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




 
               FIFTH IN A SERIES OF SUBCOMMITTEE HEARINGS
                    ON PROTECTING AND STRENGTHENING
                            SOCIAL SECURITY

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

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

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 14, 2005

                               __________

                           Serial No. 109-21

                               __________

         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
PHIL ENGLISH, Pennsylvania           WILLIAM J. JEFFERSON, Louisiana
J.D. HAYWORTH, Arizona               JOHN S. TANNER, Tennessee
JERRY WELLER, Illinois               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           LLOYD DOGGETT, Texas
RON LEWIS, Kentucky                  EARL POMEROY, North Dakota
MARK FOLEY, Florida                  STEPHANIE TUBBS JONES, Ohio
KEVIN BRADY, Texas                   MIKE THOMPSON, California
PAUL RYAN, Wisconsin                 JOHN B. LARSON, Connecticut
ERIC CANTOR, Virginia                RAHM EMANUEL, Illinois
JOHN LINDER, Georgia
BOB BEAUPREZ, Colorado
MELISSA A. HART, Pennsylvania
CHRIS CHOCOLA, Indiana
DEVIN NUNES, California

                                 ______

                    SUBCOMMITTEE ON SOCIAL SECURITY

                    JIM MCCRERY, Louisiana, Chairman

E. CLAY SHAW, JR., Florida           SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   EARL POMEROY, North Dakota
J.D. HAYWORTH, Arizona               XAVIER BECERRA, California
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
RON LEWIS, Kentucky                  RICHARD E. NEAL, Massachusetts
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin

                    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 
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                            C O N T E N T S

                               __________

                                                                   Page

Advisory of June 7, 2005 announcing the hearing..................     2

                               WITNESSES

Watson Wyatt Worldwide, Steven A. Nyce, Ph.D.....................     5
Texas Tech University, Thomas L. Steinmeier, Ph.D................    15
The Urban Institute, C. Eugene Steuerle, Ph.D....................    19
American Academy of Actuaries, Ron Gebhardtsbauer................    32
Service Employees International Union, Valerie Long, on behalf of 
  Gerry Hudson...................................................    41
New America Foundation, Maya C. MacGuineas.......................    44

                       SUBMISSIONS FOR THE RECORD

American Federation of State County and Municipal Employees 
  (AFSCME), Loveless, Charles, statement.........................    76
Barrett, Marilyn, Nantucket Public Schools, Nantucket, MA, 
  statement......................................................    73
Cone, Ruth, Montgomery, AL, statement............................    75
Fay, J. Douglas, Bronston, KY, statement.........................    76
Loveless, Charles, American Federation of State County and 
  Municipal Employees (AFSCME), statement........................    76
Marvin, Mary, Federal Government and Private Industry Retiree, 
  Punta Gorda, FL, statement.....................................    77


      FIFTH IN A SERIES OF SUBCOMMITTEE HEARINGS ON PROTECTING AND
                     STRENGTHENING SOCIAL SECURITY

                              ----------                              


                         TUESDAY, JUNE 14, 2005

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

    The Subcommittee met, pursuant to notice, at 2:06 p.m., in 
room B-318, Rayburn House Office Building, Hon. Jim McCrery 
(Chairman of the Subcommittee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                                CONTACT: (202) 225-9263
FOR IMMEDIATE RELEASE
June 07, 2005
No. SS-5

                 McCrery Announces Fifth in a Series of

                Subcommittee Hearings on Protecting and

                     Strengthening Social Security

    Congressman Jim McCrery (R-LA), Chairman on Social Security of the 
Committee on Ways and Means, today announced that the Subcommittee will 
hold the fifth in a series of Subcommittee hearings on protecting and 
strengthening Social Security. The hearing will examine the impact of 
the American population's increasing longevity on Social Security's 
finances and explore ways to encourage work at older ages. The hearing 
will take place on Tuesday, June 15, 2005, in room B-318 Rayburn House 
Office Building, beginning at 2:00 p.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. 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:

      
    Seventy-eight million Baby Boomers are heading toward retirement 
and eligibility for Social Security benefits. Those Baby Boomers and 
the generations that follow are living longer in retirement. Life 
expectancy at age 65 has increased from about 14 years in 1940, to 18 
years today, and will increase to 22 years over subsequent decades. In 
addition, American families are having fewer children, so the number of 
workers paying Social Security taxes to support the program isgrowing 
much more slowly than the number of beneficiaries.
      
    These demographic trends have put Social Security's finances on an 
unsustainable path, because Social Security operates on a pay-as-you-
go-basis; Social Security taxes paid by today's workers fund the 
benefits of today's retirees. As the population ages, the number of 
workers supporting each beneficiary is falling--from 16 to 1 in 1950, 
to about 3 to 1 today, and it will reach 2 to 1 by 2040. As a result, 
Social Security's Trustees estimate that in 2017, Social Security will 
pay out more in benefits than it collects from payroll taxes, and that 
by the time today's 26-year-olds are eligible to retire in 2041, Social 
Security's trust funds will be exhausted. Then, unless changes are 
made, revenues would cover 74 percent of promised benefits. As costs 
continue to rise faster than income, 68 percent of scheduled benefits 
are expected to be payable by 2079.
      
    Bipartisan councils and commissions, as well as many individual 
experts and policymakers, have laid out options for modifying Social 
Security to mitigate the effect of these demographic changes and to 
encourage older Americans who want to continue working to do so.
      
    In announcing the hearing, Chairman McCrery stated, ``Our aging 
society creates both challenges and opportunities for our Nation. As we 
explore how to improve retirement security and protect and strengthen 
Social Security, we need to understand the impact of upcoming changes 
in our population.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the impact of America's aging population 
on Social Security's finances, as well as options to strengthen Social 
Security, improve overall retirement security, and encourage 
individuals who want to work at older ages.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
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June 28, 2005. Finally, please note that due to the change in House 
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encounter technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
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noted above.

                                 

    Chairman MCCRERY. The hearing will come to order. Good 
afternoon, everyone. Welcome to the fifth in the Subcommittee 
hearing series on protecting and strengthening Social Security. 
Today we will learn more about how our society is growing 
older, and how this trend will impact Social Security's 
finances. Each new cohort of seniors is living longer and 
living healthier. As everyone in this room either is, or 
expects to be a senior, that is very good news for all of us.
    However, our increased life expectancy has implications for 
many aspects of society, including Social Security. The Social 
Security actuaries predict that the number of workers will grow 
more slowly than the number of beneficiaries. While 3.3 workers 
support each Social Security beneficiary today, only two 
workers are expected to support each beneficiary by 2040. This 
is an important statistic because Social Security is a pay-as-
you-go system. The Social Security contributions of current 
workers pay for the benefits of current retirees. Along with 
Social Security, our aging problem has implications for our 
labor force. We all know that older workers can make valuable 
contributions to our economy and society. One question we will 
address today is how Social Security can be modernized to help, 
not hinder people who choose to work in their senior years. 
Eyewitnesses will share their insights into America's future. 
As responsible policymakers we need to look ahead, as the 
policy choices we make today will have a major role in shaping 
that future. I welcome our distinguished panel. Thank you for 
coming today. I look forward to hearing your views. I would ask 
the Ranking Member, Mr. Levin, if he would like to make an 
opening statement?
    Mr. LEVIN. Thank you very much, and I join in welcoming all 
of you. A few of you have been at this table or another, but 
for others it is your first visit, so a special welcome. 
Today's hearing is to discuss a piece of very good news, that 
Americans are living longer now and are expected to live even 
longer in the future, and to discuss its impact on Social 
Security, which provides retirees with guaranteed benefits no 
matter how long they live. Some of my colleagues may suggest 
that the main answer to this challenge is to raise the normal 
retirement age, the age at which one can retire and collect 
full Social Security benefits. Currently that age is rising, as 
we know, to 67. Workers are allowed to retire as early as 62, 
but if they retire before normal retirement age, their benefits 
are reduced.
    As our population ages, it is important to ensure that 
older adults are protected from discrimination, and allowed to 
work as long as they choose, both to reduce pressure on our 
retirement systems, and to ensure that we fully benefit from 
their experience and talent. Many people, however, do not have 
the luxury of choosing their retirement age. Their decisions 
are dictated by their health, their employers, and other 
factors outside of their control. As a result--at least one 
result--the experience to date has been that increasing the 
Social Security retirement age, rather than making it possible 
for people to work longer, forces them to take reduced benefits 
when they retire. Accordingly, the burden of proof is on those 
who would further raise their retirement ago to show that it 
would have the desired impact.
    This is particularly true, in our judgment, for those who 
support President Bush's proposal to privatize Social Security 
by diverting trillions of dollars to private accounts. Those 
accounts alone would make Social Security's shortfall worse, 
potentially forcing much more draconian benefit cuts, whether 
via retirement age increases or other changes. The massive 
borrowing proposed by the President, nearly $5 trillion in the 
first 20 years of accounts alone, will also make it more 
difficult for us to prepare Medicare and Medicaid to provide 
the health care and long-term care we know future retirees will 
need.
    Our longer lives do pose a challenge for Social Security, 
but they also make preserving Social Security's current 
structure all the more important. Its guaranteed defined 
benefit, which rises with inflation and cannot be outlived, 
ensures that long-lived retirees do not end up in poverty. 
Private pensions, retirement savings, and investment accounts 
do not have these protections. Social Security's benefits 
account for a larger and larger share of retirement income as 
people age.
    The President has proposed that we privatize Social 
Security, over time replacing its guaranteed benefits with 
risky private accounts. This change is particularly risky as we 
live longer, since the income from the accounts is not 
guaranteed and the private annuities the President's plan 
requires people to buy from insurance companies would likely 
not be fully protected against inflation, leaving people to 
grow poorer and poorer as they age. They also could not offer 
the same level of protections for spouses and survivors, who 
are also living longer, as Social Security does today. The 
American people have spoken very clearly about the 
privatization proposals. The more they hear about them, the 
less they like them. I do believe we should discuss ways to 
ensure that workers have long and productive careers, both to 
support our retirement systems and to support our economy. 
Unfortunately, the President's insistence on private accounts 
remains a roadblock in the way of our ability to craft 
bipartisan legislation to address the shortfall in 2041 or 
2052. Thank you, Mr. Chairman.
    Chairman MCCRERY. Thank you, Mr. Levin. We are pleased to 
have a very distinguished panel to share their views with us 
today. Steven A. Nyce, Senior Research Associate from Watson 
Wyatt Worldwide; Thomas L. Steinmeier, Department of Economics 
and Geography at Texas Tech University in Lubbock, Texas; Gene 
Steuerle, Senior Fellow at the Urban Institute; Ron 
Gebhardtsbauer, Senior Pension Fellow, American Academy of 
Actuaries. Did I get that right? Okay. Valerie Long, who is 
here today in her own right as the President of the Service 
Employees International Union, Local 82, and the International 
Vice President of the International Executive Board. She is 
also here on behalf of Gerald Hudson. Mr. Hudson could not make 
it today. He is the Executive Vice President of Service 
Employees International Union. So, Ms. Long, thank you for 
making the effort to be here to replace Mr. Hudson. And Maya 
MacGuineas, Senior Fellow at the New American Foundation. 
Welcome to all of you. We look forward to your testimony. You 
have submitted written testimony which will be inserted in the 
record in its entirety. We would ask you to try to summarize 
that testimony in about five minutes. Dr. Nyce, we are going to 
let you start it off. You may proceed.

STATEMENT OF STEVEN A. NYCE, PH.D., SENIOR RESEARCH ASSOCIATE, 
                     WATSON WYATT WORLDWIDE

     Mr. NYCE. Mr. Chairman and distinguished Committee 
Members, thank you for the opportunity to be here before you 
today to discuss the challenges of our aging population. My 
name is Steve Nyce, and I am a senior Research Associate at the 
Research and Information Center at Watson Wyatt Worldwide. As a 
firm we have long been engaged in research concerning the aging 
of the U.S. work force and its implications for our retirement 
system. As we think about how our aging population will affect 
the financing of our pay-as-you-go retirement plan, it is 
generally considered in terms of the payroll tax rate required 
to sustain it. The tax rate required to support the system is 
the product of two very important ratios, the ratio of 
beneficiaries relative to workers, or the dependency ratio, and 
the ratio of average benefits to average covered earnings, or 
the replacement rate. The future financial problems with the 
system are almost entirely tied to the dependency ratio which 
is expected to increase significantly in the coming decades. 
Today there are roughly 3 beneficiaries for every 10 workers. 
By 2040, that ratio will rise to one beneficiary for every two 
workers. While this may not seem like a significant increase, 
it is because of these demographic changes that the Social 
Security actuaries are projecting program costs to increase by 
over 50 percent over the coming decades.
    Much of the discussion around the challenges we face due to 
our aging society has revolved around retirement policy. The 
debate has centered on figuring out ways within the framework 
of our current budgets to honor those promises we made decades 
ago. However, the issues related to population aging and its 
economic impact go beyond simply keeping the elderly out of 
poverty. Instead, the issue is of stagnant or falling standards 
of living that could affect all segments of our society. In 
very simple terms, the amount of output an economy can create 
is determined by the number of workers and the efficiency with 
which output is produced. In more formal terms, the rate at 
which Gross Domestic Product (GDP) grows essentially equals the 
sum of labor force growth plus worker productivity growth.
    The United States has historically enjoyed steady economic 
growth and improvements in standards of living. By many 
accounts, the steady improvement in the standards of living 
over the last half century has created an appetite for 
continued upward mobility. In this context, the challenge with 
our aging population is that the future simply will not see the 
labor force growth of the past 30 years or so. Over the coming 
decade the labor force growth will be only about 75 percent of 
that seen during the nineties, and the growth rate projected 
for the 2010s will be only about one-third that experienced 
over the past decade. So, if we want to continue to enjoy 
standards of living growth similar to those we have become 
accustomed to, and the demographics indicate slower rates of 
labor force growth, we are going to need a significant uptake 
in productivity growth to make that happen.
    So, herein lies the crux of the aging problem. If we find 
that we are unable to fix our problems by boosting labor supply 
growth or achieving higher rates of worker efficiency, the 
future portends slower rates of improvements in standards of 
living. Retirement programs will simply become a primary 
mechanism used to allocate our disappointing outcome across 
various segments of our society. The critical question we face 
today is how do we share this burden across our society? More 
importantly, how do we share this burden between generations?
    The fiscal challenges we face in the future are not all 
fixable through our Social Security system. However, there are 
a number of measures that can be taken. Encouraging greater 
work force participation at older ages is one of the most 
important avenues we should consider. Some of the most valuable 
human capital assets in our economy are the seasoned and 
educated workers in their fifties and sixties. Some avenues we 
may consider are raising the early and normal retirement ages, 
eliminating the earnings test, increasing the back-loading of 
benefits, and improving public awareness about the embedded 
incentives in these programs. Each of these measures has the 
potential to realign our system, and thus our expectations 
about retirement ages and benefit levels, to the pace of 
improvements and life expectancy. These measures have the 
potential to reduce the number of retirees, thus lessening the 
burden of retiree dependency. The increased number of workers 
would also increase total output, giving policymakers more 
flexibility in redesigning retirement programs. So, workers 
could realize the fruits of their improved productivity without 
having to drive the retiree population into poverty. As noted 
earlier, it is more than just about increasing work at older 
ages. It is about finding ways to boost work force 
participation among all individuals, and about adopting 
policies to enhance worker efficiency. Only by doing so will we 
be able to satisfy the wants and needs of our population for 
generations to come. Thank you, Mr. Chairman.
    [The prepared statement of Dr. Nyce follows:]

 Statement of Steven A. Nyce, Ph.D., Senior Research Associate, Watson 
                            Wyatt Worldwide

    Mr. Chairman and members of the Subcommittee on Social Security of 
the Ways and Means Committee of the U.S. House of Representatives, 
thank you very much for the opportunity to testify to you today about 
the challenges of our aging population. My name is Steve Nyce, and I am 
a senior research associate at the Research and Information Center of 
Watson Wyatt Worldwide. As a firm, we have long been engaged in 
research concerning the aging of the U.S. workforce and its 
implications for our retirement system. Recently, my co-author, Syl 
Schieber, and I have published an extensive analysis of the economic 
challenges that all developed societies will encounter due to their 
aging populations entitled, ``The Economic Implications of Aging 
Societies: The Costs of Living Happily Ever After''. I am very pleased 
to be here today, and all the views expressed here are my own, and 
should not be attributed to Watson Wyatt Worldwide.
Aging in the Context of Social Security \1\
    Since the mid-1950's, Social Security has been primarily operated 
on a pay-go basis. In the most basic sense, this means that 
contributions paid into the system are immediately paid out as 
benefits. However, most of these programs are not run as a pure pay-go 
basis. In practice, policy makers generally utilize a small contingency 
trust fund as a leveling device to sustain operations over variations 
in benefits and revenues across economic cycles.
---------------------------------------------------------------------------
    \1\ For further discussion see Sylvester Schieber's, ``Social 
Security Reform,'' Watson Wyatt Insider: Special Edition, March 2005, 
pp. 42-51.
---------------------------------------------------------------------------
    The ``cost'' of a pay-go retirement plan is generally considered in 
terms of the payroll tax rate required to sustain it. The tax rate 
required to support the system is the product of the number of 
beneficiaries relative to workers multiplied by the ratio of average 
benefits to average covered earnings. The ratio of beneficiaries to 
workers is called the dependency ratio--the number of retirees 
dependent on benefits relative to the number of workers supporting 
them. The ratio of benefits to wages in a retirement plan is called the 
replacement rate--how much of an average worker's earnings are replaced 
by the retirement benefit. The reason why population aging sets off 
alarms is clear from the dependency ratio measure in the costing of the 
program. As the ratio of pension beneficiaries to contributors rises 
under these plans, the cost of a given replacement rate rises 
proportionately.
    By now, most Americans are aware that our population is aging. As 
such, expectations are for a significant increase in old age dependency 
ratios in the coming decades. But the way demographics will affect 
costs in the future will be very different than it was over the last 
half century. Figure 1 maps the dependency ratio and the replacement 
rate under the system. First, the dotted line shows the dependency 
ratio. Between 1951 and 1977 the ratio of beneficiaries to covered 
workers rose from roughly 7 percent to over 32 percent, respectively. 
Certainly changing demographics, notably advancements in life 
expectancy, played a part. But most of the change was attributable to 
the way we phased in the program. In the program's early years, very 
few people over age 65 received benefits because they had not paid 
payroll taxes during their working careers. Initially, payroll taxes 
were levied on all wage and salary workers in the private sector--
roughly 60 percent of the workforce in the 1930s. Over the years, 
coverage was gradually expanded to include farmers and the self-
employed, professionals and domestic workers, and state and local 
government workers on a voluntary basis. The final sizeable expansion 
of coverage was the addition of newly hired federal civilian workers. 
It was not until the mid-1970s that the program actually matured. It 
was at that point that the percentage of people over 65 who were 
receiving benefits equaled the percentage of the active workforce 
contributing to the program. Since that point, the dependency ratio has 
remained relatively stable reflecting the maturing of the system.

                                Figure 1
Historical Retiree to Worker Dependency Ratios and Average Benefit to 
        Average Wage Ratios in the U.S. Social Security Program

        [GRAPHIC] [TIFF OMITTED] T3924A.001
        
 Source: Social Security Administration, Annual Statistical Supplement 
   to the Social Security Bulletin, various years; and Office of the 
                Actuary, Social Security Administration.

    The solid line in the graph represents the ratio of average 
benefits to average wages. Over much of the 1950s and 1960s, the 
replacement rate under the Social Security program was relatively 
constant at about 18 percent. However, in the late 1960s the concern 
about poverty led Congress to expand the program. This expansion 
continued through much of the 1970s until the 1977 and 1983 amendments 
were implemented to stabilize the program. In fact, the rapid rise in 
the replacement rate in the 1970s created a string of deficits that had 
people talking for the first time about the system literally running 
out of money.\2\ When all was said and done, average benefits to 
average wages rose by nearly two-thirds over this period. Since its 
peak, program costs have been relatively flat and have remained that 
way for most of the last two decades. Expectations are for costs to 
remain stable for the next few years until the Baby Boomers begin to 
retire at the end of the current decade.
---------------------------------------------------------------------------
    \2\ Schieber, Sylvester J., John B. Shoven, The Real Deal, (New 
Haven: Yale University Press, 1999), pp. 185.
---------------------------------------------------------------------------
    Looking to the future, we see in Figure 2 that the coming challenge 
in a mature system will be the rising rate of beneficiaries. This 
picture extends the series in Figure 1 using projections by the Social 
Security actuaries for the dependency ratio and the replacement rate. 
It is important to note that the ratio of benefits to wages in this 
picture is for the medium-earning worker who retires at age 65. This is 
different from the previous picture which showed the ratio of benefits 
to wages for all beneficiaries, including dependents and survivors who 
receive somewhat smaller benefits.
    Over the next forty years or so the ratio of benefits to wages will 
remain relatively flat. The subtle decline in the average-worker's 
replacement reflects the rising age of normal retirement and the 
reduced benefits for an individual retiring at age 65. The dependency 
ratio, however, is much more important in terms of its long-term 
implications. As the leading edge of the baby boom begins to exit the 
workforce starting in 2008, the dependency rate will begin a long 
sustained rise projected to last the next thirty years. Today, there 
are roughly three beneficiaries for every ten workers. By 2040, that 
ratio will fall to one beneficiary per every two workers. While this 
may not seem like a significant increase, Social Security actuaries are 
projecting the cost rate of the program to climb from 11% to about 18% 
over this period.

                                Figure 2

Projected Retiree to Worker Dependency Ratios and Benefit to Wage 
        Ratios for Hypothetical Medium Wage Workerrs Retiring at Age 65 
        in the U.S. Social Security Program

        [GRAPHIC] [TIFF OMITTED] T3924A.002
        
     Source: Office of the Actuary, Social Security Administration.

    A comparison between the two figures clearly shows that the 
financial dilemma facing Social Security today is of very different 
makeup from the earlier one. The financial dilemma we faced in the 
1970s was almost entirely the result of economic factors and problems 
with the benefits formula. Over the 1970s, the ratio of average 
benefits to wages increased nearly 40 percent compared to a 13 percent 
increase in the dependency ratio. As such, the earlier crisis was about 
the replacement rate. Once those problems were addressed and the 
program reached maturity in the 1980s, costs have remained relatively 
flat. The future financial problems are almost entirely tied to the 
dependency ratio. It is because of these demographic changes for the 
coming quarter century or so that the Social Security actuaries are 
projecting program costs to increase by over 50 percent over the coming 
decades.
Aging Considerations in a Larger Economic Context
    Much of the discussion around the challenges we face due to our 
aging society has revolved around retirement policy. The debate has 
centered on figuring out ways within the framework of our current 
budgets to honor those promises we made decades ago. However, the 
issues related to population aging and its economic impact goes beyond 
simply keeping the elderly out of poverty. Instead, the issue is of 
stagnant or falling standards of living that could affect all segments 
of our society. If economic growth is brought to a halt by the changing 
demographic composition, pension policy is naturally one of the primary 
mechanisms for allocating the disappointing outcome across various 
segments of our society. It is within this context that much of the 
angst over pension policy in the developed world is framed today.
    The challenges before Congress are much broader than that of Social 
Security reform. They are fundamentally about figuring out how to 
satisfy the wants and desires of our population. With the first of the 
Baby Boomers less than a decade from reaching the normal retirement age 
under Social Security, we are now faced with the prospect of not being 
able to do that. To better understand the effect of aging in a broader 
economic context, it's useful to revisit the underlying factors that 
determine growth within an economy.
    A fundamental dynamic in every economy is the interplay between 
consumer demand for goods and services and society's ability to meet 
that demand. From the earliest systematic study of economic behavior, 
economists have sought to explain the production of output in terms of 
its inputs. While there is no universal agreement on the mathematical 
formulation of the model, it is well understood that the basic building 
blocks of economic prosperity are determined by the number of workers 
and the efficiency with which output is produced. Although economists 
often employ complex terminology in their descriptions, at a 
fundamental level, economies operate in a very simple fashion. The rate 
at which gross domestic product (GDP) grows essentially equals the sum 
of labor force growth plus worker productivity growth (See Figure 3).

                                Figure 3

Operations of the Macro Eonomy and Why Demographics Matter

[GRAPHIC] [TIFF OMITTED] T3924A.003



                                                     Physical capital,
  Depends on consumer     Demographics and work     quality of  workers
         demand                 incentives            and innovation




    The United States has historically enjoyed steady economic growth 
and improvements in living standards. One measure of growing consumer 
demand is the GDP per capita, a reasonably good measure of the standard 
of living over time. By this measure, the United States has 
historically shown continued improvement--that is, the demand for goods 
and services has steadily outpaced population growth (see Table 1). 
People have generally been willing to drastically change their 
lifestyles in order to improve their standard of living. Faltering 
economic progress has usually also meant political pressure for our 
elected leaders to restart the growth process to settle a restive 
citizenry. This remarkable economic success story has been helped along 
by improved health and education systems, new and better physical 
infrastructure, technology, and the relatively strong cross-national 
cooperation that our governments have been able to establish and 
maintain. One cannot ignore, however, the role that growing labor 
forces have played in this prosperity.
    By many accounts, the steady improvement in the standards of living 
over the last half century has created an appetite for continued upward 
mobility. Expectations of future levels of U.S. output herald 
continuing improvement in standards of living over the next two 
decades. Based on Congressional Budget Office (CBO) estimates, annual 
real per capita GDP growth is projected to be roughly 2.0 percent over 
the remainder of this decade, which is consistent with historical 
patterns. From 2010 to 2020, the growth in GDP per person is 
anticipated to slow to roughly 1.66 percent per year, which again is 
roughly in line with the past.

   Table 1: Population and Output Measures in the United States for Selected Periods and Expectations for the
                                                     Future
----------------------------------------------------------------------------------------------------------------
                                                                                             Annualized growth
                                             Annualized GDP growth    GDP per capita in      rate in per capita
                                              rate from prior date       2000 dollars       GDP from prior date
                                                   (percent)                                     (percent)
----------------------------------------------------------------------------------------------------------------
        1950                                                                  $11,669.73
        1960                                                 3.48              13,845.05                   1.72
        1970                                                 4.19              18,390.54                   2.88
        1980                                                 3.19              22,658.91                   2.11
        1990                                                 3.26              28,507.01                   2.32
        2000                                                 3.28              35,659.28                   2.26
        2010                                                 2.87              43,449.48                   2.00
        2020                                                 2.48              51,237.00                   1.66
----------------------------------------------------------------------------------------------------------------
Sources: Congressional Budget Office; Census Bureau; and U.S. Department of Commerce, Bureau of Economic
  Analysis.

    How are we going to meet those expectations? The corollary to 
rising dependency rates shown in Figure 2 is that the future simply 
will not see the labor force growth of the past 30 or so years. Over 
the coming decade labor force growth will be only about 75 percent of 
that seen during the 1990s, and the growth rate projected for the 2010s 
will be only about one-third that experienced over the past decade (see 
Figure 4). This is not idle conjecture--most of the people who will 
make up our workforce over the next 20 years are already alive. We know 
a lot about working patterns, when people usually retire, and how long 
they are likely to live. While some of these patterns may change 
slightly over time, they are not likely to change drastically over the 
near future.
    So if we want to continue to enjoy standards of living growth 
similar to those in the past and given our expectations are as much and 
demographics indicate slower rates of labor force growth, the critical 
question is whether we will have enough productivity growth to make 
this work? Looking again to our most recent history, productivity grew 
by 2.66 percent per year during the 1950s and 1960s and then slowed. In 
fact, the average annual growth in productivity over the last three 
decades was a modest 1.5 percent. However, recent years have witnessed 
a resurgence in productivity growth, averaging roughly 2.1 percent per 
year during the last half of the 1990s and over 2.3 percent in 2002 and 
2003.

                                Figure 4

U.S. Civilian Labor Force Growth Rates for Selected Decades

[GRAPHIC] [TIFF OMITTED] T3924A.004

 Sources: Lofgren, Eric P., Steven A. Nyce and Sylvester J. Schieber. 
 (2003). ``Designing Total Reward Programs for Tight Labor Markets.'' 
  Benefits for the Workplace of the Future, eds. Olivia S. Mitchell, 
    David S. Blitzstein, Michael Gordon and Judith F. Mazo, Pension 
  Research Council of The WhartonSchool, University of Pennsylvania, 
                          Philadelphia, March.

    Using the CBO's estimates of GDP growth over the coming decade with 
our estimates of labor supply growth, it is relatively straight forward 
to solve for productivity growth rates needed to meet our expectations 
over the coming decade. The bottom line is that for us to continue to 
experience rising standards of living like those we've become 
accustomed to, we are going to need a significant rise in productivity 
growth. In fact, we will need to maintain productivity growth of near 
2.5 percent for this entire decade to achieve the growth we desire. 
This is a significant divergence from that of the last three decades, 
which averaged roughly 1.5 percent. If we extend our projection period 
to the end of the second decade, the required rate of productivity 
growth needed to meet our desired rates of economic growth is 2.2 
percent. The lower rate reflects the CBO's anticipated slowdown in 
economic growth over the 2010s--in part reflecting the demographic 
challenges ahead. While we have seen rising rates of productivity 
growth in our near term here in the US, the question is whether these 
are sustainable.
    So here in lies the crux of the aging problem. If we find that we 
are unable to fix our problems by boosting labor supply growth or 
achieving higher rates of worker efficiency, the future portends slower 
rates of improvements in standards of living. Retirement programs will 
simply become a mechanism we use to allocate our economic 
disappointment. The critical question we face today is how do we share 
this burden across our society? More importantly, how do we share this 
burden between generations?
    In the most basic sense, there are two possible options to achieve 
solvency under a pay-go financed system--raise taxes or reduce 
benefits. The worry that our current retirement systems will demand 
taxes that are too high articulates a concern that workers' disposable 
income levels will fall or not keep appreciably abreast of improving 
worker productivity. If that happens, then workers will be producing 
more but receiving less, in that their productivity will not purchase 
the same increase in standards of living enjoyed by their parents. The 
worry that pension benefits will have to be reduced articulates the 
concern that retirees' disposable income levels will fall, potentially 
leaving future generations of our elderly more vulnerable to income 
insecurity.
    Whatever course we choose, we must understand that the problems 
with a pay-go financed Social Security system are not just financial. 
If we limit our solutions of the financing dilemma to tax increases of 
the active workers or the reduction of retiree benefits to achieve 
solvency, we may very well create a host of inefficiencies in our labor 
and capital markets that ultimately impede economic growth. Changes in 
the fundamentals of the system have been shown to have adverse effects 
on key demographic factors, private savings and long-term growth rates. 
Notably, recent research has shown that increases in payroll taxes are 
associated with declines in net marriage rates and total fertility 
rates.\3\
---------------------------------------------------------------------------
    \3\ Ehrlich, Isaac and Jinyoung Kim, ``Social Security, Demographic 
Trends, and Economic Growth: Theory and Evidence from the International 
Experience,'' National Bureau of Economic Research Working Paper No. 
11121, February 2005.
---------------------------------------------------------------------------
    But the adverse effects of high payroll tax burdens on labor 
markets are not limited to workers. Payroll taxes are shared between 
both employers and employees. As the burden rate rises, employers may 
react to these higher costs creating its own set of economic problems. 
For example, in a number of EU countries with expensive social 
programs, the persistently high rates of unemployment largely result 
from the high fixed costs of hiring workers. Also higher employer taxes 
on labor may depress real wage growth, thus passing the rising costs of 
social insurance programs onto workers, which has occurred in several 
developed economies over the last few decades. While our demographic 
and economic outlook is much more favorable than many other developed 
societies, it is important that we do not become complacent with our 
own situation. If we do, there is concern we could fall into the same 
trap that countries like Germany and Japan are in today.

The Challenges Ahead
    The basic structure and the myriad of rules that make up our 
retirement system here in the U.S. has entrenched into our culture 
expectations about the age we can retire, how much income we should 
receive and about the basic lifestyle we can expect to lead during the 
remaining years of our lives. Our most fundamental challenge is 
figuring out how to adjust these expectations to encourage greater 
workforce participation, longer working careers and greater labor 
market efficiency. The fact is our current system has not adapted 
rapidly enough to our changing demographic realties where surplus labor 
is a thing of the past.
    The fiscal challenges we face today are not all fixable through our 
Social Security system. However, there are a number of measures that 
can be taken. Since the focus of our discussion today is about ways to 
encourage greater workforce participation at older ages I will limit my 
comments to those measures. Some of the most valuable human capital 
assets in our economy are the seasoned and educated workers in their 
50s and 60s. Keeping workers in the labor market longer would reduce 
the number of retirees, thus ameliorating the effect of retiree 
dependency. The increased number of workers would also increase total 
output, giving policymakers more flexibility in redesigning retirement 
programs, so workers could realize the fruits of their improved 
productivity without having to drive the retiree population into 
poverty.

Raise the early and normal retirement ages
    When Ida May Fuller first received her check in January of 1940, 
her life expectancy at that point was 14.7 years. Today, an individual 
retiring at 65 is expected to live on average another 19.6 years. But 
when Ida May Fuller retired, the typical worker did so at age 65 or 
later; today, workers claim Social Security benefits at age 62 more 
than any other age. The fact that people are living longer is 
essentially a very good thing. But the fact is our system has not 
adjusted retirement ages and benefit levels to keep pace with 
improvements in life expectancy. The result has been increasingly 
longer retirement periods with greater lifetime benefits. The 
modernization of production techniques in manufacturing and the shift 
toward service-oriented work have reduced the strenuous nature of work 
for most people. If work is becoming less strenuous and people's 
ability to do it is improving, does it makes sense to continue to 
subsidize longer retirement periods when many individuals are still 
able to be productive?
    For all practical purposes, raising the retirement age is a benefit 
cut. But compared to other proposals that reduce benefits, the lifetime 
benefit for those that delay retirement would be higher due to the 
additional revenues from working longer. A concern of allowing 
individuals to take benefits at a reduced rate at the early retirement 
age is that it may result in greater numbers of individuals with 
inadequate income to meet their needs throughout retirement. Moreover, 
the system would benefit from the additional revenues as well as a 
reduction in the number of beneficiaries.
    The concern is that this approach does not account for those 
individuals with shorter expected lifespans. To account for these 
groups who typically have lower lifetime income through separate 
provisions makes more sense than continuing to subsidize ever-longer 
retirement periods.

Eliminate all earnings tests
    Under the original earnings test, Social Security benefits for 
those with earnings above a certain threshold would lose part or all of 
their benefits in the year of their earnings. This essentially imposed 
an additional tax on earnings for beneficiaries creating a disincentive 
to work. However, the Senior Citizens Freedom to Work Act of 2000 
eliminated the earnings test for Social Security beneficiaries who have 
reached the full retirement age. Given the number of years since its 
repeal, it is now possible to study its effect on labor force 
participation of those 65 to 69. A recent analysis provided by the 
Social Security Administration indicates that it has had favorable 
effects at encouraging higher earnings for some workers and at 
increasing workforce participation, albeit slightly.\4\ Prior to its 
repeal, earnings for individuals 65 to 69 clustered around the earnings 
test threshold. Eliminating the test shifted the percentage of workers 
in this age group above the earnings threshold, indicating an increased 
use of earnings to supplement Social Security benefits at older ages.
---------------------------------------------------------------------------
    \4\ Manchester, Joyce and Jae Song, ``New Evidence on Earnings and 
Benefit Claims Following the Removal of the Retirement Earnings Test in 
2000,'' Presentation at the Tax Economists Forum, Wednesday, June 8, 
2005.
---------------------------------------------------------------------------
    The repeal of the earnings test for those between early and full 
retirement would likely have a similar effect on the decision of 
individuals to delay entry into full retirement. This would occur 
despite the benefit increases being actuarially fair. In fact, recent 
research that simulated the potential effect of the this repeal and 
shows a four percentage point per year reduction in the percentage 
retired from full time work.\5\
---------------------------------------------------------------------------
    \5\ Gustman, Alan L. and Thomas L. Steinmeier, ``The Social 
Security Retirement Earnings Test, Retirement and Benefit Claiming,'' 
National Bureau of Economic Research Working Paper, No. 10905, 
November, 2004.
---------------------------------------------------------------------------
    Moreover, eliminating the earnings test for those between early and 
full retirement may also lead to an even greater effect on workforce 
participation among those above the full retirement age. To the extent 
that the earnings test creates disincentives to work for those between 
62 and full retirement, the workforce effects of the existing earnings 
test repeal does not account for the difficulty in increasing work 
intensity once an individual has scaled back or even outright left the 
labor market.

Increase the back loading of benefits
    It is very common in the private pension system for employers to 
design their pension programs to provide low levels of benefits for 
short tenured younger workers and to pay a much more generous benefit 
for those with longer tenure. This sort of accrual structure of a 
defined benefit plan can create significant incentives for workers to 
stay with their existing employer throughout their careers. The fact 
that claims on the current Social Security system cluster around the 
early and normal retirement ages indicates a low response by 
individuals to the delayed retirement credits. Tilting the accrual 
structure so that older workers receive increasingly higher benefit 
payouts would create much greater incentives for individuals to delay 
claims and remain in the workplace. This adjustment can very sensibly 
be accomplished without increasing the cost burden on the system.

Disability Program
    Discussion of the disability program has often escaped the same 
level of scrutiny that the retirement program has received--in part 
because the DI program is much smaller than OASI. But over the last two 
decades the liberalization of the DI system has lead to over a 4.5 
percent annual increase in covered beneficiaries. Part of the problem 
is that the definition of ``disability'' may appear to be a reasonably 
objective determination, but in practice it is very difficult to 
determine whether or not an individual is capable of ``substantial 
gainful activity''. As work in this country becomes increasingly less 
physically demanding in our ``knowledge economy'', it might be useful 
to rethink not only how disability is defined but also how this 
definition is implemented. While many individuals currently receiving 
DI benefits are rightful candidates for who the program was designed to 
insure, there are a number of others within the system that maintain 
the skills and capabilities to be a productive resource in our economy.

Campaign for improved public awareness
    One of the greatest challenges that is often overlooked in our 
retirement system today is the lack of understanding among workers 
about their retirement benefits. Studies repeatedly find that workers 
fail to understand the value of the benefits they will receive, age at 
which they can receive benefits and the risks associated with their 
retirement decision. This problem is not isolated to our Social 
Security system; it is widespread throughout the private sector as 
well. Recent research by Watson Wyatt shows that one out of three 
workers does not even recognize that their employer offers a defined 
benefit plan. If workers do not understand the provisions of their 
retirement program, it is highly unlikely they will respond to the 
financial incentives imbedded in the plan. If we hope to fundamentally 
change workforce behavior of older individuals through a myriad of 
adjustments in the current program, it is critical that we engage 
people in the process and take measured steps to increasing 
individual's understanding. A generous communication campaign around 
these reforms is an effective way to better equip individuals to make 
informed decisions.

CONCLUDING REMARKS
    In many regards, the financial challenges we face in the future 
with our Social Security program are minor relative to those in other 
developed nations. This is largely the result of favorable fertility 
rates and a high propensity of both men and women to work at all ages. 
However, by no means does this portend an easy road ahead. When the 
baby boomers begin to retire as early as 2008, the demographic forces 
will become highly unfavorable for a pay-go financed system making the 
need for imminent reforms essential.
    The challenge of our aging population is much bigger than the 
narrow scope of the current debate. The challenge is about figuring out 
ways to meet the expectations of our population. We now face the 
prospects of slowing or stagnant standards of living. Adopting measures 
that create incentives for postponing retirement could go a long way to 
meeting the promises made under the current system. But it is more than 
just about increasing work at older ages. It is about finding ways to 
boost workforce participation among all individuals and about adopting 
policies to enhance worker productivity. If we are unable to do this, 
retirement policy will be one of the mechanisms for distributing the 
disappointing outcome across various segments of our population.
    Whatever path we choose to take, acting sooner rather than later is 
critical. The fact of the matter is that most people do not use the 
sorts of sophisticate models economists typically use to plan for 
retirement. Most people use a somewhat simpler model--what we might 
call a ``looking-around'' model. Many people look at their parents, 
older siblings and fellow workers go through life. Over time, they 
develop certain expectations and aspirations about how their own life 
will play out. This works well in a stable environment. But the 
looking-around model is prone to breaking down in an unstable 
environment like the one we face with a rapidly aging population. My 
fear is that the longer we delay adjusting our system, the larger the 
cuts that are likely to be required. The longer we delay getting people 
into other savings vehicles, the smaller their cash reserves will be 
when the real financing crunch hits. In short, the longer we delay 
taking action, the steeper the fall will be from the pension 
aspirations most people acquired from watching their parents' 
generation in retirement.
    Thank you Mr. Chairman. I would be pleased to answer any questions 
you may have.

                                 

    Chairman MCCRERY. Thank you, Dr. Nyce. Dr. Steinmeier?

    STATEMENT OF THOMAS L. STEINMEIER, PH.D., PROFESSOR OF 
 ECONOMICS, DEPARTMENT OF ECONOMICS AND GEOGRAPHY, TEXAS TECH 
                   UNIVERSITY, LUBBOCK, TEXAS

    Mr. STEINMEIER. Chairman McCrery, Ranking Member Levin, and 
Members of the Subcommittee, thank you very much for the 
opportunity to speak here. My name is Thomas Steinmeier, and I 
am a Professor of Economics at Texas Tech University. For the 
past decade, my colleague, Alan Gustman, and I have used data 
in the Health and Retirement Study to examine how potential 
changes in Social Security and pensions may affect savings and 
retirement decisions. A distinguishing feature of our research 
is the use of a model which allows individuals to have 
differing degrees of impatience regarding current versus future 
consumption. Today I would like to summarize four of our 
findings which may be of interest to the Subcommittee.
    First, changes in the early retirement age are likely to 
have significantly more impact on retirement than would changes 
in the normal retirement age. I should note that in these 
comments, I will use the term ``retirement'' to mean a 
substantial or complete withdrawal from the labor force. 
Currently about 15 to 20 percent of each cohort of individuals 
retires during their 62nd year, which under current rules is 
the early retirement age. Some individuals simply have not 
saved enough to retire before Social Security eligibility. 
Others highly value the benefits which would be lost by 
working, and tend to ignore that foregoing current benefits 
would increase future benefits. In short, they view the lost 
benefits more as a tax, which discourages work. Our model 
indicates that of those who currently retire at 62, roughly 
two-fifths would delay retirement to age 64 if the early 
retirement age were increased to that age. There may be some 
increase in disability awards, but an analysis of the pattern 
of new disability awards suggests it is unlikely to have a 
substantial impact on the labor force participation effects of 
increasing the early retirement age.
    Second, eliminating the current earnings test, which 
applies between age 62 and the normal retirement age, would 
also increase work effort, though by a smaller amount than 
increasing the early retirement age. Presently, the earnings 
test reduces current benefits by $1 for every $2 of earnings 
over a threshold amount, though later benefits are increased in 
a roughly actuarially fair manner. In our simulations of 
eliminating the earnings test, much of the impact is that fewer 
individuals would be working part time and more would be 
working full time. However, without the earnings test, more 
individuals would be eligible to collect benefits at ages 62 
through 64, and many would do so, which would be a drain on the 
finances of the system. This would also reduce the eventual 
level of benefits that these individuals could collect during 
their retirement, since they would be collecting benefits 
earlier, and hence, would be subject to a larger early 
retirement reduction.
    Third, increases in the early retirement reduction rate 
would also have significant effects. Model Three of the 
Presidential Commission's report proposed that individuals 
retiring 3 years before the normal retirement age would get 75 
percent of full benefits rather than the current 80 percent. 
Our model suggests that changing the reduction rate to the 
level specified in the Commission's report would increase the 
percentage of 62- to 64-year-olds working full time by around 3 
percentage points, which is a little less than eliminating the 
earnings test, but nonetheless substantial. Proposals to 
increase the delayed retirement credit, which increases 
benefits to individuals who delay collecting benefits beyond 
the normal retirement age, would have much less of an effect on 
retirement, primarily because the earnings test does not apply 
to individuals above the normal retirement age.
    Fourth and finally, lump sum distributions, such as might 
be available with personal accounts, can have a significant 
effect on retirement. If lump sums are tied to retirement, 
individuals may retire earlier in order to gain access to the 
lump sums, especially if the lump sums are made available at 
age 62. If the lump sums are not tied to retirement, we can 
expect a non-trivial fraction of the population to withdraw and 
spend the lump sums, leaving less income and fewer assets 
available to support retirement later on. To make matters 
worse, these are likely to be individuals who have accumulated 
few other assets for retirement. I hope these remarks have been 
helpful, and I thank you for your patience in listening to 
them. I will be glad to answer any questions you may have later 
in this hearing. Thank you.
    [The prepared statement of Dr. Steinmeier follows:]

 Statement of Thomas Steinmeier, Ph.D., Professor of Economics, Texas 
                    Tech University, Lubbock, Texas

    Chairman McCrery, ranking member Levin, and members of the 
subcommittee, thank you very much for the opportunity to speak here. My 
name is Thomas Steinmeier, and I am a Professor of Economics at Texas 
Tech University. However, I should be clear that the views expressed 
here do not represent the views of the university.
    For the past decade my colleague Alan Gustman and I have used the 
data in the Health and Retirement Study to examine how potential 
changes in Social Security and pensions may affect retirement and 
saving patterns. A distinguishing feature of our research is the use of 
a model which allows individuals to have differing degrees of 
impatience regarding current vs. future consumption. Today I would like 
to summarize four of our findings which may be of interest to the 
subcommittee.
    First, changes in the early retirement age are likely to have 
significantly more impact on retirement than would changes in the 
normal retirement age. I should note that in these comments, I will use 
the term retirement to mean a substantial or complete withdrawal from 
the labor force. Currently about 15 to 20 percent of each cohort of 
individuals retires during their 62nd year, which under current rules 
is the early retirement age. Some individuals simply have not saved 
enough to retire before Social Security eligibility. Others value 
highly the benefits which would be lost by working and tend to ignore 
that foregoing current benefits would increase future benefits, even 
though those increases are roughly actuarially fair. In short, they 
view the lost benefits more as a tax, which discourages work. Our model 
indicates that of those who currently retire at age 62, roughly two-
fifths would delay retirement to age 64 if the early retirement age 
were increased to that age.
    If the early retirement age were increased, it is possible that 
more individuals would apply for disability. However, the number of 
SSDI male recipients who enter the program at any age is relatively 
small; the numbers from the 2003 Statistical Bulletin are:

------------------------------------------------------------------------
                          Age                                Entrants
------------------------------------------------------------------------
      55                                                         21,000
      56                                                         16,000
      57                                                         16,500
      58                                                         17,900
      59                                                         19,500
      60                                                         19,300
      61                                                         18,100
      62                                                         15,900
      63                                                          9,600
      64                                                          7,100
------------------------------------------------------------------------

    If, as a result of increasing the early retirement age to 64, the 
number of entrants at ages 62 and 63 increased to 19,000, which is 
close to the average of the previous five years, the increase would 
only amount to around 11,500 individuals. This is about 0.6 percent of 
the approximately 1,800,000 62 and 63 year old males who are either 
disability insured or had been disability insured at the time of their 
retirement. This is too small a number to change the labor force 
participation results appreciably.
    Second, eliminating the current earnings test, which applies 
between age 62 and the normal retirement age, would also increase work 
effort, though by a smaller amount than increasing the early retirement 
age. Presently the earnings test reduces current benefits by $1 for 
every $2 of earnings over the threshold limit of $12,000 per year, 
though later benefits are increased in a roughly actuarially fair 
manner. In our simulations of eliminating the earnings test, much of 
the impact is that fewer individuals would be working part time and 
more would be working full time. However, without the earnings test, 
more individuals would be eligible to collect benefits at ages 62 
through 64, and many would do so, which would be a drain on the 
finances of the system. This would also reduce the eventual level of 
annual benefits that these individuals could collect during their 
retirement, since they would be collecting benefits earlier and hence 
would be subject to a larger early retirement reduction.
    Third, increases in the early retirement reduction rate would also 
have significant effects. The Presidential Commission's report, in its 
Model 3, proposed increasing the reduction for retiring three years 
before the normal retirement age from the current level of 20% to 25%. 
Our model suggests that changing the reduction rate to the level 
specified in the Commission's report would increase the percentage of 
62-64 year olds working full-time by around three percentage points, 
which is a little less than eliminating the earnings test but 
nonetheless substantial. Proposals to increase the delayed retirement 
credit, which increases benefits to individuals who delay collecting 
benefits beyond the normal retirement age, would have much less of an 
effect on retirement, primarily because the earnings test does not 
apply to individuals above the normal retirement age.
    Fourth, lump sum distributions, such as might be available with 
personal accounts, can have a large effect on retirement. If lump sums 
are tied to retirement, individuals may retire earlier in order to gain 
access to the lump sums, especially if the lump sums are made available 
at age 62. If the lump sums are not tied to retirement, we can expect a 
nontrivial fraction of the population to withdraw and spend the lump 
sums, leaving less income and fewer assets available to support 
retirement later on. To make matters worse, these are likely to be 
individuals who have accumulated few other assets for retirement.
    Our related work has generated other punch lines relevant to the 
design of Social Security policies. Four I will mention here. (1) Price 
indexing or longevity indexing has the potential to increase full-time 
work effort. In simulations of the proposed indexing schemes of the 
President's Commission report, price indexing increased the percent of 
62 year-old men working full-time in 2075 by 7 percentage points, 
relative to simulations with current formula benefits. The increase is 
4 percentage points for longevity indexing. Relative to simulations 
with feasible benefits, which are benefits payable from current taxes 
in 2075, the numbers are smaller: a 2.5 increase in full-time work for 
price indexing and a very slight decrease for longevity indexing. (2) 
Despite the progressive appearance of the benefit formula, there is 
little redistribution among families with different earnings levels. 
This occurs primarily because of the greater longevity of higher-income 
families and because spouse and survivor benefits flow 
disproportionately to higher-income families. (3) High-wage immigrant 
families with short tenures in the U.S. get exceptionally high returns 
from Social Security. The source of this result is that many years of 
zeros get included in the average monthly earnings calculation for 
these individuals, and the resulting low average earnings causes the 
benefit formula to treat them in the same generous way that it normally 
treats low income workers. This anomaly could easily be fixed by using 
a relatively simple pro-rated method for computing benefits. (4) 
Regarding the proposals of the President's Commission, the ``offset'' 
method the Commission chose to calculate benefits implies if there are 
further changes in the way traditional benefits are computed, those 
changes will have the same impact whether or not a person had selected 
a personal account. To the degree that returns in the personal accounts 
exceed the interest rate in the offset accounts, individuals with 
personal accounts would be in a better position to withstand cuts in 
traditional benefits.
    I hope that these remarks have been helpful, and I thank you for 
your patience in listening to them. I would like to thank the Social 
Security Administration and NIA for financial support over the years, 
and the Michigan Retirement Research Center, the National Bureau of 
Economic Research, and the Health and Retirement Study, and Texas Tech 
University for research support. I would be glad to answer any 
questions you may have about this work later in the hearing.

                                Sources

    ``Offsetting the Principal in the New Social Security Accounts.'' 
Tax Notes. Vol. 107 No. 1 (April 4, 2005), pp. 109-114.
    ``Retirement Effects of Proposals by the President's Commission to 
Strengthen Social Security.'' National Tax Journal. Vol. 58 No. 1 
(March, 2005), pp. 27-49.
    ``The Social Security Early Retirement Age In A Structural Model of 
Retirement and Wealth.'' Journal of Public Economics. Vol. 89, Issues 
2-3 (February 2005), pp. 441-463.
    ``The Social Security Retirement Earnings Test, Retirement and 
Benefit Claiming.'' National Bureau of Economic Research Working Paper 
10905 (November 2004).
    ``Personal Accounts and Family Retirement.'' National Bureau of 
Economic Research Working Paper 10305 (February 2004).
    ``How Effective Is Redistribution Under the Social Security 
Benefits Formula?'' Journal of Public Economics, Vol. 82, No. 1 
(October 2001), pp. 1-28.
    ``Social Security Benefits of Immigrants and U.S. Born.'' In George 
Borjas, editor, Issues in the Economics of Immigration, University of 
Chicago Press (2000), pp. 309-350.
    All work is joint with Alan Gustman. National Bureau of Economic 
Research Working Papers are available at www.nber.org/papers/. All 
opinions and conclusions are those of the authors and not those of the 
Social Security Administration, the NIA, the Michigan Retirement 
Research Center, the National Bureau of Economic Research, Texas Tech 
University, or Dartmouth College.

                                 

    Chairman MCCRERY. Thank you, Dr. Steinmeier. Dr. Steuerle?

  STATEMENT OF C. EUGENE STEUERLE, PH.D., SENIOR FELLOW, THE 
                        URBAN INSTITUTE

    Mr. STEUERLE. Mr. Chairman, Mr. Levin, Members of the 
Subcommittee, I appreciate this opportunity to testify before 
you on achieving sustainable balance in Social Security. When 
it comes to life expectancy in Social Security, which is the 
subject of this hearing, I believe reform requires answering 
publicly and directly two basic questions. Do we really want a 
Social Security system that is a middle-aged retirement system? 
Second, do we want to maintain as the number one budget 
priority in the Nation's budget, to increase the value of 
Social Security and health benefits for the average income 
retiring couple from more than $700,000 today toward $1 million 
and beyond in the near future? I believe that if we would 
honestly and publicly answer those two questions, we would be a 
long way on the road toward reform.
    Begin by defining ``lifetime benefits'' as the value at age 
65, of Social Security and Medicare benefits as if they were in 
a 401(k) account. In today's dollars, lifetime benefits for an 
average income couple are about $400,000 in Social Security and 
about $700,000 in Social Security and Medicare. One way to 
think about the benefit side of reform is simply to place a 
limit on the growth rate in that lifetime package of benefits.
    Let me try another lens. Close to one-third of the adult 
population is scheduled to be on Social Security within about 
25 years, and people are already retired for about one-third of 
their adult lives. If people retired today for the same number 
of years as when Social Security was young, that is in 1940, 
they would actually be retiring at about age 74 today. In 
another 60 years, they would be retiring at about age 78 if 
they were to retire for the same number of years of life 
expectancy as when the system was younger. By constantly 
increasing the benefits that go to these middle-aged retirees, 
at least as defined by life expectancy, smaller and smaller 
shares of Social Security benefits are being devoted to people 
who are elderly.
    Believe it or not, I think there is tremendous opportunity 
in all of this. People in their fifties, sixties, and seventies 
are going to represent to the labor force for the first half of 
the 21st century what women did for the last half of the 20th 
century: they can be a major source of labor supply if we can 
break down the barriers to them providing it. Restoring Social 
Security to an old-aged, not a middle-aged, retirement system 
can be done partly by increasing the retirement ages, including 
both the early and the normal retirement age. A related move 
would be to back-load benefits more to help those who are 
older. One can also provide a better actuarial adjustment for 
working longer since we currently subsidize people who retire 
early. Such changes would progressively move benefits to later 
ages when they are needed more, and they put the labor force 
incentives in the right place, up front, when people are more 
likely to be able to increase their labor supply.
    Now, admittedly, some groups have shorter than average life 
expectancies, but attempting to address their needs by giving 
you and me a 20th, 21st, and 22nd year of retirement support is 
a very bad form of trickle down policy. Therefore, I favor 
meeting their needs by providing a good minimum benefit, one 
that contains substance, not just symbol, and that increases 
the income of the low-income elderly.
    One question that often arises when discussion centers on 
work limitations is whether Social Security needs to provide an 
increasing share of benefits every year to those further from 
the date of expected death, or whether people can work longer. 
In my testimony I provide three pieces of evidence. First, 
Americans age 55 and older, have been reporting improved health 
for some time now. Second, the physical demands of jobs have 
been declining over time. Finally, until recently, the labor 
force participation of those with similar life expectancies to 
those now retired was much, much higher. In my testimony I also 
suggest that absent other types of reforms, we think about 
adopting some rule for default growth in the system so that the 
system would not continually grow when there are projected 
long-term deficits.
    In summary, our current Social Security system increasingly 
favors middle-aged retirement and reduces both the share of 
Social Security resources for the truly elderly, and the share 
of total revenues of government for children and working 
families. A reformed system could easily reduce poverty rates 
while providing the truly old a lifetime benefit as good or 
better than most generations have received in the past. I 
provide a lot of data in my testimony trying to back up the 
statements I have made before you, and I would be glad to talk 
to you further about them. Thank you.
    [The prepared statement of Dr. Steuerle follows:]

   Statement of C. Eugene Steuerle, Ph.D., Senior Fellow, The Urban 
Institute, and Co-director, Tax Polyc Center, and Columnist, Tax Notes 
                                Magazine

    Mr. Chairman and Members of the Subcommittee:
    Thank you again for the opportunity to testify on ways to try to 
build a viable system of Social Security for the 21st century. As you 
have requested, much of my testimony will deal with our increasing 
inability to protect the young, the truly old, and the vulnerable when 
Social Security morphs into a middle-age retirement system.
    As I have noted before the full committee a month ago, the legacy 
we are about to leave our children is a government whose almost sole 
purpose is to finance our own consumption in retirement. The impact on 
the budget is being felt already. Medicare and Medicaid long-term care 
are primary sources of this problem since they combine the old age 
problems of Social Security with the excessive cost growth that derives 
from an open-ended health care budget. But Social Security is the 
flagship around which the rest of the fleet hovers, whether it is old 
age health care insurance or private labor compensation schemes that 
the follow Social Security in encouraging people to retire in middle 
age.
    Define ``lifetime benefits'' as the value, at age 65, of Social 
Security and Medicare benefits as if they were sitting in a 401(k) 
account that would earn interest but be drawn upon over retirement. In 
today's dollars, lifetime benefits for an average-income couple have 
risen from about $195,000 in 1960 to $710,000 today ($439,000 in Social 
Security and $271,000 in Medicare) to over $1 million for a couple 
retiring in about 25 years (over $\1/2\ million in both Social Security 
and Medicare--see figure 1). These numbers quickly reveal what is 
happening to the budget as a whole. We cannot provide a very large 
portion of American couples $\1/2\ to $1 million of benefits and 
simultaneously encourage them to drop out of the workforce for the last 
third of their adult lives without affecting dramatically the services 
that can be provided through the budget to our children and to working 
families.
    These benefit are provided so early in life that many people are 
``tricked'' into believing they will be well off in retirement when 
such is not the case. Income may appear adequate to a person at age 62 
or 65 when in fair to excellent health and there is more likely to be a 
spouse around to help with minor impairments. However, twenty years or 
more later--and most couples get benefits for more than 20 years--the 
income is not enough. Social Security income falls relative to wages 
and living standards, private pension income often falls even in real 
terms (often because it is not wage indexed), earning power decreases, 
and there often is no longer a spouse around for mutual assistance.
A middle-age retirement system SERVING THE VULNERABLE LESS EACH YEAR
    Social Security's current dilemma centers almost entirely on the 
drop in scheduled workers per retiree. It is and remains a labor force 
issue. Although more saving would be nice, whether in trust funds or 
retirement accounts, we are not going to save our way out of this 
problem. Consider some of the consequences of the current system.
    Social Security has morphed into a middle-age retirement system.
      Close to one-third of the adult population is scheduled 
to be on Social Security within about 25 years. Including adults on 
other transfer programs, we are approaching the day when the majority 
of the adult population will depend upon transfers from others for a 
significant share of its support.
      People already retire on average for close to one-third 
of their adult lives.
      The average Social Security annuity for a man retiring at 
62 lasts 17 years, for a woman 20 years, and for the longer living of a 
couple at least 25 years. The life numbers are even higher for those 
with above-average lifetime earnings because they have above-average 
life expectancies.
      When Social Security was young--for instance, in 1940 and 
1950--the average worker retired at about age 68. To retire for an 
equivalent number of years on Social Security, a person would retire at 
age 74 today and age 78 in another 60 years (figure 2).
    Almost every year a smaller share of Social Security benefits goes 
        to the most vulnerable.
      By constantly increasing benefits to middle-age retirees, 
at least as defined by life expectancy, smaller and smaller shares of 
Social Security benefits are being devoted to the elderly (figure 3). 
If progressivity is defined by how well the vulnerable are served, the 
system is becoming less progressive every year.
    The economy gets hit several ways, not just in terms of costs.
      Among the most important, but ignored, sides of the 
Social Security budget equation is the decline in growth of the labor 
force (figure 4, with its additional effect on slower growth in 
national income and revenues).
      When a person retires from the labor force at late middle 
age, national income declines. But the decline is borne mainly by other 
workers, not by the retiree. For instance, when a $50,000-a-year worker 
retires a year earlier, national income declines by approximately 
$50,000, but most of those costs are shifted onto other workers as the 
retiree starts receiving about $23,500 in Social Security and Medicare 
benefits (much more in the future) and pays about $18,300 less in taxes 
(figure 5).
      Saving declines because people retire in what used to be 
their peak saving years. For instance, when a person retires for 20 
years versus 15, he both saves for 5 years less and spends down his or 
society's saving for 5 years more.
THE OPPORTUNITY: INCREASING WORK SPANS WHILE PROTECTING THE VULNERABLE
    Believe it or not, there is tremendous opportunity in all of this. 
People in their late 50s, 60s, and 70s have now become the largest 
underutilized pool of human resources in the economy. They represent to 
the labor force for the first half of the 21st century what women did 
for the last half of the 20th century. The labor demand, I believe, 
will be powerful, and it is mainly our institutions, public and 
private, that are blocking us from making full use of these valuable 
and talented people.
    Keep in mind that this labor force story differs dramatically from 
that of the past 60 years. Two factors made the remarkable decline in 
labor force participation among older men possible: the entry of the 
baby boom population into the labor force and the increased labor force 
participation of women. The net effect over the post-World War II 
period was an adult employment rate that actually increased over almost 
all non-recession years (figure 6). What this tells me is that there is 
a demand for labor that very possibly would be met by this 
extraordinary pool of talented older workers if institutions adjusted 
to encourage it and let it happen.
    We don't really know yet how all of this will play out. But if we 
remove the disincentives to work, increased labor force participation 
could make all sorts of budget decisions easier over the long run. 
Again, it is because increased labor will add both to national income 
and to revenues--thus lessening how drastically programs for the young 
AND the old have to be cut.

RE-ORIENTING BENEFITS TOWARD the OLD
    Restoring Social Security to an old-age, not a middle-age, 
retirement program can be done partly by increasing the retirement ages 
(including the early retirement age--else it is just an across-the-
board benefit cut). A related move would be to backload benefits more 
to help those who are older. Whatever the level of lifetime benefit 
settled upon in a final reform package, actuarial adjustments can 
provide more benefits later and fewer earlier. These adjustments can 
take various forms: adjust benefits upward when Social Security 
predicts that average life expectancy has fallen below, say, 12 years 
(about age 74 in 2005 and indexed for life expectancy in later years) 
and downward in earlier ages; or provide a lower up-front benefit in 
exchange for post-retirement wage indexing.
    A related adjustment would be to provide a better actuarial 
adjustment for working longer. Currently we subsidize people to retire 
early. While lifetime benefits are about the same for a worker retiring 
at, say, age 62 or 65 or 68, the worker who stays in the workforce 
contributes much more in the way of tax. A greater differential between 
earlier and later retirement would be appropriate both from a fairness 
and an efficiency standpoint. Note that there are two separate 
adjustments that have to be dealt with here--first, the adjustment 
simply for delaying the receipt of benefits, and, second, some 
adjustment for additional contributions made by those who work more. 
Among the problems with the current system in the latter category is 
the silly way that it counts only so many years of work--thus giving 
the worker who works 45 years at $35,000 (wage indexed) substantially 
fewer benefits than the worker who works 35 years at $45,000.
    These changes in retirement ages and in the lifecycle distribution 
of benefits have many positive effects. They progressively move 
benefits to later ages when people have less ability to work, lower 
income, and less help from a spouse to deal with impairments. Support 
in old age was the original purpose of the program. They put labor 
force incentives where they are most effective--in late middle age, 
including the 60s, when most people report being in fair, good, or 
excellent health. When cuts in benefit growth rates are required, they 
cause less hardship than almost any across-the-board benefit cut for 
two reasons: first, they are more likely to increase revenues, thus 
making it possible to afford a better benefit package, and second, they 
don't affect the benefits of the truly old as long as they adjust their 
work lives in line with the changes in the retirement ages.
    I recognize that some people are concerned about groups with 
shorter-than-average life expectancies. But attempting to address their 
needs by granting many of us who are healthy a 20th and 21st and 22nd 
year of transfer support and tens, if not hundreds, of thousands of 
dollars in extra benefits for retiring early is a very bad form of 
trickle-down policy.
    An increase in the retirement age can be combined with other 
provisions that help, rather than hurt, groups with shorter life 
expectancies. One way to do this is to provide a minimum benefit aimed 
at lower-income households and at reducing poverty rates (using a 
poverty standard adjusted for living standards or wage-indexed) among 
the elderly. With such a minimum benefit in place, any of the age-of-
retirement adjustments can actually increase, rather than decrease, the 
relative share of benefits for groups with lower life expectancies, 
since their life expectancies are correlated with lower lifetime 
earnings. In fact, with a good minimum benefit, we can increase the 
income of low-income people and reduce poverty rates, even relative to 
current law.
    One warning is in order here, however. Some minimum benefit 
packages end up more symbol than substance. For instance, they may not 
be indexed for wages, so don't cost much in the long run. Or they have 
so many years of work requirement that they don't help some groups of 
low-income people, especially women. We need Social Security and other 
agencies to provide estimates of the effectiveness of different 
alternatives if we want to provide a base of protection.

EVIDENCE ON ABILITY TO WORK
    One question that often arises is whether Social Security needs to 
provide an increasing share of benefits every year to those further and 
further from date of expected death. Three pieces of evidence are 
provided here: (1) health trends among old and near-old; (2) physical 
demands of jobs; and (3) the ability of people to work at similar ages 
in the years before early retirement options and other benefits were 
made available.
    First, older Americans over age 55 seem to be reporting that their 
health has improved. Figure 7 reports the share of older adults 
reporting fair or poor health in two groups: those age 65--74 and those 
age 55--64 between 1982 and 2002. Even among those age 65--74, the 
fraction reporting fair or poor health is less than one-quarter. The 
fraction actually reporting poor health is much smaller still. The rest 
report being in good or excellent health.
    Similarly, among those age 55--59, the share with work limitations 
has declined from 27.1 percent in 1971 to 19.5 percent in 2002 (figure 
8). Note that a work limitation does not mean inability to work but, 
rather, a limitation to do certain types of jobs. In any case, the 
trend moves in the same direction: as years pass, fewer people of a 
given age have been reporting work limitations.
    Survey results such as those just reported, of course, involve 
qualitative data. We need to check alternative evidence. A second 
approach is to try to find trends in physical limitations of jobs using 
a similar measure over the years. One source, shown in figure 9, 
indicates that the share of U.S. workers in physically demanding jobs 
has declined from over 20 percent in 1950 to about 8 percent in 1996.
    Finally, let us compare the labor force participation of males with 
a similar life expectancy from 1940, when Social Security first paid 
benefits, until 2001. In figure 10, we see that about 86 percent of men 
with about 16 years of life expectancy participated in the labor force 
in 1940. That figure remained high until the late 1960s, a few years 
after men with a similar life expectancy became eligible for early 
retirement benefit and after Medicare benefits were enacted into law. 
After those enactments, labor force participation began a very rapid 
descent to less than 35 percent. That decline has leveled out and may 
be beginning to rise slowly--one more piece of evidence that demand for 
labor is shifting to older workers.
    It is hard to believe that as the physical demands of jobs have 
declined, people have become that much less capable of working. It is 
more likely that the higher levels of benefits in Social Security and 
Medicare, increasingly available for more and more years before 
expected death, have been the major factors driving the drop in labor 
force participation.

CHANGING THE DEFAULT
    Under current policy, federal government spending grows 
automatically, by default, faster than tax revenues as the population 
ages and health costs soar. These defaults threaten the economy with 
large, unsustainable deficits. More important, they deny to each 
generation the opportunity to orient government toward meeting current 
needs and its own preferences for services. Only by changing the 
budget's auto-pilot programming can we gain the flexibility needed to 
continually improve government policies and services.
    Rudolph L. Penner (also a senior fellow at the Urban Institute and 
a former director of the Congressional Budget Office) and I have come 
to believe that there is no way to get the budget in order without 
addressing the issue of these defaults. Budget-irresponsible defaults 
apply to many programs of government, but the largest are linked to 
Social Security and Medicare. As currently structured, these programs 
are designed to rise forever in cost faster than national income and 
revenues--an impossible scenario. In Social Security, the problem is 
caused by the combination of more years of retirement support over time 
and wage indexing for annual benefits.
    Regardless of what Social Security reform is undertaken, some rule 
should be adopted that would put the program back into balance over the 
long term when, for instance, the trustees report for three consecutive 
years that the program is likely to be in long-run deficit. This 
trigger should force the system's automatic features to move 
responsibly back toward budgetary balance.
    With the trigger pulled, three of many options at that point strike 
me as particularly simple and easy to implement. First, the early and 
normal retirement ages could be automatically increased two months 
faster per year than under current law for everyone younger than, say, 
57 in the year the trigger is pulled. (See also note below on removing 
the confusing language on ``early'' and ``normal'' retirement ages.) 
Second, in those years, the benefit formula could be indexed to the 
lower of price or wage growth in a way that allows average real 
benefits to increase but more slowly than wages.\1\ This approach could 
be supplemented by a new special minimum benefit indexed to wage 
growth. Other approaches to this option can also be devised to reduce 
the growth rate of benefits more for high earners than for low 
earners.\2\ A third option is to cap the growth in benefits for 
households who, on average, are expected to receive more than, say 
$400,000 in Social Security benefits, or more than $750,000 in Social 
Security and Medicare benefits.
---------------------------------------------------------------------------
    \1\ Technically, there are different ways that price indexing can 
be approached.
    \2\ The term ``progressive price indexing'' has sometimes been 
applied to this effort, but there are many ways to change the growth 
rate differentially for workers with different levels of lifetime 
earnings.
---------------------------------------------------------------------------
    I generally prefer any method that tends to increase the retirement 
ages since that allows more revenues for the system and, consequently, 
higher lifetime benefits for the same tax rate. Other benefit 
reductions, as noted, hit the oldest beneficiaries with their greater 
needs as well as everyone else. For similar reasons, among the 
``progressive price indexing'' options, I prefer creating a wage-
indexed minimum benefit since that is more likely to protect the more 
vulnerable, including survivors, than is a form of progressive price 
indexing that continues to spend larger shares of revenue on increasing 
benefits for succeeding generations of those with well-above-median 
lifetime earnings. If restrictions are placed on lifetime benefits, 
then retirement age and benefit growth might be adjusted at the same 
time. But, regardless, the system must be redesigned so that, when on 
automatic pilot, the default option leads to a responsible and 
sustainable budget.
    There is, of course, no reason to believe that such automatic 
changes will alone lead to a socially optimum Social Security system. 
For instance, they do not deal with the discrimination in current law 
against single heads of households. The point of changing the defaults 
is, rather, to migrate from a system in which the Congress has little 
choice but to enact painful benefit cuts to one in which Congress has 
the opportunity to provide more generous benefits from time to time--
that is, to play Santa Claus rather than Scrooge sometimes, as politics 
requires.
    By creating a system in which the budget automatically becomes ever 
more responsive and responsible to future taxpayers and beneficiaries, 
the door is also open to spending more now on programs for people who 
aren't elderly--especially children--and on public investments. Or 
Congress might use the freed-up resources to make Social Security 
benefits more generous to those with low average lifetime earnings or 
to provide more cash to lower-income elderly to help pay for medical 
payments. And, of course, Congress can always choose to raise taxes to 
provide a higher benefit growth rate in each year, though remaining 
responsible means making each year's decision to increase benefit 
levels independent of the next year's.

A WORD ON THE PROCESS
    One of the issues facing reformers is that the goals they seek are 
specified too tightly, denying to estimators the ability to provide 
options that achieve those goals better or to improve efficiency and 
equity at the same time. This may appear to be a technical matter, but, 
in fact, it is a MAJOR process issue is trying to achieve a benefit 
package that, at any given tax rate, does the most to protect the truly 
old and vulnerable. Below I list some of the dilemmas and ways that 
they might be resolved.
    Delemma 1: Making the System More Transparent: Changing the 
retirement age is explicit--it is not a hidden tax increase or benefit 
reduction. Hence, at times, it tends to draw more attention than do 
other reforms that, in truth, are much more threatening to a good life 
in retirement, but are less transparent. This political reality 
discourages admitting to and addressing the consequences of the middle-
age retirement system we now have in place. As I continually note, 
increasing work lives is among the least painful benefit adjustments 
because it puts more benefits in old age when needs are greater, and it 
increases national output and revenues.
    Dilemma 2: Addressing the Early Retirement Age. Addressing the 
Early Retirement Age. Increasing the normal retirement age is nothing 
more than an across-the-board benefit cut. It also does nothing to 
change Social Security's misleading signal that old age somehow starts 
as early as 62. Those aged 62 are not ``old,'' if defined by life 
expectancy. Failure to adjust the early retirement age also gives 
reform much less potential to achieve in employment and revenue.
    A variety of reformers, liberal and conservative, tell me that they 
would privately favor adjusting the early retirement age but they think 
it is politically difficult to address publicly. But consider the 
following two alternatives in terms of language:

      Congress raises normal retirement age to 70 (indexed for 
life expectancy), or
      Congress increases earliest retirement age to 65 (indexed 
for life expectancy), the age it was when Social Security was first 
enacted in 1935.

    These two could easily be equivalent in terms of the total lifetime 
benefits provided by Social Security, depending upon design. But the 
latter looks a lot less radical than the former, even if the two are 
equivalent.
    I suggest also that Congress drop altogether the distinction 
between early and normal retirement ages. Declare an earliest 
retirement age and then make adjustments of one type or the other after 
that point. Again, to concentrate benefits at older ages, I would 
provide a bump up in benefits at older ages.
    Dilemma 3: Increase in Work by Older Workers. Increase in Work by 
Older Workers. I believe there is considerable and growing demand for 
older workers. But some of this will take time and is subject to 
uncertainty. Private behavior by both employers and employees will need 
to adjust to the labor market of the new century. Estimators, however, 
generally will not assume very large changes in behavior without more 
empirical evidence is gathered over time. One reason is that they do 
not know whether the rest of the fleet, including private pension 
systems, will follow the Social Security flagship if it moves back 
toward providing for old age, rather than middle age, retirement. 
However, if one adopts a system that encourages greater work at older 
ages, and at the same time, slows down the growth rate in benefits when 
there are projected imbalances, then any yet-uncounted gains from 
additional work effort would effectively allow benefits to grow more 
than might be shown in current projections.
    Dilemma 4: Choosing the Right Target. As I have noted, lifetime 
benefits provide a better first target for Social Security than do 
annual benefits, which do not take into account the number of years 
that benefits are received. As people have retired for more and more 
years, they have effectively reduced the annual benefit and replacement 
rate they could receive for the same lifetime benefit package. 
Congress, therefore, might consider the advantages for public 
presentation if limits were placed on lifetime benefit packages, rather 
than particular parameters of that package (e.g., annual benefit). 
Would the public really object if Congress said that the growth rate in 
lifetime benefits in Social Security and Medicare were to be limited 
for those couples who were projected to receive more than $750,000, at 
least during periods when the two systems were projected to be out of 
balance? Or limited for those couples scheduled to receive, say, more 
than $400,000 in lifetime benefits? The President could then be tasked 
with giving Congress alternative options from year to year on how this 
might be achieved, although a default option is again required if no 
action is taken.

CONCLUSION
    We can and should fix a Social Security system that favors middle-
age retirement and that continually reduces both the shares of Social 
Security resources for the truly elderly and the share of total 
revenues remaining for programs for children and working families. A 
reformed system can easily reduce poverty rates (adjusted for standard 
of living), while providing many others among the truly old a lifetime 
benefit as good, or better, than most generations have received in the 
past. It can also deal with other inequities and inefficiencies on 
which I provided more detail in my previous testimony, including the 
extraordinary discrimination against single heads of household and the 
ways that new revenues are weakly allocated to reduce elderly poverty 
further. I attach a list of suggestions, which expands somewhat on 
those I provided in my testimony to the full committee last month.

                               __________

Summary of Recommendations
      Increase the early and normal retirement ages so that at 
any given tax rate, the system provides fewer subsidies for middle-age 
retirement and increased revenues, higher annual benefits in 
retirement, higher lifetime benefits, and a greater portion of 
resources to those who are truly old.
      Drop all language pertaining to early and normal 
retirement ages, and simply enact an earliest retirement age, with 
actuarial and other adjustments (e.g., a backloading of benefits to old 
age) to be made from there.
      Backload benefits more to older ages, such as the last 12 
years of life expectancy, so as to progressively increase benefits in 
later ages when they are needed more and to increase labor force 
incentives for individuals still in late-middle age, as defined by life 
expectancy.
      Provide a well-designed minimum benefit to help low-
income households and groups with less education and lower life 
expectancies, while simultaneously reducing poverty rates (relative to 
living standards or wages) among the elderly.
      Determine family benefits for middle--and upper-income 
individuals in an actuarially neutral manner by applying private 
pension standards, making sure that benefits are shared equitably, and 
reducing or removing significant discrimination against single heads of 
household, many abandoned spouses, two-earner couples, many divorced 
persons, those who marry others close to their own age, some who pay 
significant marriage penalties for remarrying, and those who bear 
children earlier in life.
      Provide a minimum benefit that extends to spouses and 
divorced persons as well as workers to provide additional protections 
for groups that are particularly vulnerable, and as an alternative to 
free and poorly targeted transfers to higher-income households.
      Count all years of work history, providing an additional 
work incentive and removing the discrimination against those who work 
longer.
      Ensure responsible budgetary policy by changing the 
default rules to guarantee the system automatically moves toward 
balance--say, through adjustments in the retirement ages or the rate of 
growth of annual or lifetime benefits for higher-income households--
whenever the Social Security trustees repeatedly report a likely long-
run deficit.
      Design reform around lifetime benefits by, say, paring 
the growth rate of benefits for those above some amount, e.g., those 
scheduled to receive over $400,000 in Social Security benefits or more 
than $750,000 in Social Security and Medicare benefits.
      Reduce the tax gaming used with retirement plans when 
taxpayers simultaneously report interest deductions while deferring or 
excluding interest and other retirement plan income from taxation.
      Provide additional incentive for plans that do a better 
job at providing a portable benefit for all workers, such as using the 
FICA tax exclusion to finance increased deposits to retirement accounts 
and guaranteeing all workers in a qualified plan a minimum level of 
portable benefits.
      Make clearer in the law that employers can use opt-out, 
not just opt-in, methods of encouraging retirement plan participation--
without threat of lawsuit.
      Focus retirement plan incentives more on lower-wage 
workers, for instance, through an increase in a modified savers credit, 
which should be adjusted so that it is available for employer, as well 
as employee, contributions and so that the credit is deposited in 
retirement accounts.
      Provide safe harbors from lawsuits for designated types 
of retirement and other benefit plans offered by employers who hire or 
retain older workers.
      Restore the earnings base for Social Security by 
increasing the portion of cash wages subject to Social Security tax, 
capping the tax-free levels of health insurance that can be provided, 
and dealing with tax preferences for other employee benefits.

                               __________

                                Figure 1

[GRAPHIC] [TIFF OMITTED] T3924A.005

   *Expected rather than realized benefits. Notes: The ``high'' and 
  ``average'' wage profiles are those hypothetical profiles routinely 
    employed by the Social Security Administration in its analyses. 
 Lifetime amounts, rounded to the nearest thousand, are discounted to 
   present value at age 65 using a 2 percent real interest rate and 
 adjusted for mortality. Projections based on intermediate assumptions 
 of the 2005 OASDI and HI/SMI Trustees Reports. Includes Medicare Part 
 D. Source: Adam Carasso and C. Eugene Steuerle, The Urban Institute, 
                                 2005.

                                Figure 2

[GRAPHIC] [TIFF OMITTED] T3924A.006

                                Figure 3

[GRAPHIC] [TIFF OMITTED] T3924A.007

Source: C. Eugene Steuerle and Adam Carasso, The Urban Institute, 2002. 
  Based on data from the Social Security Administration's 2001 Annual 
                  Statistical Supplement, Table 5A.1.

                                Figure 4

[GRAPHIC] [TIFF OMITTED] T3924A.008

Note: Projections assume no change in patterns of retirement by age and 
                                  sex.

Source: C. Eugene Steuerle and Adam Carasso, The Urban Institute, 2002. 
   Based on data from the US Bureaus of Census and Labor Statistics.

                                Figure 5

[GRAPHIC] [TIFF OMITTED] T3924A.009

                                Figure 6

[GRAPHIC] [TIFF OMITTED] T3924A.010

                                Figure 7

[GRAPHIC] [TIFF OMITTED] T3924A.011

                                Figure 8

[GRAPHIC] [TIFF OMITTED] T3924A.012

                                Figure 9

[GRAPHIC] [TIFF OMITTED] T3924A.013

                               Figure 10

[GRAPHIC] [TIFF OMITTED] T3924A.014


                                 

    Chairman MCCRERY. Thank you, Dr. Steuerle. Mr. 
Gebhardtsbauer.

    STATEMENT OF RON GEBHARDTSBAUER, SENIOR PENSION FELLOW, 
                 AMERICAN ACADEMY OF ACTUARIES

     Mr. GEBHARDTSBAUER. Thank you. Chairman McCrery, 
Congressman Levin, and distinguished Committee Members, for the 
opportunity to testify. My name is Ron Gebhardtsbauer, and I am 
the Senior Pension Fellow at the American Academy of Actuaries. 
We are the non-partisan professional organization representing 
all actuaries in the U.S. In the interest of time I will 
quickly mention the major points in my written testimony, so 
please ask for clarification if you would like.
    Social Security's normal retirement age recently increased 
from 65 to 66. Gradually raising it further by 1 month every 2 
years would reduce Social Security's shortfall by about a 
third. While that reduces the increase in the annual benefit, 
it doesn't have to reduce the increase in the total lifetime 
benefits because each generation is living longer, and 
therefore receiving more years of benefits. The 1983 amendments 
reduced the impact of raising the normal retirement age on 
workers by phasing it in gradually so that there would be 
little noticeable effect, and it only affected people under age 
45 at enactment, thus, it had no impact for 17 years.
    In addition, we are not only living longer, we are 
healthier at older ages, and fewer jobs are physically 
demanding. People are also interested in staying active both 
mentally and physically, and jobs help promote that. Now, I 
will compare it with price indexation. Price indexation can 
reduce benefits four times faster than raising the normal 
retirement age on just an indexation basis. Also, price 
indexation reduces disability benefits, whereas indexing the 
normal retirement age doesn't. Both ideas affect early 
retirees. Workers could still retire at age 62 and receive 
Social Security benefits, but the benefits would be smaller.
    The early retirement issue is important for workers in 
physically demanding jobs. If Social Security continues to pay 
benefits at age 62, the benefits will be small. To avoid these 
inadequate early retirement benefits, some proposals also will 
gradually increase the earliest eligibility age from 62 to 65. 
While this only reduces Social Security's shortfall by an 
additional 10 percent, it can have a big impact on when people 
retire since a person's retirement date is very much a 
financial decision. This points out the importance of having an 
employer-sponsored pension system to provide supplemental 
benefits until Social Security is available. Proposals on tax 
reform, lifetime savings accounts, or annuity taxation 
substantially change employer incentives to offer pension 
plans, so care should be taken not to kill them. Pension plans 
help us to not rely on Social Security for all of our 
retirement needs.
    Now I want to talk about ways to keep Social Security 
solvent and sustainable. Unlike the 1983 fix, indexing 
retirement ages and price indexing can be ongoing so that 
Social Security does not go out of balance so easily due to our 
continually increasing lifespans. However, in order for this to 
work, Social Security will need to be more stable. Price 
indexation actually makes the initial benefit less stable, that 
is, price indexation of the initial benefit makes Social 
Security less stable because price inflation can exceed wage 
growth as it did in the seventies. Wage indexation, as we do it 
now, is actually more stable, because when wages and thus taxes 
go up more or less than expected, the same thing will happen 
for benefits. That is not to say that price indexation should 
never be used. It could be used to gradually curtail benefits, 
but it only makes sense to use it until benefits are at the 
desired level. If price indexation is not turned off, benefits 
eventually become inconsequential in comparison to wages.
    Similarly, progressive price indexation could be used if 
you want to move to a Social Security system that provides more 
level benefits. Under a current proposal for progressive price 
indexation, benefits would essentially be the same for almost 
everyone in 65 to 75 years. A longevity indexation provision 
could also help prevent Social Security from getting out of 
actuarial balance in the future. There is much disagreement on 
whether our lifespans will increase faster or slower than the 
intermediate projections in the trustees reports. A response to 
unexpected changes in lifespans might be to automatically 
adjust the indexation, as Eugene was mentioning.
    What should be indexed: benefits, taxes, or retirement 
ages? In order to analyze this, it helps to look at extremes. 
If we look in the distant future when people are living to, say 
age 150, will it make sense to have retirement age still at 67 
and our pensions tiny, or will it make sense to have later 
retirement ages and to not have to continually cut benefits or 
raise taxes? In summary, the demographic challenges for Social 
Security brought about by our longer lifespans can be solved 
through continual indexation. Automatic changes to the 
indexation could reduce Social Security's vulnerability to 
future changes that we can't predict. Then Social Security 
would be less likely to go out of balance, assuring American 
workers that they would get their benefits from Social 
Security. I will be happy to answer your questions later.
    [The prepared statement of Mr. Gebhardtsbauer follows:]

   Statement of Ron Gebhardtsbauer, Senior Pension Fellow, American 
                          Academy of Actuaries

    The American Academy of Actuaries is the public policy organization 
for actuaries of all specialties within the United States. In addition 
to setting qualification standards and standards of actuarial practice, 
a major purpose of the Academy is to act as the public information 
organization for the profession. The Academy is nonpartisan and assists 
the public policy process through the presentation of clear, objective 
analysis. The Academy regularly prepares testimony for Congress, 
provides information to federal elected officials and congressional 
staff, comments on proposed federal regulations, and works closely with 
state officials on issues related to insurance.

Protecting and Strengthening Social Security
    Chairman McCrery, Congressman Levin, and distinguished committee 
members: thank you for the opportunity to testify on the impact of 
longevity on Social Security's finances and ways to encourage work at 
older ages. My name is Ron Gebhardtsbauer, and I am the Senior Pension 
Fellow at the American Academy of Actuaries. We are the non-partisan 
professional organization representing all actuaries in the U.S. and do 
not endorse or propose legislation. Instead, we analyze the potential 
effects of legislation and evaluate its advantages and disadvantages 
relative to current law.
    The Demographic Challenges for Social Security: As you noted in 
your announcement for this hearing, there are major demographic 
challenges for Social Security: the retirement of the baby boomer 
generation and longer life spans. Chart I, at the end of this 
testimony, graphs Social Security's annual income and outgo. It shows 
that outgo increases rapidly for 20 or so years starting in 2008, when 
the baby boomers are first eligible for (old-age) retirement benefits. 
Outgo, as a percentage of covered payroll continues to increase 
thereafter, even though the baby boomers are retired, due to projected 
increases in our longevity. The problems do not get easier. The 
difference between Social Security's outgo and income will continue to 
widen, unless we reduce benefits, increase taxes, and/or raise the 
normal retirement age (NRA).
    Raising Social Security's Retirement Ages: You have asked us to 
discuss the options for raising Social Security's retirement ages. 
Retirement age is at the heart of the issue of balancing the Social 
Security system by defining the appropriate cultural expectations 
between the period of work and retirement life. More extensive 
information on the effects of increasing retirement ages on workers, 
employers, and Social Security can be found on the Academy's website 
(http://www.actuary.org/socsec/background.htm). At this hearing, you 
expressed a particular interest in how raising the retirement age would 
affect Social Security benefits and retirement ages.
    Current Rules Increasing the Normal Retirement Age (NRA): Between 
2000 and 2005, Social Security's normal retirement age (the age at 
which there is no reduction for early retirement) increased from age 65 
to age 66. Although this change has already affected the benefits of 
people born after 1937 who retired early, there has been little 
negative feedback. That may be because:

    1.  Congress made this change in 1983, many years before it 
affected anyone's retirement benefit.
    2.  Congress only applied the change to people under age 45 at 
enactment, thus giving workers many years to prepare for it. The change 
did not affect people who were closer to retirement, who would have had 
less ability to change their retirement plans.
    3.  Congress phased the increase in NRA to age 66 gradually over 
the six years from 2000 to 2005 so there would be no reduction in 
initial benefits compared to people who retired the year before. For 
example, raising the normal retirement age from 65 to age 65 and two 
months in the year 2000, reduced benefits for people retiring at age 62 
by about 1 percent. As wages probably increased by more than 1 percent 
over their last year of work, a retiree's benefit is likely to be 
larger than the initial benefit of a similarly situated person who 
retired in the prior year.
    4.  We are not only living longer, we are healthier at older ages, 
as shown by lower levels of impairment.\1\
---------------------------------------------------------------------------
    \1\ See Chronic disability trends in elderly US populations: 1982-
1994 by Manton, Corder, & Stallard. In 1982, 14.1 percent of elderly 
between 65 and 74 were IADL (Instrumental Activities of Daily Living) 
or ADL-impaired or institutionalized. In 1994 this decreased to 11.5 
percent. For ages 75 to 84, it dropped from 31.9 percent to 26.9 
percent.
---------------------------------------------------------------------------
    5.  Fewer jobs are physically demanding, now.
    6.  More people are interested in staying active both mentally and 
physically, and jobs help to promote that.
    7.  Many recent retirees may not even have realized it happened.

    The 1983 Social Security reform also increased the normal 
retirement age from age 66 to age 67, but it won't start affecting 
people's benefits until 2017. It affects people born after 1954, and 
will be fully phased in at age 67 for people born after 1959. Thus, all 
these gradual changes in the NRA (from age 65 to age 67) affect people 
born after 1959, so their benefits will have been reduced by about 13 
percent. However, because each generation is living longer, we really 
only decreased the value of lifetime benefits by around 5 percent.\2\ 
In other words, if we don't increase the NRA, then we are de facto 
increasing Social Security lifetime benefits, because future 
generations will receive benefits for more years. If we do gradually 
raise the NRA, we can keep total lifetime benefits about the same (or 
the same relative to payroll taxes paid).
---------------------------------------------------------------------------
    \2\ Based on Table V.A.4, males age 65 in 2022 will live 8.4 
percent longer than males age 65 in 2000, so the 13.3 reduction in 
benefits is offset by an 8.4 percent increase in years receiving the 
benefit.
---------------------------------------------------------------------------
    Proposals to Increase NRA: One possible reform option would 
eliminate the hiatus in the increase in the NRA to age 67. Instead of 
waiting until 2017 to start increasing the NRA again, it could start 
next year. The Social Security actuaries have determined this change 
would eliminate only about 7 percent of Social Security's 75-year 
shortfall, because it only affects people born between 1944 and 1959 
and only by a small amount.
    Another option found in the 1996 Social Security Advisory Council 
Report would, in addition to the last suggestion, very gradually 
increase the NRA by one month every two years so that the NRA would 
reach age 68 in 2035 for workers born in 1973. Age 70 would be reached 
in 2083, but that would only affect people not yet born (i.e., for 
people born in 2021). This proposal increases the NRA only one-fourth 
as fast as the recent increases in NRA, and it eliminates about 36 
percent of Social Security's shortfall.
    Raising the NRA could eliminate the shortfall if it were done fast 
enough. The current increases in the NRA of two months per year create 
benefit cuts that are very similar to those created by price indexing 
the basic benefit formula, which would eliminate the shortfall. Thus, 
continuing the increases in the NRA by two months per year to an NRA 
higher than 67 would substantially reduce Social Security's shortfall.
    Disability Retirees Not Affected: \3\ Raising the NRA is different 
from a straight-forward benefit cut in one aspect. It does not affect 
disability benefit amounts, whereas decreases in the benefit formula do 
affect the disabled because the same formula is used to determine both 
old age and disability benefits. Because disability benefits are not 
cut when the NRA is increased, more people in their 60s may apply for 
and receive disability benefits, and the Social Security actuaries have 
reflected that in their pricing of the proposals that affect retirement 
ages.
---------------------------------------------------------------------------
    \3\ Certain other survivors are not affected by an increase in NRA, 
as noted in my earlier testimony on the subject of Increasing the 
Retirement Age, at http://www.actuary.org/pdf/socialsecurity/
ss_future.pdf (page 2).
---------------------------------------------------------------------------
    Early Retirees Are Affected: The above proposals do not change the 
earliest eligibility age (EEA) for retirement benefits under Social 
Security. Workers could still retire at age 62 and receive Social 
Security benefits. However, if the earliest retirement age stays at age 
62, then those benefits become much smaller. For example, if we raise 
the NRA to age 70, then the age 62 retiree will have retired 8 years 
earlier than the NRA, which means their benefits will be only 55 
percent of the benefits they would have received at the NRA. This issue 
of inadequate benefits is also important for surviving spouses, because 
a couple's total benefit can drop by one-third on the death of a 
spouse. One way to discourage these early retirements might be to 
require the spouse to sign off on early retirement decisions 
(acknowledging the reduction in benefits due to early commencement), 
but that would complicate administration (e.g., if separated spouses 
cannot be found or if they disagree on the appropriate retirement age).
    This issue is important for workers in physically demanding jobs. 
Should Social Security continue to pay these benefits at an early age 
(even though they would be smaller), even though it can encourage 
people to retire too early, or should we increase the earliest 
eligibility age for Social Security benefits? This issue also affects 
employers who provide these jobs. If they need to retire workers in 
physically demanding jobs early, then they will find that they need to 
provide adequate pensions at those ages, which emphasizes the 
importance of a strong voluntary defined benefits retirement system to 
provide supplemental benefits until Social Security benefits are 
available.
    Proposals to Increase the Earliest Eligibility Age: To avoid 
inadequate early retirement benefits, some proposals also gradually 
increase the earliest eligibility age for retirement benefits from age 
62 to age 65. Social Security's actuaries noted that this would 
eliminate an additional 10 percent of the Social Security shortfall.\4\ 
This change in EEA doesn't help Social Security much over the long run, 
because the system is designed so that a person's total lifetime 
benefits have approximately the same value regardless of the age that 
one elects to commence benefits. The effect on Social Security is that 
a small amount of cash outlays would be delayed, which would help the 
unified budget a small amount, but the following year their benefits 
would be paid and their benefits would be slightly larger than they 
would have been had people been able to retire earlier. In addition, 
raising the EEA might encourage more unhealthy workers (especially 
those in physically demanding jobs) to apply for disability benefits, 
which are larger than early retirement benefits.
---------------------------------------------------------------------------
    \4\ Per the 1994-1996 Social Security Advisory Council Report 
Appendix III, items D1c and D2a.
---------------------------------------------------------------------------
    Encouraging Work at Older Ages: While raising the EEA only reduces 
Social Security's shortfall by 10 percent, it can have a large effect 
on when people retire, since a person's retirement date is very much a 
financial decision.\5\ Raising the EEA can encourage people to work 
longer, and not retire until they can get their Social Security 
pension. Chart II, at the end of this testimony, shows that retirement 
ages quickly shifted to age 62 after Social Security allowed benefits 
at that age for men in 1961 (enacted in 1956 for women). However, in 
the past 20 years, workers have started retiring later due to:
---------------------------------------------------------------------------
    \5\ In addition, people retire due to a desire for leisure, or due 
to the inability to work or find work, or due to the desire to retire 
after a spouse retires.

    1.  Government policy encouraging work (e.g., mandated employer-
based pension accruals after age 65, higher Social Security earnings 
limit before NRA, no earnings limit after NRA, increased NRA, increased 
credits from Social Security for working beyond NRA, training programs 
under Older Americans Act, etc.);
    2.  Employers converting their defined benefit plans to 401(k) 
arrangements, which will provide smaller incomes for most people and 
require employees to retain investment and longevity risks;
    3.  Employers cutting back on their post-retirement medical plans 
so that many more employees wait until they can receive Medicare at age 
65; and
    4.  Employers compensating workers more to retain them in certain 
industries due to labor shortages, particularly now that baby boomers 
are starting to retire and the numbers of new workers may not be enough 
to replace the retiring workers.

    Increasing both the Normal and Earliest Eligibility Ages: 
Increasing Social Security's earliest eligibility age to 65 in tandem 
with the increase in the NRA to age 70 by 2083 (described earlier) 
would eliminate about 46 percent of the shortfall.
    Solvency and Sustainability of Social Security: So far we have only 
discussed raising retirement ages. Another option would be to increase 
contributions. Increasing contributions by 1.92 percent of covered 
earnings would eliminate 100 percent of the shortfall and make the 
system solvent over the next 75-year period. However, if this is the 
only change, we might be back here in 20 years with a large deficit 
again, due in part to our continually increasing life spans. The same 
is true if we immediately cut all benefits by 13 percent to achieve 100 
percent solvency. In fact, this is one reason why the 1983 fix did not 
last. It made the system solvent for the 75-year period ending in 2058 
(1983 + 75).\6\ Now the 75-year period includes many more deficit 
years, in which outgo is more than income due to our longer life spans. 
Thus, as long as we continue to live longer, we will need very slow and 
gradual increases in retirement ages (or small and continual increases 
in taxes or reductions in benefits). If we don't want Social Security 
to continually go out of balance, then we need to not only make it 
solvent, but also make it sustainable. The accepted test for 
sustainability is that trust fund ratios in the final years of the 75-
year period be level or increasing.
---------------------------------------------------------------------------
    \6\ Another reason is that some assumptions did not fare as well, 
such as real wage growth and mortality, and this will be discussed 
later.
---------------------------------------------------------------------------
    Predictability: There is another reason that could bring us back to 
the table in future years, even if we have a solution that is estimated 
to be sustainable under intermediate projections. We may live longer 
than assumed under the intermediate projections, have fewer children, 
have higher inflation, or be less productive. In fact, these last two 
concerns become more relevant now that we are discussing price 
indexation (or progressive price indexation) of the initial benefit at 
retirement.
    Indexation of Initial Retirement Benefits: Under price indexation, 
if real wages increase less than projected under the intermediate 
assumptions, Social Security will receive less payroll taxes. Benefit 
outgo could increase more than wage income if real wages were negative 
like they were in the 1970s. Thus, under price indexation, the 
pessimistic projection of trust fund assets could still go to zero just 
when the economy is in bad shape, and benefits would have to be cut 
and/or taxes raised again. On the other hand, if real wages increase 
more than expected under the intermediate assumptions, payroll taxes 
would be more than expected, but benefits (only increasing with price 
inflation) would fall further and further behind wages. This would make 
the optimistic projection of the trust fund assets increase much faster 
than expected. If it actually happened, we would find we had cut 
benefits more than needed and/or increased taxes more than needed. In 
summary, price indexation would increase the spread between the 
optimistic and pessimistic forecasts. Social Security's finances would 
be more volatile. Wage indexation reduces that problem, because when 
wages go up more than expected, benefits do too (although with a lag).
    Automatic Adjustments: Because it is impossible to predict the 
economy or the future demographics of the system, Congress might want 
to consider slightly modifying Social Security so that it automatically 
handles unexpected changes in the economy or the demographics of the 
nation. For example, indexing the initial retirement benefits to wages 
would make the system less volatile to unexpected changes in wages.
    That's not to say that we should not use price indexation. We could 
use it (or something similar, such as increasing initial retirement 
benefits by wage growth less 1 percent) if we wanted to gradually 
decrease benefits, but it only makes sense to use it until benefits are 
at the desired level. If price indexation is not turned off, benefits 
eventually fall below contributions, at which point, Social Security 
would have surpluses thereafter. Some note that this gives us the 
option to reduce payroll taxes at that point in time. We could also 
decide now whether to return to wage indexation or reduce taxes at that 
date (although it should be noted that if we do not ever return to wage 
indexation, then benefits eventually become inconsequential in 
comparison to wages). Similarly, we could try progressive price 
indexation, if we wanted to move to a Social Security system that 
provides level benefits (i.e., the same benefit for everyone as in the 
United Kingdom's tier I benefit) instead of the individually equitable 
benefits under today's system. Under a current proposal for progressive 
price indexation, benefits would become the same amount for middle and 
upper income workers in 75 years assuming real wages grow by 1.1 
percent per year (or 65 years assuming real wages grow at 1.3 percent 
per year).
    We could also automatically respond to unexpected changes in life 
spans. That would decrease the large spread between the optimistic and 
pessimistic projections.
    Life Spans: There is much disagreement on whether life spans will 
increase faster or slower than the intermediate projections in the 
trustees' reports.\7\ Past improvement in life spans suggest that we 
could fully index the system to keep it in balance by increasing the 
normal retirement age very gradually (by one month every two years, 
which reduces the increase in benefits by only \1/4\ percent per year). 
This would be less than one-fourth of the reductions in benefits under 
price indexation. If life spans increase more, then we would eventually 
have to cut benefits more or raise taxes more. If life spans increase 
less than expected, then benefits will have been cut too much (or taxes 
raised too much). A solution would be to index benefits, payroll taxes, 
or the NRA to life spans. Some call this longevity indexation. If life 
spans increase faster or slower than expected, Congress could create 
rules that automatically make an adjustment (within parameters set by 
Congress on how fast the changes could occur and how soon they could be 
applied).\8\ These adjustments would be based on historical 
improvements in life spans and not depend on the person doing the 
calculations. If the Social Security system is indexed by longevity, 
then the optimistic and pessimistic projections would not be so far 
apart.
---------------------------------------------------------------------------
    \7\ Olshansky, S.J., Passaro, D., Hershow, R., Layden, J., Carnes, 
BA., Brody, J., Hayflick, L., Butler, RN., Allison, DB., Ludwig, DS. 
2005. A Possible Decline in Life Expectancy in the United States in the 
21st Century. New England Journal of Medicine 352:1103-1110
    \8\ For example, we might not want benefits, taxes, or retirement 
ages to be constantly changed up and down, so some smoothing mechanism 
could be employed. In addition, Congress might not want to change 
benefits or retirement ages for people close to retirement.
---------------------------------------------------------------------------
    Which of those three choices (indexing benefits, taxes, or NRA) 
would make the most sense? In order to analyze this, it helps to look 
at the extremes. In the distant future, when people are living to age 
150 (for example), will it make sense to still have the retirement age 
at 67 so that we are retired for 80 years (twice as long as our working 
lifetimes) and our pensions are tiny, or our contributions huge (to 
maintain the same level of benefits)? Or will it make more sense to 
have a later retirement age and not have to continually cut benefits 
and/or raise taxes so much? While raising the normal retirement age 
appears to be a more logical solution, we would still have to address 
the issue of unhealthy people who are not quite eligible for Social 
Security disability benefits and workers in physically demanding jobs. 
Gradually relaxing Social Security's disability tests as is done 
currently at older ages \9\ already addresses this concern to some 
extent. A flexible employer-sponsored defined benefit system, which can 
provide pension benefits tailored to the individual aspects of each 
company's workforce also can be of great help.
---------------------------------------------------------------------------
    \9\ Per Social Security regulation Sec. 404.1563
---------------------------------------------------------------------------
    These longevity indexation provisions could help prevent Social 
Security from getting out of actuarial balance in the future, relieving 
Congress from having to address Social Security issues every 20 years. 
While it might not put Social Security on autopilot forever, it would 
be an improvement on current rules. In addition, if Congress ever felt 
uncomfortable with benefits being cut too much (or taxes going up too 
fast) by the automatic rules, they could revise them. In fact, they 
could give themselves an automatic standing order to vote on changes, 
with preferential rules requiring a vote.

Additional Issues to Address
    In addition to the issues discussed above, you asked that we discus 
ways to encourage people to work at older ages.
    Consistent Laws: If Congress wants to encourage work at later ages, 
you may want to consider having consistent rules so that workers think 
of age 67 as the ``normal'' retirement age. For example, Medicare still 
uses age 65, and employer pension plans are not allowed \10\ to use a 
normal retirement age later than age 65. During these economically 
difficult times for employers, it might be valuable for Congress to 
consider allowing, and possibly encouraging, employers to have a normal 
retirement age in their pension plans that was consistent with Social 
Security. For example, Congress could provide employers flexibility in 
meeting the administratively complex accrual rules, if the plan sponsor 
increases the NRA gradually for employees who were accruing benefits. 
The new benefit accruals would ensure that employees' benefits were not 
being reduced, without having to test them each month.
---------------------------------------------------------------------------
    \10\ See Internal Revenue Code Sec. 411(a)(8), which defines the 
maximum NRA as age 65 and 5 years of service, Sec. 401(a)(9) which 
defines a maximum distribution starting age of 70\1/2\ for owners, and 
Sec. 401(a)(14) which sets the latest commencement date rules (age 65 
and 10 years of service).
---------------------------------------------------------------------------
    This would not mean that employees had to work until age 67 to get 
their employer pension. Just as with Social Security, most employers 
allow employees to retire and commence pensions earlier. In fact, most 
employers allow early retirement at age 55. It would just allow 
employers to keep their NRA consistent with Social Security's NRA, and 
thus keep their pension plan costs from spiraling up as we live longer.
    Conversions to Cash Balance Plans and Elimination of Early 
Retirement Subsidies: A new kind of defined benefit pension plan, 
called a cash balance plan, also encourages workers to retire later. 
Some history may be needed to explain it. Many employer pension plans 
added subsidized early retirement benefits in the 1970s and 1980s when 
the labor supply was high. It helped workers retire at younger ages 
when the baby boomers (and many women) were looking for work. However, 
now the tide has turned and labor is not as plentiful, so employers may 
not want to encourage early retirement; they may need to retain their 
employees. Employers can eliminate their early retirement subsidies or 
they can convert their traditional pension plan to a cash balance plan. 
Cash balance plans promise workers an account with a guaranteed rate of 
return. They are easier for employees to understand and provide better 
benefits for young and mobile workers, but they can also decrease the 
growth in future accruals for older, long-service employees. After 20 
years of their existence, the law is still not clear for these plans, 
and court cases have further complicated their prospects. Employers 
need Congress to clarify the law so that they can design their pension 
plans in an acceptable way that won't subject them to expensive 
litigation.
    Phased Retirement: Employers are developing other ways to retain 
their employees, such as phased retirement programs; however, such 
programs face legal obstacles because an IRS regulation \11\ requires 
that retirement plans be exclusively for (full) retirement. The 
Internal Revenue Service is to be commended for proposing a rule 
allowing employers to pay partial pensions when employees are phasing 
gradually into retirement. However, there is concern about the 
incredible complexity in the proposed rule as discussed in our letter 
to the IRS on this subject. Congress might consider clarifying the law, 
so employers can have phased retirement programs without having to 
constantly monitor an employee's hours and adjust their pension amount 
for ups and downs in hours worked.
---------------------------------------------------------------------------
    \11\ IRS regulation Sec. 1.401-1(b)(1)(i)
---------------------------------------------------------------------------
    Other Dangers to Employer Sponsorship of Retirement Plans: There 
are suggestions to reform the federal tax system to a consumption based 
tax, or provide equivalent tax advantages to all savings through such 
vehicles as Lifetime Savings Accounts (LSAs), or provide tax advantages 
to annuities purchased with non-pension funds. If there are no 
incentives for employers to surmount the enormous complexity and cost 
of providing pension plans to their workforces, they will surely face 
no alternative but to terminate their pension plans. This would be 
unfortunate not only for the retirement security of the nation's 
workers, but also for employers who use these plans to help with 
workforce management issues, and for the country, which benefits from 
the large pool of pension savings that are efficiently invested in the 
economy. In addition, employer-sponsored pension plans help reduce our 
reliance on Social Security and help provide diversification of 
retirement risks over the three legs of the retirement stool 
(government retirement systems, employer-sponsored pension plans, and 
individual savings). If any of these proposals are acted upon, it is 
important to examine and debate how they would affect national 
retirement security, and consider ways to encourage employers to 
provide pensions for their employees.

Summary: The demographic challenges for Social Security brought about 
        by the baby boomers' upcoming retirements and our longer life 
        spans can be solved through various gradual indexation methods. 
        These include indexation of contributions, benefits, or the NRA 
        to life spans and anti-volatility mechanisms to automatically 
        adjust them if longevity improves faster or slower in the past. 
        This indexation could reduce Social Security's vulnerability to 
        future changes that we can't predict. Then Social Security 
        would be less likely to go out of balance and Congress would be 
        less likely to be called on to address these difficult issues. 
        It would also help workers feel more assured that they would 
        get their benefits from Social Security.
    In addition, preserving and providing flexibility to the employer-
based pension system could help us encourage more work at older ages. 
It also could help us avoid having to pay the larger Social Security 
benefits prevalent in other countries. Hopefully, Congress will 
continue to encourage employers to provide these pension plans, and not 
discourage them, as might happen with some recent proposals.
    The Academy appreciates the opportunity to testify before this 
committee.
                                Chart I

[GRAPHIC] [TIFF OMITTED] T3924A.015

                                Chart II

[GRAPHIC] [TIFF OMITTED] T3924A.016

                               Chart III

[GRAPHIC] [TIFF OMITTED] T3924A.017


                                 

    Chairman MCCRERY. Thank you. Ms. Long?

    STATEMENT OF VALERIE LONG, PRESIDENT, SERVICE EMPLOYEES 
     INTERNATIONAL UNION, LOCAL 82, AND INTERNATIONAL VICE 
 PRESIDENT, INTERNATIONAL EXECUTIVE BOARD, ON BEHALF OF GERALD 
      HUDSON, EXECUTIVE VICE PRESIDENT, SERVICE EMPLOYEES 
                      INTERNATIONAL UNION

    Ms. LONG. Thank you, Chairman McCrery and Ranking Member 
Levin, and Members of the Subcommittee. First I would like to 
extend apologies for Executive Committee Member Gerald Hudson, 
who wasn't able to make it today, and I really appreciate the 
opportunity to speak on behalf of 1.8 million members of the 
Service Employees International Union (SEIU) that we represent. 
More importantly, I would like to talk on behalf of the 8,000 
property services workers of which I am privileged to represent 
here in Washington, D.C. I represent janitors, other building 
service workers, and ground keepers right here in the Nation's 
capital. Our overall State council represents 25,000 workers, 
about 8,000 of them are long-term care workers that work in 
nursing homes, as well as public services.
    The majority of those people work really hard at physically 
demanding jobs. The kind of work that leaves you dead tired at 
the end of the day. They do it week after week, month after 
month, year after year, and at the end of decades they want to 
retire and get some rest. When we consider the proposals to 
provide secure retirement for ordinary working folks like 
those, the deliberations that you are involved in are important 
to those members that we are privileged to represent.
    A janitor's working day, the members that I represent, is 
filled with stooping, bending, heavy lifting, having what the 
industry calls backpack bags on your back that are loud and 
heavy. People are pulling trash, pulling are stooping a lot, 
and many of them are part-time workers, who leave those jobs 
and go to other jobs like day labor jobs, food service jobs, 
and are doing the same demanding work, and sometimes even more 
demanding. It is the same in other industries where we 
represent workers. I have worked with a lot of our members in 
long-term care that work in nursing homes, and what they tell 
me is their work is extremely physical. You are on your feet 
all day, you are responding to the needs of people who are 
unable to feed, clothe, or bathe themselves because of age or 
poor health. Daily you are lifting people in and out of beds 
and into wheelchairs, turning them around in their beds, 
helping them take their baths. At any time, one slip or fall 
can cause permanent injury, and there are thousands of these 
workers who have back injuries. Nursing home work is some of 
the most dangerous work in America. While most people believe 
that nursing homes are safe facilities, they are actually more 
dangerous for workers than a coal mine, a steel mill, a 
warehouse, or a papermill. Nearly one in five nursing home 
workers will be injured or become ill on the job each year, 
more than twice the rate of other workers.
    So, it is no wonder that by the time nurse's aides and 
janitors get to be 50 or 55, often with more than 30 years on 
the job, they start to pay close attention to what they can 
expect from Social Security. It won't be much. Even unionized 
workers in these industries sometimes don't have any retirement 
benefits or pensions, and those kind of cleaning companies 
aren't known for high pay either, but it can be enough to keep 
them out of poverty when they can't work any more. That is the 
point. There comes a time sooner or later when workers really 
can't physically work any more, and because they aren't a lot 
of other jobs out there for 50--and 60-something building 
cleaners or nursing home workers, these folks are going to need 
Social Security benefits sooner rather than later. That is true 
for a lot of SEIU members like road workers, nurses, and home 
health care aides and many others.
    It is also true for millions of hard-working Americans with 
jobs in manufacturing, transportation, construction, and other 
physically demanding jobs. It is true too for people working in 
jobs where the stress is less physical but no less demanding, 
like social workers and prison guards. The time comes when 
people simply can't keep working. If that time comes before the 
normal retirement age, they stand to collect benefits that are 
about 25 percent lower than their peers who can hold out 
longer. Raising the normal retirement age won't magically make 
everyone able to work longer, it will only move the finish line 
so they must wait longer for their full Social Security 
retirement benefit, or more likely, take a bigger benefit cut.
    When the Social Security Act (P.L. 74-273) was amended in 
1956 and 1961 to allow early retirement, the age was set at 62, 
and a worker starting to collect benefits at that age faced a 
20-percent reduction. Then the 1983 amendments increased the 
full retirement. Once full retirement age reaches 67 in 2022, 
the early retirement reduction will be 30 percent rather than 
20 percent. A lot of working people can expect benefit cuts if 
the retirement age goes up. Most workers already retire before 
reaching full retirement age. About 71 percent of the people 
retiring in 2002 elected to receive early retirement benefits, 
and more than half of all retirees receiving benefits today 
began to draw their benefits at age 62. Only 4 percent waited 
until 66 or later to receive benefits. Probably some of these 
early retirees were people who did well enough in their jobs or 
their investments that they could afford to stop working when 
they felt like it. I know that many of the people who elected 
to start collecting their Social Security checks at 62 or 63 
did it because they had no choice: their aging bodies could no 
longer stand up to the wear and tear of their jobs, and Social 
Security was the only way to keep the wolf from the door. 
Changing the Social Security retirement age would do a great 
injustice to millions of people who have worked the hardest to 
earn a decent rest at the end of their working lives. Thank 
you.
    [The prepared statement of Ms. Long follows:]

  Statement of Valerie Long, President, International Vice President, 
 Service Employees International Union, International Executive Board, 
on behalf of Gerald Hudson, Executive Vice President, Service Employees 
                          International Union

    Chairman McCrery and Ranking Member Levin:
    Thank you for the opportunity to join in this discussion of 
preserving and strengthening Social Security. I appear today on behalf 
of the 1.8 million members of the Service Employees International 
Union, the nation's largest and fastest-growing labor union. SEIU 
members work in health care, public services, and property
services. Our members have elected me to serve them and take 
responsibility for our long-term care division, which represents nearly 
500,000 nursing home and home care workers nationwide.
    The majority of SEIU members do hard physical work, the kind of 
work that leaves you tired at the end of the shift, worn out at the end 
of the week--and ready to retire at the end of decades on the job. I 
got a good sense of that work in the 1970s, when I was a direct care 
worker at the Hebrew Home for the Aged in Riverdale, NY.
    Back then I had no idea that one day I would find myself testifying 
before Congress about work and retirement. But today when I consider 
proposals to provide a secure retirement for ordinary working folks, I 
think back to the people I worked with at the Hebrew Home, and how 
hard-working people like them will be affected by the decisions made 
here in the Congress of the United States.
    Things haven't changed much in the last thirty years for nursing 
home workers and home care workers. The work of long-term care is 
extremely physical: you're on your feet all day long, responding to all 
the needs of people who are unable to feed, clothe or bathe themselves 
because of age or poor health. Daily you lift people into wheelchairs, 
turn them in their beds, help them into a bath. At any time, one slip 
could cause a painful and possibly disabling back injury.
    In fact, nursing home workers have some of the most dangerous jobs 
in America. While most people believe that nursing homes are safe, 
clean health care facilities, a nursing home is actually more dangerous 
for workers than a coal mine, a steel mill, a warehouse, or a paper 
mill. Nearly one in five nursing home workers will be injured or become 
ill on the job each year--more than twice the rate of other workers.
    I could tell you about Charlie Benninger, a nurse aide in 
Pennsylvania who suffered a herniated disk in his spine after six years 
of lifting nursing home residents. Or Ann Davis, whose ongoing back 
pain resulted from breaking the fall of a resident in the Ohio nursing 
home where she worked. Or Olgarene Oliver, still working in pain at age 
61 after 22 years of lifting, turning and supporting residents.
    So it's no wonder that by the time nursing home workers get to be 
50 or 55--often with more than 30 years on the job--they start to pay 
close attention to what they can expect from Social Security. It won't 
be much--even union nursing homes aren't known for their high pay or 
benefits--but it can be enough to keep them out of poverty when they 
can't work any more.
    And that's the point--there comes a time, sooner or later, when 
workers can't work any more. And because there aren't a lot of other 
jobs out there for fifty--and sixty-something nurse aides, these folks 
are going to need their Social Security benefits sooner, rather than 
later.
    That's true for a lot of SEIU members like janitors and road 
workers, nurses and home health aides, and many others. It's also true 
for millions of hard-working Americans with jobs in manufacturing, 
transportation, construction, and other physically demanding jobs. It's 
true, too, for people working in jobs where the stress is less physical 
but no less demanding, like social workers and prison guards. The time 
comes when they simply cannot keep working.
    If that time comes before the ``normal'' retirement age, they stand 
to collect benefits that are about 25 percent lower than their peers 
who can hold out longer. Raising the ``normal'' retirement age won't 
magically make anyone able to work longer; it will only move the finish 
line so they must wait longer for their full Social Security retirement 
benefit, or, more likely, take a bigger benefit cut.
    When the Social Security Act was amended in 1956 and 1961 to allow 
early retirement, the age was set at 62, and a worker starting to 
collect benefits at that age faced a 20 percent reduction. When the 
1983 amendments increased the full retirement age, no change was made 
in the age for early retirement. Once full-retirement age reaches 67, 
in 2022, the early retirement reduction will be 30 percent, rather than 
20 percent.
    A lot of working people can expect benefit cuts if the retirement 
age goes up. Most workers already retire before reaching full-
retirement age. Seventy-one percent of the people retiring in 2002 
elected to receive early retirement benefits. And more than half of all 
retirees receiving benefits today began to draw their benefits at age 
62. Only 4 percent waited until age 66 or later to begin receiving 
benefits.
    Probably some of those early retirees were people who did well 
enough in their jobs or their investments that they could afford to 
stop working when they felt like it. But I know that many of the people 
who elected to start collecting their Social Security checks at 62 or 
63 did it because they had no choice: their aging bodies could no 
longer stand up to the wear and tear of their jobs, and Social Security 
was the only way to keep the wolf from the door. Changing the Social 
Security retire-

ment age would do a great injustice to millions of Americans who have 
worked the hardest to earn a decent rest at the end of their working 
lives.

                                 

    Chairman MCCRERY. Thank you, Ms. Long. Ms. MacGuineas.

  STATEMENT OF MAYA C. MACGUINEAS, PRESIDENT, COMMITTEE FOR A 
RESPONSIBLE FEDERALBUDGET, AND DIRECTOR, FISCAL POLICY PROGRAM, 
                     NEW AMERICA FOUNDATION

    Ms. MACGUINEAS. Thank you. Mr. Chairman, Members of the 
Subcommittee, for having me testify. It is a privilege to 
appear before you. Since Social Security began, life 
expectancies have grown while birth rates have declined, 
leading to a work force that will grow more slowly than the 
retired population, and an ongoing decline in the worker to 
beneficiary ratio. Thus, the underlying premise of an inter-
generational pay-as-you-go transfer system has actually been 
turned upside down. In many ways, Social Security reform is a 
numbers game. We have to decide what revenues to increase and 
what benefits to reduce. We have to decide on the timing of 
these changes, and we have to decide who will be affected and 
who will be protected. The more people we protect, the more 
others will have to be affected. When it comes to dealing with 
the demographic and labor force challenges, there are some 
sensible policies that could have dynamic positive effects 
beyond just their effect on Social Security solvency.
    A sensible place to start is building adjustments into the 
Social Security system that reflect demographic changes. 
Longevity indexing is one such adjustment. Under longevity 
indexing, benefit levels would be adjusted based on projected 
increases in life expectancy. As life expectancies continue to 
grow, the amount of the annual benefits would be lowered to 
balance out that benefits would be collected over a longer 
period of time. So, benefits would still increase from one 
cohort to another due to wage indexing. Whereas now, each 
subsequent cohort gets a raise from wage indexing and longer 
life expectancies, that double bump up would be reduced. This 
change would offer more flexibility than increasing the 
retirement age, and it comes with less political baggage. 
Importantly, the changes would be made automatically, freeing 
Congress from having to continually make the tough choices of 
when to adjust benefits.
    Another option is something I would call progressive 
longevity indexing, and this option would use more detailed 
life expectancy projections, broken apart by economic group, 
reflecting that high-income individuals are living increasingly 
longer than those with lower incomes. Progressive longevity 
indexing would undo some of the disproportionate gains that are 
going to the better off. Like longevity indexing, the change 
would do nothing to make cohorts worse off on a lifetime basis 
than those that came before them. An additional approach to 
adjusting benefits is to find ways to encourage workers to 
remain in the workforce longer, thereby increasing the revenues 
they pay into the Social Security system and decreasing the 
time period over which they collect them.
    The effects of the higher economic contributions and 
keeping people engaged in productive work for longer would be 
significant. One option would be to tie full retirement 
benefits to a set number of years of work rather than a set 
retirement age. For instance, workers could be entitled to full 
benefits after 40 years of contributions, which would allow 
somebody who began working at age 20 and worked straight 
through, to retire at 60, while somebody who may have spent 
more time in school or out of the work force would receive full 
benefits at a later age. People would still be able to retire 
earlier, but their benefits would be reduced accordingly, 
reflecting their fewer years of contributions.
    Another option would be a late retirement bonus. It is well 
established that people prefer lump sum payments to annuities, 
even when the value of the annuity would be higher. By allowing 
workers to choose to take some of the larger benefit they would 
have accrued from their additional years of work in the form of 
an up front payment, we could encourage people to work for a 
bit longer. Perhaps the most important change we can make is 
developing more flexible workforce options for workers who want 
to remain in the work force beyond the retirement age. With 
good reason, the idea of gradual retirement and productive 
aging is becoming more popular. Finding new ways to allow for, 
and encourage, flexible work environments will be key in both 
helping the solvency of the Social Security system and 
addressing the wider problems of labor market shortages.
    Reducing the many biases that exist against part-time work, 
both in terms of compensation and perception, will be key. For 
instance, allowing workers to begin collecting from their 
private pensions while participating in phased retirements 
would be one option. The solution probably does not lie in 
using mandates to force businesses to change or using the over 
utilized tool of tax credits to encourage them to do so, but 
instead, the combination of the mass exodus we are about to 
experience from the labor pool, and the many benefits of 
keeping talented workers active provides a win-win option for 
businesses and individuals.
    Interestingly, I think there is a tremendous opportunity 
here for the AARP and work-family communities to work together 
in helping make transparent what kind of more flexible work 
conditions really help people choose to stay in the workforce 
for longer. I am encouraged by the choice of the topic of 
today's hearing. Both longevity indexing and more flexible work 
conditions offer fair and sensible options to help the Social 
Security system. None of the choices we confront as the result 
of an aging society are simple, and the changes I have 
mentioned today alone will not be sufficient to fix Social 
Security, but they are a good place to start in implementing 
long overdue reforms in that they would both help the Social 
Security system, and would also help the economy at large. 
Thank you.
    [The prepared statement of Ms. MacGuineas follows:]

Statement of Maya C. MacGuineas, President, Committee for a Responsible 
    Federal Budget and Director, Fiscal Policy Program, New America 
                               Foundation

    Good morning, Mr. Chairman and Members of the Subcommittee. Thank 
you for the opportunity to testify. It is a privilege to appear before 
the Subcommittee. When Social Security started in 1935, it was assumed 
that each generation would be larger than the previous one, leading to 
manageable costs on individual workers. Nobel Laureate Paul Samuelson 
wrote, ``The beauty about social insurance is that it is actuarially 
unsound. Everyone who reaches retirement age is given benefit 
privileges that far exceed anything he has paid in . . .'' However, 
demographics have changed from what we expected when the program was 
designed. Life expectancies have increased while birth rates have 
declined, leading to a workforce that will grow more slowly than the 
retired population, and a continuation in the decline of the worker to 
beneficiary ratio.
    The first of the seventy-eight million Baby Boomers will retire in 
2008. Many of them will spend as much as a third of their adult life in 
retirement. Over the next half century, the number of Social Security 
beneficiaries will more than double, while the number of covered 
workers will increase by only 22 percent.\1\ Thus, the basic underlying 
premise of the intergenerational, pay-as-you-go, transfer system has 
been turned upside down.
---------------------------------------------------------------------------
    \1\ According to the Social Security Administration, between 2005 
and 2055, beneficiaries will grow from 47 million to 98 million, while 
covered workers will grow from 158 million to 194 million.
---------------------------------------------------------------------------
Table 1


----------------------------------------------------------------------------------------------------------------
                                                          At Birth                          At Age 65
                                             -------------------------------------------------------------------
                                                    Male            Female            Male            Female
----------------------------------------------------------------------------------------------------------------
Actual
----------------------------------------------------------------------------------------------------------------
  1940                                                  61.4             65.7             11.9             13.4
----------------------------------------------------------------------------------------------------------------
  1950                                                  65.6             71.1             12.8             15.1
----------------------------------------------------------------------------------------------------------------
  1960                                                  66.7             73.2             12.9             15.9
----------------------------------------------------------------------------------------------------------------
  1970                                                  67.2             74.9             13.1             17.1
----------------------------------------------------------------------------------------------------------------
  1980                                                  69.9             77.5             14.0             18.4
----------------------------------------------------------------------------------------------------------------
  1990                                                  71.8             78.9             15.1             19.1
----------------------------------------------------------------------------------------------------------------
  2000                                                  74.0             79.4             15.9             19.0
----------------------------------------------------------------------------------------------------------------
Projected
----------------------------------------------------------------------------------------------------------------
  2010                                                  75.4             80.0             16.6             19.2
----------------------------------------------------------------------------------------------------------------
  2025                                                  77.0             81.2             17.5             20.0
----------------------------------------------------------------------------------------------------------------
  2050                                                  79.4             83.2             18.9             21.4
----------------------------------------------------------------------------------------------------------------
  2075                                                  81.3             84.9             20.2             22.7
----------------------------------------------------------------------------------------------------------------
Source: Social Security Administration

    In many ways Social Security reform is a numbers game--we have to 
decide what revenues to increase and what benefits to reduce. We have 
to decide the timing of these changes. And we have to decide who will 
be affected and who will be protected--the more some are protected, the 
more others will have to be affected.
    But when it comes to dealing with the demographic and labor force 
challenges, there are some sensible policies that have dynamic, 
positive effects beyond just their effect on Social Security solvency. 
Let me be clear, I am not advocating that there are any free lunches 
out there--there are not. Social Security reform will require tough 
choices and they should be made sooner rather than later. But smart 
choices will help ease the transitions.
    When Social Security began, workers on average were not expected to 
live to the retirement age of 65 while now they are expected to live 
decades beyond that. Though the retirement age is moving (at glacial 
speed) towards age 67, this change alone will not be close to enough to 
return the ratio of retired years to working years to what it once was. 
Supporting retirees for roughly a third of their adult life in 
retirement would require far greater levels of Social Security taxes 
than we have been willing to contribute.

Changes to Social Security
    A sensible place to start is building adjustment into the Social 
Security system that reflect these demographic changes. Longevity 
indexing is one such adjustment. Under longevity indexing, benefit 
levels would be adjusted based on projected increases in life 
expectancy. As life expectancies continued to grow, the amount of the 
annual benefits would be lowered to balance out that benefits would be 
collected over a longer period of time. If life expectancy increases 
slowed down, the adjustments would slow correspondingly. Benefits would 
still increase from one cohort to the next due to the wage indexing of 
benefits. But whereas now each subsequent cohort gets a ``raise'' from 
wage indexing and longer life expectancies, that double-bump up would 
be reduced. A number of reform proposals have included longevity 
indexing in one form or another as one of their components. This reform 
is not untried; versions of it have been used in Italy and Sweden.
    Longevity indexing can be done in a number of ways. One option is 
to reduce the initial benefit based on life expectancy. Another is to 
modify the 90, 32, and 15 PIA formula factors to reflect life 
expectancy expectations or by some pre-set amount. Generally, proposals 
would rely on the Social Security Administration's projections for life 
expectancy and adjustments would be made on a regular basis. Most 
proposals would exempt disability and some other auxiliary benefits 
from the adjustments.
    This change is similar to increasing the retirement age, but has 
the advantage that it would allow more choice about when participants 
retire, which offers a desirable level of flexibility. Furthermore, 
while increasing the retirement age (both early and normal) is a 
sensible policy, many politicians strongly oppose it. Thus, longevity 
indexing offers a policy with similar benefits but less political 
baggage. A second advantage is that the changes would be made 
automatically, thereby removing the need for Congress to continually 
make the tough choice of when to adjust benefits. Congress could always 
alter the adjustments, but automatic indexation would do much of the 
heavy lifting.
    Another option is something I would call ``Progressive Longevity 
Indexing''. Generally, longevity indexing is based on a single, unisex, 
life expectancy projection. However, one could use more detailed life 
expectancy projections, broken apart by economic group. This approach 
is easily justified by the fact that high-income individuals are living 
increasingly longer than those with lower incomes. Thus, the effects of 
growing income inequality are exacerbated by the growing inequalities 
in life spans. Progressive longevity indexing, which would allow 
benefits to be adjusted by life expectancy expectations for specific 
income groups, would undo some of the disproportionate gains going to 
the better-off. Like longevity indexing, the changes would do nothing 
to make cohorts worse off than those that came before them on a 
lifetime basis.

Labor Force Alternatives
    An alternative or additional approach to adjusting benefits to 
reflect longer life expectancies is to find ways to encourage workers 
to remain in the workforce for longer, thereby increasing the revenues 
they pay into the Social Security system and decreasing the time period 
over which they collect benefits. The positive benefits of such 
policies clearly go beyond their effects on the Social Security system. 
The labor force is projected to grow far more slowly in the future than 
it has in the past. This is true even accounting for higher levels of 
immigration. The higher economic contributions from keeping people 
engaged in productive work for longer would be significant.
    One option would be to tie full retirement benefits to a set number 
of years of work rather than a set retirement age. For instance, 
workers could be entitled to full benefits after 40 years of 
contributions, which would allow somebody who began working full-time 
at the age of 20 and worked straight through, to retire at 60, while 
those who may have spent more time in school or out of the workforce, 
would receive full benefits at a later age. People would still be able 
to retire earlier, but their benefits would be reduced accordingly, 
reflecting their fewer years of contributions. This policy would undo 
some of the bias against workers who are in the workforce for years 
beyond those where they get full credit for their contributions.
    Another option would be a late retirement bonus. It is reasonably 
well established that people prefer lump-sum payments to annuities even 
when the value of the annuity is higher.\2\ Thus, there is an 
opportunity to incentivize people to stay in the workforce by offering 
a lump-sum payment as a reward. For instance, workers who remained in 
the workforce until the age of 70, or for 45 years or more, could be 
offered a small immediate payout upon retirement on top of their 
traditional benefit. By allowing workers to choose to take some of the 
larger benefit they would have accrued from their additional years of 
work in the form of an up-front payment, many would be motivated to 
work a bit longer. You could construct this lump-sum payment so that it 
would actually save money for the Social Security system but still 
serve to encourage workers to work longer.
---------------------------------------------------------------------------
    \2\ Warner, John T. and Saul Pleeter, ``The Personal Discount Rate: 
Evidence from Military Downsizing Programs.'' American Economic Review, 
vol. 91, no. 1, March 2001, p. 33-53. Atkins, Allen B. and Edward A. 
Dyl, ``The Lotto Jackpot: The Lump Sum Versus the Annuity.'' Financial 
Practice & Education 1995. vol. 5, issue 2. p. 107-111.
---------------------------------------------------------------------------
    Perhaps the most important change we can make on this front is 
developing more flexible workforce options for workers who want to 
remain in the workforce beyond the retirement age, but may not want the 
commitment or responsibility of a traditional, full-time job.
    With good reason, the idea of gradual retirement and productive 
aging is becoming more popular. Many workers do not want to shift 
abruptly from a full-time work environment to full-time leisure. At the 
same time, they do want to scale back their time commitments and 
increase the flexibility of their jobs, to allow more leisure time, 
time with the family, flexibility to deal with health issues, etc. 
Similarly, many employers are realizing they are beginning to lose a 
significant segment of their talent pool. This loss of institutional 
knowledge will only grow as the Baby Boomers start to leave the 
workforce.
    Finding new ways to allow for and encourage flexible work 
environments will be a key in both helping the solvency of the Social 
Security system and addressing the wider problem of labor market 
shortages. Currently, part-time and nonstandard workers receive, on 
average, lower hourly wages than do their full-time counterparts.\3\ 
Furthermore, only 14% of nonstandard workers receive healthcare 
benefits compared to 69% of traditional workers in the same jobs.\4\ 
The discrepancies between part and full-time coverage for pensions is 
similar to that of healthcare.
---------------------------------------------------------------------------
    \3\ New America Foundation's Work and Family Program: ``Working 
Families' Catch-22: Inflexibility or Part-Time Penalty.'' April 2004.
    \4\ Ibid.
---------------------------------------------------------------------------
    Reducing the many biases that exist against part time work--both in 
terms of compensation and perception--will help to encourage workers to 
remain in the workforce well beyond when they might otherwise retire. 
For instance, allowing workers to begin collecting from their private 
pensions while participating in phased retirement would be one option 
to induce workers to remain in the workforce. There is a tremendous 
opportunity for advocates of flexible work from the AARP and the work-
family community to work together on this issue. The solution does not 
lie in using mandates to force businesses to change, or using the over-
utilized tool of tax credits to encourage them to so. Instead, the 
combination of the mass exodus we are about to experience from the 
labor pool and the many benefits of keeping talented workers active, 
provides a win-win option for businesses and individuals.
    I would like to conclude by saying that I am encouraged by the 
choice of topic for today's hearing. Both longevity indexing and more 
flexible work conditions offer fair and sensible options to help the 
Social Security system. None of the choices we confront as the result 
of an aging society are simple. And the changes I have mentioned today 
will alone not be sufficient to fix Social Security. But they are an 
excellent place to start on implementing long-overdue reforms to help 
Social Security in that they offer one of the few silver linings in the 
Social Security debate since they would help both the Social Security 
system and the economy at large.

                                 

    Chairman MCCRERY. Dr. Steuerle, I want to start with you. 
Ms. Long brought up the primary objection that I hear to 
increasing the rate of retirement, either early retirement or 
full retirement, and that is, a lot of people work in jobs 
which are difficult physically and they are just simply not 
able to work as long as the rest of the elderly society. How do 
you respond to that? Is there a way we can accommodate that 
concern and yet increase the age of retirement?
    Mr. STEUERLE. I think there is, but I do not want to 
indicate that anything we do here is pure. If you think about 
the system and the way it is indexed, jobs have increasingly 
become less physically demanding over time, and we have 
correspondingly provided more and more years of retirement 
support. If we were to be concerned with the physical demands 
of jobs, we probably should have had many more years of 
retirement support back when jobs were more physically 
demanding and then accommodated fewer physical demands with 
fewer benefits over time. Also, if we look at the data on the 
health reported by people even as old as 65 to 74, the vast 
majority of whom are out of the work force altogether, I 
believe less than 10 percent reported being in poor health and 
less than a quarter reported being in poor or fair health.
    So, there is a very substantial number of people who are 
not, as I say, elderly. They are late middle-aged, and report 
being capable of working longer in the work force. The cost to 
the system of not having them in the work force stretches 
beyond the question of Social Security solvency. I would work 
on reforming Social Security lifetime benefits or on the age of 
retirement even if the system was totally solvent, because if 
we could get more people in the workforce, what we get are 
three big gains: one, we get a higher annual benefit, an 
especially important item for some of those low-income people 
who retire at 62 and find out by the time they are 80 or older 
they do not have enough income. It is not quite the same having 
that same income at 80 as it was at 62. Second, we get more 
revenues for the system, and not just for Social Security. 
Revenues increase throughout all of government. It helps 
relieve all of the other pressures on the budget--on children's 
programs and working family programs. Three, because we get 
more revenues in Social Security for the same tax rate--
assuming you agree to a final tax rate as a compromise, with 
more people working you get more revenues--we actually can 
increase the lifetime benefit across the board for everyone.
    This leaves the problem of how we adequately take care of 
that small minority who actually have very severe physical 
problems. There we have to ask questions, and they are tough 
questions, such as how to structure our Disability Insurance 
program, whose problems we have not really been tackling well. 
As many of you know, we have done a horrible job in that 
program in getting people back to work once we get them on the 
rolls. So, there are a lot of questions we have to address 
there. I think there are also some compromises you can make if 
you are going to increase the normal and the early retirement 
age. By the way, I suggest just dropping that terminology 
altogether and just having an earliest retirement age, and 
making your actuarial adjustments from there. I think there are 
other things we could do with looking at the disability 
payments. I suggest that even if you are not willing to deal 
with the retirement age, you could cap or provide a lower 
benefit up front, say at age 62 or 65. That would actually take 
care of most low-income people because that adjustment may not 
affect what they are eligible to receive in the first place. 
Then back-load benefits more so that most middle, or at least 
upper-income people, cannot get so much cash up front. They 
could wait a little bit longer to get the higher benefit, say 
until they have 12 or 15 years of life expectancy instead of 
for all years of retirement. It is a tough question you raise, 
and I do not want to indicate that I have completely solved it. 
It is just very, very expensive to try to solve a problem for 
what may be 5, 10, or 20 percent of the population, by taking 
100 percent of a population and encouraging them to duck out of 
the work force.
    Chairman MCCRERY. Thank you. Dr. Nyce, you said that if we 
limit our solutions for strengthening Social Security to tax 
increases and benefit cuts, it could create inefficiencies in 
our labor and capital markets that would ultimately impede 
economic growth. Could you expound upon that a little bit? What 
negative effects could result, especially if we have high 
payroll tax burdens?
    Mr. NYCE. In terms of the payroll tax, it essentially 
affects both sides. It affects employees as well as employers. 
It affects employees in the sense that employees see the 
payroll tax as exactly that, a tax, not as a contribution into 
the system. There has been a disconnect between the 
contribution into the Social Security system and the payout 
eventually that they will receive. On the employer side, the 
concern is that employers, if we look around the globe and see 
the case of France and Germany, the high social insurance costs 
in those systems has been an impediment to capital moving to 
those countries. Actually, we have seen capital moving quite 
rapidly out of those countries because of the higher social 
costs. If the option on the table is to increase tax rates in 
the future, we may eventually fall into the same traps as those 
countries.
    Chairman MCCRERY. Just to give us a little more, what has 
been the experience in those countries that have high tax 
burdens to support high social costs? You mentioned capital 
flowing out instead of in.
    Mr. NYCE. Standards of living have been lower.
    Chairman MCCRERY. Standards of living have been lower.
    Mr. NYCE. That is eventually what it would lead to.
    Chairman MCCRERY. What about general employment?
    Mr. NYCE. Unemployment has been much higher as well, and 
there has also been some recent research that higher payroll 
taxes have been linked to lower rates of fertility.
    Chairman MCCRERY. I would like to see that research.
    [Laughter.]
    Mr. NYCE. It is in my testimony. The paper is there for you 
to read.
    Chairman MCCRERY. Good.
    Mr. NYCE. I am not sure how much I believe it, but----
    Chairman MCCRERY. Thank you. Thank you very much. Mr. 
Levin?
    Mr. LEVIN. I don't think I will follow up that question.
    [Laughter.]
    Just a couple of points. Dr. Nyce, I don't think it is 
correct, from my experience, anyway, that workers do not feel 
that their payroll tax is paid for Social Security. I don't 
think that is true. The people I have talked to feel they 
earned their Social Security, and that is part of the 
resistance to change. Also, I think we face this problem. Right 
now the defined benefit plans are becoming less and less 
reliable, and the guaranteed portion, the guaranteed character 
of Social Security, therefore, is becoming more and more 
important. I just warn everybody, as you talk about changing 
the benefit as people grow older. When there is less of a 
foundation for them in their belief, and also in reality for 
lots of them, there is a real problem. As people grow older, 
they are more reliant on Social Security, not less.
    Let me just focus in, and I will start with you, Dr. 
Steuerle. We admire your dedication, your innovations, but I 
think all of us here on this panel, and everybody else in the 
Congress and the White House, had better try to get into the 
shoes of our constituents and ask ourselves: What is it? You 
say it is a middle-aged benefit. I don't think that is the 
perspective of the recipient. They like to think of themselves 
when they are 65, 67, 68 as middle-aged. I can attest to that. 
I just don't think that that really works. So, let me suggest--
I will take a few minutes, maybe some of my colleagues will 
follow up. I was reading these materials, and it says, ``Only 4 
percent waited until age 66 or later to begin receiving 
benefits.'' People have been telling us something by the huge 
proportions who retire early. It has been a rather persistent 
pattern. That statistic, only 4 percent waited--this is in 
2002--until 66 or later to begin receiving benefits, that at 
least is a warning flag to us. Whatever we think here, think 
about what the feelings and reactions and conduct are of 
people.
    You used the words ``putting them off work.'' You used 
``put off.'' I think I heard you correctly. People who retire 
early, we did not put them out of their jobs in most cases. 
Most of these retirements either are because of certain 
conditions or because of their attitude toward their years of 
retirement. It is complicated. So, I just urge you as you do 
your work to not just dismiss what people are doing with their 
feet. They are walking into retirement at age 62 often because 
they have no choice because of various attributes, but in many 
cases because that is what their family wants. Do you 
understand? What are the American people telling us when they 
retire before 65 if it is voluntary? What are they telling us?
    Mr. STEUERLE. Mr. Levin, when I go out and make public 
appearances on these issues and related matters, I present the 
issue as a matter of choices. For instance, if I relate that 
the child poverty rate is much above the elderly poverty rate, 
and I ask people if they really think that having, for 
instance, a 20th year in retirement or a 19th year or an 18th 
year in retirement is the national priority in our budget, they 
almost always say ``no.'' What you are referring to is why we 
choose to retire. Our choice to retire is partly related to the 
fact that we judge when we are old, by past history. We look at 
when our parents and our grandparents were old, and so we don't 
always look at how much data have changed, although even that 
perception, I think, is changing somewhat. You are also 
referring to something that economists often call option value. 
If we are given the option of taking something now, we often 
will take it, even sometimes when it is a bad deal--like in 
some employer-provided plans, when employees get tricked into 
taking bad deals because they get the money up front. If you 
give people a choice to have money now or money later, they 
will often just take the money now. That is what often happens 
when people take the money. At about age 66, by the way, 
whether they retire or not, they are eligible to take the 
money. They will take it, in part, because it is available.
    I don't have to run for office. I don't have to figure out 
how to turn what I consider to be a 50-year political trend 
around. A trend where we spent larger and larger shares of our 
National wealth on giving us more and more leisure in 
retirement. I do try to address the broader public issue of 
what do we really need to do as a society, where are our 
greatest need?. Are our programs really providing us too much 
in the way of some benefits, when we look at lifetime benefits 
at retirement? Are programs dealing with terrorism, are they 
dealing with our kids in the street, are they dealing with our 
educational system, which I think is a failure. I think one 
reason we fail to deal with this last problem is because we put 
so much money in elderly years. I think the public does respond 
when the broader issue is presented as a matter of choice. It 
is not just as if I am coming to the--or, in particular, you as 
an elected official are coming to them and just asking them to 
give up something. You and I are offering them something in its 
stead.
    Mr. LEVIN. My time is up, but I think we have to be very 
careful not to sell people short and consider them irrational 
or they take something just because they are not wise enough to 
wait 2 or 3 more years. People are more rational than that, and 
they are saying something to us by their choices as to 
retirement. We also have to figure that out and not simply 
dismiss it. It is not political. What motivates here, I don't 
know how many of us--I won't say that--need the votes. That is 
not what is motivating us. It is what is true in the real lives 
of people and the choices they make and the choices they want 
to make. Thank you. Thank you, Mr. Chairman.
    Chairman MCCRERY. Yes, sir. Mr. Shaw?
    Mr. SHAW. Thank you, Mr. Chairman. Ms. Long, you mentioned 
the problem of many walks of life and having to retire early 
because of physical disability, such as, I know, nurses in 
nursing homes turning patients or nurses in hospitals turning 
patients. It is a burnout job, and there are a lot of problems 
working until you are 62, 66, or 67, or whatever the retirement 
age is. How much of that, though, shows up in disability 
payments under Supplemental Security Income (SSI)?
    Ms. LONG. I don't know the statistic on that, but the 
discussion reminds me that the work force, working America, is 
getting older, and that industry, the long-term care industry, 
whether it is in nursing homes, assisted living, is going to 
explode in the next few years. That work force is going to 
continually be getting older as we are taking care of older 
people. It just seems to me that part of this debate has to 
bear that fact in mind, for there are people who want to retire 
in dignity and retire before their bodies fall apart. I am sure 
there are some that get disability insurance, just like my 
members, some of them collect workers' comp because, you know, 
they cannot carry the backpack anymore. That is a horrible 
quality of life if you are being forced to wait until age 67 or 
longer before you can retire.
    Mr. SHAW. Well, the present law takes us up to 66, and then 
there is a hiatus there of some 10 years, and then it ratchets 
up to 67. Did any of you all do any research as to what would 
be the effect if you did away with that 10 year hiatus period 
and went straight into just ratcheting it up to 67? Has anyone 
taken a look at that as to what effect that would have on the 
revenue?
    Mr. GEBHARDTSBAUER. They call that the hiatus period, you 
bring it up to 67 much quicker?
    Mr. SHAW. Yes, sir.
    Mr. GEBHARDTSBAUER. It just eliminates about 7 percent of 
Social Security's shortfall. So, it is not a huge effect, and 
the reason is because it only affects people born between 1944 
and 1959, and it only changes their benefits by a little 
amount. So, it is not huge. This gives me a chance to mention 
one other thing. You were talking about ways of addressing the 
concern of people in physically demanding jobs and still be 
able to raise the retirement age. You mentioned SSI, and there 
are also a couple other ways to address it, too. One is, Social 
Security actually has a disability definition that is relaxed 
as you get older. In your twenties, in order to qualify for 
disability benefits, you must not be able to do your job, but 
any job. As one gets older, it gets to the point where it is 
more you cannot do your own job because of education or 
physical abilities, so it is a little bit easier to get a 
disability benefit. So, that is one way of addressing having 
the retirement age go up, but still strategically address the 
issues of people in physically demanding jobs.
    Now, it depends on how far you want to go in this direction 
of tailoring Social Security to each different group, and they 
did that in South America, and eventually they had so many 
different Social Security systems for different groups that it 
got too unwieldy, too complex, and that is one reason why they 
went to individual accounts. So, you do not want to go 
overboard in that area, but that is one way of addressing 
people that are not able to do their physically demanding jobs.
    Now, how about partially disabled people? Maybe they do not 
satisfy the disability rule. Another way to deal with that is 
with pension plans. In the private sector a lot of employers 
that have very physically demanding jobs provide pension plans 
that are bigger and you can commence benefits at younger ages. 
So, for industries where there are physically demanding jobs, 
you can get it at an earlier age. That has always been very 
valuable in the past. Of course, as Congressman Levin 
mentioned, there are fewer and fewer companies that are 
providing these Defined Benefit (DB) plans, so one of my 
responses then would be to encourage companies to still provide 
them. Right now our rules are going in the opposite direction 
of discouraging employers from having these DB, or even any 
pension plan. Some of the ideas could discourage even defined 
contribution plans. We want to encourage them because they can 
address different industries in a flexible way and provide more 
pensions in those areas.
    Mr. SHAW. Mr. Chairman, I agree with Mr. Levin as far as I 
view Social Security certainly as an earned benefit. The worker 
is taxed. There is no question of any discretion as to whether 
to pay that. The courts have said that it is not an asset that 
the Congress can't change. I think the Congress certainly views 
it as a responsibility, and I would certainly say here that I 
feel that it is our responsibility to save Social Security for 
all time. I compliment you for having this hearing. Life 
expectancy now is about 10 years more than it was back when 
Social Security first came online. As Mr. Nyce just said, 
increasing the payroll tax also decreases fertility, and I 
would suggest that maybe you would want to have a whole hearing 
on that. I think we would have complete attendance at such a 
hearing.
    [Laughter.]
    That has got to be a very complex story. I think that we 
should try to work together and get this thing saved. That is 
our responsibility as Members of Congress, to save Social 
Security for all time, and I think it should be retained as a 
guaranteed benefit plan. Thank you. I yield back.
    Chairman MCCRERY. Thank you, Mr. Shaw. Mr. Neal?
    Mr. NEAL. Thank you very much, Mr. Chairman. I think that 
most of us here in the House can draw the distinction between 
Members of Congress who routinely serve into their seventies, 
their eighties, their nineties, and I believe in one case an 
individual who was 100 years old. That is far different than an 
iron worker in the Second District of Massachusetts. I don't 
know many iron workers who work into their sixties, their 
seventies, their eighties, their nineties, and I think that is 
a very important distinction for all of us to draw. Let me, Ms. 
Long, since you raised that very point, direct this question to 
you. Doesn't rising life expectancy make Social Security's 
guaranteed benefits that cannot be outlived and full inflation 
protection and survivor benefits more important than ever?
    Ms. LONG. I am sorry. I did not understand the question. I 
am sorry.
    Mr. NEAL. The idea that you cannot outlive Social Security, 
doesn't that make it more important than ever?
    Ms. LONG. Oh, absolutely.
    Mr. NEAL. For your members.
    Ms. LONG. Absolutely true, and I can't remember which 
distinguished panelist said there were issues with education 
that might outweigh issues of Social Security. I don't think in 
our society it should be an either/or. There are workers in 
this country who deserve to have their kids be able to go to 
good schools, and there are people who deserve to retire in 
dignity. There are more and more folks in the workplace. If you 
look around D.C., buildings are getting built. There are going 
to be workers that clean them. That work is not going away, and 
it is not getting easier. It is not like you have robots 
cleaning these buildings. It is very difficult, demanding work, 
and folks are going to be doing it for years to come. People 
deserve to be able to retire in dignity. I certainly support 
this man's suggestion that maybe you should have a hearing on 
forcing employers to have pension plans. You know, the labor 
movement would love that. So many employers do not, and that is 
just the crux of it. I think that these are hugely difficult 
decisions that you all are making, and I support Congressman 
Shaw saying that it has to continue being something that people 
earn and can have.
    Mr. NEAL. Dr. Steuerle, your point, I understand as you 
have offered it, is well taken about how we distribute dollars 
here in Washington. Isn't there some evidence that at least 
during the last four or 5 years that balance that you spoke of 
in the ideal world really has not been practiced? Because, 
overwhelmingly, benefits here in the last few years have gone 
to the very wealthy. We argue about redistributing wealth. We 
certainly have redistributed it in Washington. It has gone to 
the people in the top income groups. Your question about 
spending more on the needs of children is legitimate, but I 
think one could argue just based upon basic charts and graphs 
that the money here clearly has been directed toward the 
wealthiest Americans.
    Mr. STEUERLE. My dilemma is that if we free up money, we 
free up resources. The question is what is done with it, and to 
be quite honest, I think the fear among those who are 
progressives is that, well, the money would just go for tax 
cuts and not go to meet other needs. The fear perhaps, among 
conservatives, is that the money is freed up and just goes for 
wasteful government expenditures. So, we still have to face 
this dilemma through the political process. I think it is a 
basic fact that the budget process has a bias in favor of 
programs that have built in automatic growth, and in the U.S. 
system--actually in a lot of industrial countries' systems--
that growth is basically in health and retirement. We have 
these systems that grow automatically, faster than the economy. 
They constantly squeeze everything else, and then we face the 
dilemma of what to do. Both parties say, well, I am not sure I 
want to free up the resources because I am not sure I trust 
everybody else to deal with those resources well.
    I cannot tell you how to make that compromise to make an 
appropriate tradeoff, but there is no doubt that there is a 
bias in the political process--in the budget process---in favor 
of systems that have automatic growth. By the way, that 
includes some tax expenditures, too. Those systems that have 
automatic growth absorb most of the resources. They get their 
additional money automatically when every other program does 
not. One of two suggestions in my testimony that has immediate 
implications is to change the defaults in the system. Maybe we 
should have no default system that can grow faster than the 
economy, whether it is a tax cut or tax expenditure or Social 
Security system or Medicare system. That frees up the resources 
and puts back to the electorate to decide year after year how 
to use those additional revenues that come with economic 
growth. That is a wider political question. I cannot get around 
the dilemma: you just cannot maintain these systems that have 
such large automatic growth in them. It is not a viable budget 
in the long run.
    Mr. NEAL. Would you say that the wealthy have done okay for 
the last few years, sir, in America?
    Mr. STEUERLE. Yes.
    Mr. NEAL. Pardon?
    Mr. STEUERLE. Yes.
    Mr. NEAL. Ms. Long, could I go back to you for a second 
because of your members. One of the things we have all had the 
experience of doing here in Washington is--I will get right to 
this, Mr. Chairman, because I know my time has expired--
attending many functions with iron workers and tin knockers, 
and electricians, and others. One of the things you notice very 
quickly are the calloused hands, and you will hear them say, 
particularly the iron workers and the tin knockers, that they 
cannot climb the heights anymore. They do not take early 
retirement because they want to give up what is a decent wage 
base. They take early retirement because they cannot climb the 
iron anymore. That is the fear part of their lives. I think in 
the case of electricians and the tin knockers as well, that is 
a problem that they confront. If you just want to quickly 
respond to that, that would be fine.
    Ms. LONG. I think you are right. You know, I have most 
knowledge about nursing home workers and cleaners, but if you 
talk to building trades workers, laborers, electricians--I 
talked to a guy that works at Amtrak, actually fixes MARC 
trains and the Acela, the brakes, he helped fix those brakes. 
He talked about several of his coworkers who have had to leave 
work because they have to climb up on the trains, and they 
cannot do it anymore. You know, people that are in those 
physically demanding jobs are not talked about a whole lot. 
There are more and more of them in our society who do not know 
what they are going to do based on the choices that we are 
deliberating on today.
    Mr. NEAL. Thank you. Thank you, Mr. Chairman.
    Chairman MCCRERY. Mr. Johnson?
    Mr. JOHNSON. Thank you, Mr. Chairman. Dr. Steinmeier--and 
put that mike over there close to you--I wonder if you could 
discuss the issue you raise in your testimony about high-wage 
legal immigrants and that they get disproportionately higher 
rates of return from Social Security. I presume you are talking 
about H1-B visas and that sort of thing.
    Mr. STEINMEIER. Well, the question is how the formula 
works. It is a progressive formula with 90 percent of the first 
dollars of earnings and then 32 percent and 15 percent. The 
average earnings is taken by adding up the highest 35 years. If 
you don't have 35 years of earnings, zeros are added in the 
average. So, if you have somebody who has been in for 10 years, 
he may have been earning $60,000 a year, but his average 
earnings over the 35 years with all the zeros looks more like 
$17,000 to $18,000, and the benefit formula is arranged to 
treat somebody like that very well relative to the tax they 
have paid.
    Mr. JOHNSON. That is right, but most of those guys are high 
income, too, higher than what you are talking about.
    Mr. STEINMEIER. They are high income. The problem is that 
the system is treating those workers as low-income workers, 
when, in fact, they are high-income workers.
    Mr. JOHNSON. You also, all of you, are talking about lump 
sums, for goodness sake, as if that is a bad deal. You know, I 
agree with you. I would take the lump sum, too, if I had the 
opportunity. Most of the plans that I have seen call for an 
annuity to forestall at least part of that. Would you all like 
to comment on that?
    Mr. STEINMEIER. The work we have done assumes that you will 
be forced to annuitize up to some minimum poverty level, and 
what we are really talking about are lump sums beyond that. 
There is a wide variety of individuals in the country. Some of 
them are very farsighted, and some of them are not very 
farsighted. What our model is showing is that a lot of people 
who are not so very farsighted, if lump sums are available, 
will probably take them and run.
    Mr. JOHNSON. Then live in poverty.
    Mr. STEINMEIER. Or retire, and then they will be----
    Mr. JOHNSON. Yes, and not have the same amount.
    Mr. STEINMEIER. Yes.
    Mr. JOHNSON. Mr. Gebhardtsbauer, you discussed making 
pension law and Social Security law consistent. Social Security 
full benefits are going up at age 67. Medicare eligibility is 
65. Many employer pensions offer full benefits at 62 or 
earlier. You suggest allowing the employers to keep their 
retirement age consistent with Social Security. You also raise 
the issue of phased retirement that permits people to collect 
retirement benefits and a paycheck. I wonder if you would 
discuss those two issues a little bit.
    Mr. GEBHARDTSBAUER. Okay. If Congress is interested in 
encouraging more work at older ages, one way to do it is 
something you have already done on the Social Security side--in 
fact, way back in 1983--to say 67 is now normal or it will 
eventually be normal. For company pension plans, the law still 
says you cannot use an age higher than 65 in a company pension 
plan. So, there are mixed signals here.
    Mr. JOHNSON. Do you think we should make that consistent 
with Social Security?
    Mr. GEBHARDTSBAUER. Right. You could allow in pension law 
for company pension plans to also use age 67 so that employees 
realize that, okay, age 67 now is the normal retirement age. I 
think it would change what is in our minds. It may not affect 
retirement dates as much as raising the early retirement age, 
but I think it still would encourage people to think of 67 as 
normal instead of 65. Employers cannot do that now. So, it 
would be good to allow that, but I should note that it would be 
difficult for employers to raise it to 67, too. That would be 
one way to allow them to do it and also give flexibility in how 
they do it.
    On the phased retirement issue, some companies are doing 
it, and there is an Internal Revenue Service (IRS) regulation 
out now that won't allow employers to both pay a paycheck and a 
pension at the same time. Now, the IRS is coming out with a 
proposed regulation that says, okay, if you reduce your working 
period down to half-time, then you can get half your pension 
and half a paycheck. It is very complex, and it would be great 
if it could be simplified a little bit so that employers could 
do that without having to watch whether an employee is changing 
their hours, because as soon as you change your hours, then you 
have to give them more wages and less pension, or if they 
reduce their hours, you have to reduce their paycheck and 
increase their pension.
    So, some of those ideas could really work. I think 
employers are very interested in doing that because the the 
growth in the work force is getting smaller, so I think a lot 
of employers are going to want to retain their older employees, 
and one way to do it is say we will keep you on but maybe not 
full-time, maybe part-time, and they may like doing that, and 
getting a partial pension. So, ways in which Congress can 
encourage phased retirement would be good.
    Mr. JOHNSON. I think we should look at that. Thank you, Mr. 
Chairman.
    Chairman MCCRERY. Mr. Johnson, there is another Committee, 
authorizing Committee, that has a Subcommittee with an 
excellent Chairman that I think could take care of that.
    [Laughter.]
    Mr. JOHNSON. Like I say, we are working on it.
    Chairman MCCRERY. Okay. Mr. Pomeroy?
    Mr. POMEROY. Thank you, Mr. Chairman, and thank you for 
scheduling another very interesting hearing. I really do think 
these questions of longevity get to the heart of what we need 
to keep in our minds as we look at Social Security solvency 
issues or, for that matter, privatizing Social Security. 
Personally, I am terribly concerned about the kind of lifestyle 
people are going to have in their nineties with the increased 
life expectancy they will be enjoying, but, on the other hand, 
the toll that that takes on retirement savings. Dr. Steuerle, I 
am very interested in your comments on lifecycle distribution 
of benefits. Do you want to explain that concept a little bit? 
I noted it in your testimony, but it gets to something I am 
quite interested in.
    Mr. STEUERLE. Well, as I say, my concern about retirement 
age is in many ways independent of the actuarial imbalance in 
Social Security.
    Mr. POMEROY. Yes.
    Mr. STEUERLE. It is partly a question that goes all the way 
back to Public Finance 101 courses, if you want, to designing 
programs to progressively address needs of society. It seems to 
me that Social Security is primarily--skipping over the 
disability part, and focusing on the old age part of the 
system--designed to provide benefits in old age. Going back in 
the history of this country, all the way back to the Civil War 
pensions, there was a sense that, well, at some age, a 
substantial portion of the population would be impaired enough 
that they probably would not be able to work. So, that is the 
point at which we would not use a disability measurement 
system. We would just say, well, you are old enough now, we 
will provide benefits for old-age itself.
    Over time, we have increased the number of years that 
people can receive benefits. If we wanted to provide a stock of 
benefits for people in the last 10 years of life, but then we 
let the system go to 12,13, or 15 or more years and keep 
increasing the number of years that benefits are provided, then 
within that pile of benefits we give, smaller and smaller 
shares are going to the people in those last years of life. 
There is a graph I have in my testimony that shows that it used 
to be that the majority of benefits among men went to people 
with less than 10 years of life expectancy. Now, the vast 
majority of those benefits go to people currently with more 
than 10 years of life expectancy. So, we are taking smaller and 
smaller shares for the people who are really old, which used to 
be one of our measures of need. We are giving larger and larger 
shares to those people who I would define as being closer to, 
or actually in, middle age. There are repercussions not only 
for the progressivity of the system but on the extent to which 
people work. By the way, Mr. Johnson, also on the extent to 
which people save----
    Mr. POMEROY. You can talk about Johnson on Johnson's time.
    [Laughter.]
    Mr. STEUERLE. They retire in their prime saving years. I am 
saying that people now they retire in what used to be their 
prime saving years.
    Mr. POMEROY. I see it in very simple ways. You have a pot 
of dough. You stretch it out longer, smaller incremental 
payments. To have it shorter, more meaningful payments. So, as 
I look at two-thirds of the people accessing their Social 
Security before full retirement age, they are accepting a 
discounted payment. Certainly some absolutely need to access 
that benefit. They are played out. Chairman Thomas spoke of his 
father, a plumber. He said he was used up when he got to that 
retirement age. Two-thirds are not. Some are making a decision. 
They want early access to benefits. I think we need to do a 
better job of explaining the system, that that involves some 
serious tradeoffs. You have a discount for that early access to 
benefits. As the years go up from 66 and 67 that discount is 
going to be even steeper. You get a smaller payment. Well, that 
smaller payment, it may look okay in your sixties, you are 
going to work a little here, and you have some savings 
accumulated there, what about when you are in your eighties and 
early nineties when you are not going to be working and the 
savings are gone? You have got yourself on a real tight little 
payment. Or, for that matter, in the sixties, we do allow 
unlimited earnings in addition to Social Security if you are 
full retirement age. If you are accessing it early, you do not 
have that unlimited earnings opportunity.
    So, you are taking some serious tradeoffs, and with two-
thirds exercising that option, I do not believe everyone fully 
understands that tradeoff. I do worry about that. With my time 
rapidly running here, Mr. Gebhardtsbauer, as we try to deal 
with longer life expectancies, it seems to me that the notion 
of a longevity risk pool reflected in Social Security is 
critically important. A massive pool of Americans, some live 
longer, some live shorter. There is a cross-subsidy within that 
pool. That is the way we are able to absolutely guarantee 
benefits for as long as you live. Now, it seems to me if we 
would privatize Social Security and carve into this pool of 
these private accounts, you would significantly diminish your 
ability to ensure longevity risk for the people of this 
country. Do you have a comment on that? And I see my time has 
elapsed.
    Mr. GEBHARDTSBAUER. I guess it depends on how you set up 
the individual accounts. Some of the proposals do require 
annuities. So, to the extent that it requires annuities, then 
you do spread that pool better. To the extent that you don't 
require annuities, then the people who are going to live a long 
time are more likely to get annuities. The people that are not 
going to live very long won't buy annuities. So, annuities 
become more expensive. So, it is not only more efficient, but 
you use that pooling better if you require everybody to buy an 
annuity.
    Mr. POMEROY. Thank you.
    Chairman MCCRERY. Mr. Ryan?
    Mr. RYAN. Thank you, Mr. Chairman. I came in a little late, 
and, Mr. Steinmeier, you were in the middle of your testimony 
talking about the earnings limit for 62 to 65. I think that was 
your testimony. Am I correct?
    Mr. STEINMEIER. Yes.
    Mr. RYAN. I wanted to ask you, Is it your analysis--and 
anybody else feel free to chime in--that if we removed the 
earnings limit for 62 to 65, that you would, in fact, have more 
people--I am trying to catch this. Did you say more people 
would retire early or less?
    Mr. STEINMEIER. People would retire later, but start 
collecting earlier.
    Mr. RYAN. Earlier benefits. So, you are saying people would 
try and get both benefits. They would get their payments, and 
then they would also be able to work without getting the 
penalties. So, you think that that is adverse toward reaching 
solvency, essentially. Is that what your point is?
    Mr. STEINMEIER. I don't do a lot of work on solvency, but 
they will start collecting the benefits earlier.
    Mr. RYAN. That is what your research has found?
    Mr. STEINMEIER. Yes.
    Mr. GEBHARDTSBAUER. That would happen, yes. If more and 
more people started collecting benefits at 62, it would be more 
expensive for Social Security because when people work beyond 
their 35th year, as Gene was talking about, your benefit does 
not go up as much. You are putting in a full contribution, but 
your benefit is not going up as much. So, we would lose some of 
that.
    Mr. RYAN. Ms. MacGuineas, I wanted to ask you a question. 
You mentioned progressive longevity indexing, kind of a melding 
of the two concepts that have been talked about lately. How 
would that work in your description? Are you talking about 
picking a certain percentile like the progressive indexing, 
30th percentile, and then longevity indexing on top of that 
while freezing the current calculation in place? I guess what 
we are all trying to get here is an accurate measurement for 
those who truly, as you mentioned earlier, those who truly 
cannot work anymore, whose bodies cannot get them into extra 
years of work. How do you find the most accurate measurement of 
doing that? Raising disability eligibility may be one way of 
doing it. I don't know if that is something that workers would 
prefer, going on disability as a part of the retirement 
planning. Would you describe how you would meld the two, 
progressive indexing along with longevity indexing, to try and 
accomplish that end goal?
    Ms. MACGUINEAS. Right. I think a lot of the questions here 
have been focused on that there are a number of tensions 
between different goals that we have. Clearly, we want to find 
a way to resolve the underfunded problems of the system. One of 
the ways that makes sense is to adjust the system in a way that 
reflects the changes in demographics. That said, you want to 
continue to allow for enough flexibility so anybody who cannot 
work would never be required to work. How you create a system 
that allows for both is the real challenge here.
    Mr. RYAN. Right.
    Ms. MACGUINEAS. So, one of the interesting sort of 
innovations, I think, that there could be is we know that life 
expectancy is growing, but we also know that it is growing 
differently for different income quintiles. So, I guess 
quintile would be the way I would think about it. You could do 
it in different ways if you wanted. It happens that many of 
these workers who we are worried about who cannot work for 
longer also have lower-paying jobs and also have lower life 
expectancies. So, it seems rather punitive to say we are going 
to raise the retirement age or do a flat rate longevity 
indexing even knowing that this low-income manual laborer is, 
one, going to have a harder time working longer and, two, more 
likely not to collect benefits for a longer period of time. So, 
if we got a little bit more specific and said, based on these 
different economic quintiles, this is your life expectancy, and 
we are going to adjust benefits accordingly, it is a little bit 
more tailor-made for some of the built-in unfortunate 
inequities that we have because higher-income people tend to 
live longer.
    Mr. RYAN. Let me ask the actuary in the room. Mr. 
Gebhardtsbauer, do you agree with that analysis that on a 
quintile basis--I know that is a little rough, but on a 
quintile-by-quintile basis it does track, as Ms. MacGuineas 
just mentioned? Are life expectancies longer for higher 
quintiles than lower quintiles?
    Mr. GEBHARDTSBAUER. Oh yes, right.
    Mr. RYAN. So, the question here is, actuarially does this 
line up? Ms. Long, what is your impression of that idea?
    Ms. LONG. Obviously we focused--I focused in my testimony 
on, you know, hard-working people who physically cannot do the 
work, and to that extent I would have to agree that you should 
not think there is a monolithic work force that we have in 
society. People who are rich tend to live longer and enjoy life 
better than folks that are digging ditches. I also said in my 
testimony that there are high stressors and other types of 
work. There is social work that is high stress, people who work 
in the criminal justice system. So, I don't know--I have never 
heard the word ``quintiles'' before. I like that word. I don't 
know that they would fit, do you know what I mean? I think that 
there is a way in which we need to look at how many different 
subsections there would be to make sure it is fair for folks 
who put in 30 years of life and want to retire with dignity, 
even if their hands are not calloused or even if their backs 
are not broken.
    Mr. RYAN. I will just close here. I cannot see the clock, 
but I assume it is going out. Under a personal account, not 
only under most personal account plans, you get to choose when 
you want to retire, so you can tailor-make your retirement 
benefit for your particular situation based upon your ability 
or willingness to continue working or not, but also through a 
personal account you have an incentive to keep working because 
under the current system it is the high 3 for your 35 years. 
Under a personal account, every year you keep working you are 
adding to your personal account. You are growing your benefit 
that you will get in retirement. If you want to annuitize the 
whole thing at the end, you will be able to do that under most 
of these plans. There is some level of minimum annuitization 
that occurs, but under a personal account situation it gives 
the worker the ability to custom-make their retirement benefit 
per their particular situation and an incentive to keep working 
if they want to because they keep growing their retirement 
benefit because they are putting more money into the retirement 
system through their personal retirement account. So, I think 
that is one thing that is just not mentioned here. I assume my 
clock is red. I cannot see it from here. It is something that I 
think we all need to think about as one of the solutions to 
fixing this very important problem.
    Chairman MCCRERY. Thank you, Mr. Ryan. I also want to point 
out, I am not averse to looking at some kind of progressive 
longevity index, although, to tell you the truth, I have not 
thought about it much before today. I think we should all 
remember that Social Security benefits are already quite 
progressive. They replace a much higher percentage of a lower-
wage worker's income than a higher-wage worker's income, and 
that is by design. That is to make it progressive. So, any 
index that you apply is going to be applied against an already 
very progressive benefit structure. Yes, Ms. MacGuineas?
    Ms. MACGUINEAS. A quick response, because I think that is 
right, and it is certainly up to the people who designed the 
system how progressive the system should be. My thinking was if 
we do raise the retirement age further, that will actually make 
the system slightly less progressive. This is a way to return 
it even just to the current levels of progressivity if you 
chose.
    Chairman MCCRERY. Yes, I understand that, but if you take 
the longevity index in isolation, do not raise the age of 
retirement, just take that in isolation, then I am not sure you 
want to further make that index progressive. Dr. Steuerle?
    Mr. STEUERLE. Mr. Chairman, I suggest in my testimony, a 
way to get around to this dilemma. My proposal involves meeting 
multiple objectives. To examine the current system, I did a 
study with a member of the SSA using both records and some 
projections. It turns out that Social Security does have a 
progressive benefit formula. Its progressivity is offset for 
people with shorter life expectancies, which would also largely 
be the people who have trouble working longer, by the fact that 
forced annuitization means they get fewer years of benefits. 
So, actually the system isn't all that progressive on net: 
forced annuitization is roughly matched or offset by the fact 
we have the progressive benefit formula.
    What I suggest we do is focus on some level of lifetime 
benefit we would have in the future. We could make sure these 
lifetime benefit packages are of a certain level for people 
with certain lifetime earnings patterns. So, for instance, I 
suggest we bump up a minimum benefit; that helps the people in 
the bottom quintile. Now, I don't think we can define that 
quintile well, quite honestly, in part because there is a big 
difference between women and men. A lot of women fall in the 
low earnings quintile, although they are very healthy. A lot of 
men fall in the lower earnings quintile who are full-time 
workers. There are all sorts of differences here. You could 
make use of lifetime earnings. You could develop a system that 
solved your progressivity problem by looking at lifetime 
benefits, and still adjusted for retirement age. There are ways 
to get around that problem. The mistake is thinking we have to 
change one parameter at a time. We could change three or four 
things at the same time to try to maintain whatever 
progressivity we want in a balanced system.
    Chairman MCCRERY. Thank you. Mr. Becerra?
    Mr. BECERRA. Thank you, Mr. Chairman. Again, like Mr. 
Pomeroy, I would like to thank you for another very good 
hearing on the issues of Social Security. Let me see if I can 
address squarely one question that I think you have to talk 
about in any discussion about retirement age and longevity, and 
that is that increasing the retirement age hurts, by its very, 
nature those who rely on it most. Those are lower-paid, higher-
risk workers. So, any discussion about tinkering in any way 
with retirement age means that you are going to hit folks who 
have had the least amount of time and the lowest amount of 
income to try to prepare for their retirement. Would anyone 
dispute that? Mr. Steuerle?
    Mr. STEUERLE. Again, the problem comes in looking at one 
parameter at a time. Most of the people who have shorter than 
normal life expectancies also have disabilities, they often 
lose out because they don't even make it to 65. You know, the 
difference----
    Mr. BECERRA. If they are not going to make it to age 65, 
chances are they are not going to put enough away in a nest 
egg, whether in a private account or otherwise, to have much in 
retirement anyhow.
    Mr. STEUERLE. If we do something like only increase the 
retirement age, it would proportionally cut benefits slightly 
more for those people who are in the lower earnings group, that 
is correct, slightly more.
    Mr. BECERRA. Okay. So, now----
    Mr. STEUERLE. But if we provide a minimum benefit, we can 
more than compensate for it, that is----
    Mr. BECERRA. Now you are talking about making some 
adjustments. From the get-go, if you start talking about 
tinkering with retirement age, those who you have to worry 
about most are going to be those who are lower-income and in 
the higher-risk jobs. You might find ways to try to accommodate 
that, but the reality is that any discussion about tinkering 
with the retirement age is going to hit modest-income workers 
most who happen to also, as Ms. Long has said, work very long, 
very tough hours, and, therefore, are in most need of something 
that is stable like Social Security.
    Mr. STEUERLE. I am also worried about the old versus the 
young, and by giving more years of benefits we are hurting the 
old.
    Mr. BECERRA. I do not disagree with you, but I am just 
saying if you are going to talk about this issue, you have to 
address squarely the audience that is probably going to be most 
concerned about the discussion, because whether we make 
adjustments, as you indicate, Dr. Steuerle, or not, they are 
the ones that are going to be most affected by any change that 
occurs. If you are higher-income, you do not have to rely on 
Social Security as much. If you are in a less risky job, you 
also don't have to worry so much about dying before you are 
able to take advantage of those benefits for quite some time. 
Let me move to a second question. Does anyone here on this 
panel believe that in any reform of Social Security we should 
cut disability benefits?
    [No response.]
    Okay. I will take that silence to mean no.
    Ms. MACGUINEAS. I better speak up. I think--and, actually, 
I am going to address your first question, too.
    Mr. BECERRA. No, no, no, because my time is focused, please 
just try to address this second question, if you can.
    Ms. MACGUINEAS. I think it is impossible to analyze any one 
change to Social Security in isolation, because the one thing 
we know is that the current system is unsustainable. Some 
changes will have to be made. So, I think in order to evaluate 
the fairness of any change, you need to know what the 
alternative is. It is not the current system. It is other 
reforms. So, I would want to know what other reforms you are 
planning to do.
    Mr. BECERRA. That is a fair answer. I think that is an 
answer that anyone in the panel could have given or anyone 
sitting up here would give, that you have got to consider 
everything. The reason I asked that is because if you are going 
to tinker with the retirement age or reduce benefits somehow 
because of age, then what you are probably doing is making some 
people calculate, have I reached the point in my life when I am 
working, where I am actually physically so incapable of 
continuing my work that I can claim disability benefits versus 
wait till that new higher retirement age? Or, do I continue 
working in a job when I am less able physically, and risk that 
I will find myself truly permanently disabled?
    My concern with, again, tinkering with the retirement age, 
is that you probably start making a lot of folks start to 
think, maybe I had better start claiming those disability 
benefits under Social Security. If that is the case and you are 
shifting people's application for disability versus retirement 
benefits under Social Security, then have we really saved 
ourselves much money in causing people to make that shift 
toward disability payments under Social Security versus 
retirement age? Another question. Unemployment benefits. If we 
require people to work longer in their life, to age 70, 72, and 
we know how difficult sometimes it is for a worker in his or 
her older age who may become unemployed or is laid off, to be 
able to secure relatively similar employment with similar pay, 
and we know the issues of age discrimination that occur 
throughout the country. I know, Mr. Chairman, my time has 
expired, so I will end with this one question. What could the 
effect be on an increased retirement ago on States' obligations 
under unemployment benefits to help cover now workers who have 
to work longer before they can retire, but are finding it very, 
very difficult to find a job to replace the one that they had 
before?
    Ms. MACGUINEAS. I think you raise really important points 
in saying that anything we do to the retirement age will also 
probably affect increased costs for disability and 
unemployment. I think those are both very valid points. The 
only other important factor is that the labor market is going 
to be significantly different in a decade and two decades from 
now because the labor force will be growing at such a slower 
pace, there will actually be some demand-side solutions in that 
employers are going to want to find ways to keep people 
employed for longer because they are going to need more 
laborers than they currently have as more people move toward 
retirement.
    Mr. BECERRA. Although you have seen, in some cases, 
industries where they replace older workers with younger 
workers because the cost of sustaining a younger worker is far 
less than an older worker.
    Ms. MACGUINEAS. Right. Those are some of the kinds of 
policies that we should look at when we are thinking about how 
to encourage people to stay in the workforce in a more flexible 
way for longer.
    Mr. BECERRA. Excellent point, thank you. I know my time has 
expired, Mr. Chairman. If Gebhardtsbauer wants to respond----
    Chairman MCCRERY. Sure.
    Mr. BECERRA. Thank you, Mr. Chairman.
    Mr. GEBHARDTSBAUER. Just really quick. When you ask the 
actuaries at Social Security to price something that raises the 
retirement age, they do price in the fact that more people will 
take disability, and so they reflect that in their costs.
    Chairman MCCRERY. Mr. Brady.
    Mr. BRADY. Thank you, Mr. Chairman. Ms. MacGuineas had a 
great point there. In 20 years, maybe 25, we will be holding 
hearings in Congress trying to figure out ways to find enough 
workers for the jobs that are needed in America. We have got a 
different challenge there. I just wanted to follow up on the 
issue that Paul Ryan raised at the very end about the practice 
today where people don't really relate their years of work and 
wages to their Social Security benefit. They don't see the need 
to work an extra few years because they don't see really any 
payoff in their retirement in Social Security, or at least they 
don't make that connection.
    Several of you have suggested--I like the idea of being 
able to tailor-make your own retirement, to make it higher or 
lower depending on what is right for you and your family. 
Several of you have suggested modifying the benefit structure 
to provide greater rewards at older ages, for example, reducing 
benefits even more for early retirement, and as we know, 55 
percent of our folks choose the early Social Security 
retirement, and providing greater benefit enhancements for 
delayed retirement. In other words, the ability to really 
create a stronger and larger retirement by working those extra 
years of your choice. Any of the panelists, could you describe 
in more detail various options for accomplishing this, for 
back-loading the benefits for those who choose to work longer?
    Mr. STEUERLE. Mr. Brady, I had a few comments in my 
testimony, and I don't want to take too much of your time, so I 
will just refer you mainly to those. It is not just increasing 
the retirement age. One could even do a neutral exchange. For 
instance, if you have a choice between $100 today and $100 10 
years from now, dodging discounting, I could give you $50 today 
and $150 10 years from now. It would be the same lifetime 
benefit package but you would have a substantial incentive by 
having that lower amount up front--to think about whether you 
wanted to work longer. We discussed this a little earlier. A 
lot of people make the choice. They look at age 62, at the 
amount of cash income they have, they look at the wage they 
have, they look at what their taxes are going to be--and they 
say, you know, I am pretty well off--and Mr. Pomeroy raised 
this issue--they say, I am going to retire. Then what happens 
is they retire when most of them have substantial human capital 
and work capability. They retire when they are more likely to 
have a spouse who can help them through some minor impairment 
so they don't need a nurse or somebody else to help out. Yet 
their retirement wages relative to the economy are probably 
going to fall 20 or 30 percent 20 or 30 years from now. The 
price of a practical nurse, for instance, is something that is 
going up in that time. So, they think they are okay retiring at 
62. By the time they hit 85 or 90 they are often in deep 
trouble, and the government sometimes has to come back and help 
them with nursing home and other care.
    We could think of a variety of ways of back-loading 
benefits. Some we could do actuarially. That is, just make 
actuarial adjustments for working longer. Some of them we could 
just do by putting more benefits on the tail end and less on 
the front end. If you are really worried about the low-income 
worker, you do that less for them. You keep some minimum base. 
As I say, I think we want to think long and hard about how we 
protect the low-income person when we do that reform. I think 
there are a variety of ways that you can think about----
    Mr. BRADY. As an alternative to raising the age, you really 
can provide some incentives, you know, for people to 
voluntarily choose.
    Mr. STEUERLE. The one warning I will give you, because I 
have worked a lot with the CBO and the actuaries, is that for 
50 years we have been in this system where a person could 
retire earlier and earlier and younger and younger, I think 
literally that we are in the midst of a multi-decade process of 
turning in the opposite direction. The estimators are going to 
sit there and give you the estimate, you know, when Chairman 
McCrery is sitting there with Mr. Levin and they are actually 
trying to add up the numbers to get Social Security balanced. 
The estimators are reluctant to give you huge labor supply 
effects even though, as Maya has suggested, and I think a 
number of us agree, there is a substantial potential for labor 
demand there. You may not get it right up front when you 
actually do the first step. It is almost like we are saying: 
free up the system, make it much easier for people to work 
longer. We think if the flagship, Social Security, starts 
turning in that direction, then the private pension systems, 
the employers and others, will start turning in that direction 
too. I have to confess, you know, we don't fully know.
    Mr. BRADY. Ms. MacGuineas, you have a----
    Ms. MACGUINEAS. Yes. One of the challenges here is that if 
you think about how you would ideally structure some of these 
changes, you might say, okay, we are going to give you a little 
bit larger of a bump up in your Social Security benefits if you 
choose to retire later, but you will still have the 
flexibility. However, if you do that, you end up having a 
situation where you helped the labor market incentives, because 
people are going to stay in the labor market longer, but 
actually you could potentially hurt Social Security solvency 
because people will then collect larger benefits. You also run 
the risk of some adverse selection, where low income people 
won't take it as much, knowing that they are not going to live 
as long, and high income people will. So, you may have even 
opened up the problem a little bit more.
    The challenge I was trying to meet when I was writing about 
kind of a lump sum bonus, where instead of doing an actuarially 
fair increase, you would do one that is unfair, that gives 
people less than they would have deserved for their additional 
contributions, but you would give it in the form of a lump sum, 
which as long as there is the underlying Social Security 
annuity, as long as people's basic benefit is still there and 
indexed for inflation and lifetime, you might, instead of 
giving them an additional annuity, give them a little bit in a 
lump sum which will prove enticing enough to that they will 
stay in the labor force for a little bit longer, but won't 
drain the Social Security system of additional revenues beyond 
what would be fair.
    Mr. BRADY. The year-end bonus versus the small amount in 
each paycheck over the years. Mr. Chairman, on a personal note, 
I have an interest in this discussion because, as you know, I 
have a 3 year old, and I figured out to pay to get them through 
college I have to work 'till I am 100.
    [Laughter.]
    So, that is why I have a real interest in incentives on the 
back end of Social Security. Thank you, Mr. Chairman.
    Chairman MCCRERY. Good question, Mr. Brady. Ms. Tubbs 
Jones.
    Ms. TUBBS JONES. Thank you, Mr. Chairman. Good afternoon, 
ladies and gentlemen. Thank you for appearing before our panel. 
I don't know where I want to begin. It has in fact been 
government and private industry that has encouraged people to 
retire early by offering buyout programs because they wanted 
the older worker to get out to bring the younger worker in. Is 
that true?
    Mr. GEBHARDTSBAUER. That was true in the seventies 
particularly because there were a lot of new workers.
    Ms. TUBBS JONES. It is not happening in the eighties, and 
the nineties, and 2000?
    Mr. GEBHARDTSBAUER. I don't know that it is happening quite 
to the same extent, but it is still happening.
    Ms. TUBBS JONES. So now you are offering----
    Mr. STEUERLE. It will happen less in the future because 
there will be fewer and fewer people coming in, but huge 
numbers of retirees going out.
    Ms. TUBBS JONES. I don't know what is going to happen in 
the future. Who knows what is going to happen? Perhaps we will 
lower the tax, you know, we will repeal the tax that gave the 
top 1 percent all the money we needed to operate Social 
Security and Medicare benefits, and we will be better off than 
we are today. Be that as it may. Was it you, Dr. Steuerle, who 
said that there are less people working in hard labor jobs now 
than previously? Was that you, Dr. Steuerle?
    Mr. STEUERLE. Yes. We tried to figure out what is a 
consistent data source--this is just a question of how can you 
find a consistent measure over time----
    Ms. TUBBS JONES. Hold on. I know you can give me a great--
--
    Mr. STEUERLE. In my testimony, physical demands in jobs 
have gone down.
    Ms. TUBBS JONES. Have gone down. So, let us talk about a 
service worker's job. Those physical demand jobs are still very 
serious, right? A janitor's job is still a very serious demand, 
hard work?
    Mr. STEUERLE. There are a lot of jobs that have severe 
physical demands and----
    Ms. TUBBS JONES. If they have gone down, what percentage of 
the jobs are still jobs that have high physical demand? Just 
roughly, you don't have to give it----
    Mr. STEUERLE. There is a chart in my testimony.
    Ms. TUBBS JONES. Roughly tell me what the chart says.
    Mr. STEUERLE. I don't remember off the top of my head. I am 
sorry. Let's see, the share of U.S. workers in physically 
demanding jobs in 1950 was a little over 20 percent. By 1996 it 
dropped down to about 7 percent. This is defined by the amount 
of weight they have to lift on the job.
    Ms. TUBBS JONES. Truly--there are no doctors at the table--
but we understand that people who are not lifting weights do 
demanding jobs. A golfer even has a demanding job with swinging 
that club and then a lot of them end up with back trouble as a 
result of that.
    Mr. STEUERLE. Yes, of course.
    Ms. TUBBS JONES. So, that is not really a true reflection 
of what a demanding job is, just solely lifting weight.
    Mr. STEUERLE. It is a reflection that the physical demands 
of jobs have gone down. It doesn't mean there are not physical 
demands on jobs.
    Ms. TUBBS JONES. What I am saying to you is--your statement 
was that lifting weight was the way in which you determined 
whether a job was a physically demanding job. That is what you 
just said, is it not?
    Mr. STEUERLE. That is correct, but----
    Ms. TUBBS JONES. I am saying to you that there are other 
physically demanding jobs where you don't have to lift weight 
and it is not a true reflection of physically demanding jobs 
that are in our government or in our country today. Well, 
anyway, you don't want to answer the question, so I am going to 
move on. You understand what I am saying to you, sir, and I am 
sure everybody listening----
    Mr. STEUERLE. There are many jobs with physical demands, 
yes.
    Ms. TUBBS JONES. Yes. That would require workers or would 
put workers in a position that they need to retire early. For 
example, my father carried bags for United Airlines for 40 
years. Fortunately, he was able to retire at 62 and is till 
living at 85, but he is an unusual person in the midst of 
people who work in that type of job and have the opportunity to 
live that long that are African-American males. You would agree 
with that, wouldn't you, sir?
    Mr. STEUERLE. Yes.
    Ms. TUBBS JONES. Okay, thank you. I can't remember who 
mentioned this, but about having a family that is capable of 
having a spouse that can take care of them while they are 
having minor illnesses, and then that may even lower the cost 
of health care for older--was that you also, Dr. Steuerle?
    Mr. STEUERLE. I was pointing out that if we want a system 
to progressively meet people when their needs are greater, 
their needs are often greater when they are single than when 
they are married because the cost of taking care of their 
impairments often rises.
    Ms. TUBBS JONES. Are you aware of the fact that the cost of 
the health care of a caretaker is aggravated as a result of 
being required to take care of a spouse? In other words, the 
caretaker's health diminishes as great as the person that they 
are taking care of when they are at that other end of the age 
spectrum.
    Mr. STEUERLE. Sure, of course.
    Ms. TUBBS JONES. So, we need to factor that in when we 
begin to talk about whether that is a good ideal for deciding 
what happens with workers or adjusting their income.
    Mr. STEUERLE. Ms. Tubbs Jones, I think we are on the same 
page--I am trying to figure out how we can design a system so 
it is progressive, and, for every dollar we spend that dollar 
goes where needs are greatest. I think we are aiming at the 
same target.
    Ms. TUBBS JONES. I want to be progressive also, but I am 
just trying to point out to you some of the things that you are 
thinking of as progressive are truly not progressive because 
people, older people trying to take care of other older people 
diminished their health even if it enhances the health of the 
person they are taking care of. I am out of time. Thank you, 
Mr. Chairman.
    Chairman MCCRERY. Thank you, Ms. Tubbs Jones. Mr. Rangel, 
would you like to inquire?
    Mr. RANGEL. Thank you, Mr. Chairman.
    Chairman MCCRERY. My pleasure.
    Mr. RANGEL. I really want to thank the witnesses because 
you can see we are going to need a lot of help if we are going 
to resolve this very complicated problem. This is especially so 
if we recognize that you either have to raise taxes, which is 
off of the table; we have to either extend the retirement age 
or cut the benefits. Of course, our job is basically to try to 
get solvency in terms of the long term so that we don't have to 
revisit that. To me this screams out for Republicans and 
Democrats to be working together because it is nothing on this 
but pain, pain, pain. The only way any party can do it, if our 
constituents believe that we did the best that we could by 
them. The difficulty we have is that--do any of you believe 
that it is necessary to have private accounts on the table and 
to be a part of the solution in order to resolve what is 
basically our mandate, and that is the solvency problem, and 
that would be the person, if any, that I would want the talk 
with.
    [Laughter.]
    Ms. MACGUINEAS. I guess I will take a quick stab at this. I 
feel like I am answering all the unpopular questions, and I am 
a little worried about opening up this topic in this hearing.
    Mr. RANGEL. Please let me make it clear that you guys 
should not have the burden of the political aspects of it. You 
are experts in what you do. This is not going anywhere, and I 
guess all of us want to be able to walk away from this saying 
that we made the contribution because we were looking for a 
solution. So, if you agree it has to be bipartisan, then you 
have to be able to say that you believe we cannot resolve this 
unless we do have private accounts.
    Ms. MACGUINEAS. That is not exactly why I am making the 
point. Here is what I would say.
    Mr. RANGEL. That is exactly the question I am asking. Can 
we resolve this, in your opinion, without having private 
accounts on the table? Not whether you think we should have it. 
I think we should have taxes on the table. The President said 
strike that out. I don't think increases in taxes is on the 
table, so I don't bother with it. I am asking you, as a 
professional, do you think we can reach the goal of long-term 
solvency if we sacrificed putting private accounts on the 
table?
    Ms. MACGUINEAS. I heard a couple of questions. So, yes, I 
think you can achieve long-term solvency without putting 
private accounts on the table.
    Mr. RANGEL. That was my only question.
    Ms. MACGUINEAS. Well, but I don't--well, I guess I heard a 
couple different questions. I think in order for a bipartisan 
solution to happen, which I agree with you completely is what 
needs to be there because there has to be a lot of cover 
because there are a lot of difficult choices. Probably the best 
place is to start with everything on the table. That includes 
private accounts and that includes tax increases. Second, I 
think the role of private accounts can be--is required if you 
want two things, solvency and prefunding or building up savings 
in order to have the money there for Social Security. So, 
changes that we would make now instead of postponing them all 
to the future. If you think private accounts are a replacement 
for trust funds as a way to prefund the system, then they play 
a critical role.
    The key that I would put there is that it is not a 
replacement for finding ways to pay for those private accounts. 
I do believe that you also have to put taxes and spending 
reductions on the table in order to create the private accounts 
which would prefund the system. So, I am not sure if that 
answered your question, but I think it is best to start with 
everything on the table and the understanding it must be 
bipartisan, but the realistic understanding, most importantly, 
that none of these choices are easy. They come down--the tough 
policy choices on the revenue side, on the spending side and 
figuring out the fairest distribution of those choices and the 
timing so that we can spread the costs over generations and 
hopefully do it in a way that helps the economy.
    Mr. RANGEL. I appreciate that answer. Does anyone else, on 
the question of private accounts, because I support private 
accounts as an incentive for savings. I just don't support it 
in connection with Social Security. I support having thrift 
accounts like we in the Congress, but we in the Congress don't 
have--that doesn't have anything to do with our pension or our 
Social Security. So, it is not that I am against private 
accounts and incentives for savings. I want to see whether we 
can do something with Social Security, and if there is anyone 
who believes that unless we put private accounts on the table 
that we can't do it, then I just would want to hear from them, 
and I respect your answer.
    Ms. LONG. I guess I would say for the workers that we 
represent, low-wage workers, have nothing to depend on except 
for Social Security. There are not annuities. There are not 
pensions for the vast majority of low-income workers. A lot of 
folks don't have savings. So, to the extent that personal 
accounts would replace Social Security, I don't think that is 
fair to folks who put a lifetime into retirement--for 
retirement.
    Mr. STEUERLE. Mr. Rangel, I would guess--this is going to 
be very short--that if you ask every member of this panel, we 
would think of some ways of combining some private pension 
reforms that might have aspects of personal accounts in them as 
part of a longer term solution to the problems we are 
addressing. But, no, you don't need to have the private 
accounts just to reach solvency in Social Security if that is 
all you are aiming for.
    Mr. RANGEL. Thank you, Mr. Chairman.
    Chairman MCCRERY. Thank you, Mr. Rangel. I think Ms. 
MacGuineas answered your question very well. That is just about 
the way I would have answered it. The fact is, technically we 
can fix the solvency problem of Social Security without 
personal accounts or private accounts, and according to the 
Social Security actuaries, we can fix the Social Security 
solvency problem totally with personal accounts or private 
accounts, with no cuts in benefits, no change in the benefit 
structure, no increase in the retirement age. So, yes, it can 
be fixed with or without personal accounts. Whether they should 
be on the table is a political question that only we can 
ultimately answer, and my hope has been all along that we would 
bring everything to the table, as Ms. MacGuineas suggested, and 
so far that hasn't been the case.
    More to the theme of this Subcommittee hearing--and Mr. 
Ryan raised this briefly at the end of his questioning, but I 
would like to give the panel a chance to respond more 
thoroughly--and that is, can having a personal account 
contribute to a person staying in the work force longer? In 
other words, right now Social Security is only on your 35 years 
of highest earnings, so, if you have already been in for 35 
years you have got those earnings clocked, there is not much 
incentive, if you can get that benefit right now, to stay in 
the workforce. Your benefits are not going to get appreciably 
higher unless you expect to make a whole lot more money in the 
next few years than you have over your working life. If you 
have a personal account to which you are adding and watching it 
grow, and you know it is going to grow every year that you stay 
in the work force and add to it, wouldn't that be an incentive 
to staying in the workforce?
    Mr. LEVIN. No guarantee that it would grow.
    Chairman MCCRERY. Ms. MacGuineas? Let me get the panelists 
to respond.
    Ms. MACGUINEAS. Generally I would answer the question 
certainly as yes. My personal belief is that in order to fix 
Social Security we are going to have to do something on both 
the revenue side and the benefit side. I also believe that 
individual accounts, if paid for, will prove to be far superior 
to the existing trust fund as a way of prefunding the system. 
In order to pay for them I think one of the policies to look at 
is to increase revenues. The reason I think you look at that 
specifically is that a revenue increase that goes to 
traditional Social Security system will have the effects more 
similar to a tax, where it will have more--it will create more 
inefficiencies in the labor force and for employers, on the 
employer side, whereas if those contributions go directly into 
people's accounts it is less likely to have the negative 
economic effects. I generally think that will lead people to 
staying in the labor force longer.
    There is one risk, which is when you see your account and 
you see that full of savings, you will actually feel richer and 
you will therefore retire more quickly. So, I think that one 
thing that is very important is to make sure we show people the 
value of their accounts in terms of annuities. Whether you 
require annuitization or not is another choice, but to say the 
value of this $150,000 account will get you X dollars a month, 
so that people don't make the mistake I was talking about 
before, which is choosing that lump sum and overvaluing it. So, 
as long as we make the real value transparent, I think it will 
serve as a way to keep people in the work force for longer.
    Chairman MCCRERY. Any other panelists want to comment on 
this? Yes, Dr. Steinmeier.
    Mr. STEINMEIER. The Social Security already increases 
benefits if you delay retirement, and that is possible. You 
don't have to collect them the minute you retire. You can leave 
them in there and opt to collect them later. Almost nobody 
does, so that suggests that there is not much effect to be had 
there. As I said in my earlier testimony, when you start to 
permit any kind of lump sums, then you are going to have a 
certain segment of the population that is going to take that 
money, and if it is tied into retirement, they may well retire 
earlier to do it.
    Mr. STEUERLE. There is some empirical evidence--and again, 
this can be interpreted two different ways--that when people 
have defined contribution plans, that is, Individual Retirement 
Accounts (IRAs), personal accounts, 401(k)s or whatever, that 
if they look at the value of a 401(k) account versus the value 
of a defined benefit pension system that has an annuity, they 
are more likely to work longer in the first case. That is, on 
average people with defined contribution plans work about 2 
years longer than people with defined benefit plans of the same 
value.
    Now, you can consider that two different ways. You might 
worry about the risk that is associated with the defined 
contribution account if you haven't annuitized it, so there 
could be a increased level of risk. Yes, there does seem to be 
some evidence, that in comparing one plan versus the other 
people work longer when they are absorbing a little more of the 
risk. They are recognizing a little more what they have to do 
in retirement, again, given two equal cost systems.
    Mr. GEBHARDTSBAUER. We have had some experience over the 
last 10 years in this area on assets and defined contribution 
plans, and when the defined contribution plans did really well 
and the assets went up a lot, then more people did retire at an 
earlier age. In fact, I am on the Board of the United Methodist 
Church's pension plan. Some people's assets did so well, they 
could get more than their salary, so they definitely retired 
earlier. Now that assets are not doing well, more people are 
remaining in the work force. You can see the labor force 
participation rates have actually gone up at ages 65 because 
their accounts aren't doing as well. So, it can affect you in 
different directions depending on how the markets go, and also 
depending on whether employers are willing to hire or not 
willing to hire more people.
    Chairman MCCRERY. Thank you. Mr. Becerra, did you have a 
comment?
    Mr. BECERRA. Mr. Chairman, I just wanted to make sure we 
were clear in terms of Social Security. If I understand Social 
Security correctly, there still is an incentive to work beyond 
the 35 years because since Social Security averages your 
highest 35 years, your initial years of work when you are young 
are probably paid at a lower rate than your final years when 
you are getting close to retiring, so the more years you put 
in, the better the chance is that you are going to knock out 
the years when you were younger working and earning less and 
averaging out only the best 35 years of whatever amount of 
years you worked so that you end up with a higher benefit after 
you retire. I just wanted to clarify that. There is an engaging 
discussion on just the whole issue.W
    Chairman MCCRERY. I think intuitively, you know, one might 
conclude that, but the evidence suggests otherwise.
    Mr. LEVIN. Let me just quickly comment.
    Chairman MCCRERY. Sure.
    Mr. LEVIN. If you want to make the benefit more and more 
risky, people will work longer if the risk turns out to be 
heavy, very true. If people--I think a lot of people who are 
losing their pensions today are going to work longer, for sure. 
My guess is that people who work for United who are suffering 
these cuts will work longer than if the defined benefit had 
really been there. So, changing from a defined benefit to 
defined contribution may have people work longer because they 
are poorer. One of the strengths of Social Security is that 
there isn't that risk, and I would hope that our main effort to 
get people to work longer would not be to increase the risk of 
their retirement program.
    Chairman MCCRERY. Well, if personal accounts were on the 
table, we could discuss ways of perhaps combining guaranteed 
benefits with the prefunding that would take place in personal 
accounts and solve your concern.
    Mr. LEVIN. Well, we will--I guess they called the vote, so 
we would not continue this, so we had better----
    Chairman MCCRERY. Yes. Ms. Tubbs Jones.
    Ms. TUBBS JONES. Just very quickly. I met yesterday with 
several leaders of banking institutions in my community, and 
two of them actually have cash benefit plans that they offer to 
their retirees, and they asked me to come back to the Congress 
and remind Congress that we are still looking, they are still 
looking for us to help them know specifically what the 
regulations are going to be with regard to cash benefit plans 
so they can understand what they are supposed to do under those 
regulations. So, I just want to put that on the record so I can 
tell my constituents I did what they asked me to do.
    [Laughter.]
    Thank you, Mr. Chairman.
    Chairman MCCRERY. Thank you, Ms. Tubbs Jones. Thank all of 
the Members for coming today and participating. I want to thank 
our panelists particularly for your testimony. It was very 
good, and appreciate your patience in answering our questions. 
Thank you. The hearing is adjourned.
    [Whereupon, at 4:06 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

    Statement of Dr. Marilyn Bean Barrett, Nantucket, Massachusetts

    Thank you for the opportunity to share my experience as you 
consider this important topic. I am 58 years old. I grew up in New York 
State and have taught in Washington, DC and Massachusetts for 36 years. 
My Social Security history is this:
    In 1964, I got my first small high school summer secretarial job 
and began contributing small amounts each year to Social Security. 
During college from 1965-69, I had a job at a public library and at my 
father's company, Crouse-Hinds, Co. in Syracuse, NY as a summer 
secretary. (SS-3/4) (SS=Social Security; PS=Public School)
    In 1969, I began my teaching career in Marshfield, MA. After two 
years in public school teaching, I went to Vermont to get a Masters 
degree. At this point I had accumulated two years of social security 
plus a few other quarters part-time. (SS-1, PS-2)
    I did my student teaching in Mexico, learned Spanish and got my 
first job in 1972 in Washington, DC at a private language academy. I 
then taught at 2 private universities and one private secondary school 
in Massachusetts until 1977. (SS-6, PS-2) When my daughter was born, my 
husband and I began to job share one job. My husband eventually went to 
a full time job, but I stayed half time until my daughter and then son, 
born in 1980, entered school full time in 1986. (SS-10.5, PS-2) 
Throughout this period at Northfield Mt. Hermon School in Northfield, 
MA, I taught summer school every year. As I tried to regain full time 
employment, the 1987 recession hit, and part-time school employees were 
laid off.
    My husband still had a full-time job at the school, and we had 
housing, so I decided to go to the University of Massachusetts, Amherst 
to get a doctorate in education. After starting, I applied for and was 
hired to be part of a special initiative called the Futures grant, in 
Lawrence, MA working with Latino youth in the public schools so I 
worked 4 days a week, traveling back and forth to the university and 
completing my first year of study. The job in Lawrence, although it 
worked with public schools, was a private foundation so it was a social 
security position. (SS 12, PS-2)
    I then got a part-time job in the Greenfield, MA public schools 
that allowed me to study and apply my learning to my teaching. After 
completing my doctorate in 1994, the school system continued to have me 
work at part-time (.6-.85) percentages and hire full time younger 
teachers to assist me. The law stated that the years (1989-2000) would 
count as complete years of experience until such time as I got a full 
time job and then the percentages would revert to fractions of a year. 
So by 2000, I had 2 years from 1969-71 and then 11 years all in the 
public sector. Through all these years, I continued teaching summers at 
Northfield Mt. Hermon, accumulating a few months a year toward social 
security. (SS 16, PS 13)
    In 2000, I began searching for full time work as my children were 
entering college. I got a research position at the School for 
International Training, in Brattleboro, VT at a cut in salary but full 
time. It is a private school. (SS 17, PS 13)
    Then in 2001 I got a full-time job creating a new department for 
the Nantucket Public Schools, Nantucket, MA. My goal was to get a good 
job which required my doctorate and to try to stay at least three years 
at a decent full time salary so that when I retired, I would get a 
fraction of a better wage than what I had earned to date. Since 
September of 2001, I have been a teacher/administrator here and plan to 
continue. When I got this full time job, all my part-time years in 
Greenfield reverted to fractions so 11 years experience fell to 7. So 
at this time I have 2 years 1969-71, 7 years 1989-2000, and 4 years 
2001-2005 for a total of 13 years. If I maintain my health and teach 
until 65 years of age, I will have a total of 20 years in public 
institutions. Massachusetts retirement would provide me with a pension 
of 40% of the average of the last three years of my salary. If I were 
to retire at 60 after 15 years, I would only get about 25% of my final 
salary as a teacher's pension or less than $20,000/year.
    My private school earnings for social security have accumulated at 
low wage private school positions from 1972-1989 and again 2000-2001 
for a total of 18 years. The social security benefit from these wages 
is small but under the double dipping law, I cannot receive even that 
amount even though both amounts are minimal compared to a reasonable 
living wage in my retired years because of low private school pay.
    At 65, I will have taught continuously, at least part time, my 
entire adult life but could conceivably receive about $30,000 a year or 
less. Teachers who stay in public schools their entire lives normally 
earn a pension of 80% of their final salary. Private school teachers 
may have TIAA-CREF or small annuities but there is no pension income or 
even real estate to sell because of living in school housing much of 
one's life. I started teaching earning $5500. From 1974-1988, my salary 
went from $6,000 to $18,000. In the public school part time, my salary 
from 1989-2000 went from $24,000 to $40,000. I also worked part time as 
an adjunct faculty member at a community college from 1993-6, in the 
public sector but did not have enough hours to accrue benefits.
    From what I understand, the ``double-dipping'' law was created to 
prevent early retirees from public pension jobs like the military or 
the post office from going into private business for 20-30 years and 
earning a large amount of social security in addition to a full 
pension. But I believe that this law inadvertently (I hope!) 
discriminates against low paid or middle income working public 
employees who have spent time in private or religious schools, or have 
worked in small businesses intermittently throughout their public 
career. It does not allow us to receive the proportional amount of 
money earned toward putting into social security over a lifetime in 
addition to working in an institution that has a pension plan.
    The Government Pension Offset (GPO) and Windfall Elimination 
Provision (WEP) affects only California, Massachusetts, Ohio, Texas, 
Maine, Alaska--a total of 15 states. That distinction alone makes it 
inequitable.
    I hope you will vote to eliminate this law. I believe women who 
elected to stay home and/or work part time during their child-raising 
years as well as public servants--the firemen, police and teachers--are 
the main recipients of this legal discrimination. Thank you very much.

                                 

          Statement of Ruth Ann Cone, Montgomery, Alabama

    I very much appreciate the opportunity to submit this 
written testimony on the Government Pension Offset (GPO) and 
Windfall Elimination Provision (WEP) Social Security 
provisions, and their adverse and unfair impact on me--a 
Federal retiree. Thank you for taking the time to listen to me, 
and many other retirees, who are in a similar situation as I 
am.
    My husband served honorably in the United States Air Force 
for over twenty years. When we first married, our assignment 
was overseas in England. My husband, at the time, was a Staff 
Sergeant. For over three years, I tried to get a job in the 
Civil Service, but back in the 1960's, unless you had three 
years of career status Civil Service, they would not even talk 
to you, much less hire you. It was difficult trying to raise a 
family on a staff sergeant's pay, so I had to work.
    We were transferred in 1970 to San Angelo, TX. I still did 
not have my three years career status with the Civil Service, 
so I still could not work for the government--so I entered the 
civilian world of working. I did have my government paperwork 
showing my typing and shorthand skills; but without working 
three consecutive years in the Civil Service, I was always 
unacceptable. Unfortunately most of the tours for servicemen 
back in those years were three years--so we never stayed in one 
place long enough for me to earn my career status.
    Finally, in 1973, we were sent to Italy and I was hired to 
work in the Civil Service as a GS-05 in 1975. However, we did 
not stay long enough, so I was considered a temporary GS 
employee. After returning to the states, we were assigned to 
Maxwell Air Force Base in Alabama.
    I had to go to Huntsville, AL to retest and get another 
rating. It was over a year before I heard anything. Finally, I 
received a call from the Army Corps of Engineers for a 
temporary GS position--which I took. I then was hired at Air 
Command and Staff College (ACSC) and stayed at ACSC until I had 
my three years status--although my husband had received orders 
to report to Germany. I made the decision to remain behind with 
my two children so I could get my three years and then I joined 
him several months later. I was immediately hired by the Army 
in Germany, and remained in the Civil Service for the rest of 
my working career.
    We moved back to Montgomery, AL, but our retirement dreams 
were short lived as my husband passed away at the age of only 
56. I retired with 29 years and 8 months. Yes, I am drawing a 
Civil Service Retirement System (CSRS) retirement check; 
however, I was forced to return to work in the civilian world, 
so that I can continue to pay my mortgage, utility bills, 
health care, etc. Although my husband is no longer with me, the 
bills are, and must be paid.
    I am simply an ordinary working woman trying to better my 
life in retirement age, and really need the Social Security 
spousal benefit to which I am entitled. My husband started 
working when he was 13, and continued paying into the Social 
Security system for 43 years. Yet, none of his contributions 
are being given to his family. Had I known about this, I would 
never have worked for the Civil Service.
    When I called the Social Security Administration office in 
Montgomery, Alabama, I was informed that I would have been 
entitled to my husband's social security in the amount of over 
$1,100 a month, due to being a widow. I turned 60 back on March 
13, 2004--which amounted to $13,200 for the year. But due to 
the fact I was a federal employee, receiving CSRS, I was not 
entitled to one penny--this is not right. We were married 
almost 35 years and we were not only married, but he was my 
best friend. He wanted to make sure I and my children would be 
taken care of should something happen to either of us--and I 
felt the same way.
    Life is precious and you must live it on a daily basis--you 
never know what the next day will bring. My husband and I lived 
by the motto ``Cherish Yesterday, Dream Tomorrow, Live Today'' 
and I truly believe this. This is something we worked for all 
our lives, our social security benefits, and now, I am being 
penalized because I worked for the Federal Government.
    I know several years back, if a retired military officer 
went back to work for the Federal Government, he had to give up 
half of his retirement pay--well, they changed that law a year 
or two ago--now these generals, colonels, etc. are coming back 
to the exact job they had while in the service, receiving a 
full federal retirement check, a current federal retirement 
check and when they are eligible, they will receive some social 
security check--so what is the difference between me and others 
like me and the retired military officers????
    In addition, I am further adversely impacted by the WEP 
which drastically cuts my own earned Social Security benefits 
because I also am covered by the CSRS. This is simply not fair.
    I love America and all it stands for. I highly respect all 
that our military does for us, and am proud that I was able to 
serve. However, these laws penalize federal workers, and are 
simply wrong. Please repeal them.

                                 

          Statement of J. Douglas Fay, Bronston, Kentucky

    Please keep in mind that strengthening SS will require 
adding funds to the program. That is a given! However, you must 
realize that you must also pay back to the program money that 
has been taken from those who have made contributions over the 
years and have been bilked out of their entitlement. I am 
referring to those affected by GPO and WEP.
    To deny budgeting to replace those funds as too expensive 
is unfair to all of those civil servants who have given so 
much. When this administration has spent billions to fight the 
proverbial windmills of unnecessary war, it is unconscionable 
to say that ``making the pot'' right is too expensive.
    Please plan for replacing the 40% that the Government 
Pension Offset and the Windfall Elimination Provision cut from 
current and future retirees, and then support H.R. 147 and S. 
619.
    Teachers, Firemen, and Police Officers throughout the 
country are depending on you to do the right thing.

                                 

Statement of Charles Loveless, American Federation of State County 
                    and Municipal Employees (AFSCME)

    The American Federation of State, County and Municipal 
Employees (AFSCME) is a labor organization that represents 1.4 
million employees who work for federal, state, and local 
governments, health care institutions and non-profit agencies. 
We submit the following statement for the record of the House 
Ways and Means Committee hearing on Protecting and 
Strengthening Social Security and Examining the Impact of the 
American Populations Increasing Longevity on Social Security's 
Finances.
    The Subcommittee's statement announcing this hearing noted 
that recent demographic trends, the increase in life expectancy 
and a lower birth rate leading to fewer workers paying Social 
Security taxes, has ``put Social Security's finances on an 
unsustainable path.'' Similarly, The New York Times reported on 
June 12, 2005 that ``policy experts have told Congress in 
recent weeks that any effort to improve Social Security's long-
term finances should somehow deal with this jump in life 
expectancy by adjusting benefits, raising the retirement age, 
increasing taxes or creating new incentives to work longer.'' 
Many proponents of radically altering the Social Security 
program to include private investment accounts have described 
these demographic trends as the major and newly discovered 
cause of the shortfall that Social Security is expected to 
experience sometime between 2041 (Social Security Trustees 2005 
Report) and 2052 (Congressional Budget Office).
    In actuality, however, the current debate over whether the 
retirement age for Social Security should be raised because 
Americans are living longer and having fewer children is deja 
vu all over again. The 1983 bipartisan Greenspan Commission was 
fully cognizant of these same demographic statistics and 
structured their recommendations, including raising the 
retirement age to 67 by 2026 and raising the payroll tax rate, 
based on their implications. The Greenspan Commission's 
recommendations went on to form the basis of the modifications 
that Congress made on a largely bipartisan basis to the Social 
Security program and that then-President Ronald Reagan signed 
into law.
    There has been only a very minor change in the assumed rate 
of decline in the mortality rate for Social Security 
beneficiaries since 1983, and as such, it should play a very 
small part in determining Social Security's financing gap. If 
the 1983 assumption was adjusted, less than 5 percent of the 
total actuarial shortfall would be eliminated. In fact, when 
all of the demographic factors affecting Social Security's 
current financial outlook are accounted for--fertility rates, 
mortality rates and immigration--demographic factors have 
actually improved the actuarial balance of the Social Security 
system since 1983. The small declines in mortality rates and 
stable fertility rates relative to what was predicted in 1983 
have been trumped by the larger than anticipated immigration 
flows.
    Therefore, if everyone thought that the problem had been 
fixed in 1983, why has another actuarial deficit materialized? 
If the implications of increasing longevity and declining 
births were accounted for in the 1983 changes, what has 
happened that the Greenspan Commission did not foresee? 
According to a recent report by the Economic Policy Institute 
(EPI), 60 percent of the reemergence of Social Security's long 
term deficit can be accounted for by two major economic trends 
that the Greenspan commission did not anticipate; the growth of 
average wages earned by U.S. workers slowed considerably and 
income inequality rose significantly. The unexpected growth in 
inequality also meant that Social Security lost revenue and 
interest on that revenue as the percentage of wages subject to 
the Social Security cap declined from the historic 90 percent 
level to the current 85 percent level. This loss in revenue, 
and the interest it would have earned, coupled with the two 
unexpected economic changes, combine to account for about 75 
percent of Social Security's reemerged long-term deficit.
    If lawmakers wish to address the causes of Social 
Security's long term projected shortfall, they should focus on 
remedying the underlying economic causes--slow real wage growth 
and inequality--that are creating the bulk of the problem and 
not compel American workers to take another hit. Despite the 
continuing improvements in longevity, large segments of the 
American workforce simply cannot physically work more years. 
AFSCME's members work at jobs that represent a cross-section of 
how America works. Our members work in hospitals, schools, and 
prisons. They climb trees and utility poles, drive buses and 
ambulances, repair roads and parklands, and lift sick patients 
and heavy machinery. These are jobs that require strength of 
mind and body.
    Some workers may want to continue working until they reach 
full retirement age, which is mandated to climb to 67, and some 
may want to work even longer, but many just do not have the 
option. Often a worker's health has deteriorated to the point 
that he or she is not physically able to continue. This is 
especially true for low-income and blue-collar workers, women, 
African-Americans and Latinos. Social Security was designed as 
a social insurance program. Raising the retirement age would 
hurt exactly those workers for whom Social Security was created 
in the first place and who continue to depend on Social 
Security for the major portion of their post retirement income.
    AFSCME urges the Committee, the Congress and President Bush 
to preserve Social Security as a life long social insurance 
program that workers have earned by their many years on the 
job. American workers don't deserve to have their benefits 
cut--and raising the retirement age would be a benefit cut.

                                 

       Statement of Mary Ellen Marvin, Punta Gorda, Florida

    I very much appreciate the opportunity to submit this 
written testimony on the Government Pension Offset (GPO) and 
Windfall Elimination Provision (WEP) Social Security 
provisions, and their adverse and unfair impact on me--a 
federal retiree. First I want to thank Chairman Jim McCrery and 
the other legislators serving on this Subcommittee for 
conducting this important hearing. As a federal worker being 
adversely impacted by these provisions, I urge all Subcommittee 
members, and lawmakers, to repeal them as soon as possible and 
allow me to receive my full social security benefits.
    I took an early Civil Service Retirement in 1989, and then 
worked for private employers from 1991 to 2004. My Social 
Security earnings statement led me to believe that I would get 
about $400 per month in Social Security benefits.
    However, when I actually retired in 2004, I only received 
$171 per month of my earned Social Security benefits because I 
was also covered under the CSRS retirement system. If I had 
worked in the private sector for my whole career, then I would 
be receiving all my earned Social Security benefits with no 
penalties.
    I had purchased a retirement home with the assumption that 
I would have $400 each month from Social Security. Now that I 
am receiving only $175 per month (with the 2005 COLA increase), 
I am having trouble making ends meet and am considering selling 
my retirement home. Receiving that extra few hundred dollars 
each month would enable me to keep my home.
    Please fix this inequitable problem. Don't punish Americans 
for working for the federal government.

                                 
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