[Senate Hearing 108-202]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 108-202

                            SOCIAL SECURITY:
                      WHOSE TRUST WILL BE BROKEN?

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JULY 29, 2003

                               __________

                           Serial No. 108-18

         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 B. BREAUX, Louisiana, Ranking 
SUSAN COLLINS, Maine                     Member
MIKE ENZI, Wyoming                   HARRY REID, Nevada
GORDON SMITH, Oregon                 HERB KOHL, Wisconsin
JAMES M. TALENT, Missouri            JAMES M. JEFFORDS, Vermont
PETER G. FITZGERALD, Illinois        RUSSELL D. FEINGOLD, Wisconsin
ORRIN G. HATCH, Utah                 RON WYDEN, Oregon
ELIZABETH DOLE, North Carolina       BLANCHE L. LINCOLN, Arkansas
TED STEVENS, Alaska                  EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          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 Larry E. Craig......................     1

                                Panel I

Hon. David M. Walker, Comptroller General, United States General 
  Accounting Office, Washington, DC..............................     3
James B. Lockhart, III, Deputy Commissioner, Social Security 
  Administration.................................................    31

                                Panel II

Thomas R. Saving, Public Trustee, Social Security and Medicare 
  Trust Funds, College Station, TX...............................    67
Brad Smith, President/Co-Founder, Social Good Through Politics 
  (Harvard University), Knoxville, TN............................    79

                                APPENDIX

GAO Report on Social Security Reform; Analysis of a Trust Fund...    91

                                 (iii)

  

 
              SOCIAL SECURITY: WHOSE TRUST WILL BE BROKEN?

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



                         TUESDAY, JULY 29, 2003

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m., in room 
SD-628, Dirksen Senate Office Building, Hon. Larry E. Craig 
(chairman of the committee) presiding.
    Present: Senators Craig and Stabenow.

     OPENING STATEMENT OF SENATOR LARRY E. CRAIG, CHAIRMAN

    The Chairman. Good morning, everyone. The U.S. Senate 
Special Committee on Aging will convene.
    I was just chatting with BNA's correspondent, Mr. Wyand, 
and he tells me that his uncle turned 100 yesterday. He 
mentioned he was coming down here on a Social Security hearing, 
and he instructed his nephew to make sure that Social Security 
is going to be OK and left alone. I can tell your uncle 
personally that the system will be stable and long-lived for 
him. [Laughter.]
    Well, thank you all very much for being with us this 
morning. Today we do something that is really the primary 
responsibility of this committee, and that is, oversight, 
review, and record building, information gathering, for the 
purposes of senatorial use, especially as the appropriate 
committees begin to look at Social Security in the coming years 
and deal with the realities of the trust funds.
    Last year, Senator Chuck Grassley, Chairman of the Finance 
Committee, and I asked the GAO to use its analytical framework 
to evaluate a Social Security Trust Fund exhaustion scenario or 
what might be called the status quo option. This option 
reflects the idea that we do not need to act soon to strengthen 
Social Security. Critics of the models developed by the 
President's Commission to Strengthen Social Security suggest 
that we wait until the trust fund is exhausted before we act to 
improve the system.
    Today's GAO trust fund exhaustion study builds on a report 
requested by Aging Committee Ranking Member Senator Breaux and 
presented in January to this committee by the Comptroller 
General. The January report used GAO's analytical framework to 
evaluate the models developed by the President's Commission to 
Strengthen Social Security. Today's GAO study will help us 
compare the Commission's models with the status quo or the 
trust fund exhaustion scenario.
    Many of us in Congress have a strong concern for the future 
of Social Security and the impact on future beneficiaries of 
the status quo option. It is important to emphasize that the 
trust fund exhaustion scenario does not affect seniors 
currently receiving Social Security benefits or those about to 
retire. This scenario is really about America's youth, in other 
words, looking forward into the future.
    Representing them here today will be a panelist by the name 
of Brad Smith, who will be on our second panel, a 20-year-old 
college student who will testify before us. We are here today 
to receive first the GAO's report and listen to additional 
testimony on the trust fund exhaustion scenario, but before we 
begin, I am compelled to mention recent action taken by several 
lawmakers in Congress.
    Last Wednesday, I signed a bipartisan letter with several 
lawmakers, including my good friend, the ranking member of this 
committee, John Breaux. The letter was addressed to leaders of 
the Democrat and the Republican Campaign Committees. The letter 
called for a political cease-fire on Social Security.
    In signing the letter, we pledged to defend candidates 
running for public office, Republican or Democrat, who support, 
and I quote, ``Social Security modernization and are willing to 
make the tough choices to address the fiscal challenges facing 
Social Security.''
    This hearing is convened in the spirit of a cease-fire on 
Social Security and to point this Congress in the direction of 
facing up to the tough choices ahead on Social Security.
    With that, I am pleased to welcome the distinguished 
witnesses to the Aging Committee. Our first witnesses on panel 
one are David Walker, who is the Comptroller General of the 
General Accounting Office. James Lockhart, Deputy Commissioner 
for the Social Security Administration, will also testify 
before us today on panel one.
    Panel two I mentioned. We will hear from Dr. Thomas Saving, 
Public Trustee for the Social Security/Medicare Trust Funds, 
and Brad Smith of Knoxville, TN, President and co-founder of an 
organization called Social Good Through Politics at Harvard 
University, where he will be a junior this fall.
    So I look forward to all of your testimony. Now let us turn 
to our first panel, Mr. Walker and Mr. Lockhart. David, if you 
would start.

STATEMENT OF HON. DAVID M. WALKER, COMPTROLLER GENERAL, UNITED 
        STATES GENERAL ACCOUNTING OFFICE, WASHINGTON, DC

    Mr. Walker. Thank you, Chairman Craig. It is a pleasure to 
be here to speak about the important issue of our Nation's 
Social Security program. As you know, today we are issuing the 
report that Senator Grassley and you requested dealing with the 
trust fund exhaustion scenario, or the so-called ``do nothing'' 
scenario. But before I end up getting into summarizing the key 
parts of that report, I would like to talk about a few 
framework issues that I think are important to put this subject 
in context.
    I think it is important to keep in mind that in looking at 
Social Security reform, focusing on trust fund solvency alone 
is not sufficient. We need to put the program on a path toward 
sustainable solvency. Trust fund solvency is an important 
concept, but focusing on trust fund solvency alone can lead to 
a false sense of security about the overall condition of the 
Social Security program.
    Second, as this next graphic will show, Social Security 
reform is part of a broader fiscal challenge, and the combined 
Social Security and OASDI program will end up taking an 
increasingly large part of the overall Federal budget. If you 
look into the future, you can see that we are in for some very 
tough decisions because of the large and growing gap between 
projected revenues and projected expenditures based upon these 
assumptions. Absent reform, the Nation will ultimately have to 
choose between persistent and escalating Federal deficits, 
significant tax increases, and/or dramatic budget cuts.
    Solving Social Security's long-term financing problem is 
more important and complex, as you know, Mr. Chairman, than 
simply making the numbers add up. Acting sooner rather than 
later would clearly help to ease the difficulty of change. 
Social Security will begin to constrain the budget long before 
the trust funds are exhausted in 2042. In fact, as you can see 
from this graphic, the program's annual cash-flow is projected 
to become negative in 2018.
    Social Security's annual cash deficit will place increasing 
pressure on the rest of the Federal budget to raise resources 
necessary to meet program costs. Waiting until Social Security 
faces an immediate solvency crisis will limit the scope of 
feasible solutions and could reduce the option only to those 
choices that are the most difficult and dramatic options.
    Acting soon reduces the likelihood that Congress will have 
to choose between imposing severe budget cuts and benefit cuts 
or unfairly burdening future generations, as the next chart 
will show. This chart shows the sooner you act, the less 
dramatic changes you have to make, whether it be on the revenue 
side or the expenditure side because we get the power of 
compounding working for us rather than as it is right now, 
namely working against us.
    The trust fund exhaustion scenario or the ``do nothing'' 
scenario analyzed in our report dramatically illustrates the 
need for action sooner rather than later. Under this scenario, 
once the combined trust funds have been fully depleted, benefit 
payments would be adjusted each year to match the annual tax 
revenue that will be coming into the trust funds.
    Under the trust fund exhaustion, scenario those receiving 
benefits would experience a large and sudden benefit reduction 
of about 27 percent, or, in other words, they would receive 
about 73 percent of currently scheduled benefits in 2039. By 
the end of the 75-year period, smaller reductions that would 
occur in successive years after 2039 would mean that 
individuals would only be receiving about two-thirds of what 
otherwise they would have been receiving under the current 
benefit formulas, or about 67 percent of their currently 
scheduled benefits. As you can see, a dramatic decline would 
occur between 2037 and 2039 and then a gradual decline beyond 
that.
    As the next graphic shows, the trust fund exhaustion 
scenario raises significant intergenerational equity issues. 
The timing of the benefit adjustments means that the trust fund 
exhaustion scenario would place much greater burdens on younger 
generations. For example, those born in 1955 would receive 
currently scheduled benefits until they reach age 83, while 
those born in 1985 would always receive benefits in retirement 
lower than currently scheduled benefits. This means that the 
lifetime benefits would be reduced for younger generations. So, 
therefore, their return on investment would also be reduced.
    In addition, under the trust fund exhaustion scenario, 
benefits would be adjusted proportionally for all recipients, 
increasing the likelihood of hardship for lower-income retirees 
and the disabled, those who rely on Social Security as their 
primary or sole source of retirement income.
    In summary, Mr. Chairman, the Social Security challenge is 
a significant one. We do not have an immediate solvency 
problem. We do not have an immediate crisis with regard to this 
program. We do, however, have a large and growing imbalance. 
Acting sooner rather than later is the responsible approach. 
Candidly, solving the Social Security problem is easy lifting 
compared to Medicare and some of the other challenges we face. 
We have an opportunity to exceed the expectations of all 
generations of Americans if we take timely and prudent actions. 
Thank you, Mr. Chairman, for holding this hearing. It is 
incredibly important.
    [The prepared statement of Mr. Walker follows:]

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    The Chairman. Well, David, thank you very much. You are not 
the first to compare the difficulties between Medicare 
prescription drugs and Social Security and those kinds of 
adjustments. We had Chairman Greenspan before the committee 
some months ago, and he made the same reflection. It was really 
the first time I had actually begun to focus on the reality of 
the differences between a dynamic activity like health care 
versus being able to effectively calculate, shall I say, 
relatively static figures or predictable outcomes. So thank you 
very much.
    Now let us turn to Jim Lockhart, Deputy Commissioner, 
Social Security Administration. Thanks for being with us.

   STATEMENT OF JAMES B. LOCKHART, III, DEPUTY COMMISSIONER, 
                 SOCIAL SECURITY ADMINISTRATION

    Mr. Lockhart. Thank you, Mr. Chairman, for holding this 
hearing on the very important topic, the future of Social 
Security. Commissioner Jo Anne Barnhart has made achieving 
sustainable solvency a major goal of the agency.
    Both the Trustees' Annual Report and GAO's report confirm 
that the Social Security program as currently financed is 
unsustainable. However, I want to make it clear, as you did, 
that the benefits of current retirees and those nearing 
retirement are safe.
    Social Security is one of the most successful Government 
programs, last year paying out over $450 billion to 46 million 
people. Only 70 percent were retirees, with the rest being 
survivors and disabled. The 154 million American workers paying 
Social Security taxes last year and the millions joining the 
system every year are relying on Social Security for a major 
portion of their financial future.
    Turning to the first chart--America is aging rapidly. In 
the next 30 years, the number of Americans aged 65 and older 
will double. Lower birth rates and increased life expectancies 
have reduced the ratio of workers to beneficiaries from over 
8:1 in 1955 to 3.3:1 today. By 2031, we will reach an 
unsustainable level--in fact, well before 2031 we will reach an 
unsustainable level.
    As the Trustees point out, the pressure on the trust funds 
will begin in 5 years, when the first baby boomers reach 
retirement age. In 2018, the cash-flow will turn negative. By 
2042, the trust fund will be exhausted.
    As David Walker pointed out, and as shown in this next 
chart, when the trust fund is exhausted there would be a 27-
percent reduction in scheduled benefits. Benefits would 
continue to decrease every year thereafter, and by 2077, the 
reduction would be 35 percent.
    Today's younger workers such as my 26-year-old son, who is 
here today, would be particularly hurt. After paying into 
Social Security for well over 40 years, his scheduled benefits 
would be drastically cut at retirement and every year 
thereafter. In contrast, based on my life expectancy, leading-
edge baby boomers like myself would never see a benefit cut.
    An alternative, as the next chart shows, is to raise taxes 
to maintain solvency. The payroll tax rate would have to start 
increasing in 2042, reaching 18.9 percent by 2077. That is more 
than a 50-percent payroll tax increase from today's 12.4 
percent rate. The GAO report reinforces the Trustees' position 
in their annual report, and I quote, ``The sooner adjustments 
are made the smaller and less abrupt they will have to be.''
    Another way to look at this shortfall over just the 75-year 
period is its present value of $3.5 trillion. What present 
values means is the trust funds would need the equivalent of 
that amount today plus earning interest on that amount today to 
pay for the shortfall over the 75-year period. To achieve 
sustainable solvency, which is our goal, the present value is 
actually $10.5 trillion. That is triple the public national 
debt of today. Absent any action, the shortfall will continue 
to compound every year thereafter.
    Clearly, achieving sustainable solvency will be no easy 
task, but delay only makes the task more difficult. As David 
Walker just said, ``if we wait we will have to make benefit 
reductions even deeper or tax increases even steeper.''
    The unattractiveness of relying exclusively on tax 
increases and benefit reductions has led a number of 
Republicans and Democrats to propose Social Security personal 
accounts among other changes. Some of those proposals have 
significantly less costs than the current system.
    In March, Social Security's Trustees presented their annual 
report to President Bush personally. At the meeting, the 
President said, ``.  .  . the Trustees confirmed that benefits 
for today's seniors are safe and secure .  .  . also once again 
have delivered a sobering message--Social Security .  .  . is 
unsustainable for the long term. .  .  . We need to explore new 
ways to ensure that Social Security remains strong and 
financially secure for America's children and grandchildren.''
    He continued: ``I am encouraged by the unprecedented level 
of bipartisan interest in .  .  . proposals .  .  . to 
strengthen Social Security. .  .  . Although these proposals 
differ in details, they are consistent in showing that if we 
give workers the opportunity to invest a portion of their wages 
in personal accounts, Social Security will be able to offer 
high benefits than would otherwise be the case.''
    He continued: ``I hope that Members of Congress will join 
with the Social Security Administration and other interested 
parties in a national dialog about how best to strengthen and 
protect Social Security. I look forward to working with 
Congress to see that Social Security remains sound and strong 
for today's and tomorrow's retirees.''
    This hearing is part of that process of working together to 
fulfill our obligations to the hundreds of millions of 
Americans we serve. There is really no other program that 
impacts the lives of so many Americans.
    Mr. Chairman, thank you, and I look forward to working with 
you and other Members of Congress to reach a bipartisan 
consensus on how best to protect and strengthen Social Security 
for future generations.
    [The prepared statement of Mr. Lockhart follows:]

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    The Chairman. Well, Commissioner Lockhart, thank you very 
much. Let me thank both of you for your testimony this morning 
and the consistency and I think the responsibility you have 
brought in discussing this issue. I think all of us recognize 
the value of the program and the phenomenal impact it has on 
seniors.
    I am always made aware of that. I hold a good number of 
town meetings in my State on an annual basis, and I have a fair 
number who attend who will tell me that it is their single 
largest source of income in their senior years or that it is a 
substantial or only source of income, depending on their 
particular condition and situation of disability.
    That is a fairly sobering statement, at least to me, when I 
realize the level of dependency that these individuals place on 
the program itself. So there is no question that not only is it 
important for the healthy, the most vulnerable in our society 
are dramatically impacted and would be, I suggest, by this 
proposal.
    A 30-percent reduction, or near that, in payment by the 
late 2030 to 2040 timeframe, both of you agree with that 
scenario. I see your charts are very similar.
    Mr. Lockhart. Yes, they are.
    Mr. Walker. That is correct.
    The Chairman. Of course, that is making the assumption that 
those who are the recipients at that time are the ones who have 
paid in at consistently higher levels throughout their 
productive years. Is that not correct?
    Mr. Walker. That is correct.
    The Chairman. You know, outside of economists and 
actuaries, most folks--and, Mr. Lockhart, you dealt with 
explaining this. Most folks do not really understand what 
present value means. Can you briefly clarify for us the 
difference between present value and common ways of thinking 
about spending? For example, in normal dollar terms, about how 
big would the 75-year deficit be? Both of you can respond to 
that if you wish.
    Mr. Lockhart. Well, let me start with that. It is a concept 
we introduced this year in the Trustees' Report for the first 
time. It is not only actuaries and economists who use it, but 
financial folk like myself use it all the time.
    Really, to look at it in its simplest way, it means that we 
would need that amount of money today, earning interest today, 
to cover the shortfall over the 75-year period. So if you look 
at the numbers, the interest on that amount of money is well 
over $200 billion a year. That is just to cover the shortfall 
over the 75-year period. As David Walker pointed out, what our 
goal has to be is sustainable solvency. The other point of that 
number is it does include our present trust fund.
    But if you look at the longer term, that $10.5 trillion 
that I had in that chart--if you would put that back up--if you 
look at that, it is triple that amount. Every year there is 
interest of about $650 billion. So the numbers are very, very 
large. The point is you need that money today earning interest. 
Or if you get it later, you have to even put in more money.
    Yes, there are other ways to look at it, and one of the 
ways is to say how much in today's dollars we need for the 75-
year period. Again, including the trust fund, that is about $21 
trillion in constant 2003 dollars.
    If you look at nominal dollars and assume, say, a 3-percent 
inflation rate----
    The Chairman. I was going to say, how do we adjust for 
inflation here? If we choose to do that, obviously.
    Mr. Lockhart. The Trustees' Report assumes a 3-percent 
inflation rate. If you use that number and look at nominal 
dollars, future dollars, if you will, that is about $120 
trillion. I mean, all these numbers are so large it is hard to 
come to grips with. But one way to look at the $10.5 trillion 
number is it is $100,000 for every American family. The net 
worth of the average American family is just about that.
    Mr. Walker. The bottom line, Senator Craig, is how much 
money you would have to have today invested at Treasury rates 
in order to fund the gap between projected revenues and 
projected expenses. As Mr. Lockhart said, for the 75-year 
period, which is historically what the Trustees have done for a 
number of years, you would need $13.5 trillion today invested 
at Treasury rates.
    But if you look in perpetuity, recognizing that things are 
getting worse every year after the trust fund goes insolvent, 
including at the end of the 75-year period, you would have to 
have $10.5 trillion today invested at Treasury rates. Guess 
what? We don't have $10.5 trillion today. That is almost the 
size of the U.S. economy for a year.
    The Chairman. Very close.
    Mr. Walker, in your testimony you state that slowing labor 
force growth is not always recognized as part of the Social 
Security debate. One of the possibile items you mentioned for 
addressing the financial gap includes raising payroll taxes. 
What would be the effect on wages and employment of increasing 
the payroll tax to close the Social Security financing gap?
    Mr. Walker. Well, it is a complex factor, but I will say 
this: to the extent that you end up raising the payroll tax, 
that obviously has a negative effect on employment 
opportunities. It also happens to be the most regressive tax 
that we have. As you know, the payroll tax gets imposed on all 
individuals up to the taxable wage base, and so raising it is 
obviously going to have a negative effect on what employment 
opportunities and represents an increase in a regressive tax.
    I think one of the things we need to think about, Senator, 
is what can we do to encourage people to work longer. We have a 
problem whereby we face slow workforce growth and we need to 
try to encourage seasoned Americans, especially in a knowledge-
based economy with longer life spans, to work longer. This can 
help us not only on the revenue side, it can help us on the 
expenditure side. Other than that, we can look at immigration 
policy and what, if anything, might need to be considered in 
order to deal with these dependency ratios.
    The Chairman. OK. Today, the worker-to-retiree ratio is 
about 3.3:1. By the time of the trust fund exhaustion in 2042, 
there will be only two workers to support each retiree. At 
least that is the current projection. This happens because our 
labor force growth drops to what your testimony terms 
``negligible growth.'' In what ways can lawmakers address labor 
shortages in the next couple of decades? You probably have 
already addressed that in the tail end of your last question 
about working longer. Are there other factors?
    Mr. Walker. Well, immigration policy--which is obviously 
complicated now because, while our country is comprised to a 
great extent of immigrants, with new security threats there is 
obviously a new dimension associated with immigration policy. 
Other than that, it is trying to find ways, as I mentioned, to 
encourage people to work longer.
    Now, the interesting thing is that if you look at average 
life spans, if you consider the fact that we have moved from 
the industrial age to the knowledge age, where it is brain 
power rather than brawn; if we recognize the fact, as medical 
science has shown, that to the extent that people stay mentally 
and physically active for a longer period of time, they are 
likely to live longer and have a more productive life, all 
things being relatively equal; I would argue that we need to 
look at what can be done not only with regard to Federal 
entitlement program policies but also private pension and other 
employee benefit policies and practices to encourage people to 
work longer, even if it is just on a part-time basis.
    The Chairman. It appears to be starting to happen almost 
voluntarily because of certain needs and certain desires and 
lifestyles and health and niches with the workforce that need 
that kind of experience. But as a part of policy, it isn't 
there yet.
    Mr. Lockhart, from the Social Security Administration 
standpoint, can you tell us why sustainability is so important?
    Mr. Lockhart. We have set sustainability as one of our four 
major strategic goals, and the reason really simply is that we 
think it is important to strengthen Social Security not just 
for a short-term period or some arbitrary period, but for the 
long term, for our children and our grandchildren.
    There are obviously a lot of ways to define 
``sustainability,'' but it really means that we eventually 
start creating a positive cash-flow; that if you look at the 
$3.5 trillion and the $10.5 trillion numbers, that they are 
equal, if you will, that it doesn't grow after the 75-year 
period.
    If you don't have sustainable solvency, you are going to 
fall off the cliff, just like they are falling off the cliff in 
2042. Reform should really be addressed to achieve sustainable 
solvency, not just a 75-year period.
    The Chairman. OK. Can you explain what you mean by saying 
in your testimony that some of the reform proposals, despite 
significant transition costs, are less costly than the present 
system?
    Mr. Lockhart. Yes, Mr. Chairman. It is our belief that 
reforms should be judged against the cost and benefits of the 
present system, and that cost over the very long-term future is 
$10.5 trillion. In contrast, some of the personal account 
proposals, with other changes besides personal accounts as 
well, have a cost to general revenues in the $1 to $3 trillion 
range, and they have been graded by GAO, some of them, and by 
our actuaries as sustainable.
    So by that transition investment, one could actually reduce 
or eliminate that $10.5 trillion number. So from our 
standpoint, it is not a transition cost. It is a transition 
investment. The return on investment is excellent.
    Mr. Walker. Mr. Chairman, if I might?
    The Chairman. Please.
    Mr. Walker. One of the problems that we have is that if you 
look at how we keep score in the Federal Government, it can 
lead to some very perverse decisions. For example, from a 
budgeting standpoint, we look at 10-year cash-flows. We don't 
look at discounted present value concepts.
    It is very important that we start considering discounted 
present value, not only for Social Security and Medicare and 
related obligations, but also any major spending and tax 
decisions. Because if we don't do that, then we may end up 
taking actions that arguably make sense in the short term, but 
are unsustainable in the long term. This is part of our 
fiduciary and stewardship obligation to future generations, to 
our children and grandchildren.
    The Chairman. Mr. Lockhart, what is the Social Security 
Administration doing or what efforts are you making at this 
moment to educate the public about the consequence of inaction 
in strengthening Social Security? Is there any outreach of 
communicative effort now based on the information that is being 
accumulated?
    Mr. Lockhart. Certainly. As, again, one of our four 
strategic objectives, a big part of that objective is solvency 
education. We have started that. We have a lot farther to go in 
that. We have our communications group, our policy group, our 
actuaries all working on it.
    One of the things we do is that we send out every year a 
statement to American workers, anybody who is over 25. I think 
my son just got his first this year. It is trying to lay out 
the future of Social Security as well as project future 
benefits. Unfortunately, too many people just look at the 
numbers, and they don't look at the message. The message in 
there is the same that we have been talking about today, that 
there is a serious long-term issue. So we put that out.
    Certainly our website is one of the most looked at websites 
in Government. We have frequently asked questions on there 
about Social Security's future. We have communications people 
throughout the country. We, as you know, have 1,300 field 
offices. We are involved in a lot of local events. We are 
working with interested interest groups and hope to do a lot 
more of that. Our policy and actuarial groups do papers, have 
forums.
    But we can do more, and we will do more.
    The Chairman. Mr. Walker?
    Mr. Walker. Mr. Chairman, I was part of a concerted 
national dialog effort in the 1997 to 1998 timeframe prior to 
becoming Comptroller General of the United States. As you know, 
I used to be a Trustee of Social Security and Medicare, and 
Assistant Secretary for Pensions and Health at the Labor 
Department in an earlier part of my life. That effort showed, 
quite frankly, that the American people get it; that if they 
are provided with the information, that they can be moved to 
recognize that there is a need for reform.
    At the same point in time, I would respectfully suggest 
that if we are going to engage in such a dialog, we need to 
recognize that we have a broader challenge. As on one of the 
charts that I showed, we have a large and growing fiscal 
imbalance. We have a structural deficit. This is a subset of 
that broader challenge, and so people need to understand that 
we need to make some tough choices in a range of areas. This is 
just one. Health care is one that is much greater than this.
    So I would respectfully suggest that while we need a 
national dialog, we need to dialog on the overall imbalance, we 
need to talk about Social Security, but we also need to talk 
about health care, because, frankly, that is a lot bigger 
problem and a lot tougher challenge than Social Security.
    The Chairman. Well, I agree with both of you. The American 
people get it today. I sense that in my experience over the 
last 20 years, that when it comes to a dialog on Social 
Security--there was an old line that I remember as a freshman 
in Congress: ``Don't you touch Social Security. You leave that 
alone, Congressman.'' To a much more thoughtful line today, and 
that is, ``How do we fix it?'' Or ``How do we make sure that it 
is there for our children and our grandchildren?'' Most 
importantly--and I think I am increasingly surprised, and I 
spend a lot of time in high schools. The No. 1 question asked 
of me by high school seniors is: What are you going to do about 
Social Security? All of a sudden they got their first paycheck. 
They saw what was taken out of it. They know the importance of 
it to their grandparents. But all of a sudden it has dawned on 
them that they are going to be large payers into it. There is 
an informational base that they are looking at out there.
    So it is interesting to see that dialog beginning at a very 
early age in the workforce, and I think that is tremendously 
valuable.
    Mr. Walker. If I might, Mr. Chairman, follow up, you 
mentioned before something that is very important--Mr. Lockhart 
did as well--that from a practical standpoint, today's seniors 
and those that are nearing retirement aren't going to be 
affected.
    The Chairman. Exactly.
    Mr. Walker. So, therefore, it means that the sooner we act 
so that we can end up structuring reforms to where they affect 
younger people more than the current seasoned Americans, if you 
will, and retirees, then they have time to be able to make the 
necessary adjustments. They will have an opportunity to make 
the adjustments. So we can structure reforms, if we get on with 
it, that will exceed the expectation of every generation of 
Americans.
    One of the things that many younger workers and young 
people don't understand is that even when the trust fund goes 
insolvent, they still will get 73 cents of their benefits but 
declining thereafter many think it means that there is no money 
at all. That is not true. So we really have an opportunity to 
exceed the expectations of all generations. We just need to get 
on with it.
    The Chairman. Well, thank you. We have been joined by my 
colleague from Michigan. Senator, welcome, and you are 
certainly welcome to make an opening statement and ask 
questions of either of these gentlemen. Thank you.
    Senator Stabenow. Thank you, Mr. Chairman, and----
    The Chairman. Turn your mike on, please?
    Senator Stabenow. Rather than making an opening statement, 
welcome. We appreciate both of you and your leadership roles 
and information that you provide. I think rather than an 
opening statement, I would like to ask some questions.
    I noticed that the hearing really talked about--and the 
chairman, our distinguished chairman of the committee, has 
asked you to look at the ``do nothing'' strategy related to 
Social Security. I guess I would challenge the ``do nothing'' 
title of this because I believe we have done something. What we 
have done is pass a series of tax cuts on two different 
occasions now that have placed us in a much more serious 
situation in order to meet our obligations long term, it would 
certainly appear by the numbers.
    Mr. Chairman, there is a Center on Budget and Policy 
Priorities study that I would ask be placed in the record that 
is called ``Social Security and the Tax Cut.'' The 75-year cost 
of the tax cut is more than twice as large as the long-term 
deficit in Social Security. I would ask that that be placed as 
part of the record.
    The Chairman. Certainly. It will be a part of the record.
    Senator Stabenow. Thank you.
    [The study follows:]

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    It seems to me, if we are looking at all options--and it is 
always a question of values and priorities--that we certainly 
cannot look at tax policy separately or in isolation from this 
debate, that this is all part of the same debate in terms of 
the revenues that are available, the way the trust funds are 
used, what the deficit is, as well as our obligations and so 
on.
    So I am wondering--Mr. Walker, I would ask you first--if 
you would agree that the decisions we have made on tax policy 
will make it tougher to meet our Social Security obligations in 
the long run.
    Mr. Walker. I think you have to look from a macro and micro 
perspective. Macro is the overall fiscal situation, and then 
micro would be individual programs such as Social Security.
    As my testimony points out on one of the figures, we face a 
large and growing fiscal imbalance due to decisions that have 
been made both on the spending side and the tax side. Frankly, 
we have been increasing spending at a much more dramatic rate 
than historically has been the case and was expected. There 
have also been actions taken on the tax side. The combined 
effect is that the bottom line is much worse as a result.
    As we show on Figure 5 that is in the testimony, based upon 
the assumptions laid out, we face a large and growing fiscal 
imbalance, a structural deficit. Tough decisions are going to 
have to be made dealing with entitlement programs, 
discretionary spending, and tax policy. Ultimately that is a 
policy decision for the Congress to make, but it is not just 
one issue. It is looking at all three dimensions in order to 
solve the problem.
    Senator Stabenow. I appreciate that. The reality is, as you 
have just indicated, that we make decisions every day. It is 
really not ``do nothing.'' We make decisions every day that 
impact what will happen in terms of Social Security.
    Mr. Lockhart, I don't know if you would like to respond to 
that question.
    Mr. Lockhart. Certainly if you just look from the Social 
Security standpoint, for all payroll taxes that are not used, 
to pay benefits or administrative expenses, we get a Treasury 
bond. We also receive bonds to pay for the interest on trust 
fund assets every year. So from the trust standpoint, there is 
no impact.
    I think what I would like to do is really look at the $3.5 
trillion, and picking up a comment that Mr. Walker made about 
looking at the net present value of the cost of these programs, 
one of the things one can do with reform is to reduce those 
numbers pretty dramatically. You can stop some of the growth on 
those charts that he has there. Social Security is slated to 
grow from about 4.4 percent of GDP to about 7 percent by 2077. 
By reforms, you can actually level that off in a way that is 
fair to present and future generations. That is, I think, what 
we should be looking for, and that is why I think we should be 
doing reform sooner rather than later because it is a lot 
easier if we do it sooner.
    Senator Stabenow. Well, I guess to go back to my original 
premise, when I look at as a member of the Budget Committee at 
decisions like--I was fortunate to come on that committee 2 
years ago. We were debating what to do with the $5.7 trillion 
surplus, I believe the largest or one of the largest surpluses 
that our Federal Government has been fortunate to have. Then 2 
years later, now we have seen, I believe, the largest swing 
ever in our history to over a $2 trillion deficit. So over a $7 
trillion swing as we just look 10 years out, the largest single 
year deficit possibly ever in our country that we are facing 
right now.
    The reality is that we are making decisions that impact 
that. Some of that is the slowed economy. The largest single 
piece of that is tax policy, the tax cuts that were given. Then 
we have spending, and I believe it is somewhere in the range of 
96 percent of the increases we have seen in 2 years are 
defense, homeland security, and restoration of the 9/11 
targets, particularly in New York. So 96 percent is something 
that the people of our country certainly believe needs to 
happen for our basic safety and security. All of those things, 
again, combine back to having an impact.
    When we were debating the $5.7 trillion surplus, a number 
of us, including at that time the chairman of the Budget 
Committee, suggested because of your presentations, the numbers 
you have, that we actually put dollars aside to go into--to 
essentially put money in the bank in terms of the trust fund 
for future generations to address these issues of solvency so 
we would not be in a situation of looking at raising payroll 
taxes or cutting benefits or so on.
    That choice was not made. So it is not that we are doing 
nothing. We are making choices that impact where we are today, 
which I think is just very important for the American people to 
understand--not that that takes the place of the baby boomers 
retiring, not that it negates any of what you are talking 
about, but we are making choices.
    Now we have the economy, and the unemployment rate for June 
jumped from 6.1 percent to 6.4 percent, the highest level in 9 
years, the highest number of people on unemployment benefits 
since 1983. In a macro sense, I guess I would ask you: 
Shouldn't we be focusing very much on job creation, not only 
for individual families, where it is absolutely critical, but 
doesn't the weakened economy undermine our ability to provide 
benefits for future generations? Our economic policies now, how 
we stimulate the economy to create jobs, doesn't that have an 
impact on your numbers as well when we look at the strength of 
the economy?
    Mr. Walker. Well, first, let me clarify that the ``do 
nothing'' phrase only deals with Social Security. Clearly, you 
are correct that Congress has been doing a lot of things in 
many different areas, and many of which were good things. I 
mean, some are good and some are not so good, depending upon 
where you sit.
    I do think, however, whether it be on the tax side or the 
spending side, that when Congress is debating significant 
legislation that could have significant costs not just over the 
next 10 years, but also beyond the 10 years, many times 
Congress debates both tax and spending proposals that the costs 
balloon after 10 years, and we act like the world is going to 
end in 10 years. Well, it isn't.
    As a result, we need to consider discounted present value 
concepts as part of the discussion and debate on both the tax 
side and the spending side, and one of the things that we need 
to start doing, quite frankly, is to quit digging because we 
are already in a huge hole. For Part A of Medicare alone, we 
have a $6 trillion unfunded discounted present value 
obligation. For Social Security, we have got $3.5 trillion. 
That is only for 75 years. If you look for perpetuity, Social 
Security is $10.5 trillion, according to the latest 
calculations, and Medicare may be more like $30 trillion. So we 
need to recognize reality.
    By the way, I have been testifying on this issue for 
several years, and we have had a long-range structural 
imbalance even when we had surpluses. We had a long-range 
problem then. Even if the tax cuts didn't happen, we still 
would not solve our problem. But you are right to say you have 
got to look at both sides. You have got to look at both sides 
of the equation.
    Mr. Lockhart. Senator.
    Senator Stabenow. Yes, go ahead.
    Mr. Lockhart. Excuse me, Senator. The only point I would 
like to make is, in the case of Social Security, I think there 
is still time to make some choices here. If we do it relatively 
soon, we have the opportunity to stop those numbers growing. 
That is critical. Every year that $10.5 trillion will grow by 
about $650 billion. That is more than the present deficit.
    So to the extent we can start looking at solutions, start 
evaluating them, and, as the President asked, do it on a 
bipartisan basis, I think we can really make a great choice for 
America's children and grandchildren.
    Senator Stabenow. Well, I certainly agree with that and 
believe that we need to make choices. I would also suggest 
that, Mr. Walker, when you talk about stopping digging, that 
around here we just continue to dig, and without looking at the 
situation. The vast majority of--I mean, if we asked the 
American people do we have the option of not focusing on 
homeland security or rebuilding the Pentagon and New York or 
defense, or, on the other side, reducing revenue through a 
supply side strategy on tax cuts, people understand that we had 
to come forward with those dollars in terms of protecting 
safety and security. The option, in my judgment, was on the 
other side, and we have chosen as a Congress to keep diggings. 
My guess is we are going to see more digging and more and more 
undermining revenue that just adds to the problem that you are 
talking about right now.
    Thank you, Mr. Chairman. I would just add one thing as a 
positive note on Social Security. Social Security is not just 
about income for people, which we know the vast majority of 
people receive income from, and many of them, many of our 
constituents or possibly family members rely on Social 
Security. But it is also a life insurance and disability policy 
for people of this country. I remind young people of that when 
I speak to them in schools that if they were to become disabled 
or if there would be a loss of life of their parents or 
themselves with minor children, it also is a part of a safety 
net that I believe has been a great American success story. It 
is our job to be responsible about making sure it is there for 
the future.
    Thank you.
    The Chairman. Senator, thank you very much.
    One of the reasons Chairman Grassley and I asked the GAO to 
do the audit and look at the ``do nothing'' is because we--you 
know, while you are concerned, and responsibly so, about 
actions taken this year and next year, what is critical to 
Social Security is actions we take now to impact us out 40 and 
50 years. If you will notice, even with what we did this year, 
the line of revenue on Social Security is still flatlined, 
relatively speaking, as growth patterns occur.
    Of course, out there in late 2030 or early 2040, a 
precipitous drop begins in Social Security's ability unless we 
do one of a couple of things at that time, and that is why we 
thought it was important, if you will, to look at the cliff, 
because we don't function well, you or I, at that cliff level. 
We really have to think in actuarial terms long term on Social 
Security and its impact. The idea of raising payroll taxes by 
50 percent would be as precipitously negative on your workforce 
and mine as it would be to cut benefits by anywhere from 30 to 
35 percent. Those are the ``do nothing'' scenarios that both 
GAO and Social Security agree on.
    So what we are trying to do is build a record so that you 
and I can look outward and in the coming years make those kinds 
of decisions. I personally think that is critically important.
    Senator Stabenow. Mr. Chairman, if I might, I absolutely 
agree with the need to do that. I would just urge that we do 
that within the context of all of the decisions we make, not 
just in the context of raising benefits--lowering benefits or 
raising the payroll tax, but that we do this in the context of 
the broader issue. If we, in fact, had now a $5 trillion 
surplus and were able to take a large part of that and pre-fund 
the liability outward on Social Security, I would dare say that 
would help a great deal. It wouldn't solve the problem, but it 
would allow us to make different decisions.
    So that is all that I guess I wanted to say, is that we 
have--as we make decisions responsibly about where we go, I 
don't think going back into huge deficits, the largest deficit 
possibly in the history of the country, helps any of these 
numbers. That should be of a big concern to all of us.
    The Chairman. Thank you.
    Gentlemen, thank you very much for your work and your 
testimony before us. As you know, this is ongoing as we work to 
build a record from which decisions will be made by Members of 
this Congress, so I thank you both very, very much.
    Mr. Lockhart. Thank you, Senator.
    Mr. Walker. Thank you, Senator.
    The Chairman. Now I would ask our second panel to come 
forward, if you would please: Dr. Thomas Saving, Public Trustee 
of the Social Security and Medicare Trust Funds; and Brad 
Smith, the President and co-founder of Social Good Through 
Politics at Harvard University.
    Gentlemen, welcome to the committee. Mr. Saving, if you 
would proceed, please. Pull that mike as close as is 
comfortable, and we thank you for being here.

STATEMENT OF THOMAS R. SAVING, PUBLIC TRUSTEE, SOCIAL SECURITY 
         AND MEDICARE TRUST FUNDS, COLLEGE STATION, TX

    Mr. Saving. Thank you, Mr. Chairman, and I would like to 
present some things about Social Security. A few of those--this 
is a chart that comes right from the Trustees' Report, and 
mainly what I would like to do is--if I can figure out how to 
do it. That is where I want to be, right here at Figure 1.
    As Congress considers legislation to reform Social 
Security, it is important to understand the program's financial 
condition, and I think there are a lot of ways to speak about 
this, and I am going to say some things that may be somewhat 
different than we have just heard but are related to it in a 
way that I will make very clear as we go along.
    In less than a decade, the combined Social Security and 
Medicare programs--and I am going to briefly comment on both of 
them because I think they are both important. In fact, they are 
part of the same kind of a program, and that is, transfers from 
the young to the old. One of those programs, as we have already 
heard from both witnesses, is in much more dire straits, but is 
much more difficult to solve. So that means that the reason we 
are concentrating on Social Security is it is something that we 
can do something about. We can solve at least perhaps a fourth 
of the problem that these two programs represent in an easy 
way, and then we can try to solve the other three-fourths of 
that problem.
    But in less than a decade, the combined Social Security and 
Medicare programs will go from a position of providing net 
revenue to the Treasury, which is what they have been doing up 
until--forecasts for this year will be the first year in which 
Medicare Parts A and B and Social Security together have ever 
actually required a transfer from the Treasury as a group. That 
is going to happen this year, and it is going to get much worse 
in the near future.
    The other thing I think that is important--and in that 
sense, I am going to say something a little bit different than 
the last two witnesses. The fact that the Trustees' 2003 
estimate of trust fund exhaustion date is 2042 has no bearing--
I want to repeat that, no bearing--on the demands that Social 
Security and Medicare are going to place on the budget in the 
next few years. The trust fund is not going to help us fund the 
deficits that we are talking about, and I think that is very 
important, and it relates to what we might have done with a 
surplus or something that we might have had that we might have 
put somewhere that we think might have helped us. The question 
is: What would we have to had done with that to have helped us?
    So there are a few years of good news remaining from these 
programs. Social Security and Medicare Part A payroll tax 
revenue currently exceed expenditures, and these surpluses are 
sufficient to cover almost all the Medicare Part B expenditure. 
So we can say that is really what we are doing with the money. 
We are subsidizing Medicare Part B.
    This year and next, these combined programs will require 
only a small transfer. But in fewer than 5 years, beginning in 
2008, and every subsequent year, these programs are going to 
become a drag on the Federal budget. By 2010, less than 7 
years, these programs are going to consume 1.5 percent of total 
Federal income tax revenues.
    I would like to say something about income tax revenues, 
that if you look at a graph--and I do not have it with me--of 
the percent that Federal income tax revenues are of the gross 
domestic product, for the last 50 years--and we have had 
dramatic changes in the Tax Code over those 50 years--you will 
see that the percentage that is of gross domestic product is 
remarkably stable. It changes very, very little, and part of 
that is that incentives matter, and lower marginal tax rates 
are the difference between what we are like and what Europe is 
like, outside of Ireland and England, where they have become 
more like us in Tax Code, and as a result, have had much faster 
growth than the rest of Europe. The key to this is increasing 
gross domestic product.
    Now I will go on. We project as Trustees that Social 
Security expenditures, the year they will first exceed revenues 
is 2018. But at 2020, just 2 years after that, these programs 
together are going to be using 17.5 percent of all Federal 
income tax revenues. That is what you can see on the chart, on 
Figure 1. By 2040, which is 2 years before we say the trust 
fund is going to be exhausted, something on the order of 47 
percent of all Federal income tax revenues are going to have to 
be transferred to Social Security and Medicare. That is, half 
of almost every dollar that we are taking in as Federal income 
tax is going to have to go to these programs. That is clearly 
not sustainable.
    So, in spite of Medicare reform that is getting most of the 
press right now, Social Security's financing future is ominous, 
and I think that is what this hearing is about. This year, 
Social Security is going to contribute the equivalent of 6.5 
percent of Federal income tax revenues to the Treasury, and, of 
course, we have got good uses for that money. By 2020, just at 
the beginning of the baby boomer wave--we will be 10 years into 
it--Social Security is going to require a transfer of 3.4 
percent of Federal income tax revenues. So it is going to go 
from providing you a 6.5-percent addition to Federal income tax 
revenues to taking almost 3.5 percent of those revenues. By 
2021 or so, it is going to be at 4.5 percent of Federal income 
tax revenues. I might add, historically that is the largest 
that the Social Security transfer has ever been. In 1978 and 
1983, it was that large, and those are the 2 years, as you 
know, that we changed Social Security. We reduced benefits in 
1978, and we raised taxes and reduced benefits in 1983. So both 
of those things happened, and that is the largest that this 
transfer has ever been.
    Then I want to say something about 2042, right here to the 
shortfalls, because these are dollar shortfalls in 2003 
dollars. So these are the amounts in 2003 dollars we are going 
to be transferring to Social Security. I think if we look at 
2042, the year we say the trust fund is going to be exhausted, 
we are going to transfer $427 billion in today's dollars out of 
Federal income tax revenues of $2.76 trillion, because that is 
15.5 percent of Federal income tax revenues that will be 
transferred to Social Security. The next year, we would only 
have to transfer $438 billion. The message there is that if we 
have figured out how to transfer $427 billion to Social 
Security, trust fund exhaustion is irrelevant. If we found that 
much money, the next year there is no way that you are going to 
tell constituents we are going to now spend this money on 
something else and not pay you your benefits. So if we figure 
out how to do that, we have solved the problem. I think that is 
important.
    On tax requirements, I want to discuss now the size of the 
debt that we have. We have done some new things this year in 
the Trustees' Report. I want to come back to that. Usually, the 
Trustees' Report is concentrated on the 75-year deficit. That 
is what these numbers show, and the $3.5 trillion deficit that 
both the two witnesses discussed before is--the real amount of 
money you are going to have to come up with in a present value 
context is not $3.5 trillion. It is $4.9 trillion, because the 
trust fund is not going to help you pay the debt. In fact, you 
have to find the revenue somewhere, because the trust fund is 
simply debts you have decided to pay for yourself. They are not 
invested.
    That is what I meant by if you had taken this so-called 
surplus that we had estimated we were going to have, you would 
have to have invested it in something real. I don't know what 
that would have been and how we would have done it. I know 
that, in general, the Senate in 1998 somewhat of unanimously 
said we are not going to have the Government invest in equities 
or in real capital. But that is what we would had to have done 
with that money.
    We now report, in addition to this number--and I think 
something that is even more important in the Trustees' Report, 
and that is what we refer to as splitting up the future of 
Social Security into two things. One of them is the current 
members of Social Security, those 15 years old and older. Now, 
we give that a name. We call it the 100-year closed group. But 
it says: What do we owe the current members of the Social 
Security system? As it turns out, we owe them $11.9 trillion. 
That is the 10.5, as previously discussed, but now the question 
is: What are the new people going to contribute? The person who 
starts working tomorrow and everyone following them, if the 
system was in equilibrium, those people would do what? They 
would contribute $11.9 trillion. What are they going to 
actually contribute? Nothing. So the new people are going to 
contribute nothing to solving the $11.9 trillion that we owe 
everyone who is currently in the system. Therein is the 
problem, and how we are going to solve that problem is the 
issue.
    That is why I think we have taken a very big step in the 
Trustees' Report this year by emphasizing what we do owe 
everyone who is in the system, and what are the upcoming people 
going to pay for it. If you think very simply about the Social 
Security system and what it is going to be in 2040 with two 
workers per retiree, on the average we replace 42 percent of 
earnings. That is what Social Security is like. If you have two 
workers for every retiree, what is the tax rate going to have 
to be to support that? It is going to have to be 21 percent. 
Each person gives up 21 percent of their earnings. Added 
together, that is the 42 percent that it is going to take for 
every retiree. It is a very simple idea.
    What is the problem? The tax rate is way too low. Why is it 
too low? Well, two things. We have got baby boomers going 
through, a big generation supporting a small generation of 
retirees. We are able to get by with a small tax rate. When the 
big generation retires, the smaller generation coming up is 
going to have to consume less. I was on the President's 
Commission, to strength Social Security and as I constantly 
reminded my fellow Commissioners all the time, the elderly are 
going to eat real food, drive real cars, live in real houses, 
use real hospital beds and doctors and nurses when they are 
consuming health care. Somebody has to produce that stuff. The 
only people who are going to produce it are the young. The 
question we really have before us is: How are the young going 
to produce more because, otherwise, they are going to have to 
drive smaller cars, live in smaller houses, and consume less 
perhaps--eat out less often, so that we can live it up the way 
we are scheduled to do so. So we are going to have--if we can't 
capture the baby boomers before they leave working--we are 
going to have a great deal of difficulty solving the problem.
    I think I will stop there.
    [The prepared statement of Mr. Saving follows:]

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    The Chairman. Well, Mr. Saving, thank you very much. 
Obviously, Doctor, you have challenged us well beyond what the 
two first panelists did, so we are going to ask Brad to solve 
the problem. [Laughter.]
    We are always looking for solutions, Brad, and we thank you 
very much. Brad Smith is President and co-founder of Social 
Good Through Politics. Please proceed.

  STATEMENT OF BRAD SMITH, PRESIDENT/CO-FOUNDER, SOCIAL GOOD 
      THROUGH POLITICS (HARVARD UNIVERSITY), KNOXVILLE, TN

    Mr. Smith. Thank you, Chairman Craig. It truly is an honor 
and a privilege to be here today to speak with you, so I thank 
you.
    My name is Brad Smith. I am a junior at Harvard University 
majoring in economics and government. For the past 2 years, I 
have led a group of 20 Harvard students that has studied Social 
Security and developed a five-point plan that remedies the 
fiscal insolvency and increases the equality of the current 
Social Security system. We have discussed our plan with notable 
individuals including Harvard President and former Secretary of 
the Treasury Lawrence Summers, former CEA Director Martin 
Feldstein, current CEA Director Gregory Mankiw, former Senators 
David Pryor and Warren Rudman, and current Senators Kennedy and 
Hagel.
    However, the reason I am here today is not to tell you 
about what my group has done, but rather to implore you to lead 
Congress and to take immediate action to guarantee that my 
generation has financial security in our retirement.
    Since the Social Security system was instituted by Franklin 
Roosevelt in 1935, the system has lifted millions of our 
Nation's retirees out of poverty. But I am frightened for my 
peers today. As you have heard this morning, the system will 
not be able to do this for my generation of Americans.
    If no changes are made to the current system, my generation 
will receive somewhere between 75 percent and two-thirds of the 
benefits we have been promised. This means that my generation 
of Americans will not have the social insurance we have been 
promised. This means that millions of retirees in my generation 
will fall below the poverty line. This means that my generation 
will receive less in benefits than we paid in taxes, never mind 
seeing a return on our investment.
    To me it is clear: The insolvency of the current Social 
Security system is a threat to the social welfare of our 
Nation's future retirees.
    However, there is good news. We do have the power to 
protect these future retirees. That is why I am here today: to 
plead with you to take action and to take it immediately.
    Every day we delay, the cost of fixing the problem 
increases. Yes, it is better to undertake reform in an economic 
boom than during an economic recession. Yes, it is better to 
undertake reform when there is a budget surplus rather than 
when there is a budget deficit. But as any investor will tell 
you, it is better to start investing today than it is to start 
investing tomorrow.
    I know that Social Security is not an easy problem to fix. 
If it was, it would have already been done. But I believe that 
is exactly why Chairman Craig asked me here today: to be a 
voice for the millions of Americans who the current system will 
certainly fail.
    I am not here to promote a specific solution, but I do 
believe that the plan my group has developed can serve as a 
starting point for a discussion on reform. Using a Social 
Security Administration caliber model, my group has developed a 
five-point plan that is progressive and that addresses the 
fiscal insolvencies of the current system. Our plan includes 
investing a portion of the FICA tax, redistributing wealth to 
lower-income and minority Americans, and ensuring that all 
retirees receive at least 100 percent of their promised 
benefits.
    However, no matter how good our plan is and no matter how 
hard we work to inform Americans of the importance of reforming 
the system, the power to change the system lies only in your 
hands.
    My generation needs you to be bold and commit yourselves to 
developing, publicizing, and passing a bipartisan reform plan. 
It will be difficult, perhaps even controversial. But, in the 
end, I can guarantee you that it will be worthwhile. My 
generation will thank you and your generation will leave a 
great legacy behind.
    Thank you for your time.
    [The prepared statement of Mr. Smith follows:]

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    The Chairman. Well, Brad, thank you for that testimony and 
your thoughts.
    Several years ago, I held a series of meetings across my 
State on Social Security with all the appropriate charts and 
graphs to tell the story of current versus future situations. I 
invited senior citizens and seniors in high school to attend. 
It was interesting to watch the interaction, because in the 
first instance, the senior citizen came somewhat defensive, and 
in the end, that defense was gone and they were thinking in a 
much broader sense about the totality of the system and the 
impact that it will have on your generation in relation to 
money in versus money out.
    It was a fascinating experience, and it is some of what we 
are going to have to hear from the younger generation to cause 
this Congress to deal with this issue sooner, I think, rather 
than later.
    Dr. Saving, you have made a somewhat broader perspective 
analysis, I think, of Social Security and the impacts ahead. In 
fact, your testimony suggests that Social Security and Medicare 
financing will have Federal budgetary implications as early as 
2008. Will this create an immediate visible effect at the time? 
Or will it be kind of a gradual shadow effect, if you will, on 
the budget?
    Mr. Saving. Well, I think it is certainly going to be 
gradual, and, actually, before it goes into deficit, it would 
start to have an effect as soon as the revenues from this 
system have peaked and start to decline. So that is going to be 
almost immediate.
    But, you know, those are very small effects, and until we 
reach--and perhaps we can go back to right here and get a feel 
for it. But by 2020, you are looking at 17.5 percent of Federal 
income tax revenues being transferred, and in the sense of your 
10 years, that is well beyond 2013. But by 2013 we already will 
be transferring--we won't be transferring anything to Social 
Security, of course. Social Security is going to go on not 
requiring a transfer. But the sum of the two will indeed be 
requiring a transfer by then on the order of 7 or 8 percent of 
Federal income tax revenues.
    But we have to recall that Medicare itself right now, Parts 
A and B together, have a deficit of about 7 percent.
    The Chairman. Right.
    Mr. Saving. Because of Federal income tax revenues. So we 
are already transferring to the elderly, and the complicated 
part is to find a way to accomplish this within, I think, the 
fairly near future because these numbers are going to be huge, 
and as you are well aware, there is no way that even at 2020 
that 17.5 percent of Federal income tax revenues is going to be 
obtainable as a transfer. It just can't happen. That means that 
we have to do something, and the problem that we can do 
something about more quickly is Social Security.
    But the other issue is that we still have the debt to the 
existing people that we somehow have to do something about, and 
that is the $11.9 trillion. The question is: What do we do 
about it? I might say simply that, as you know, in the 
Commission we took care of a lot of that debt by price indexing 
benefits as of 2008. Actually, that wipes out about $5.5 
trillion of that debt.
    Now, if you try to do a reform, then you have to give 
something back to people, and what the Commission tried to do 
is give something back in terms of private accounts. I am not 
here to promote the Commission's proposals or any other reform. 
I am here as a Trustee and just to discuss. But no matter what 
you do, that number has to be dealt with, and I think that is 
what the important point is. Each reform that we suggest has to 
say how are we going to deal with this $11.9 trillion, and we 
can deal with it by making the baby boomers pay more taxes 
because they, clearly, in a sense were undertaxed. Now, they 
might not agree with that if you would come to them and say----
    The Chairman. I don't agree with it.
    Mr. Saving. Exactly. I assumed you didn't feel like you 
were undertaxed. But in the sense of supporting what you are 
expecting--and I think another important point is that a 
generation transfer system such as Medicare and Social Security 
have a bad effect on the economy in the sense they reduce the 
capital stock, because to the extent that people believe that 
their retirement is taken care of, they invest less in the 
economy and they then leave a smaller capital stock to the 
generations that follow them.
    The Chairman. Well, on the first panel, following up on 
your comment there, we discussed the need to assess the 
potential economic effects of tax increases necessary to pay 
current promises. I am interested in your judgment as an 
economist on the economic impact of raising taxes to fill the 
financial gap in Social Security and Medicare. What is your 
general view on that?
    Mr. Saving. Well, I think if we take a look at this chart 
right here, it can give you an idea of where those taxes would 
have to be if we were going to pay Medicare costs. As a percent 
of taxable payroll, we are looking at tax rates that are double 
the current payroll tax rates by almost 2030 if we were going 
to really pay the Medicare that way. Those kind of tax 
incentives matter, and we were discussing one way to solve this 
problem is to have people work longer. The question is: How do 
we make people work longer? We have to make it profitable for 
them to work longer. If you are taking away 30 percent up front 
of what they earn, the labor force participation is going to 
fall. Jobs are going to fall, because jobs are a function of 
how many people want to work. If we make it less profitable to 
work, fewer people are going to want to work. I think we have 
to solve this--these are onerous tax levels that approach 
European levels, and that is the reason why they have grown so 
much more slowly than we have. I think there is no doubt that 
the capital stock will get smaller, and income and employment 
will fall, and that will actually exacerbate this problem, 
although it looks like it might solve it.
    The Chairman. OK. Brad, you are probably the first person 
ever to testify before Congress who can expect to receive his 
entire Social Security retirement benefit off the edge of the 
cliff, that chart that both GAO and Social Security were 
showing us a few minutes ago. You are certainly one of the 
youngest, if not the youngest, witness ever to testify before 
the Aging Committee. [Laughter.]
    There ought to be a message in that beyond what I am 
proposing, and that is that you, too, someday will grow older.
    But, anyway, it is especially refreshing, I think, for 
young people like yourself now becoming very much involved in 
the system and the thought processes of this country to 
associate yourself with the older generation, and that cross-
generational relationship, I think, on the solution that we are 
all talking about is extremely important here for both sides to 
understand this issue and effectively deal with it.
    Can you tell the committee what has compelled your interest 
and your group's interest in Social Security?
    Mr. Smith. My interest in Social Security and my group's 
interest sprung from a discussion we were having at Harvard's 
Institute of Politics. We were sitting around talking about 
what were going to be the issues that affected our generation 
and what were going to be the issues that affected our 
lifestyles in the future. One of the issues that kept coming to 
the forefront was Social Security. Social Security brings 40 
percent of the people that receive its benefits above the 
poverty line. My Grandmom, Alma Smith, in Knoxville, TN, she 
relies on Social Security. It is how she feeds herself. What I 
am afraid of is that in the future the Social Security benefits 
my grandmother receives are not going to be there for my 
generation. Instead the people in my generation are going to 
have significant financial problems in their retirement because 
Social Security is not going to be there for them.
    My group came together not only because we saw there was a 
problem with Social Security but because we saw there was a 
problem that could be fixed. Social Security is both a problem 
and an opportunity, for our generation to work with the older 
generation to develop a solution, that not only fixes the 
current problem but that improves individuals lifestyles well 
into the future.
    The Chairman. Well, I am pleased to have you thinking about 
fixing it. A good number of young people I speak to just simply 
say to me, ``Well, Senator, it is not going to be there. We 
understand we probably still have a social obligation to our 
parents and our grandparents, but we are not expecting to get 
anything. We are going to invest in other forms of retirement 
and annuity programs because it is not going to be there.'' 
That kind of pessimism, if you will, or I guess I could say 
pessimistic objectivity, at least at the current time, 
frustrates me because there are going to be a good many of our 
citizens out there of your generation who are going to probably 
need this kind of help.
    The Comptroller General, Mr. Walker, pointed out in his 
testimony that the trust fund exhaustion scenario raises, and I 
quote, ``significant intergenerational equity issues.'' I have 
told my grandchildren that they may someday look at me and say, 
``Gramps, we can't afford you any longer.'' We should not let 
that happen.
    Do you see inaction on Social Security as increasing 
tension of the generations?
    Mr. Smith. What I see is that my generation is paying 12.4 
percent of what we earn to FICA. I see that money going to help 
my Grandmom and lots of other elderly senior citizens. In the 
future, if Social Security is not there for my generation I 
think there is a great possibility that it will cause 
intergenerational tension. Right now we sit on the brink of 
opportunity, the opportunity to fix the Social Security system. 
If we pass over this brink without your generation considering 
the effects in action will have on my generation I think that 
intergenerational tension will increase. On the other hand, if 
our generations work together, we have the chance to increase 
generational cooperation.
    The Chairman. It is important for us to find the best ways 
to educate our young people on important public issues. 
Obviously, the old phrase that you are the next generation of 
leaders may be old, but it is true. What, in your opinion, is 
the extent of awareness of your generation regarding Social 
Security insolvency issues? What lawmakers do to increase that 
awareness, Brad?
    Mr. Smith. I think there is a limited awareness and in a 
lot of cases, the awareness that people think they have is 
actually wrong, as you alluded to earlier. A lot of people 
think either there will be no Social Security for us in the 
future or people don't even think about Social Security at this 
point in their lives. I think that there is a two-pronged 
approach that we all can take to improve that into the future.
    The first prong of this approach involves groups like mine 
going onto college campuses, reaching out to people in their 
20's and 30's, and showing them the graphs, talking to them 
about the numbers, and explaining to them the tradeoffs that 
are inherently involved in the Social Security debate and 
saying be informed, be wise, so that when you go vote you know 
what you are voting for. Think about this when you choose who 
to vote for. Think about this when you are electing your 
Senators and Congressmen. In this way I think there is a lot 
that can be done by my generation to inform others in my 
generation.
    But the second prong of this approach to increase fix 
awareness must involve Congress and the Senate. It involves 
concerned Senators like yourself standing besides the graphs we 
have seen this morning saying, Look, this is what is going to 
happen in the future; if we don't do anything, this is what our 
grandchildren are going to face. We need to do something. I 
have ideas, and you have ideas about how to fix the problem. We 
need to work together because the most important thing is 
finding a solution. No matter what that solution is, fixing the 
problem needs to come first, and then we can talk about 
different ways and different means of doing that.
    The Chairman. Thank you very much. It is a thoughtful 
approach and the right one, I think, in the end to get there.
    I was here in 1983. I made the tough choice of voting for 
that new reform at that time that we are currently living under 
today. You have spoken to it already, Dr. Saving, as it relates 
to the impact on revenue and the programs that were made 
available at that time.
    You are suggesting that the tax necessary to fund the 
deficit or the reality of what you are looking at is not a move 
from 12 to 18 but a move ultimately from 12 to over 20 percent. 
Is that correct?
    Mr. Saving. That is correct. It is going to take that to do 
it, and I think that is what happened in 1983--and I think Pat 
Moynihan, who I worked with on the Commission and had a great 
deal of respect. He was a wonderful guy, and, of course, you 
knew Pat.
    The Chairman. Absolutely.
    Mr. Saving. Wonderful person. But he recognized by 1990 
that the approach taken in 1983 wasn't right because what was 
going to happen was there was no way for Congress or the 
Government to protect the excess revenue, because there was no 
real way to invest it. That was the real problem with it.
    It led us down the path where even where, we are now, we 
look at the trust fund as if it is something real, because it 
was generated by this tax revenue that was there to help the 
system, presumably, but never really invested. I think it is a 
problem, and that is why, when one of the things that we 
produce as Trustees--and I was not going to mention this here, 
but it is something we call the actuarial deficit; that is, 
what is the immediate change in taxes which would solve the 
problem of the system? We do that in two ways now. One of them 
is the perpetuity one, if you say; if we immediately raise 
taxes 4 percentage points over what they are now, we would 
permanently solve the problem. But that would only be true if 
we really took the surpluses and invested them in factories. 
Because if we do not invest them in factories, all we have done 
is to raise taxes and spending somewhere.
    The Chairman. You ultimately have fed the general fund of 
the U.S. Treasury.
    Mr. Saving. Exactly, which funds the current people in the 
world, but not the future. To fund the future requires that we 
build factories. If we do not do that, we have not funded the 
future. There is no real way to fund the future other than 
that. It may be possible for Government to do that, but we 
recognize that it is very difficult. I think the Senate in 
1998, when they voted unanimously that they would not support 
something like that, recognized the difficulties--not that it 
cannot be done, but that it is difficult in the political 
system to do it. That is what private accounts were like. Or 
another way to do it independent of that, and I don't know the 
answer to that. But it does require--and when I speak to young 
people--and I do that a lot, obviously, on a university 
faculty, and they are the age of Brad. When you speak to them, 
of course, at that age most of them assume they are immortal so 
they are never going to be old. By the time I am done, I am 
pointing to this chart----
    The Chairman. Well, let the record show they will get old. 
All right?
    Mr. Saving. They will get old, yes.
    The Chairman. Let's establish that fact here.
    Mr. Saving. I say, Look, this isn't about--``You think this 
is about old people,'' I say. ``It is not. I am going to get 
mine. This is about you because these are the taxes that you 
are going to have to pay. So the reform in Social Security is 
about you, not about old people.'' It is about young people.
    The Chairman. Well, let's talk about----
    Mr. Saving. It is nice to see that Brad and his group 
recognize that.
    The Chairman. Let's talk about that for just a little bit, 
because I have been through one of the most significant reforms 
in Social Security, and you have just spoken to it. In all 
instances, reforms have been a combination of two things: 
usually a reduction in overall benefits and increases in 
revenues through taxation. Of course, you have run into the 
biggest frustration of a major tax increase flowing into the 
treasury, therefore, being used up until it is needed for other 
purposes and that kind of negative obligation, if you will, 
resulting. That is what Congress, I think--that is what people 
like myself and others, and that is what I hope Brad and his 
group are wrestling with at this moment. Are there other ways 
to reform it? Of course, I am one of those who believes you can 
begin to cause people to look at a portion of their revenue, 
their taxes into individualized accounts that change the 
character of the system.
    Visit with us a little bit about those thoughts in your 
mind, because I am one of those that will no longer accept the 
standard form of adjusting the system. I don't think it is 
viable anymore.
    Mr. Saving. Well, I think step one of that is the point 
that I made earlier. The only way to transfer resources from 
the present to the future is with factories. That, in effect, 
is what individuals saving for their retirement do. In effect, 
they build factories so that when they retire, they are going 
to be able to sell to the younger generation, in effect. The 
younger generation is going to be willing to pay for them and 
to consume less. Because ultimately all we have to work with is 
the gross domestic product of the country. When retirees 
consume more of it, there is less of it for the younger 
generation.
    So, part one of the whole thing is to get rid of this $11.9 
trillion debt. Again, it comes back to that issue. If we are 
going to have young people save more, they have to consume 
less. The only way to increase the capital stock of the country 
in any year, since we only have a fixed amount of gross 
domestic product, if investment is going to be bigger, 
consumption has to be smaller. We have to let people know that, 
yes, consumption is going to be smaller, but the benefits of 
the smaller consumption are going to more than compensate you 
for the fact you get smaller consumption. That is what 
investment means. Whenever you put money in your savings 
accounts or you invest, you consume less.
    The Chairman. Brad, do you agree with that?
    Mr. Smith. Yes.
    The Chairman. Please go forward on that, because you and 
your group have thought of a variety of ideas. Obviously, you 
have mentioned five approaches or a five-point approach.
    Mr. Smith. Right.
    The Chairman. Does it incorporate some of what Dr. Saving 
has just mentioned?
    Mr. Smith. It does incorporate some of what Dr. Savings 
mentioned. The only way we can really fix the Social Security 
system is by consuming less now and looking at how we can use 
the money we have now to ensure ourselves a secure financial 
future. I believe that the answer to the Social Security crisis 
does have to be some form of investment, and that does mean 
reducing our consumption now or adjusting how we distribute 
benefits to the elderly generation now or just looking at 
different possibilities for the way to do that. But I do think 
that it does require some form of investment in capital and in 
the future.
    The Chairman. Historically, we have reached out into the 
future and adjusted in time slots that actuarially fit the 
trust funds. One of the things that I have heard constantly in 
my life as a public person--and I hear it from my parents, but 
I also hear it from a chorus of other seniors, and my parents 
are now in their mid-80's. They were notched babies or notch 
babies. Somehow, somebody else before them got more than they 
are getting, and that is inequitable, when, in fact, it was a 
Congress making a decision as the Board of Directors of Social 
Security in making those adjustments to fit the cash-flow in 
part.
    I reference that as a point of interest because if I have 
heard it once, the chorus has been loud, and there have been 
numerous efforts on the part of Congress to make adjustments in 
the notch.
    Mr. Saving. Yes. One of the interesting things about it--
one of my brothers is a notch baby. I heard about this all the 
time. I spoke to him yesterday----
    The Chairman. Were you ever able to effectively----
    Mr. Saving. I said I am going to Washington to testify 
before the Senate Committee on Aging. He had two comments. He 
said first, ``Tell them don't age.'' But the second thing is--
and he is always wanting to get me to impose upon you, ``Fix 
this notch thing.'' But the other issue is----
    The Chairman. Well, let me ask this question of you first, 
though. Have you ever been able to convince him of how the 
notch came about and that it was equitable at the time?
    Mr. Saving. Well, you know the answer to that. [Laughter.]
    You aren't going to convince him of that.
    The Chairman. But you are an economist. I am just a lowly 
politician. I have never been able to pull it off.
    Mr. Saving. You would be better at that than I would, 
though. But what is interesting is I gave him a piece of 
research that came out of the National Bureau of Economic 
Research recently that suggested that the notch babies have 
benefited from the fact that they got smaller Social Security 
benefits because they worked longer and have lived longer. When 
I tell my brother that he is lucky he was a notch baby, he does 
not buy that either.
    But the thing that you had the GAO do here points very 
clearly at the impact of that approach, which creates several 
notches. As we know, politically, as you know, notches are not 
good. From that perspective it is clear that we can't just let 
the system go on the way it is, because it is going to re-
create these notches. But also, I think that the points that 
were made here that the transfer is really not any different 
after the trust fund expires than it was before, the real 
problem is to deal with the deficits and forget the trust fund. 
But, again, anytime you compare any proposal to reform Social 
Security, you have to say: What is it if we don't do it? I am 
very pleased that you had GAO do this, because it is important 
for us to say these are the things that will happen if we don't 
do anything.
    But I want to emphasize that here are the transfers that 
we--in order to even make that happen, this is the money we are 
going to have to raise and transfer to Social Security, even to 
make the so-called ``do nothing'' thing happen. It is going to 
be very expensive to, so to speak do nothing. It is important 
for us to say--and one of the things on the Commission we were 
always faced with, people would say this is expensive and let's 
do something else, and we would say, well, show us where you 
are going to find the money to do what you are talking about. 
That is the issue.
    The other side always would simply have a better idea, but 
never tell you how they are going to fund it. That is 
important. I think that is why I like very much what you have 
done here.
    The Chairman. Well, thank you very much for that statement.
    Brad, I am going to give you the chance to have the last 
word.
    Mr. Smith. Well, I think the last word has to be reform and 
reform now. There are tons of ways--great people have looked at 
lots of different ways to reform the system. I think Pride of 
Retirement Council have a great way to reform the system. But I 
think there are other good ways on the table. We need to reform 
the system now in order to ensure that my generation has 
financial security in our retirements. My generation will make 
the necessary investment to secure our futures and I hope that 
your generation will assist us in this process.
    The Chairman. Words well spoken. Thank you.
    The committee will stand adjourned.
    [Whereupon, at 11:32 a.m., the committee was adjourned.]


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