addition to the fair market value of the benefit.
    So I'm not sure that the change in the economic environment 
changes the need for taking a long, hard look at changing that 
rate.
    Mr. Henrikson. I would agree with everything Dan said, and 
I would emphasize that point about the discount rate being used 
for cashouts. Here again, you have a population that has a very 
difficult time understanding the longevity risk they're looking 
at, and yet they're actually being encouraged by a rate for 
cashouts that is not fair to the plan, and on the other side 
encourages the person, the individual to take a lump sum, which 
is not good for them either.
    So I think it's a lose-lose all the way around.
    Chairman Boehner. So you're both suggesting that the use of 
the 30-year Treasury rate for lump sum distributions is not in 
the best interest of companies or employees?
    Mr. Henrikson. Well, not to get technical, and Dan's being 
an actuary would be better able to answer this, but actually 
when somebody takes cash out of a plan, you really don't know 
whether the plan was a winner or a loser until several years, 
many years have gone by.
    And so it's just like, you know, weakening the financials 
of the plan by encouraging people to take lump sums, which 
hurts the strength of the plan for those who remain.
    Chairman Boehner. Mr. Orszag, you talked about more 
employee participation in plans. And you made--you had some 
recommendations. But to have more employee participation, we 
need, one, more employers who are willing to offer plans, and 
second, we need more incentives for employees to participate in 
those plans. Do you have any further ideas about how we get 
more employers to offer plans?
    Mr. Orszag. Well, I do think it's a difficult question. I 
don't think that, if you look at where the bulk of noncoverage 
occurs, it is in small businesses, and the surveys that EBRI 
and others have done that ask firms that don't offer pensions, 
why don't you offer them, provide some guidance. And many of 
the reasons are not that amenable to policy. Fluctuating 
revenues, workers who don't demand retirement saving as opposed 
to current wages. Those sorts of things are very difficult to 
grapple with at the Federal policy level.
    I also think it's a mistake to think that we are going to 
get substantial increases in employer-provided plans by 
providing ever larger incentives for the corporate executives 
to participate. And I think that for two reasons.
    With regard to the small businesses, many of the plans that 
are offered in small businesses, let's take a defined benefit 
plan, which I agree with the other panelists has a lot of 
benefits for most workers. In some small business settings, 
however, it doesn't, frankly. In a lot of small business 
settings, it is effectively a way for the owner and maybe a 
couple other key employees to obtain very large tax subsidies 
without covering the full array of workers through the various 
loopholes that already exist.
    So I think we do in small business settings have to be 
careful about defined benefit plans. In larger corporate 
settings, I don't think policymakers should be, regardless of 
what we read about in the newspaper, corporate decisionmakers 
should not be making decisions of their overall compensation 
packages for workers as a whole based on their own personal 
interests. And regardless of what read in the newspaper about 
that sort of thing happening, I think it's a very bad mistake 
to motivate Federal policy on that kind of personal corporate--
personal executive interest. It's a violation of fiduciary duty 
to the shareholders basically.
    So either in the small business community or in the large 
business community, I worry about this argument that the way 
that we're going to get better coverage is to provide yet more 
incentives for executives, especially given the evidence, which 
I think is overwhelming, that the tax preferences at the high 
end just lead to asset shifting.
    So you're asking a very difficult question. I've pointed 
out things we shouldn't do. There are some suggestions I made 
both in my testimony and in some longer written materials about 
areas that I do think would be helpful.
    I do think the nondiscrimination rules, for example, are 
too complicated, and they could be simplified. There are a 
variety of regulatory things that we can do to try to encourage 
more coverage, but there are also a lot of ways that we can go 
wrong here. And I think the fundamental thrust of policy over 
the past several years has not gotten it right.
    Chairman Boehner. Mr. Miller.
    Mr. Miller. Mr. Orszag, you said that you felt that the 
default position, if you will, is that the employee is in the 
plan, and I assume in there you're talking about a 401(k) plan.
    Mr. Orszag. Right.
    Mr. Miller. That they would participate. And your other 
point was that you believed that Social Security should remain 
at the core of the savings plans and these other efforts I 
assume are to supplement that and to improve the status of 
individuals to provide for their retirement.
    I'd just like to ask the other members in your agreement on 
that, do you believe that we should--that the default position 
should be that the employee is in a 401(k) plan in that 
instance?
    Mr. Henrikson. I think that would be great.
    Mr. Miller. Mr. McCaw?
    Mr. McCaw. I think it would probably actually help 
participation in the programs.
    Mr. Miller. Mr. Stein?
    Mr. Stein. Should have to opt out if they want to be out.
    Mr. Miller. They would--if they want to opt out, but--
    Mr. Henrikson. Congressman, could I--one of the things that 
Mr. Orszag said, and the tax policy question is connected to 
this, it has to do with consumer behavior. I mean, everything 
we're talking about is consumer behavior in terms of whether or 
not something becomes effective or not.
    The tax incentives, I couldn't agree more that we shouldn't 
drive retirement policy by tax incentives for executives. But I 
have to disagree with a statement relative to giving people a 
little bit, a tiny bit of tax incentive to look at retirement 
income annuities. The cost to the country, to the Federal 
Government, however you measure it, to have the kind of costs 
he's talking about, literally every person in the United States 
would buy an annuity contract. And since that's the consumer 
behavior we're trying to turn, I don't think that would happen.
    So I just couldn't let that go relative to tax incentives. 
That's not--
    Mr. Miller. Let me raise another point here, and this 
goes--you've all testified how poor a job the baby boomers and 
everyone else in society is doing. In every, you know, 
financial writer that's designed for the average person, 
whether it's Money Magazine or Jane Bryant Quinn or Newsweek or 
Time, and people ask for advice, what do I do? What should I 
do? It's an up market, it's a down market, and everybody says 
the same thing. First and foremost if you're in--if you are 
offered a 401(k) plan and your employer matches, you must do 
that and maximize that contribution first and foremost. Then 
you can think about other things you want to do. And yet, 
huge--half of America doesn't do this that has it available to 
them. I mean, we're spending billions of dollars telling these 
people that if they don't keep consuming, the economy is going 
to go int he tank. I mean, we just need--we've got them in 
long-distance training now. We've got them past Christmas. 
We're getting them toward--we got them past Easter, they're 
heading into the summer season, we've got to get them right 
there for back to school. Come on, folks, and you're pulling 
them along. Get your grandkids, you know. I mean, these are the 
fittest people in the world. They're the fittest people in the 
world.
    But what they're not doing is that they--I mean, they're 
obviously consuming. And I'm not here to bash whether their 
decisions about what they want to do with, you know, their 
personal lives. But a lot of people say there's really not 
enough discretionary income left over for people to then save. 
Which is it? What's going on here?
    Mr. Stein. Well, there are societies in which people are 
encouraged to spend, and also encouraged to save, and to save a 
lot more than we do.
    Mr. Miller. That's not this society.
    Mr. Stein. There's been a secular downward trend in how 
much households save in this country. Presumably, it can be 
reversed. It has been reversed in the last 3 years. The trend 
say from 1999 to 2004 is up in terms of personal household 
savings. It could be reversed quite a lot more. We need people 
with your eloquence to explain to people what the consequence 
of non-saving.
    Mr. Miller. You don't know me very well.
    [Laughter.]
    Mr. Stein. The consequence of not saving enough when you're 
old and too feeble to work or too tired to work is disastrous. 
That has to be explained.
    Mr. Miller. Having never been called eloquent before, I'm 
going to leave.
    [Laughter.]
    Mr. Miller. And go save.
    Mr. Orszag. If I could just--
    Mr. Miller. Excuse me. Peter?
    Mr. Orszag. Sure. Just quickly add two things. One is that 
I think it's very important, again, this inertia and the 
defaults is crucially important. If you show people the money 
and say, OK, here's $100, you can either save it or spend it, 
you're not going to get very good results. We've seen that over 
and over again. If you say, Person A, you're about to get some 
raises over the next several years. How about if you pre-commit 
to saving a good chunk of those raises? People are more likely 
to agree to that, and they're more likely to save the money, 
because they don't feel like they ever had it.
    And the empirical evidence on this is overwhelming. I don't 
think there's a single thing that you guys could do that would 
be more important than to encourage these sorts of precommitted 
automatic default savings plans in the 401(k) world.
    So there is some hope that we can raise savings rates. But 
if you just sort of throw the money at people and say go out 
and do it, I don't think it works.
    Mr. Miller. Just one point. Let's take it to the next step. 
They decide to do that. Then, you know, Mr. Stein, your 
argument is what we've really got to do is make tools available 
to these investors. We've got to educate them. They've got to 
see that they can put together a plan, they can cobble it 
together in some fashion or another.
    The other item that they're being deluged with is that this 
game isn't on the level. There were guys that got there after 
four o'clock and got to buy at the nine o'clock price and got 
to sell before the eight o'clock price. You know, there's this 
law professor from the University of South Carolina says maybe 
it's nine--Mr. Freeman says maybe it's $9 billion in excessive 
fees that have been raked out of the mutual funds system.
    So we've got two hurdles, it seems. One to get them to 
save, and then if they save beyond what's controlled in one 
fashion through the 401(k) plan, you've got to then build some 
confidence in this consumer that this is a market where they 
want to go back into. You know, people are flooding into the 
market, but they're flooding in kind of on the blind pig 
theory.
    Mr. Stein. I think that can be done, sir, because it is 
true that every penny that is taken unethically is a shame, and 
everyone who does it should be prosecuted and punished to the 
full extent of the law. But the amounts that have been taken in 
this late trading and market timing are incredibly trivial, and 
by the scales of the amount that has been saved in these 
plans--any is too much. There's no doubt about that. And anyone 
who does it should be punished. But people should be informed 
that the fact that there are people who are misbehaving in this 
arena is no excuse for them not to save.
    Mr. Miller. No, but you see the comparisons of, you know, 
if you just take sort of the vanguard style index fund and the 
people who run the same kind of funds, but the fees here are 
.25 and the fees here are--I mean 2.13, and then they say, 
well, this is what it means to you over 15 years. If I think 
I'm going to save, I say what the hell's going on here? These 
people are providing the same service.
    Mr. Stein. But people have to understand that often when 
you are paying the higher fee--not always--but often when 
you're paying a higher fee, you're getting more service. I am 
reminded of something someone--well, I'm reminded of something 
someone said to me recently, which made a lot of sense, which 
is if you call up to buy 100 shares of GM, you do it through E-
Trade, for which I used to be a spokesman, you can just press a 
button and it's done, and nobody, not one single live human 
being has to do anything. If you buy a variable annuity, some 
man or woman has to come to your house, explain it to you, come 
back to your house, draw up a plan, explain it to you over and 
over again. It's an incredibly greater service.
    Mr. Miller. That's an argument for E-Annuity, or what?
    Mr. Stein. Excuse me?
    Mr. Miller. Is that an argument for E-Annuity?
    Mr. Stein. No. It's an argument for buying something that 
is customized to your situation by somebody who's spent some 
time investigating your situation.
    Mr. Miller. One final point if I might, Mr. Chairman, this 
point that Mr. Orszag made, we constantly are sort of raising 
the ceiling. But if I listen to a lot of your testimony, it's 
not the ceiling that's the problem. It's all the people that 
are well down below that that aren't contributing for one 
fashion or another. They're not making the maximum contribution 
under the current laws. And the question raised, Mr. Orszag, is 
at some point you get into asset shifting. Do you agree with 
that or don't agree with that?
    Mr. McCaw. I would agree with a lot of what Dr. Orszag said 
about who is taking advantage of the system as it currently 
stands, and it by and large is not low and middle income 
Americans.
    This is a very difficult and complicated subject for an 
individual to deal with. How much do I need to put away? How 
much will it grow to by the time I retire? As you said a moment 
ago, why does this particular manager want to charge me X 
percent and this one Y? They kind of look the same to me. And 
when I do retire, how long am I going to live? And if something 
happened to me, how much should I leave for my spouse?
    I'm not sure too many people are really capable of dealing 
with all of those issues, and I agree with everything that Mr. 
Stein said, but I'm not sure that people are very capable of 
dealing with those issues unless there's a huge increase in the 
amount of education that people have, and this is going to take 
years and years. I'm not sure we have years and years to deal 
with this gap. It'll help. It'll definitely help.
    Mr. Stein. Well, if I may just add to that, that is in some 
way an argument for having people come to your house and 
explain it to you in some regard rather than just calling up on 
the phone or using your computer to buy. There is some merit in 
having someone who has some education in the area explain it to 
you.
    Mr. Henrikson. If I might, the other thing--there's a lot 
of good points being made here, and I echo them. The part of 
the problem in terms of education, you mentioned the press. You 
mentioned Jane Bryant Quinn and you mentioned so forth and so 
on.
    In fact, we did a very interesting survey. And actually, 
most people get most of the information that they rely on from 
the press on financial matters. They get it from what they read 
in the newspaper. They get it from what they read and so forth.
    One of the chilling aspects of what's happening today is 
that bad acting out there, and, you know, Ben's right about 
this in terms of the amount of relative dollars, it has more of 
a chilling effect on the consumer behavior. People focus on 
that. Whereas--and gathering wealth. And so the focus has been 
on save to have a pile of money. And somehow, when you get to 
65, you're home free. The most difficult time of your life in 
taking a pile of money and turning it into income is when 
you're 65 and going forward. A pension expert, a pension plan 
manager who's managing a large pension plan for a large 
corporation, if you freeze that plan and stop putting new 
contributions into it, and have to have a stream of income to 
pay all of those retirees for the rest of their lives, that 
individual needs to change the entire scope and format of the 
investment portfolio and then monitor it continuously to make 
sure there's enough money.
    We're asking individuals to do that for themselves. It's 
absolutely impossible. So education is the name of the game. 
People do need face-to-face advice. People do not take care of 
this stuff themselves. They do not buy over the net financial 
products. They need help. They need someone to encourage them 
to do what they need to do for themselves and their families.
    Mr. Johnson. Thank you for your comments. Since it's my 
turn to question, I think I will. I'd like any of you who want 
to answer, you know, in the Bush Administration pension reform 
proposals from last summer, one of the items would have 
prevented underfunded plans from increasing benefits, sort of 
if you're in a hole, stop digging it, you know. They keep 
promising more and more, but they keep delivering less and less 
it seems like. Would you all care to comment on that, whether 
or not that's a good policy change for us or not?
    Mr. Henrikson. Let me take a shot at just commenting a 
little bit about history. In the first place, as was said one 
way or another before, the business we're in, that we've all 
been connected to in our careers, takes a long time for things 
to unfurl. I don't think to point to any particular 4-year 
period and say this caused it or didn't, it's just not true, 
because it takes a long time for financial experience to 
emerge.
    There were times back with major manufacturing corporations 
where there were negotiations around wages, for example, six 
cents more per hour. No, we'll give you another ten dollars a 
month in your retirement plan. And that caused a huge problem 
in the United States. And so to try to stop that or slow that 
activity down and make sure that it doesn't happen again I 
think is a healthy thing to do. Now how to do that and what 
kind of regulatory methodology to use is--
    Mr. Johnson. Well, it seems to me the more we regulate, the 
less people want to provide these plans, you know. It was a 
kind of a voluntary thing to start with. I think Boehner 
pointed that out earlier. If we start laying laws on them to 
make them do that kind of thing, I don't think that's going to 
work in a free enterprise system.
    Mr. McCaw. Well, I think we've already seen that, haven't 
we? I mean, one of the biggest reasons for a lot of 
organizations leaving the defined benefits system, because they 
haven't just been leaving in the last two or 3 years of 
difficult economic times. A lot of them are leaving the system 
in the '90's, plans and big surpluses. It wasn't a financial 
consideration largely. In large part, for many of these 
organizations, it was, as well meaning as it all was, 
regulatory considerations. If you talk to people in the 
boardrooms of America today, a lot of them will say on the 
pension issue, we just felt overregulated. We just felt that--
it might have all been well intentioned, but to some degree, we 
just felt that it was just getting too expensive to run the 
program. And as one of the panelists mentioned a little bit 
earlier, and this is back to education, defined benefit plans 
as far as employees are concerned are also a little bit more 
difficult to understand. Perhaps you could argue, it's less 
important they understand them because they're not driving the 
car, the employer is. I think it is important that they 
understand them, by the way. But employees didn't understand 
them particularly well. So I'm paying all this money for a 
program. My employees don't appreciate it. I'm feeling 
overregulated. Let me think. What might I do about that? And 
we've seen what some of them have done.
    Mr. Stein. And if I may say, all of this goes back again to 
the fact that the individual has to take some responsibility 
here. The guy is sitting in the chairman's office or in the 
boardroom of a corporation, he's got pressure from all sides. 
He's got to cut his costs. He wants to avoid legal costs with 
regulation. Simple thing. Cut down or cut out the pension plan. 
Again, always the burden goes back to the individual.
    And at the end of the day when some guy is in a nursing 
home thinking to himself, am I going to have enough money to 
pay my bill this month? He's not going to go to the guy who was 
chairman of his corporation 20 years before. He's got to rely 
on himself. Self-reliance is the American way. I mean, it's a 
cliche, but it's true.
    Mr. Johnson. Well, you know, one of you made a comment in 
your remarks that we don't know how long we're going to live. I 
went to the doctor the other day. He told me I was going to be 
105 when I died. So maybe I know. You ought to check with your 
doctor.
    You know, would you talk to the 30 year Treasury rate? Is 
it an accurate measure? And what do we need to do about that? 
Because that really is affecting what's happening, too.
    Mr. Stein. Well, it's not an accurate measure in the sense 
that it--in many different ways. I mean, it's not an accurate 
measure in the sense that it doesn't really measure the real 
discount rate of long-term lendable funds, and it's not an 
accurate measure in that it doesn't accurately measure what 
people can expect to earn on the money, so it really is not an 
accurate rate.
    Mr. Johnson. OK. Thank you. I appreciate your comments.
    Ms. Woolsey. It would be me.
    Mr. Johnson. OK. The chair recognizes you.
    Ms. Woolsey. All right.
    Mr. Johnson. Me is recognized.
    Ms. Woolsey. Oh, thank you very much, Mr. Johnson.
    Mr. Johnson. Thank you.
    Ms. Woolsey. All right. In response to the free enterprise 
system. If the free enterprise system protects only the 
wealthy, it is very clear that that gentleman in the nursing 
home is going to then depend on the--become a ward of the 
state, depend on Medicaid.
    So what we should be protecting here and what we should be 
preventing is that need, that the wealthy stay wealthy, which 
they will, you know, and have every right to be. They've earned 
it. But that middle income and low income people don't become 
wards of the state, which every--the taxpayers, middle income 
and the poor workers, et cetera, pay for also.
    So I'd like us to start talking--and something that Mr. 
Hendriks said--Henrikson said--is that 401(k) plans are not as 
secure as we would think they are, which we've seen, because of 
the economy and the ups and downs in the stock market. So I 
think all of us should take that as a really fair warning about 
what we are talking about when we're talking about going even 
further by privatizing Social Security. We need a base. We need 
a secure base.
    OK. Now I would like to talk to Mr. Orszag about the fact 
that if we're going to turn this around, if we're really going 
to protect low income and middle income workers, because you 
see, they have the same overhead as this wealthy family. I 
mean, the basics of what a person needs when they get older, I 
mean, so you've got a lifestyle that you need to support. 
That's different than the absolute basics. How can we put 
together a plan where we turn it around where we actually 
contribute more to the low income worker and contribute less as 
the workers earn more? Because they then can afford to do more 
on their own.
    Mr. Orszag. I think there's several elements to that kind 
of package that would make sense. I mentioned some of them. 
Removing the disincentives to saving. For example, the asset 
tests under means tested benefit programs. Enlisting the force 
of inertia to get these lower and moderate income households 
into the plan and saving and pre-committing their future pay 
raises toward saving has been shown in studies to be 
particularly effective.
    And then I think we have a tool that is on the books but 
that is limited and flawed as enacted, which is the saver's 
credit. The saver's credit provides a 50 percent credit, and 
actually on an after-tax basis, that's like 100 percent 
matching rate. It's a very powerful incentive, but it's not 
refundable, which means there's millions of households who 
qualify on paper for it but receive actually no incentive to 
save because they have no income tax liability against which to 
offset with the credit.
    I think if we made the credit refundable and we extended 
that 50 percent credit rate a little bit up the income 
distribution, combine that with automatic enrollment and the 
split refund kind of proposal that the Administration has 
already put forward, do a few other things like remove the 
asset tests or the disincentives from the asset tests, and I've 
laid out a few other more minor things, that would be at least 
a substantial step int he right direction.
    And I can't promise that we would then get 90 percent 
participation rates, but it would help, and it would at least 
be pointing in the right direction rather than continuing to 
move in the wrong direction as I think Federal policy largely 
has been over the past several years.
    Ms. Woolsey. And would there be any suggestion of when 
there's matching funds that the employer then would match more 
for the low income worker than the higher income worker? 
Reverse.
    Mr. Orszag. One of the things about saver's credit and one 
of the things that's very important in designing these sorts of 
incentives is that the saver's credit applies not just to IRA 
contributions but also to 401(k) contributions. You don't want 
to be creating an incentive for more low or moderate income 
household saving that dissipates interest in employer-provided 
plans.
    I couldn't agree more with the other panelists that 
basically employer-provided plans are the way to go, because if 
you look at the do it yourself, go off and save on your own, 
participation rates are very low. It's striking. If you look at 
$20,000 or $30,000 in earnings, the worker is offered a 401(k) 
plan at those earnings levels, participate 50, 60, 70 percent 
rates. It varies a little bit depending on exactly what your 
cutoff is. Participation rates in IRAs at those income levels, 
about 5 percent. I mean, striking difference in the sort of do 
it yourself approach of an IRA and an employer-based plan where 
you have the water cooler effects of people talking about it. 
You have the employer match. You have the nondiscrimination 
rules that may be helping, and a variety of other forces. We 
can't afford to lose the benefits from that kind of pooled 
employer provided approach.
    Mr. Stein. May I make a comment? We can't really afford to 
lose any source of saving whatsoever. So the self-motivated 
saving, which is not subsidized through a 401(k) plan, through 
the employer, is vital too. The savings gap for retirement is 
so enormous, madam, that anything we can get is very valuable. 
There's nothing it seems to me that should be overlooked, 
including, I go back to something as basic and seemingly 
trivial as education, which doesn't necessarily have a large 
cost to the taxpayers, but which will we hope frighten people 
enough to start them saving.
    Ms. Woolsey. Well, I agree with that, but I believe the 
President's budget has cut funding for pension education.
    Mr. Johnson. Thank you, Ms. Woolsey, for your comments. Mr. 
Ehlers, you're recognized for 5 minutes.
    Mr. Ehlers. Thank you, Mr. Chairman. And I really 
appreciate the hearing. I apologize. I had to step out for a 
Transportation Committee markup, so I hope my questions aren't 
redundant with something you said or someone else has asked.
    This is a very important hearing, and I really appreciate 
that we're having it, Mr. Chairman. I've been concerned for 
some time, because I've read some of the statistics that you 
quoted, particularly Mr. Stein, about how little Americans know 
about this issue, how many think that their nest egg plus 
Social Security will carry them through.
    But let me ask a couple questions about a different stage 
where I think education is very important, and that is when 
they are retiring and they have to make decisions about what to 
do with the money they have.
    Now what options are typically the best for them to 
consider, and how can we help educate the public about that 
particular aspect? For example, are annuities the best 
retirement instrument because they provide a steady rate of 
return or a guaranteed rate of return until they die? How does 
inflation affect those? If there's considerable inflation and 
they're on a fixed annuity revenue, what happens? And do 
variable annuities fit into this? Are these the best 
instruments for people to look at, or is there something here 
that I'm not understanding? We'll just go down the line. Mr. 
Stein?
    Mr. Stein. I would always recommend a diversified 
portfolio. It seems to me diversification is the best friend 
the investor has. But annuities have a valuable place in that 
diversified portfolio because they do distribute the risk away 
from the retiree, who cannot really afford to take the risk, 
and toward a large pool in the form of an insurance company who 
can afford to take the risk and have the understanding of how 
to take that risk. That's incredibly valuable.
    There are instruments that can be variable annuities take 
advantage of what we hope and has historically been a long-term 
growth in assets, especially in the stock market. So to some 
extent would offset inflation. But this again is why it's 
valuable to consult with an adviser, and it's extremely 
valuable to consult with an adviser who understands the 
individual situation that each retiree is in, rather than 
trying a one-size-fits-all approach so you buy over the 
Internet or over the phone.
    Mr. Ehlers. Are these advisers licensed, certified? I mean, 
how does the consumer know?
    Mr. Stein. They are trained in various ways. I think any 
respectable or large insurance company or broker would only 
have employees who have a certain amount of training. I must 
say my experience in buying annuities recently has been that 
they put you through an exhaustive treadmill of tests to see 
what is appropriate for you.
    Mr. Ehlers. And what are the guarantees for the consumer? 
You know, we have the bill to protect the pensions of workers, 
but what if the economy really goes bust and the insurance 
company is in financial problems? Is there any protection then?
    Mr. Stein. Well, that's a good point, but that's another 
argument in favor of diversification. I'm not sure that, aside 
from the companies in the Drexel junk bond insurance empire 
that any large insurance companies have gone bankrupt in the 
United States in the postwar period. So I think you would be 
fairly safe with any of them.
    Mr. Ehlers. OK. Let's go down--yes, Mr. Henrikson?
    Mr. Henrikson. Yes. A couple of things I'd like to 
emphasize. First, your point about people coming close to 
retirement at the workplace and needing help at that time is 
right on. I mean, I couldn't agree with that more. And 
leveraging the power of the workplace, bringing people 
together, giving them information in either a seminar setting 
or a pre-retirement setting for a group of people is actually 
very, very effective. Because, in the first place, people know 
that they are hearing the same information that others are 
hearing. They can ask any questions. Others can ask questions 
that they may not have thought of. And so this really leverages 
advice at the work site in a major way.
    In terms of the annuity contracts, in the first place, I 
don't think anyone's suggesting that just blanket that 
everybody should put all of their money in an annuity contract. 
It's very much up to the individual and what their particular 
needs are.
    The underlying investments in a payout annuity now in 
today's world with the amount of options available and so 
forth, the retiring employee literally can take the mortality 
risk portion of his life off the table and buy that protection 
from the insurance company and invest in the underlying 
securities in any diversified way, as Mr. Stein pointed out, he 
or she so desires. So today you can buy an annuity that you 
might say 50 percent of my income I'd like to have it just 
guaranteed. The other 50 percent, maybe I could live with 
market fluctuations.
    That monthly paycheck will vary depending on those market 
fluctuations. But the person can never outlive their assets. 
This is extremely important to understand. So there's a lot of 
option today. People can tailor make financial instruments to 
their own desires. But the one thing that I mentioned about 
mortality guarantees is if you look at it from the standpoint 
of risk to the individual, the difficulty of pinning what your 
longevity risk is dwarfs, dwarfs what the risk is in investing, 
for example, in small cap stocks only. The mortality risk is 
much more difficult, and it can be insured simply by 
individuals joining that pool.
    Mr. Ehlers. And just getting back to the education for a 
moment. Both of you have talked about education in the 
workplace. But there are many individuals who don't work in 
much of a workplace. A person that is self-employed or there 
are three people in the firm. Are there advisers or educational 
programs available for those individuals?
    Mr. Stein. I know that in California, where I'm from, in 
Southern California, a number of the community colleges offered 
courses and programs in that. But I certainly would ask that 
whatever you can do to encourage the broadcast media to talk 
about this, it would be very helpful.
    I'm mindful of the fact that I'm on a show on Fox News 
every Saturday talking about the stock market, and they always 
ask me what my prediction is for the stock market for the next 
week, and I always say my prediction is you're going to get 
another week older and closer to retirement, and you'd better 
make preparation for it. And I wish some people would be 
talking more about that.
    Mr. Ehlers. Well, that's precisely why I'm raising these 
questions, but I want the word to get out.
    Chairman Boehner. I thank the gentleman for his questions. 
The chair recognizes the gentleman from Ohio, Mr. Ryan, for 5 
minutes.
    Mr. Ryan. Thank you, Mr. Chairman. And I appreciate you all 
coming today. I have a couple of questions. Mr. Stein, you were 
talking about the education process. Can you tell us a little 
bit--face-to-face, are you really talking about going to these 
people's homes and educating these folks?
    Mr. Stein. No, we--well, I think that should be done by 
local--the people who go face-to-face and go to people's homes 
are people who are selling financial instruments or financial 
planners or people who have passed various financial planning 
tests, and those people have a financial interest in making a 
sale. But they also have a financial interest in making the 
right sale so that people will be coming back to them.
    And we do have data, by the way, that people who buy 
annuities, I don't know if there's data for other financial 
instruments, but people who buy annuities are very happy with 
them on an overwhelming basis. But I think there should be some 
kind of national program about this at schools and the 
community colleges.
    I grew up in the schools of Montgomery County and went to 
the schools in Montgomery County, Maryland, right next door. We 
were taught even in elementary school and junior high school 
about the incredible importance of saving for retirement when 
we were playing with Hopalong Cassidy toys. And I notice that 
the people I went to school with seem to be in very good 
financial shape by and large no matter what their jobs were. 
This doesn't seem to be taught anymore, and I wish it would be 
taught at every level.
    It seems to me no matter what you do to incentivize 
employers, it's still going to be the basic responsibility of 
the employee and the worker to take care of himself or herself, 
and that should be taught more.
    Mr. Orszag. If I could just add to Mr. Stein's comments 
quickly. The evidence--there is empirical evidence suggesting 
that people who are exposed to financial literacy and financial 
education courses in high school do wind up saving more than 
others. And yet in the education debate, one doesn't really 
hear about financial literacy being part of the core curriculum 
for high school students. I think it should be.
    Mr. Ryan. Well, given that this is the Education Committee 
as well, maybe we can take that up, Mr. Chairman, and include 
that in the No Child Left Behind.
    Mr. Henrikson. This was, by the way, a conclusion at the 
Saver's Summit here in Washington both times--both times it 
came up that focus for education at the grammar school level 
was absolutely essential.
    Mr. Ryan. For some of those people, too, Mr. Stein, you may 
have to teach them who Hopalong Cassidy is.
    [Laughter.]
    Some of us don't know that either. One other question. You 
talked a little bit about the defined benefit and the fact that 
it's overregulated, and that's one of the main reasons why. And 
then someone also mentioned too simplifying the 
nondiscrimination rules. Is that the only thing we can do? What 
else can we do to try to make this simpler, to lessen the 
regulatory burden?
    Mr. McCaw. Well, the comment about anti-discrimination 
rules being simplified, that certainly is one area. There are 
all kinds of rules, as I'm sure you know, that apply to defined 
benefit plans, all well meaning. Some of the legislation around 
the PBGC, some of the legislation around this 30-year bond 
issue that is currently being looked at. It's quite a long list 
of things that could and should be looked at in terms of 
putting us in a position where the defined benefit system is 
more appealing to American companies.
    There are still going to be risks associated with it, of 
course, because by definition, if you have a defined benefit 
pension plan, it's the company, not the employee, who's taking 
the risk and delivering the benefit, by definition. You have 
defined the benefit. And once you've defined the benefit, the 
cost of that benefit fluctuates with the economic times, and 
that fluctuating cost goes to the employer. That's understood.
    But I think there's sort of a basic premise here that we 
should all recognize and really hasn't exactly come up other 
than indirectly. One of the great things about a defined 
benefit plan is that the organization is taking the risk and 
the organization, most of them in any event, go on for years 
and years and years.
    You and I retire on a pretty predetermined by our parents 
essentially, fairly narrow range. And where the economy is, and 
we're at that point in time when we choose to retire or when we 
come to the point where we must retire, is something that's 
completely beyond our control. The employer can go with the ups 
and downs of the economy, and many have for 40, 50, 60 years. 
That's not our choice.
    Mr. Orszag. Yeah. I guess I basically agree with much of 
what was said. And I think you face a very difficult challenge 
in trying to convince corporations at this point to go back to 
traditional or to renew interest in traditional defined benefit 
plans. So we can perhaps nudge on the margins, but we should be 
realistic that it seems like that is a very high hurdle to 
cross.
    I want to just, if I have a second, just to follow up on 
the annuities question. Because I think annuities are a very 
important source of protection for retirees that are currently 
underappreciated. But it is important to realize that for a 
typical worker, because insurance companies naturally have to 
price the annuities based on the people who actually purchase 
the annuities, who tend to be higher income and have longer 
lives than the typical worker, research has shown that for the 
typical worker in present value, there is about a 10 or 15 
percent reduction in the value of your balance when you 
annuitize, and that's because insurance companies naturally 
have to price based on the people who are actually buying 
annuities rather than the overall population. And that is a 
sort of selection effect that is very important to realize.
    The question is, how do we get more people into annuities? 
The question had arisen earlier about tax incentives. The 
reason that I'm skeptical about the modest tax incentive that 
was included in Portman-Cardin last year is that two-thirds or 
three-quarters of workers are in the 15 percent or smaller, or 
lower marginal tax bracket. You're not providing a huge 
incentive for them.
    And I do want to clarify. I did not mean to say that that 
provision alone would cause trillions of dollars in revenue 
losses, but rather we are assuming that there are trillions of 
dollars in revenue losses on withdrawals from these 401(k)s and 
IRA plans. And I worry that as soon as we violate the principle 
that if you got the tax break up front and enjoyed tax-free 
accumulations, you pay tax on withdrawals, even if it's for a 
good purpose, like annuities, as soon as you violate that 
principle, the floodgates will open, and you won't be able to 
prevent tax breaks for this, that and the other thing on 
withdrawals, and then we are talking about trillions of dollars 
in revenue.
    So I just wanted to clarify that I didn't mean to imply 
that provision alone would be trillions of dollars.
    Mr. Stein. But you don't get the tax break on the annuities 
going in, so it would not be violating that principle.
    Mr. Orszag. I'm sorry. The proposal, as I understood it, 
was to allow up to a couple thousand dollars in annuity income 
to be tax free even if it's coming out of a 401(k) or IRA plan 
which had up-front tax breaks associated with it.
    Mr. Stein. I thought you were referring to an idea in which 
there would be no--there would be a reduction in tax on 
contingent annuity payments if there had not been a deduction--
    Mr. Orszag. No. This is a proposal that was in Portman-
Cardin last year.
    Chairman Boehner. The chair recognizes the gentleman from 
Georgia, Mr. Isakson.
    Mr. Isakson. Mr. Henrikson, I've read your testimony, 
listened to part of it and I was called out. So I read all of 
it when I got back, and particularly the survey and the results 
of the survey of what Americans know about retirement and what 
they know about planning for it, and I have a question for you.
    The survey and all your comments indicate we're in deep 
trouble in terms of the working knowledge of the individual and 
what they need to do to be prepared. Do you have any strategies 
that you recommend that we would be better off in terms of 
preparing people, No. 1? And No. 2, is there a role for the 
Federal Government in that preparation and that knowledge?
    Mr. Henrikson. Well, let me start with the second. Anything 
that the Federal Government does in a public way I think is 
very helpful in the debate around this topic. So, for example, 
in a related area, when the Federal Government decided to 
provide a long-term care insurance for Federal employees, it 
was a terrific lift in the United States in education going out 
around long-term care programs. So anything that fosters 
discussion and education around these issues is very, very 
helpful. And of course the Federal Government is powerful in 
being able to do that.
    We are working and have been working for a long time on 
this problem, and it is a difficult one. I would not, by the 
way, and I don't know that anybody implied this, but this is 
not just the recent generation phenomenon. When I said in my 
testimony that we're asking people to do the first time, 
something for the first time in U.S. history, I really believe 
that. If you look at people in my parents' generation, they 
were not saddled in the same way with something that I think is 
just a wonderful phenomenon in the country today, is that 
people are going to live a long time. But that creates a very, 
very difficult issue relative to retirement and savings.
    So I think if we can speak in the retirement community 
about not accumulation of wealth, around how much you might 
leave your children if you pass away, but taking care of 
yourself first and having your children be very, very happy 
that you are self-sufficient is a bigger reward to your kids 
for most people in the United States than trying desperately 
through fear to stop spending money as you become older and 
older.
    One of the biggest problems in this country is not only the 
people that don't have enough, but the people that have saved 
enough, but when they go into retirement, we see what happens. 
We have data on this. That folks look at their 401(k) balance, 
they look at their savings, they don't live off of it, because 
they're afraid. And one way to get rid of the fear is to knock 
out the impossible task of self-insuring your own mortality.
    So it all has to come together in a way that, from an 
education point of view, in a simple way that people can 
understand things.
    We have in the 401(k) arena, for example, and I love 401(k) 
plans. We're a major provider of 401(k) plans, and I think 
they're wonderful. But we know some interesting things about 
them. There is a correlation between the number of options 
people have in 401(k) plans and their participation. I.e., the 
more options they have, the lower the participation is. Why? 
Because they're confused.
    We know major corporations that we've done recordkeeping 
for where we do status reports for them, that major, well known 
corporations, sophisticated corporations with sophisticated 
employees, have 401(k) plans where no one changes the assets. 
Seventy percent of the people don't change their asset 
allocation at all. And we don't know whether that's because 
they're reconfirming something they think is right, or whether 
they're scared to death. We don't know.
    But I know something for sure. If you think income 
averaging into the marketplace is difficult, you ain't seen 
nothin' until you try to income average out.
    Mr. Isakson. Right.
    Mr. Henrikson. There was a very well known individual, very 
respected individual, who made a very good point not too many 
years ago when the market started bouncing around, saying that, 
you know, income averaging in is not the right way to go. 
People should value average in. So if the market goes down 30 
percent, just increase your contributions by 30 percent. Well, 
I don't know what planet that individual lives on, but I do 
know that what that means to retirees, if you follow that 
logic, that when the market goes down 30 percent just cut your 
income by 30 percent.
    People can't live that way. And all of this has to get to 
the forefront through education.
    Mr. Isakson. Mr. Chairman, I know my time is about up, but 
I would like to make one comment. I agree with you that it is a 
historical problem of people not being well enough educated on 
planing for their retirement, but I do think there's a 
difference in this generation and previous generations. I think 
previous generations expected that they were going to have to 
take care of themselves. Today's generation, or a lot of them, 
believe somebody's going to do it. And somebody oftentimes ends 
up being the government. And so this is not really a question 
but a comment.
    We have an obligation to the taxpayers of the United States 
of America to help them see the light on being prepared for 
their retirement, because if we don't, when they do retire and 
it's not enough, even to subsist on, they're going to come to 
the government which in turn is back on the taxpayer, and it's 
a cycle that--and the numbers looking at the baby boomers is 
very, very serious consequences for economic policy in the 
country. And that's just a comment.
    Thank you, Mr. Chairman.
    Chairman Boehner. As we near the end of this, let me ask 
this question. As much work as we're going to put into helping 
save defined benefit plans for American workers and help 
encourage employers to offer them, does anyone at the table 
believe that the exodus will slow down or come to an end and 
that we're not likely to see a continuing shift to defined 
contribution plans like 401(k) plans?
    Mr. McCaw. Well, I'll take a start at that. I think a lot 
of what we've talked about today and a lot of--the possibility 
of making some changes in legislation and so on, will at the 
very least slow down the exodus. And I continue to have some 
hope that in the right economic and regulatory environment, we 
may come to the day where we see more employers or some 
employers prepared to put forward a defined benefit plan for 
employees if for no other reason that I do see one thing in 
America today in terms of how organizations see their 
organization, and I think this is great, by the way. More and 
more companies are truly seeing the future of their 
organization doesn't rest in their fixed assets, doesn't rest 
in the raw materials. It rests in their people, having the best 
people, keeping the best people. That's going to be their 
competitive advantage. And as they look around at how they do 
that and how they keep those people and how they attract those 
people, I think this may be one of the programs that American 
industry may be looking at to make that happen. But there has 
to be some changes for them to be prepared to do that.
    Mr. Henrikson. I agree wholeheartedly. The one thing that I 
would say, I think major corporations, very, very large 
corporations, who have exited the defined benefit business, I 
don't think there's much we can do in the short term to have 
them turn on their heels and go back.
    I do think that formation in the middle market, smaller 
companies, can be encouraged and in fact could be--could be 
seen to be in a period of an uptick there, particularly if 
regulatory weight is not too heavy. If it's simple for them to 
do it, I think because of the human resource values that 
employers see, we could see an uptick in defined benefit 
formation.
    Mr. Orszag. I think the answer really depends on whether 
workers change their perceptions of the attractiveness of 
defined benefit plans versus 401(k) plans. One of the reasons 
we've seen the shift is workers seem to prefer 401(k) plans.
    With stock market fluctuations, which have really hit home 
to some near retirees, it's possible that workers will develop 
a larger appreciation for the benefits of a defined benefit 
plan. If that were to occur, then I think you will see more 
firms offering them as a way to attract high quality workers. 
But in the absence of that, it's a hard sell.
    Mr. Stein. It's a very hard--and it's a question which is 
really extremely difficult to answer, especially in light of 
the extraordinary burden of foreign competition, especially in 
manufacturing. But what we do know is no matter what they do, 
no matter what the employer does, the employee will be very 
well served to provide as well as he or she can for his own 
needs.
    Chairman Boehner. Well, I thank all of our witnesses today 
for your excellent testimony and your assistance in what will 
become I think one of the biggest issues that this Committee 
will be dealing with over the next several years.
    Thank you all very much. This hearing is adjourned.
    [Whereupon, at 12:10 p.m., the Committee was adjourned.]
    [Additional material submitted for the record follows:]

Statement of Hon. Jon C. Porter, a Representative in Congress from the 
               State of Nevada, Submitted for the Record

    Good morning Mr. Chairman. Thank you for convening this committee 
on this most important issue. I also wish to extend my appreciation to 
this panel of witnesses for sharing their experience and knowledge on 
the need to reevaluate our current pension system. Ensuring that 
Americans are financially secure in their retirement should remain one 
of the highest priorities of this committee and this Congress.
    As an increasing number of Americans prepare for a retirement that 
will last significantly longer than past generations, our job of 
examining the pension security of all Americans becomes increasingly 
important. The need for adequate education on and understanding of the 
financial needs of retirees has become paramount. As we look at means 
of augmenting the dissemination of this kind of knowledge, we must 
acknowledge that significant numbers of Americans lack the essential 
knowledge to ensure that their retirements are not fraught with the 
distresses of poverty.
    While we must work to make Americans informed consumers when it 
comes to their retirements, we need also to make significant progress 
in reforming the defined benefit pension system in this country. 
Reforms of this important system, and taking steps to ensure that the 
Pension Benefit Guaranty Corporation is based on a sound financial 
footing, will allow greater flexibility and portability among working 
Americans as they seek to prepare themselves for retirement. Americans 
today and for generations to come will reap the benefits of these 
reforms as a strengthened pension system will provide an essential 
aspect of retirement security.
    The hard work of America's retirees deserves our greatest efforts 
in bringing to them the highest levels of comprehension on the need to 
plan adequately for a secure retirement. This hearing serves as a 
starting point in our effort to bring to our constituents this message 
of fiscal responsibility. I believe that spreading this message to our 
constituents will enhance their ability to plan for their old age 
effectively and with minimal constraint on their lives before and after 
their retirements. Again, thank you Mr. Chairman for convening this 
necessary hearing. I am sure that the insight of these witnesses will 
better equip all of us who sit on the committee to better comprehend 
the need for work in this important area as we try to ease the 
potential burdens of retirement for our constituents.
                                 ______
                                 

 Statement of Hon. Charlie Norwood, a Representative in Congress from 
             the State of Georgia, Submitted for the Record

    Thank you Mr. Chairman for holding today's hearing on the very 
important subject of pension security. I look forward to the testimony 
of our witnesses, and as always, I appreciate their time and expertise 
in shedding light on this absolutely critical issue facing the American 
workforce today.
    Mr. Chairman, I am pleased that our Committee is continuing to 
explore solutions to the pension security system for workers, and look 
forward to working with you and the rest of my colleagues on the 
Committee in developing comprehensive legislation to improve the long-
term viability of private pension plans. Simply put, it is time we 
address this growing problem and begin to tackle the issue before 
millions of hard-working Americans are forced to retire with an 
insecure future.
    Too many Americans do not have the information or resources at 
their disposal to make proper plans for their future, and as we well 
know from previous Hearings on this very subject, the structure of our 
private pension system may in fact be structurally inadequate to meat 
their retirement needs.
    Mr. Chairman we cannot allow this trend to continue. If American 
workers are to enjoy their golden years in a secure retirement, 
Congress must be prepared to enhance pension security by reversing the 
decline of the defined benefit pension system, providing workers with 
sufficient information and decision-making tools, and expanding 
retirement plan coverage for those that do not have it already.
    As I alluded to earlier, this Committee hosted a similar hearing in 
2003 where we learned about the poor financial health of the Pension 
Benefit Guaranty Corporation (PBGC), including the startling fact that 
the PBGC continues to face an $8.8 billion deficit. The PBGC is 
responsible for guaranteeing payment of basic pension benefits for 44 
million American workers and retirees participating in some 30,000 
private sector defined benefit pension plans. However, this number is 
down dramatically from 170,000 in 1985, and does not include a number 
of plans that have been frozen to exclude new employees.
    This decline in the number of defined benefit pension plans is 
symptomatic of the increasingly elaborate and inefficient nature of the 
private pension system, and directly contributes to the lack of 
retirement security for employees in the private pension system.
    It is also disturbing that so many American workers and retirees 
have dramatically underestimated how much money they will need in order 
to retire after a lifetime of hard work. Statistics consistently 
suggest that the American workforce is not prepared to make the 
decisions today that will directly impact their quality of life 
tomorrow, including a recent survey conducted by the Employee Benefit 
Research Institute that found less than 4 out of 10 American workers 
have even calculated how much money they must save before retirement. 
If this is indeed the case, and there is a ``pervasive lack of 
knowledge about key retirement financial issues,'' Congress must 
consider alternative methods to provide workers with the education and 
decision-making tools they need to plan for a secure retirement.
    At the same time, we cannot ignore the fact that 6 1 % of all 
workers between the ages of 24 and 64 have no retirement accounts at 
all! Even those lucky enough to enjoy a private pension account carry a 
median balance of less than $25,000.
    Mr. Chairman, I don't know many families from Augusta, GA that can 
retire on less than $25,000.
    What is it going to take to reverse these alarming statistics? What 
is it going to take to make sure hard working Americans are not left 
penniless in their retirement? These are the questions I look forward 
to exploring as this Committee begins to delve more deeply into the 
issue of private pension security for the American workforce.
    Today, I look forward to hearing our witness' thoughts on how 
Congress and the Administration can begin to reform our system to 
ensure that our workers retire with dignity and security. As a proud 
supporter of your bill, the Pension Security Act of 2003, you can be 
sure that I will continue to actively seek out reforms to our private 
pension system that will expand coverage, improve decision-making and 
restructure the Defined Benefit Pension System in an appropriate way.
    Thank you Mr. Chairman and I yield back.
                                 ______
                                 




    Statement of American Council of Life Insurers, Washington, DC, 
                        Submitted for the Record




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