[Senate Hearing 108-4]
[From the U.S. Government Publishing Office]



                                                          S. Hrg. 108-4

                       ANALYZING SOCIAL SECURITY:
           GAO WEIGHS THE PRESIDENT'S COMMISSION'S PROPOSALS

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                            JANUARY 15, 2003

                               __________

                            Serial No. 108-1

         Printed for the use of the Special Committee on Aging



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                            WASHINGTON : 2003
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                       SPECIAL COMMITTEE ON AGING

                      LARRY CRAIG, Idaho, Chairman
RICHARD SHELBY, Alabama              JOHN BREAUX, Louisiana, Ranking 
RICK SANTORUM, Pennsylvania              Member
SUSAN COLLINS, Maine                 HARRY REID, Nevada
MIKE ENZI, Wyoming                   HERB KOHL, Wisconsin
GORDON SMITH, Oregon                 JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri            RUSSELL D. FEINGOLD, Wisconsin
PETER G. FITZGERALD, Illinois        RON WYDEN, Oregon
ORRIN G. HATCH, Utah                 BLANCHE L. LINCOLN, Arkansas
ELIZABETH DOLE, North Carolina       EVAN BAYH, Indiana
TED STEVENS, ALASKA                  THOMAS R. CARPER, Delaware
                                     DEBBIE STABENOW, Michigan
                      Lupe Wissel, Staff Director
             Michelle Easton, Ranking Member Staff Director

                                  (ii)

  


                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator John Breaux.........................     1
Statement of Senator Larry Craig.................................     3



Hon. David M. Walker, Comptroller General, U.S. General 
  Accounting Office, Washington, DC; accompanied by Barbara D. 
  Bovbjerg, Director, Education, Workforce, and Income Security 
  Issues, U.S. GAO, Washington, DC...............................     5

                                APPENDIX

Prepared Statement of Senator Russ Feingold......................    55

                                 (iii)

  

 
  ANALYZING SOCIAL SECURITY: GAO WEIGHS THE PRESIDENT'S COMMISSION'S 
                               PROPOSALS

                              ----------                              --



                      WEDNESDAY, JANUARY 15, 2003

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 9:33 a.m., in 
room SD-562, Dirksen Senate Office Building, Hon. John Breaux 
(chairman of the committee) presiding.
    Present: Senators Breaux, Stabenow, Craig, and Talent.
    The Chairman. The Senate Aging Committee will please come 
to order.
    Good morning, everyone. Welcome to the 108th Congress. I am 
sure we will be joined by other members. I am delighted to have 
my ranking member, Senator Larry Craig. I call him the crown 
prince of chairs.
    Senator Craig. Be careful with terms.
    The Chairman. He is the chairman-in-waiting here, soon to 
be, and we are very, very delighted to begin this year, I 
think, in the same timeframe and in the same manner which we 
did last year, in a cooperative fashion, which I think is so 
important particularly on the questions of aging. There is 
really not a lot of difference in how we approach these issues.
    I also want to welcome our new member, Senator Talent. 
Welcome to the Aging Committee. We are delighted to have you on 
board. A number of other members have requested to be members 
of our Aging Committee and we are delighted to have them and we 
will welcome them when they get to the meeting, and we look 
forward to working with them.
    The purpose of our hearing this morning is really quite 
simple. It is to hear the findings of the GAO study that we 
requested on plans proposed by the President's Commission on 
Social Security.
    I had asked the GAO and our good colleague, David Walker, 
to conduct this analysis really for one reason, to sort of call 
a time-out in some of the political rhetoric of the debate 
regarding Social Security. We can have a number of groups come 
before the Aging Committee and we will pretty much tell you 
what they are going to say before they get here with regard to 
Social Security and what should be done.
    We wanted to try and get as much of a neutral 
recommendation and review of the commission proposal as 
possible, and we could think of no one better to conduct that 
review than the GAO. Of course, that is the purpose of the 
hearing, is for them to present this report.
    I believe we have actually taken a giant step backwards in 
the Social Security reform debate in the past few years. Rather 
than a discussion about the real reform that we need with the 
American public, Social Security is once again becoming every 
politician's favorite 30-second negative ad.
    I was at a speech in Washington yesterday and mentioned 
that I did not think that Social Security reform was going to 
happen this year. I got folks saying, ``Well, then why should 
we even have a hearing this morning? '' The answer is that 
reform, while it may be a long way off, rhetoric on Social 
Security is still here; it is now and it is red hot.
    It is not that Social Security isn't getting enough 
attention; it is that it gets too much of the wrong kind of 
attention. The truth is simply that politicians and interest 
groups can't talk enough about Social Security, about 
protecting it and about saving it for future generations, or 
too often about the other side, trying to destroy it for our 
Nation's seniors.
    So if we are going to do all this talking, I thought we 
should at least have a sort of non-partisan, objective voice in 
the mix. I might add that finding a non-partisan voice on 
Social Security is almost impossible. We are rapidly running 
out of interested parties who are not firmly in one camp or the 
other.
    I am still a firm believer that Congress must address 
entitlement reform overall. The demographic changes in this 
country will soon cause an extraordinary collision of financial 
pressures. I referred to it yesterday as truly the perfect 
political storm.
    Social Security and Medicare both are facing long-term 
insolvency. Medicaid, which is having to fill in for the lack 
of a long-term care system in this country, is already putting 
enormous pressure on State and Federal budgets. We have all 
heard time and time again that unless we do something, 
entitlement spending will crowd out dollars for other 
discretionary investments such as our national security and 
education, just to mention two. If I know Dave Walker, he will 
speak to these issues as well.
    We truly are at a crossroads of either ducking and waiting 
for that perfect storm to hit or actually preparing to face it. 
Today's hearing will hopefully give the American public a 
realistic reminder about the tough choices facing our Social 
Security system for millions of Americans. It is such a 
critical program and it deserves better than what we have seen 
in recent times.
    I want to thank once again Dave Walker and the terrific 
staff that he has at GAO for the enormous amount of work that 
has gone into the report that he has prepared for us this 
morning. We look forward to hearing that report and asking 
questions.
    I would like to recognize now my friend and chairman soon, 
soon to be, Senator Craig.

                STATEMENT OF SENATOR LARRY CRAIG

    Senator Craig. Well, Mr. Chairman, thank you very much. I 
am here today because this was a hearing that the chairman had 
begun to work on some time ago, prior to the election. If it 
had not been, I would not be here.
    I think it is important for the record to show that the 
transition of power in a democratic society is being flawed at 
this moment; that I should be the chairman, as should others, 
in a majority party.
    When the transition occurred some months ago, with the 
change of a single member, that transition in this committee 
and others came almost immediately, and that is the way it 
ought to be. But because of the cooperative nature that the 
chairman and I have worked under and will continue to work 
under for the benefit of this committee, I am here today.
    But it is very important that the record demonstrate that 
what is going on in this Senate at this moment is historic and 
precedent-setting and it will be denied. I think that is 
fundamentally important.
    But this committee will work in a cooperative vein because, 
as I think the chairman laid out, the issues before it and the 
challenges in Aging America are critical and it is our 
opportunity, both John Breaux' and mine and Jim Talent's and 
others', to highlight those in this committee, to challenge 
authorizing committees within the Congress to meet those kinds 
of demands.
    Today before us is a GAO review about Social Security, and 
I too welcome David Walker. Social Security, I think, has 
provided protection from financial uncertainty for generations 
of older Americans. However, America has changed dramatically 
over the past decades and continues to change.
    The U.S. economy, for example, has evolved from an 
industrial-age workforce to an economy characterized more and 
more by information-age opportunities. America also faces 
unprecedented demographic changes, and it is in those changes 
that this committee has an opportunity to highlight and bring 
to the forefront.
    As a Nation, Americans are living longer than ever before. 
Birth rates have stabilized to roughly replacement levels. The 
ratio of workers paying into Social Security to those 
collecting Social Security benefits has declined from 5-to-1 in 
1960 to 3.4-to-1 today. The worker-to-beneficiary ratio is 
projected to decline to 2-to-1 by 2040.
    Let us be clear. Current retirees and those nearly 
retirement age will continue to receive their promised 
benefits. Let me repeat that. There is not a Member of 
Congress, nor does the current system deny current retirees and 
those nearing retirement age being allowed to continue to 
receive their promised benefits.
    Those receiving benefits now and in the near future need 
not fear losing their benefits. I think it is in that context 
that the chairman challenged us this morning to be able to 
openly, honestly and effectively review these programs that 
benefit our elderly, our Aging in America, without the 
political demagoguery that has historically mounted around it.
    The challenge calling out to this generation of leaders is 
how to sustain Social Security beyond this generation of 
retirees without over-burdening our children and grandchildren 
with excessive taxes on their labor or huge cuts in their 
retirement income.
    We are here today to learn how best to provide a Social 
Security program that is adequate and sustainable for the 
future. Our charge is to develop a Social Security program that 
future generations can depend on.
    On May 3, 2001, President Bush courageously established a 
Social Security Commission to study the future of our national 
retirement program. The President tasked this commission with 
the responsibility of developing models designed to strengthen 
Social Security.
    The commission featured an impressive bipartisan group of 
experts. This group produced three models using different 
design features to show how each approach might address the 
twin issues of benefit adequacy and sustainability.
    So, Mr. Chairman, I too look forward to listening to the 
GAO's view of how the President's commission meets these twin 
goals because they are the twin goals that remain the 
challenge.
    Thank you very much.
    The Chairman. Thank you, Senator Craig, and you point out 
the great challenge facing us. We are challenged to fix Social 
Security and we still haven't even figured out how our 
committees are going to meet. So that puts everything in 
perspective here.
    Senator Talent, comments? Welcome to the committee. We are 
glad to have you on board.
    Senator Talent. Thank you, Mr. Chairman. It is a pleasure 
to be here. In the House, generally you don't get to make 
opening statements unless you are the chairman or the ranking 
member. So while normally I probably wouldn't, I think I will 
take advantage of the opportunity at least on this one 
occasion.
    The Chairman. One minute. [Laughter.]
    Senator Talent. Oh, the 1-minute rule. Thank you, Mr. 
Chairman. It is the first time I have ever served on a 
committee where you say ``Mr. Chairman'' and two people turn 
around.
    The Chairman. You should see what happens when you say 
``Mr. President.'' [Laughter.]
    Senator Talent. I would like to associate myself with the 
comments both of the chairman and the future chairman. I am 
also frustrated with the slow pace of change in terms of 
reflecting the last elections, and I hope that will be dealt 
with in the next day or two.
    I asked on this committee and am pleased to be here because 
I think really what this committee is going to be dealing with 
today and in the future are the most important issues that we 
are confronting.
    If you just look at this issue on a very concrete basis 
today, if you are a couple approximately my age and you are 
thinking about your retirement and thinking about what kind of 
assets you are going to have available and how much money you 
are going to need to be able to sustain your quality of life, 
that $900 a month that you ought to have a right to expect to 
get from Social Security is very important.
    Whether that is going to be there depends in large part on 
what we do in the next few years. So I think this isn't an 
issue where we can just afford to do nothing because 
politically it is hard to bring it up. I think we do have to 
confront it. I think we need to strengthen this system for 
current recipients and future recipients.
    I congratulate the chairman on scheduling this hearing and 
I am looking forward very much to what Mr. Walker has to say.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Talent, and we are glad to 
have you on the committee.
    David, you have heard our comments and now we are very 
pleased to have you report on Social Security Reform: Analysis 
of Reform Models Developed by the President's Commission to 
Strengthen Social Security. We are glad to see you back at the 
committee. Welcome.

 STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, U.S. 
  GENERAL ACCOUNTING OFFICE, WASHINGTON, DC.; ACCOMPANIED BY 
 BARBARA BOVBJERG, DIRECTOR, EDUCATION, WORKFORCE, AND INCOME 
SECURITY ISSUES, U.S. GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

    Mr. Walker. Thank you, Senator Breaux, Senator Craig, 
Senator Talent. It is a pleasure to be here.
    Senator Talent, congratulations on your victory and on 
joining the world's most prestigious deliberative body.
    It is a pleasure to be here to talk about Social Security 
reform. This is not the first time and I am sure it won't be 
the last time that I will talk about this, but I hope I don't 
have to do it every year during the balance of my tenure. I 
have only 11 years left and I am hoping that the Senate and the 
House might act on comprehensive reform well in advance of the 
expiration of my term.
    Since there are only three of you here, and I understand I 
am the only witness, what I would like to do, Senator, is to go 
through some background information and then talk about the 
results of our study.
    You have held up the report. This is the report that we are 
issuing today. But as all of you know, we have done a lot of 
work in this area over the past several years, and expect to do 
more in analyzing various reform proposals as they come forth.
    The Chairman. We have a pending request right now on 
voluntary versus mandatory private accounts that we are working 
with you on.
    Mr. Walker. I believe you are correct, and we have other 
ones that we are discussing with Senator Craig and others to do 
as well. So our cup runneth over and we are looking forward to 
trying to help to the extent that we can.
    If I can, let's go to the first slide. There are a few 
important points  that I  think we  have to  lay out  in an  
overall framework before we get into this particular proposal. 
This represents projected cash-flows for the Social Security 
Trust Fund starting in 2002 moving forward.
    Now, we hear a lot about the Social Security Trust Fund and 
we hear a lot about the issue of trust fund solvency. But as we 
all know, cash is key, and Social Security's combined trust 
fund, OASIS, which is old age and survivor's insurance and DI, 
disability insurance, turns a negative cash-flow in 2017. That 
is really the key date, not just 2041 when the trust fund 
becomes insolvent because we have liquidated all of the bonds 
that are in the trust fund. So we really need to recognize that 
the sense of urgency is a lot more immediate than many people 
realize.
    Now, if you were to add on top of this Medicare's cash-flow 
problems which are greater than Social Security, you will find 
they begin at about the same timeframe and we see red as far as 
the eye can see with a never-ending escalation, unless 
something is done.
    Looking back and over time until the present time it is 
important to understand that in 1962 when John F. Kennedy was 
President, continuing to 1982 when Ronald Reagan was President, 
and until 2002, with President George W. Bush, the composition 
of the budget has changed fundamentally.
    In 1962, had you been in the Senate, you would have been 
able to decide how 68 percent of the Federal budget was going 
to be spent for that year. Last year, the Congress was able to 
decide how 37 percent of the Federal budget was going to be 
spent, and the squeeze is getting tighter every year.
    Now, if we can look forward, one of the things GAO has done 
for about 10 years now is we have performed various long-range 
budget simulations. Now, this is important. This is not a 
projection. It is a simulation and I will tell you what the key 
assumptions are.
    As you know, the CBO is responsible for being the official 
budget scorekeeper for the Congress. They do projections for 10 
years. The problem is that those are all based on cash-flows 
and the world doesn't end in 10 years. In fact, our biggest 
problems actually don't start until after 10 years. So, 
therefore, we believe it is important to take a longer-term 
intergenerational view, in part not just because of Social 
Security, but Medicare and various other issues.
    The blue line that goes horizontally across, this graphic 
represents Federal revenues as a percentage of the overall 
economy. The left-axis is the percentage of GDP. So we assume 
that that stays what it is under current law. We are not 
getting into the details about tax rates and tax preferences 
and all those issues, just the relative share of the economy 
represented by Federal tax revenues.
    Then if you look at the bars, the bars represent the 
composition of Federal spending. In the year 2000, you see 
there was a gap. The gap was what we used to call a surplus. In 
2015, 2030, 2050, you see what the future may hold if certain 
things happen: No. 1, if the Social Security and Medicare 
trustees are correct that their best estimate assumptions of 
what the spending on those programs will be will come true. 
Historically, they have been a little bit optimistic. So in 
other words, it could be somewhat worse. I was a trustee for 
Social Security and Medicare from 1990 to 1995, so I have got 
firsthand experience dealing with these issues.
    Second, if the economy grows at the rate that the CBO is 
expecting, which at the end of 10 years is 3.1-percent real GDP 
growth, although this model assumes that it is affected by 
deficits and so it goes down if you just leave it on auto 
pilot. It starts at 3.1 percent read GDP growth. If you don't 
do anything, it is going to go down. It could go up with other 
policies.
    Finally, if discretionary spending as a percentage of the 
economy does not change; in other words, discretionary spending 
grows by the rate of the economy, not by the rate of inflation, 
but the rate of the economy. As you know, discretionary 
spending includes such things as defense, homeland security, 
education programs, transportation, infrastructure, the 
judicial system of the Nation, some things that arguably 
shouldn't be discretionary because they are in the 
Constitution, but nonetheless under our current system they 
are.
    So let's just say that is not a scenario anybody wants. All 
the more important why we need to be talking about this. This 
means several things. One, we must have Social Security and 
Medicare reform, and we need it sooner rather than later.
    Second, we also need to take a look at the base of Federal 
spending and other policies and programs to consider what 
should the Government do, how should the Government do 
business, and who should do the Government's business in the 
21st century. We need to set new priorities because the numbers 
don't add up. The status quo is unacceptable. We have got to 
get on with the heavy lifting.
    The next figure shows what happens just to Social Security, 
Medicare and Medicaid spending as a percentage of GDP, given 
the escalation that is expected. That is unsustainable, 
Senators. There is no way we can sustain these escalating 
deficits and maintain economic growth.
    This shows why it is important to act sooner rather than 
later. Basically, it says that if you look at early action, 
let's say 2002 versus 2017 versus 2041, if you act in 2002 and 
all you did was adjust benefits, you can see there would be a 
13-percent across-the-board adjustment necessary. I am not 
proposing that is what you do. Nobody is for that, but it gives 
you a sense of the relative order of magnitude.
    If you waited until 2017, you would have to adjust them by 
16 percent. If you wait until the trust fund runs out, you 
would have to adjust them by 31 percent across the board, at 
this time.
    On the other hand, if you looked on the revenue side, you 
could increase payroll taxes by 15 percent now, 22 percent in 
2017, or 45 percent in 2076, as compared to current payroll tax 
levels, and you would get the same job done. The problem is 
that these actions would balance the system for only for 75 
years and at the end of 75 years, we are still facing 
escalating deficits. So that is why we talk about sustainable 
solvency.
    The point here is not that you are going only to adjust 
benefits, not that you are just going to look on the revenue 
side, but that early action causes the miracle of compounding 
to work for you. The miracle of compounding means that if you 
act earlier, the amount of change you are going to have to make 
is much less dramatic and people have a lot more time to be 
able to adjust to that change.
    The last figure shows the three basic criteria that we used 
to evaluate the proposal that I will talk about today and that 
we evaluate all proposals on. First, financing sustainable 
solvency. It is not just trust fund solvency; it is what 
percentage is this program as a percentage of the economy. Is 
it solvent and sustainable in the year 2075 and beyond? The 
world won't end in 10 years and it won't end in 75, and 
therefore, we need to look for a longer horizon.
    Second, balancing adequacy and equity in the benefit 
structure. Are the benefits adequate and are they equitable 
from a variety of different perspectives? Third, what about the 
issues of implementing and administering reforms? This is 
particularly important if you are talking about individual 
accounts because that would be a new ball game. It is more like 
a defined contribution plan.
    By the way, I used to be Assistant Secretary of Labor for 
Pensions and Health, and so I have a lot of experience dealing 
with pension and health issues in the private sector, and there 
are a lot of analogies here, I think, that could be drawn with 
regard to potential reform proposals along the lines of the 
commission's and others.
    So these are the real keys and the bottom line is that 
there are tradeoffs. Every reform proposal is going to have 
pros and cons. Every one is going to be able to be attacked on 
individual elements. You need to look at reform proposals as a 
package and you need to look at them as compared to at least 
two benchmarks.
    First, you increase revenues. Second, you only cut 
benefits. Those are the two extremes. I don't think you are 
going to do either one. I don't think you are going to do 
either extreme and I wouldn't recommend that you do either 
extreme, but those represent the extremes. The solution is 
someplace in between and may possibly involve individual 
accounts, which would add a new element.
    But you need to be able to look at it both ways. Why do I 
say that? Because, for example, all promised benefits aren't 
funded, as a result it is not fair just to look at a benchmark 
that is based just on promised benefits because they are not 
all funded.
    But, Congress could decide to fund promised benefits. That 
is why you all are elected. I don't have a vote, but hopefully 
I can help you get to some of this information.
    Now, if I can, Senators, I will now go to the commission's 
proposals. We have applied our criteria to the commission 
models and what I would respectfully suggest is that I focus on 
Model 2 because when you get right down to it, I think there is 
a fairly broad-based consensus that Model 2 is the one that is 
being discussed the most. It is kind of like the three bears 
theory. One is too hard, one is too soft, and the other one may 
or may not be just right. But Model 2 is the one that I think 
people are focusing on as having the most potential with regard 
to the commission's proposals.
    As you see, if you apply our criteria to the commission 
models, especially Model 2, you are going to see there are 
tradeoffs. There are tradeoffs between achieving sustainable 
solvency and maintaining adequate retirement income for current 
and future retirees. They illustrate these tradeoffs that have 
to be part of this national debate.
    Now, as far as financing sustainable solvency, a few key 
points. Overall, Model 2 would provide for sustainable solvency 
not just during the 75 years, but also beyond the 75 years, and 
it would reduce the share of the Federal budget and the economy 
that are projected to be devoted to Social Security as compared 
to currently scheduled benefits, regardless of how many 
individuals selected the accounts.
    The Chairman. Could you give us sort of a synopsis of what 
Model 2 does? I know you are talking about the effects. Could 
you just structurally say what that recommendation is?
    Mr. Walker. I sure can, Mr. Chairman. I think that is 
important.
    Senator Talent. Mr. Chairman, if I could, I wonder since I 
am new, if I just don't understand a term he is using, would it 
be all right if I just asked him to explain that so I can 
follow?
    The Chairman. Sure.
    Senator Talent. Again, explain sustainable solvency. Do you 
mean something that corrects the cash-flow problem? Is that 
what you mean?
    Mr. Walker. We mean something that not only causes the 
trust fund to be in actuarial balance for 75 years. It is in 
balance in year 75 and beyond, and it is sustainable as a 
percentage of the economy. That is basically it.
    Senator Talent. OK, so by ``imbalance'' you mean the money 
coming in will be enough to pay the money going out that we 
promised?
    Mr. Walker. Through the end of 75, at the end of 75, and 
our analysis also considers beyond 75.
    Senator Talent. The total volume of it is economically 
sustainable, in your judgment?
    Mr. Walker. Correct.
    Senator Talent. Those are the two things you mean by that?
    Mr. Walker. Right, and we have a more technical and 
detailed definition in the material. I would be happy to speak 
with you separately, Senator, on these issues if you would 
like.
    Senator Talent. I follow what you are saying.
    Mr. Walker. In Model 2, there are several key elements. It 
provides for a defined benefit base, which is the form of the 
current system. It does not propose to change benefits for 
anybody who is 55 or older today. That is something that 
Senator Craig talked about. In other words, for people who are 
55 and older today, it does not propose to change their 
benefits.
    For individuals who are younger than that, it proposes that 
starting in the year 2009 they would have an opportunity to 
elect, choose, if they so desire, to have a voluntary 
individual account of up to 4 percent of taxable payroll, or 
$1,000 annually. If they choose that, they are agreeing to 
certain benefit adjustments, as compared to what they would 
otherwise get under the current defined benefit system. Namely, 
a benefit offset amount.
    So they can choose the individual account in exchange for 
agreeing to certain benefit offset adjustments. In addition, 
the primary general benefit adjustment would be that right now 
under Social Security, in calculating your initial benefit when 
you retire, in order to calculate that benefit, in indexing the 
amounts that you earned during your working life, right now 
those amounts are indexed to real wage growth; in other words, 
not just inflation to make the dollars comparable, but also 
increases in productivity, increases in standard of living.
    So what this would propose is that rather than indexing the 
initial benefit that you get to real wage growth, which would 
include again productivity increases and improvements in the 
standard of living, you would index to inflation. So you would 
calculate benefits to maintain purchasing power, not for 
overall changes in the standard of living.
    Now, as you know, right now the way that it works is once 
you retire, benefits are indexed to inflation to maintain 
purchasing power. There would be an enhanced benefit for low 
wage workers. In addition, there would be a requirement for 
general fund transfers for about three decades to fund the 
transition obligation, which is to fund the benefits already 
payable under the old system, along with the individual 
accounts.
    The Chairman. How much?
    Mr. Walker. About $2.2 trillion, but the unfunded 
obligation for Social Security today for 75 years alone is 
about $3.4 trillion. So one of the things we always have to 
keep in mind is you have to start with where we are and how do 
things compare to where we will be if we do nothing.
    I know, Senator Craig, one of the things we are looking at 
is the possibility of, what would happen if we waited until the 
trust fund ran out of money. That is something that we can look 
at from an analytical standpoint, but that raises major 
intergenerational and timing issues. But you may want to 
consider that and debate it.
    Senator Craig. David, in analyzing these models, though, 
did you not in your evaluation make a couple of assumptions on 
baseline activity?
    Mr. Walker. On the baseline?
    Senator Craig. Yes, as it relates to these are not analyses 
from the status quo, the current status quo.
    Mr. Walker. Well, let me clarify. Basically, what they are 
is if you look--let's go back to the figure right before this 
one. We use two benchmarks.
    Senator Craig. Right.
    Mr. Walker. We believe you ought to have at least two. You 
could add others, but for simplicity we just start with two. 
The left one is a tax adjustment benchmark which says you 
increase payroll taxes, and we are not recommending that, but 
increase payroll taxes, or otherwise generate revenues of an 
equivalent amount, starting in 2000 necessary to try to be able 
to deal with the funding over the next 75 years.
    The tax adjustment is the blue and the benefit adjustment 
is the yellow. Under the benefit adjustment, you would change 
benefits across the board effective immediately. You are not 
going to do that. So those are our two baseline assumptions.
    Senator Craig. But I mean in going forward in analyzing 
these models, those assumptions are built in there that action 
would have taken place, are they not?
    Mr. Walker. That is correct.
    Senator Craig. That Congress would raise taxes and cut 
benefits?
    Mr. Walker. These are two extremes. The solution is likely 
to be somewhere in between. These are the two extreme 
benchmark.
    Senator Craig. Politically, don't assume we are going to do 
either of those.
    Mr. Walker. No, I don't, but on the other hand I think it 
is important to recognize that is what many people debate. Many 
people say, ``Well, gee, we need to deliver on our promised 
benefits.'' Well, if you are going to deliver on your promised 
benefits, that means you have got to come up with the revenues. 
There are some other people who say, ``Well, you know, we need 
to live within our means and we need to make sure we only pay 
what we have revenues for.'' Well, OK, that is what this would 
do.
    The scenario you are talking about, Senator Craig, I 
believe, the so-called status quo scenario, would be 
theoretically as follows. Once you starting turning negative 
cash-flow in 2017, you start drawing on these Government bonds 
which are basically an unsecured promise to pay. They represent 
a first claim on future general revenues. They are not readily 
marketable.
    You have got to either raise taxes, cut benefits, or do 
additional public debt financing to pay them off, to turn them 
into cash. So you do that until 2041, and in 2041 you are faced 
with either cutting benefits 31 percent or raising payroll tax 
revenues 45 percent.
    Now, theoretically, you could say, ``Well, we could slow 
down payments and pay everybody a hundred percent.'' But, 
realistically, that is a kiting scheme. I mean, you are not 
going to do that, and so that is theoretically what the status 
quo is. I don't think anybody would want that.
    The Chairman. Well, give us your summary of Model 2, then, 
as to what that recommendation consists of.
    Mr. Walker. As I mentioned Model 2 would provide for 
sustainable solvency not only for the 75 years, but beyond the 
75. It would require significant general fund transfers, but 
quite frankly virtually every proposal requires significant 
general fund transfers.
    In addition, viewed from the perspective of the economy, 
the total payments--Social Security is defined benefits, plus 
income from individual accounts as a percentage of GDP--would 
fall under Model 2 with universal account participation 
relative to both the baseline extended and the tax increase 
benchmark. In 2075, the share of the economy absorbed by 
payments to retirees from the Social Security of the system as 
a whole would be roughly 20 percent lower than the baseline 
extended or tax increase benchmark and roughly the same as the 
benefit reduction benchmark.
    As far as balancing adequacy and equity, the commission's 
proposal illustrates that there are tradeoffs here in order to 
try to achieve a plausible solution. Both models 2 and 3 
protect benefits for current and near-term retirees, and the 
shift to advanced funding could improve intergenerational 
equity.
    However, under each of the models, some future retirees 
could face potentially significant benefit reductions over the 
long term because of how you change the benefit formula. In 
Model 2, the initial benefit is based upon earnings indexed to 
the cost of living rather than by real wage growth.
    Median benefits for those choosing individual accounts are 
always higher than those who do not choose the account, and 
that gap grows over time. In other words, what this says for 
younger people, in other words for people that are under 55, is 
take the deal if it is offered. I mean, that is basically what 
it says based on our probability analysis. As you know, you 
don't know for certain because you don't know exactly what 
investment returns are going to do, but the probability 
analysis says you take the deal.
    However, median monthly benefits received by those without 
accounts would fall below the benefit reduction benchmark. In 
other words, those who don't choose the accounts could end up 
being worse off over the long term.
    For the 20 percent of beneficiaries with the lowest income, 
the median monthly benefits with universal participation in the 
accounts tend to be higher than benefits under the benefit 
reduction benchmark. This is likely due to the enhanced benefit 
for low wage workers. In other words, there is a minimum 
benefit provided in here that is enhanced over current law, and 
so that is the primary reason why that lowest 20 percent is in 
the aggregate better off.
    Senator Craig. Both in Models 2 and 3, low-income and low-
income disabled actually benefit.
    Mr. Walker. From this enhanced benefit. From my 
understanding, that is correct. Both Models 2 and 3 have that.
    Senator Craig. More than under the current situation, is 
that not correct, making these assumptions and this kind of 
reform?
    Mr. Walker. For median benefits, the answer is yes. For 
everybody, the answer is no. But most, yes.
    Senator Craig. Correct.
    Mr. Walker. Regardless of whether an account is chosen 
under Model 2, many people could receive monthly benefits that 
are higher than the benefit reduction benchmark. However, some 
could fare worse. Some people could also receive a greater 
benefit than if you just essentially raise payroll taxes or 
otherwise generate other revenues, general revenues, to meet 
today's promise. Some could actually be better off than that.
    Now, as far as implementing and administering reforms, 
there would be a governing board that would be established in 
order to administer the individual accounts that would decide 
which investment options would be available to individuals and 
that would provide various financial information to 
individuals.
    The commission didn't spend a whole lot of time trying to 
work out the details. This would be a significant undertaking 
because there is nothing of this size and magnitude anywhere in 
the world, but intellectually and technologically it is 
possible to accomplish with time and resources to get this 
done.
    We do, however, believe that making the accounts voluntary 
ends up increasing the complexity, and that furthermore even if 
you end up having individual account options and can do it in 
an administratively feasible manner, which you can, it is going 
to be incredibly important to have a significant education 
campaign for individuals who would be involved in having to, 
one, make a choice, and two, after having made a choice, if 
they decide to go with individual accounts, how they should 
invest and what they should do once they do that. The fact of 
the matter is that the dynamics of who is bearing the risk are 
changed fundamentally, and therefore this has to be recognized.
    So in summary, Senators, I think it is important to know 
that Social Security reform is part of a broader fiscal and 
economic challenge, that focusing on trust fund solvency alone 
is not sufficient. In fact, it can be misleading to focus on 
trust fund solvency alone. We need to put the program on a path 
of sustainable solvency.
    Solving Social Security's long-term financing problem is 
more important and complex than simply making the numbers add 
up. It is a balancing of all these interests. Given the current 
projected financial shortfall in the program, it is important 
to compare proposals to at least two benchmarks, the two that 
we have used and possibly others, and we are obviously looking 
for continuous improvement on this.
    The reform proposals should be evaluated as packages 
because if you try to look at them on each individual element, 
you will get ripped apart. Every individual element will get 
ripped apart. You have to look at a proposal as a package and 
you need to look at it as compared to these two benchmarks in 
order to put it in perspective. Acting sooner rather than later 
will clearly help you be able to be successful here.
    Last, let me just say--and I have said this for years, 
probably 10 years or more, since I was a trustee of Social 
Security and Medicare--it is possible to exceed the 
expectations of all generations of Americans in connection with 
Social Security reform if you decide to act.
    Why? Because from a practical standpoint, current retirees 
and near-term retirees aren't going to be affected. They are 
going to get what they have been promised. They fear they 
won't. It wouldn't be fair not to deliver on the promise, and I 
would argue it wouldn't be politically feasible not to deliver 
on the promise.
    But on the other hand, individuals such as myself, baby-
boomers, and my kids, generations X and Y, are already 
discounting what they think they are going to get from Social 
Security because they know that all the promises aren't funded. 
Every survey and poll will tell you that, and I have gone 
around the country as part of public education campaigns over 
the last 10 years and you see that.
    So, therefore, if you structure a reform proposal that 
leaves current and near-term retirees alone and that 
restructures the program with or without individual accounts--
we can debate that, but with or without them, that provides for 
more adjustments to younger people, you can end up giving them 
more than they think they are going to get and yet achieve all 
these objectives. I call that win-win.
    The bad news is the longer you wait, the tougher it is 
going to be, and this is easy lifting compared to Medicare. 
This is real easy lifting compared to Medicare. So it is 
important that we deal with the easy lifting so we can get on 
with the tough work.
    Thank you, Senators.
    The Chairman. David, thank you very, very much for a very 
clear and I think a very concise presentation.
    I would say to our colleague, Senator Stabenow, we had 
asked GAO to conduct this assessment of the various proposals 
of the President's commission. We have had a lot of the 
political groups make their presentations on both sides of the 
issue. Guess what? There were no surprises in what they said. 
So we were trying to get someone from GAO who would be more 
neutral on this issue.
    I think one thing is clear from the presentation and the 
graphics that you have, David, that to me the twin problems of 
Social Security and Medicare are a greater threat to the 
economy of the United States than the twin threats of Iraq and 
North Korea because these threats affect not just this 
generation, but these affect the next generation and the next 
generation and all Americans into the future.
    I mean, this is a huge threat to the economic security of 
the United States, the twin problems of Medicare and Social 
Security. The urgency of us beginning to address this, I think, 
is so graphically presented by your testimony that I would hope 
very much that when the President presents the State of Union 
Address that he addresses both of these, that he says what 
needs to be done on Medicare and prescription drugs, and also 
Social Security reform that is desperately needed.
    Without leadership from all of us, this will not happen. I 
mean, it is going to take the President, it is going to take 
Republicans, it is going to take Democrats trying for just a 
moment to set aside the harsh political rhetoric of these 
issues and the 30-second sound bites which we have seen time 
and time again and try and work for resolution. I really do 
hope that the White House addresses this in the State of the 
Union. We are trying to buildup the record, pointing out the 
urgency of this, and I think it is going to take that 
leadership.
    Let me ask, if I could, how close is Model 2 that you have 
discussed today to the type of program that I as a member of 
the Senate and the Thrift Savings Plan, and all of us here, all 
of these people behind me and 9 million other Federal workers 
have with regard to our retirement in terms of the voluntary 
nature of the private accounts that we have a chance to invest 
in, with regard to how those accounts are managed? Can you give 
some discussion?
    It seems that Model 2 is not so novel that it has never 
been tried before. It seems very similar to what I have as a 
member of the U.S. Senate.
    Mr. Walker. There are some similarities and some 
differences. No. 1, Federal workers that were hired after 1983 
had to come in under the new Federal Employee Retirement 
System, which includes the Thrift Savings Plan.
    There are some similarities to individuals who were hired 
before that as well. They were given an option. They could 
elect whether or not to stay under the old CSRS system or 
whether to go to the new system. So there is a direct 
comparison, I think, that could be made in that regard. It was 
a one-time election to make at that point in time.
    I will be able to provide more information for the record 
if you would like. What we are talking about here is something 
very similar. Under Model 2, Individuals would be able to make 
a one-time election whether or not they are going to do this or 
not, although the relative amount of defined benefit under 
Model 2 is greater than the relative amount of defined benefit 
under FERS. In addition, there is a minimum benefit guaranteed 
under Model 2.
    The Chairman. We also can, I think, put up to 12 percent 
in.
    Mr. Walker. Yes, you can put a lot more money in TSP as a 
percent of pay.
    The Chairman. Three times more.
    Senator Craig. There is a difference, also. The base amount 
that comes out for the retirement plan is fixed and the 
percentage that we put into our 401(k) is voluntary above that 
as a percentage of our retirement amount that goes into the 
retirement fund.
    Mr. Walker. That is correct. You can put a lot more money 
in. That is correct.
    Senator Craig. I assume in Model 2, when you say ``4 
percent of,'' you are talking about 4 percent of the payroll 
tax.
    Mr. Walker. Four percent of taxable payroll, correct, up to 
$1,000, as I recall. So it is less money on a relative basis 
than you can do in the Federal TSP.
    Senator Craig. Taxable payroll or percentage of the tax 
that is paid in?
    Mr. Walker. It is 4 percent of that person's taxable 
payroll. If I was making $40,000 a year, it is 4 percent of 
that, up to $1,000.
    Senator Craig. I was wrong in that assumption, then. I 
thought it was a percentage of the total already coming in.
    Mr. Walker. That is not my understanding; 4 percentage 
points of the 12.4, with a maximum of $1,000.
    Senator Craig. Then I was right, OK, thank you.
    Mr. Walker. So, therefore, we are saying the same thing. 
The fact is it is very similar, but the amounts involved are 
different. For Social Security, under Model 2, you would 
continue to have much more of a defined benefit element than 
defined contribution. The Federal Thrift Savings Plan provides 
much more of a defined contribution.
    Another similarity, and then I will respond to any more 
questions, is under the Federal Thrift Savings Plan you have a 
board that oversees it. They provide several mutual fund 
options that are managed by the private sector, which shares 
are voted not by Government employees but by private sector 
investment managers. They maintain individual accounts, and so 
there are a lot of analogies.
    The Chairman. Those accounts would be inheritable?
    Mr. Walker. Yes.
    The Chairman. The children and grandchildren of the 
employee?
    Mr. Walker. Yes, so you could have a sizeable pre-
retirement benefit which you don't have now under Social 
Security.
    The Chairman. Let me wind up my questions with this. I have 
seen the rhetoric on both sides on this issue and I have seen 
some that have argued, look, if we compare the idea of an 
individual account to the Enron debacle and scandal, how would 
that type of calamity be protected against in Model 2?
    I mean, I think the obvious way is you don't put your money 
in one single account and one single company. It is 
diversified. But can you elaborate on how that type of calamity 
could be prevented under the structure that they are 
recommending?
    Also, I remember the numbers say that we have never had a 
negative 20-year period of market returns in the history of 
this country. Most people not just one year for their 
retirement, but probably an average of 20 years, plus. Give me 
a little bit of discussion on that.
    Mr. Walker. Well, first, it is envisioned that there would 
be several investment choices and that each of those investment 
choices would be collective investment pools. In other words, 
you would have an investment in a mutual fund where you own a 
piece of a broadly diversified fund. That is what the Federal 
Thrift Savings Plan----
    The Chairman. We have five accounts we can choose from.
    Mr. Walker. Right. It is not anticipated that you would be 
able to buy the stock of any particular company, nor would you 
be able to buy the bonds of any particular company. So 
therefore you manage risk through diversification between asset 
classes, and diversification within asset classes.
    Then, second, obviously you have an investment horizon that 
covers a number of different years. Depending upon what your 
age is, you may want to change what your investment strategy is 
in order to reduce the potential volatility or variation in 
return the closer you get to retirement or once you are in 
retirement.
    So you have broad-based diversification between classes, 
within classes, and that should help to moderate risk. It 
doesn't eliminate it, but it helps to moderate it.
    The Chairman. Senator Craig, then Senator Stabenow.
    Senator Craig. Well, David, I have already asked several of 
the questions that I had planned to ask. But in your testimony, 
you do make a couple of assumptions and I want to make sure 
those are clear for the record.
    You talk about general fund contributions or participation 
in all of this. You make that statement under what assumptions? 
No. 1, that there would not be a tax increase to fund current 
promises and benefits, a Social Security tax, or is it an 
offset to the 4 percent that would be coming out to the 
individual accounts?
    Explain general fund contribution because right now I am 
under the assumption that the payroll tax is taking care of 
Social Security and there is no general fund contribution.
    Mr. Walker. There is a very small amount of general fund 
contribution right now. As you know, there are certain Social 
Security benefits that are subject to individual income tax. 
The income tax associated with that goes into the Social 
Security Trust Fund. That is a general revenue fund.
    Senator Craig. I see.
    Mr. Walker. But it is not significant.
    Senator Craig. But that is not what you were meaning here?
    Mr. Walker. No, it is not. Let me clarify what I was 
meaning. What I was meaning is in order to make this program 
sustainable and solvent over the long term, and yet try to have 
a program that has reasonable adequacy and equity, you are 
going to have to come up with money somehow.
    Now, how you come up with the money--you could increase the 
payroll tax, you could use general revenue, or whatever. Every 
proposal that I am aware of but one provides for general 
revenue funding. The question is how much and when you get 
general revenue funding.
    Model 2 assumes about $2.2 trillion in general revenue 
funding over about three decades.
    The Chairman. How much over ten?
    Mr. Walker. I will have to find out and provide it for the 
record, Senator.
    The Chairman. It was about $1 trillion. Is it still about 
that?
    Mr. Walker. I think that is correct, but I would be happy 
to provide it for the record. I wouldn't want to shoot from the 
hip on that.
    But again I think it is important to look beyond ten. I 
think one of the problems we have is that we look at ten, but 
our real problems don't start until after ten because the baby-
boomers don't really start retiring in big numbers until after 
ten. So we are deluding ourselves, I think, if we just look at 
ten.
    It is kind of like the flat earth theory. In our budget, we 
have a flat earth theory. It is like everything is going to end 
in ten. Well, Columbus showed us the earth isn't flat, it is 
round, and so we have got this huge tidal wave right beyond the 
10 years that we have got to deal with.
    Senator Craig. Columbus did it on deficit, too, remember. 
[Laughter.]
    Mr. Walker. Right. I know you are big on trying to keep the 
deficit under control and eventually eliminating the deficit.
    The Chairman. A new Republican theory, keeping it under 
control.
    Senator Craig. Well, we are just following our leader.
    Mr. Walker. We are talking about how do you end up 
financing whatever gap, and most people are not proposing a 
payroll tax increase because that is the most regressive tax 
that we have. So most people don't believe that that makes a 
lot of sense. If you are not going to do a payroll tax, well, 
then what else are you going to do?
    Now, some people are proposing to eliminate the payroll tax 
cap for Social Security. In other words, right now you only pay 
12.4 percent, the combined employer and individual total up to 
a certain level. Some people are proposing that everybody 
should have to pay Social Security payroll taxes that on every 
dime of earned income. That obviously would be somewhat 
controversial. That is the only proposal that I know of that 
does not require general revenue transfers. Every other one 
does.
    Senator Craig. Again, in examining the models, I still 
don't quite understand. I know you have not put the figures to 
it in the sense of just a broad analysis, but you are not 
assuming status quo?
    Mr. Walker. No.
    Senator Craig. You are assuming some adjustments in 
benefits and revenue?
    Mr. Walker. Yes. Our two benchmarks are, simply stated, in 
2002 you either adjust income to meet benefit payments as 
projected or you adjust benefits to meet income availability. 
But you do it up front; you don't wait until the trust fund is 
out of money. We are going to do an analysis of that for you.
    Senator Craig. In 2002, by this analysis, it is an either/
or or both, 15 and 13?
    Mr. Walker. No. It is either/or. So if all you did was just 
adjust benefits in 2002, that is what it would be, and that 
would be for everybody. You could decide, for example, let's 
leave persons 55 and over alone. So it would be zero for them, 
but you would have to adjust a lot more than 13 percent, 
obviously, for people under 55. Then you get another notch, 
maybe, situation for some people.
    Senator Craig. That begins to resolve that original chart 
where, at 2017, you went from surplus to deficit, is that not 
correct? That is what you are saying?
    Mr. Walker. That is correct. That was the negative cash-
flow date.
    Senator Craig. That shoves that back, then?
    Mr. Walker. It does, it does. As I said, ``We have got one 
that adds Medicare.'' That will get your attention.
    Senator Craig. Do you have it with you?
    Mr. Walker. We have one that adds Medicare to that and, 
believe me, it is a sobering chart.
    Do we have it with us? We will provide it to you this 
afternoon, Senator.
    Senator Craig. We would like to see that.
    Thank you, Mr. Chairman.
    The Chairman. Senator Stabenow, and then Senator Talent.
    Senator Stabenow. Thank you, Mr. Chairman, and thank you 
for holding this hearing on this very important topic.
    Mr. Walker, thank you for joining us. I have deep concerns 
about this proposal, and your comments it just reemphasize the 
concerns that I have.
    First of all, when we look at these charts, it is one of 
the reasons that many of us on the Budget Committee last year 
at a time when we were projecting $5.6 trillion in surpluses, 
suggested that one of the most responsible things that we could 
do for ourselves and for our children, grandchildren and on to 
the future would be to pre-fund Social Security, put dollars 
into that rather than doing the tax cut that was proposed, the 
supply side tax cut over a 10-year period reducing revenue.
    So I share your concern about these numbers, and understand 
what happens with Social Security and Medicare as we go, and 
think we have a very important challenge in being responsible.
    Given that, though, when I look at these numbers, I am 
concerned that the commission at this point has not identified 
exactly how to come up with the dollars that you are talking 
about. We are talking about the need for more dollars to go in 
the system, and this is the transitional cost if we are going 
to a system that involves private accounts.
    You were saying, ``Over a 30-year period, $2.2 trillion, or 
over a 75-year period, $3.4 trillion.'' Then your comments just 
a moment ago, it sounds like you are assuming that in 2002 all 
of this would be predicated on a payroll tax increase or 
benefit cuts. It seems to me that is what you are suggesting at 
this point in time, or some other general fund transfer. Would 
that be correct?
    Mr. Walker. Well, we are not suggesting a payroll tax 
increase or benefit cut. We are doing that for illustrative 
purposes just to give you a sense of the magnitude of the 
charges that are needed.
    Senator Stabenow. I understand.
    Mr. Walker. But every proposal that I am aware of, Senator 
Stabenow, other than the one that comes from the House that 
proposed eliminating the cap on payroll taxes--in other words, 
what wages are subject to payroll taxes--every one assumes 
general revenue transfers.
    I would argue that if you want to deliver on the promises 
that have been made right now, and if you don't want to raise 
the payroll tax, then ultimately you are going to have to do 
general revenue transfers under the status quo.
    Senator Stabenow. So just to put it in perspective--and 
this is where we are now when we look at the numbers on 
deficits, and so on, based on decisions that we have made to 
this point--now we have in front of us another proposal for 
somewhere between $600 billion and $1 trillion, depending on 
how you figure the interest costs, of additional tax cuts.
    Again, we could argue fairness on who receives those, but 
looking at the overall numbers, we are looking at deficits as 
far as the eye can see. We are looking at another round of tax 
cuts, and yet at the same time you are warning us, and I 
believe correctly, that the biggest challenge that we have to 
the economy and to the Federal budget is Social Security and 
Medicare, and that it, in fact, will require, as you have said, 
``Significant general fund transfers whether we go with the 
current system or with a new system.'' Certainly, with a new 
system, as I understand it, it is even greater transfers 
because of the costs of going to a new system.
    Mr. Walker. I am not recommending any proposal. I am trying 
to be an honest broker here and there are a lot of proposals 
out there.
    Under current law, if you were just to let the trust fund 
run out of money and then fill up the gap between 2041 and 
2075, the discounted present value of that today is $3.4 
trillion. You wouldn't have to start paying it until the trust 
fund runs out, but you would have to have $3.4 trillion today 
invested at Treasury rates to close the gap.
    Senator Stabenow. I understand.
    Mr. Walker. Under Model 2, it is $2.2 trillion. So both of 
them cost money. It is a matter of how much and when, and then 
to the extent there is a difference, then how did you make up 
that difference. Did you adjust benefits? Did you get 
additional rate of return on investments? That is really what 
it comes down to.
    Senator Stabenow. So Model 2, if I understand correctly, 
then, would involve some changing of revenue coming in--i.e. 
payroll tax increase--or benefit cuts to offset some of that 
cost?
    Mr. Walker. Model 2 would leave everybody who is 55 today, 
as I understand it, alone. For people who are under 55 today 
who chose to go with the individual account--they don't have to 
go with the individual account. If they chose to go with the 
individual account, their defined benefit would be reduced by 
an offset amount because they are getting part of their payroll 
taxes for this individual account, and so that is part of what 
they are paying. In other words, that is part of making up the 
difference between the 3.4 and the 2.2.
    Now, one of the differences is if you went with Model 2, it 
means that the money that you are going to have to raise is 
going to have to come quicker because right now under the 
status quo, let the trust fund run out, you don't have to raise 
it until further on out.
    On the other hand, if you go with Model 2 or anything like 
Model 2 that has individual accounts, you are going to have to 
raise the money quicker because you have to pay the promised 
benefits to current retirees and near-term retirees and start 
funding these individual accounts.
    Senator Stabenow. So the pressure, in other words, under 
Model 2 with individual accounts is dollars sooner in some way, 
decisions having to be made, general fund transfer, payroll tax 
increase, benefit cuts, or some kind of combination of those, 
then?
    Mr. Walker. That is correct. It is the timing and the 
magnitude. Let me say for the record to clarify one thing that 
I may have misspoke on, everybody's defined benefit formula 
changes under Model 2. There is just an additional offset for 
the ones that choose the individual accounts. Model 2 also 
proposes an across-the-board benefit formula change, to set the 
record straight.
    Senator Stabenow. Mr. Chairman, just one more point, if I 
might.
    The other concern that I have--and I am very concerned 
about what we are talking about in terms of the dollars and how 
we would pay for this in the context of the current budget and 
the economy, and so on. The second issue, though, that I think 
is important for all of us to understand--and you have said 
this; you said the dynamics of who is bearing the risk are 
fundamentally changed.
    So in the current system, Social Security is a base, a 
foundation. We then add to our accounts on top of that, 401(k)s 
or other kinds of investments that we all do, and that is on 
top of that. I know that the folks, for instance, at Enron that 
had come in said thank goodness for Social Security because it 
at least was there as a foundation for them when everything 
else went bad.
    One of my major concerns relates to that, that we are 
changing the fundamental risk, fundamentally changing a policy 
that has been in place in this country now for many, many 
years.
    I had one example brought to my attention from a 
grandmother of a young woman who is a junior at Michigan State 
University, my alma mater, who had invested in what is called 
the Michigan Educational Trust, which is an investment program 
that accepts tax-deductible contributions, and so on.
    In Michigan, she was lucky because the Michigan trust fund 
invests primarily in bonds and so it was not affected by the 
latest stock market situation. But she indicated that in 
looking at other States that had up to 60 percent of their fund 
revenue in the stock market, they lost a great deal of money 
and their ability to send their children to college.
    So it has a direct relationship when we are investing and 
what happens in terms of the ability to send our children to 
college if it is a college fund, or the ability to prepare for 
retirement, and so on. Fundamentally, under the proposal that 
includes private accounts, that risk is shifted to the 
individual as opposed to a fundamentally defined benefit 
program that serves as a floor or a foundation for retirement 
for individuals.
    Mr. Walker. That is correct, Senator. Can I respond real 
quickly?
    First, the risk is shifted, you are correct, between a 
defined benefit plan and a defined contribution plan. By 
definition, individual accounts are defined contribution 
arrangements. I think it is important to note that right now 
the investment risk is borne to some extent by the taxpayers of 
the United States broadly.
    The nature of the investment risk would be that it would 
shift from the taxpayers broadly to individuals involved. Not 
all the benefit because let's keep in mind that under every 
proposal that I have seen here there would be a base defined 
benefit, just as you have in many cases in the private sector.
    A portion of the risk would be shifted to the individual, 
but the individual would make a choice as to whether or not 
they want to assume that risk. It would not be thrust upon 
them. They could say, ``Yes, I want to assume that risk or, no, 
I don't want to assume that risk, and that would be their 
choice.''
    Furthermore, as I understand Model 2--and again I am not a 
proponent for any plan--as I understand Model 2, there is also 
a minimum benefit guarantee which is not there under current 
law; that for the bottom 20 percent, the lowest income 20 
percent, it is obviously helpful because it is not there right 
now.
    Senator Stabenow. Thank you very much.
    The Chairman. Thank you.
    I was just noticing, having the discussion with you on the 
various rates of return, over the period 1992 to 2001, looking 
at what we have as Senators, the G Fund, which is the bond fund 
only, as I understand it--the rate of return has been about 
plus 6.5 percent.
    The C Fund, which is basically the market, even with the 
bad years of 2000 and 2001--over that 10-year period, our rate 
of return for those who chose voluntarily to go into the 
market, has been almost a 13-percent return, 12.9 percent. So 
that is an average-out, so that is really significant.
    Senator Talent.
    Senator Talent. Thank you, Mr. Chairman.
    Mr. Walker, I want to make certain what I understood to be 
a predicate, what you said at the beginning. Did I understand 
you to be saying that the current system, at the current tax 
and benefit levels, is actuarily mathematically impossible? Is 
that correct?
    Mr. Walker. It is not in actuarial balance. It is not 
solvent in the long term, it is not sustainable in the long 
term. The difference between the projected revenues and the 
projected expenditures over 75 years alone, not beyond that--
the discounted present value of that difference is $3.4 
trillion as of the end of fiscal 2001. That gives credit to the 
bonds that are in the trust fund which don't have economic 
significance.
    Senator Talent. It is actuarily impossible, it is 
mathematical impossible?
    Mr. Walker. Well, the numbers don't add up.
    Senator Talent. It is not sustainable. It is like a Ponzi 
game is not sustainable, right?
    Mr. Walker. Ponzi schemes aren't sustainable. I am not 
equating this to a Ponzi scheme.
    Senator Talent. Well, I understand, but I mean in the sense 
that it is not sustainable, right, long term?
    Mr. Walker. It is not sustainable, correct.
    Senator Talent. Are you certain about that? Couldn't you 
make different assumptions about the productivity of the 
American economy? Let's say there was another information 
revolution, maybe, that came along and all of a sudden workers 
became ten times more--I mean, is that the kind of thing it 
would take to make the current system safe for our people?
    Mr. Walker. Well, in fact, having been a trustee myself for 
5 years, the trustees every year do 75-year projections and 
they assume three sets of assumptions: high-cost, low-cost, 
best estimate or the so-called intermediate assumption. Ours 
are based upon the best estimate, or intermediate set of 
assumptions.
    Under the low-cost assumptions, which assumes very positive 
assumptions across the board not just with regard to economic 
growth, but also with regard to immigration, also with regard 
to birth rates, also with regard to a whole variety of things--
under that, it says we don't really have a problem. Now, I 
don't know anybody who believes that.
    Senator Talent. OK.
    Mr. Walker. I think the other thing is that even if we were 
to have a new paradigm shift with regard to economic growth and 
be able to grow which would really help the situation, to grow 
faster than this has assumed--that would clearly help. I would, 
however, respectfully suggest that when you look at our 
aggregate fiscal challenge, you are not going to grow your way 
out of that challenge.
    The imbalance, when you look at Social Security, Medicare, 
Medicaid--you are not going to grow your way out of that 
problem. Additional growth that can help, but you are going to 
have to make some tough choices.
    Senator Talent. I am pushing you on this because this is an 
important predicate for even taking this issue on for me. I 
have no ideological axe to grind in this. I have no desire to 
change the system unless we need to, but what I hear you 
telling me is we are like in the position of somebody who is 
standing in the middle of a highway and a big truck is coming 
down the highway and if we don't move, the truck is going to 
hit us.
    I would just say, Senator Stabenow, that is how I view 
this. I know there are risks to moving. I mean, maybe you will 
sprain your ankle in the ditch if you move. But if you are 
correct, there is no chance about what is going to happen if 
you stay there; you are going to get run over.
    Is that your perception essentially of where we are at with 
this thing?
    Mr. Walker. You have got to act. You don't have a choice. 
The question is when are you going to act and how are you going 
to act. This is a truck, but Medicare is a much bigger truck. 
Medicare is a freight train coming.
    Senator Talent. It is a train.
    The Chairman. You could jump in a ditch full of alligators, 
which may not be a good idea.
    Senator Stabenow. Would my colleague yield for just a 
moment?
    Senator Talent. Yes, sure, I would be happy.
    Senator Stabenow. There is no question that we have a big 
hole. I think the first thing is to stop digging, which is a 
major issue around here because we just keep digging the hole 
bigger by the tax proposals that come forward, and so on. So we 
are just making it bigger.
    But there is a significant difference between shoring up 
Social Security, the current system, and transferring to 
another system that involves keeping the current system and 
transferring to private accounts. My concern is, for instance, 
when we look at what Mr. Walker has indicated, the $2.2 
trillion in transfer costs, that, as I understand it, includes 
a benefit cut. So I think we just need to be clear on that, 
that there are major tradeoffs here.
    Senator Talent. If I could just reclaim my time, I 
understand that. There is an area here where it just seems to 
me, regardless of what we think of tax cuts versus tax 
increases or this or that or the other thing, there is a quite 
appealing, perhaps narrow area where we may all be able to 
agree.
    For example, you were mentioning before that we are going 
to have to have general fund transfers under Model 2. But if 
indeed it is true that no matter what we do, we are going to 
have to have general fund transfers and if we don't do Model 2 
the general fund transfers are going to have to be even 
greater, then while we can all concede we don't like the idea 
of general fund transfers, let's at least do the model that 
lets us have the lowest general fund transfers.
    Do you see what I am getting at?
    Senator Stabenow. I might just say that Model 2, though, 
includes a benefit cut. So I think that is important.
    Senator Talent. Reclaiming my time again, if we don't do 
Model 2, I mean what I hear Mr. Walker saying is we are going 
to have to have either much bigger benefit cuts or very 
substantial tax increases on everybody. I don't think anybody 
here really wants either one of those two things.
    I really would like to get with the chairman to talk about 
some kind of common ground so we can agree. You know, we are 
going to disagree about things like how we create prosperity, 
but regardless of what we feel about that, there may be some 
proposals that we can all agree on, and that is kind of what I 
would like to get at and I hear you maybe trying to move us a 
little bit in that direction.
    Let me ask one other thing, though, about Model 2. As I 
understand it, because of the floors that we establish, low-
income workers and disabled workers, the neediest, are better 
off under your assumptions about Model 2. Is that correct?
    Mr. Walker. Low-income, the bottom 20 percent, most are 
better off, not all, than the----
    The Chairman. Why don't you just pull her up to the table 
and she can help you explain?
    Mr. Walker. We are drilling down deep now.
    The Chairman. Go ahead, and just mention your name.
    Ms. Bovbjerg. I am sorry to interrupt. I am Barbara 
Bovbjerg. I am Director of Education, Workforce----
    The Chairman. You are not interrupting. Mr. Walker is happy 
to have you.
    Ms. Bovbjerg. I am Barbara Bovbjerg. I am Director of 
Education, Workforce, and Income Security.
    We did look at these two polar benchmark and when we 
compared those, most of the lower earners and the lower-earner 
disabled come out better than under the benefit reduction 
benchmark. Some, not a lot, not the majority--some will come 
out better than the tax increase benchmark which is essentially 
equivalent to currently scheduled benefits.
    Senator Talent. Thank you, Mr. Chairman.
    The Chairman. Let me go ahead. I have a couple of questions 
and then I will recognize everybody again for a second round.
    On page 26, David, you are talking about your analysis of 
Model 2 shows that median monthly benefits for those choosing 
individual accounts are always higher than for those who do not 
choose the accounts, and the gap grows over time.
    Then in the next paragraph you say for the lowest quintile 
of beneficiaries, median monthly benefits with universal 
participation in accounts tend to be higher than the benefits 
received under the benefit reduction benchmark.
    Tell me what that means so that I can perhaps understand it 
a little bit better. Are you saying that the median monthly 
benefits for people choosing individual accounts are always 
going to be higher? I mean, that is what I read it as saying. 
It is on page 26 in my earlier copy. I don't know if it is the 
same in the book.
    Ms. Bovbjerg. That is true because the people who do not 
select the accounts only have the benefits that are being 
reduced by the change from wage to price indexing. The people 
who select the accounts, while the account income is offset 
with the defined benefit portion, still will generally do 
better. That increases over time with the different cohorts.
    We looked at three different cohorts, those born in 1955, 
1970 and 1985, and because the 1985 cohort would have the 
longer time with both the defined benefit reduction and the 
individual account, you can see that that disparity widens.
    Mr. Walker. It is because of compounding, basically.
    The Chairman. The point of the projection on whether 
individual accounts work is a projection on what the markets 
are going to be doing, which is sort of anybody's guess, but we 
have a track record. I mean, we have a track record ever since 
we have had a market, and we had a track record which I just 
read over the last 10 years for the Thrift Savings Plan that we 
have showing what the combination of investment in stocks have 
done over the last 10 years.
    So tell us a little bit about how GAO went about creating a 
model that gave us some idea of what these individual accounts 
would generate because people always use the argument, well, if 
the market collapses, you are not going to have any retirement 
left.
    So how did you project this? Give me a little bit more 
about the protections involved.
    Mr. Walker. What we tried to do in order to assure 
consistency, and also in order to be able to assure that we 
weren't in the business of coming up with new assumptions that 
are, GAO assumptions, is we used the same assumptions that the 
Social Security actuaries use for the different analysis that 
they do.
    If you look at page 66 of the report, 6.3 percent for 
Treasuries, 6.8 percent for corporate bonds, and 10 percent for 
equities over time. Those are the assumptions, and that is 
consistent with the Social Security actuaries.
    The Chairman. Senator Craig, do you have any follow-up, or 
Senator Stabenow after Senator Craig?
    Senator Craig. Well, I don't have any additional questions. 
A couple of observations.
    First of all, David, thank you very much, and your troupe, 
for being here and the work you are doing. As we thrust these 
things upon you to analyze, we are all going to work to build a 
record here.
    But I am sitting here looking at that chart and I refer, 
Senator Stabenow, to it because that is what David went through 
before we began to look at different models. The reality is 
right there. We should cut benefits 13 percent this year or 
raise taxes 15 percent to sustain outward, or by 2017 we should 
a 16-percent benefit cut or a 22-percent increase in payroll 
tax, or by 2041 we should do a 31-percent benefit cut or a 45-
percent payroll increase.
    That is the reality upon us based on current assumptions, 
current projections. That is what we have all been looking at 
for a time. I am not one that is going to saddle my 
grandchildren in a huge payroll tax increase. At the same time, 
I am going to want them, because they are very dynamic people, 
to go to their computer and pull up their account and make some 
assumptions and know what they are dealing with, as other 
countries have taught or educated their people into doing.
    I think there is a phenomenal assumption that I have always 
found totally faulty. When you give the American public 
adequate information, they respond in a phenomenal way.
    You had said very early, David, in your comments that there 
is one thing that is obvious in all of this, that if we make 
these changes, there needs to be driving it a major educational 
program that allows people to make certain assumptions and 
understand where they are and what their opportunities might 
be, and certainly for younger people a great deal more 
opportunity in the long term, compounding, if you will, than 
those of an older age and of no benefit to me at my age, but 
certainly I think the opportunity for my children and 
grandchildren to have something that is worth their money, or 
they are going to aggressively depart from it or find 
alternative ways because the law will demand they can't depart.
    I have always said in this debate I am not going to be part 
of creating a generational rift in this country of the 
magnitude that will occur by 2075 if we don't make the 
adjustments now. I still want kids to be willing to help their 
grandparents out just a bit. At the same time, obviously the 
grandparents of that day are going to be a much more 
sophisticated American from the standpoint of understanding and 
making decisions and having information available to them than 
probably the grandparents of today.
    That is our challenge, to be able to be forward-looking in 
this instead of reactionary as it relates to current 
circumstances. It is critical that we view long-term 
projections and we look at historic averages because we are 
talking about actuarily thinking down the road and that is a 
phenomenal challenge for all of us.
    Thank you.
    Mr. Walker. Senator, if I can quickly respond, you actually 
are going to need to do more than this.
    Senator Craig. You didn't need to say that. [Laughter.]
    Mr. Walker. But I am just trying to keep the record 
straight here, and the reason I say that is this would achieve 
solvency and actuarial balance for 75 years. But at the end of 
75 years, you still have a big imbalance, and every year we 
take off a good year and we add a bad year. Now, in our 
analysis we think you need to achieve sustainable solvency, 
which means not just for 75, but beyond. So you really need to 
do more than that.
    The last thing is, coming back to what Senator Breaux 
said----
    Senator Craig. Excuse me for interrupting. This does also 
assume there are some unpaid promised benefits in there now, 
are there not?
    Mr. Walker. Yes.
    Senator Craig. This assumes that?
    Mr. Walker. This assumes that for 75 years, but it doesn't 
deal with perpetuity. We think you need to do something that 
not only works for 75 years, but isn't pre-programmed to not 
work beyond 75 years. That is our current system. I mean, even 
if you can make it work for 75, it is pre-programmed that it 
doesn't work beyond that.
    The last thing on this and then I think Senator Stabenow 
has a point. Senator Breaux said at the outset--and I think it 
is important to say this--this will require Presidential 
leadership.
    Senator Craig. No question.
    Mr. Walker. I know that President Bush is dedicated to do 
something in this area, and I also know that President Clinton 
was, too.
    Senator Breaux, you and I and others were involved in at 
least one commission in the past, and we were also involved in 
a massive national education campaign that included going 
around the country, including the President and the Vice 
President, to try to educate Americans as to the nature, 
extent, timing and magnitude of our problem. They get it.
    The Chairman. Oh, yes.
    Mr. Walker. They understand it. Realistically, that has got 
to happen because you get elected and you can't get too far 
ahead of the people. So something has to happen that will cause 
the American people to understand the nature, extent timimg and 
the magnitude of the problem. Believe me, they get it, and that 
will enable you to act in a way that is not only prudent, but 
in a way that can exceed the expectations of all generations of 
Americans.
    The Chairman. Senator Stabenow, any comments?
    Senator Stabenow. Yes, thank you. I do have a comment.
    I do, Senator Craig, understand these numbers very, very 
well and what we have right here. In the last Budget Committee 
last year as we were debating what to do, as we at that time 
thought we had substantial surpluses, there were many of us 
arguing exactly these points and why we should be looking to 
the future.
    If I remember the budget numbers from the hearings, the 
second 10 years of just the current tax cut is a $4 trillion 
loss, which is more than the liability totally of Social 
Security during that time period. It was something like $3.8 
trillion.
    We have made decisions--``we'' meaning the Congress--that 
have substantially dug the hole deeper by decisions made last 
year. I fear, in all seriousness, that the hole will get even 
deeper based on what is being proposed right now. So I have 
grave concerns about that, understanding that, in fact, we have 
to make decisions either way regarding Social Security. It is a 
question of what.
    The point I would just make in conclusion is I want to make 
a pitch for Social Security and just tell you as somebody who 
has watched over the years--I wasn't here when it was passed, 
but we have substantially brought people out of poverty, 
seniors out of poverty. This is a system that has about a 1-
percent administrative cost, much cheaper than anybody, if we 
are out managing our own accounts, will be paying.
    This is a system also that is not only retirement; it is a 
disability policy and a life insurance policy. We haven't 
talked about that today and I am wondering, as we look at all 
of this, we are looking only at the retirement piece of this. 
Yet if you are a worker that becomes fully disabled, your 
dependent children know that they have a safety net. If you die 
on the job, your family knows that there is a safety net there. 
So this is broader; Social Security is broader than just 
retirement.
    I guess I would just ask, in conclusion, for your comments 
and analysis as to how the system is affected, the broader 
system of Social Security, with the disability provisions and 
life insurance provisions of changes that are made as it 
relates to individual accounts, and so on.
    Mr. Walker. Well, you are correct that Social Security is 
much more than retirement income. That is the primary part of 
Social Security, but disability income and certain survivor 
benefits, et cetera, are part of it.
    My understanding is that this proposal really is focused 
primarily on the retirement income portion. In other words, it 
envisions that there will still be a disability program. I know 
there is a proposed change in here that in the case of certain 
low-income individuals, there are actually some potential 
enhancements to disability income for low-income people, the 
bottom 20 percent.
    So I think it is very important that we recognize exactly 
what you said. This isn't just the monthly payments. It is also 
disability, which could be in monthly form. It is also these 
other factors. But at the same time, I think we also have to 
recognize that right now you don't get a pre-retirement death 
benefit out of Social Security, and that under this option if 
you chose to have an individual account, you would get a pre-
retirement death benefit. So there are tradeoffs. There is no 
free lunch, there is no perfect solution.
    The Chairman. Well, thank you very, very much. While there 
is not a perfect solution, we may be in the middle of a perfect 
storm when you have all of these things colliding at the same 
time, with Medicare and Social Security all coming due in 
approximately the same timeframe because of the baby-boom 
generation and other factors.
    It was difficult when we had a $200 billion surplus. It is 
going to be a lot more difficult with a $200 billion deficit. 
But the problem doesn't go away and political rhetoric is not 
enough to solve it. We have to find ways to work together to 
get something done.
    David, thank you very much. We look forward to future 
reports in this area for the Aging Committee and for our new 
chairman when he takes over next time.
    [The prepared statement of Mr. Walker follows:]

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    The Chairman. With that, the committee will stand 
adjourned.
    [Whereupon, at 11 a.m., the committee was adjourned.]

                            A P P E N D I X

                              ----------                              


              Prepared Statement of Senator Russ Feingold

    Mr. Chairman, thank you for calling this hearing. This may 
be your last hearing as Chair of the Committee, at least for 
two years, and let me take this opportunity to congratulate you 
on your tenure. You have continued the tradition of previous 
Chairs in using this Committee to help educate both 
policymakers and the public about issues of concern to our 
seniors. In particular, I want to congratulate you on the 
series of hearings you held in the last Congress on long-term 
care, an issue on which I have worked for the past twenty 
years, first in the Wisconsin State Senate, and now as a member 
of the United State Senate.
    It is fitting, in what for a while may be your last hearing 
as Chair, that we will be focusing on what may be the single 
most important issue to seniors--especially tomorrow's seniors-
namely, the future of Social Security. And I am especially 
pleased that the Comptroller General will discuss the GAO's 
review of the President's Social Security Commission. Since the 
President's Commission made its report more than two years ago, 
there has been little discussion of it, even though the 
recommendations from that Commission would affect every single 
American currently receiving, or expecting to receive, Social 
Security benefits.
    Mr. Chairman, we should have the debate over whether or not 
to privatize Social Security. I strongly oppose privatization, 
but I recognize that there are some, including President Bush, 
who want to privatize the program. The public is entitled to a 
robust and informed debate on the topic, and today's hearing 
would be an excellent beginning.
    Mr. Chairman, contrary to what some advocates of 
privitization argue, Social Security is in good shape for the 
near term. We can extend the program's solvency for 75 years if 
we make changes now equal to less than 2 percent of our payroll 
taxes or 13 percent of benefits. If we wait until 2038, we will 
need payroll tax increases of more than 5 percent or benefit 
cuts of more than 27 percent, so there is a strong case for 
acting on this matter soon.
    By contrast, the President's commission seems bent on 
taking 2 percent of the payroll taxes away from the present 
Social Security system and devoting those funds to private 
accounts. As the Institute for America's Future notes, this 2-
percent plan would require Social Security to come up with 
another $1.5 trillion in the next 10 years alone. And as former 
Presidential economic advisor Gene Sperling has pointed out, it 
will move forward the date when payroll taxes no longer cover 
benefits from 2016 to 2007.
    The plan of the President's Commission to divert Social 
Security money into private investments would thus just add to 
Social Security's problem. It would take resources away from 
Social Security that we would have to make up with either more 
taxes or more benefit cuts. As the Wall Street Journal 
reported, it would require making huge offsetting benefit cuts, 
averaging 40 percent.
    In the 107th Congress, Congressman Kolbe and Stenholm did a 
great service to this debate by introducing a bill that largely 
tracked the President's approach. Their bill demonstrated just 
how unacceptable that approach would be. The proposal reduced 
Social Security's guaranteed benefit, reduced cost-of-living 
adjustments, and raised the retirement age, all made necessary 
in order to help fund the diversion of Social Security revenues 
into private accounts.
    Mr. Chairman, reducing cost-of-living adjustments would 
disproportionately hurt older beneficiaries, particularly 
women, who have longer life expectancies. And raising the 
retirement age would disproportionately hurt blue collar 
workers and African-American beneficiaries, when African-
American men have a life expectancy of 68 years.
    It was not surprising, then, that Speaker Hastert and 
Leader Gephardt both said that they could not support the bill. 
I couldn't either.
    Prior to the last Congress, I initiated a series of 
discussions with the people of Wisconsin about Social 
Security--at town-hall listening sessions, through letters to 
my office, and through a special page on my web site. Of 
course, this wasn't a scientific sample, but hundreds of my 
constituents expressed some clear opinions.
    Part of that discussion was a section on my web site that 
allowed people to choose among various options to extend the 
solvency of Social Security. Respondents rejected most options. 
I note that because I want to make it clear that there are no 
easy options. Extending the solvency of Social Security will 
require tough decisions. In this regard, the people I heard 
from do not want us to cut Social Security benefits or raise 
taxes significantly.
    But, Mr. Chairman, a majority of respondents did support 
five options, which, taken together, would keep Social Security 
solvent for 75 years. They supported former President Clinton's 
plan, including transferring to Social Security general 
revenues equal to the interest savings Social Security 
generates, and having an independent board invest 15 percent of 
trust fund assets in the stock market.
    They also supported two other structural changes to the 
Social Security program: requiring all new State and local 
government employees to participate in Social Security, and 
raising the cap for earnings subject to Social Security taxes 
to the level of salary that a member of Congress makes.
    Respondents also rejected a number of options, many by 
resounding majorities. They overwhelmingly opposed across-the-
board benefit cuts, COLA cuts, across-the-board payroll tax 
increases, and raising the retirement age.
    Let me note that President Clinton's proposal to transfer 
to Social Security general revenues equal to the interest 
savings Social Security generates was made at a time when we 
had projected budget surpluses. As we know, those surpluses 
were dissipated quickly in large part by President Bush's 
massive tax bill, and compounded by increased spending and the 
economic slow down, and what might have been the basis for a 
rational plan to ensure that Social Security would be available 
for future generations was squandered.
    But as difficult as our task is now to extend the solvency 
of Social Security, it will be made far worse by the 
President's plans to privatize the program. As the Institute 
for America's Future points out, each of the three Bush 
Commission plans diverts at least $1.5 trillion from Social 
Security over the next 10 years, and thus would create an 
immediate problem for the program that does not currently 
exist.
    This is a fundamental flaw of privatization. Not only does 
privatization undermine the Social Security program's well-
proven principle of shared commitment to a decent life for our 
seniors, privatization also creates a financial hole that, as 
economist Paul Krugman has noted, ``must be filled by slashing 
benefits, providing large financial transfers from the rest of 
government, or both.''
    Mr. Chairman, we do not have $1.5 trillion to transfer from 
the rest of government. Indeed, just the opposite is occurring. 
Thanks to the massive Bush tax cut, a slowed economy, and 
increased spending, the rest of government is relying on Social 
Security surpluses. There is no money in the budget to protect 
current Social Security beneficiaries from the benefits cuts 
that would almost surely result if the Bush privatization plan 
were to be enacted.
    Mr. Chairman, thank you again for calling this hearing. I 
very much hope it will mark the beginning of a real debate on 
the future of Social Security.

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