[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]



 
                     THE FUTURE OF SOCIAL SECURITY

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 9, 2005

                               __________

                           Serial No. 109-12

                               __________

         Printed for the use of the Committee on Ways and Means








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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

E. CLAY SHAW, JR., Florida           CHARLES B. RANGEL, New York
NANCY L. JOHNSON, Connecticut        FORTNEY PETE STARK, California
WALLY HERGER, California             SANDER M. LEVIN, Michigan
JIM MCCRERY, Louisiana               BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan                  JIM MCDERMOTT, Washington
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
ROB PORTMAN, Ohio                    WILLIAM J. JEFFERSON, Louisiana
PHIL ENGLISH, Pennsylvania           JOHN S. TANNER, Tennessee
J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
JERRY WELLER, Illinois               LLOYD DOGGETT, Texas
KENNY C. HULSHOF, Missouri           EARL POMEROY, North Dakota
SCOTT MCINNIS, Colorado              STEPHANIE TUBBS JONES, Ohio
RON LEWIS, Kentucky                  MIKE THOMPSON, California
MARK FOLEY, Florida                  JOHN B. LARSON, Connecticut
KEVIN BRADY, Texas                   RAHM EMANUEL, Illinois
THOMAS M. REYNOLDS, New York
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.
















                            C O N T E N T S

                               __________

                                                                   Page

Advisory of March 9, 2005 announcing the hearing.................     2

                                WITNESS

U.S. government Accountability Office, Hon. David Walker, 
  Comptroller General............................................     7

                                 ______

Social Security and Medicare Trust Funds, John L. Palmer, Ph.D., 
  Public Trustee.................................................    76
Social Security and Medicare Trust Funds, Thomas R. Saving, 
  Ph.D., Public Trustee..........................................    80

                       SUBMISSIONS FOR THE RECORD

American Federation of Labor-Congress of Industrial 
  Organizations, Gerald M. Shea, statement.......................    91
Bratman, Stephen, San Diego, CA, letter and attachment...........    94
Everett, Judy and Bobby Lee, Selma, TX, joint statement..........    95
Executive Intelligence Review, Leesburg, VA, Paul B. Gallagher, 
  statement and attachment.......................................    95
Freeding, Joellen, Algonquin, IL, letter.........................   103
Fronek, Don Karel, Toney, AL, statement..........................   103
Human Rights Campaign, Lara Schwartz, statement..................   104
John Wood Community College Annuitant Association, Quincy, IL, 
  John Gebhardt, statement.......................................   105
National Committee to Preserve Social Security and Medicare, 
  Barbara B. Kennelly, statement.................................   105
Plett, Monica, and Barry Wauligman, Cincinnati, OH, statement....   106
Social Security Advisory Board, Hal Daub, statement..............   108















                     THE FUTURE OF SOCIAL SECURITY

                              ----------                              


                        WEDNESDAY, MARCH 9, 2005

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 10:45 a.m., in 
room 1100 Longworth House Office Building, Hon. Bill Thomas 
(Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
March 09, 2005
FC-4

                      Thomas Announces Hearing on

                     the Future of Social Security

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
the future of Social Security. The hearing will take place on 
Wednesday, March 9, 2005, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 10:30 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 
Witnesses will include U.S. Comptroller General David M. Walker, and 
Social Security Trustees Thomas R. Saving and John L. Palmer. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    The Social Security Trustees reported in their 2004 report that 
while Social Security is currently running an annual surplus, Social 
Security's annual costs are projected to exceed its tax income starting 
in 2018, and the program is expected to become ``insolvent (i.e., 
unable to pay scheduled benefits in full on a timely basis)'' when the 
trust funds' balances are exhausted in 2042. According to the Trustees, 
Social Security's cash flow deficits and the subsequent depletion of 
the trust funds are expected to have important economic and public 
policy implications, as within a little more than a decade, the 
government must increase taxes, reduce other spending, or borrow to 
raise cash to honor obligations to the trust funds and pay promised 
benefits.
      
    In announcing the hearing, Chairman Thomas said, ``We stand at a 
critical crossroads in shaping the retirement security of all 
Americans, especially since the Baby Boomers begin retiring just three 
short years from now. To ensure Social Security meets its promise to 
all, President Bush has challenged Congress to update the program to 
offer greater prosperity to future generations. As we discuss how to 
meet the needs of an aging society, we will examine Social Security's 
financial challenges and also consider ways to protect pensions, 
enhance personal savings and improve long term care options.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on Social Security's financial outlook, why 
Social Security faces problems, and the importance of acting soon to 
restore the program's solvency in the context of the Federal budget, 
the economy, and the impact on today's workers and future 
beneficiaries.
      

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FORMATTING REQUIREMENTS:

      
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noted above.

                                 

    Chairman THOMAS. I want to welcome you all. I am pleased 
today's panelists, the U.S. government Accountability Office 
Comptroller General David Walker and two Public Trustees of the 
Social Security and Medicare Trust Fund, Mr. John Palmer and 
Thomas Saving, will be at this first hearing on the future of 
Social Security. This is the Committee that is responsible for 
dealing with a trust fund, normally referred to as Social 
Security, and in reviewing the history, I realized that the 
last time that the Committee handled this with any degree of 
specificity was 1983. On the Committee on Ways and Means panel 
in the 98th Congress were three Members who are still on the 
Committee today, to my left, the gentleman from New York, Mr. 
Rangel, and to his left, the gentleman from California, Mr. 
Stark, and the Chairman. Of the three, one of us were on the 
Subcommittee on Social Security, which in great detail examined 
options. That Subcommittee on Social Security was chaired by 
J.J. ``Jake'' Pickle of Texas. Jake Pickle had been a driver 
for Lyndon Baines Johnson and eventually succeeded Lyndon 
Baines Johnson in the House of Representatives in Lyndon Baines 
Johnson's old district. The other primary Democrat who had been 
involved in structuring the debate on the floor of the House 
was Senator Claude Pepper, who was a Member of the House of 
Representatives but had served in a long and distinguished 
career in the U.S. Senate and was a U.S. Senator in 1936.
    The point I am clearly making is that this very important 
fundamental safety net program, not having been reviewed for 
more than 20 years, is being looked at by a Committee that has 
not had significant experience in legislating in the area. It 
seems to me that when you have that kind of a time gap, what 
you ought to do is to pretty much begin at the beginning, as 
they say, and talk about what the program is, what the program 
looked like, what the program looks like, and what the program 
will look like. Clearly, the current program, because the 
American population has changed, is not sustainable based upon 
the old method of financing. President Bush is clearly 
committed to strengthening Social Security and has agreed to 
expend significant time and energy with the American people so 
that there will be a receptive audience when this Committee 
examines options to change the system. I do want to remind 
Members as we move forward that retirement security in an aging 
society does not depend on Social Security alone. Personal 
savings, pensions, health care, especially long-term and 
chronic care, each play an essential role in helping seniors 
meet their needs.
    The President's leadership, however, has given us a unique 
opportunity to assess government institutions that worked and 
will not work in the near future, and it has given this 
Committee an opportunity to examine a number of other issues 
that probably would not be able to be examined in the manner 
the Chair hopes that we examine them if the President hadn't 
gone out front on Social Security issues. The Nation's 
population or the demographic patterns have changed. Labor 
force, economy, length of employment at particular locations, 
family structures have all changed over the last five decades 
and have continued to change over the last two. This 
reexamination of the government's commitment to an aging 
society and seniors is essential and the government faces 
unprecedented challenges in meeting the needs of this new and 
different society. The Chair looks forward to working with all 
Members as they present ideas to help us with this daunting 
task, and the Chair recognizes the gentleman from New York, Mr. 
Rangel, for any opening statement he may wish to make.
    Mr. RANGEL. Thank you, Mr. Chairman. I know the Chairman 
will agree with me that tackling this very complex legislative 
and social problem demands and screams out for bipartisanship. 
It doesn't really make any difference about the sincerity of 
each side when you are about to pay out more than you are 
taking in. In order to resolve this problem, you are going to 
have to cause some political pain. The only way you can ease 
that pain and accomplish your goal is to get people that worked 
together in the past working together so the American people 
will know that it may have been a difficult political task, but 
together, in a bipartisan way, we can resolve it.
    If, Mr. Walker, you are able to testify in a way that you 
have done your job in an objective and partisan way, then we 
will then ask you the question as to why is privatization and 
the private accounts placed on the table if, in fact, it has 
little or no relationship to deal with the real problem that we 
face, and that is solvency. We cannot use these words about 
crises and bankruptcies and polarizing the young against the 
old and saying the system will not be there when you know if we 
do nothing, the system would be there, but it would be the 
fiscal irresponsible thing to do nothing.
    There are two ways to handle this, to come to the table, 
take off the one thing that doesn't deal with solvency, take it 
off the table so we can work, or to go around the country to 
political groups, 60 cities in 60 days, tightening up and 
separating our ability to work together. I know you don't deal 
with the politics of it, but I do hope that you can help us to 
overcome this hurdle we are having since private accounts will 
not be on the table if you are looking for bipartisanship. I 
would like, Mr. Chairman, to yield to Mr. Levin, who is the 
Ranking Member of the Social Security Committee.
    Mr. LEVIN. Thank you, Mr. Rangel. The topic, as we know, 
for today's hearing is ``The Future of Social Security.'' 
Recently, I had the opportunity to talk with hundreds of my 
constituents who came to townhall meetings because they felt so 
strongly about what Social Security has meant to them and their 
families. For seniors especially, but also disabled workers, 
widows, and children, Social Security has meant independence to 
live their own lives. The more they learned about President 
Bush's Social Security privatization proposals, the more 
worried they became about the future of Social Security. 
Private accounts do not address Social Security shortfall. In 
fact, they would actually make it significantly worse by 
diverting nearly $5 trillion from the trust fund over the first 
20 years of private accounts. If President's private accounts 
proposal were enacted, Social Security would experience a 
shortfall 11 years sooner, in 2031.
    Social Security's challenges are made more difficult by the 
fiscally irresponsible policies of the past 4 years, which have 
turned a $5.6 trillion projected surplus into a nearly $3 
trillion projected deficit. This year, the President's budget, 
like previous ones, proposes to borrow every penny of Social 
Security's surplus, $169 billion, to pay for other proposals in 
the budget. Democrats stand ready to address Social Security's 
long-term challenges and safeguard it for future generations, 
just as we have in the past. We cannot accept the notion that 
you safeguard Social Security by undermining it. In recent 
days, the President has taken to trying to describe his 
proposal as adding on to Social Security. Addition is the 
opposite of subtraction. We have before us today three 
witnesses that have a duty to provide factual, unbiased 
information about the solvency of Social Security. I hope and 
trust that all three of them will take that responsibility 
seriously and will particularly focus on answering two major 
questions. One, do private accounts that divert money from 
Social Security address the solvency issue? Two, how do the 
overall fiscal policies of this government affect our ability 
to meet our obligations to Social Security? Thank you.
    Chairman THOMAS. I thank the gentleman. It has been a 
pleasure----
    Mr. MCDERMOTT. Mr. Chairman? Point of information.
    Chairman THOMAS. Any additional Members who have written 
statements can be made a part of the record.
    Mr. MCDERMOTT. I just want to ask a question about the new 
equipment I see here. Where is it run from, who runs it, and 
what do we expect to see on it, and how is it going to be used 
so we understand what is going out on the television?
    Chairman THOMAS. The Chair's assumption is that any of the 
witnesses who wish to augment their written testimony, which 
will be made a part of the record, with visual charts or other 
information generated either by the General Accounting Office 
or the Social Security Actuaries will, in fact, do that----
    Mr. MCDERMOTT. Will it be shown----
    Chairman THOMAS. --in the enhancement of their 
presentation. Is the Chair's assumption correct?
    Mr. WALKER. It is, Mr. Chairman.
    Mr. MCDERMOTT. Will the same thing be shown on that screen 
at the far that is sort of at a tough angle for us as the one 
that is here? Are those two going to show the same thing?
    Chairman THOMAS. When I was growing up, they used to have 
drive-ins in which they had a different theater at each end, 
and depending on the way you parked, you could watch each 
particular movie.
    [Laughter.]
    My assumption here is that it will be the same show on each 
screen, and although that is a bigger one down there, the Chair 
believes this is a higher-resolution quality one for the 
Members.
    Mr. MCDERMOTT. That is the one for television and this is 
the one for us?
    Chairman THOMAS. These are actually both, but it is an 
assistance to the audience since we got some comments the last 
time that the angle of this particular screen did not allow the 
audience full participation in the hearing. We are trying to 
accommodate that. The Chair is resisting, as you have seen in 
some other Committee rooms, hanging televisions from various 
portions of the room.
    Mr. MCDERMOTT. Is the system----
    Chairman THOMAS. The colonial revival architecture does not 
lend itself well to plasma TV screens.
    [Laughter.]
    Mr. MCDERMOTT. May I ask one further question? You said 
last time that perhaps some day soon the minority might be able 
to use the PowerPoint operation and slip a disk in and show 
some things if we wish?
    Chairman THOMAS. The Chair is more than willing to allow 
everyone who wants to make a visual point to make a visual 
point. This is the second time the gentleman has brought it up 
in a full Committee hearing meeting. If he really wants to talk 
about it, he ought to engage the Chair when we can come in and 
talk about how the machinery works so that he can actually have 
an opportunity to do it rather than to bring it up as a 
discussion issue every time we have a full Committee meeting. 
The Chair looks forward to the gentleman contacting the 
Chairman so we can do a walk-through.
    Mr. MCDERMOTT. I will do that. Thank you.
    Mr. RANGEL. I will tell you how to reach him.
    [Laughter.]
    Chairman THOMAS. Thank you, Mr. Walker, who is the seventh 
Comptroller General of the United States. He began his 15-year 
career when he took his oath of office on November 9, 1998, 
sworn in under President Clinton. As Comptroller General, Mr. 
Walker is the Nation's chief accountability officer and head of 
the U.S. government Accountability Office, and I think he is 
one of the three very appropriate people that we would have 
before this Committee to discuss what we look like and what we 
are going to be looking like. Mr. Walker, as I said, any 
written testimony you have will be made a part of the record. 
We will incorporate any visual presentation that you make, as 
well, and you can address the Committee in any way you see fit.

    STATEMENT OF THE HONORABLE DAVID M. WALKER, COMPTROLLER 
         GENERAL, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. WALKER. Thank you, Mr. Chairman, Ranking Member Rangel, 
all Members of the full Ways and Means Committee. It is a 
pleasure and a privilege to be back before you to talk about 
the important topic of Social Security. As you know, Mr. 
Chairman, in addition to my current capacity, I also served as 
a Public Trustee of Social Security from 1990 to 1995, as well 
as Medicare, so I have been involved in this issue for many 
years. If I can, I am going to use a PowerPoint presentation to 
help, but we won't go to it immediately. Almost all of the 
material that will be shown here is in the statement. I will 
provide all of it for the record. There is only one show, for 
the record, so we won't be showing two different ones here. In 
summary, at the outset, Mr. Chairman, Social Security does not 
face an immediate crisis, but it does have a large and growing 
financing problem and it would be prudent to address it sooner 
rather than later.
    There are two broader contexts where I believe it is 
important for the Congress to keep in mind in connection with 
any related Social Security reform effort. First, Social 
Security, its financial challenge, is a subset of our Nation's 
financial and fiscal challenge. Social Security has an 
estimated unfunded commitment in current dollar terms for the 
next 75 years of $3.7 trillion, in current dollar terms. That 
compares with a roughly $43 trillion problem for our country. 
Secondly, Social Security reform should also be considered in 
the context of trends and challenges facing the private pension 
system as well as our personal savings rate, because as you 
pointed out properly, Mr. Chairman, Social Security is intended 
to be the foundation of retirement income security, but it is 
intended to be supplemented by private pensions and personal 
savings. With regard to private pensions, we have a stagnant 
private pension coverage rate--we have had for a number of 
years--and the private pension system is moving to the defined 
contribution world. Secondly, we have the lowest personal 
savings rate of any major industrialized nation on Earth. So, 
in effect, we have three deficits, a Federal budget deficit, a 
balance of trade deficit, and a savings deficit, and all are 
problems that have to be addressed. With regard to Social 
Security, the first slide, please. This represents the cash 
flows for Social Security and Medicare, and I will give you the 
key dates. Social Security is expected to run a negative cash 
flow starting in 2018. That means in that year, there is not 
enough money going to be coming in to pay benefits and expenses 
and what will have to happen is we will have to start cashing 
in some of these bonds that have accumulated over time. To cash 
in these bonds, you will either have to increase taxes, cut 
other spending, or increase the debt held by the public.
    In reality, 2008 is a sooner date that you need to be 
concerned with because in 2008, the surplus in Social Security 
will start to decline, and since Congress has for a number of 
years spent every dime of the surplus on other operating 
expenses, that means it will increasingly put additional 
pressure on the balance of the Federal budget starting in 2008. 
I might note that 2008 is the date that the first baby boomer 
is eligible for early retirement, and so the problem will 
become worse and accelerate over time. I also note for you 
here, just to give you a sense not just of Social Security but 
Medicare, and you can see it has problems, too, but I realize 
that this is not the purpose of this hearing. To put it into 
perspective, Social Security's problem is $3.7 trillion in 
current dollar terms. Medicare is $27.8 trillion in current 
dollar terms. Next one, please. The key dates, 2008, the Social 
Security surplus begins to decline. Two thousand eighteen, 
negative cash flow. Two thousand twenty-eight has a negative 
income, but frankly, that is not of significance because it is 
really just paper, adding interest on paper. There is no cash 
there. There is no economic value. Two thousand forty-two is 
the date that the Trustees estimate by their best estimate, 
intermediate assumptions, that the trust fund will become 
exhausted. In 2042, if their estimate is correct, then benefits 
will have to be cut precipitously and dramatically across the 
board by 27 percent and they will have to be cut gradually more 
as time moves on. The CBO has an alternative date based on 
different assumptions. The bottom line is, we have got a large 
and growing problem that it would be prudent to act sooner 
rather than later. Next, please.
    If you look at the numbers over 75 years or the infinite 
horizon, I have mentioned the $3.7 trillion being the 
discounted present value dollar number term. That is how much 
money you would have to have today invested at Treasury rates 
to close the gap between projected revenues and projected 
expenditures over the next 75 years. If you wanted to do it in 
perpetuity, you would have to have $10.4 trillion, and the 
reason being is because every year we drop off a positive 
year--for example, last year, we had a $151 billion surplus. 
Every year we drop off a positive year until 2018 and we add an 
increasingly negative year because of known demographic trends, 
primarily. Next, please. It would be prudent to act sooner 
rather than later for a number of reasons, which I am happy to 
get into in the Q&A session, but one of the reasons is because 
time is working against us. The sooner you act, the less 
dramatic the changes have to be made, whether it is on the 
benefit side, the income side, or a combination thereof.
    This chart demonstrates the percentage increase that would 
have to be made to either benefits, which is the blue or left-
hand side of the bar, versus the tax side, or the revenue side, 
which is the red, right-hand side of the bar, if you were to 
try to solve the problem totally on the benefits side or 
totally on the revenue side as of 2004, 2018, or 2042. You can 
see with delay, the degree of change that is necessary becomes 
more dramatic. Yet importantly, at the end of the 75-year 
period, you still have a huge problem, and so I would encourage 
you not just to look for a solution for 75 years but also to 
try to look for a solution that at the end of the 75-year 
period, your position, such that hopefully you can maintain 
solvency for the long term rather than pre-programmed to have 
to come back, which was the case in 1983. Next, please. The GAO 
has done a tremendous amount of work on Social Security reform. 
We have analyzed various proposals already. I expect we will be 
asked to analyze others. The three major elements in which we 
have analyzed them on is how do they do in financing 
sustainable solvency? How do they do in balancing adequacy and 
equity? What are the implementation and administrative 
challenges?
    Importantly, under financing sustainable solvency, one of 
the sub-elements is what do they do to improve our savings 
rate, either with regard to the government and/or individuals 
and then in the aggregate? Savings is critically important and 
we have a serious problem there. Next, please. The last two 
slides. It is important to understand where the budget has come 
from and where it is heading. Forty years ago, almost--about 43 
percent of the Federal budget was for defense. It is down to 
19. Where did the money go? Social Security, Medicare, and 
Medicaid, almost dollar for dollar. You will note 40 years ago 
we didn't have Medicare and Medicaid. It came into existence in 
1965, and it is growing a lot faster. Secondly, looking 
forward----
    Mr. MCDERMOTT. Mr. Chairman, did you skip slide number 
seven that you had in the packet, the one that says----
    Mr. WALKER. It is next. It is next, Mr. McDermott.
    Mr. MCDERMOTT. Oh, that is next?
    Mr. WALKER. I apologize. I changed the order.
    Mr. MCDERMOTT. Okay.
    Mr. WALKER. I apologize for that. It is coming next.
    Mr. MCDERMOTT. Thank you.
    Mr. WALKER. I think you are talking about the disembodiment 
chart, is what I call it, which is the--yes, that is it. Next, 
please.
    Chairman THOMAS. The gentleman will continue with his 
testimony.
    Mr. WALKER. Next, please. This shows what our potential 
fiscal future is. We have got two scenarios included in your 
testimony. This is the more serious or adverse of the two. This 
cannot be allowed to happen. Frankly, the first one is not 
acceptable, either. Under this scenario, we could be doing 
nothing more than paying interest on Federal debt in 2040 if we 
don't end up engaging in some fundamental reforms of 
entitlement programs, mandatory spending, discretionary 
spending, and tax policy, all three. All three need to be on 
the table. We have issued this report, gentleman and ladies, 
which I would respectfully suggest that if you have not read, 
it is critically important for our country, our children and 
grandchildren that you do read. It was issued within the last 
two weeks. It is on our website, www.gao.gov. It is entitled, 
``21st Century Challenges: Reexamining the Base of the 
government.''
    Basically, Mr. Chairman, as you know, and other Members, a 
significant majority of the Federal Government, both on the 
spending side and the tax side, is based upon conditions that 
existed in this country in the 1950s and sixties and has not 
been subject to fundamental review and reexamination for 21st 
century realities. It is time that we do that, and we look 
forward to working with you and other Committees to be able to 
do that in a professional, objective, fact-based, nonpartisan, 
and non-ideological manner. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Walker follows:]
 Statement of The Honorable David M. Walker, Comptroller General, U.S. 
                    Government Accountability Office
Mr. Chairman and Members of the Committee:

    I am pleased to be here today to discuss the underlying structural 
problems and long-term challenges facing the Social Security 
program.\1\ Before addressing these matters specifically, I would like 
to place these challenges in the context of the larger challenges 
facing the federal government today, which we discuss in our recently 
issued 21st Century Challenges report.\2\ There is a need to bring the 
federal government and its programs into line with 21st century 
realities. This challenge has many related pieces: addressing our 
nation's large and growing long-term fiscal gap; deciding on the 
appropriate role and size of the federal government--and how to finance 
that government--and bringing the panoply of federal activities into 
line with today's world. Continuing on our current unsustainable fiscal 
path will gradually erode, if not suddenly damage, our economy, our 
standard of living, and ultimately our national security. We therefore 
must fundamentally reexamine major spending and tax policies and 
priorities in an effort to recapture our fiscal flexibility and ensure 
that our programs and priorities respond to emerging security, social, 
economic, and environmental changes and challenges.
---------------------------------------------------------------------------
    \1\ In this statement, Social Security refers to the Old-Age and 
Survivors Insurance and Disability Insurance (OASDI) program.
    \2\ GAO, 21st Century Challenges: Reexamining the Base of the 
Federal Government, GAO-05-325SP (Washington, D.C.: February 2005).
---------------------------------------------------------------------------
    Social Security represents the foundation of retirement income for 
millions of Americans and has helped to prevent many former workers and 
their families from living their retirement years in poverty. It 
provides millions of Americans with disability insurance and survivors' 
benefits, thus, providing benefits that are critical to the current and 
future well-being of tens of millions of Americans. Fixing Social 
Security is about more than finances. It is also about maintaining an 
adequate safety net for American workers against loss of income from 
retirement, disability, or death.
    As I have said in congressional testimonies over the past several 
years, the Social Security system faces serious solvency and 
sustainability challenges in the longer term.\3\ While the Social 
Security program does not face an immediate crisis, it does have a $3.7 
trillion gap between promised and funded benefits in current dollar 
terms over the next 75 years. This gap is growing as time passes and, 
given this and other major fiscal challenges, including expected growth 
in federal health spending, it would be prudent to act sooner rather 
than later to reform the Social Security program. Failure to take steps 
to address our large and structural long-range fiscal imbalance, which 
is driven in large part by projected increases in Medicare, Medicaid, 
and Social Security spending, will ultimately have significant adverse 
consequences for our future economy and the quality of life of our 
children, grandchildren, and future generations of Americans.
---------------------------------------------------------------------------
    \3\ GAO, Budget Issues: Long-Term Fiscal Challenges, GAO-02-467T 
(Washington, D.C.: Feb. 27, 2002); Social Security: Long-Term Financing 
Shortfall Drives Need for Reform, GAO-02-845T (Washington, D.C.: June 
19, 2002); Social Security: Long-Term Challenges Warrant Early Action, 
GAO-05-303T (Washington, D.C.: Feb. 3, 2005); and Long-Term Fiscal 
Issues: The Need for Social Security Reform, GAO-05-318T (Washington, 
D.C.: Feb. 9, 2005).
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    Let me begin by highlighting a number of important points 
concerning the Social Security challenge and our broader fiscal and 
economic challenge.

      Solving Social Security's long-term financing problem is 
more important and complex than simply making the numbers add up. 
Social Security is an important and successful social insurance program 
that affects virtually every American family. It currently pays 
benefits to more than 47 million people, including retired workers, 
disabled workers, the spouses and children of retired and disabled 
workers, and the survivors of deceased workers. The number of 
individuals receiving benefits is expected to grow to almost 69 million 
by 2020. The program has been highly effective at helping to reduce the 
incidence of poverty among the elderly, and the disability and survivor 
benefits have been critical to the financial well-being of millions of 
others.
      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 
financial condition of the Social Security program. After all, the 
Social Security Trust Fund is a subaccount of the federal government 
rather than a private trust fund. Its assets are not readily marketable 
nor are they convertible into cash other than through raising revenues, 
cutting other government expenses, increasing debt held by the public, 
or some combination of these. Furthermore, the size of the trust fund 
does not tell us whether the program is sustainable--that is, whether 
the government will have the capacity to pay future claims or what else 
will have to be squeezed to pay those claims. Aiming for sustainable 
solvency would increase the chance that future policymakers would not 
have to face these difficult questions on a recurring basis. Estimates 
of what it would take to achieve 75-year trust fund solvency understate 
the extent of the problem because the program's financial imbalance 
gets worse in the 76th and subsequent years.
      Social Security reform is part of a broader fiscal and 
economic challenge. If you look ahead in the federal budget, Social 
Security together with the rapidly growing health programs (Medicare 
and Medicaid) dominate the federal government's future fiscal outlook. 
While this hearing is not about the complexities of Medicare, it is 
important to note that Medicare presents a much greater, more complex, 
and more urgent fiscal challenge than Social Security. Medicare growth 
rates reflect not only a burgeoning beneficiary population, but also 
the escalation of health care costs at rates well exceeding general 
rates of inflation. Federal and state spending for Medicaid will 
especially be stressed by anticipated growing demand for long-term care 
services by the aging baby boom population. Taken together, Social 
Security, Medicare, and Medicaid represent an unsustainable burden on 
future generations. Under the 2004 Trustees' intermediate estimates and 
the Congressional Budget Office's (CBO) long-term Medicaid estimates, 
spending for Social Security, Medicare, and Medicaid combined will grow 
from 8.5 percent of GDP today to 15.6 percent in 2030. Absent 
meaningful changes to these programs, the nation will ultimately have 
to choose among persistent, escalating federal deficits, huge tax 
increases, and/or dramatic budget cuts. Furthermore, any changes to 
Social Security should be considered in the context of the problems 
currently facing our nation's private pension system. These include the 
chronically low levels of pension coverage of the private sector 
workforce, the continued decline in the number of defined benefit plans 
coupled with the termination of large underfunded plans by bankrupt 
firms, and the shift by employers to defined contribution plans, where 
workers face the potential for greater return but also assume greater 
financial risk. Similarly, the growing demand for long-term care will 
also likely exacerbate current concerns regarding the provision and 
financing of these services. These include the potential for families 
to face the financially catastrophic costs of long-term care. In 
addition, the heavy reliance on unpaid care from family members and 
other informal caregivers already has led, in many cases, to severe 
personal burdens. This strain will likely be exacerbated, with possibly 
fewer caregivers available in the coming decades.
      Acting sooner rather than later helps to ease the 
difficulty of change. The challenge of facing the imminent and daunting 
budget pressure from Medicare, Medicaid, and Social Security increases 
over time. Social Security will begin to constrain the budget long 
before the trust fund is exhausted in 2042. The Social Security cash 
surpluses that are now helping to finance the rest of the government's 
budgetary needs will begin to decline in 2008, and by 2018, the cash 
surpluses will turn to deficits. Beginning in 2008, Social Security's 
declining cash flow will begin to place increasing pressure on the rest 
of the budget. In addition, starting in 2018, the government will have 
to either increase revenues, decrease other government spending, or 
increase debt held by the public to convert the bonds in the trust 
funds into cash in order to pay full benefits when due. Waiting until 
Social Security faces an immediate solvency crisis will limit the scope 
of feasible solutions and could reduce the options to only those 
choices that are the most difficult. It could also contribute to a 
further delay of the really tough decisions on Medicare and Medicaid. 
Acting sooner rather than later would allow changes to be more modest 
while also being phased in so that future and near-term retirees will 
have time to adjust their retirement planning. Furthermore, acting 
sooner rather than later would serve to increase our credibility with 
the markets and improve the public's confidence in the federal 
government's ability to deal with our significant long-range fiscal 
challenges before they reach crisis proportions.
      Reform proposals should be evaluated as packages. The 
elements of any reform proposal interact; every proposal will have 
pluses and minuses, and no plan will satisfy everyone on all 
dimensions. Reform elements can take a variety of shapes; examples 
include benefit reductions, like changing replacement rates, moving 
from wage to price indexation, or increasing the retirement age, 
increasing payroll taxes or the taxable wage base, and/or creating 
individual accounts. If we focus on the pros and cons of each element 
of reform by itself, we may find it impossible to build the bridges 
necessary to achieve consensus. However, any analyses of reform 
proposals should reflect the fact that the program faces a long-term 
actuarial deficit and that benefit reductions and/or revenue increases 
will be necessary to restore solvency. Therefore, it is important to 
establish the appropriate comparisons or benchmarks against which 
reforms should be measured. This requires looking at proposed reforms 
from at least two benchmarks--one that raises revenue to fund currently 
scheduled benefits (promised benefits) and one that adjusts benefits to 
a level supported by current tax financing (funded benefits). Comparing 
the benefit impact of reform proposals solely to currently scheduled 
Social Security benefits is inappropriate since all current scheduled 
benefits are not funded over the longer term.

    Failure to address the Social Security financing problem will, in 
combination with other entitlement spending, lead to an unsustainable 
burden on both the federal government and, ultimately, the economy. As 
the Congress considers proposals to restore the long-term financial 
stability and viability of the Social Security system, it will also 
need to consider the impact of the potential changes on the millions of 
Americans the system serves: specifically, the effects on different 
types of beneficiaries and the resulting implications for the adequacy 
and equity of the benefits structure. The fundamental nature of the 
program's long-term financing challenge means that timely action is 
needed. I believe it is possible to craft a solution that will protect 
Social Security benefits for the nation's current and near-term 
retirees, while ensuring that the system will be solvent, sustainable, 
and secure for future generations. I also believe that it is possible 
to exceed the expectations of all generations of Americans. In 
addition, given our overall fiscal challenge and various trends in the 
private pension and personal savings areas, I believe it would be 
prudent to act sooner rather than later to address this large and 
growing problem.
Social Security's Long-term Financing Problem Is More Urgent Than It 
        May Seem
    Today, the Social Security program faces not an immediate crisis 
but rather a long-range financing problem driven primarily by known 
demographic trends. While the crisis is not immediate, the challenge is 
more urgent than it may appear since the program will experience 
increasing negative cash flow starting in 2018. Acting soon to address 
these problems reduces the likelihood that Congress will have to choose 
between imposing severe benefit cuts and unfairly burdening future 
generations with the program's rising costs. Acting soon would also 
allow changes to be phased in so that the individuals who are most 
likely to be affected, namely younger and future workers, will have 
time to adjust their retirement planning while helping to avoid related 
``expectation gaps.'' On the other hand, failure to take remedial 
action will, in combination with other entitlement spending, lead to a 
situation unsustainable both for the federal government and, 
ultimately, the economy.
    The Social Security system has required changes in the past to 
ensure its future solvency. Indeed, the Congress has always taken the 
actions necessary to do this when faced with an immediate solvency 
crisis. While such an immediate crisis will not occur for many years, 
waiting until it is imminent would not be prudent. I would like to 
spend some time describing the nature, timing, and extent of Social 
Security's financing problem.
The Nature of Social Security's Long-Term Financing Problem
    As you all know, Social Security has always been a largely pay-as-
you-go system. This means that the system's financial condition is 
directly affected by the relative size of the populations of covered 
workers and beneficiaries. Historically, this relationship has been 
favorable to the system's financial condition. Now, however, people are 
living longer, and spending more time in retirement.
    As shown in figure 1, the U.S. elderly dependency ratio is expected 
to continue to increase.\4\ The proportion of the elderly population 
relative to the working-age population in the U.S. rose from 13 percent 
in 1950 to 19 percent in 2000. By 2050, there is projected to be almost 
1 elderly dependent for every 3 people of working age--a ratio of 32 
percent. Additionally, the average life expectancy of males at birth 
has increased from 66.6 in 1960 to 74.3 in 2000, with females at birth 
experiencing a rise of 6.6 years from 73.1 to 79.7 over the same 
period. As general life expectancy has increased in the United States, 
there has also been an increase in the number of years spent in 
retirement. Improvements in life expectancy have extended the average 
amount of time spent by workers in retirement from 11.5 years in 1950 
to 18 years for the average male worker as of 2003.
---------------------------------------------------------------------------
    \4\ The elderly dependency ratio is the ratio of the population 
aged 65 years or over to the population aged 15 to 64.
---------------------------------------------------------------------------

    Figure 1: U.S. Elderly Dependency Ratio Expected to Continue to 
                                Increase


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    A falling fertility rate is the other principal factor underlying 
the growth in the elderly's share of the population. In the 1960s, the 
fertility rate, which is the average number of children that would be 
born to women during their childbearing years, was an average of 3 
children per woman. Today it is a little over 2, and by 2030 it is 
expected to fall to 1.95--a rate that is below what it takes to 
maintain a stable population. Taken together, these trends threaten the 
financial solvency and sustainability of Social Security.
    The combination of these trends means that labor force growth will 
begin to slow after 2010 and by 2025 is expected to be less than a 
fifth of what it is today, as shown in figure 2. Relatively fewer U.S. 
workers will be available to produce the goods and services that all 
will consume. Without a major increase in productivity or immigration, 
low labor force growth will lead to slower growth in the economy and to 
slower growth of federal revenues. This in turn will only accentuate 
the overall pressure on the federal budget.

     Figure 2: Labor Force Growth Is Expected to Slow Significantly


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Note: Percentage change is calculated as a centered 5-yr moving average 
   of projections based on the intermediate assumptions of the 2004 
                           Trustees Reports.

    This slowing labor force growth has important implications for the 
Social Security system. Social Security's retirement eligibility dates 
are often the subject of discussion and debate and can have a direct 
effect on both labor force growth and the condition of the Social 
Security retirement program. It is also appropriate to consider whether 
and how changes in pension and/or other government policies could 
encourage longer workforce participation. To the extent that people 
choose to work longer as they live longer, the increase in the amount 
of time spent in retirement could be diminished. This could improve the 
finances of Social Security.
    The Social Security program's situation is one symptom of this 
larger demographic trend that will have broad and profound effects on 
our nation's future in other ways as well. The aging of the labor force 
and the reduced growth in the number of workers will have important 
implications for the size and composition of the labor force, as well 
as the characteristics of many jobs in our increasingly knowledge-based 
economy, throughout the 21st century. The U.S. workforce of the 21st 
century will be facing a very different set of opportunities and 
challenges than that of previous generations. The slowdown in labor 
force growth can have very negative effects on our nation's economic 
future, as relatively fewer workers will be producing the goods and 
services that everyone will consume. If people do choose to work longer 
this may mitigate the expected slowdown in labor force growth, which 
could strengthen the nation's economic prospects.
Cash Flow Turns Negative in 2018
    Today, the Social Security Trust Funds take in more in taxes than 
they spend. Largely because of the demographic trends I have described, 
this situation will change. Although the trustees' 2004 intermediate 
estimates project that the combined Social Security Trust Funds will be 
solvent until 2042,\5\ within the next few years, Social Security 
spending will begin to put pressure on the rest of the federal budget. 
Under the trustees' 2004 intermediate estimates, Social Security's cash 
surplus--the difference between program tax income and the costs of 
paying scheduled benefits--will begin a permanent decline in 2008. By 
2018, the program's cash flow is projected to turn negative--its tax 
income will fall below benefit payments. At that time, Social Security 
will join Medicare's Hospital Insurance Trust Fund, whose outlays 
exceeded cash income in 2004, as a net claimant on the rest of the 
federal budget. (See figure 3.)
---------------------------------------------------------------------------
    \5\ Separately, the Disability Insurance (DI) fund is projected to 
be exhausted in 2029 and the Old-Age and Survivors' Insurance (OASI) 
fund in 2044. Using slightly different economic assumptions and model 
specifications, CBO estimated the combined Social Security trust fund 
will be solvent until 2052. See Congressional Budget Office, The 
Outlook for Social Security (Washington, D.C.: June 2004) and Updated 
Long-Term Projections for Social Security (Washington, D.C.: January 
2005).
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Figure 3: Social Security and Medicare's Hospital Insurance Trust Funds 
                           Face Cash Deficits


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    In 2018, the combined OASDI Trust Funds will begin drawing on its 
Treasury securities to cover the cash shortfall.\6\ At this point, 
Treasury will need to obtain cash for these redeemed securities either 
through increased taxes, spending cuts, and/or more borrowing from the 
public than would have been the case had Social Security's cash flow 
remained positive. Whatever the means of financing, the shift from 
positive to negative cash flow will place increased pressure on the 
federal budget to raise the resources necessary to meet the program's 
ongoing costs.
---------------------------------------------------------------------------
    \6\ CBO estimates that OASDI cash flow will turn negative in 2020.
---------------------------------------------------------------------------
Different Measures but Same Challenges and Same Conclusion
    There are different ways to describe the magnitude of Social 
Security's long-term financing challenge, but they all illustrate a 
need for program reform sooner rather than later. A case can be made 
for a range of different measures, as well as different time horizons. 
For instance, the shortfall can be measured in present value, as a 
percentage of GDP, or as a percentage of taxable payroll. The Social 
Security Administration (SSA) has made projections of Social Security 
shortfall using different time horizons. (See table 1.)

                                   Table 1: Different Measures, Same Challenge
----------------------------------------------------------------------------------------------------------------
                                                            SSA's Projections of Unfunded OASDI Obligations
                 Projection Horizon                  -----------------------------------------------------------
                                                         Present value      Percent of GDP    Percent of payroll
----------------------------------------------------------------------------------------------------------------
75 year                                                   $3.7 Trillion                0.7%                1.8%
----------------------------------------------------------------------------------------------------------------
Infinite horizon                                         $10.4 Trillion                1.2%                3.5%
----------------------------------------------------------------------------------------------------------------
Sources: Social Security Administration, The 2004 Annual Report of the Board of Trustees of the Federal Old-Age
  and Survivors Insurance and Disability Insurance Trust Funds. Washington, D.C., March 2004.

    While the estimates vary due to different horizons, both identify 
the same long-term challenge: The Social Security system is 
unsustainable in its present form over the long run. Taking action soon 
on Social Security would not only make the necessary action less 
dramatic than if we wait but would also promote increased budgetary 
flexibility in the future and stronger economic growth. Some of the 
benefits of early action--and the costs of delay--can be seen in figure 
4. This figure compares what it would take to keep Social Security 
solvent through 2078, if action were taken at three different points in 
time, by either raising payroll taxes or reducing benefits. If we did 
nothing until 2042--the year SSA estimates the Trust Funds will be 
exhausted--achieving actuarial balance would require changes in 
benefits of 30 percent or changes in taxes of 43 percent for the period 
2042-2078. As figure 4 shows, earlier action shrinks the size of the 
necessary adjustment. However, these changes do not achieve sustainable 
solvency, they only achieve solvency through 2078.

  Figure 4: Size of Action Needed to Achieve Social Security Solvency


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

 Note: This is based on the intermediate assumptions of the2004 Social 
    Security Trustees Report. The benefit adjustments in this graph 
   represent a one-time, permanent change to all existing and future 
benefits beginning January 1st of the first year indicated to December 
                               31, 2078.

Social Security Reform is Part of a Broader Fiscal and Economic 
        Challenge
    As I have already discussed, reducing the relative future burdens 
of Social Security and health programs is essential to a sustainable 
budget policy for the longer term. It is also critical if we are to 
avoid putting unsupportable financial pressures on Americans in the 
future. Reforming Social Security and health programs is essential to 
reclaiming our future fiscal flexibility to address other national 
priorities.
    Changes in the composition of federal spending over the past 
several decades have reduced budgetary flexibility, and our current 
fiscal path will reduce it even further. During this time, spending on 
mandatory programs has consumed an ever-increasing share of the federal 
budget. In 1964, prior to the creation of the Medicare and Medicaid 
programs, spending for mandatory programs plus net interest accounted 
for about 33 percent of total federal spending. By 2004, this share had 
almost doubled to approximately 61 percent of the budget.
    GAO's long-term simulations illustrate the magnitude of the fiscal 
challenges associated with an aging society and the significance of the 
related challenges the government will be called upon to address. 
Figures 5 and 6 present these simulations under two different sets of 
assumptions. In figure 5, we begin with CBO's January baseline--
constructed according to the statutory requirements for that 
baseline.\7\ Consistent with these requirements, discretionary spending 
is assumed to grow with inflation for the first 10 years and tax cuts 
scheduled to expire are assumed to expire. After 2015, discretionary 
spending is assumed to grow with the economy, and revenue is held 
constant as a share of GDP at the 2015 level. In figure 6 two 
assumptions are changed: discretionary spending is assumed to grow with 
the economy after 2005 rather than merely with inflation and the tax 
cuts are extended. For both simulations Social Security and Medicare 
spending is based on the 2004 Trustees' intermediate projections, and 
we assume that benefits continue to be paid in full after the trust 
funds are exhausted. Medicaid spending is based on CBO's December 2003 
long-term projections under mid-range assumptions.
---------------------------------------------------------------------------
    \7\ The Congressional Budget Office, The Budget and Economic 
Outlook: Fiscal Years 2006 to 2015, (Washington, D.C.: January 2005).
---------------------------------------------------------------------------

Figure 5: Composition of Spending as a Share of Gross Domestic Product 
(GDP) Assuming Discretionary Spending Grows with GDP after 2005 and All 
                        Existing Tax Cuts Expire

[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Notes: In addition to the expiration of tax cuts, revenue as a share of 
  GDP increases through 2015 due to (1) real bracket creep, (2) more 
 taxpayers becoming subject to the AMT, and (3) increased revenue from 
tax-deferred retirement accounts. After 2015, revenue as a share of GDP 
                           is held constant.

     Figure 6: Composition of Spending as a Share of GDP Assuming 
 Discretionary Spending Grows with GDP after 2005 and All Expiring Tax 
                        Provisions Are Extended


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

  Notes: Although expiring tax provisions are extended, revenue as a 
share of GDP increases through 2015 due to (1) real bracket creep, (2) 
 more taxpayers becoming subject to the AMT, and (3) increased revenue 
 from tax-deferred retirement accounts. After 2015, revenue as a share 
                        of GDP is held constant.

    Both these simulations illustrate that, absent policy changes, the 
growth in spending on federal retirement and health entitlements will 
encumber an escalating share of the government's resources. Indeed, 
when we assume that recent tax reductions are made permanent and 
discretionary spending keeps pace with the economy, our long-term 
simulations suggest that by 2040 federal revenues may be adequate to 
pay little more than interest on the federal debt. Neither slowing the 
growth in discretionary spending nor allowing the tax provisions to 
expire--nor both together--would eliminate the imbalance. Although 
revenues will be part of the debate about our fiscal future, the 
failure to reform Social Security, Medicare, Medicaid, and other 
drivers of the long term fiscal gap would require at least a doubling 
of taxes--and that seems implausible. Accordingly, substantive reform 
of Social Security and our major health programs remains critical to 
recapturing our future fiscal flexibility.
    Alternatively, taking action soon on Social Security would not only 
promote increased budgetary flexibility in the future and stronger 
economic growth but would also make the necessary action less dramatic 
than if we wait. Indeed, long-term budget flexibility is about more 
than Social Security and Medicare. While these programs dominate the 
long-term outlook, they are not the only federal programs or activities 
that bind the future. The federal government undertakes a wide range of 
programs, responsibilities, and activities that obligate it to future 
spending or create an expectation for spending. GAO has described the 
range and measurement of such fiscal exposures--from explicit 
liabilities such as environmental cleanup requirements to the more 
implicit obligations presented by life-cycle costs of capital 
acquisition or disaster assistance.\8\ Making government face and 
address the challenges of the future will require not only dealing with 
the drivers--entitlements for the elderly--but also looking at the 
range of federal activities. A fundamental review of what the federal 
government does, how it does it, and how it finances its operations is 
both needed and overdue.
---------------------------------------------------------------------------
    \8\ GAO, Fiscal Exposures: Improving the Budgetary Focus on Long-
Term Costs and Uncertainties, GAO-03-213 (Washington, D.C.: Jan 24, 
2003).
---------------------------------------------------------------------------
    Also, at the same time it is important to look beyond the federal 
budget to the economy as a whole. Under the 2004 Trustees' intermediate 
estimates and CBO's long-term Medicaid estimates, spending for Social 
Security, Medicare, and Medicaid combined will grow to 15.6 percent of 
GDP in 2030 from today's 8.5 percent. (See figure 7.) Taken together, 
Social Security, Medicare, and Medicaid represent an unsustainable 
burden on future generations of Americans.

    Figure 7: Social Security, Medicare, and Medicaid Spending as a 
                           Percentage of GDP


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

      Note: Social Security and Medicare projections based on the 
   intermediate assumptions of the 2004 Trustees' Reports. Medicaid 
 projections based on CBO's January 2005 short-term Medicaid estimates 
and CBO's December 2003 long-term Medicaid projections under mid-range 
                              assumptions.

    The government can help ease future fiscal burdens through spending 
or revenue actions that reduce debt held by the public, thereby saving 
for the future and enhancing the pool of economic resources available 
for private investment and long-term growth. Economic growth can help, 
but given the size of our projected fiscal gap we will not be able to 
simply grow our way out of the problem. Closing the current long-term 
fiscal gap would require sustained economic growth far beyond that 
experienced in U.S. economic history since World War II. Tough choices 
are inevitable, and the sooner we act, the better.
Considerations in Assessing Reform Options
    As important as financial stability may be for Social Security, it 
cannot be the only consideration. As a former public trustee of Social 
Security and Medicare, I am well aware of the central role these 
programs play in the lives of millions of Americans. Social Security 
remains the foundation of the nation's retirement system. It is also 
much more than just a retirement program; it pays benefits to disabled 
workers and their dependents, spouses and children of retired workers, 
and survivors of deceased workers. In 2004, Social Security paid almost 
$493 billion in benefits to more than 47 million people. Since its 
inception, the program has successfully reduced poverty among the 
elderly. In 1959, 35 percent of the elderly were poor. In 2000, about 8 
percent of beneficiaries aged 65 or older were poor, and 48 percent 
would have been poor without Social Security. Because the program is so 
deeply woven into the fabric of our nation, any proposed reform must 
consider the program in its entirety, rather than one aspect alone. To 
assist policymakers, GAO has developed a broad framework for evaluating 
reform proposals that considers solvency as well as other aspects of 
the program. Our criteria aim to balance financial and economic 
considerations with benefit adequacy and equity issues and the 
administrative challenges associated with various proposals.
GAO Framework For Evaluating Reform Proposals
    GAO developed an analytic framework to assess reform proposals 
using three basic criteria:

      Financing Sustainable Solvency--the extent to which a 
proposal achieves sustainable solvency and how it would affect the 
economy, the federal budget, and national saving. Our sustainable 
solvency standard encompasses several different ways of looking at the 
Social Security program's financing needs. While a 75-year actuarial 
balance has generally been used in evaluating the long-term financial 
outlook of the Social Security program and reform proposals, it is not 
sufficient in gauging the program's solvency after the 75th year. For 
example, under the trustees' intermediate assumptions, each year the 
75-year actuarial period changes, and a year with a surplus is replaced 
by a new 75th year that has a significant deficit. As a result, changes 
made to restore trust fund solvency only for the 75-year period can 
result in future actuarial imbalances almost immediately. Reform plans 
that lead to sustainable solvency would be those that consider the 
broader issues of fiscal sustainability and affordability over the long 
term. Specifically, a standard of sustainable solvency also involves 
looking at (1) the balance between program income and costs beyond the 
75th year and (2) the share of the budget and economy consumed by 
Social Security spending.
      Balancing Adequacy and Equity--the relative balance 
struck between the goals of individual equity and income adequacy. The 
current Social Security system's benefit structure attempts to strike a 
balance between these two goals. From the beginning, Social Security 
benefits were set in a way that focused especially on replacing some 
portion of workers' preretirement earnings. Over time other changes 
were made that were intended to enhance the program's role in helping 
ensure adequate incomes. Retirement income adequacy, therefore, is 
addressed in part through the program's progressive benefit structure, 
providing proportionately larger benefits to lower earners and certain 
household types, such as those with dependents. Individual equity 
refers to the relationship between contributions made and benefits 
received. This can be thought of as the rate of return on individual 
contributions. Balancing these seemingly conflicting objectives through 
the political process has resulted in the design of the current Social 
Security program and should still be taken into account in any proposed 
reforms.
      Implementing and Administering Proposed Reforms--how 
readily a proposal could be implemented, administered, and explained to 
the public. Program complexity makes implementation and administration 
both more difficult and harder to explain. Some degree of 
implementation and administrative complexity arises in virtually all 
proposed changes to Social Security, even those that make incremental 
changes in the already existing structure. While these issues may seem 
technical or routine on the surface, they are important. In particular, 
if these issues are not considered early enough for planning purposes, 
they could potential delay--if not derail--reform. Moreover, issues 
such as feasibility and cost can, and should, influence policy choices. 
Continued public acceptance of and confidence in the Social Security 
program require that any reforms and their implications for benefits be 
well understood. This means that the American people must understand 
why change is necessary, what the reforms are, why they are needed, how 
they are to be implemented and administered, and how they will affect 
their own retirement income. All reform proposals will require some 
additional outreach to the public so that future beneficiaries can 
adjust their retirement planning accordingly. The more transparent the 
implementation and administration of reform, and the more carefully 
such reform is phased in, the more likely it will be understood and 
accepted by the American people.

    The weight that different policymakers place on different criteria 
will vary, depending on how they value different attributes. For 
example, if offering individual choice and control is less important 
than maintaining replacement rates for low-income workers, then a 
reform proposal emphasizing adequacy considerations might be preferred. 
As they fashion a comprehensive proposal, however, policymakers will 
ultimately have to balance the relative importance they place on each 
of these criteria. As we have noted in the past, a comprehensive 
evaluation is needed that considers a range of effects together. 
Focusing on comprehensive packages of reforms will enable us to foster 
credibility and acceptance. This will help us avoid getting mired in 
the details and losing sight of important interactive effects. It will 
help build the bridges necessary to achieve consensus.
    One issue that often arises within the Social Security debate 
concerns the appropriate comparisons or benchmarks to be used when 
assessing a particular proposal. While this issue may seem to be 
somewhat abstract, it has critical implications, for depending on the 
comparisons chosen, a proposal can be made more or less attractive. 
Some analyses compare proposals to a single benchmark and as a result 
can lead to incomplete or misleading conclusions. For that reason, GAO 
has used several benchmarks in assessing reform proposals.\9\ Currently 
promised benefits are not fully financed, and so any analysis that 
seeks to fairly evaluate reform proposals should include comparisons to 
benchmarks that reflect a policy of an adequately financed system. 
Similarly, it is important to have benchmarks that are consistent with 
each other. Using one that relies on action relatively soon versus one 
that posits no action at all are not consistent and could also lead to 
misleading conclusions. Estimating future effects on Social Security 
benefits should reflect the fact that the program faces a long-term 
actuarial deficit and that conscious policies of benefit reduction and/
or revenue increases will be necessary to restore solvency and sustain 
it over time.
---------------------------------------------------------------------------
    \9\ GAO, Social Security Reform: Analysis of Reform Models 
Developed by the President's Commission to Strengthen Social Security, 
GAO-03-310 (Washington, D.C.: Jan 15, 2003).
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Reform's Potential Effects on the Social Security Program
    A variety of proposals have been offered to address Social 
Security's financial problems. Some of these proposals work within the 
current structure of Social Security and others would restructure the 
program. For instance, many proposals contain reforms that would alter 
benefits or revenues within the structure of the current defined 
benefits system. Also, a number of proposals seek to restructure the 
program through the creation of individual accounts. The discussion 
about examples of reform in this section are meant for illustrative 
purposes, and are by no means intended to be exhaustive of all the 
reform options proposed or the issues related to these approaches.
    Some proposals would reduce benefits relative to scheduled benefits 
by modifying the benefit formula. For example, increasing the number of 
years used to calculate benefits or using price-indexing instead of 
wage-indexing would reduce the benefits individuals receive. Since 
wages generally grow faster than prices, indexing earnings to prices 
rather than wages would reduce the measure of average lifetime earnings 
used in the formula--reducing benefits. Changing the number of working 
years used to calculate benefits to include more than the highest 35 
years of earnings would reduce the average lifetime earnings; thus, 
reducing benefits as compared to current levels. Other proposals 
include options to reduce cost-of-living adjustments (COLA) by lowering 
the COLA to less than the CPI, limiting the COLA to a specified 
threshold, or delaying the COLA; to raise the normal and/or early 
retirement ages or to reduce benefits more for workers who retire 
before the full retirement age; and to revise dependent benefits. Some 
of the proposals also include measures or benefit changes that seek to 
strengthen progressivity (e.g., replacement rates) in an effort to 
mitigate the effect on low-income workers.
    Others have proposed options that would provide revenue increases. 
For example, raising the payroll tax or expanding the Social Security 
taxable wage base that finances the system would result in more revenue 
coming into the system. In 2005, earnings above $90,000 are not subject 
to payroll taxes. If the cap were raised and the benefit formula 
remained the same, workers with earnings above the old cap would 
ultimately receive somewhat higher benefits as well as pay more taxes. 
Other options to increase revenues include increasing the taxation of 
benefits or covering those few remaining workers not currently required 
to participate in Social Security, such as some state and local 
government employees, although such new participants would increase 
future spending commitments as well. In addition to these proposals, 
Social Security can obtain revenues from sources outside of the 
program, such as by increasing the investment returns on Social 
Security holdings or by earmarking revenue from estate taxes or other 
sources.
    A number of proposals also seek to restructure the program through 
the creation of individual accounts. Under a system of individual 
accounts, workers would manage a portion of their own Social Security 
contributions to varying degrees. This would expose workers to a 
greater degree of risk in return for both greater individual choice in 
retirement investments and the possibility of a higher rate of return 
on contributions than available under current law. There are many 
different ways that an individual account system could be set up. For 
example, contributions to individual accounts could be mandatory or 
they could be voluntary. Proposals also differ in the manner in which 
accounts would be financed, the extent of choice and flexibility 
concerning investment options, the way in which benefits are paid out, 
and the way the accounts would interact with the existing Social 
Security program--individual accounts could serve either as an addition 
to or as a replacement for part of the current benefit structure.
    In addition, the timing and impact of individual accounts on the 
solvency, sustainability, adequacy, equity, net savings, and rate of 
return associated with the Social Security system varies depending on 
the structure of the total reform package. Individual accounts by 
themselves will not lead the system to sustainable solvency--an 
increase in revenue, a decrease in benefits, or both will also be 
necessary. Furthermore, incorporating a system of individual accounts 
may involve significant transition costs. These costs come about 
because the Social Security system would have to continue paying out 
benefits to current and near-term retirees concurrently with 
establishing new individual accounts.
    Individual accounts can contribute to sustainability as they could 
provide a mechanism to prefund retirement benefits that would be immune 
to demographic booms and busts. However, if these accounts are financed 
through borrowing, prefunding will not be achieved until the additional 
debt has been repaid.\10\ An additional important consideration in 
adopting a reform package that contains individual accounts would be 
the level of benefit adequacy achieved by the reform. To the extent 
that benefits are not adequate, it may result in the government 
eventually providing additional resources to make up the difference.
---------------------------------------------------------------------------
    \10\ After the accounts have been established and the transition 
costs have been repaid prefunding may be achieved, but this is likely 
not to happen for many decades.
---------------------------------------------------------------------------
    Some degree of implementation and administrative complexity arises 
in virtually all proposed changes to Social Security. However, the 
greatest potential implementation and administrative challenges are 
associated with proposals that would create individual accounts. These 
include, for example, issues concerning the management of the 
information and money flow needed to maintain such a system, the degree 
of choice and flexibility individuals would have over investment 
options and access to their accounts, investment education and 
transitional efforts, and the mechanisms that would be used to pay out 
benefits upon retirement. The federal Thrift Savings Plan (TSP) could 
serve as a model for providing a limited amount of options that reduce 
risk and administrative costs while still providing some degree of 
choice. However, a system of accounts that spans the entire national 
workforce and millions of employers would be significantly larger and 
more complex than TSP or any other system we have in place today.
    Harmonizing a system that includes individual accounts with the 
regulatory framework that governs our nation's private pension system 
would also be a complicated endeavor. However, the complexity of 
meshing these systems should be weighed against the potential benefits 
of extending participation in individual accounts through payroll 
deductions to millions of workers who currently lack private pension 
coverage.
Social Security Reform Should be Considered in the Context of Broader 
        Challenges
    Other broader concerns for Social Security reform include 
evaluating a proposal's effect on national saving and a proposal's 
implications for other sources of retirement income, access to long-
term care and retirement security generally. An important economic 
consideration is assessing a proposal's effect on national saving. 
Individual account proposals designed as a carve-out that finance 
accounts through the redirection of payroll taxes or general revenue, 
do not increase national saving on a first order basis. The redirection 
of payroll taxes or general revenue reduces government saving by the 
same amount that the individual accounts increase private saving. 
Individual accounts that are structured as ``add-ons'' may increase 
saving. However, this will depend on how the accounts are financed and 
how they are structured i.e. do they target low income workers who 
currently may not have high saving rates. Individual accounts that 
achieve prefunding without borrowing might increase government and 
individual saving. The effect of individual accounts on national saving 
will also be affected by other elements, such as benefit cuts or tax 
increases, that are part of the overall reform package.
    Beyond these first order effects, the actual net effect of a 
proposal on national saving is difficult to estimate due to 
uncertainties in predicting changes in future spending and revenue 
policies of the government as well as changes in the saving behavior of 
private households and individuals. For example, the higher deficits 
that result from redirecting payroll taxes to individual accounts could 
prompt changes in fiscal policy that reduce spending or increase 
revenue thereby resulting in lower deficits that would otherwise have 
been the case and increase net national saving. On the other hand, 
households may respond by reducing their other saving in response to 
the creation of individual accounts. No expert consensus exists on how 
Social Security reform proposals would affect the saving behavior of 
private households and businesses.
    Besides the effect on savings, Social Security reform proposals may 
also have implications for retirement security in general. Economic 
security in retirement requires both adequate retirement income--Social 
Security, pensions, personal savings, and earnings from continued 
employment--and affordable health care--Medicare and retiree health 
care; and long-term care coverage. In addition to the issues I have 
discussed regarding the financing challenges that Social Security, 
Medicare and Medicaid face, the nation also faces serious challenges 
associated with the private pension system and long-term care 
financing.
    Only about half of the private sector workforce is covered by a 
pension plan. A number of large underfunded traditional defined benefit 
plans--plans where the employer bears the risk of investment--have been 
terminated by bankrupt firms, including household names like Bethlehem 
Steel, US Airways, and Polaroid. These terminations have resulted in 
thousands of workers losing promised benefits and have saddled the 
Pension Benefit Guaranty Corporation, the government corporation that 
partially insures certain defined benefit pension benefits, with 
billions of dollars in liabilities that threaten its long-term 
solvency. Meanwhile, the number of traditional defined benefit pension 
plans continues to decline as employers increasingly offer workers 
defined contribution plans like 401(k) plans where, like individual 
accounts, workers face the potential of both greater return and greater 
risk. These challenges serve to reinforce the imperative to place 
Social Security on a sound financial footing which provides a 
foundation of certain and secure retirement income.
    In 2002, GAO reported that the total number of disabled elderly 
could be as high as 12.1 million, by 2040. Long-term care includes an 
array of health, personal care, and supportive services provided to 
persons with physical or mental disabilities. It relies heavily on 
financing by public payers, especially Medicaid, and has significant 
implications for state budgets as well as the federal budget.
    Current problems with the provision and financing of long-term care 
could be exacerbated by the swelling numbers of the baby-boom 
generation needing care. These problems include whether individuals 
with disabilities receive adequate services, the potential for families 
to face financially catastrophic long-term care costs, and the burdens 
that heavy reliance on unpaid care from family members and other 
informal caregivers create coupled with possibly fewer caregivers 
available in coming generations.
    Given the broader fiscal challenges that our nation faces and the 
potential future changes to Social Security, Medicare, and Medicaid, as 
well as the state of private pensions and long-term care trends, it is 
even more important that individuals are educated about what to expect 
in retirement. In this respect, regardless of what type of Social 
Security reform package is adopted, continued confidence in the Social 
Security program is essential. This means that the American people must 
understand why change is necessary, what the reforms are, why they are 
needed, how they are to be implemented and administered, and how they 
will affect their own retirement income. All reform proposals will 
require some additional outreach to the public so that future 
beneficiaries can adjust their retirement planning accordingly. The 
more transparent the implementation and administration of reform, and 
the more carefully such reform is phased in, the more likely it will be 
understood and accepted by the American people.
Conclusions
    Social Security does not face an immediate crisis but it does face 
a large and growing financial problem. In addition, our Social Security 
challenge is only part of a much broader fiscal challenge that 
includes, among other things, the need to reform Medicare, Medicaid, 
and our overall health care system.
    Many retirees and near retirees fear cuts that would affect them in 
the immediate future while young people believe they will get little or 
no Social Security benefits in the longer term. I believe that it is 
possible to reform Social Security in a way that will ensure the 
program's solvency, sustainability, and security while exceeding the 
expectations of all generations of Americans.
    In my view, there is a window of opportunity to reform Social 
Security; however, this window of opportunity will begin to close as 
the baby boom generation begins to retire. We have an opportunity to 
address Social Security as a first step toward improving the nation's 
long-term fiscal outlook. Furthermore, it would be prudent to move 
forward to address Social Security now because we have much larger 
challenges confronting us that will take years to resolve. The fact is, 
compared to addressing our long-range health care financing problem, 
reforming Social Security should be easy lifting. As I have said 
before, the future sustainability of programs is the key issue policy 
makers should address--i.e., the capacity of the economy and budget to 
afford the commitment over time. Absent substantive reform, these 
important federal programs will not be sustainable. Furthermore, absent 
reform, younger workers will face dramatic benefit reductions or tax 
increases that will grow over time.
    Irrespective of when Social Security reform may occur and what form 
it may take, other Social Security related issues also need to be 
explored. These include, but are not limited to, the current 
accounting/reporting and budget treatment of Social Security and the 
related trust funds; its current investment options and strategy, and 
the current composition of the Social Security Board of Trustees.
    We at GAO look forward to continuing to work with this Committee 
and the Congress in addressing this and other important issues facing 
our nation. In doing so, we will be true to our core values of 
accountability, integrity, and reliability.

                                 

    Chairman THOMAS. Thank you very much, Mr. Walker. You 
indicated in your initial remarks in your testimony that we 
don't currently face a crisis in dealing with the 
underfinancing of Social Security. Would you say that in 1983, 
it would be fair to characterize the last time Congress looked 
at adjusting Social Security that it could have fairly been 
called a crisis?
    Mr. WALKER. Yes, I would, Mr. Chairman, and the reason 
being is because in 1983, we were within weeks of the checks 
not going out on time, and I would respectfully suggest that 
would have been a crisis.
    Chairman THOMAS. We did come to an agreement, and one of 
the things we are supposed to deal with as humans is to learn 
from our experience. I think one of the reasons we are here 
today is that I would hope no Member of this panel would like 
to wait until we have a crisis before we address it. Clearly, 
the problem is out there, and as you indicated, every day the 
solution is delayed, the solution is more costly. In 1983, in 
large part because there was a crisis in which checks would not 
go out, as the gentleman from New York indicated, there was a 
bipartisan agreement. You would like to think that in a crisis 
when checks are not going out, you could reach a bipartisan 
agreement. Unfortunately, as far as the Chair is concerned, the 
bipartisan agreement was what had always been done in previous 
solutions virtually entirely, and that is from the initial two 
percent of the payroll tax was to increase the payroll tax, 
only it wasn't just to increase the payroll tax, because in 
1977, Congress had put in an increase in the payroll tax, it 
was to accelerate the increase in the payroll tax. That was a 
tax increase. The other half of the bipartisan solution was to 
cut benefits. The agreement cut benefits in two ways. One, it 
delayed the cost-of-living adjustment, which was a short-term 
delay to salvage a cash flow, but it cut benefits by extending 
the retirement age.
    So, I would like to remind Members of this Committee as we 
begin to look at trying to address the problem, in 1983, under 
the Democrat leadership, the solution included cutting 
benefits, and that to the degree we continue to draw a line in 
the sand that benefits promised that cannot be delivered must 
be adhered to, I think we are going to have a little bit of 
difficulty in moving forward. I notice that you looked at a 
blue and a red line, each of them an extreme example contained 
only in their particular area, raise the payroll tax up beyond 
perhaps 16 percent, or cut benefits. Describe the benefit cut, 
if it were financed only on the benefits side.
    Mr. WALKER. Basically, the illustration that we have that 
is in the testimony would say--it doesn't say how you would 
achieve that benefit cut. It says that is the percentage, the 
average percentage of benefit that would have to be cut today 
or immediately in order to achieve sustainable solvency and to 
achieve actuarial balance for 75 years. It would not achieve it 
beyond 75 years because of known demographic trends.
    Chairman THOMAS. The argument that since we have made a 
promise, however ill-advised the promise may have been in terms 
of delivering benefits, the damage to the economy in terms of 
raising taxes to honor an ill-advised commitment versus making 
adjustments, not completely on the benefit side but prudently 
on the benefit side, in terms of choices to the Committee, 
should we continue to honor an ill-advised--this is commonly 
referred to as a loaded question, in case anybody misses it. I 
mean, at what point should we, in our process of examining a 
solution to the problem, begin examining ill-advised promises 
in terms of benefits versus simply saying we made a promise and 
we have to honor it and we are going to have to find the 
revenue to cover it?
    Mr. WALKER. Mr. Chairman, I would respectfully suggest that 
you need to have the benefits side and the revenue side on the 
table. I would, however, respectfully suggest that, as I 
mentioned before about our larger fiscal challenge, if you end 
up dedicating revenues to Social Security, which you may well 
decide to do, either through increasing the taxable wage base 
and/or the tax rate, whatever, if you decide to do that, 
understand those revenues can't be spent twice. So, when you 
come back here to address Medicare with a gap that is eight 
times greater than it is Social Security, just keep in mind 
that whatever you decide to do, to keep it in the broader 
context that you have got other heavy work that has to be done, 
as well.
    Chairman THOMAS. As we define terms in going forward, we 
still insist on talking about this as a pay-as-you-go system. 
One of the concerns I have is that the decisions that were made 
in 1983 allowed us not to revisit Medicare until 2005, but I 
think the principal reason we haven't visited it sooner was 
because in 1983, we began a process that was not pay-as-you-go 
by virtue of collecting more payroll taxes than was necessary 
and front-loading the payroll tax side to afford us 20 years of 
not having to deal with the issue. Yet I see even today, as 
people write articles, they describe the current system as a 
pay-as-you-go system. Is it fair to say that we got off 
significantly of the pay-as-you-go system as we made those 
decisions in 1983?
    Mr. WALKER. Based upon your decisions in 1983, I think it 
would be fair to say that you have a partially pre-funded 
system. At the same point in time, as you know, Mr. Chairman, 
Congress has been spending those surpluses each year on other 
government expenditures, although at the same point in time, 
replacing them with government bonds that are non-readily 
marketable, that are backed by the full faith and credit of the 
United States government, guaranteed as to principal and 
interest, so they have legal, political, and moral 
significance. They will be honored, in my view. But, as I said, 
when you have to start cashing them in, you are either going to 
have to raise revenues, cut expenses elsewhere, or increase 
debt held by the public.
    Chairman THOMAS. One of the more difficult problems for all 
of us as we address problems is that we tend to lapse back into 
cliches about Social Security. One, it is not pay-as-you-go. 
Two, people who say all they want to do is get back what they 
paid in plus interest get it virtually--well, today it is a 
little less than it used to be, but they will get that back.
    I appreciate your testimony. We look forward to analyses as 
we look for solutions so that you can begin to give us the 
short-term and principally the long-term ramifications of 
decisions, because I agree with you completely. To put blinders 
on at this stage and attempt to fix Social Security without 
keeping at least in our peripheral vision the need to deal with 
Medicare that has the same fundamental problem only multiples 
of Social Security means we may be able to fix Social Security 
and we will be jumping out of the frying pan and into the fire. 
I thank you for your testimony and look forward to working with 
you. Does the gentleman from New York wish to inquire?
    Mr. RANGEL. Thank you, Mr. Chairman. Do you perceive the 
social contract that we have with the potential beneficiaries 
as a promise, an ill-advised promise?
    Mr. WALKER. I think that we have made a commitment. The 
current system has made a commitment, but as you know, Mr. 
Rangel, the Supreme Court has ruled that Congress has the right 
to change that commitment any time. In fact, Congress has 
changed that commitment several times.
    Mr. RANGEL. Do you think that if we break the commitment, 
that we can do it in a partisan way, that one party or the 
other, forgetting this Congress, but any Congress can do that 
without having the perception of being bipartisan?
    Mr. WALKER. My view is, Mr. Rangel, is that you need 
nonpartisan facts and bipartisan solutions.
    Mr. RANGEL. That would mean that if the issue is solvency, 
then anything that deals with solvency has to be something--we 
have to have the facts to deal with it in a bipartisan way, is 
that not so?
    Mr. WALKER. You have got to have the facts before you can 
solve the problem.
    Mr. RANGEL. In your opinion, does the question of personal 
private accounts deal with the question of solvency?
    Mr. WALKER. It depends upon how they are structured. If 
private accounts or individual accounts are a carve-out, then 
they do not. They would exacerbate the solvency problem. If 
they are an add-on, they wouldn't affect it. Then, thirdly, it 
depends upon what other reforms you have, what other type of 
adjustments would be made in order to deal with the long-term 
solvency and sustainability problem----
    Mr. RANGEL. Can we deal with the short-, medium-, and long-
term problems of solvency without having the private accounts 
on the table, in your opinion?
    Mr. WALKER. It is possible to do it, yes.
    Mr. RANGEL. If you had a situation where one party or the 
other was anxious to deal with this issue in an unpolitical 
way, since it is not a crisis, it is not emotional, bonds of 
full faith and credit, and it will cause a political problem 
for both sides, if the one issue did not deal with solvency was 
private and personal accounts, based on your experience not as 
a legislator or politician, would you not suggest that that one 
issue be taken off of the table and the other issues that could 
resolve the problem would be what would be before the Congress?
    Mr. WALKER. Mr. Rangel, I don't think they are 
irreconcilable. I mean, it is possible, for example, where you 
could consider--this is one example--you could consider 
individual accounts as an add-on rather than as a carve-out. 
That would be one example where you could get individual 
accounts and not exacerbate the solvency and sustainability 
problem.
    Mr. RANGEL. Then the answer to my question, then, would 
have to come from the President, who promised the Congress that 
he would have a bill that we could determine whether it was a 
carve-out or whether it was going to be separately. So, before, 
in this particular case, Democrats could decide whether we can 
cross the aisle and resolve this problem, in your opinion, 
would we not have to know first whether it is an add-on or 
whether it is a carve-out?
    Mr. WALKER. You would have to know that and a number of 
other factors, including what other changes are going to be 
made in order to try to achieve longer term solvency and 
sustainability in order to make an informed judgment.
    Mr. RANGEL. As long as Democrats, in this particular case, 
believe that we are talking about dismantling Social Security 
and not dealing with the solvency problem, is there any way 
that you can see, based on your past experience in dealing with 
the Congress, that this issue can be dealt with in a bipartisan 
way?
    Mr. WALKER. Oh, I think it is possible. I think it is 
critical that it be done that. My personal view, Mr. Rangel, is 
the step one has to be to convince a majority of the Congress, 
a significant majority of the Congress because it is going to 
have to be bipartisan, and a significant majority of the 
American people, that we have a problem that needs to be solved 
and it is prudent to solve it sooner rather than later.
    Mr. RANGEL. Then do you----
    Mr. WALKER. That involves nonpartisan facts. Then to 
approach solving the problem in a comprehensive, package 
manner, bipartisan manner----
    Mr. RANGEL. Well, let me ask you this. Do you think it 
would help for us to get together in a bipartisan way, for the 
President of the United States to visit 60 cities in 60 days 
dealing with the question of private accounting, which has 
nothing to do with solvency and it is the one issue that stops 
us from dealing with this in a bipartisan way, does that make 
any sense at all to you?
    Mr. WALKER. Well, Mr. Rangel, I don't work for the 
President. I work for the Congress, and I probably----
    Mr. RANGEL. That is why I asked you, because----
    Mr. WALKER. I would have done it differently. I would have 
done it differently.
    Mr. RANGEL. That is enough for me. I yield back the balance 
of my time.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Florida, Mr. Shaw, wish to inquire?
    Mr. SHAW. Yes, I would. Mr. Walker, it is great to see you 
back before our Committee. You certainly bring great 
credibility to this most important debate. In your testimony, 
you spoke of a $3.7 trillion present value shortfall. 
Obviously, the Congress isn't going to put up that kind of 
money, so just push that one off the table and let us talk 
about what the actual shortfall or the actual deficit is going 
to be commencing in 2018. For the next 75 years, how much, if 
Congress goes completely to a borrowing situation and doesn't 
cut benefits or increase taxes, what would be the cash 
shortfall over the next 75 years?
    Mr. WALKER. I don't have that number readily available, Mr. 
Shaw, but I will be happy to provide it for the record, if you 
would like.
    Mr. SHAW. The Social Security Administration has used the 
figure of $26 trillion. Does that sound about right?
    Mr. WALKER. It clearly would be over $10 trillion. I don't 
know what the number would be because this $3.7 is discounted 
present value. I just have not done the calculation, but I will 
provide it for the record.
    Mr. SHAW. If the Congress does nothing, according to the 
slide that you have up there, each year gets worse. I notice 
that 45 years from now, you are looking--at 40 years from now, 
under your slide, you are looking at an approximately $750 
billion shortfall that grows to over a trillion dollars a year 
as you get beyond 2040 and thereon, is that correct?
    Mr. WALKER. Those numbers sound correct, Mr. Shaw.
    Mr. SHAW. All right.
    Mr. WALKER. I also would note that when you look at my 
charts, you will see that Social Security is a subset of the 
broader fiscal challenge, and so we are going to have some 
heavy lifting to do in other areas, as well.
    Mr. SHAW. You also in your testimony stated that the sooner 
we handle this, the more manageable it is going to be. I have 
heard the Vice President use the figure of it is going to cost 
us $600 billion a year the longer we wait. Do you know how he 
came up with that figure, or do you have a figure that----
    Mr. WALKER. I don't know how he came up with that figure. I 
would imagine that one of the things he could be thinking about 
is how much the discounted present value number might go up 
each year, but I have not run the calculation.
    Mr. SHAW. You also in your testimony, or in reply to a 
question from Mr. Rangel, you said that the question of 
solvency would not be solved with the carve-out, but it would 
with the add-on. Could you elaborate or expand on that answer?
    Mr. WALKER. Well, obviously, to the extent that you have a 
carve-out, it means that you have to, number one, pay current 
promised benefits when due as well as fund the individual 
accounts.
    Mr. SHAW. So, if you go with a carve-out, the shortfall 
that we are projecting in 2018 will actually come earlier?
    Mr. WALKER. That is correct. You will end up having--the 
cash flow--the negative cash flow will happen earlier and the 
magnitude of the cash flow deficit will increase. Now, over 
time, that could change depending upon what other types of 
reforms you have. Undoubtedly, if it is a carve-out, you will 
exacerbate the negative cash flow and, therefore, solvency and 
sustainability.
    Mr. SHAW. With the carve-out, over 75 years, the cash 
shortfall would be less than it is under the projections that 
you have used, or we can go back to the 2040 date which you----
    Mr. WALKER. Mr. Shaw, it depends upon what reforms are 
coupled with the carve-out. In other words, do you have a claw-
back provision of the benefit? What other types of changes do 
you have to the benefit structure otherwise, in order to be 
able to answer that question.
    Mr. SHAW. With the add-on--is this a correct statement, 
that with the add-on, with personal accounts that are properly 
funded, that we can solve the solvency problem, we can hold 
benefits at the same level they are today, and we do not have 
to increase taxes?
    Mr. WALKER. I don't see how you would be able to do all of 
those things, Mr. Shaw. If you are going to have an add-on, it 
seems to me that if you are not going to exacerbate the 
solvency and the sustainability problems, you are going to have 
to have a revenue source to fund the add-on, which could, for 
example, be through increasing the taxable wage base or some 
other way to be able to get at it. Ultimately, even if you do 
have an add-on, if you want to solve the underlying solvency 
and sustainability problem for the current program, you are 
going to have to make other changes. You are going to have to 
make changes either in replacement rates, retirement ages, 
indexing formulas, a variety of other factors to make it work.
    Mr. SHAW. I would invite you to visit my website to see 
such a plan that has been scored by the Social Security 
Administration of not only protecting the solvency of Social 
Security over 75 years, but creating a $4.6 trillion surplus.
    Mr. WALKER. I will be happy to do that.
    Mr. SHAW. Thank you, Mr. Walker.
    Chairman THOMAS. Does the gentlewoman from Connecticut wish 
to inquire?
    Mrs. JOHNSON. Thank you very, very much, Mr. Walker, for 
your testimony. You are absolutely right to put this in the 
context of the problems in the private pension system and the 
desperate need for reform in that area, public policy reform. 
Also, it should be put in the context of the crisis that is 
developing in long-term care, another one that if we address 
well in advance will cost us a lot less. So, it is important 
that if the next generation is going to have the retirement 
security of current retirees, that we address not only Social 
Security but our underlying pension law as well as long-term 
care policy and I certainly hope we can work together to do 
that.
    I do think all the ideas have to get on the table because--
and those have to come from Democrats as well as Republicans. 
They can't just wait to see whether they like a total plan we 
put out. They have to put ideas on the table because this is 
far bigger than any one individual party. There are systemic 
problems in Social Security now that create great hardship on 
people already. The offset issue is working out unfairly. It 
isn't working out the way we anticipated. The fact that you 
have to work 10 years to qualify for Social Security, but your 
benefit is calculated over 35 years, is harsh punishment for 
women who stay home to raise their children, because for every 
one of those years, they get a big fat zero in that 
calculation. Have you done any thinking or work about how we 
could improve the equity of this system?
    Mr. WALKER. We have, and in fact, there are a number of 
different proposals that have been put forth in the past that 
we have done analysis on that include, among other things, 
looking for a minimum benefit, in other words, strengthening 
what the minimum benefit would be for low-income, looking at 
improving progressivity, and looking at some particular 
populations, if you will, that might be exposed under the 
current system, and I would be happy to visit with you 
separately about that if you want.
    Mrs. JOHNSON. Thank you. I would like to visit with you 
about that. I think that is terribly important. I was terribly 
pleased that, although it has been lost in the discussion, that 
the President did put on the plate, on our plate, the 
possibility of having no benefit below the poverty line. There 
are seniors now getting benefits that are significantly below 
poverty income, and part of reform ought to be increasing that 
level. There is something else that I just want to talk about 
and ask you in general. If you have personal accounts, no 
matter how they are structured and governed by the government, 
then you have hard cash in those accounts so when they come 
due, you are not having to cut spending or increase public debt 
or increase taxes to get the money to pay them. Now, that seems 
to be a substantial difference.
    Also, those on the other side of the aisle and President 
Clinton advocated investing Social Security surplus dollars 
into the private market. In fact, President Clinton suggested 
putting all of the surplus money in. Now, that would cost a lot 
more than letting people put a small percentage into personal 
investment accounts, but all of these are areas--ways in which 
to get tangle assets underneath the system, are they not, and 
isn't that in the long range going to make a difference, if we 
could either structure the government investment or structure 
the diversion of private contributions so we have tangible 
money there to help pay the benefits as opposed to just IOUs?
    Mr. WALKER. Clearly, one of the things you ought to 
consider, whether it is through individual accounts or whether 
it is not through individual accounts, because it can work 
either way----
    Mrs. JOHNSON. Right.
    Mr. WALKER. --is to consider how you might change the 
current investment strategy to obtain some hard assets, if you 
will. In that regard, Mrs. Johnson, I think one of the things 
that Congress needs to consider, especially as Social Security 
gets closer to having negative cash flows, is whether or not 
any bonds that are going into the Social Security Trust Fund 
should be readily marketable, such that the Social Security 
Trustees could sell those bonds and raise cash and not be 
subject to a situation where, because of the debt limit or 
otherwise, you might not be able to pay benefits when due.
    Mrs. JOHNSON. Thank you very much, Mr. Walker.
    Chairman THOMAS. Does the gentleman from California, Mr. 
Stark, wish to inquire?
    Mr. STARK. Thank you, Mr. Chairman. Thank you, General 
Walker, for your testimony. You mentioned that, I think you 
said that if you reduce Social Security taxes for private 
accounts, it would exacerbate the problem. Isn't it correct 
that the only way that add-on accounts would help is if they 
are used to reduce Social Security benefits?
    Mr. WALKER. Not necessarily. You could have additional 
revenues. You, for example, could decide that you are going to 
increase additional revenues either through payroll taxes or 
through increasing the taxable wage base or whatever else.
    Mr. STARK. Taken by themselves, add-on accounts keep taxes 
as they--the only way they could help the problem is by 
reducing benefits, is that not correct?
    Mr. WALKER. Well, if you wanted to fund the add-ons, you 
would have to make changes in the benefit structure in order to 
make the numbers come out. In my----
    Mr. STARK. Those changes would reduce the benefits----
    Mr. WALKER. Absolutely.
    Mr. STARK. Okay.
    Mr. WALKER. My view is, when I say ``add-on,'' Mr. Stark, 
and maybe it is my terminology rather than yours, I normally 
assume that when you have an add-on, that there is going to be 
additional money coming in. You are correct. If there is not 
additional money coming in, then it is not much different than 
a carve-out, quite frankly.
    Mr. STARK. Last February, you said on the News Hour that it 
would be inaccurate to say that the Social Security Trust Fund 
would be bankrupt in 2042. Do you stand by that statement?
    Mr. WALKER. I do. I like to go by Webster's Dictionary, and 
based on Webster's Dictionary, I would say an accurate 
description of Social Security is it is not in crisis, but in 
2042, it would be insolvent because it would not be able to pay 
full benefits when due, but the system would not be bankrupt 
because bankrupt means total failure. It would still be able to 
pay 73 cents on the dollar, gradually declining over time.
    Mr. STARK. Now, in your charts, you showed in 2040 this 
problem of interest using up most of our revenue. I believe it 
is correct that in 2018, the Social Security cash shortfall 
will be about $23 billion a year and the interest on the Bush 
tax cuts will be about $400 billion a year. This is in 2018. 
You can suggest that those figures aren't accurate, but I 
suspect they are about in the ballpark. If that is correct, in 
2040, where you show this huge amount of revenue being eaten up 
by interest, can you give me a comparable estimate, comparing 
the 2040 Social Security cash flow shortage with the interest 
that we would be paying on the current Bush tax cuts?
    Mr. WALKER. I could try to provide you something for the 
record, but I think I could do something that will help you 
right now, and the other Members. If you look on page 12 of my 
testimony and then compare that graphic to the one on page 13, 
the difference between page 12 and page 13 is page 12 assumes 
that discretionary spending grows by the rate of inflation and 
that all tax cuts sunset. Page 13 assumes that discretionary 
spending grows by the rate of the economy and all tax cuts are 
made permanent.
    Mr. STARK. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from California, Mr. Herger, wish to inquire?
    Mr. HERGER. Thank you, Mr. Chairman. Mr. Walker, in your 
testimony, you lay out the nature of Social Security's problems 
as one driven by demographics. Americans are living longer. 
Families are having fewer children. Consequently, there will be 
fewer workers supporting each retiree in the future. For 
example, in 1945, when I was born, there were 42, 
approximately, paying in for every one receiving it. Today, it 
is just a little more than three paying in for every one 
retiree receiving it. Would you agree that while the exact date 
Social Security will start running cash flow deficits and the 
trust funds will be exhausted can only be estimated, all the 
signs are that the program's problems are here to stay and will 
only grow worse unless we act?
    Mr. WALKER. The problem is--the program is unsustainable in 
its present form. You will have to act. It is only a matter of 
when you act, how you act. You will have to act.
    Mr. HERGER. Would you agree that the longer we wait to act, 
every year we put off acting, that the problem becomes worse 
and it takes more to be able to correct it?
    Mr. WALKER. Because of known demographic trends, primarily, 
the longer you wait, the bigger the changes will have to be and 
the less time you may have to transition those changes, the 
less time individuals will have to be able to adapt to those 
changes.
    Mr. HERGER. So, therefore, while technically it is right we 
are not in crisis now, in reality, the longer we wait, every 
year we wait, to put it off, saying it is okay, the more 
difficult it is for us to solve this problem and the more 
challenging it is for our children and our grandchildren and 
their retirement and Social Security?
    Mr. WALKER. That is true, and I think one has to keep in 
mind that in the case of Social Security reform, not only is 
time working against us, but it is a subset of this bigger 
challenge. The fact of the matter is that with Social Security 
reform, you, the Congress, have an opportunity to exceed the 
expectations of every generation of Americans, with or without 
individual accounts. Every generation can get more than they 
think they are going to get--not more than they are promised, 
more than they think they are going to get if you go about this 
in the right manner, and I think that is a win and I would 
encourage you to hit a single or a double in the form of Social 
Security reform because you have got a lot bigger problems you 
are going to have to deal with--Medicare, Medicaid, overall 
health care reform, and a variety of other issues.
    Mr. HERGER. From hearing your testimony, it would sound 
that you would be somewhat encouraged that we have a President 
Bush with the courage to stand up and say, let us solve this 
problem today. Let us not wait until tomorrow or next year or 
ten or 20 years from now.
    Mr. WALKER. I think the President is right in saying we 
should solve it now. The process, I don't think, has been a 
very good process, but hopefully that will improve going 
forward.
    Mr. HERGER. Ultimately, hopefully, if we can get our 
friends on the Democrat side to work with us and not try to 
stop us on everything we do, hopefully we can begin today and 
do that. Mr. Walker, let me address another issue. There is a 
great deal of confusion among the American people about the 
Social Security Trust Funds and how they work. To clarify, all 
Social Security surpluses are invested into Treasury bonds held 
by the trust funds and these Treasury bonds are backed by the 
full faith and credit of the government and will be honored, 
isn't that correct?
    Mr. WALKER. That is correct, but as I said before, I go by 
Webster's on words. These aren't trust funds. These are 
accounting devices. Trust funds give you some significance that 
there is a fiduciary responsibility and that they are treated 
as separate and distinct legal entities. If you look at the 
financial statements of the U.S. Government, you won't even 
find a liability of the U.S. Government for the bonds held in 
the trust funds, and the reason you won't is because the left 
hand owes the right hand. Now, don't get me wrong. The 
government is going to deliver on its promise. It is not going 
to default on those bonds. We need to fundamentally review how 
we are treating Social Security from a variety of perspectives.
    Mr. HERGER. Mr. Walker, that is the exact point I wanted to 
make and I appreciate you pointing it out. Many Americans, if 
not almost all, think this trust fund is something out there, 
it is an investment, it is an asset. The fact is, that is not 
the case. All it is is an IOU, and, therefore, we----
    Mr. WALKER. Well, right.
    Mr. HERGER. --critically important we begin dealing with 
this.
    Mr. WALKER. Right, but we have to be careful about IOU 
because all bonds are IOUs. The difference is this is not a 
readily marketable bond, and the other thing that is different 
is when the government has to start cashing in this bond to 
turn it to cash, it is either going to have to raise revenues, 
decrease other spending, or increase debt held by the public, 
one or the other.
    Mr. HERGER. Thank you very much. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Michigan, the Ranking Member on the Subcommittee on Social 
Security, wish to inquire?
    Mr. LEVIN. Thank you, Mr. Walker. I hope everybody in this 
hall today, in this room, and in the country will very much 
take note of what you said, that a carve-out does not address 
solvency. Indeed, it exacerbates it by itself. I just hope the 
world hears that, and I hope the world will also go back and 
read the State of the Union Address of President Bush. What he 
proposed was a carve-out, four cents of the 6.2, about a third 
of the payroll tax being carved out and put in private 
accounts. Over the weekend, the President talked about his 
approach more or less as an add-on. Subtraction isn't 
addition--and that is in Webster's, too. At least, it was in my 
fourth grade math, or third grade.
    Mr. WALKER. It is Accounting 101, I think.
    Mr. LEVIN. I hope I learned it before that. So, this is the 
problem. This is the gist of the approach of the President, and 
all that goes into these private accounts and what they mean 
for benefit cuts and for borrowing, and this is not acceptable 
to the American people or to Democrats in this institution, but 
most importantly to the American people. Once that issue is 
clarified, we are more willing to go on from there. I mean, 
this is a solution that makes a problem worse and I don't think 
we want to congratulate anybody for proposing a solution that 
makes a problem worse. Now, let me just ask you about another 
aspect, and I think your charts are useful in terms of the 
overall debt of this country as it is projected. Social 
Security is less than 10 percent, right?
    Mr. WALKER. That is correct.
    Mr. LEVIN. It is about eight or 9 percent. I also learned 
that in fourth grade, I guess. Now, let me just ask you in 
terms of facing up to the issue, do you favor putting revenue 
issues on a pay-as-you-go basis?
    Mr. WALKER. Are you talking about in the budgetary process?
    Mr. LEVIN. Yes.
    Mr. WALKER. I have testified before, Mr. Levin, that if you 
are trying to control the bottom line, if you are trying to 
make sure that we are fiscally responsible on the bottom line, 
that you need to look at both the revenue side and the spending 
side.
    Mr. LEVIN. Okay. I just find it mind-boggling that policies 
that have helped lead to this fiscal irresponsibility, that the 
advocates of those policies are now using fiscal 
irresponsibility--irresponsibility--as a reason to dismantle 
Social Security. Those on this side have taken steps to try to 
keep the $5.6 trillion projected surplus from being dissipated, 
but it has been worse than dissipated. It has been reversed. 
So, to Mr. Herger and everybody else, we are more than willing, 
as was true 20 years ago, to sit down and talk about approaches 
that will address solvency and that will be fair. We are not 
willing to accept policies that do not address solvency and 
that would dismantle the Social Security system of this country 
that has meant so much for the independence of people retiring, 
of the disabled and family members. So, I think your testimony, 
the gist of your testimony needs to be heard in this 
institution, in the White House, and around this country. Thank 
you.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Louisiana, the Chairman of the Subcommittee on Social 
Security, wish to inquire?
    Mr. MCCRERY. Yes. Thank you, Mr. Chairman. Mr. Walker, the 
Social Security Actuaries don't agree with your conclusion that 
personal accounts funded through a carve-account cannot 
contribute to the solvency of the system. So, I don't--and I 
know you are aware of that. I don't think you meant to say that 
under no circumstances can personal accounts funded by a carve-
out contribute to the solvency of the system. I believe you 
said earlier in your response to a question that it depends on 
how those accounts are structured and how they are tied to the 
ultimate benefit payout of the Social Security system. Would 
you like to amend your----
    Mr. WALKER. Let me--I think I was pretty clear, but let me 
make it clear now if I wasn't. First, carve-outs by themselves, 
with no other reforms, will exacerbate the solvency and 
sustainability.
    Mr. MCCRERY. Absolutely.
    Mr. WALKER. Depending upon what other reforms you have with 
a carve-out, they may or may not cause a--contribute positively 
or negatively over the long term, depending upon what the other 
reforms are. However, irrespective of what the other reforms 
are, they will accelerate negative cash flows because most of 
the reforms----
    Mr. MCCRERY. In the short term.
    Mr. WALKER. Correct. Correct.
    Mr. MCCRERY. Well, let us be clear about it.
    Mr. WALKER. Most of the reforms--it is important. Most of 
the reforms will end up leaving--that I have seen--will leave 
current retirees and near-term retirees alone, which therefore 
means to the extent that you are going to have offsets, it is 
going to be for people who retire in future years, and I think 
when you look at Social Security reform, you have to consider 
it two ways, the cash flow impact and the discounted present 
value dollar impact, because there will be timing differences. 
So, you need to look at solvency, sustainability, short-term 
and long-term.
    Mr. MCCRERY. The question of short-term impact on the 
unified budget is a separate question, separate from solvency 
of the system. Mr. Levin, in his questioning, characterized 
your earlier remarks as saying unequivocally that carve-out 
personal accounts don't contribute to solvency, and that is 
incorrect if you couple that with a claw-back, as you put it, 
from the ultimate benefit payout from the system, and in fact, 
Mr. Archer and Mr. Shaw had a plan that the Actuaries have 
scored as solving the entire insolvency of the system. It will 
make it permanently solvent. So, that is just dead wrong and we 
ought--the American people, you are right, ought to know what 
the facts are, and the facts are that if you do it correctly, 
if you do it properly, if you structure it right, the personal 
accounts funded through a carve-out can, in fact, solve the 
problem of Social Security.
    Mr. WALKER. As you point out, Mr. McCrery, if they are 
coupled with other reforms, and I believe the question I 
answered was standing alone, and so, therefore----
    Mr. MCCRERY. Standing alone----
    Mr. WALKER. Therefore, there is a difference. There is a 
difference.
    Mr. MCCRERY. Absolutely.
    Mr. WALKER. There is a difference and it is important that 
that be clear.
    Mr. MCCRERY. As part of the solution, personal accounts can 
contribute to the solvency of the system because of the 
compound interest those funds that are put--real cash in a real 
account in a real market will grow over time faster than this 
imaginary trust fund does.
    Mr. WALKER. As you know, part of it is what is the 
assumption for the offset or the claw-back or whatever you want 
to call it, and then what other changes occur. So, again, I 
think it is very, very important for people hopefully to agree 
that we have a problem. It is prudent to solve it now. It is 
also important that entire packages of proposals get on the 
table because there will be pluses and minuses to any package. 
It is also very important that you look at Social Security 
reform not just based on promised benefits, but based on funded 
benefits because not all promised benefits are funded.
    Mr. MCCRERY. Right. The bottom line is, for anyone to take 
anything off the table right now is counterproductive to the 
process, and if you want to be serious players, then you will 
stop this nonsense of saying we won't take personal accounts. 
If it is structured properly, it can be a very constructive 
reform of the system, and coupled with guaranteed benefits, it 
can still be a very strong--in fact, stronger--safety net than 
it is today. So, I hope that we will all calm down and say 
everything is on the table.
    Mr. NEAL. Will the gentleman yield?
    Mr. MCCRERY. I would be glad to yield.
    Mr. NEAL. Mr. McCrery, is it your position that the trust 
fund is an imaginary account?
    Chairman THOMAS. The gentleman's time has expired. The 
gentleman will have the opportunity to ask the question on his 
own time.
    Mr. MCCRERY. Thank you, Mr. Walker.
    Chairman THOMAS. Does the gentleman from Michigan----
    Mr. NEAL. Mr. Chairman----
    Chairman THOMAS. The gentleman from Michigan, Mr. Camp.
    Mr. CAMP. Thank you, Mr. Chairman. Mr. Walker, I appreciate 
your testimony today and your written statement here that says 
early action would be prudent and your comments that Social 
Security faces serious solvency and sustainability challenges 
and challenges facing Social Security is more urgent--the 
challenge is more urgent than it may appear. Those comments are 
in your written testimony. There has been considerable 
discussion about the shortage of funding facing the program, 
and in your testimony, you said that it would be about $3.7 
trillion to cover the shortfall over the next 75 years. My 
question is, how much more will it cost taxpayers each year if 
we do nothing to address this shortfall that is coming?
    Mr. WALKER. I don't have the number off the top of my head, 
Mr. Camp. I am happy to provide it for the record. By 
definition, it will go up each year, and the reason it will go 
up each year is twofold. Each year, we drop a good year with a 
surplus and we add an increasingly bad year, plus we have one 
yet less year to discount. Therefore, by definition, it is 
going up every year.
    Mr. CAMP. Senator Lieberman on one of the shows over the 
weekend said that it was $600 billion more if we fail to 
address this issue. Is that a number that you----
    Mr. WALKER. That is the number I want to verify. That is 
the one that I think the Vice President has also referred to, 
and I just want to see how they calculated it. It is an 
unaudited number. I would like to be able to get behind it a 
little bit.
    Mr. CAMP. If you could get that to me----
    Mr. WALKER. I would be happy to.
    Mr. CAMP. --I would very much appreciate that. Also, as we 
have heard, this personal account could be very helpful to 
solving this problem. The personal account that I have heard 
discussed would be modeled very much after the Thrift Savings 
Plan, which is the plan that Federal employees and most Members 
of Congress contribute. I wondered if you know what percentage 
of Federal employees take advantage of that plan, and what the 
administrative costs associated with that plan are.
    Mr. WALKER. It is a significant majority. I don't have the 
percentage. I will provide it for the record. The 
administrative costs on a relative basis are low. As you may 
know, Mr. Camp, I used to be Assistant Secretary of Labor for 
Pensions and Health and so I am very familiar with the Federal 
Thrift Savings Plan. In fact, I think it is important to note 
that with regard to if the Congress decides to have an 
individual account proposal, whether it be an add-on or a 
carve-out or whatever, if you decide to do that, two things to 
keep in mind. The Federal Thrift Savings Plan model has worked 
and it is one that you may want to look to as a possible 
example. Secondly, less than 50 percent of the private sector 
work force has a pension plan, and if the Federal Government 
decided that it wants to have an individual account plan, 
either as a carve-out or an add-on, then that could provide a 
mechanism by which Americans who do not have a private pension 
plan could save on a payroll deduction basis, gain economies of 
scale, gain limited investment options like the Federal Thrift 
Savings Plan, and some investment education to help them plan 
and save and investment for retirement.
    Mr. CAMP. I saw an article in the Washington Post that said 
that 3.4 million Federal employees belong to the TSP. Does that 
sound about right to you?
    Mr. WALKER. It is over three million. I just don't recall 
the exact number.
    Mr. CAMP. That is more than $151 billion invested, with 
administrative costs of about 57 cents per $1,000 invested. 
Does that sound similar?
    Mr. WALKER. It sounds reasonable.
    Mr. CAMP. All right. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Maryland, Mr. Cardin, wish to inquire?
    Mr. CARDIN. I do, Mr. Chairman. First, let me thank you for 
bringing Mr. Walker before our Committee because I find your 
testimony very helpful and I thank you for the detailed 
information that you have supplied us. In response to Mr. 
Camp's point and your reply, I do want to see Americans have 
the same type of opportunities that Federal workers have. We 
have Social Security, which provides about one-third of their 
replacement for their income, a guaranteed core benefit, 
inflation-proof and lifetime. We have an employer-sponsored 
pension plan which adds to that defined benefit. I would like 
to see American workers have that protection. We have a Thrift 
Savings Account so I can put money, matched by government, into 
an account which I can use to supplement my retirement. All 
three are provided to Federal workers, and that is what I want 
to see continued. So, let me try to get to Mr. McCrery's point 
first, just so I can clarify this issue. If you take what the 
President suggested in his State of the Union Address, 4 
percent of the payroll tax, or about one-third, that in and of 
itself out of Social Security--Mr. Levin suggests, pointed out 
in his opening comment, that in and of itself would accelerate 
the insolvency by about 11 years, using the Actuaries' 
assumptions. I assume that you agree with that, is that 
correct?
    Mr. WALKER. That by itself----
    Mr. CARDIN. By itself----
    Mr. WALKER. --but I don't think even the President is 
talking about doing that by itself.
    Mr. CARDIN. I am trying to isolate the point. I will come 
right back to it. That, by itself, accelerates the insolvency 
by 11 years, by itself.
    Mr. WALKER. It would accelerate it. I don't know about the 
11 years, but it would accelerate it.
    Mr. CARDIN. That change then makes it more complicated and 
difficult and more changes are going to be needed in order to 
deal with the insolvency issue if we just dealt with it 
directly.
    Mr. WALKER. It will mean that the sense of urgency--well, 
not only will the negative cash flow increase, but it also 
means that potentially the insolvency date would get closer, 
depending upon what other reforms there are.
    Mr. CARDIN. I understand that. Other reforms mean more 
revenue coming into the system or benefit cuts.
    Mr. WALKER. Or some combination thereof.
    Mr. CARDIN. Or some combination thereof. Thank you. I 
appreciate also the fact that we do have a trust account that 
you agree is there, and, therefore, there is enough assets in 
those accounts to pay full benefits for 37 years, using the 
Actuaries' numbers.
    Mr. WALKER. I guess the way that I would put it, Mr. 
Cardin, is I believe that the government will not default on 
its obligations for those bonds, but this is not a real trust 
fund. Let us don't kid ourselves.
    Mr. CARDIN. Well, it is----
    Mr. WALKER. I used to be a fiduciary for private pension 
plans.
    Mr. CARDIN. I agree with you, and that is one of the steps 
that we should be doing in Congress, is make it a true trust 
fund.
    Mr. WALKER. Yes.
    Mr. CARDIN. Let the trustees take the responsibility for 
the funds and get a fair return. The other point I want to 
bring out, and I think it is extremely helpful, the fact that 
on a 75-year basis, we have a serious budget problem in this 
Nation and Social Security represents about 10 percent--less 
than 10 percent of that problem. I think in response to Mr. 
Levin, you pointed that out, and that is a very good point. The 
two charts, one that you put up that shows--which is pretty 
frightening, I hope sobering--that if we continue the tax cuts 
and if discretionary spending moves at the growth of our 
economy and we don't change entitlement spending, that we will 
be spending virtually 100 percent of our revenues in the year 
2040 on interest payments. That is the chart that you pointed 
out.
    Mr. WALKER. That is correct, and I think it is important, 
however, to look--even if you look at the other chart, which is 
optimistic, which says even if you don't extend any of the tax 
cuts and even if discretionary spending only grows by the rate 
of inflation, we still have a serious long-range imbalance.
    Mr. CARDIN. We do, but the interest payments would 
represent about 20 percent of our revenues if we don't extend 
the tax cuts. A big difference between close to 100 percent or 
20 percent, one change, the extension of our tax cuts, if I 
understand the two charts that you have presented.
    Mr. WALKER. They are factually accurate.
    Mr. CARDIN. Thank you. The last point I would point out is 
that in the year 2042, when we reach this point, even if we 
didn't make any changes in Social Security, and I agree with 
you, we should strengthen Social Security today, but we will 
still have assets in the Social Security Trust Fund if the 
Actuaries' numbers are accurate. So, when we reach this point 
where we are spending every dollar of money on interest because 
we have extended the tax cuts, we will still have money in 
Social Security. So, you are correct. We should deal with 
Social Security and we should deal with Social Security now, 
which is strengthen it. We shouldn't do it by taking money out 
of the trust fund. The more urgent issue is for us to deal with 
our budget problems, which include whether we extend these tax 
cuts or not.
    Mr. WALKER. Mr. Cardin, I think my biggest concern is we 
are on an imprudent path. We have large deficits. We have 
growing structural deficits projected in the out-years due 
primarily to known demographic trends and rising health care 
costs. The problem is not just on the revenue side, it is on 
the spending side. It is on both. I would commend to you and 
your colleagues to read this [holding up book] because we have 
to mend our ways.
    Mr. CARDIN. I think your testimony has been extremely 
helpful. Thank you.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Texas, Mr. Johnson, wish to inquire?
    Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Walker, we keep 
hearing this trust fund stuff. I thought I heard you say that 
there is not a real trust fund for Social Security, true or 
false?
    Mr. WALKER. True. I mean, if you go by Webster's and if you 
go by what most people would think a trust fund is, including 
individuals like myself who have had fiduciary responsibilities 
to manage trust funds, that is really not what these are. They 
are called trust funds under the law. They are really a sub-
account of the general ledger, a sub-account of the Federal 
budget.
    Mr. JOHNSON. It is a piece of paper, right?
    Mr. WALKER. Well, but all bonds are a piece of paper.
    Mr. JOHNSON. Okay. Well, as a Federal employee, 
theoretically, the employer is supposed to put in 6.2 percent 
into the Social Security fund, whatever we want to call it. 
Does the Federal Government do that for all of us?
    Mr. WALKER. I would be happy to talk to you, Mr. Johnson. 
You would be amazed. Well, the Federal Thrift Savings Plan is 
invested in hard assets.
    Mr. JOHNSON. Right.
    Mr. WALKER. Most trust funds are not invested into hard 
assets. Most trust funds are invested in non-readily marketable 
U.S. Government securities backed by the full faith and credit 
of the United States government. It has legal, political, and 
moral significance, not real economic significance. It 
represents no more and no less than a priority claim on future 
general revenues.
    Mr. JOHNSON. That is right, but the government does do 
their 6.2, only it is another piece of paper, right?
    Mr. WALKER. The government, you mean on Social Security is 
what you are saying?
    Mr. JOHNSON. Yes.
    Mr. WALKER. The employer portion? No, it pays its portion.
    Mr. JOHNSON. A piece of paper, though, not real money.
    Mr. WALKER. I would have to follow up on that, Mr. Johnson. 
I would have to follow up on that. Whether or not that is 
notational----
    Mr. JOHNSON. You just got through telling me that there was 
no trust fund, per se, and----
    Mr. WALKER. You are talking about on the annual payments on 
the 6.2. There might be an electronic transaction that takes 
place. The physical cash doesn't go, but an electronic 
transaction. I mean, the bottom line is when you work it all 
through, the question is how much money is the government going 
to borrow each year, because right now, we are in a situation 
where last year, we ran a $568 billion on-budget deficit. We 
offset that with a $155 billion Social Security and Postal 
surplus. So, the real bottom line is, how much money are we 
going to go out and borrow from foreigners?
    Mr. JOHNSON. I understand you, but to get you once more to 
say there is no asset out there, no real money.
    Mr. WALKER. There is a bond, but it is not a readily 
marketable asset. It is not stocks and bonds. It is not real 
estate. It is not cash. It is not things many Americans----
    Mr. JOHNSON. Right, and the people who think they have a 
little account set aside for them by Social Security that is 
going to pay them in the long term is not true. There is no 
account for each person that pays into Social Security, isn't 
that true?
    Mr. WALKER. There is no account, just like there is no 
account under a defined benefit pension plan. There is no 
separate account under a defined benefit pension plan, and that 
is basically what Social Security is right now. It is a defined 
benefit pension plan----
    Mr. JOHNSON. Can you tell me, do you have any idea how much 
Social Security dollars are wasted, i.e., given to illegals or 
dead people?
    Mr. WALKER. No, I don't, but we have done some work on 
that. I can try to provide something for the record. Let me 
clarify one thing, Mr. Johnson. There is an individual account 
for certain kinds of defined benefit plans. It is called a cash 
balance plan, which I would be happy to get back to you if you 
want. That kind of plan does have an individual account, but it 
is a defined benefit plan. That is not Social Security, though.
    Mr. JOHNSON. Okay. You know, recently, Greenspan emphasized 
the importance of national savings before the House Budget 
Committee last week. Frankly, the U.S. personal savings rate 
has dropped from 12.2 percent in 1982 to 1.6 percent now. 
Historically, the United States is near the lowest in the 
world. Economists have long argued that national savings are 
essential for building capital stock that drives economic 
growth. In fact, Alan Greenspan made the statement that, ``In 
my view, a retirement system with a significant personal 
accounts component would provide a more credible means of 
ensuring that the program actually adds to overall saving and, 
in turn, boosts the national capital stock.'' In your view, 
what retirement policies, inside or outside the Social Security 
system, could increase net national savings or improve wealth 
and income for future retirees?
    Mr. WALKER. Well, there is absolutely no question that we 
need to increase our overall savings rate as well as individual 
savings rate. I think we have to take a look at how best to 
accomplish that. I personally believe that we need to have more 
payroll deduction type of arrangements where individuals do not 
touch the money because once you touch the money, you tend to 
spend the money, especially if you don't have a lot of 
discretionary income.
    Mr. JOHNSON. Personal retirement accounts would do just 
that, would it not?
    Mr. WALKER. It could, but you have to understand that if 
you end up having to borrow money to finance the personal 
accounts, that does not increase net national savings. So, if 
you end up putting money into an account but you have to go out 
and borrow because the government runs bigger deficits in order 
to fund that, that won't increase net national savings. It is a 
wash.
    Mr. JOHNSON. Okay. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Washington wish to inquire?
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Mr. Walker, the 
Chairman has set up a kind of a straw man. He said if we don't 
do anything with Social Security, we don't do anything with 
Medicare, all hope is lost. He refuses to talk about tax cuts 
that are going to be extended. It seems to me that when Mr. 
McCrery says everything ought to be on the table, the extension 
of the tax cuts really ought to be a part of what we are 
talking about if that line that you have drawn on your chart 
for us is correct. If by 2042, every cent that we are raising 
goes to pay interest on the debt, isn't it about time that this 
place started thinking about that?
    Mr. WALKER. Well, in this book [holding up book], what we 
say, Mr. McDermott, is we say that you have to engage in a 
baseline review of mandatory spending, entitlement programs, 
discretionary spending, and tax policy, including tax 
preferences. I expect the Congress will probably have a healthy 
debate about whether or not to extend those.
    Mr. MCDERMOTT. I listened to you talk, and you have gotten 
the same kinds of questions from us down the row here. The 
President creates a crisis. He says there is nothing in that 
trust fund, where all hope is lost. We have got to start 
cutting budget--start cutting the benefits now. On the other 
hand, every solution includes those trust funds as assets. It 
seems they want it both ways. On the one hand, there is nothing 
there. We are going to have to raise taxes for that or borrow 
more money. What I have a hard time understanding, if I was 
sitting out there in the audience, in the TV audience, and 
looking at that chart, I would say to myself, you say there are 
not, those bonds that are in the trust account are not 
negotiable, you can't market them, you can't sell them and buy 
them, and so I guess they are just pieces of paper. Now, those 
are different than the kinds of pieces of paper we sell to the 
Central Bank of China, is that correct?
    Mr. WALKER. Well, and the primary way they are different is 
that while both are backed by the full faith and credit of the 
United States government, guaranteed with principal and 
interest, they are not marketable. I mean, the ones in China 
are marketable. They can sell them to somebody else so they can 
raise cash.
    Mr. MCDERMOTT. What does that mean, not marketable? Come 
on. You worked for Arthur Anderson. You know what----
    Mr. WALKER. Right now, what----
    Mr. MCDERMOTT. I don't know what that means. What do you 
mean, not marketable?
    Mr. WALKER. Well----
    Mr. MCDERMOTT. If the bond from the Central Bank of China 
can be taken in and you get money in your hand, why doesn't it 
when the trust fund goes over to the Treasury and says, here is 
a bond, give us the money? Why isn't that just as good as the 
one for the people of China?
    Mr. WALKER. The issue is is that when the government does 
that, the government has that legal obligation. I do not 
believe the government will default. The question is, how does 
the government accomplish that? The way the government will 
accomplish that is either through raising revenues, decreasing 
other government spending, or going out and borrowing more from 
China or elsewhere, okay.
    Mr. MCDERMOTT. That is the same thing for the Chinese bond. 
When the Chinaman shows up with the bond, we are either going 
to borrow money or raise revenue to pay that bond off, aren't 
we?
    Mr. WALKER. There is a different option, though. The 
different option is----
    Mr. MCDERMOTT. Oh, what is that?
    Mr. WALKER. --the Chinese can sell to somebody else and get 
cash. They don't have to come back to Uncle Sam to get the 
cash. My point is, the government is going to make good on the 
bonds----
    Mr. MCDERMOTT. They are.
    Mr. WALKER. --and that is why I think we have to 
understand, what is the difference between the trust funds and 
the bonds that are in the trust funds? The government is not 
going to default on the bonds----
    Mr. MCDERMOTT. Well, will you please tell the rest of the 
Committee to stop using the argument that there is nothing in 
the trust fund, because we hear that argument again and again 
and again. There is nothing in the trust fund. It is just 
paper. You are saying the full faith and credit stands behind 
that, and that means it is just as good as a bond for the 
Chinese or the Japanese or anybody else who buys one of our 
government bonds.
    Mr. WALKER. It is, but I do think that you ought to think 
about whether or not, on a prospective basis, the bonds that 
the trust fund gets, as to whether or not they ought to be 
readily marketable such that when the trust fund starts running 
a negative cash flow, that the trustees might be able to sell 
those to somebody else, especially if we have got debt ceiling 
limit problems, and I haven't thought through all the issues.
    Mr. MCDERMOTT. Well, tell us, why aren't they marketable? 
Why don't we market them now? I mean, we have the Trustees----
    Mr. WALKER. You would have to ask----
    Mr. MCDERMOTT. --we will ask in a minute, but----
    Mr. WALKER. You would have to ask the Secretary of the 
Treasury that. He is the----
    Mr. MCDERMOTT. Is there some accounting reason, from your 
background at Arthur Anderson, to tell you why?
    Mr. WALKER. You know, one of the reasons that it is handled 
the way that it is right now is because by the government 
putting back in a bond, that is obviously a certain and 
generally viewed to be a secure investment. After all, 
historically, U.S. Government securities have been viewed as 
one of the safest and most secure investments that you can 
have, historically. If we don't get our act together----
    Mr. MCDERMOTT. The whole world----
    Mr. WALKER. If we don't get our act together, that may not 
be the case in the future, okay, because we are on an 
unsustainable fiscal path. So, my point is, is that 
historically, they are viewed as being very safe and secure. 
Hopefully, they will continue to be if we take the necessary 
actions. It is not the same as readily marketable investments 
in which you can end up converting it into cash any time you 
want to through selling it to somebody else.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from Pennsylvania wish to inquire?
    Mr. ENGLISH. Yes. Mr. Walker, I have found this to be a 
very stimulating exchange and I am particularly grateful that 
you have been able to, I think, make very clear that the Social 
Security system is facing a very serious challenge and one that 
invites creativity on our part and current action to deal with 
the problem. As I have talked to people in my district, there 
are some common misconceptions about some of the proposals that 
have been laid out, and I think your testimony gestures at some 
of the answers to those misconceptions. At the risk of dragging 
you back into a discussion of the trust funds, that I agree 
with you is not a trust fund in any meaningful sense that I had 
ever understood it to be but is still, as an accounting device, 
perhaps useful, could you please comment. One hundred percent 
of the Social Security surpluses are invested in Treasury 
bonds--we have stipulated that--as required by law, and that 
happens regardless of whether the rest of the budget is in 
surplus or deficit, is that correct?
    Mr. WALKER. That is correct, although it is my 
understanding under current law, and you may want to ask the 
current Public Trustees, that there is the authority to invest 
in certain other government securities, which government 
securities could be readily marketable and wouldn't have to 
necessarily be Treasury bonds.
    Mr. ENGLISH. I guess my question gets to the false charge 
that, somehow, part of the problem here, or the main problem is 
that this trust fund has been raided. Whether the Treasury uses 
the invested Social Security surplus to reduce the debt or for 
other purposes, it does not affect the trust fund balances, is 
that correct?
    Mr. WALKER. That is correct, although, obviously, if you 
have got a captive source for borrowing, then whether or not 
the interest rates would have been the same and whether or not 
the earnings would have been the same on the Social Security 
surpluses are very much a question.
    Mr. ENGLISH. That raises the point of the weakness of the 
non-marketability, the fact that it will always show one 
outcome and one rate of return regardless of what is going on 
in the market.
    Mr. WALKER. Correct.
    Mr. ENGLISH. So, in other words, it doesn't show the 
fluctuations or even the appreciations in value that happened 
in the marketplace as a result of the economy growing.
    Mr. WALKER. Well, that can cut both ways. I think it is 
important for the Members to understand that Medicare part A is 
a window to the future. Medicare part A turned negative cash 
flow last year. The equivalent of that is Social Security's 
2018. Medicare part A is expected to be--the trust fund does 
dry in 2019, Social Security's 2042. So, we have some 
experience in what happens when these events are triggered.
    Mr. ENGLISH. That is well said, but would you not agree 
that saying budget deficits resulted in the raiding of Social 
Security's trust funds is really a fundamentally misleading 
statement and one that I think reduces the public understanding 
of what is actually going on here?
    Mr. WALKER. Well, the fact of the matter is, even when we 
had budget surpluses, we were still investing the Social 
Security surpluses in government securities because of current 
law. The real problem is not that. The problem is we have large 
and growing structural deficits. That is the problem.
    Mr. ENGLISH. That is very well said and that is a very 
useful statement for us to have on the record and I think that 
is something people in my area, my district, have wanted to 
hear. Now, shifting gears, I see I have very little time left. 
There has been also raised the issue of risk and whether moving 
toward personal accounts will expose individuals to unnecessary 
risk and potentially unnecessary losses. Would you agree that 
under a voluntary system, no worker would be required to accept 
any investment risk?
    Mr. WALKER. Presumably, they would have the choice as to 
whether or not they are willing to accept the additional risk 
for the additional potential return.
    Mr. ENGLISH. With the conventional investment choices that 
have been laid out there, including choosing from government 
bonds, corporate bond index funds, equity index funds, would 
you agree that if you had personal accounts grounded in these 
investment choices, they would offer workers the potential to 
receive a better income in retirement than what can be paid 
based on the current pay-as-you-go system, where whatever 
impact personal impacts could have on solvency, aren't they 
also--have the potential for strengthening the basic retirement 
position of younger workers as they move toward retirement?
    Mr. WALKER. They could potentially increase adequacy, 
increase rates of return. Again, you have to analyze the whole 
package.
    Mr. ENGLISH. That is right.
    Mr. WALKER. How are you going to pay for them? You are 
looking at issues in isolation----
    Mr. ENGLISH. I don't dispute that, sir. Thank you very 
much. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from Georgia, Mr. Lewis, wish to inquire?
    Mr. LEWIS OF GEORGIA. Thank you, Mr. Chairman. Thank you, 
Mr. Walker, for being here today. Today we have heard a great 
deal about the challenges Social Security is facing, and we 
need to deal with those challenges. We need to meet them head 
on. We have heard very little if anything about the importance 
of Social Security. As a Member of this Committee, this is my 
first time hearing you, seeing you before the Committee to talk 
about Social Security. We are a community. We are one house. We 
are one family and one Nation. We are all in this thing 
together. I wish you would put on the record the importance, 
the significance of Social Security. What would happen to our 
seniors, disabled workers, to the survivors without Social 
Security? What would our country look like? I think it would be 
important for you, as the Comptroller General, to put it on the 
record, let me hear some statement from you.
    Mr. WALKER. Sure. Mr. Lewis, I think it is important to 
understand that Social Security is more than a retirement 
income program. It is also a program for the disabled. It is 
also a survivor's insurance program. It is arguably the most 
successful Federal program we have ever had. It represents the 
foundation of retirement income security, but it should be 
supplemented by private pension and personal savings. It is a 
program that is more than retirement income. We have to keep in 
mind the provisions of Social Security that deal with 
disability income and survivors income. In any reform effort 
that is of critical importance.
    Mr. LEWIS OF GEORGIA. Could you speak to if we did not have 
Social Security, what would our Nation look like? If we did not 
have Social Security in 2005 or 2006, 2007, 2008, 2009, 2019? 
What would the Nation be like?
    Mr. WALKER. Well, first, I cannot imagine anybody who would 
for a bill that would repeal Social Security, and I think it is 
important that even if you do nothing, which would be 
fundamentally imprudent, especially in light of our broader 
fiscal challenge, people are going to get something from Social 
Security just based upon the current system. They are going to 
get 73 cents on the dollar in 2042, gradually declining. If you 
didn't have Social Security at all for some reason, which I 
cannot imagine, if you didn't have it at all, then obviously 
poverty among the elderly would increase significantly among 
other things.
    Mr. LEWIS OF GEORGIA. Thank you. Thank you, Mr. Chairman.
    Mr. MCCRERY. [Presiding.] Thank you, Mr. Lewis. Mr. Weller?
    Mr. WELLER. Thank you, Mr. Chairman. Mr. Walker, thank you 
for appearing before the Committee today in what is an 
extremely important hearing, and we appreciate your input. In 
listening to your testimony and the questions of my colleague, 
clearly the question before us is do we fix Social Security now 
or do we wait? Of course, as you have outlined, we need to talk 
about what are the costs if we wait.
    You noted in your testimony and your presentation here some 
important dates resulting from the changing demographics of our 
Nation. 2008 the baby boomers enter the Social Security system, 
and we often think that they will enter at age 65, but it is my 
understanding two-thirds of those chose to begin collecting 
Social Security at age 62, and because of that and the sizeable 
population of baby boomers entering the Social Security system, 
then 2018 we begin running a deficit in Social Security, and if 
nothing continues to be done, that in 2042 we exhaust the 
revenues available.
    I would like to just hear from you so we can clearly 
understand what I think are the consequences of doing nothing, 
or say if we take a look at the plan that was suggested by the 
president of the AARP, Mr. Novelli, the plan suggested raising 
the retirement age, raising payroll taxes, cutting benefits as 
a solution, what that would mean to the typical taxpayer? I was 
wondering, can you, if Congress were to consider just one 
option which would be a payroll tax increase on workers, how 
big would that payroll tax increase have to be per worker? Do 
you have any dollar figure so we can put it in terms of an 
individual you can share?
    Mr. WALKER. I have the percentage that I think we included 
in the record. I want to say it was 1.89 percent of taxable 
payroll. I believe that is correct, 1.89 percent of taxable 
payroll in total is how much would have to happen immediately, 
but that would only take care of the problem for 75 years, and 
in fact, you would be out of balance after 1 year because of 
known demographics where you drop in a good year and you are 
adding an increasingly bad year every year.
    Mr. WELLER. So, that would require they have to keep 
ratcheting up the tax?
    Mr. WALKER. You would have to increase it over time.
    Mr. WELLER. Every year you would have to increase it.
    Mr. WALKER. Well, not every year, but you would have to 
increase it over time, and I would strongly encourage the 
Congress to try to achieve a solution that doesn't just obtain 
actuarial balance over 75 years, but at the end of the 75 years 
you are positioned such that hopefully you will not have to 
deal with it again.
    Mr. WELLER. In addition to a tax increase on workers, some 
have suggested lifting the cap which is currently at $90,000, 
and implying that that is the solution. If the cap were to be 
eliminated on 90,000 or more of income, what would that mean 
for the Social Security system?
    Mr. WALKER. Well, it would solve a significant part of the 
problem but then the question would be--not all of it by any 
means. You would still have to do more. Then the question would 
be, what other impacts would that have? That is 12.4 percent, 
12.4 percent obviously on people making more than 90,000, so 
they are obviously better off. On the other hand it would have 
a disproportionate effect on small business and those that are 
in that type of business who pay both taxes, they pay it both 
as the employer portion and the individual portion. It 
obviously would be one that wouldn't bear an additional burden 
on middle and lower income workers because you are not changing 
the payroll tax rate which is the most regressive tax of the 
major taxes that we have right now.
    Mr. WELLER. So, those hit hardest would be the entrepreneur 
on Main Street who is not----
    Mr. WALKER. It would be upper income including 
entrepreneurs who are self-employed and have other types of 
entities that are taxable----
    Mr. WELLER. Setting aside the idea for tax increases as a 
solution, say that Congress was solely going to look at a 
benefit cut, benefit reduction. What would that mean for an 
individual recipient?
    Mr. WALKER. If you ended up reducing benefits immediately, 
about 13 percent across the board or at least to an average 13 
percent----
    Mr. WELLER. For an individual recipient?
    Mr. WALKER. For an individual recipient.
    Mr. WELLER. What does that come to in dollars? Do you have 
that number?
    Mr. WALKER. Not off the top of my head, maybe the trustees 
do.
    Mr. WELLER. About 13 percent of the average?
    Mr. WALKER. 13 percent of what the average benefit is right 
now, but it would be for everybody, or you can adjust it and 
say, well, we are going to reduce it more for upper income, we 
are going to reduce it less for lower income or not at all, but 
it would have to average 13 percent. If you did that today, 
then you would solve the problem for 75 years, but you would 
not solve the problem beyond that period.
    Mr. WELLER. In order just to get an understanding of the 
magnitude of how much money is going to be necessary to ensure 
the solvency for the 75 years the actuaries give us and not 
thinking about beyond 75 years from now, give us that dollar 
figure.
    Mr. WALKER. Well, the amount of money that you would have 
to have today invested at treasury rates in real assets would 
be $3.7 trillion.
    Mr. WELLER. That would be combined with the 1\1/2\ trillion 
that is already in----
    Mr. WALKER. Correct, that is correct. In other words, we 
are going to deliver. I mean the government is not going to 
default on that 1\1/2\ trillion, but that is not enough. You 
would have to have another 3.7 trillion on top of that today, 
and every day that you delay the more money you are going to 
have to have.
    Mr. WELLER. A very quick follow-up. What is----
    Mr. MCCRERY. The gentleman's time has expired.
    Mr. WELLER. Thank you, Mr. Chairman.
    Mr. MCCRERY. Next to inquire is my good friend from 
Massachusetts, Mr. Neal.
    Mr. NEAL. Thank you, Mr. Chairman. Thank you, Mr. Walker. I 
think we would all agree that your testimony has been most 
helpful. We focused up to this point primarily on Social 
Security's finances, and I think that we have sufficiently 
established that you agree that carve-out private accounts do 
not unto themselves improve Social Security's financial 
position. So, let me shift gears for a moment and think about 
this from a different angle. If we are contemplating an 
expenditure of $5 trillion over 20 years in order to establish 
private accounts, we should think very carefully about what we 
are getting in exchange. Let me speak specifically to benefits. 
When Mr. Cardin asked this question you referred to your role 
as a fiduciary of Social Security, and I also concluded in your 
former life perhaps other trust funds. You could say yes to 
that if----
    Mr. WALKER. That is correct.
    Mr. NEAL. While you were serving in those fiduciary 
capacities, would you have been willing to sign your name to a 
report that promised individuals that their private accounts 
wouldn't lose money?
    Mr. WALKER. Well, for one thing, as a fiduciary, I would 
not be signing that. That would be a promise of the plan 
sponsor, in your case the government, in deciding what the 
promise is going to be.
    Mr. NEAL. You did draw parallels----
    Mr. WALKER. That is not a fiduciary----
    Mr. NEAL. You did draw parallels in your comments earlier 
to trust funds and your description of trust funds and how they 
operated.
    Mr. WALKER. Right. My comment on that, Mr. Neal, was that 
when most people think of a trust fund, you think of a trust 
fund that is associated with something like a private pension 
plan or a personal foundation or whatever.
    Mr. NEAL. But, Mr. Walker, would you have guaranteed that 
those trust funds would not lose money?
    Mr. WALKER. If I did that, then I would be very careful 
about what my investment strategy would be, and I wouldn't do 
that personally, I wouldn't do that.
    Mr. NEAL. You wouldn't do that, okay. That is important. 
Now, let me follow up on----
    Mr. WALKER. Plus I couldn't deliver on the guarantee 
anyway.
    Mr. NEAL. Right. Let me follow up on Mr. Lewis's question 
because I think it is equally significant. You did not 
explicitly speak to the issue of how survivors would get by on 
private accounts. Presumably if a worker leaves behind young 
children, then their working career didn't last very long. If 
private accounts are capped at $1,000 a year or indexed, then 
these accounts won't be very large; is that true?
    Mr. WALKER. Obviously, the accounts will be larger 
depending on how many years and what the compounding is. The 
bottom line is, I think, Mr. Neal, is we need a lot more 
details on how any proposal would affect survivor's insurance 
and disability insurance. We don't have those.
    Mr. NEAL. Would you agree then that the survivor's benefit 
is a terribly important component of Social Security's promise 
to the American people?
    Mr. WALKER. I think survivors benefits as well as the 
disability benefit.
    Mr. NEAL. How would you surmise that a family might get by 
with survivor's benefits on very small private accounts?
    Mr. WALKER. My understanding is, Mr. Neal, is that the 
private accounts, under no proposal are they intended to be the 
only thing that an individual would get. The question is, is 
whether or not they would be a piece of what the individual 
would be promised.
    Mr. NEAL. Has that question been resolved?
    Mr. WALKER. Mr. Neal, quite frankly, I don't know what--it 
depends on whose proposal you are talking about. There are some 
proposals----
    Mr. NEAL. We don't have a proposal in front of us from the 
President, we have a concept.
    Mr. WALKER. No. The answer is from the President that issue 
has yet to be resolved it seems to me.
    Mr. NEAL. Lastly, when you spoke to this issue of 
trusteeship as it related to your former role with private 
trusts or a fiduciary of Social Security, your description 
seemed to parallel the current questioning that is taking place 
here today in this sense, where it has been described as 
something that is intangible. We certainly are not arguing that 
it does not exist.
    Mr. WALKER. There is something called a trust fund which is 
a separate accounting device which has pieces of paper, bonds, 
backed by the full faith and credit of the U.S. government.
    Mr. NEAL. Thank you very much, Mr. Walker.
    Mr. WALKER. It is actually a file cabinet I think in 
Baltimore.
    Mr. NEAL. Thank you very much, Mr. Walker.
    Mr. WALKER. It is locked.
    Mr. NEAL. Thank you, Mr. Chairman.
    Mr. MCCRERY. Thank you, Mr. Neal. I would tell the 
gentleman, as Chairman of the Subcommittee on Social Security, 
I would welcome your thoughts and ideas on how we make sure we 
preserve the disability and survivors benefits in the program.
    Mr. NEAL. My intention is to be most helpful.
    Mr. MCCRERY. Thank you. Mr. Lewis?
    Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. Mr. Walker, 
when you talk about the full faith and credit of the government 
standing behind the Social Security Trust Fund, the fact is 
that the U.S. government is the citizens of this country. In 
order to stand by the bonds, how will the government come up 
with the money to stand by those?
    Mr. WALKER. Thank you, Mr. Lewis. I think the fact of the 
matter is a lot of people think the government has money. The 
government has no money. The government owes money. We have 
huge debt, over $7 trillion right now. When you talk about 
backed by the full faith and credit of the United States 
government, what does that mean? It means the power to tax.
    Mr. LEWIS OF KENTUCKY. Exactly.
    Mr. WALKER. Unless you end up increasing taxes or revenues, 
unless you end up cutting other government spending and using 
that money to pay for it, or unless you go out and borrow money 
to raise cash, which ultimately you are going to have to pay 
back that debt, and that is part of the problem.
    Mr. LEWIS OF KENTUCKY. Exactly.
    Mr. WALKER. Debt on debt is not good.
    Mr. LEWIS OF KENTUCKY. As we look to the future, as has 
been stated here today, right now we have a little more than 
three people paying into the Social Security. Eventually that 
is going to be two. Eventually it probably will be one. So, how 
can that be sustained? Just taking the personal accounts off 
the table--let us just take them off the table--the only way 
that we can then deal with the problem we have facing us with 
Social Security would be huge increases in the payroll tax, 
means testing, increasing the age of retirement, I mean those--
basically it comes down to a very narrow window of what we can 
do to fix the system. I understand that there is some up front 
cost in personal accounts, and whether it is a carve-out or 
whether it is an add-on, there is some up-front cost. I have 
heard estimates of $2 trillion or so, but to transition for 
those who would like to have personal accounts, when we look at 
what the cost will be in deficits because of the demographics 
in 75 years, as Mr. Shaw said earlier, we are looking at 
double-digit trillions of dollars of debt or huge increases in 
payroll taxes, or basically having a situation where people are 
not going to even come close to receiving the benefits that we 
are receiving today.
    Mr. WALKER. Not that we are receiving today. I think it is 
very, very important to understand how Social Security works. 
Social Security's benefit is designed to help people have the 
same relative standard of living based upon tomorrow's standard 
of living. That is what wage indexing is about, not to maintain 
your purchasing power based upon today's standard of living, 
which is what cost of living adjustments are about. So, the 
fact is, is that even if you end up getting to the point where 
the trust fund goes insolvent and you would have to end up 
cutting benefits dramatically by 27 percent and then gradually 
more over time, that is more than they would get in today's 
dollars. In other words, because a lot of that is to improve 
their standard of living to maintain their relative standard of 
living in future terms, rather than just maintain purchasing 
power based upon current terms. The bottom line is if you don't 
have individual accounts you either have to increase taxes, you 
have to decrease benefits or you have to get a greater rate of 
return on the investment of the existing trust fund assets or 
the surpluses that are likely to occur between now and 2018, 
some combination thereof.
    Mr. LEWIS OF KENTUCKY. Thank you.
    Mr. MCCRERY. Mr. Tanner.
    Mr. TANNER. Thank you very much, Mr. Chairman. I want to 
say that this has been the most refreshing and enlightening 
hearing I have been to in this Committee in some time, Mr. 
Walker. It is refreshing in the sense that one comes here and 
tells it like it is, even though it is not pleasant to hear. I 
hope that people who have been listening to this have grasped 
not only the seriousness of this problem, but more importantly, 
the seriousness of our budgetary situation. What I have heard 
is Social Security has a problem, Medicare has a problem, but 
both pale into insignificance if you look at what is happening 
to this country. This country is going bankrupt under the 
present system. If your chart shows that in 20, 40, 35 years 
from now every dollar coming in here is going to be paid in 
interest. Is that----
    Mr. WALKER. Mr. Tanner, I think----
    Mr. TANNER. The magnitude of our budgetary problem right 
now dwarfs everything else, does it not?
    Mr. WALKER. Our current financial condition is worse than 
advertised. We are on a unsustainable fiscal path, but in 
fairness I think it is important to note that even in the years 
that we had short-term surpluses and even in the years where we 
had projected surpluses, they were temporary projected 
surpluses. Even in those years we knew we were going to face 
deficits in the future due primarily to known demographic 
trends and rising health care costs. So, you are correct in 
saying that the bigger problem is we have got to get on a more 
prudent fiscal path.
    Mr. TANNER. In the last 31 months the Congress has seen fit 
to raise the debt ceiling of the country $2.23 trillion. In the 
last 48 months we have increased the gross debt of the country 
over 2 trillion. We have borrowed in real money 1.2 trillion. 
Of that 1.2 trillion, 925 billion or 84 percent of the hard 
money that we borrowed in the last four years, has been from 
foreigners. Is that correct?
    Mr. WALKER. Those numbers sound about right. Last year it 
was well over 90 percent.
    Mr. TANNER. I know it. If you go back it wasn't quite as 
bad in 2002. Now it is over 90 percent of the money we are 
borrowing is coming from foreign interests. Now, what I guess 
my question is, is could you somehow capsule the fact that this 
Congress is unwilling to come to grips with the immediacy of 
what is going on here with four or five hundred, perhaps 600 
billion dollar deficits in the budget and the trade deficit? 
Here we are talking about a $3.7 trillion dollar problem in 
Social Security over 75 years, when we have an elephant in the 
room right now, today, and that is mortgaging this country to 
foreign interests at the rate of 90 percent of our indebtedness 
that we go into every year. Is there some way to capsule that 
so we can get the attention of the American people as to how 
bad the mismanagement is of our finances in this town?
    Mr. WALKER. Here is my concern. Take last year, real 
numbers. We had a $412 billion unified deficit. We had a $568 
billion on-budget deficit because we spent every dime in the 
Social Security surplus and the temporary posted surplus on 
operating expenses. Less than 25 percent of the unified deficit 
had anything to do with the global war against terrorism or 
incremental homeland security costs. That means over 75 percent 
had nothing to do with that. We had among the strongest, if not 
the strongest, GDP growth rates of any Nation on the country. 
We haven't been in a recession since November of 2001. How can 
we justify running deficits at that level? What is more 
important is not where we are, where we are headed. I commend 
to you again, Mr. Tanner, please read this book.
    Mr. TANNER. Well, I commend you for telling it like it is, 
because I think if the American people knew the extent of the 
mismanagement of what is happening in this town and what has 
happened the last four--and where we are going, they would 
demand that something be done about it. Thank you so very much.
    Mr. MCCRERY. Mr. Beauprez.
    Mr. BEAUPREZ. Thank you, Mr. Chairman. Mr. Walker, thank 
you for your testimony today. It is truly a pleasure to have 
you in front of us. There is a whole lot that is being said out 
there, obviously, and for that reason it is especially good to 
have you in front of us. Today back home in one of my papers 
there is an editorial about Social Security that basically 
makes the case that there really is not that much wrong with 
it. I want to go through a few of the facts as they cite them, 
and maybe it is yes/no on a few of these. Within that 
editorial, that op-ed, it says that if we do absolutely nothing 
until 2042, 2052, depending whose projections you want to 
accept, there will still be enough to pay 70, 80 percent 
inflation adjusted of the current benefit.
    Mr. WALKER. Seventy-three percent.
    Mr. BEAUPREZ. Okay, 73 percent, so that there still will be 
funds coming in, right?
    Mr. WALKER. Yes. However, if we face the fiscal future that 
I showed, we may have a much bigger problem because the country 
may not be able to deliver on its promise.
    Mr. BEAUPREZ. Fair enough. The trust fund now has about a 
trillion and a half dollars in it of those bonds that we have 
talked about.
    Mr. WALKER. That is correct.
    Mr. BEAUPREZ. It suggested by 2018 that number will grow to 
about 5.3 trillion.
    Mr. WALKER. I don't have the numbers in front of me, but it 
sounds reasonable.
    Mr. BEAUPREZ. It would grow, okay. Who pays the interest on 
that trust fund?
    Mr. WALKER. The taxpayers.
    Mr. BEAUPREZ. So, that comes out of?
    Mr. WALKER. It comes out of general revenues, but we have 
huge deficits so we are borrowing that.
    Mr. BEAUPREZ. So, if we pay it on that growing trust fund, 
we are not going to have it to spend somewhere else?
    Mr. WALKER. That is correct. Whatever you pay on interest 
is for past----
    Mr. BEAUPREZ. The op-ed also suggests, if I can go on, that 
that trust fund balance will increase to about 6.6 trillion 
over the number of years, till in 2028 they say it will be 
about 6.6 trillion. Thus, since it is so big and it is earning 
so much interest, that we will have the funds to pay almost 
till kingdom come the benefits as they current exist, that the 
trustees--and this is the question I really want to pose to 
you--even the trustees say that because that is the case, 
because this trust fund that we have talked about at length 
will continue to grow and earn ever more and more and more 
interest to pay ever more and more benefits, that in the next 
75 years according, it says, to the trustees themselves, no 
benefit or tax cut is necessary at all in the next 75 years. 
Does that sounds----
    Mr. WALKER. The only thing I can assume that they are 
doing, and you may want to ask the trustees, is the trustees 
have three simulations or projections that they run each year, 
a low cost, a high cost, and the intermediate best estimate 
assumption. That could be based on the low cost or the 
optimistic scenario. I don't think the optimistic scenario, if 
it is, if that is what it is based on, is realistic at all. 
Actual experience has been very close to the best estimate 
intermediate assumptions, if anything a little bit more toward 
the high cost. The 3.7 trillion is based upon the best estimate 
assumptions, 2008, 2018, 2042. Based upon those numbers, that 
is what I think you ought to go on.
    Mr. BEAUPREZ. We are 3.7 trillion in present dollars short 
of taking care of the next 75 years obligation?
    Mr. WALKER. Right. You need a lot more than that if you 
want to take care of it beyond that.
    Mr. BEAUPREZ. That sounds to me like we need to do 
something. Isn't the big challenge here that we basically have 
an enormously unfunded liability that we have promised--and I 
agree with you, will deliver somehow if we have to break the 
country, we will deliver somehow on that promised benefit. It 
is an unfunded liability. We don't have the money sitting there 
to deal with it.
    Mr. WALKER. It is an unfunded commitment. It is not 
currently deemed to be a liability, and the Supreme Court has 
said that you can change it any time you want. Now, my personal 
view is, is to the extent that you have got trust fund assets, 
then at a minimum you are going to deliver on that because that 
is backed by the full faith and credit of the United States 
government. It would be a default if you didn't deliver on 
that. Anything beyond that is questionable. You have the 
discretion to----
    Mr. BEAUPREZ. The real challenge in front of us is where is 
the revenue going to be? Where is it going to come from when we 
have to deliver on the benefits?
    Mr. WALKER. Just keep in mind this, it is very important. 
We have a 43 trillion plus dollar problem. This is a $3.7 
trillion problem. You have to solve this in the context of the 
bigger problem. You can allocate more revenues here if you 
want, but then what are you going to do when Medicare comes up 
and you have a $27.8 trillion problem?
    Mr. BEAUPREZ. I thank the gentleman because I think that is 
a critical point because I think in a lot of this discussion 
that is going on out there, we are trying to deal in isolation 
as it may benefit our particular argument, and we really need 
to be dealing in total context of the size and direction of the 
Federal Government. I thank the gentleman. I yield back.
    Mr. MCCRERY. Mr. Becerra.
    Mr. BECERRA. Thank you, Mr. Chairman. Mr. Walker, thank you 
very much, and by the way, thank you for the work that you do 
as the government's watchdog over all programs for the Federal 
Government. Let me go back to what you said before, and that is 
that the biggest problem we face, the real problem is that we 
are on an unsustainable, as you said, unsustainable fiscal 
path. The fiscal irresponsibility of not the Federal 
Government's activities in 50 years, in 2042 or 2052 with 
regard to Social Security, but we are doing today and how we 
are setting up our priorities on how we spend the taxpayers' 
dollars when it comes to the Treasury. You just mentioned right 
now that the problem for Social Security over 75 years the 
shortfall is about $3.7 trillion, and previously in response to 
another Member's question, you mentioned that today's Federal 
Government debt is already more than twice that sum, over $7 
trillion. So, the national debt today, not in another 75 years, 
but today, is already twice as big as the whole problem would 
ever be for Social Security over the next 75 years. If we could 
put up the chart that you had put up there at the end, your 
final chart, I would appreciate that because I would like to 
get into that for just a second.
    Mr. WALKER. Okay.
    Mr. BECERRA. It showed that the biggest problem we have 
come the year 2040, the fastest-growing problem we have come 
the year 2040 isn't Social Security, it is the interest that we 
are paying on the national debt, and let's make sure we are 
clear so folks understand this, we get nothing for the billions 
or trillions of dollars we spend in paying interest. It is like 
when someone pays off a mortgage. With your principal you are 
buying a house. When you pay the principal off on your mortgage 
you know that that is because you are owning the house. The 
interest you pay is just because you borrowed money. Interest 
doesn't create new jobs. Interest payments don't create new 
jobs. It doesn't create new opportunities for businesses to be 
developed. It is just lost money in payment on interest. Yet 
there is another chart that you have in your testimony but that 
you don't have on your presentation that you referenced before, 
which showed that if you were to remove--could we get that 
chart up? Is it possible to get that chart up? Mr. Chairman, is 
it possible to get----
    Mr. WALKER. Are you talking about the one on page 12?
    Mr. BECERRA. Correct. I am hoping that you can put up the 
chart that you had used before. That is on page 13. I will make 
reference to the chart that you don't have on display, but that 
showed that what was the largest and fastest growing part of 
our expenditures in 2040, the black portion, the interest 
payments on the national debt shrink dramatically, 
dramatically, when you take out the cost of the tax cuts. So, 
that blue bar in the year 2040, which is nothing more than 
paying interest on the national debt, shrinks dramatically to a 
third or a fifth of the size when you take out the cost of the 
tax cuts.
    Mr. WALKER. It is not just the tax cuts. It is the tax cuts 
plus the fact that under this scenario discretionary spending 
grows by the rate of the economy. Under the other one it grew 
by the rate of inflation.
    Mr. BECERRA. That is a good point. The largest portion of 
the reduction is due to the fact that you don't extend the tax 
cuts. Now, that is dramatic to me because if we want to resolve 
the problems with Social Security today, we had better resolve 
the problems of our fiscal irresponsibility today as well. That 
takes us to what you said before, carve-outs in Social 
Security, where you take money that workers are contributing 
into the Social Security system, and take it out in what are 
called private accounts. When you privatize or partially 
privatize Social Security by taking money out that is supposed 
to be in Social Security and put it into these private 
accounts, as you said, that by itself no only doesn't solve the 
problem, it exacerbates it, which is your word. As far as I can 
tell--and I think you have said this before--the President has 
talked to us in terms of Social Security about nothing more 
than his proposal to carve out a portion of the Social Security 
moneys going in right now, and create these privatized 
accounts, where he would take the 4 percent, which amounts to a 
third of the money that employees currently put in. If we want 
to have people feel secure about their Social Security, 
wouldn't the best thing be for the President to tell us how he 
is going to resolve the solvency issue rather than begin by 
exacerbating the problem and talking about a carve-out before 
he tells us how he is going to do the other things to create 
solvency for Social Security?
    Mr. WALKER. I think the President has already made it clear 
that you would have to have other reforms in order to achieve a 
sustainable solvency, adequacy and equity, administrative 
feasibility. He just hasn't provided the details of what he is 
proposing to do, and that is obviously a political issue.
    Mr. BECERRA. I thank you very much.
    Chairman THOMAS. [Presiding.] The gentleman's time has 
expired. Does the gentleman from Texas, Mr. Doggett, wish to 
inquire?
    Mr. DOGGETT. Thank you, Mr. Chairman. Mr. Walker, than you 
for your service to America and to your willingness again 
today, as you have previously in testifying to this Committee, 
to answer the questions regardless of the political 
consequences of your answers. Let me say that I very much share 
what you have stated is your biggest concern, that we are on an 
imprudent path, and as we consider that imprudent path, I 
believe in answer to some earlier questions, as far as the 
total debt we have now, Social Security contributes less than 
10 percent of that, does it not?
    Mr. WALKER. Right now our total national debt I think is 
about 7,5 trillion, roughly around there. Social Security I 
think has about 1.5 trillion of the 7.5.
    Mr. DOGGETT. So, while it is extremely important to look at 
the long-term Social Security issue, the broader problem of 
fiscal responsibility, the other 90 percent, is also a very big 
problem that we need to look at?
    Mr. WALKER. Right. I think it is important we recognize not 
where we have been but where we are and where we are headed.
    Mr. DOGGETT. Indeed as far as where we are headed, isn't 
our biggest unfunded liability at this point--you discussed 
that earlier--isn't our biggest unfunded liability interest on 
that public debt?
    Mr. WALKER. Actually, I would say the biggest unfunded 
commitment that we have right now is Medicare, about 27.8 
trillion, of which 8.1 trillion relates to the new Medicare 
prescription drug benefit.
    Mr. DOGGETT. That is right, and in fact, that liability got 
much larger after the subsidy that was given in the Medicare 
bill last year to the pharmaceutical and the insurance 
industries. Didn't it grow in size after that bill was passed?
    Mr. WALKER. Medicare had about a $15.5 trillion unfunded 
obligation before that bill was passed. The combination of the 
passage of that bill, as well as changes in estimated long-term 
cost of health care took Medicare's estimated unfunded 
commitment from about I think 15.5 trillion to about 27.8 
trillion in 1 year.
    Mr. DOGGETT. In addition gave us new insight into the 
accuracy of some of these estimates about what the total cost 
of some of these initiatives, whether they are a cut in revenue 
or an addition in spending, where this Committee was told 400 
million, then the Administration knew it was really 550, and 
now it has jumped to almost twice that amount.
    Mr. WALKER. That was in billions.
    Mr. DOGGETT. Yes, sir, in billions. Excuse me. It does make 
a difference. Let me talk to you about a term that I think 
quite appropriately the Chairman of the Subcommittee on Social 
Security injection into this debate in asking you a question, 
and that is the term ``clawback'' because I have never heard 
President Bush use that term. A clawback is a reduction of 
Social Security benefits when you sign up for a private 
account, isn't it?
    Mr. WALKER. I think most of us would call it an offset. 
Clawback is kind of ominous, but, yes, it basically--if you get 
a private account, typically the way that it would work is, in 
exchange for getting that private account, you would get 
somewhat less of the defined benefit. You would still get a 
defined benefit, but you would get less than otherwise you 
would have.
    Mr. DOGGETT. I am going to use, just to be fair, I am going 
to use Mr. McCrery's term, because he used the term 
``clawback,'' and unless you have a clawback with the private 
accounts, you pointed out that private accounts will exacerbate 
the Social Security solvency long term?
    Mr. WALKER. You have to have either a clawback and/or other 
changes in order to deal with the problem.
    Mr. DOGGETT. I think that is very, very important, and I 
think it is important and appropriate that it was the Chairman 
of the Republican Subcommittee on Social Security, our 
Subcommittee, who raised that issue, because president Bush has 
talked a lot about the ownership society, about the value of 
private accounts, but he has yet to mention that a clawback, a 
claw into Social Security guaranteed benefits is an absolutely 
essential and vital part of his plan to privatize because 
unless you have a clawback to go along and accompany the 
private accounts, you actually make the solvency problem worse 
than it already is. Now President Clinton had a different 
approach. When he came to the Congress in his State of the 
Union and talked about saving Social Security first, wasn't a 
big part of that that in order to save Social Security and 
preserve Medicare and the other obligations that this country 
would face as it had an aging population and a declining ratio 
of workers to that aging population, that now was the time to 
begin to reduce the public debt and the size of our deficits. 
You would agree with that objective, wouldn't you?
    Mr. WALKER. I testified in 2001 on the issue, and it is on 
the record as to what I said.
    Mr. DOGGETT. Thank you very much. Of course that situation 
has gotten much worse since President Clinton left office.
    Chairman THOMAS. The gentleman's time has expired. The 
Chair can make sure that anyone reading the record in the 
future is clear. The comparison of the cost of the Medicare 
bill at 400 billion was an estimate from the Congressional 
Budget Office. The statement that it actually costs $532 
billion was the Office of Management and the Budget's estimate. 
Mr. Walker, you put up on the screen that you thought based 
upon the Social Security actuaries, which would be the 
equivalent of the Office of Management and the Budget, that we 
would go below the 100 percent benefit rate in 2042. You had an 
additional date on the screen, which I believe was 2052.
    Mr. WALKER. That is correct.
    Chairman THOMAS. That was based upon the Congressional 
Budget Office's estimate. So, when you get discrepancies either 
in years of solvency or the costs of programs, it really is not 
fair to compare one set of estimates for one particular group 
of numbers that you seem to like and then switch to another 
group of estimators and utilize their amounts. Would you say 
that that is probably not, in your experience as an accountant 
and financial responsibility, a way to explain a problem?
    Mr. WALKER. Consistency is a principle that we generally 
follow in accounting. I would note, Mr. Chairman, as you know, 
I think the OMB's estimate was based upon the Office of the 
Actuary at Social Security. They are the ones that came up with 
the $534 billion estimate I believe--pardon me--Medicare, CMS.
    Chairman THOMAS. They were, but they emphasize it through 
OMB since they utilized the actuaries numbers. So, in both 
instances they came from the same sources, and in both 
instances they are different estimates because in both 
instances people make different assumptions about the future. I 
thank the gentleman. Does the gentlewoman from Pennsylvania 
wish to inquire?
    Ms. HART. Yes, I would, Mr. Chairman. Thank you for joining 
us, Mr. Walker. I appreciate your time today. I want to go down 
a different track a little bit regarding benefits. One of the 
concerns, obviously, we have discussed quite a bit is the 
demographic issue, and how Social Security as it is is not 
sustainable. The other issue that we haven't touched on much is 
the way Social Security works for married couples when both 
members of the couple work, and how benefits for women are 
often not particularly fair if they are widowed, the way the 
numbers work. Can you reflect on that a little bit as far as 
the system works now, the fairness issue for men and women?
    Mr. WALKER. Part of the issue is is how long are women in 
the workforce? If people come in and out of the work force in 
order to bear children and raise children, then one of the 
aspects that you have to consider under Social Security is you 
have to have the equivalent of 10 years worth of credits in 
order to earn anything, and then the formula is based upon 35 
years worth of credits. So, to the extent that women typically 
don't have as much work experience and they may come in and out 
of the work force, obviously that could end up affecting their 
ultimate benefit. As you also know, Ms. Hart, is generally you 
have to look at how much both working family members earn and--
--
    Ms. HART. Right, there is a total.
    Mr. WALKER. Right. Then you have to consider the 50 percent 
factor. Even if one doesn't work at all, you still are entitled 
to certain supplemental benefits in the future as it relates.
    Ms. HART. So, if you look at the total income of a couple 
where, for example, Couple A, the woman does not work at all 
and they make $3,000 a month; and in Couple B the man makes 
2,000, the woman makes 1,000, so they have the same total. 
Their benefits are different?
    Mr. WALKER. My understanding is yes, but you may want to 
talk to the trustees about that. They are probably getting 
their calculators out right now.
    Ms. HART. It is my impression anyway that in the couple 
where the woman is working and the couples' incomes are close 
together, in the end it is actually not much of a benefit under 
Social Security for the couple's total Social Security income. 
I am not sure if you have analyzed this at all, and we are 
probably going to have to do a lot more, but I believe as part 
of the reform we probably want to look at the actual benefit 
that both Members of the couple would earn under the reform. Is 
that something you guys have considered at all?
    Mr. WALKER. That is something that several reform proposals 
have looked at things like for women, for survivors. That is an 
issue I think that should be explored as part of reform.
    Ms. HART. I think it should be too. I think that is a great 
idea. While I have a couple seconds, I just want to talk a 
little bit more about the personal accounts issue, and I think 
this would actually also help make the benefits more fair. One 
of the issues we talk about is the personal savings rate, and I 
know Mr. Greenspan has reflected on how personal accounts could 
actually increase our personal savings rate in the United 
States. I am concerned anyway about how families are able to 
receive survivor benefits as a result of Social Security. 
Obviously if there are children under 18 there are survivor 
benefits. Under the current system is it not true that if there 
is nobody under 18 in the family, there is basically no Social 
Security survivor benefit?
    Mr. WALKER. That is my understanding, but you may want to 
check with the trustees.
    Ms. HART. Under a system where we have a personal 
retirement account, does that change?
    Mr. WALKER. I haven't seen a proposal that would change it. 
Hold on. I think----
    Ms. HART. Under the present retirement where you----
    Mr. WALKER. My understanding is where you have an 
individual account.
    Ms. HART. Own an account.
    Mr. WALKER. Yes, when you own an account, that you would 
give a survivors benefit that otherwise you would not get 
because the account would be transferable to the survivor 
irrespective of their age. That is my understanding, but again 
I haven't seen a written proposal.
    Ms. HART. It is mine, and in the whole change of the nature 
of the system would be to change the system from a lot of money 
being paid as a tax into a pot versus money being paid into an 
account that actually has the beneficiary's name on it.
    Mr. WALKER. Right. A portion of the benefit would be in an 
individual account. A portion of the benefit would be a defined 
benefit which would be pooled as it is right now for 
everything. It is clear that under an individual account 
proposal, certain individuals would receive survivor benefits 
who do not receive them right now.
    Ms. HART. Today.
    Mr. WALKER. That is correct.
    Ms. HART. That is fair. That is all I needed. Thank you. I 
yield back.
    Chairman THOMAS. Thank the gentlewoman. Does the gentleman 
from North Dakota, Mr. Pomeroy, wish to inquire?
    Mr. POMEROY. Thank you, Mr. Chairman. I would begin by 
complimenting our witness. David Walker, you are a square one 
with the numbers, and not everyone that sits at that table is, 
and I very much appreciate your testimony today as well as your 
leadership with GAO. Let us just follow up for a moment on this 
women's fairness question. A principle feature of Social 
Security is the retirement annuity, pays every month, inflation 
adjusted for as long as a person lives, right?
    Mr. WALKER. After they receive the benefit it is inflation 
adjusted, yes.
    Mr. POMEROY. Women on average live longer than men, is that 
correct?
    Mr. WALKER. That is correct.
    Mr. POMEROY. I mean I have heard figures that they live on 
average six, 7 years longer than men, which means every month 
they are receiving that guaranteed retirement annuity benefit 
for six or 7 years, again, in addition to over what perhaps the 
spouse would have done. In fact, if my figures are right, a 
couple at the age of 65 has got a 50 percent chance one of them 
lives till the age of 92, a 25 percent chance one of them lives 
till the age of 97, and the chances are that will be the woman, 
not the man, and that means that that guaranteed inflation 
adjusted annuity payment coming in every month is a tremendous 
benefit to women, and indeed, changing to a system that either 
added risk in terms of the amount to be received or reduced the 
benefit received would produce a system where a lot of those 
very elderly women would be in deep trouble. The thing I want 
to get to about this chart is it shows in very visual terms 
your point. We got a $43 trillion unfunded liability problem, 
3.7 trillion of which is related to Social Security. Is that 
more or less the essence of your testimony today is we have got 
a Social Security unfunded liability issue, but it is a smaller 
part of what is a much bigger picture?
    Mr. WALKER. Well, two things. One is, as of September 30, 
2004 we had total liabilities in unfunded commitments totaling 
$43 trillion, of which 3.7 was Social Security. This is looking 
forward to be able to show what our fiscal future would look 
like based upon CBO's assumptions for economic growth, based 
upon the Social Security and Medicare trustees, the best 
estimate assumptions, and based upon the other factors that I 
mentioned, discretionary spending grows by the rate of GDP, and 
all tax cuts are made permanent.
    Mr. POMEROY. It appears from the other chart in your 
testimony that the step of making the tax cuts permanent alone, 
looks like it quadruples at least the interest payments by the 
year 2040. Is that----
    Mr. WALKER. The difference between the one on page 12 and 
page 13, I believe--this is the one I believe, on page 13, is 
both the tax cuts and the discretionary spending growing by the 
rate of the economy rather than inflation.
    Mr. POMEROY. Okay. The blue bar components----
    Mr. WALKER. I see what you are saying. Since the green is 
on top I understand what you are saying.
    Mr. POMEROY. Is interest, that is interest.
    Mr. WALKER. That is right.
    Mr. POMEROY. That goes up. Making the tax cuts permanently 
increases that, and in fact, increases it by a dimension that 
is greater than the Social Security unfunded liability.
    Mr. WALKER. It is important to keep in mind that that blue 
is fed also by the entire bar, so the fact that discretionary 
spending grows by the rate of the economy rather than rate of 
inflation also serve to increase the green, in addition to the 
tax.
    Mr. POMEROY. I take your point.
    Mr. WALKER. I mean it can serve to increase the blue in 
addition to the tax provision.
    Mr. POMEROY. I thought Mr. Beauprez made a very important 
point when he said we need to not look at this in isolation, 
but deal with this unfunded liability issue in the entire 
context. The context I want to reduce it to is to take it away 
from macroeconomics for a minute to the circumstance of the 
individual Social Security check. In my State that check 
averages $834 a month, and we know that the national average is 
about nearly 30 percent rely on Social Security for 90 percent 
or better of their income, and more than two-thirds rely on 
Social Security for better than half of their income. So, as we 
face the difficult choices represented by that bar, choices 
that we would make that would reduce this income from Social 
Security to the people that are really depending upon it, would 
be a pretty unwise policy choice in terms of the retirement 
income security picture, it seems to me. Do you have a comment?
    Mr. WALKER. Mr. Pomeroy, I think obviously the Congress 
would have to make a number of decisions about whether or not 
it wanted to have individual accounts, if it did if it was add-
on versus carve-out plus, to what extent would it be voluntary 
versus mandatory, to what extent might you want to target it to 
middle and upper income versus lower income. There are lots of 
issues that you would have to decide. So, until you actually 
see the package and understand how it would work, it would be 
difficult to respond to.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from Florida, Mr. Foley, wish to inquire?
    Mr. FOLEY. Thank you very much, Mr. Chairman. Mr. Walker, 
welcome to the Committee. The tone has changed somewhat, and I 
am heartened by the fact that many Members recognize at least 
the difficulty we face in meeting our obligations. Earlier when 
asked about bankruptcy, you said it is not bankrupt but it is 
insolvent. We used the example of a dollar into the system and 
yielding 73 cents as a return in 2018. So, that is technically 
a default position, correct, in business?
    Mr. WALKER. In 2042 I think the accurate term would be is 
the program would be insolvent because it would not be able to 
pay full promised benefits when due.
    Mr. FOLEY. So, in any business you would either be pushed 
into a chapter filing, you would be foreclosed on, you would 
lose your assets technically, correct?
    Mr. WALKER. Something adverse would happen, yes.
    Mr. FOLEY. However, the government can go along and whistle 
by the graveyard and print money at this kind of notion if we 
don't do something soon.
    Mr. WALKER. It can print money, it can borrow. It can 
increase taxes. It has a number of options available that 
corporations do not have.
    Mr. FOLEY. Last year when we were having debates about tax 
relief--and we have heard a lot of conjecture that if we had 
not passed tax cuts we wouldn't be in a financial crisis. My 
colleagues on the other side of the aisle advocated for 
reduction in the payroll taxes at that time instead of reducing 
other taxes. Would a reduction in payroll taxes in effect 
weaken the system?
    Mr. WALKER. It would, one, add to the deficit, and it would 
also reduce the cash flows coming into Social Security, so, 
yes.
    Mr. FOLEY. It would have further exacerbated the problem--
--
    Mr. WALKER. Yes, unless you replaced it somewhere else.
    Mr. FOLEY. It is interesting to me as well--I come from the 
fifth oldest Medicare eligible population in America. Number 
one is in Florida. I think the top ten are all in Florida. So, 
certainly Medicare is critical to our constituents. One of the 
patterns of behavior I notice about my constituents as well is 
they are very prudent when shopping for returns on their 
investment. In fact, several will drive across town, if they 
can get a higher rate on a CD at a bank. They will use a lot of 
energy to increase the yield on their own personal savings. I 
think that is a dramatic representation of how smartly they 
manage their money. I guess I am talking aback when we talk 
about giving them a chance to possibly have their own accounts, 
that somehow there is this fear factor. So, I would like you, 
if you could, dispel at least the factor of compounding 
interest. The higher the interest, the larger the aggregate 
return on investment.
    Mr. WALKER. Well, the so-called miracle of compounding. To 
the extent that you have earnings compounding over time, that 
is obviously a positive thing. Right now, unfortunately, as a 
country we have the miracle of compounding working against us. 
We have debt on debt, interest on interest in the negative 
sense, which we have to take care of. I think one of the things 
you would have to keep in mind is if you have individual 
accounts how many options would people have because you would 
not want it to be very complex. What type of assistance are you 
going to give them in determining how to invest their account? 
What if any default options will you have for people who are 
not comfortable making those decisions to do it in a manner 
that considers their age and certain factors like that? I think 
the Federal Thrift Savings Plan is a pretty good model, that as 
a foundation, possibly with some enhancements with some age-
based investment options or other things, could be a way to 
move forward if you decide to proceed with individual accounts.
    Mr. FOLEY. I am glad you mentioned thrift savings because I 
have been a member since 1994. I have been here 10 years, and I 
have looked. Even during difficult years, average return on my 
investment using either the fixed income formula or the more 
aggressive equity has been between 6\1/2\ and 11 percent over 
those 10 years on average. So, while there have been excellent 
years, there have been some declining years based on the bubble 
of the stock market. Over all over those 10 years the 
significant return on investment has maximized my retirement 
savings. I think that is a point that has to be emphasized, 
that if it is safe enough for Members of Congress, worthy 
enough for Members of Congress, we should not necessarily fear 
at least debating it as a conceptual plan for our citizens.
    Mr. WALKER. I think you are right in not fearing to debate 
it, but I think you also have to keep in mind, Mr. Foley, that 
the Federal Thrift Savings Plan for you is like an employer 
sponsored plan for somebody in the private sector.
    Mr. FOLEY. Correct. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank the gentleman. Does the gentlewoman 
from Ohio wish to inquire?
    Ms. TUBBS JONES. Thank you, Mr. Chairman.
    Mr. Walker, good afternoon. How are you, sir?
    Mr. WALKER. Well, thank you.
    Ms. TUBBS JONES. I want to read a quote from your GAO 
report, and it says, ``Social Security represents the 
foundation of retirement income for millions of Americans and 
has helped to prevent many former workers and their families 
from living their retirement years in poverty. It provides 
millions of Americans with disability insurance and survivor 
benefits, thus providing benefits that are critical to the 
current and future well-being of tens of millions of 
Americans.'' Earlier in your testimony you said that the Social 
Security Trust Fund wasn't really a trust fund, right?
    Mr. WALKER. That is correct.
    Ms. TUBBS JONES. To millions of Americans, seeing that we 
have represented to them that it is a trust fund, and that the 
people who handle the trust fund are called trustees, and there 
are reports dating back to 1929, 1938, whenever it was created. 
You have created a legal fiction that there is a trust fund, 
correct, sir? Not you personally, but we have represented to 
America that there is a Social Security Trust Fund.
    Mr. WALKER. I think quite candidly, the trust fund really 
confuses the issue.
    Ms. TUBBS JONES. I didn't ask you whether it confused the 
issue. I have asked you for millions of Americans for decades 
we have created a legal fiction that there exists a Social 
Security Trust Fund upon which they can rely.
    Mr. WALKER. I think most Americans think that there is a 
separate trust fund like a trust fund that you would normally 
think of that has real money in it, and that is not the case.
    Ms. TUBBS JONES. Well, but they do know that there are 
trust fund dollars or Social Security dollars that they have 
put into a fund and they have an expectation of receiving the 
benefit, correct?
    Mr. WALKER. Absolutely, and I think to the extent that the 
government has backed by the full faith and credit these bonds, 
I think it will deliver on them.
    Ms. TUBBS JONES. In fact, China, Japan and a whole bunch of 
other foreign countries think our money is so good that they 
are willing to invest tons of dollars in the United States and 
believe we are going to pay them back, correct?
    Mr. WALKER. Correct. The question is how much longer.
    Ms. TUBBS JONES. So, the people of America shouldn't think 
that we are going to pay Japan and China back before we are 
going to pay ourselves, should they?
    Mr. WALKER. Oh, absolutely not. Don't----
    Ms. TUBBS JONES. I just want to be clear so you don't 
represent to America, all that is listening, that even it may 
not be a legal trust fund as you want to say it would be 
because you are from Arthur Andersen or whatever other 
accounting firm, that it is in fact a trust fund upon which 
they can rely and that they paid into?
    Mr. WALKER. What they can rely upon is the fact that the 
bonds that are in the trust fund are backed by the full faith 
and credit of the United States government.
    Ms. TUBBS JONES. Everybody else thinks that the full faith 
and credit of the United States is big enough for them to 
invest trillions and billions of dollars into America, and they 
hold the paper that creates the deficit that we now have as a 
country, right?
    Mr. WALKER. I believe we will deliver on that promise both 
to people who have--both to the trust funds as well as to those 
that are public investors outside the trust fund.
    Ms. TUBBS JONES. The people of America expect we are going 
to pay them before we are going to pay Japan and China.
    Mr. WALKER. The answer is we are going to pay them when the 
trust fund--when we get a negative cash flow and these bonds 
are going to be redeemed to the extent and at the time 
necessary to pay back----
    Ms. TUBBS JONES. All I want to say, Mr. Walker, and all the 
people of America want to know is that you are not representing 
that the United States of America will not pay the money owed 
to Social Security, people who have paid in over decades what 
they are entitled under Social Security.
    Mr. WALKER. I think I have been consistent on that, that 
the bonds----
    Ms. TUBBS JONES. All I am asking for is a yes. Let me----
    Mr. WALKER. The government will deliver on the bonds.
    Chairman THOMAS. Let Mr. Walker----
    Ms. TUBBS JONES. Thank you very much. Now, you did speak to 
the issue we need facts with a bipartisan solution, is that 
correct?
    Mr. WALKER. Correct.
    Ms. TUBBS JONES. Would you say that the Medicare 
prescription drug program was facts with a bipartisan solution?
    Mr. WALKER. I would say you didn't have all the facts, and 
you certainly didn't have a broad based bipartisan solution.
    Ms. TUBBS JONES. We didn't have all of the facts, but what 
you are advocating right now is facts with a bipartisan 
solution.
    Mr. WALKER. First you have to have the facts. Then you have 
to develop a bipartisan solution based on them.
    Ms. TUBBS JONES. We are saying the same thing, Mr. Walker. 
I want to enter into the record a copy of a newspaper article 
from the Cleveland Plain Dealer, which is my local newspaper, 
today, and what it says is----
    Chairman THOMAS. Without objection.
    [The information follows:]

                        March 9, 2005 Wednesday
                      Final Edition; All Editions
Medicare drug plan backfires on states; Seniors' switch from Medicaid 
        will boost costs by millions
Susan Jaffe, Plain Dealer Reporter
    The Medicare prescription drug benefit is backfiring on states--
running up millions of dollars in extra drug bills instead of the 
savings promised by its Republican supporters.
    Under the new drug benefit that starts in January, seniors enrolled 
in state Medicaid programs will get their drugs instead from Medicare, 
the Federal health plan that covers 41 million older Americans. States 
will have to pay nearly all the cost.
    Ohio will owe Medicare $55.7 million more in 2007 than the state 
would have paid without the new benefit, estimated Barbara Edwards, 
Ohio's Medicaid director.
    ``It's pretty disturbing,'' she said.
    That's enough to restore the proposed cuts in dental and vision 
coverage for nearly 1 million adults receiving Medicaid, Edwards said. 
Medicaid provides health insurance for low-income families paid for by 
state money with a 60 percent Federal matching contribution.
    More than 200,000 Ohio seniors on Medicaid will have to switch to 
Medicare for drugs.
    California will spend roughly $215 million more in the first year 
of the program, said Medicaid Director Stan Rosenstein. He said that 
amount will only increase in the future.
    The payment formula is based on states' 2003 drug bills, which 
don't reflect the latest cost-savings, among other things. It also 
doesn't allow states to negotiate prices with drug makers, as they do 
now to get bargains on Medicaid drugs.
    The extra costs couldn't come at a worse time: the Bush 
administration wants to cut $60 billion from its share of Medicaid. 
Gov. Bob Taft wants to tame what he calls the Medicaid ``monster'' by 
trimming $2.3 billion in the next 2 years. The state's Medicaid 
spending is outpacing growth in state revenue and consumes the largest 
portion of the general budget, exceeding the cost of primary and 
secondary education.
    The day before Sen. George Voinovich voted for the Medicare drug 
benefit in 2003, his spokesman said the legislation would save Ohio's 
Medicaid program $700 million over 8 years. Messages left with the 
senator's staff were not returned Tuesday.
    What happened? How did the savings turn into a multimillion-dollar 
liability?
    Look in the fine print.
    The law requires states to continue to pay 90 percent of their 
share of drug costs for Medicaid-eligible seniors. But instead of 
paying actual costs, the drug bill is based on what the states paid in 
2003--when the seniors were still in Medicaid--plus an extra adjustment 
to reflect the annual rise in medical costs, explained Edwards, who has 
a national reputation as an expert on Medicaid intricacies.
    That's a terrible year to base costs on, according to Edwards. It 
doesn't include rebates from pharmaceutical companies for drugs 
purchased that year but received in the following year. It doesn't 
include additional rebates that Ohio negotiated with drug makers that 
took effect in 2004, along with other measures that reduced costs that 
year.
    ``We're not going to get credit for that,'' Edwards said. ``They're 
starting with a base rate that's too high.''
    And states will be stuck with it, year after year.
    Plus there are other ways the states are getting shortchanged, she 
said.
    ``The other thing that causes some heartburn is that we're paying 
costs for a formulary that doesn't reflect what Medicare is buying,'' 
Edwards said.
    Medicaid covers any FDA-approved drug, and the Medicare drug 
benefit does not. Medicaid also covers some over-the-counter medicine 
and vitamins that are cheaper alternatives to prescription drugs, but 
they are also not covered by Medicare.
    Drugs are not the only costs that states will have to pay. Edwards' 
staff is still analyzing how much Ohio will have to spend in 
administrative costs to meet other requirements in the law, including 
handling applications, educating the public and determining 
eligibility.
    When the Federal Centers for Medicare and Medicaid Services, or 
CMS, issued rules implementing the drug benefit, agency officials 
rejected suggestions to make some adjustments in the drug payment 
formula.
    ``The law is pretty clear,'' said CMS spokesman Gary Karr. ``We 
can't change the 2003 base year.''
    If states have questions about how their drug costs are calculated, 
they should contact CMS, he said.
    ``We want to get these payments right.''
    And states shouldn't lose sight of ``the big picture,'' he added. 
Along with other employers, states can apply for money from Medicare to 
subsidize drug coverage for retired state workers. So overall, the new 
Medicare law will save states money, he said.
    Officials at the Ohio Public Employees Retirement System have 
estimated that the subsidy would save PERS about $50 million a year in 
drug costs, if they apply for it and meet the eligibility requirements. 
But it is not clear whether that money must used exclusively by PERS or 
if it could be applied to shore up Medicaid.
    Last week, Gov. Bob Taft and his colleagues in the National 
Governors Association unanimously supported a resolution asking 
Congress and the Bush administration to revise the reimbursement 
formula.
    Taft has also written and met with CMS chief Mark McClellan, and he 
received assurances that the Federal agency will look at how Ohio's 
drug cost was calculated. California has also objected, seeking a 
reduction in its drug bill.
                                 ______
                                 
    Ms. TUBBS JONES. Thank you, Mr. Chairman. That the Medicare 
prescription drug benefit is backfiring on States, running up 
millions of dollars in extra drug bills instead of the savings 
promised by its Republican supporters. Under the new drug 
benefit that starts in January, seniors enrolled in State 
Medicaid programs will get their drugs instead from Medicare, 
the Federal Health Plan that covers 41 million older Americans. 
Ohio will owe Medicare $55.7 million more in 2007 than the 
State would have without the new program. That is what happens 
when you have not all the facts, and a not only totally 
bipartisan solution on our government program, is it not, sir?
    Mr. WALKER. It evidently did happen last time. Let's hope 
it doesn't again.
    Ms. TUBBS JONES. That is why when you are representing to 
the people of America about individualized accounts that we 
must give them the whole truth and nothing but the truth, in 
fact, that they may have to pay a tax on the individualized 
account, in fact, that the tax may eat up any individualized or 
privatized account that they have, and you haven't talked about 
that today.
    Chairman THOMAS. The gentlewoman's time has expired.
    Ms. TUBBS JONES. Thank you, Mr. Chairman. I would like an 
answer in writing, please.
    Mr. WALKER. The problem is, is that we need a full plan to 
be able to comment.
    Chairman THOMAS. Mr. Walker, would you supply a written 
answer?
    Mr. WALKER. I would be happy to, Mr. Chairman.
    Chairman THOMAS. The Chair, once again for the accuracy of 
the record, would invite Members to examine the Medicare 
legislation in which there is a progressive buyout of the State 
based upon the previous State/Federal relationship under 
Medicaid transferring seniors to Medicare. That was in the 
legislation. It was not an inadvertent mistake, as I believe, 
Mr. Walker, you characterized it.
    Mr. WALKER. I don't think I did, Mr. Chairman, but I will 
check the record. I didn't intend to do that, that is for sure.
    Chairman THOMAS. Well, you indicated that you supported her 
assumption based upon the newspaper article.
    Mr. WALKER. My point is I don't think that you necessarily 
had all the facts, including the cost of the drug benefit. I 
will check it, Mr. Chairman.
    Chairman THOMAS. Her point in the article was transference 
of an obligation from the State of Ohio.
    Mr. WALKER. Right.
    Chairman THOMAS. Previously under Medicaid, to a change in 
the benefit structure of seniors' prescription drug now under 
Medicare.
    Mr. WALKER. Right.
    Chairman THOMAS. It was, in fact, in the legislation. That 
was the only point the Chair wanted to make so that the record 
is clear rather than perpetuating a misunderstanding. The Chair 
recognizes the gentleman from----
    Ms. TUBBS JONES. Mr. Chairman, for the record----
    Chairman THOMAS. --Indiana, Mr. Chocola--yes?
    Ms. TUBBS JONES. Mr. Chairman, for the record, I think that 
we ought to have opportunities to clear up assumptions, as you 
do, at the end of the testimony or examination of witnesses. I 
just want to register that for the record. Thank you.
    Chairman THOMAS. I appreciate the gentlewoman's 
clarification, and the job of the Chair--the job of the Chair--
is to make sure that the record is accurate, and the Chair will 
make sure the record is accurate. The Chairman recognizes the 
gentleman from Indiana, Mr. Chocola.
    Mr. CHOCOLA. Thank you, Mr. Chairman. Thank you, Mr. 
Walker, for being here today. You and I first met shortly after 
I was elected a couple years ago at an orientation for new 
Members in Baltimore. I was impressed with your approach to 
this issue then, and I hear greater urgency in your voice even 
today, and I appreciate your factual approach to a very 
important issue. We hear some characterization of some of the 
proposals as ``risky schemes.'' Is the current Social Security 
system without risk?
    Mr. WALKER. Well, there is a risk now. The fact of the 
matter is it is not adequately funded.
    Mr. CHOCOLA. Are the benefits guaranteed under law?
    Mr. WALKER. No. The Supreme Court has stated that Congress 
has the right to change it. I think realistically, to the 
extent that there is adequately payroll tax revenues and to the 
extent that there are accumulated bonds that are guaranteed by 
the full faith and credit of the U.S. government, at least to 
that extent the government will deliver on that. Beyond that, 
Congress might decide to change it.
    Mr. CHOCOLA. So, doing nothing could be characterized as 
risky?
    Mr. WALKER. Doing nothing means that we are going to head 
to a precipitous decline in benefits. Remember the notch baby 
problem? This would be a notch baby problem magnified multiple 
times, and it should not be allowed to happen.
    Mr. CHOCOLA. I just want to make sure I heard you correctly 
in your earlier testimony. I don't want to revisit a lot of the 
testimony you have given. I think you said that the special 
issue bonds in the trust fund essentially have no economic 
value. Did I hear you correctly on that?
    Mr. WALKER. I may have said that, and what I mean by that 
is since they are not readily marketable that you can't 
exchange them in the market in order to be able to generate 
revenues. You have to rely solely on the government to be able 
to do it at the time, to the extent that you need it.
    Mr. CHOCOLA. That in part is why you say that the trust 
fund does not meet your or Webster's definition of a trust 
fund, because of the lack of marketability of these assets?
    Mr. WALKER. No. The other reason is that typically trust 
funds are deemed to be separate and distinct legal entities. 
They are not deemed to be a subset of the general ledger of the 
employer or the foundation. If you look at the financial 
statements of the U.S. Government, if you look at the budget of 
the U.S. Government, we are consolidating the results of the 
trust fund with the ongoing operations of the government. If 
you look at the financial statements, we are netting these two 
out. We are not treating it as a separate and distinct legal 
entity. That is how a trust fund would be treated.
    Mr. CHOCOLA. It is, as you said, an accounting device.
    Mr. WALKER. Yes, but, again, what is more important is not 
the accounting device. It is the revenues and it is the bonds. 
That is what is more important.
    Mr. CHOCOLA. So, whether they are add-ons or carve-outs, 
whatever they may be, if personal accounts are part of a bigger 
package of solutions, would personal accounts come closer in 
the definition of a trust fund?
    Mr. WALKER. If you had personal accounts, presumably those 
personal accounts would be invested in something, for example, 
possibly like the investment options of the Federal Thrift 
Savings Plan. Those would have to be held in trust for the 
benefit of those individuals, and that aspect of it presumably 
would be characterized more like a regular trust fund. Then you 
would have to determine how you are going to pay for those, 
what are people going to get through the defined benefit 
system, and how is that going to be structured.
    Mr. CHOCOLA. So, if you had funded personal accounts, they 
would be closer to the definition of actual trust fund?
    Mr. WALKER. Presumably they would be held in trust, yes.
    Mr. CHOCOLA. If you borrowed money to fund these personal 
accounts, would that be new debt or would that be just 
recognition of existing unfunded liabilities?
    Mr. WALKER. There are two ways to look at it. First, if you 
borrow money to fund individual accounts, you are not 
increasing net savings today because what ends up going into 
the personal accounts has to get barred outside and, therefore, 
it is a negative for the government, and it is a positive for 
the individual accounts. Again, your question, I want to make 
sure I am answer it. Would you please let me know the balance 
of the question?
    Mr. CHOCOLA. Well, if you borrow money to help fund these 
personal accounts, whether they are inside or outside, carve-
outs or add-ons, would it be new debt or would it be just 
earlier recognition of existing unfunded liabilities?
    Mr. WALKER. The answer to that is it would be new debt held 
by the public, but then you would have to look at what is the 
total cost of the reform plan on a discounted present value 
basis versus when that is recognized. So, it would be new debt. 
At the same point in time, as I mentioned before, when you are 
doing a reform, I think you have to consider it based on cash 
flow, which is the budget way that we typically do things, and 
discounted present value. There could be a circumstance in 
which you solve the problem long term, but you have negative 
cash flows quicker that are offset more over time that actually 
solve the problem, but you are going to take on more debt 
earlier than otherwise you would have if you did nothing. I 
hope I didn't confuse anyone.
    Mr. CHOCOLA. Thank you very much.
    Mr. WALKER. Thank you. I would be happy to meet separately 
with any of you.
    Chairman THOMAS. I thank the gentleman. The Chair 
understands that many Members believe that when the Chair 
pauses to correct the record, that that is somehow unfair 
because they wish to get their point in and then have it be 
assumed to be factual, accurate, or truthful. The Chair will 
attempt to correct the record when any Member on either side of 
the dais makes a statement which really is not sustainable. The 
Chair will do it again right now because the argument and the 
discussion--and many of the Members--one of the reasons I want 
to make sure we begin to get into these debates, Mr. Walker, 
you brought up the question of notch babies, which somehow 
provided someone with less than they should have gotten. The 
correction in terms of the payment was because Congress made a 
mistake on an inflator, and it created a double bonus rather 
than a single bonus.
    The actual correction should have been to take those people 
born prior to 1917 and take money away from them, so they would 
not have had a greater amount and there would have been no 
notch. So, to argue that this is analogous to the notch babies 
means that the benefit reduction that occurred in 1983 created 
a whole new set of notch babies because they are not going to 
get the same benefits that the previous dated people got. So, 
the argument of notch babies and somehow an unfairness of 
benefits is not analogous in this situation with the previous 
situation.
    Mr. WALKER. Mr. Chairman, I----
    Chairman THOMAS. Do you agree with that?
    Mr. WALKER. I agree with what you said. Let me tell you 
what I meant by that. What I means was where you would have 
individuals who precipitously would be treated differently 1 
month later as compared to the prior month--in other words, 
where you would have individuals that would receive a 
dramatically different result based upon a moment in time. So, 
I really that there are differences between those two. That is 
the point that I am trying to make.
    Chairman THOMAS. The Chair will continue to emphasize the 
fact that in 1983, as he indicated at the beginning, there were 
two benefit reductions. One, of course, was the retirement age 
extension. The other one was the 6-month delay in the COLA, 
which produced literally in 1 month an amount that changed in 
the next month.
    Mr. WALKER. Right.
    Chairman THOMAS. ``Precipitous'' might be the correct 
explanation of that situation. So, in that situation, it was a 
notch baby, and the Chair would wish, as we try to examine 
history and look at what we are doing now and going forward, to 
underscore the fact that it is not an entitlement. Congress can 
at any time change the benefits if they believe that a previous 
decision was imprudent or ill-advised.
    Mr. WALKER. Right.
    Chairman THOMAS. We have got to keep that in front of us as 
we move forward, or we are going to quote the record of this 
Committee as having meant something when, in fact, it should 
not. That is the reason the Chair feels compelled periodically 
to correct the record, so when you go back and look at that 
discussion it does not leave you with the fact that what we are 
doing is, in fact, creating a whole new universe of ``notch 
babies.''
    Mr. WALKER. Oh, absolutely not. One of the reasons, Mr. 
Chairman, that you are making, which is excellent, another 
reason why we should act sooner rather than later, is so we can 
transition over a period of time and avoid precipitous and 
dramatic changes.
    Chairman THOMAS. The Chair thanks the indulgence of the 
Committee, and the Chair would recognize the gentleman from 
California, Mr. Thompson, if he wishes to inquire.
    Mr. MCDERMOTT. Mr. Chairman, a point of information. Will 
there be a time for us?
    Chairman THOMAS. The Chair would indicate that the 
gentleman from Washington, although he is allowed, the 
gentleman from Washington, to speak on what he calls a point of 
information, in fact, there is no such thing as a parliamentary 
point of information. The gentleman from California is 
recognized.
    Mr. THOMPSON. Thank you, Mr. Chairman. I commend the 
Chairman for the courage of revisiting the notch baby issue 
during a televised hearing. Mr. Walker, thank you very, very 
much for being here, and I agree with our colleague, Mr. 
Tanner, who said that your presentation is one of the best that 
we have been exposed to, and your honesty in pointing out these 
problems is very much appreciated. On page 7 of the chart that 
you handed out, the color chart--I don't know if we can get 
that back on the screen. I think this illustrates the amount of 
interest, and someone else had talked about this earlier, but 
for my clarification--the bar graphs. For my clarification, 
this says that if we continue to grow discretionary spending to 
correspond with GDP and the tax provisions are extended, in 
2040 all of the money that we take in at the Federal level will 
go to pay the interest and that everything above that bar line, 
the revenue line, will be unfunded. That includes Medicare, 
Medicaid, all other spending, and Social Security. So, we will 
have enough revenue--only enough revenue to deal with the 
interest on our debt.
    Mr. WALKER. You could pay a little bit more on that, but 
not much more.
    Mr. THOMPSON. Not much. Well, I think that is the most 
telling chart of everything that we have seen so far. It brings 
me to my first question. It seems to me that if we do not take 
steps--I think we are past due, but we need to take immediate 
steps to get this under control, notwithstanding anything else 
that we are doing in Congress today. It seems to me the first 
step would be to enact a strong or reinstate a strong PAYGO 
provision so that we do not spend any money that we do not have 
or that everything we do we pay for. Would you agree that this 
is an important step?
    Mr. WALKER. I have testified previously before the Budget 
Committees and elsewhere that PAYGO is one of the budget 
reforms that the Congress should seriously consider and that 
PAYGO should apply on both sides of the ledger.
    Mr. THOMPSON. It was, in my view, a mistake to allow it to 
expire. It was a bigger mistake not to enact it. You point out 
the fact that it needs to be on both sides, expenditures and 
revenues. I think if we do not do that, it does not matter what 
else we do. We are going to be where Mr. Tanner suggested we 
are headed, and that is on a course of true bankruptcy, and 
that is going to be devastating to everything that our great 
country stands for.
    Mr. WALKER. Mr. Thompson, I also think that in addition to 
looking at it on both sides of the ledger, you also need to 
consider the discounted present value dollar cost of big-ticket 
spending and tax proposals before they are enacted into law. 
For example, in the case of Medicare prescription drugs, take 
the $395 billion, which was CBO's as the Chairman said. I think 
it would have been prudent for the Congress to also have the 
$8.1 trillion number before it voted on the bill.
    Mr. THOMPSON. I think there is a lot of more prudent fiscal 
practices that we can and should take. I want to talk about 
your findings in regard to savings. You talked specifically 
about the privatization component of the President's proposal 
not adding to the savings. I thought one thing was missing that 
I think should be at least looked at, and that is that in 
addition to low personal savings right now is the high personal 
debt. I think it is about a $6,000 per person increase in debt 
over the last or within the last decade. I don't think you 
can--I think the two have to be coupled, and it is another 
alarming indicator that we should be concerned about as we are 
dealing with this. Your point on the privatization component of 
the President's proposal not providing any additional savings I 
think is important for us to consider. Also on those private 
accounts, reading your statement and what I have heard today, 
we know that it does not fix the problem that we are all 
concerned about regarding Social Security. It does not do 
anything to increase savings, which we are all concerned about. 
It does not do anything to reduce the amount of private debt. 
It takes--or it moves Social Security out of the defined 
benefit box into a more risky column for everyone who is now or 
will be getting Social Security. So, what does it do?
    Mr. WALKER. Well, for one thing, Mr. Thompson, whether or 
not it would increase savings----
    Chairman THOMAS. The gentleman's time has expired, and the 
Chair would anticipate the General would respond in writing. 
Does the gentleman from Texas, Mr. Brady, wish to inquire?
    Mr. BRADY. Yes, Mr. Chairman. Thank you, Mr. Walker, very 
much, and I appreciate your overview. You have raised, I think, 
a very sobering assessment of very serious challenges facing 
not just Social Security but as a Federal Government and as 
savers for families. It seems to me from your testimony there 
are really two questions Congress ought to pose to itself 
before we tackle the issue of Social Security. The first one 
is: Are we going to preserve Social Security for every 
generation? It is clear that we have the funds and the 
demographics for our seniors today. We may--may--be able to 
preserve Social Security through the baby boomers. We certainly 
cannot keep that promise for young people.
    One of the issues today, I think, that that question is so 
serious is because it really dictates the solutions we look at. 
The second question facing us is: Are we going to solve Social 
Security once and for all? As you said, sustainable solvency is 
the goal, not simply kicking the can down the road a few more 
years. Which brings me to my question. A number of real 
credible groups and read credible lawmakers have said, you 
know, Social Security really is not a problem, we can preserve 
it simply by tweaking it, that we can tweak Social Security to 
solve the problem. Do you think it is a credible statement 
given the serious challenges we face to say----
    Mr. WALKER. I wouldn't consider $3.7 trillion a tweak.
    Mr. BRADY. That is my thought, and it seems to me that it 
is going to take some serious and substantial reforms looking 
far beyond a few years in order to really preserve this Social 
Security system for every generation. The second point you made 
and cautioned us against, which I think is a critical one--and 
when I visit in my Social Security workshops that our audiences 
always appreciate--is the issue of ending up right back where 
we are today. You made the point that in the past Congress has 
taken sort of a proven path, raised taxes, decreased benefits. 
We kick the can down the road 15 or 20 years, almost 
automatically, but we end up right back where we are only the 
problem is more severe. Today I heard you caution us again not 
to seek solutions that kick the can down even farther than 
that, but end us right back up here only with even a more 
serious problem at the time. Do you want to elaborate on that?
    Mr. WALKER. Typically what has happened in the past is that 
people have looked to achieve solutions that provide for 
actuarial balance over 75 years. My point is because of known 
demographic trends, if you do that, it means you still have a 
significant long-range problem that otherwise you are going to 
address. I would respectfully suggest that the Congress should 
try to, among other things, achieve sustainable solvency, 
meaning not just actuarial balance over 75 years, but at the 
end of 75 years the lines both as to projected revenues and 
expenditures are such that you are not by definition going to 
have to come back, that hopefully you won't have to, but you 
are not pre-programmed to have it.
    Mr. BRADY. So, in essence, your answer to the question of 
should we solve it once and for all or should we preserve it 
beyond just, you know, a set date is yes, we ought to look for 
a solution that is long-lasting.
    Mr. WALKER. You should try to preserve it for current and 
future generations.
    Mr. BRADY. A final point, Mr. Chairman, before I hang up 
here. In my Social Security workshops, you know, mine have been 
very encouraging, even in some of my most rural FDR Democrat 
communities. At the end, most of my seniors say, look, it looks 
like we are very sound in this, but you need to start working 
on a solution for young people, and don't put it off any 
longer. Sometimes I will run into a senior who literally--I had 
one in east Montgomery County, she literally covered her ears 
and said, ``Social Security has worked beautifully for all 
these years. Why can't you just leave it alone?'' How would you 
answer that question?
    Mr. WALKER. Well, first, most of the proposals that I have 
heard or seen would leave current retirees and people nearing 
retirement alone. They would get the current promise. The irony 
is they are the ones in many cases that are the most insecure. 
I was in Alabama--I am from Alabama originally. I was down 
there speaking a week and a half ago to 300 students, business 
leaders, the faculty, and others. Of the roughly 300 students I 
spoke to, only five thought they were going to get Social 
Security. They are wrong. So, the fact is that most of the 
proposals that I have seen are current retirees and near-term 
retirees will not be touched. The question is: What are you 
going to do for the younger people? How is the program going to 
be reformed to make it solvent, sustainable, and secure for 
them? That is what the debate is about, I think.
    Mr. BRADY. Right. It is hard with all this rhetoric 
sometimes to get to that end answer, but the sooner we do, the 
better. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Connecticut, Mr. Larson, wish to inquire?
    Mr. LARSON. Yes, I do, Mr. Chairman, and thank you. Thank 
you, Mr. Walker, for your frank testimony today. Because I know 
that my mother and a group called the Golden Girls are going to 
be tuned into this broadcast, for the record--and I think you 
have said this several times, but I just want to assure them--
has Social Security ever defaulted on any payment to any 
individual, whether they are receiving disability, survivor's 
insurance, or their retirement?
    Mr. WALKER. It has not.
    Mr. LARSON. As you have testified, do you anticipate that 
that would ever happen in the future?
    Mr. WALKER. I expect that the government will end up 
delivering on its promises in relationship to the bonds that 
are backed by the full faith and credit of the U.S. government. 
I expect that the Congress will end up reforming Social 
Security that will make changes to some people going forward.
    Mr. LARSON. That is largely because, as you have stated 
throughout the hearing, it is the full faith and credit of the 
United States government that stands behind Social Security.
    Mr. WALKER. It stands behind the bonds. It does not stand 
behind Social Security. It is very important to understand the 
difference. The Supreme Court has already said that the 
Congress has the right to change Social Security anytime it 
wants. However, to the extent that people have paid in payroll 
taxes, which they have to the extent of $1.5 trillion, and to 
the extent that those bonds are backed by the full faith and 
credit of the United States government, the government has 
never defaulted on that, nor do I expect that they will. I 
think that is important for people to understand.
    Mr. LARSON. I thank you for clarifying that point and 
putting my mother and others at ease. As others have testified 
and have suggested, your charts are very revealing, and I 
think--is it safe to say that based on looking at those charts 
from a novice' perspective, not having the kind of background 
that you have, the Nation is more likely to go broke before 
Social Security is based on our inability to pay? If we remain 
on this unsustainable path that you have----
    Mr. WALKER. Based upon the two scenarios you saw, in the 
case of the first scenario Social Security would go insolvent 
before the Nation. In the case of the second scenario, it would 
be about the same time.
    Mr. LARSON. So, as you have suggested--and I think this is 
what Mr. Rangel asked for at the outset of the meeting--what we 
need is nonpartisan facts and a bipartisan solution. Now, the 
Chairman has also said on several different occasions--and I 
commend him for this--that oftentimes we find ourselves pushing 
the same pieces around in the box, and what we need to do is 
think outside the box. You came to the precipice--at least I 
thought you did a couple of times--of recommending a solution. 
One of them I thought I heard you say--and I would like you to 
clarify--is looking at getting a greater return on our monies 
that are being--the surplus dollars that exist. I thought I 
heard you talking about giving marketing capability that would 
provide us. Are those a couple of solutions? Could you 
enumerate on those, please?
    Mr. WALKER. Those are something you could consider. You 
could consider whether and to what extent any surpluses that 
exist in Social Security might be invested differently. Keep in 
mind you are only going to have surpluses now for another 13 
years, and then you are going to run to deficits. That by no 
means would solve the problem. It would not come close to 
solving the problem, but it could lessen potentially----
    Mr. LARSON. Is that something you would suggest to the 
trustees that they should look at?
    Mr. WALKER. Well, I think it is something that needs to be 
on the table. I think a number of things have to be on the 
table.
    Mr. LARSON. Well, I agree with you that all of those have 
to be on the table. You also mentioned, in looking at the 
projected deficit that we had, and you went through our unified 
budget and the online budget, and so forth, and what kind of 
ramifications, and you said that--and correct me if I am wrong. 
How much of this deficit is not attributed to the current war 
on terror?
    Mr. WALKER. For fiscal year 2004, we ran a unified budget 
deficit of $412 billion. Less than 25 percent of that had 
anything to do with the global war against terrorism or 
incremental homeland security costs.
    Mr. LARSON. I believe you said to Mr. Tanner's questions 
earlier also that in terms of the debt that we are incurring, 
83 percent of that debt was purchased by foreign countries?
    Mr. WALKER. I think Mr. Tanner said it was 83 percent 
during a certain period of time. Last year alone it was over 90 
percent.
    Mr. LARSON. So, this issue of paying interest exacerbates 
the problem that we have with Social Security. To Mr. Doggett's 
point, perhaps we need to be considering taking care of Social 
Security, and I think you would say Medicare, in that order.
    Mr. WALKER. I think you have to take care of both Medicare 
and Social Security, but I think that Social Security is a lot 
easier lift. You can get a win on Social Security. You can 
exceed the expectations of every generation of Americans. 
Hopefully that will increase our credibility with the markets 
and enhance confidence to be able to deal with some of the 
heavy lifting.
    Mr. LARSON. So, you would be an advocate of paying into 
that rather than providing tax cuts, as one, perhaps one of the 
solutions.
    Mr. WALKER. I don't want to get to that degree--I have said 
that I think it is important that you consider entitlement 
reform, mandatory spending, discretionary spending, and tax 
policy review.
    Mr. LARSON. Thank you very much.
    Mr. WALKER. You are going to have to do all of those.
    Mr. LARSON. Thank you, Mr. Chairman.
    Chairman THOMAS. The gentleman's time has expired. Does the 
gentleman from Illinois wish to inquire?
    Mr. EMANUEL. Thank you, Mr. Chairman. Thank you for being 
here, Mr. Walker, and for your testimony. You had mentioned I 
think earlier in your opening testimony about the fact that you 
see truly a savings deficit in this country, that we have both 
a trade deficit, account deficit, and we have run up close to 
about $1.8 trillion in the last 4 years onto the Nation's debt, 
and we are presently running a little over $450 billion a year 
in deficit. Correct?
    Mr. WALKER. Correct.
    Mr. EMANUEL. That the savings crisis we have, as I 
understand it, is we have about 80 percent of the small 
business employees in this country do not have an employer-
based savings plan. Basically for about 40 percent of the 
households in America, 28 million households, Social Security 
is their only retirement plan. Then as you said, I think, less 
than 50 percent of the people have any savings outside of 
Social Security. Correct?
    Mr. WALKER. I said less than 50 percent of the people are 
covered by a private pension plan.
    Mr. EMANUEL. Private pension plan. You know, what I believe 
one of the things that we need to be addressing at this point 
is what I call--you call it the saving deficit--initiating more 
people saving for their retirement. Some ideas we have put 
forward, a universal 401(k) account where everybody would get 
that; direct deposit of your tax refunds into your savings plan 
as a way to generate that type of savings. There could be 
structural things we could do to save, improve the savings of 
Americans. Have you ever looked at anything like that?
    Mr. WALKER. I have not looked at that particular one. I do 
think that one of the things we need to be thinking about is 
what can be done to try to create easy, potentially even 
automatic savings vehicles where individuals won't touch the 
money because once you touch the money, it tends to be spent. 
Candidly, the government is not leading by example. I mean, you 
know, we are dissaving. We are running up deficits. We are 
consuming way more than we have revenues for, and that is what 
many Americans are doing, too.
    Mr. EMANUEL. You acknowledge, though, in the nineties from 
where we started to the end of the nineties, we added a little 
over a decade to the longevity and the health of the Social 
Security trust fund; that by the end of the nineties, beginning 
on this doorstep of the 21st century, we had added, if I am not 
mistaken, close to 14 years to the lifetime of the trust fund 
in the sense that before, one predicted that it would become 
insolvent or start to run, rather, a deficit. Correct?
    Mr. WALKER. It went up, and I would respectfully suggest, 
Mr. Emanuel, that you may want to talk to the trustees about--
--
    Mr. EMANUEL. Okay. It had gone up, my calculation, if I 
remember correctly, over 14 years, and one of the reasons was 
we ran an economic policy, both here in the government and also 
in the private sector, that basically created surpluses, 
reduced the capacity of the Nation to borrow, and that, 
therefore, by having the kind of surplus we had, we increased 
the savings, total savings dollars for the country and put 
ourselves in an economic position, given the growth of the 
economy, to, in fact, improve the longevity of the Social 
Security trust fund. The first thing you should do is no harm, 
and that means putting our fiscal house in order.
    Mr. WALKER. Well, for a period of time, we ran Social 
Security surpluses, and we used those surpluses to pay down 
debt held by the public, because as has been mentioned before, 
Social Security has to invest in government securities under 
current policy.
    Mr. EMANUEL. If, in fact, over the next--the economy has 
been growing in the last 25 years on average 2.8 percent. If, 
in fact, we continue to do that over the next 50 years and did 
what we did for the last 25 years, you would add close to a 
little over--a little shy of two decades to the health and 
longevity of the trust fund without having done anything, just 
as is. Correct? Incorrect?
    Mr. WALKER. I don't know what the exact numbers would be, 
but that is a higher growth rate than otherwise is being 
assumed by the trustees, so obviously----
    Mr. EMANUEL. No, I understand that. The trustees are 
assuming that the economy would only grow at 1.8 percent.
    Mr. WALKER. At 1.8.
    Mr. EMANUEL. They do assume that in your private account 
while you are investing, you would do close to a little--like 6 
percent, which my own view is the only way you can do 6 percent 
with an economy growing at 1.8 percent is you are buying 
American stocks short because you think the economy is doing 
bad. There is no way consistently that you can see the private 
accounts having a net 6-percent return while the economy is 
projected by those on the trust fund, the trustees, is growing 
at 1.8 percent. Yet in the last 25 years, the economy grew at 
2.8 percent. If we just did--if we were able to have an 
economic strategy that permitted for that, rather than 
borrowing from the future, we would, in fact, have--the 
longevity of the trust fund would be just--I wouldn't say fine, 
but, in fact, we would be adding close to two decades.
    Mr. WALKER. I think we have to look at----
    Chairman THOMAS. The gentleman's time has expired, and I 
think----
    Mr. EMANUEL. Thank you, Mr. Chairman.
    Chairman THOMAS. The Chair thinks that is a perfect segue 
into the trustees so we can ask them directly rather than 
having Mr. Walker demur in hopes that we would ask the 
trustees. Mr. Walker, during the discussions, you mentioned a 
number of particulars. You responded to Mr. Larson. Several 
times you indicated expanding the taxable wage base. There are 
other options that you talked about. The Chair would be 
grateful if you would in a concise fashion, not necessarily 
bulleted but with short explanations, provide a series of 
options that the General Accounting Office has looked at and 
that you wouldn't necessarily recommend but you could certainly 
provide as a list that we could examine as we go forward. I 
think that would be useful to us as we move forward.
    Mr. WALKER. On behalf of the government Accountability 
Office, I would be happy to do that. Again, we will not make a 
recommendation, but we will put a number of things that I think 
you should at least consider. Thank you, Mr. Chairman.
    Chairman THOMAS. It would at least help us in our 
examination of options because, in putting all options on the 
table, we want a request from everyone who is involved in this 
whatever options they think should be on the table. Thank you 
very much for your testimony. I look forward to your visiting 
the Committee again.
    Mr. WALKER. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank you. It is now the Committee's 
pleasure to ask Mr. Thomas R. Saving and John L. Palmer, both 
of them Ph.D.s, who are public trustees, Social Security and 
Medicare Trust Funds. Dr. Saving is from College Station, 
Texas, and Dr. Palmer is from Syracuse, New York. The Chair 
would once again indicate, as he did with Mr. Walker, that 
these gentlemen became trustees of the Social Security and 
Medicare system in the previous Administration. Gentlemen, 
welcome to the Committee. Your written statements will be made 
a part of the record, and you can inform us in the time that 
you have in any way that you see fit. We will probably start 
with Dr. Palmer and then move to Dr. Saving.

  STATEMENT OF JOHN L. PALMER, PH.D., PUBLIC TRUSTEE, SOCIAL 
     SECURITY AND MEDICARE TRUST FUNDS, SYRACUSE, NEW YORK

    Dr. PALMER. It is our privilege to be here today to testify 
regarding the financial outlook of the Social Security Trust 
Funds as shown in the 2004 Annual Report of the Board of 
Trustees. Work is now being completed on the 2005 report for 
release later this month. While Dr. Saving and I will be 
referring to the 2004 report projections today, there has been 
no legislation or major economic or demographic change in the 
last year that would alter significantly the basic thrust of 
our testimony.
    It is important to remember always in Social Security 
financing discussions that the projections are for a future 
that is subject to considerable uncertainty. Even very small 
variations in assumptions and methods can produce wide 
differences in projections over a long period of time. Thus, 
the projections in the Trustees Reports are most useful if 
understood as a guide to a plausible range of future outcomes. 
As this hearing illustrates, the reports serve as an early 
warning system that allows us the opportunity to make necessary 
changes in a timely and responsible manner. Let me now offer 
just very brief answers to the three questions that were posed 
to us.
    First, what is the financial outlook for Social Security? 
Here, we have little to add to what you heard from David 
Walker. He presented the information based on our report, and 
so I won't take up the time to go through that in any more 
detail for you. I will simply point out one thing, that Social 
Security is comprised, as you well know, of two different 
programs--the Old Age and Survivors Insurance program and the 
Disability Insurance program. All of the data that he presented 
was for the combined programs. Considered separately, the OASI 
trust fund is about 85 percent of the total, and its year-by-
year financial outlook more or less tracks the combined funds' 
outlook that you heard from Mr. Walker. The smaller DI trust 
fund merits continuing close separate attention because its 
annual cash flow surpluses are projected to cease in 2007 in 
its reserves to be exhausted in 2029.
    Secondly, why does the Social Security retirement program 
face financing problems? Here again, I think it is clear that 
the financial challenge facing the program is largely the 
result of demographic changes that have their roots back in the 
last century, particularly the sharp decline in fertility rates 
subsequent to the birth of the baby boom generation and 
reductions in mortality rates, particularly at older ages that 
are expected to continue to result in gradual increases in life 
expectancy throughout this century.
    As was alluded to very briefly earlier, as the large baby 
boom generation born after World War II begins to retire, 
annual growth in the labor force will slow dramatically. This 
not only means fewer workers paying Social Security taxes per 
retiree, but, also, has wider implications for growth of the 
American economy. Faster than historical growth in worker 
productivity could help offset the slower growth of the labor 
force, but cannot e counted upon to a great extent. Future 
levels of immigration beyond those currently projected could 
also boost the growth of the rate of the labor force and 
improve somewhat the outlook for Social Security finances, but 
again cannot be counted on to a great extent.
    As a result of the retirement of the baby boom, the largest 
increases in Social Security costs relative to income are 
projected to occur between 2010 and 2035. The program's costs 
will then grow more slowly, but still continue to increase 
thereafter as a share of taxable payroll, since the baby boom 
generation represents the leading edge of a projected new 
population age structure in which those over 65 are an ever-
growing share of the total population.
    Finally, how urgent is the need to improve action for 
Social Security's financing? Given our fiduciary responsibility 
as public trustees for Medicare as well, we echo what you heard 
from David Walker, too, in saying that we would note that the 
financial challenges posted by Medicare are expected to occur 
sooner, grow much larger and otherwise be more difficult to 
address than those facing Social Security. Today's subject is 
Social Security, and we believe that action on it should not be 
deferred any longer than necessary for due deliberation and 
decision. For a decade now, the trustees have recommended 
action to address Social Security's projected financing 
shortfalls because the sooner the legislation is enacted, the 
more varied and the less disruptive to American workers, their 
families and the economy can be the solutions. I thank you for 
the opportunity to appear before you and will be pleased to 
answer any questions that you might have after Dr. Saving has 
made his oral statement.
    [The prepared statement of Dr. Palmer follows:]
Statement of John L. Palmer, Ph.D., Public Trustee, Social Security and 
                Medicare Trust Funds, Syracuse, New York
    Mr. Chairman and Members of the Committee:
    It is our privilege to be here today to testify regarding the 
financial outlook of the Social Security Trust Funds as shown in the 
2004 Annual Report of the Board of Trustees of those funds. Work is 
being completed as we speak on the 2005 Annual Report for release later 
this month. While we will be referring to the 2004 report projections 
today, there has been no legislation or major economic or demographic 
change in the last year that would alter significantly the Social 
Security financial outlook we will describe, the reasons for it, and 
the need to address Social Security's projected financing shortfall.
    As you know, Public Trustees are part-time officials appointed by 
the President and confirmed by the Senate to represent the public 
interest in an important process of public accountability. In our 
private lives, we both trained as economists, have taught at the 
university level, and have written about Social Security. As Public 
Trustees our primary activities are directed at assuring that the 
Annual Trust Fund Reports fully and fairly present the current and 
projected financial condition of the trust funds. To this end we work 
closely with the Office of the Chief Actuary in the Social Security 
Administration to ensure that all relevant information is considered in 
the development of the assumptions and methods used to project the 
financing of the Social Security program. Mr. Chairman, we would note 
for the record what we are sure you and this committee know well: it is 
an extraordinarily complex task to make financing projections for 
Social Security far into the future. The

high professionalism and decades of experience of the Social Security 
actuaries are critical to the production of these Annual Reports.
    It is important to remember always in Social Security financing 
discussions that the projections are for a future that is subject to 
considerable uncertainty. Even very small variations in assumptions and 
methods can produce wide differences in projections over a long period 
of time. Thus, the projections in the Trustees Reports are most useful 
if understood as a guide to a plausible range of future outcomes. And, 
as this hearing illustrates, the reports serve as an early warning 
system that allows us the opportunity to make necessary changes in a 
timely and responsible manner.
What is the Financial Outlook for Social Security?

    As this committee well knows, what we call Social Security is, in 
statute, composed of two separate programs and trust funds--Old-Age and 
Survivors Insurance (OASI) and Disability Insurance (DI). On a combined 
basis the two trust funds are projected in the 2004 Trustees Report to 
continue to run annual cash flow surpluses of about $100 billion for 
the next seven years. However, those annual surpluses will steadily 
decline each year thereafter, until ceasing in 2017. Then, beginning in 
2018, the combined OASDI trust funds are projected to begin redeeming 
bonds held in reserve, by amounts typically increasing from $30-$50 
billion each year, until annual redemptions necessary to pay scheduled 
benefits exceed $350 billion (in today's dollars) in 2041 and the 
reserves are exhausted in 2042. At that point, the combined funds are 
projected to receive annual income equal to only about 73 percent of 
costs. Costs will exceed income each year thereafter by growing 
amounts, so that by 2080 annual income will cover only 68 percent of 
currently scheduled benefits. (See the attached figure from the 2004 
Social Security Trustees Report for a depiction of this situation.) 
Thus, measures that would close the financing gap at the time of trust 
fund exhaustion and thereafter would have to be of far greater 
magnitude in impact than those that simply address the actuarial 
deficit over the next 75 years.
    Considered separately--as the law requires for financing 
legislation--the OASI Trust Fund is about 85% of the total, and its 
year-by-year financial outlook tracks the combined funds' outlook just 
noted. Although relatively smaller, the DI Trust Fund merits continuing 
close attention, because its annual surpluses are projected to cease in 
2007 and its reserves to be exhausted in 2029. Its history has been 
much more volatile than that of OASI, and the option of taking income 
from OASI to increase funding for DI may not be a good one.
Why Does the Social Security Retirement Program Face Financing 
        Problems? 

    The financing problem that Social Security will begin facing in the 
next decade is, in essence, the result of demographic changes that 
began several decades ago. First, life expectancy began to increase at 
a faster pace in the late 1960s as rapid progress was made in reducing 
mortality due to heart disease. Progress in extending life expectancy 
in this country has continued since then, although with distinct shifts 
in the rate of that progress. The increase in life expectancy is 
welcome to all of us, but it does mean that retirees will receive 
Social Security benefits for longer periods of time as life spans 
continue to lengthen.
    The second demographic change affecting Social Security financing 
was the sharp downturn in fertility that began in the mid-1970s in the 
U.S. and has now occurred in many countries around the world. The 
expansion of education and job opportunities for women, combined with 
the development of reliable birth control, seems to be the leading 
cause of the decrease in fertility. For Social Security the lower 
fertility that began 30 years ago has already led to some reduction in 
the rate of growth of the American labor force over the last 10-15 
years. But as the large baby-boom generation born after WWII soon 
begins to retire, annual growth in the labor force will slow 
dramatically--about as many workers will retire each year as enter the 
workforce--and this not only means fewer workers paying Social Security 
taxes per retiree, but it also has wider implications for the growth of 
the American economy. Faster than historical growth in worker 
productivity could help offset the slower growth of the labor force, 
but cannot be counted on to a great extent. Future levels of 
immigration beyond those currently projected could also boost the 
growth rate of labor force and improve somewhat the outlook for Social 
Security finances, but again are subject to considerable uncertainty 
and cannot be counted on to a great extent.
    As a result of the retirement of the baby boom, the largest 
increases in Social Security costs relative to income are projected to 
occur between 2010 and 2035. Social Security's costs will then grow 
more slowly but still continue thereafter to increase as a share of 
taxable payroll for the indefinite future. The baby boom generation 
represents the leading edge of a projected new population age structure 
in which

those over 65 are an ever growing share of the total population due to 
the continuation of relatively low fertility rates and lengthening life 
expectancy.
How Urgent is the Need for Action to Improve the Social Security's 
        Financing?

    Given our fiduciary responsibility as Public Trustees for Medicare 
as well, we cannot discuss the need for action regarding Social 
Security financing without first noting, as we did in our Message in 
the Summary of the Trustees Reports last year, that the financial 
challenges posed by Medicare are expected to occur sooner, grow much 
larger, and otherwise be more difficult to address than those facing 
Social Security. But today's subject is Social Security, and we believe 
that action on it should not be deferred any longer than necessary for 
due deliberation and decision. For a decade the Trustees have 
recommended each year action to address Social Security's projected 
financing shortfalls because the sooner legislation is enacted, the 
more varied and less disruptive to American workers, their families, 
and the economy can be the solutions. Many years of advance notice to 
the public and adequate time to phase in changes slowly will allow 
workers to adjust their retirement plans to take account of those 
changes. Also, acting sooner rather than later will allow time to 
spread the burden of any changes across different age groups. Waiting 
decades to address Social Security financing could mean that the only 
option, given other needs at that time, might be to reduce benefits to 
then-retired, or nearly-retired, workers by 25 or 30 percent--an 
unthinkable outcome, and one that is avoidable if action is taken 
sooner rather than later.
Conclusion

    There is inherent uncertainty in projecting the future and 
especially the far-distant future. But using the best information and 
methods available, the Trustees, the Congressional Budget Office, and 
most private forecasters all project cash flow deficits for Social 
Security beginning in little more than a decade and growing worse 
thereafter for the indefinite future because of the demographic changes 
we have noted. The reason to act soon is to avoid the forced necessity 
of more precipitous action later.
    We have attached the four-page ``Message From the Public Trustees'' 
from the Summary of the 2004 Annual Reports as well as our biographical 
information. We thank you for the opportunity to appear before you and 
will be pleased to answer any questions you may have.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                                 
    Chairman THOMAS. Thank you very much, Dr. Palmer. Dr. 
Saving?

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

    Dr. SAVING. Once again, Mr. Chairman, thank you for having 
me here. I am going to begin a somewhat different tack than Dr. 
Palmer, since I think there are some things that we ought to 
think about. Today, Social Security is America's largest 
entitlement program. As we know, Medicare is going to become 
larger, though, in not very many years. It accounted for 18 
percent of the Federal budget, 3.6 percent of gross domestic 
product. Its revenues have exceeded expenditures every year 
since the 1983 tax reform, and in 2004, Social Security 
provided the Treasury the equivalent of 6 percent of Federal 
income tax revenues, additional revenue. This contribution to 
the Federal budget is going to peak in 2008, something David 
Walker mentioned, and about 7 percent of Federal income tax 
revenues, and then it is going to fall rapidly, and it is going 
to become a deficit in 2018 that is going to be equal to 1 
percent of projected Federal income tax revenues. Thus, in the 
decade 2008 to 2018, Treasury's disposable income will fall by 
an amount equal to almost 8 percent of Federal income tax 
revenues as the Social Security system moves from a surplus to 
a deficit.
    In the following comments, I want to discuss several ways 
to assess the current and future status of Social Security as 
it pertains to the budget because I think it is the budget that 
has to fund, eventually, what Social Security is going to have 
to pay. Social Security's revenue expenses, without 
consideration of the coming demographic issues, are 
approximately proportional to the gross domestic product. Its 
future deficits are the result of a combination of the baby 
boom generation retirement, falling fertility, increasing 
lifespans. Importantly, the baby boom generation doesn't 
represent just a bulge in the population, but it is rather a 
surge. It is the leading wave of a larger population so that, 
once the baby boomers are out of the system, the retired 
population is not actually going to get smaller. It is going to 
stay the same size, which means the financing shortfalls are 
going to persist.
    We can summarize the status of Social Security in two broad 
ways, in terms of the present value of its unfunded obligation 
and in terms of the future budget transfers that are going to 
be required to funded shortfalls. Social Security is, 
fundamentally, a generation transfer system in that current 
taxpayers pay for the benefits of current beneficiaries. That 
is largely true because even though the 1983 reform was 
attached to form a prepayment system, the money was spent 
instead of actually invested in real resources. Social Security 
debt owed to the current generation, that is, everyone who is 
currently in the system, working and retired, is, from our 2004 
Trustees Report, $12.7 trillion.
    The next generation, that is, the people who start working 
tomorrow and everyone who follows them, is only going to pay 
off less than a trillion dollars of that, so that we are going 
to have to find

$11.9 trillion somewhere. As I say, the trust fund itself 
cannot be considered a dedicated funding resource because the 
surpluses, while credited to the trust fund, have been used for 
other purposes and, in exchange, we have received, of course, 
these trust fund bonds, but the trust funds' assets themselves 
do not provide any revenue to the Treasury, and it is the 
Treasury that is going to have to pay the Social Security 
benefits. I think that is an important concept that we have to 
bear in mind.
    Another approach to understanding the future funding 
problems facing us is the annual cash flows, and I think we 
want to express those in terms of Federal income tax revenues. 
As I pointed out last year, the Social Security surplus 
contributed just over 6 percent of Federal income tax, an 
amount equivalent to over 6 percent of Federal income tax 
revenues. That is going to peak in 2008 and rapidly decline 
into a cash flow deficit that will occur in 2018, and that is 
going to be 1 percent of Federal income tax revenues. Within 4 
years, the cash flow deficit will be over 5 percent of Federal 
income tax revenues, and five years later it will be over 10 
percent of Federal income tax revenues.
    To put those transfers in historical perspective, the 
largest transfers that we have ever made to Social Security, as 
a percentage of Federal income tax revenues, have occurred 
twice--1977, when the transfer was 4 percent, and in 1978 we 
changed the benefit formula, essentially, reducing future 
promised benefits, and in 1983, the transfer was 4.5 percent of 
Federal income tax revenues. Then, of course, we changed, we 
raised taxes and reduced benefits.
    So, we are going to reach, very quickly after we turn to a 
deficit, more than 5 percent of Federal income tax revenues 
being transferred to Social Security. Congress has never let 
that size transfer occur without changing the system. That 
doesn't mean that will happen in the future, but it is 
important to understand what has happened in the past.
    In conclusion, Social Security pluses and commensurate 
contributions to the Federal budget are going to peak in the 
next several years and then begin a rapid decline, becoming 
deficits. As we have said, John Palmer and myself, for the last 
5 years, reforming Social Security, sooner rather than later, 
is critical. The financial realities we have discussed bear 
this out. While there is disagreement among the types of 
reforms that should be pursued, there is little disagreement 
that reform is necessary. Thank you.
    [The prepared statement of Dr. Saving follows:]
 Statement of Thomas R. Saving, Ph.D., Public Trustee, Social Security 
            and Medicare Trust Funds, College Station, Texas
    Mr. Chairman and Members of the Committee:
    It is our privilege to be here today to testify regarding the 
financial outlook of the Social Security Trust Funds as shown in the 
2004 Annual Report of the Board of Trustees of those funds. Work is 
being completed as we speak on the 2005 Annual Report for release later 
this month. While we will be referring to the 2004 report projections 
today, there has been no legislation or major economic or demographic 
change in the last year that would alter significantly the Social 
Security financial outlook we will describe, the reasons for it, and 
the need to address Social Security's projected financing shortfall.
    As you know, Public Trustees are part-time officials appointed by 
the President and confirmed by the Senate to represent the public 
interest in an important process of public accountability. In our 
private lives, we both trained as economists, have taught at the 
university level, and have written about Social Security. As Public 
Trustees our primary activities are directed at assuring that the 
Annual Trust Fund Reports fully and fairly present the current and 
projected financial condition of the trust funds. To this end we work 
closely with the Office of the Chief Actuary in the Social Security 
Administration to ensure that all relevant information is considered in 
the development of the assumptions and methods used to project the 
financing of the Social Security program. Mr. Chairman, we would note 
for the record what we are sure you and this committee know well: it is 
an extraordinarily complex task to make financing projections for 
Social Security far into the future. The high professionalism and 
decades of experience of the Social Security actuaries are critical to 
the production of these Annual Reports.
    It is important to remember always in Social Security financing 
discussions that the projections are for a future that is subject to 
considerable uncertainty. Even very small variations in assumptions and 
methods can produce wide differences in projections over a long period 
of time. Thus, the projections in the Trustees Reports are most useful 
if understood as a guide to a plausible range of future outcomes. And, 
as this hearing illustrates, the reports serve as an early warning 
system that allows us the opportunity to make necessary changes in a 
timely and responsible manner.
What is the Financial Outlook for Social Security?

    As this committee well knows, what we call Social Security is, in 
statute, composed of two separate programs and trust funds--Old-Age and 
Survivors Insurance (OASI) and Disability Insurance (DI). On a combined 
basis the two trust funds are projected in the 2004 Trustees Report to 
continue to run annual cash flow surpluses of about $100 billion for 
the next seven years. However, those annual surpluses will steadily 
decline each year thereafter, until ceasing in 2017. Then, beginning in 
2018, the combined OASDI trust funds are projected to begin redeeming 
bonds held in reserve, by amounts typically increasing from $30-$50 
billion each year, until annual redemptions necessary to pay scheduled 
benefits exceed $350 billion (in today's dollars) in 2041 and the 
reserves are exhausted in 2042. At that point, the combined funds are 
projected to receive annual income equal to only about 73 percent of 
costs. Costs will exceed income each year thereafter by growing 
amounts, so that by 2080 annual income will cover only 68 percent of 
currently scheduled benefits. (See the attached figure from the 2004 
Social Security Trustees Report for a depiction of this situation.) 
Thus, measures that would close the financing gap at the time of trust 
fund exhaustion and thereafter would have to be of far greater 
magnitude in impact than those that simply address the actuarial 
deficit over the next 75 years.
    Considered separately--as the law requires for financing 
legislation--the OASI Trust Fund is about 85% of the total, and its 
year-by-year financial outlook tracks the combined funds' outlook just 
noted. Although relatively smaller, the DI Trust Fund merits continuing 
close attention, because its annual surpluses are projected to cease in 
2007 and its reserves to be exhausted in 2029. Its history has been 
much more volatile than that of OASI, and the option of taking income 
from OASI to increase funding for DI may not be a good one.
Why Does the Social Security Retirement Program Face Financing 
        Problems? 

    The financing problem that Social Security will begin facing in the 
next decade is, in essence, the result of demographic changes that 
began several decades ago. First, life expectancy began to increase at 
a faster pace in the late 1960s as rapid progress was made in reducing 
mortality due to heart disease. Progress in extending life expectancy 
in this country has continued since then, although with distinct shifts 
in the rate of that progress. The increase in life expectancy is 
welcome to all of us, but it does mean that retirees will receive 
Social Security benefits for longer periods of time as life spans 
continue to lengthen.
    The second demographic change affecting Social Security financing 
was the sharp downturn in fertility that began in the mid-1970s in the 
U.S. and has now occurred in many countries around the world. The 
expansion of education and job opportunities for women, combined with 
the development of reliable birth control, seems to be the leading 
cause of the decrease in fertility. For Social Security the lower 
fertility that began 30 years ago has already led to some reduction in 
the rate of growth of the American labor force over the last 10-15 
years. But as the large baby-boom generation born after WWII soon 
begins to retire, annual growth in the labor force will slow 
dramatically--about as many workers will retire each year as enter the 
workforce--and this not only means fewer workers paying Social Security 
taxes per retiree, but it also has wider implications for the growth of 
the American economy. Faster than historical growth in worker 
productivity could help offset the slower growth of the labor force, 
but cannot be counted on to a great extent. Future levels of 
immigration beyond those currently projected could also boost the 
growth rate of labor force and improve somewhat the outlook for Social 
Security finances, but again are subject to considerable uncertainty 
and cannot be counted on to a great extent.
    As a result of the retirement of the baby boom, the largest 
increases in Social Security costs relative to income are projected to 
occur between 2010 and 2035. Social Security's costs will then grow 
more slowly but still continue thereafter to increase as a share of 
taxable payroll for the indefinite future. The baby boom generation 
represents the leading edge of a projected new population age structure 
in which those over 65 are an ever growing share of the total 
population due to the continuation of relatively low fertility rates 
and lengthening life expectancy.
How Urgent is the Need for Action to Improve the Social Security's 
        Financing?

    Given our fiduciary responsibility as Public Trustees for Medicare 
as well, we cannot discuss the need for action regarding Social 
Security financing without first noting, as we did in our Message in 
the Summary of the Trustees Reports last year, that the financial 
challenges posed by Medicare are expected to occur sooner, grow much 
larger, and otherwise be more difficult to address than those facing 
Social Security. But today's subject is Social Security, and we believe 
that action on it should not be deferred any longer than necessary for 
due deliberation and decision. For a decade the Trustees have 
recommended each year action to address Social Security's projected 
financing shortfalls because the sooner legislation is enacted, the 
more varied and less disruptive to American workers, their families, 
and the economy can be the solutions. Many years of advance notice to 
the public and adequate time to phase in changes slowly will allow 
workers to adjust their retirement plans to take account of those 
changes. Also, acting sooner rather than later will allow time to 
spread the burden of any changes across different age groups. Waiting 
decades to address Social Security financing could mean that the only 
option, given other needs at that time, might be to reduce benefits to 
then-retired, or nearly-retired, workers by 25 or 30 percent--an 
unthinkable outcome, and one that is avoidable if action is taken 
sooner rather than later.
Conclusion

    There is inherent uncertainty in projecting the future and 
especially the far-distant future. But using the best information and 
methods available, the Trustees, the Congressional Budget Office, and 
most private forecasters all project cash flow deficits for Social 
Security beginning in little more than a decade and growing worse 
thereafter for the indefinite future because of the demographic changes 
we have noted. The reason to act soon is to avoid the forced necessity 
of more precipitous action later.
    We have attached the four-page ``Message From the Public Trustees'' 
from the Summary of the 2004 Annual Reports as well as our biographical 
information. We thank you for the opportunity to appear before you and 
will be pleased to answer any questions you may have.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                                 

    Chairman THOMAS. Thank you very much, Dr. Saving. Thank 
both of you. Let me ask you some questions that, obviously, are 
partially tied to previous questions offered to Mr. Walker to 
try to get us focused on the kinds of things that you might be 
able to respond to us about. The Disability Insurance Trust 
Fund, which is the most recent significant addition to the 
Social Security system, there was a discussion extended, the 
Chair thought, over whether or not the Social Security Trust 
Fund was really a trust fund. To what extent, in your opinion, 
is the Disability Insurance Trust Fund really a trust fund?
    Dr. PALMER. The status of both the Old Age and Survivors 
Insurance and Disability Trust Funds are identical with respect 
to all of the issues that have previously been discussed.
    Dr. SAVING. I might add, in a sense that you and I imagine 
trust funds, that is, they yield revenue to you, these trust 
funds yield no revenue to the Treasury. So, that sense, they 
are not revenue-producing in assets to the Treasury, and the 
Treasury ultimately has to write the checks. To the Social 
Security system, as it stands, it is separate from the 
Treasury, in a sense, of course, they are assets, they 
represent liabilities of the Treasury, but they are assets to 
the Social Security system.
    Chairman THOMAS. So, one of the things, if we really want 
to try to move to a bipartisan solution, is to perhaps overcome 
or set aside some of the descriptive terms, and all of us are 
familiar with spending more time than was probably necessary 
dreaming up attractive names to our legislation so that we 
would have a broader appeal to our legislation than would 
otherwise be the case and that if we, in fact, call this the 
Disability Insurance Trust Fund, that not only is it not a 
trust fund, as most people recognize trust funds, it isn't 
insurance, as most people recognize insurance because 
notwithstanding the fact a portion of the payroll tax is 
designated as a premium for disability, the payout on that so-
called premium for disability ``insurance'' in no way conforms 
to what the disability premium is; is that correct? In other 
words, you get a payoff of the Social Security payment 
structure and not off of an insurance program tied to the 
Disability Insurance Trust Fund.
    Dr. SAVING. You are correct in the sense that the amount of 
disability you get is related to the Social Security benefit 
formula.
    Chairman THOMAS. Not the disability insurance that you pay.
    Dr. SAVING. Well, not the disability. The premium is not 
related to the disability experience is really what you are 
saying, I believe.
    Chairman THOMAS. So, it really isn't a premium, again, as 
if you moved to the private world, we understand a premium; it 
isn't a trust fund, as we understand a trust fund; it isn't 
insurance, as we understand insurance. If we understand that 
and set that aside, then, we can simply say that we have 
problems that we need to address, and that really is what I 
want to get to. To hang on to fictions and then argue a failure 
to make substantive change based upon an attractive name, which 
is a fiction, to me, is to deny our ability or certainly hamper 
our ability to get to a real solution. That is one of the 
concerns I probably have that will impede us if we continue to 
try to substantiate the fact that we have what, in fact, we do 
not have.
    The second question I want to ask you was brought up in 
response to a question to Mr. Walker, and I am glad he did not 
go too far in the answer because you are clearly the ones that 
we should ask, and he indicated that, although we may, by 
statute, require you to invest the trust funds in a particular 
category of securities, do you have flexibility? My assumption 
is, if you did and you could maximize the return, you would 
have done that already, and you may have already done that 
within the limited capability that we may have provided you, is 
there an opportunity to change the law to allow you to travel a 
little farther afield in terms of your investment capability 
and give us the same protection on the risk side?
    My assumption is the answer will be, no. So, what I am 
looking for is for you to give us a series of potential 
investment opportunities it might be prudent to consider in 
changing the Social Security law. Then you could provide us 
with a graduated risk calculation that we could then judge as 
to whether or not that would be an appropriate thing to include 
in legislation. Any reaction from either of the trustees?
    Dr. SAVING. I would say, first, the role of the current 
trustees of the Social Security and Medicare Trust Funds are 
not in choosing, as you are well aware, the investment in 
structure, but I think both John and I agree that some 
prepayment of any of these elderly entitlements in generation 
transfers is going to be critical to solving these problems. 
Such a prepayment would imply real investment on the part of 
either individuals or the system. By ``real investment,'' I 
mean investment in the real economy.
    Chairman THOMAS. Is there any concern, on either of your 
parts, that since you raised your right hand to be a trustee, 
that wasn't part of the job when you raised your right hand, 
and if it became part of the job of making these kinds of 
judgments that you would probably not be comfortable or you 
don't think we should provide you with that opportunity?
    Dr. PALMER. It certainly would be an expansion and 
redefinition of the role of the trustees, and I, personally, 
would simply have to evaluate the issues surrounding that if it 
were to become a reality. We don't have the same kind of legal 
fiduciary responsibility that applies in the private sector. I 
find it most useful----
    Chairman THOMAS. Nor am I suggesting that you move, 
initially, to the private sector or immediately to the private 
sector. I am wondering if there aren't any baby steps that you 
might consider suggesting to us, based upon your role and 
knowledge.
    Dr. PALMER. David Walker mentioned possibilities there, 
certainly, which is to broaden the ability for the trustees to 
invest in marketable Treasury bonds. Beyond that, there have 
been, from time to time, it has been raised whether the trust 
funds might be able to invest even broadly beyond government 
securities.
    Chairman THOMAS. Are the trust funds or the securities, the 
marketable securities that Mr. Walker talked about that you 
have the potential to invest in, are they backed by the full 
faith and credit of the United States?
    Dr. PALMER. Well, I think he was raising the possibility of 
investing in marketable Treasury bills, which would be.
    Chairman THOMAS. Are they backed by the full faith and 
credit of the United States?
    Dr. PALMER. Yes.
    Chairman THOMAS. Do they produce a higher interest rate?
    Dr. PALMER. They could, conceivably. There is a formula 
that dictates now what the Social Security Trust Fund interest 
is. It is, basically, the average of the 5- to 15-year issue 
bonds. So, you could invest in such a way in bills to raise 
that yield, if you so choose, by going more long term, 
presumably.
    Chairman THOMAS. In your opinion, is that an appropriate 
and prudent examination this Committee should undertake as one 
of the many options that may be available to us?
    Dr. PALMER. Yes.
    Chairman THOMAS. Thank you very much. Does the gentleman 
from Michigan wish to inquire?
    Mr. LEVIN. I think I will restrict my inquiry and assume 
that you are here as public trustees and not in other 
capacities. I don't think, Mr. Chairman, we agree for a moment 
that the trust fund is a fiction. I think Mr. Walker's 
testimony has indicated that it isn't. Bonds have been redeemed 
by our government for Social Security purposes I think 11 times 
backed by the full faith and credit. To call that a fiction I 
think is a fiction. Also, I think your earlier designation of 
the benefits we now have is ill advised we, also, don't agree 
with. I think we can explore the issues that you have raised. 
Dr. Saving, you made one statement about the utility of having 
these tax moneys somehow placed in a different way, I don't 
think I agree with your implication. I think, however, I won't 
probe that. I think you need to make clear, in any answer you 
give, that you are now in a capacity other than a public 
trustee. You are I think it is now called a consultant for an 
organization that is in the vanguard of the efforts trying to 
sell the President's privatization. I think you are consulting 
for progress for America, are you not?
    Dr. SAVING. I am not a consultant for them. I agreed that I 
would advise them on certain things, but I am not a consultant 
for them.
    Mr. LEVIN. You are an adviser?
    Dr. SAVING. Yes, I am an adviser to them. I am telling 
them, when they say something wrong or something, I will tell 
them that that is wrong, but I am not a consultant to them.
    Mr. LEVIN. You are more than that. I mean, you are an 
active participant in their work, are you not?
    Dr. SAVING. No, I do not view myself as an active 
participant. I am not a spokesman for them.
    Mr. LEVIN. You have received no compensation?
    Dr. SAVING. I have received no compensation from them.
    Mr. LEVIN. You very much agree with their position, do you 
not?
    Dr. SAVING. I have agreed with personal accounts long 
before the President ever thought of them.
    Mr. LEVIN. You basically agree with the position of 
Progress for America, do you not?
    Dr. SAVING. Well, if you mean do I believe that personal 
accounts would be a useful thing, the answer to that is, yes.
    Mr. LEVIN. Including diversion of Social Security payroll 
taxes for that purpose, right?
    Dr. SAVING. Well, I have suggested----
    Mr. LEVIN. Yes or no?
    Dr. SAVING. --my own proposals, and they actually include 
additional revenues coming from individuals. So, I am not----
    Mr. LEVIN. You haven't taken the position over the years 
that you favor using Social Security payroll taxes to be placed 
in private accounts? That hasn't been your position?
    Dr. SAVING. No. My position has been that, in addition to 
that, people should put additional amounts of their own in into 
these accounts.
    Mr. LEVIN. In addition, not the diverting of Social 
Security payroll taxes.
    Dr. SAVING. As a matter of fact, you would be diverting 
some, but not anything like what has been suggested by the 
Administration. I am not involved, in any way, in the 
Administration's position on this.
    Mr. LEVIN. Some, but not as much as the administration.
    Dr. SAVING. Well, we have additional moneys. In the 
proposals that I put forward, there are additional, if you want 
to call them taxes or contributions by individuals, into 
their----
    Mr. LEVIN. In addition to the 6.2?
    Dr. SAVING. In addition to the total of 12.4 or, actually, 
if it is OASI we are discussing, it is 10.6 percent.
    Mr. LEVIN. I am talking all together.
    Dr. SAVING. Yes, but the real issue is the proposals that I 
have had were really about retirement and not about disability. 
I was leaving the disability alone. It is important to 
understand that.
    Mr. LEVIN. Thank you.
    Mr. MCCRERY. [Presiding.] Dr. Palmer, are you an adviser 
for any group that is out there talking about----
    Dr. PALMER. No, I am not.
    Mr. MCCRERY. Well, do you agree with the conclusion stated 
by one of you, and I think it was Dr. Saving, that given the 
current demographics of the country, and the birth rate, and 
longevity and so forth, the current Pay As You Go system for 
financing Social Security benefits has outlived its usefulness, 
and we need to at least partially prepay some of the future 
liabilities for this program?
    Dr. PALMER. No, I don't agree, stated that way, 
particularly. I do think it is important that we somehow raise 
our savings rate, both our private savings rate and our public 
savings rate or DIS saving at that point, reduce the DIS 
savings in order to help make the adjustments to an aging 
society. Whether one would actually prefund a portion of the 
programs or not, is a separate question and could be part of 
that, ultimately.
    Mr. MCCRERY. So, you don't believe, necessarily, that 
prefunding Social Security at this point is a good idea?
    Dr. PALMER. The action that was taken in 1983 has been 
integral in helping to build the surpluses that exist in Social 
Security now and will exist for sometime in the future. Were 
that money not being used to offset a deficit on the Federal 
side, we would be, in some more general sense, helping to 
prefund the program. That I think is important. It can be done 
through public savings overall. It doesn't have to be in the 
program, per se.
    Mr. MCCRERY. What could we have done differently in 1983 to 
avert what has happened since then with the surplus?
    Dr. PALMER. That would be a question of overall fiscal 
policy, of treating the----
    Mr. MCCRERY. Assuming that Congress would have behaved 
exactly as it has over the last--when Democrats were in charge 
and when Republicans were in charge--what could the Congress 
have done and the Commission to recommend to the Congress in 
1983 to prevent that from happening, to prevent Congress from 
spending all the surplus?
    Dr. PALMER. I think if Congress chooses to do that, there 
is very little that can be done to prevent it.
    Dr. SAVING. I think I would suggest that you could have 
given the trustees, maybe required them to invest the surpluses 
in the private economy and not in any government securities at 
all or in the government securities of other Nations, for 
example, so that they would, when we had to cash them in, they 
would have to consume less and send us things. That is sort of 
a ``lock box,'' if you like.
    Mr. MCCRERY. Right.
    Dr. SAVING. We are not suggesting that. I am saying you 
asked me a question, a hypothetical, of what we could have done 
in 1983.
    Mr. MCCRERY. That is a very good response. Dr. Palmer, 
granted that Congress could change its mind and not invest it 
in negotiable securities of some form or another or allow 
individuals to invest it in negotiable securities and get, 
therefore, prefund some of the obligations of the system, but 
once you start establishing a fund that is in the name of an 
individual, it would seem to be common sense it would be more 
difficult for Congress to take that back, rather than the 
situation we have had since 1983, which has been Congress got 
the money, there is nothing else to do with it, except pay down 
the debt, which we did for a couple of years, but other than 
those couple of years, we just spent it all. So, I just think 
anyone who looks at this, and given the history of Congress's 
behavior, would want to try to at least build a little better 
wall around that money than we did in 1983. That is my point.
    Dr. PALMER. I understand, and I am very much in favor of 
more fiscal responsibility on the part of Congress.
    Mr. MCCRERY. Yes. Mr. Shaw?
    Mr. SHAW. Let me just read a short statement, and then I am 
going to ask you if you think it applies to the Social Security 
system as we have it today. ``An unstable or crucial time or 
state of affairs in which a decisive change is impending, one 
with the distinct possibility of a highly undesirable 
outcome.'' Do you think that applies in any way to the present 
state of Social Security?
    Dr. PALMER. Could I ask you to repeat that?
    Mr. SHAW. Yes, I would be glad to.
    Dr. SAVING. I would like you to, as well.
    Mr. SHAW. ``An unstable or crucial time or state of affairs 
in which a decisive change is impending, especially one with 
the distinct possibility of a highly undesirable outcome.'' Or 
do you think we are reaching a critical stage?
    Dr. PALMER. That suggests, to me, a somewhat more imminent 
and immediate problem that must be dealt with tomorrow, as 
opposed to something that I think is----
    Mr. SHAW. Well, tomorrow, do you think it would apply, Dr. 
Palmer?
    Dr. PALMER. Well, it is a problem that----
    Mr. SHAW. I am talking about----
    Dr. PALMER. --will gradually grow worse over time.
    Mr. SHAW. Eventually, we will get there before 2018; is 
that correct?
    Dr. PALMER. Well, I don't think there is any magic year 
here. The surpluses will peak at a certain level, the annual 
cash flow, and then it will gradually begin to decline, and 
then it will become negative.
    Mr. SHAW. How about you, Dr. Saving?
    Dr. SAVING. I think John and I here agree on this. The 
issue here is that the surpluses, that is, the pressure on you 
as Congress, because of the pressure of the budget, is going to 
begin immediately following 2008, when the money available to 
the Treasury is going to rapidly decline.
    Mr. SHAW. So, that would apply in 2008.
    Dr. SAVING. So, 2008 is when it is going to peak, and that 
is when we are going to first feel the budget pressure, and it 
is just going to continue very rapidly after that.
    Mr. SHAW. That definition is taken from the Webster 
dictionary as the definition of crisis. We seem to be arguing 
whether there is a crisis or not and spending all the time 
doing that, when we know we have got one big, big problem, and 
it is going to reach a crisis stage if we don't do something 
about it, particularly for young Americans. I thank both of you 
for your testimony and for being here. I understand you are 
both President Clinton's appointees, and I know that President 
Clinton, himself, was looking to the private sector and 
searching for some type of a solution to the impending problem 
that certainly is going to be facing us, and I thank you for 
your testimony.
    Mr. MCCRERY. Mr. Cardin?
    Mr. CARDIN. Thank you. There is only a few minutes left, 
and we have a vote on the floor. Let me just make an 
observation. I very much appreciate both of your testimonies. 
It seems to me that if we gave you the traditional powers of a 
trustee, and you were very kind to point out there is a trust 
fund, but you don't have the same powers that a normal trustee 
would have of pension funds, if we gave you the normal powers 
to do what you thought was prudent, that we would solve some of 
the problems, not all, but we would at least have a better 
asset allocation, we would have better dealing with the needs, 
the cash flow needs of the system, but you are restricted by 
some of the laws that we pass; that you don't really have a 
sacred fund. It is commingled too much in the budget process of 
this Nation and too many restrictions placed on the trustees. I 
think that is a good point, and I hope, Mr. Chairman, you 
mentioned that in your comments, I hope that is one area that 
we can look at because it seems to me the public believes there 
is a trust fund, and we should at least give you more powers to 
deal with it in the best interests of the beneficiaries and the 
Nation. Thank you, Mr. Chairman. I appreciate the time.
    Mr. MCCRERY. Mr. Lewis?
    Mr. LEWIS OF GEORGIA. Thank you very much. Do you feel like 
you are a fox in a hen house? Do you ever feel like that? You 
are the one that said a few years ago that Social Security 
should be destroyed as we know it. Then you went on to say, 
also, a few years ago, that the Social Security Trust Fund 
doesn't exist. It is just a promise. I don't understand how you 
can reconcile accepting a job as being a trustee of the fund if 
you don't believe in it. I happen to believe that Social 
Security is a sacred covenant. It is a trust, and some of us 
believe in it. It is a serious trust.
    Dr. SAVING. Well, I think that is exactly right, what the 
promise legislation is. The issue with Social Security is it is 
a promise that Congress can change any time. One of the issues 
that you have with it is, and, in fact, the only two times in 
which you have made significant transfers from the budget to 
Social Security, you changed it. You reduced the benefits both 
times. The issue here is how do you protect the recipients of 
Social Security from changes that can occur? I don't know the 
answer to that, necessarily.
    Mr. LEWIS OF GEORGIA. How do you reconcile being a trustee 
of something that you really don't believe in?
    Dr. SAVING. I think it is a misnomer to believe that I 
don't believe in people planning for the future. I believe that 
generation transfers is a bad way to do that.
    Mr. LEWIS OF GEORGIA. I yield to my friend, Mr. Doggett.
    Mr. DOGGETT. Your comment, as I understand it, was, ``We 
must destroy Social Security as we know it in order to save 
it.'' I am sure that that is a point of view that you continue 
to hold. The difficulty we have in trying to achieve a 
bipartisan solution to the long-term concerns over Social 
Security is when we hear terms like claw back, like phased 
destruction of Social Security, and know that people who are 
playing key decisionmaking roles in this process really don't 
believe in Social Security as we know it. I think we can 
achieve, as indicated by Mr. Walker's testimony, a bipartisan 
solution to these problems, but we cannot achieve it if it 
means the phased destruction of Social Security. That is the 
big concern that those of us on the Democratic side have.
    Dr. SAVING. I think you ought to have that. I think you 
ought to have the thing of guaranteeing the, that individuals 
have, as Franklin Delano Roosevelt said, the legal, the moral, 
and the political right to their pension benefits, and I am not 
sure how to do that. The current system doesn't do that. The 
question is, is a system in which it is individually based, and 
this has nothing to do with my role as a trustee----
    Mr. DOGGETT. Well, the current system is doing that. It has 
been doing it since Franklin Roosevelt and a Democratic 
Congress set up this program, and it can continue doing it 
completely, according to the Republican-appointed Congressional 
Budget Office, until about 2050, 2052. It can do almost 80 
percent of guaranteed benefits after that. There is a need to 
take care of the problems after 2050. We should start working 
on it now, but private accounts don't do anything but make that 
problem worse not better.
    Dr. SAVING. As I say, I am here as a trustee and not as 
someone proposing private accounts.
    Mr. MCCRERY. Thank you very much, gentlemen, for your 
testimony today. That concludes our hearing for today.
    [Whereupon, at 2:30 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
 Statement of Gerald M. Shea, American Federation of Labor-Congress of 
                        Industrial Organizations
    Thank you for the opportunity to present the views of the AFL-CIO 
on the financial outlook of Social Security. The AFL-CIO is a voluntary 
federation of national and international labor unions representing 
approximately 13 million working women and men of every race and 
ethnicity and from every walk of life. The mission of the AFL-CIO is to 
improve the lives of working families--to bring economic justice to the 
workplace and social justice to our nation. The achievement of a 
reasonable level of financial security in retirement is an important 
component of economic justice for all Americans and economic stability 
for the nation.
    The union movement has been one of the strongest advocates for 
creating and strengthening Social Security over time. Throughout the 
program's history, we have participated in the system at all levels, 
including the highest policy levels. The American Federation of Labor 
actively supported passage of the Social Security Act of 1935. Former 
AFL-CIO President Lane Kirkland served on the bipartisan National 
Commission on Social Security Reform (the Greenspan Commission). Union 
representatives also have served on the quadrennial Social Security 
Advisory Councils and most recently on the Social Security Advisory 
Board. These are just some of the many examples of our active work in 
this area. As our country engages in another debate about the future of 
Social Security, the union movement and the AFL-CIO, in particular, are 
committed to working with Congress and the President to strengthen this 
vital family program for current and future generations.
Social Security's Role
    Social Security is America's most comprehensive and important 
family protection system. It is an insurance-based program that builds 
individual family security through the combined contributions of 
everyone. Benefits are designed to replace lost wages and preserve 
family living standards. Benefit levels are set by law and are a 
function of a worker's lifetime earnings. This design allows the system 
to provide predictable, dependable benefits as a foundation for family 
security on which families can build, not just for retirement but also 
in case of the disability or premature death of a worker.
    Commentators often refer to Social Security as a safety net program 
because it provides an important lifeline for low-wage families. The 
twenty percent of seniors with the lowest incomes in retirement receive 
90 percent of their income from Social Security, on average. But, 
Social Security is considerably more than an anti-poverty program. It 
is important to all workers and their families, particularly middle 
class families. Middle class married seniors count on Social Security 
for more than 56 percent of their income, on average. Middle class non-
married seniors, many of whom are widows and widowers, rely on Social 
Security for nearly 80 percent of their income, on average. The extent 
to which seniors rely on Social Security is all the more striking given 
how modest benefits are, averaging just $955 per month for a retired 
worker and $1,574 per month for a retired couple today.
    Social Security plays such an important role, in part, because the 
private pieces of the retirement system--job-based pensions and 
retirement plans and individual retirement savings accounts--do not 
cover nearly enough workers and fail to deliver adequate retirement 
income to many of those lucky enough to be covered. According to the 
U.S. Department of Labor, fewer than half of private-sector workers 
have any kind of retirement plan (defined benefit or defined 
contribution) on their current job, a huge gap that has persisted for 
decades. Even among year-round, full-time workers closest to retirement 
(ages 55-64), retirement plan participation is only 58 percent. 
According to the Federal Reserve Board, fewer than three-in-five 
families approaching retirement (ages 55-64) have established any kind 
of defined contribution retirement savings account at work or on their 
own (e.g., 401(k)s, 403(b)s or IRAs), and half of those families with 
any account have less than $55,000 in it, enough to generate only 
several hundred dollars per month in income.
Social Security's Challenges
    Against this backdrop of a secure Social Security and a porous 
private system, we face projected shortfalls in Social Security over 
the long run. According to the intermediate projections contained in 
the 2004 report of the Social Security Trustees, the system would have 
sufficient resources to pay full benefits for another 37 years, until 
2042, and at that time the program would have sufficient revenue to 
cover 73 percent of current-law benefits if no changes were made. The 
75-year shortfall in the system is equivalent to 1.89 percent of 
taxable payroll. Similarly, the Congressional Budget Office projects 
that trust fund exhaustion will occur in 2052, at which time the system 
will be able to pay 78 percent of promised benefits, and that the 
shortfall equals 0.26 percent of taxable payroll over 50 years (2004-
2053) and 1.50 percent of taxable payroll over 100 years (2004-2103).
    We strongly believe these projected long-run financial shortfalls 
should be addressed sooner, not later. Nothing in these projections, 
however, necessitates a rush to make changes without careful 
consideration of the impact on current and future workers, retirees and 
their family members. Given the crucial role Social Security plays in 
delivering retirement and family economic security, particularly for 
low-income families and the broad middle class, Congress and the 
President should take the time to get it right. Furthermore, in 
recognition of the great uncertainty to which the Trustees' 75-year 
projections are subject, policymakers should act prudently and avoid 
drastic and irreversible changes to the benefit structure.
    Nevertheless, calls are being made by some policymakers and 
commentators to change Social Security dramatically and radically. The 
justification for these changes is the assertion that Social Security 
faces a looming ``crisis'' and ``catastrophe'' and that it is 
``unsustainable.'' These kinds of characterizations of Social 
Security's long-term financial outlook are dramatically out of 
proportion to official projections for the magnitude and timing of the 
shortfalls.
    For example, some would say that the $3.7 trillion present value of 
the long-run Social Security shortfall (according to the Social 
Security Trustees intermediate projections) speaks for itself in 
establishing the need for drastic changes that over time would phase 
out much of the current Social Security system and replace part of it 
with private investment accounts. While on its face this appears to be 
a big number, over the 75-year projection period, the projected 
shortfall represents just 0.65 percent of GDP (or 0.35 percent under 
the CBO projections). By comparison, the present value cost of the 2001 
and 2003 tax cuts, if made permanent, would be 1.95 percent of GDP or 
$11.1 trillion. That is, the revenue losses from the tax cuts amount to 
between three and five times the size of the projected Social Security 
shortfall, according to the Center on Budget and Policy Priorities. Tax 
cuts for the top one percent of income earners would be about as big as 
the Social Security shortfall.
    Similarly, those who cite the infinite horizon present value of the 
shortfall, $10.4 trillion, give little or no context, such as the fact 
that the present values of taxable payroll and GDP are projected to be 
$295.5 trillion and $843.8 trillion, respectively, over the infinite 
horizon. This projected shortfall represents just 1.2 percent of GDP 
over the infinite horizon. Furthermore, the serious questions that have 
been raised about the meaningfulness and appropriateness of measuring 
the size of system shortfalls into infinity are not mentioned. The 
American Academy of Actuaries, for example, concluded that infinite 
horizon projections of Social Security's shortfall ``provide little if 
any useful information about the program's long-range finances and 
indeed are likely to mislead anyone lacking technical expertise into 
believing that the program is in far worse financial condition than is 
actually indicated.''
    It also is important to consider the timing of the projected 
shortfalls. As noted above, the Social Security trust funds are 
expected to be exhausted in 2042 under the Trustees' intermediate 
projections. Some policymakers and commentators have focused instead on 
2018, when benefit payouts are projected to exceed program revenue for 
the first time, as the real date at which Social Security experiences 
shortfalls despite the existence of substantial assets built up in the 
system's trust funds. In effect, the trust funds and the U.S. Treasury 
bond assets they hold are dismissed as meaningless.
    These efforts to diminish or even ignore the effects of the trust 
funds run counter to the explicit intentions of lawmakers at the time 
the last significant changes were made to the system. In 1983, Congress 
enacted and President Reagan signed into law changes in Social Security 
aimed at partially pre-funding future benefits by accumulating surplus 
assets. Congress and the President made a decision to set payroll taxes 
on workers higher than would be necessary to pay benefits each year for 
decades. As a result, workers' payroll tax contributions exceeded total 
program costs by $54.4 billion and total tax revenues generated a $67.9 
billion cash surplus in 2003.
    The clear intention of Congress and the President was to build up 
trust fund reserves so that they could be spent down to help pay for 
the retirement of Baby Boomers. At that time, Senator Daniel Patrick 
Moynihan, who helped shepherd the 1983 reforms into law, called the 
accumulation of a large reserve fund ``a considerable achievement.'' 
This policy has resulted in the build up of $1.5 trillion in 
``cumulative savings'' at the end of 2003, as Federal Reserve Board 
Chairman Alan Greenspan recently noted.
    Social Security does not have enough money to cover full benefits 
in 2018 only if Congress and the President choose to default on the 
bonds held by the trust fund. That would be the first time in its 
history that the U.S. government defaulted on its debt. It also would 
be an extraordinary betrayal of the millions of workers who paid in 
extra to help build up Social Security's assets. A default on the trust 
fund-held bonds in 2018 would represent a $1.1 trillion transfer from 
low- and middle-income households (a loss of $10,100 per household) to 
the richest 5 percent (a gain of $226,900 per household), according to 
the Center for Economic and Policy Research.
    Finally, it is important to note that the financial outlook for 
Medicare differs markedly from that of Social Security. The financial 
difficulties facing that program are much larger and come much sooner. 
According to the 2004 report of the Medicare trustees, the long-run 
shortfall for the Hospital Insurance (HI) trust fund alone is expected 
to be 3.12 percent of Medicare's taxable payroll, and the HI trust fund 
is expected to be exhausted in 2019, 23 years sooner than the Social 
Security trust funds. The size of the total Medicare program as a share 
of the economy is expected to grow fivefold, from 2.6 percent of GDP in 
2003 to 13.8 percent of GDP in 2078.
    Medicare provides crucial health benefits to seniors and disabled 
workers. It does not provide, however, a deluxe benefits package, and 
as expensive as health care has become for our country, it would be 
even more expensive if we simply unloaded the responsibility for it 
onto individuals. As the debate over what to do about Medicare and 
health care costs in general proceeds, it needs to be expanded to 
include a discussion of systemic changes that can reduce long-term 
growth rates in health care spending. Reducing medical errors, which 
result in too many needless deaths each year and far too much economic 
waste, and introducing quality purchasing management may be important 
tools for simultaneously addressing health care costs and improving the 
quality of care received by Americans.
Conclusion
    Social Security plays a crucial role in the economic lives of 
Americans because of how it is designed as well as longstanding 
limitations and inadequacies in the private retirement income system. 
Its relative importance to American families is unlikely to change for 
current or future retirees, making it all the more important that we 
act to strengthen Social Security and do so with great care.
    Some policymakers have used the system's long-run financial outlook 
to argue that it faces a near-term crisis and that its current benefit 
structure should be cut back drastically and replaced partly with 
private accounts. We believe such an analysis is inconsistent with the 
fundamental projections for the system's future. Social Security is 
strong today and faces modest financial challenges in the future.
    The key question facing policymakers and the public, then, is not 
whether Social Security can be strengthened. Clearly, it can. At issue, 
however, is whether policymakers are willing to make strengthening 
Social Security a national priority in the face of competing interests, 
such as making tax breaks for the richest Americans permanent. We 
strongly believe strengthening Social Security for American workers and 
their families should be a top priority for Congress and the President.

                                 

                                        San Diego, California 92130
                                                       May 27, 2005
Ways and Means Committee
House Of Representatives
Washington, D.C. 20510

To whom it may concern

    The current debate around the privatization of Social Security has 
prompted me to submit this statement. Around 18 years ago, my wife was 
diagnosed with a chronic disease, and so qualified for and began to 
receive Social Security Disability benefits. Five years later, our 
first child was born, and we were surprised to learn that children of 
someone receiving disability payments are also eligible to receive 
payments. We were happy to open a private investment account for our 
son, and immediately began automatically depositing his Social Security 
checks into this brokerage account to use as a college savings account. 
Two years later, our daughter was born, began receiving Social Security 
checks, and we set up a brokerage account for her as well. For the past 
thirteen years in my son's case, and eleven years in my daughter's 
case, we have consistently directed their Social Security checks into 
these private brokerage investment accounts. We have even adjusted the 
investment amount to correspond as closely as possible with the income 
adjustments made by Social Security over the years.
    These brokerage accounts were managed by a well-respected firm 
(Twentieth Century, now American Century), and were considered 
moderate-risk growth mutual funds. At the end of this year, due to my 
concern regarding the reckless fiscal policies of the current 
administration, I decided to convert the shares of these mutual funds 
into money market assets, so as to minimize any further risk to the 
account values, as my son will be entering high school next year. I had 
anticipated realizing a hefty tax burden from this asset transfer.
    Imagine my surprise when I learned that not only have I not made 
money from these accounts over the last thirteen years, but I have lost 
considerable money from both accounts! This was even more surprising 
considering the fact that these accounts were added to regularly 
without fail, making use of dollar cost averaging, and were held mostly 
during the economic boom years of the Clinton administration..
    I'm enclosing performance statements from both children's funds. 
You'll notice the years each was opened, along with a sample of the 
regular investments made. You'll also notice that the annualized rates 
of return on each fund over the past eleven to thirteen years was 
between 5.7 and 6.2 percent. That looks pretty good until you look at 
my 2004 tax statement for these accounts, also enclosed, which shows 
both a short-term and long-term loss from both accounts. According to 
my tax statement this year, I have incurred a Short-Term loss of 
$178.34 and a Long-Term loss of $9786.75 upon converting the mutual 
funds.
    You now have an example of empirical evidence which you can use to 
argue the risks of the kind of reform proposed by this administration 
and it's allies. The ironic thing to me is that I am now 52 years of 
age, and so if I were to begin privatizing a portion of my own Social 
Security payments into a brokerage account until retirement age (around 
13 years, the same as the data I've provided you), I can forsee a big 
disappointment looming ahead for me when I retire.
    Please feel free to use this data in any way you see fit. I'm 
willing to meet with committee members to discuss my experience in this 
regard.
            Sincerely,
                                                    Stephen Bratman
                                 ______
                                 
    [The attachment is being retained in the Committee files.]

                                 

         Statement of Judy and Bobby Lee Everett, Selma, Texas
    Thank you for allowing me to send you this message. ``If Congress 
would repeal the ACT/Bill that allowed them to spend/BORROW the reserve 
monies from Social Security, SS would then continue to have TRILLIONS 
IN RESERVE AND EARNING INTEREST AS IT WAS DESIGNED. When is Congress 
going to pay back the large amounts of money that they have borrowed 
from our money? If you would correct all these things, then we would 
not have to be concerned with saving the FUTURE OF SOCIAL SECURITY.''

                                 

    Statement of Paul B. Gallagher, Executive Intelligence Review, 
                           Leesburg, Virginia
                  --Reject `Pinochet' Privatization;--
            --An `FDR' Jobs Boom Would Perpetuate Surplus--
    The future of Social Security is the choice between President 
Franklin Roosevelt's successful retirement insurance program, and 
privatization modelled on fascist Chile's by dictator Gen. Augusto 
Pinochet. Privatization was born in 1981 when Chile privatized at the 
point of a bayonet. Since then, every country in the world which has 
imitated Chile's Social Security privatization, has destroyed a 
relatively successful system in favor of one which pumps up the stock 
and bond markets, but leaves low-income and moderate-income wage 
earners destitute in their retirement.
    President Bush's proposed privatization scheme has been pushed on 
him for more than 20 years by George Shultz's ``Chicago Boys'' 
economists who ran fascist Chile's economy; and in particular by Jose 
Pinera, General Pinochet's Labor Minister. They are the ideological 
reason that George W. Bush already in 1978 infamously declared that 
only privatization could save Social Security from imminent bankruptcy.
    Leading Chilean Social Security officials, and economists, and 
labor representatives are warning the U.S. Congress to reject 
privatization at all costs. See the attachments from these leading 
Chileans.
    The economic reason you are even considering such dangerous 
action--overarching the ideological reason--is pressure from the 
banking community to use Social Security revenue to prop up a 
collapsing dollar and its markets.
    On the subject of attention of your March 9 hearing, any and all 
forecasts of future Social Security deficits are based on unexamined 
and unsupported forecasts of extremely low economic growth for most of 
the 21st Century.
    Members of this Committee, with its responsibility to understand 
sources of government revenue, should be ashamed to be debating policy 
on the basis of projections which assume virtual zero growth in U.S. 
employment from 2015 onwards, since Social Security tax revenue depends 
on employment more than any other factor. With strong U.S. economic 
growth, Social Security will be solvent, and in surplus, indefinitely.
                --Jobs vs. President Bush's `The Math'--
    Why should any intelligent American accept an actuaries' 
``forecast'' about Social Security which is embraced and promoted by 
President George W. Bush? When Bush received National Intelligence 
Estimates about [the current situation] in Iraq which displeased him, 
he called them ``just speculation,'' and ``really just guesses.'' But 
when he got actuaries' ``forecasts'' about the income and outgo of 
Social Security, which stretch out tenuous and very pessimistic 
assumptions--``guesses''--[a century into the future], they met the 
President's policy specifications. Bush decided, ``This is the math. 
Learn the math.''
    How about this math: From 2001-04, in the reign of Bush's jobless 
economic policies, the total tax revenue of the Social Security system 
grew by 5% over three years; usually, it grows by 5-7% [every year]. 
Between 2002 and 2003, Bush held Social Security's revenue growth to 
zero. No other President has been able to do that in Social Security's 
70-year history. The ``President of layoffs'' is not believable about 
the program's future prospects; Social Security taxes are paid by 
people with jobs and companies with employees. Any long-term forecast 
embraced by Bush is suspect, especially in light of privatization 
advocates' takeover of the President's Commission, the Social Security 
Trustees, and the Social Security Administration.
    In fact, we'll show that a long-term ``Super-TVA''-type 
infrastructure recontruction an recovery program, creating millions of 
new productive jobs, would perpetuate the Social Security surplus for 
decades.
    The analyses made by both the Social Security Actuaries and the 
Congressional Budget Office, are based on predicting economic 
developments over the long term--in slow motion--which, if happening 
rapidly, would be called by their proper name, economic collapse. 
Employment growth stops. Productivity growth and GDP growth fail. Real 
wages stagnate. A low birth rate and falling immigration bring the 
growth of the labor force to a crawl. Federal Reserve Chairman Alan 
Greenspan claimed on Feb. 15 that these were ``inexorable 
demographics''; but in fact, they are the economics of a century-long 
recession. If Social Security were eventually bankrupted by these 
economic conditions, the Federal budget, U.S. debt, the housing bubble, 
and the dollar would all have blown out long before.
    The evidence is that Social Security grows, not on trees, nor Wall 
Streetmutual funds, nor actuaries' forecasts; but on jobs. Let us see 
to what kind of forecast that evidence leads, and what we have to do to 
keep Social Security solvent--if we stop President Bush from stealing 
it.
                      --Forecasts or Predictions--
    Look at Figure 1, the past 20 years' record of Social Security's 
tax revenues (the upper graph line) and benefit payouts (the lower 
line), both expressed as percentages of Gross Domestic Product (GDP). 
This is taken from the Congressional Budget Office's ``Outlook for 
Social Security, June 2004.'' But this is not the ``forecast'' part of 
the chart, which everyone is usually induced to focus on. This is the 
actual record of Social Security's income and outgo since its current 
tax structure was set, in the mid-1980s. [Clearly, this lively 
variation is anything but long-term ``predictable''.] It reflects 
economic policies, and their effects.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Leave aside the lower, benefit-payout graph for the moment; it is 
set by law, and resulted from the varying size of generations retiring, 
particularly the small size of the cohorts of our population born 
during the Great Depression of the 1930s.
    Focus on Social Security's tax revenues relative to GDP. There are 
two periods of five years or so, in which employment in the U.S. 
economy grew by 1.5% annually, or more. (They roughly overlap somewhat 
more than Presidents Reagan's and Clinton' second terms.) During each 
of those periods, Social Security tax revenues as a portion of GDP 
rose, by 3-4 tenths of a percent--a fairly sprightly jump. And there 
are two shorter periods, in each of which U.S. employment grew by 
substantially [less] than 1.5% a year (1.2% for 1990-94, and 0.4% from 
2000-04). During each of those two periods, the payroll tax as a 
percent of GDP took an unsightly tumble by about 0.3%.
    Over the 15-year period 1985-2000 (i.e., leaving out the jobs 
bloodbath under Bush ``43''), employment and the U.S. labor force grew 
by an average of just about 1.6% a year, 27.7% over the whole 15 years. 
And the Social Security payroll tax revenue as a portion of GDP, grew 
by.55% during that time, from 4.7% to 5.25%.
    As of 2005, jobs growth of 1.5% means about 2 million net new jobs 
a year.
    In Figure 2, following that 20-year record of variation of both 
jobs growth and the Social Security surplus, we see a virtually flat 
and level straight line for 100 years! That is a [prediction,] based 
simply on a set of assumptions; and supposedly it could only be 
altered, in Bush's ``math,'' by increasing the tax rate.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    But it is not a [forecast], which must be based on an idea of 
different economic policies which, if followed, would produce differing 
hypothetical results.
                     --An American Marshall Plan--
    Suppose a bipartisan U.S. leadership, after stopping Bush and Wall 
Street from stealing Social Security, launches--as a recovery policy 
from the looming dollar collapse--what Lyndon LaRouche has called an 
FDR-style ``Super-TVA'' policy of Federal credits for productive, 
skilled employment, mainly through high-technology reconstruction of 
our economic infrastructure. Minority leader Reid has called for ``a 
Marshall Plan for American infrastructure.'' And suppose such a 
recovery policy successfully launches an economic growth which keeps 
productive employment rising at 1.5% a year or better, to the middle of 
this century? That would mean creating about 2.6 million new jobs a 
year by 2020, some 3.3 million a year by 2035, and 4 million a year by 
mid-Century.
    If the same relationship of jobs growth, to Social Security revenue 
growth, which obtained from 1985-2000, were extended to the 2050 
horizon, Figure 3 shows what could happen. The hypothesis is: Implement 
such an ``American Marshall Plan,'' and Social Security doesn't need 
its surpluses, its special obligation Treasury bonds, to pay benefits. 
They could, in fact, be used as the reserve basis for some of the large 
volumes of Federal credits which would drive such a ``Super-TVA.''


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    What about Bush's paper-doll cut-outs of ``workers'' vs. 
``beneficiaries ``--the level of ``demographics'' his experts think 
Americans can understand?
    The current ratio of contributors to beneficiaries of Social 
Security, the 3.3-to-1 so much lamented and scorned by Bush, Cheney, et 
al., has been just about constant for 15 years; and the Social Security 
system has collected about 130% of what it needs to pay benefits in 
most of those years. So in fact, a demographic ratio of about 2.5-to-1, 
employed contributors to beneficiaries, may be the baseline needed--at 
current average wage levels. (At higher wage levels, the ratio might be 
lower.) Figure 4 shows that if the U.S. economy were to keep creating 
net jobs at 1.5% annually or better, especially productive jobs, that 
Social Security ratio would stay above 2.5-to-1 to 2050, even through 
the supposedly death-dealing retirement of the allegedly huge Baby-Boom 
generation.


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

Bush Has SSA Projecting Depression
    Alan Greenspan, Treasury Secretary Snow, the President's Economic 
Advisors and the actuaries say ``inexorable demographics'' make this 
impossible; it would produce the most drastic labor shortages ever 
seen.

      They assume that immigration into the United States will 
fall, by 2025 to 900,000 annually, 100,000 less than the Census Bureau 
forecasts at that time, and perhaps 20% less than today's immigration 
level;
      they assume that the birth rate and fertility rate will 
remain just below ``replacement level,'' although they have been 
rising;
      they assume U.S. population growth will fall fromthe 
current 1.3% to well below 1% annually, a large drop;
      they assume the growth of the American labor force will 
almost completely halt during the 20 years the Baby Boomers are 
supposed to be retiring, from 2011-2030, rising very slowly after that, 
locking down possible job creation to the level of a century-long, deep 
economic recession;
      they assume that real national wages won't grow at more 
than 1.1% a year.

    In other words, the actuaries that our illiterate President calls 
``the math,'' are [following the Malthusian axiom, so long discredited 
by American history, that demographic pessimism determines the 
possibility of economic progress, rather than the other way around.]
    It is likely, that the actuaries also assume that Social Security 
will continue to tax only about 85% of that total national wage--even 
though it taxed 90% of it only about 15 years ago. The reason? Greater 
inequality of income--more rich, more poor--takes a greater portion of 
the national wage above the level at which the Social Security payroll 
tax applies.
                   Deliberately Pessimistic Forecasts
    As the White House is overseeing two quite different GDP forecasts 
for the same periods--one to project the Federal budget, the other to 
project a Social Security deficit--so there are very different 
projections for the U.S. birthrate and immigration, and the Social 
Security Administration is using the most pessimistic possible. Like 
other Administration officials, Treasury Secretary Snow, in testimony 
Feb. 8 to the House Ways and Means Committee, claimed that 
``demographics, not economics'' determined the Social Security's 
solvency. The SSA reports' projections of low GDP growth, falling to 
the deep recessionary level of 1.8% annually for 80 years (2015-2095), 
are claimed to be ``locked in'' by even lower labor force growth (and 
therefore jobs growth) of 0.5% after 2015. This is only one-third of 
the rate of new jobs creation in the 1990s, and just over one-third the 
current rate of growth of the labor force.
    But the SSA's middle-variant birthrate of 1,950 per thousand women 
of child-bearing age is just a long-term projection of the average of 
1975-1995, it is below the U.S. Census Bureau's reported current 
fertility rate, 2,048 (and increasing, according to Census); well below 
Census' projected 2025 rate, 2,180, and Census' projected 2050 rate, 
2,186. These differences, which approximate 230 births per thousand 
childbearing-age women by 2025, would translate into about half a 
million more Americans coming of working age each year during the 
second quarter of this century.
    The same is true for immigration, another important factor in 
determining the growth of the workforce and potential growth in jobs 
creation and GDP. The SSA's long-term assumption of 900,000 total 
immigrants per year is below the projection of the U.S. Census Bureau 
(which, in turn, are below the current rate of immigration) by 200,000 
per year in the second quarter of the century.
    One of the most straightforward ways of maintaining an ongoing 
surplus in the Social Security account, is by continually increasing 
real wages. Snow's statements might be seen as statements of intent of 
the Bush Administration, a policy of low and shrinking real wages.
    As a first step, simply compare two of the SSA's own scenarios. 
With their most publicized ``Intermediate'' set of assumptions, total 
SSA Income is greater than Cost until 2028, at which point Cost starts 
to outrun Income. With these assumptions, real wages only increase at 
1.1% per year.
    But then turn to the SSA's own ``Low Cost'' scenario, which has 
real wages growing at 1.6% per year. Over the 50 year period 2005-2055, 
SSA total Income rises by 84%, and Costs do rise as well, but by a much 
smaller 9.5%--which produces a barely discernible shift in the Cost 
curve between the two cases. In other words, the changed parameters 
between these two sets of assumptions raise the Income 9 times as much 
as they raise Costs. So in this case, Costs [never] exceed Income--
i.e., there is a long-term continuing surplus.
    To try to further isolate the wage component from the other 
variables, [EIR] obtained from SSA officials the outcome of a computer 
run, using their own model, in which the ``Intermediate'' set of 
assumptions were all preserved, except that real wages were increased 
not by 1.1% per year, but by an average 2.6% per year, over the 75 year 
horizon from 2005 to 2080. According to the SSA itself, this produced a 
nearly zero ``net actuarial balance'' over that time frame--which means 
that total Income would exceed Cost for approximately the first half of 
that period, and then Cost would be greater than Income for the second 
half, and the cumulative total would pretty much balance out.
    It is clear that increasing real wages--the natural result of a 
healthy, growing economy, with continuous growth of real productivity-- 
can help keep the Social Security account in the black.
    An ``American Marshall Plan'' mobilization of productive jobs--
infrastructure, industrial, and scientific employment--would raise the 
wages and salaries that are within the Social Security tax (a 
manufacturing job pays twice, on average, what a retail job pays, for 
example). And let us not forget that with that kind of job creation, 
there are 15 million American workers ``sitting on the sidelines'' 
right now--unemployed, dropped out of the labor force, forced to work 
temp or part-time. If even two-thirds of those Americans were 
productively employed ``FDR-style'' in a jobs-creation recovery, they 
represent five years worth of the needed growth of the labor force to 
put Social Security further into surplus, on top of the natural labor 
force growth and immigration.
    Finally, the actuaries are assuming an extraordinary further 
increase in the average American lifespan, which is not occurring now, 
but would be based on future ``medical miracles,'' according to Chief 
Actuary Stephen Goss. This guess certainly increases the forecast 
Social Security benefits to be paid out. But it would be welcome; a 
longer life and higher living standard of the elderly, as Italian 
government economist Nino Galloni has shown, increases the demand for 
production, and jobs, among the labor force. And it makes it likely 
that more elderly Americans will choose to keep working productively 
past the retirement age.
    These actuaries' forecasts about Social Security have become 
markedly more pessimistic, for no good reason. The so-called 
``demographic facts'' which are held up today as meaning big future 
deficits, were well-known and taken into account in 1983. ``It's a less 
optimistic estimate today,'' a former Chief Actuary told the [New York 
Times] in January.
    Well, U.S. economic performance under George W. Bush might be 
enough to make anyone pessimistic.
    So Bush has now become ``self-fulfilling prophet'' of doom for the 
Social Security system. Stop Bush's privatization drive, get rid of him 
and Dick Cheney, launch a serious recovery program for the physical 
economy of the United States, and Social Security will be found to have 
a long life-expectancy and no serious ailments.
                                 ______
                                 
The Fascist Chile Model of Social Security Privatization
    President George Bush has repeatedly cited Chile as his model for 
Social Security privatization. While in Chile last November, he called 
it a ``great example.'' And in an April 2001 visit to the country, Bush 
said: ``I think some members of Congress could take some lessons from 
Chile, particularly when it comes to how to run our pension plans.''
    The architect of Chile's 1981 privatization was Harvard-trained 
Jose Pinera, who was Chile's Labor and Social Security Minister from 
1978-1980, under the Pinochet military dictatorship (1973-1990). Pinera 
today is Co-chairman of the Cato Institute's Project on Social Security 
Choice, one of the ideological centers of the Bush assault.
    George Shultz, the eminence grise of the Bush-Cheney 
administration, visited Pinera back in 1981. In his capacity as advisor 
to the incoming Reagan Administration. Shultz asked Pinera to provide 
him with a one-page memo on Chile's pension privatization, which had 
barely been implemented, for Shultz to try to sell the idea to Reagan. 
Reagan didn't buy it, but George W. Bush has.
What Is the Chile Model?
    1) Up until 1981, Chile had a U.S.-style pay-as-you-go system. In 
1981, workers already in the system were given a hard-sell ``choice'' 
of switching to a new, privatized system. All new entrants to the labor 
force after 1981 were required to enter the private system--with the 
exception of the military, who protected themselves by staying in the 
public system. Under the private system, workers pay 10% of their 
salaries into private investment accounts, run by financial 
institutions called Pension Fund Administrators (AFPs).
    2) The Chilean privatization and related economic measures were 
implemented by a fascist police state. From 1973 to 1979, many unions 
were dissolved and collective bargaining was sharply reduced. Then in 
1979, Labor Minister Pinera's ``Plan Laboral'' abolished the minimum 
wage, wiped out all collective bargaining, de facto eliminated the 
right to strike, prohibited trade union federations, reduced unionized 
workers to less than 10% of the work force, and allowed workers to be 
fired without cause. Dissidents were rounded up, jailed, tortured, or 
disappeared.
    3) The driving force behind Chile's privatization of social 
security was the impending meltdown of its entire financial system, 
under the weight of a giant speculative bubble--a national bankruptcy 
which in fact occurred a year later, in late 1982. Chile's 
international creditors were able to refloat the country's banking 
system, based largely on the multi-billion dollar income stream 
appropriated through pension privatization, in order to keep looting 
it. Shultz and related financial hit-men are driving the Bush 
privatization frenzy today for the similar reasons, only on a much 
larger scale of impending bankruptcy.
    4) After 24 years in operation, the Chilean system today is such a 
fiasco that almost all political forces in the country now agree that 
it has to be jettisoned, and some sort of an alternative devised. A few 
facts summarize the crisis:
    5) Half of Chile's 6.1 million labor force is not even captured by 
the pension system: they are unemployed, in the underground economy, or 
are seasonal workers. Of the remaining half, only 1.2 million workers--
a mere 20% of the labor force--are covered with a pension greater than 
the government minimum standard of about $110 per month.
    6) The government subsidizes those who receive less than this 
minimum, paying out more than a quarter of its total budget in social 
security payments--nearly as much as it does on education and health 
combined. And government social security payments are rising, with no 
end in sight.
    7) Anywhere from 25 to 33% of worker payments are skimmed off as 
``administrative fees'' by the AFPs.
    8) From 1997-2004, the AFP annual profit rate was a cool 50%. Even 
in 2002, a year of economic recession in Chile, the average AFP profit 
rate was 50.1%--with one of the largest AFPs achieving a 210% return!
    9) There were 18 AFP's when the system began in 1981; now there are 
only 6, of which 5 are foreign controlled. Out of $36 billion in Assets 
Under Management in the system, 95% are controlled by these foreign 
banking interests. These are: BBVA (Spain) with 32% of the total; 
Citibank (U.S.) 23%; Sun Life (Canada) 16%; Aetna (U.S.) 13%; and Banco 
Santander (Spain) 11%).
    10) From 1982-2004, the annual return on individual accounts with 
the AFPs has averaged only 5.1%. If two co-workers retire in Chile 
today, both having the same salary and the same number of years paying 
into social security--one into the old pay-as-you-go system, and the 
other into the privatized AFP system--the co-worker in the privatized 
system today would receive less than half of the pension of the one who 
remained in the old public system.
    The Chilean model is a failure. It means fascist economics, and 
fascist politics. It should not be repeated in the United States.

                                 

                                          Algonquin, Illinois 60102
                                                     March 18, 2005
Committee on Ways and Means
1102 LHOB
Washington, DC 20515

To Whom It May Concern:

    I am writing to encourage you to support passage of the above bill.
    I have worked at William Rainey Harper College for the last 17 
years and have, during that time, paid into the State Universities 
Annuitants Association (SURS). At retirement, I will collect a pension 
from SURS.
    Before Harper I worked in the private sector and paid into Social 
Security. I have enough quarters to collect a Social Security benefit 
at retirement.
    However, my Social Security benefit would be reduced due to the 
current law. If that law is changed by the passage of the above bill, I 
will be able to collect my entire benefit.
    How could I benefit from the receipt of my total Social Security 
benefit? I could buy groceries for a month or the extra money could 
offset prescription drug and medical costs. The added income would be 
very helpful to me in retirement.
    I encourage you to support the passage of this bill so that people 
in my situation can receive the entire benefit they actually earned.
    I appreciate your time and hope you take this matter under 
consideration. Thank you.
            Sincerely,
                                                   Joellen Freeding

                                 

             Statement of Don Karel Fronek, Toney, Alabama
    I am 67 years old and currently drawing Social Security Benefits. I 
am an Electrical Engineer and Mathematician by training and have worked 
the ``numbers'' on the Social Security Trust Fund. What is clear at 
this point is that the federal government must stop placing individual 
contributions in the general fund and spending this money. The IOU's 
credited to individual accounts have no worth at this point. When the 
money is paid back it is the tax payer (you and me) that pays it back. 
I therefore pay again for my retirement.
    Money coming into the trust fund must be reserved for current 
obligations and the excess should be accumulated. The accumulated 
surplus (as it is being called these days) should not be spent or 
loaned to the Federal Government. It is this money that has to be paid 
back by individual tax payers. Accumulated funds could be invested in 
non-governmental institutions over long periods of time. A committee of 
experts in investing could be formed to establish interest rates with a 
very high degree of reliability. But this is not the main comment here.
    The single most important aspect of the reformed Social Security 
system must include keeping the Federal Government from spending the 
accumulated surplus Social Security trust funds.

                                 

           Statement of Lara Schwartz, Human Rights Campaign
    The Human Rights Campaign, which works to ensure that lesbian, gay, 
bisexual and transgender Americans can be open, honest and safe at 
home, at work and in the community, on behalf of its over 600,000 
members nationwide, presents the following statement for consideration 
by the Committee:
The Prevalence of Same-Sex Families in America
    As demonstrated by the 2000 Census, there is a significant 
percentage of American families whose makeup is different from what was 
once considered a traditional family. Recent studies show that there 
are more than three million same-sex couples living in committed, long-
term relationships. Data also shows that there are over one million 
children being raised by same-sex couples. Gay and lesbian Americans 
contribute equally into the Social Security system but are not 
protected equally because their partners or spouses are excluded from 
spouse's and survivor's benefits under the program.
Denial of Spousal Benefits
    Same-sex partners do not receive survivors' benefits when a partner 
dies, even though they pay for them equally. This exclusion includes 
even same-sex couples who are legally married in their home state or 
participate in another state-recognized union that imposes the same 
legal obligations as a marriage.
    These families are also excluded from spousal benefits under the 
Social Security Disability Insurance program, even though they pay 
equally into the program.
Denial of Benefits to Protect Children
    Sixty percent of children being raised by same-sex couples live in 
a jurisdiction where second-parent adoption is unavailable, meaning 
that these children cannot secure a recognized legal relationship with 
one of their parents. When a parent dies without such a legal 
relationship, the surviving child is not eligible for surviving child 
benefits under Social Security, even though the deceased parent paid 
into the program, and even if the parent supported the child for the 
child's whole life.
    Social Security provides ``surviving parent'' benefits to the 
parent caring for a minor child when the other parent dies. But all 
children raised by same-sex couples are excluded from this benefit, 
even though their parents pay equally into Social Security, because it 
is only given to couples who are recognized as ``spouses'' under 
federal law, which same-sex couples are not. Even though the benefit is 
for children and not spouses, children being raised by GLBT people are 
denied it because their parents cannot marry.
    The following table illustrates the way that families headed by 
lesbian and gay couples are denied surviving child and surviving parent 
benefits:

----------------------------------------------------------------------------------------------------------------
                                                                             Domestic Partner
                                                         Domestic Partner    without legally-
              Benefit                 Married Parent        with legal          recognized
                                                          relationship to     relationship to
                                                               child               child
----------------------------------------------------------------------------------------------
Surviving Parent                           $900/month                  $0                  $0
------------------------------------------------------------------------------------------------
Surviving Child                            $900/month          $900/month                  $0
----------------------------------------------------------------------------------------------------------------

Recommendation
    In order to meet the needs of today's families, and protect future 
generations, Social Security must provide equal benefits and 
protections to all. Lesbian and gay Americans already contribute into 
the program on an equal basis as other workers. The program must 
provide equal protections to all Americans regardless of sexual 
orientation.

                                 

   Statement of John Gebhardt, John Wood Community College Annuitant 
                     Association, Quincy, Illinois
    I would like my comments entered into the written record of 
testimony to support H.R. 15 a resolution in support of removing the 
federal Social Security GPO/WEP penalties and H.R. 147 to eliminate GPO 
and WEP.
    I am one of the many individuals I know in my community college 
Annuitants Association who are affected by the GPO/WEP. One of the 
things I don't think was considered when this provision was passed is 
how it affects people who move from state to state and job to job. I 
have been paying into Social Security ever since I began making money 
in High School in the late 60's. After college, in 1968 I served 7 
years on active duty as both an enlisted person and an officer. When I 
left service to pursue a civilian career I maintained my affiliation 
with the military serving a total of 31 years. During all of this time 
I paid into social security. From 1976 to 1987 I worked in Wisconsin, 
Illinois, Iowa, and Nebraska in jobs where I paid Social Security. I 
then took a job in Illinois where I worked for John Wood Community 
College where I was told I no longer could contribute to Social 
Security--except for the Medicare portion as Illinois had opted out of 
paying into Social Security system. I was not allowed to continue 
paying into Social Security--even though I wanted to. They did not 
inform me, at that time, that because of my employment there, I would 
lose some of my social security benefits. Evidently there were and as 
far as I know are ``no'' requirements for them to have me sign anything 
informing me of the GPO/WEP offset. If they had, I would probably not 
have taken the job as I had a lot of years invested in Social Security. 
When I retired 13 years later, I find out the GPO/WEP will take away 
benefits i thought I had earned and I am irritated. I am especially 
irritated on the impact it will have on my wife--if I die before her. I 
feel I have been wronged by the system. I paid into a system in good 
faith and now I am denied some of the benefits I felt I was promised. I 
have been told by the Social Security Administration that I will not 
loose as much as some of my fellow workers who are in the same 
situation but, I still stand to loose at least $400/month. Had I not 
served in the Reserves, I would have lost more! Friends of mine are 
loosing big time especially women who took jobs in education in 
Illinois and their husbands had jobs that paid into Social Security. 
They loose the normal spousal benefit because they draw an Illinois 
Teacher's pension--even though what they get is a small amount since 
they did not work for a long time under the system.
    I urge you to eliminate this injustice. It is the little people who 
get hurt here. This is not a ``windfall'' to us. I blindly believed 
Social Security would be there when I retired. As to this ``double 
dipping'' I keep hearing, why is it, if I worked for ABC company and 
then took a part time job at Wal-Mart and paid into Social Security it 
is not considered ``double dipping'' but, if I work for the public 
sector it is.
    I did the work; I paid into the system why shouldn't I get the pay!

                                 

Statement of Barbara B. Kennelly, National Committee to Preserve Social 
                         Security and Medicare
    On behalf of the 4 million members and supporters of the National 
Committee to Preserve Social Security and Medicare, we thank the 
Committee for holding this hearing to explore the financial status of 
Social Security. In light of the limited panel of witnesses, we believe 
it is important for our organization to make one key point that cannot 
be ignored in this debate--regardless of what you believe about the 
fiscal status of Social Security, it is an undeniable fact that private 
accounts not only do not improve solvency, they make the situation 
worse.
    Plans to privatize Social Security, such as the one proposed by 
President Bush, divert payroll taxes out of Social Security and into 
private accounts thereby substantially increasing Social Security's 
funding gap. In fact, the date on which Social Security is unable to 
pay full benefits is moved forward a full decade. Because privatization 
diverts money out of Social Security and into private accounts, cuts in 
Social Security benefits have to be significantly steeper than those 
necessary to bring Social Security into financial balance. Moreover, 
these larger-than-necessary benefit cuts would be accompanied by 
trillions of dollars in new federal debt--a debt burden which will be 
borne primarily by today's young people. It stands to reason that 
taking money out of Social Security is only going to make its 
challenges more acute.
    Any discussion about the solvency of Social Security must take into 
account the very real costs of private accounts. Diverting payroll 
taxes out of Social Security and into private investment accounts only 
weakens Social Security. Private accounts are not a plan to save Social 
Security, they are a plan to dismantle Social Security as we know it by 
making drastic cuts in benefits and passing along trillions of dollars 
of debt to future generations.
    The Administration has gone to great lengths to assure retirees and 
near retirees that they won't be impacted by privatization. But our 
members fully understand the potential consequences of adding trillions 
of dollars in borrowing on top of existing mountain of debt. They are 
leery of promises to protect future benefits that may become 
unsustainable in the face of massive new borrowing, and they shudder at 
the heavy burden it will impose on their children and grandchildren.
    It is for those reasons that many in the general public oppose 
Social Security private accounts, and opposition to the accounts grows 
as people learn more about the trade-offs involved. Although more 
Americans are becoming aware of the programs' financial challenges, it 
is only recently that proponents of private accounts have admitted that 
privatization does not improve solvency by one day. That fact should be 
at the heart of any discussion on private accounts, so the American 
public can truly make informed judgments about Social Security's 
future.
    Despite the rhetoric surrounding the status of the program's 
finances, both the Trustees and the Congressional Budget Office make it 
clear that Social Security will be able to pay 100% of benefits due for 
nearly another four to five decades. The Trustees currently place that 
insolvency date at 2042, the Congressional Budget Office at a decade 
later--after which time incoming payroll taxes will still be sufficient 
to pay between 70% and 80% of benefits for years.
    It should also be mentioned that projections that far into the 
future are notoriously unreliable, and that the projected insolvency 
dates have edged forward with every single annual Trustees Report of 
the last two decades. Small differences between the estimates that 
factor into the financial projections and what is actually realized can 
result in dramatically different expected insolvency dates, because 
small differences can become significant when projected over time.
    A second issue relating to solvency arises in connection with the 
year in which the program begins to spend more in benefits than it 
takes in through payroll taxes, currently estimated by the Trustees to 
occur in 2018. While those who support privatization often use this 
date in order to create a sense of urgency about the need to radically 
change the system, the fact of the matter is that the changes made to 
Social Security in 1983 generated surpluses that will finance the baby 
boom generation's retirement. Those surpluses are represented by the 
bonds held by the Social Security Trust Funds--bonds which represent 
the debt owed by the federal government to the American worker.
    Social Security's bonds represent the same legal obligation that is 
represented by any other type of government bonds. Default by the 
United States on those bonds would cause an economic crisis of immense 
proportions in the international financial marketplace, as our country, 
which is traditionally considered one of the safest places to invest 
money, would suddenly join the ranks of the economically unstable. 
Default on Social Security's bonds represents a breach of faith between 
the US government and its own workforce--a violation of the covenant 
between worker and the government that is represented by the payroll 
taxes that are withheld from every workers' paycheck.
    A strengthened Social Security can provide reliable, guaranteed 
benefits for today's retirees and future generations, providing a 
strong foundation for America's workers entering the next century.

                                 

    Statement of Monica Plett and Barry Wauligman, Cincinnati, Ohio

  PROTECT OUR TRUST FUNDS-PIA/FAMILY MAXIMUM WINDFALL REDUCTION FACTOR

    CURRENT SITUATION--PIA computations determine the amount of T2 
benefits payable to wage earners and the family maximum that can be 
paid to eligible dependents on the worker's record for social security 
retirement, disability, and survivor applications. Currently this PIA 
computation is based on averaging the earnings over a specified number 
of computation years. For retirement PIA computations the number of 
computation years is typically 35, that is, averaging the highest 35 
years of earnings. For disability and survivor PIA computations the 
number of computation years is dependent on the age when the wage 
earner became disabled or died. For these disability/survivor cases the 
number of computation years can be as few as 2 and as many as 35 
computation years. Using less than 35 computation years results in an 
inflated PIA computation since fewer years of earnings are being 
averaged and lower years of earnings are not being included. The PIA 
computation in these disability/survivor cases based on fewer than 35 
computation years results in an inflated PIA as compared to a PIA 
computation based on the full 35 years of averaged earnings.
    IDEA FOR IMPROVEMENT--All PIA/family maximum computations based on 
fewer than 35 computation years should have an automatic windfall 
reduction factor imposed (possibly about 1% per year). This PIA/family 
maximum reduction factor should be determined based on the number of 
PIA computation years fewer than 35. For example, a PIA computation 
based on the highest 30 earning years would possibly have a 5% 
reduction and a PIA computation based on the highest 4 earning years 
would possibly have a 31% reduction.
    EXAMPLE--A T2 disability claim was recently approved for a young 
wage earner who was found disabled at age 25. His PIA computation was 
based on his highest 2 years of earnings resulting in a PIA of about 
$1,000 and a family maximum of about $1,500. The young wage earner, 
himself, paid total FICA (social security) taxes of about $6,000 over 
his relatively short working career and was awarded social security 
disability benefits of $12,000 yearly and an additional $6,000 yearly 
for his wife and young child. These payments will continue indefinitely 
to the worker for as long as he is disabled (potentially the rest of 
his life) and the payments for his dependents can continue till his 
child turns age 18 (and possibly longer). The wage earner and his 
family's social security payments represent a windfall payment as 
compared to the total amount of FICA taxes that he paid into the social 
security system. Especially when it is considered that he could 
potentially receive these benefits, as well as cost of living allowance 
increases for his lifetime, the amount of money he paid into the system 
is very small compared to the resultant monthly check and long duration 
of years the payments could continue.
    By applying a PIA/family maximum windfall reduction factor in the 
above example, the PIA and family maximum would have about a 33% 
reduction imposed (35 minus 2), resulting in a PIA of about $670 and a 
family maximum of about $1005. Even these reduced social security 
payments represent a windfall compared to the $6,000 FICA taxes paid, 
but the amount is much more reasonable and is still consistent with 
social security's original purpose as a partial replacement of income 
lost due to disability or death.
END RESULT
    Our agency has imposed various types of windfall offset reductions/
computations in determining social security payments. Examples include 
WEP (windfall elimination provision for government workers), GPO 
(government pension offset for government workers), worker compensation 
offset (for individuals receiving worker compensation payments), and 
SSI offset (for individuals awarded both social security and 
supplemental security income). Using a PIA/family maximum windfall 
reduction factor for all computations involving less than 35 
computation years seems to fit within the same context of these other 
types of windfall offset provisions.
    The social security trust funds will run out of money within the 
next 20-30 years and solving this long term problem is something that 
will only become increasingly more difficult as time passes until a 
solution is reached. Best guess is that this PIA/family maximum 
windfall reduction factor would apply in about 50% of disability cases 
and possibly 20% of survivor cases. Social Security publication #13-
11785 states that, in 2003, there were 777,000 disability awards to 
workers, 482,000 additional disability awards to spouse's and children, 
and 853,000 survivor awards. Also, the average monthly disability award 
is $936 to a worker and about $480 total for spouse/children. If we 
conservatively assume that a PIA/family maximum reduction factor of 1% 
would apply in 50% of disability awards and that the average reduction 
would be just 5-6% of the average 2003 payment, this would mean a 
savings of about $50/mo for the worker and about $25/mo for dependents. 
For the first year of using this new windfall offset provision, trust 
fund savings would, conservatively, total about $233,100,000 ($600/yr 
for each of about 388,500 disability awards) and about $72,300,000 
($300/yr for each of about 482,000 disability dependents. The total 
first year savings for disability awards would thus total over 
$300,000,000 and the savings for survivor cases would increase this to 
a higher amount. For the second year after using this new windfall 
offset provision, the total savings to the trust funds would be over 
$900,000,000 since we'd then have 2 years of $300,000,000 savings on 
the individuals awarded the prior year and another $300,000,000 savings 
on the individuals awarded disability in the second year. Similarly for 
the third year after using this new windfall offset provision, the 
total savings to the trust funds would be about $1,800,000,000 for 
disability awards over the 3 year period and the savings for survivor 
cases would increase this amount even higher. To summarize, the 
$1,800,000,000 three year conservative estimate of disability award 
savings represents an amount based on a 1% PIA/family maximum reduction 
factor. If the PIA/family maximum reduction factor was decreased to =%, 
then the resulting savings would also be one-half of this amount, or 
$900,000,000.
    Insofar as public support for this PIA/family maximum windfall 
offset reduction factor, the majority of Americans would probably favor 
it. Individuals directly affected by the provision would have some 
dissatisfaction but the majority of individuals would probably feel 
that a reduction is justified based on the fewer number of years the 
individual worked and paid into the system.

                                 

         Statement of Hal Daub, Social Security Advisory Board
    Mr. Chairman, Mr. Rangel, and members of the Committee. I 
appreciate the opportunity to submit a statement for this most 
important hearing. The Social Security program plays a foundational 
role in retirement security for America's workers. It also provides 
essential protections to them and their families against the risk of 
lost earnings as a result of disability or premature death. Congress 
has always taken special care in dealing with the program to assure 
that it will be soundly financed in both the short-range future and 
over the long-haul. In 1994, Congress enacted a law creating an 
independent, bi-partisan Social Security Advisory Board. One of the 
specific charges that legislation gave to the Board was to provide 
recommendations to the President and to the Congress about the solvency 
of the Social Security program.
    The Board has taken that responsibility very seriously. We have 
carefully studied the financing of the program. We have closely 
consulted with both the Social Security Administration's actuaries and 
with the Congressional Budget Office. Twice in the past six years, we 
have appointed technical panels of expert economists, demographers, and 
actuaries to review and make recommendations about the assumptions and 
methodology used in projecting the solvency of the program. And we 
have, as a Board, issued a report describing the problems facing the 
program and urging prompt action to address those problems. The Board 
first developed that report seven years ago and then reissued it four 
years ago. We are now planning to update and issue it again this year. 
Over this period of time, the Board has had some change in membership 
but it has maintained a consistent, unanimous, and bi-partisan 
position. In brief, the Board's position has been and is that the 
Social Security program faces a serious financing problem, that there 
are a variety of proposals available from which policymakers can craft 
a solution, and that it is most important that action should be taken 
sooner rather than later.
    The Board's report identifies over 20 separate proposals that might 
be considered as Congress takes up the task of dealing with Social 
Security's deficit. These proposals cover a broad gamut including 
eligibility rules, formulas for determining and updating benefits, 
program coverage, Social Security tax levels and income sources. Some 
of these proposals would modestly improve the program's financial 
status and others would make substantial improvements. It was not our 
objective to urge the adoption of these particular proposals. In fact, 
as a Board, we have not taken a position for or against any of these 
proposals nor to rule out additional proposals that may be developed. 
Rather it was our objective to demonstrate that many options are 
currently available from which Congress can choose in order to weave 
together a workable package that will bring Social Security's financing 
back to a state of solvency. Members of the Board, as individuals, do, 
of course, have views as to what they feel are the most desirable 
approaches to this problem, and we make known those individual views in 
appropriate forums. As a Board, however, we have concluded that we can 
best serve the interests of the program and the legislative process by 
pointing out that many options exist and by expressing our unanimous 
and bipartisan conviction about the importance of taking action soon.
    It is true, of course, that we are dealing with the future and that 
the future is never perfectly foreseeable. Different experts will have 
somewhat different views as to the date on which outgo begins to be 
larger than income or the date on which the fund is exhausted. Even the 
same experts will change their projections somewhat from year to year 
as they see developing economic and demographic trends or as they make 
improvements to their forecasting tools. But the essence of the 
underlying facts that the Board saw 7 years ago when it first issued a 
report on Social Security solvency has remained unchanged. Between the 
Social Security and CBO projections, the differences are less striking 
than the similarities. The Board's technical panels have recommended 
some changes in assumption and method, but none of these changes make 
the problem go away.
    The Social Security solvency problem has to be faced, but why now? 
Why is it important to act now when the Social Security program is 
still bringing in more than it pays out and will continue to do so for 
a bit more than a dozen years? There are really two basic answers to 
that question though they can be subdivided into a number of more 
refined arguments. The first reason for acting now is that the Social 
Security program is too important a part of our social fabric for us 
not to deal with its serious financial problems. The second reason is 
that we are now enjoying a window of opportunity for taking action, but 
that window is closing and, when closed, will leave us with much less 
capacity to deal with the problem.
    Social Security affects the current or future economic security of 
nearly all Americans. It should be unthinkable to allow questions about 
the program's solvency to remain simply unanswered. Ninety percent of 
those over 65 are drawing Social Security benefits now, and for roughly 
two-thirds of them Social Security provides most of their income. 
America's workers of all ages are also participants in this program. We 
encourage them to take the time and effort to think about their future. 
To save. To participate in employment-based retirement programs. To 
plan ahead so that they can enjoy an adequate income in retirement. But 
how can they do this, if our foundational program is not soundly 
financed? How can they make reasonably reliable estimates of what they 
can expect? Congress set Social Security up with earmarked financing 
and a commitment to long-range solvency. This was done so that those 
who draw its benefits in the present and those who hope to do so in the 
future can have confidence that they can count on this program. When we 
have year after year of official reports that the program is not sound, 
how can we expect that that will not undermine the trust and confidence 
of both beneficiaries and workers?
    The need to maintain confidence in the program provides ample 
rationale for acting promptly. But there also is the very practical 
reason that we now have a closing window of opportunity. Acting now 
gives you, the Nation's elected policymakers, a much wider and less 
unpleasant range of options. Because we are still some years away from 
the point of inability to meet promised benefits, the cost of repairing 
Social Security can be spread more evenly across generations and 
changes can be phased in gradually. Individual taxpayers and 
beneficiaries will not have to face sudden, drastic changes that 
disrupt their decisions about consumption and savings. But this time of 
opportunity is shrinking. Since the Advisory Board issued its 1998 
report on the need for prompt action, the baby boom generation has 
moved seven years closer to the age of eligibility for retirement 
benefits, and because disability tracks age, a portion of the 
generation is in fact already on the benefit rolls. The chart below 
shows you how the window of opportunity is closing. With the baby boom 
still in the work force, we still have about 3.3 workers for each 
beneficiary. But in just a few years, in 2009 that ratio is going to 
start a steady decline. By 2042, the year the trust funds will be 
exhausted, the ratio will have dropped by 40 percent so that there will 
be only two workers for each beneficiary. If you look at the vertical 
line at 2005, you can see that since the Board first urged the need for 
prompt action in 1998, we have already lost about half the remaining 
time before those adverse demographics begin to take hold. The Board 
then said it was important to act sooner rather than later. We are now 
beginning to approach ``later.''


[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]

    Moreover, it is clear that these demographic pressures we face are 
creating challenges not just for Social Security but for our entire 
complex of retirement security including such elements as Medicare and 
Medicaid and privately sponsored programs for retiree income and health 
benefits. The Social Security Advisory Board has just issued a report 
based on a year or more of studying this bigger picture. This report 
Retirement Security: The Unfolding of a Predictable Surprise is, like 
all our reports, available on the Board's website: www.ssab.gov. 
Different programs have different purposes, and we understandably tend 
to think about them and deal with them separately. But we need to 
understand that they are not really unconnected. Social Security 
benefits help individuals to meet out-of-pocket medical costs not 
covered by Medicare. For a large portion of the elderly, employer 
sponsored health and pension programs are, like Social Security, 
important parts of their retirement security. And all of these 
elements--and our other national priorities--are affected by these same 
structural changes taking place in our workforce and population. All 
retirement support programs, both public and private, draw on a common 
pool of national economic resources. Efforts to resolve issues in one 
program will impact our ability and strategy for dealing with the 
problems in other programs.
    In the course of the Board's study, we were repeatedly told that 
Medicare is a tougher problem than Social Security. That is undoubtedly 
true, but we don't have the luxury of solving only the less difficult 
problems. Nonetheless, it certainly makes sense to begin by tackling 
the Social Security solvency issue now. Perhaps, by meeting that task, 
we can pave the way and set ourselves an example for dealing with the 
many other challenges that this Nation also faces in the 21st century.

                                 
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