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




 
                        SOCIAL SECURITY REFORM:
                     SUCCESSES AND LESSONS LEARNED

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
                       DOMESTIC AND INTERNATIONAL
                 MONETARY POLICY, TRADE AND TECHNOLOGY

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 5, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-25


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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
PETER T. KING, New York              NYDIA M. VELAZQUEZ, New York
EDWARD R. ROYCE, California          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             GARY L. ACKERMAN, New York
ROBERT W. NEY, Ohio                  DARLENE HOOLEY, Oregon
SUE W. KELLY, New York, Vice Chair   JULIA CARSON, Indiana
RON PAUL, Texas                      BRAD SHERMAN, California
PAUL E. GILLMOR, Ohio                GREGORY W. MEEKS, New York
JIM RYUN, Kansas                     BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           DENNIS MOORE, Kansas
DONALD A. MANZULLO, Illinois         MICHAEL E. CAPUANO, Massachusetts
WALTER B. JONES, Jr., North          HAROLD E. FORD, Jr., Tennessee
    Carolina                         RUBEN HINOJOSA, Texas
JUDY BIGGERT, Illinois               JOSEPH CROWLEY, New York
CHRISTOPHER SHAYS, Connecticut       WM. LACY CLAY, Missouri
VITO FOSSELLA, New York              STEVE ISRAEL, New York
GARY G. MILLER, California           CAROLYN McCARTHY, New York
PATRICK J. TIBERI, Ohio              JOE BACA, California
MARK R. KENNEDY, Minnesota           JIM MATHESON, Utah
TOM FEENEY, Florida                  STEPHEN F. LYNCH, Massachusetts
JEB HENSARLING, Texas                BRAD MILLER, North Carolina
SCOTT GARRETT, New Jersey            DAVID SCOTT, Georgia
GINNY BROWN-WAITE, Florida           ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   AL GREEN, Texas
KATHERINE HARRIS, Florida            EMANUEL CLEAVER, Missouri
RICK RENZI, Arizona                  MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
STEVAN PEARCE, New Mexico            GWEN MOORE, Wisconsin,
RANDY NEUGEBAUER, Texas               
TOM PRICE, Georgia                   BERNARD SANDERS, Vermont
MICHAEL G. FITZPATRICK, 
    Pennsylvania
GEOFF DAVIS, Kentucky
PATRICK T. McHENRY, North Carolina

                 Robert U. Foster, III, Staff Director
 Subcommittee on Domestic and International Monetary Policy, Trade and 
                               Technology

                       DEBORAH PRYCE, Ohio, Chair

JUDY BIGGERT, Illinois, Vice Chair   CAROLYN B. MALONEY, New York
JAMES A. LEACH, Iowa                 BERNARD SANDERS, Vermont
MICHAEL N. CASTLE, Delaware          MELVIN L. WATT, North Carolina
FRANK D. LUCAS, Oklahoma             MAXINE WATERS, California
RON PAUL, Texas                      BARBARA LEE, California
STEVEN C. LaTOURETTE, Ohio           PAUL E. KANJORSKI, Pennsylvania
DONALD A. MANZULLO, Illinois         BRAD SHERMAN, California
MARK R. KENNEDY, Minnesota           LUIS V. GUTIERREZ, Illinois
KATHERINE HARRIS, Florida            MELISSA L. BEAN, Illinois
JIM GERLACH, Pennsylvania            DEBBIE WASSERMAN SCHULTZ, Florida
RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin
TOM PRICE, Georgia                   JOSEPH CROWLEY, New York
PATRICK T. McHENRY, North Carolina   BARNEY FRANK, Massachusetts
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    May 5, 2005..................................................     1
Appendix:
    May 5, 2005..................................................    29

                               WITNESSES
                         Thursday, May 5, 2005

Amelio, Gary, Executive Director, Federal Retirement Thrift 
  Investment Board...............................................     8
Cavanaugh, Francis X., Public Finance Consulting.................    12
James, Estelle, Consultant and Professor Emeritus, Suny, Stony 
  Brook..........................................................     9
Purcell, Patrick, Specialist in Social Legislation, Congressional 
  Research Service...............................................    11

                                APPENDIX

Prepared statements:
    Oxley, Hon. Michael G........................................    30
    Maloney, Hon. Carolyn B......................................    35
    Pryce, Hon. Deborah..........................................    44
    Wasserman Schultz, Hon. Debbie...............................    46
    Amelio, Gary.................................................    48
    Cavanaugh, Francis X.........................................    67
    James, Estelle (with attachments)............................    79
    Purcell, Patrick.............................................   118

              Additional Material Submitted for the Record

Frank, Hon. Barney:
    ``Why Personal Accounts and Why Now?''.......................   128
Amelio, Gary:
Written response to questions from Hon. Barbara Lee..............   131
James, Estelle:
Written response to questions from Hon. Barney Frank.............   132
Written response to questions from Hon. Barbara Lee..............   133


                        SOCIAL SECURITY REFORM:

                     SUCCESSES AND LESSONS LEARNED

                              ----------                              


                         Thursday, May 5, 2005

             U.S. House of Representatives,
         Subcommittee on Domestic and International
             Monetary Policy, Trade and Technology,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 10:05 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Deborah Pryce 
[chairman of the subcommittee] presiding.
    Present: Representatives Pryce, Biggert, Harris, Gerlach, 
Neugebauer, Price, Maloney, Waters, Moore, Frank, and Pearce.
    Chairman Pryce. [Presiding.] Good morning. The hearing of 
the Subcommittee on Domestic and International Monetary Policy, 
Trade and Technology will now come to order.
    Thank you all for being here today to discuss Social 
Security reform and review the successes and lessons learned 
from both foreign countries and our own plan for federal 
workers, the Thrift Savings Plan. The witnesses at this hearing 
have immeasurable knowledge of the structural reforms 
undertaken by our international counterparts, and also the 
importance of incorporating private accounts into any reforms 
we make here at home.
    We know that the United States is wonderfully unique in its 
history, its economy and its people. Therefore, the lessons 
learned by the systems that work well or do not work well in 
other countries may not be directly analogous to the United 
States. Differences in population, life expectancy, and savings 
rates are just a few examples of the fine nuances that can make 
the application of the same policies yield dramatically 
different results. Indeed, our goal should not be to mimic the 
retirement programs of other nations. Rather, we should aim to 
enact a system that is tailor-made for the people and the 
economy of our United States.
    Having said that, examining the retirement security systems 
of other nations can and should be done by this committee and 
this Congress. Other countries's experiences in implementing 
these retirement security policies can provide very valuable 
lessons for us. By reviewing the successes and shortcomings of 
other nations's programs, we will find areas that can be 
improved upon and then made applicable to the American 
experience.
    A case in point is the United Kingdom's efforts at pension 
reform. According to the Congressional Research Service, this 
mis-selling of personal pensions is said to have affected 1.5 
million workers, mostly older and lower-paid, who were 
persuaded by overzealous sales agents to switch to risky, 
inappropriate plans based on unduly optimistic estimates on 
rates of return. The government has ordered companies to 
reimburse these workers at an estimated cost of $3.2 billion to 
date, with total costs projected to reach $20 billion.
    Investor choice is just as significant as investor 
protection in any voluntary personal accounts. We have seen the 
stagnant rates of return in Chile, where workers initially had 
no investment choice, with only one portfolio offered for over 
20 years. Finally, Chile reformed its system to offer five 
portfolios with different degrees of risk.
    I was pleased to read Dr. Estelle James's quote in a recent 
Washington Post article saying, ``If we create personal 
accounts in the United States, we should also make portfolio 
choices simple, limited and diversified, including 
international securities, to protect inexperienced investors 
from themselves.''
    As Congress moves forward in drafting legislation to reform 
our Social Security system, this committee must stay involved 
to ensure that proper protections for investors and increased 
financial literacy are included. In addition, any plan to 
reform Social Security will require a concentrated effort by 
Congress to craft a program that will remain solvent long after 
we are gone. We have an opportunity to broaden the discussion 
to include a range of retirement security issues and to educate 
Americans on the personal savings plans provided by the 
financial services industry today.
    Financial literacy empowers individuals to manage money, 
credit and debt and become responsible workers, heads of 
households, investors, entrepreneurs and business leaders. 
While Congress can make laws and provide savings vehicles for 
Americans's retirement through Social Security or personal 
retirement accounts, only with an overall understanding of 
financial services can a person truly benefit from an 
investment in their future.
    We must continue to do more to reach out to more people. 
Like the Thrift Savings Plan, voluntary personal accounts would 
provide safe investment opportunities. In addition to a no-risk 
option of investing in U.S. Treasury bonds, the accounts could 
be invested only in secure bond and stock index funds, 
including a life-cycle fund designed to protect workers from 
sudden market changes on the eve of their retirement.
    With more than three million investors, the TSP is the 
largest individual account retirement system in the country. It 
has been successful in keeping costs to consumers low through 
the use of competitive bidding. In 2003, the TSP had $129 
billion in assets under management and paid just over $2.1 
million in investment expenses. The introduction of personal 
retirement accounts to the public means that they must be 
designed with adequate regulation and oversight. There must be 
a significant investor protection effort in addition to 
financial literacy so that people can understand the 
investments that are offered and make appropriate choices.
    I look forward to a lively discussion today and appreciate 
the witnesses's sharing with us their knowledge on this issue. 
Without objection, all members's opening statements will be 
made a part of the record.
    At this time, I would like to recognize my friend, the 
gentlelady from New York, the Ranking Member of this 
subcommittee, Congresswoman Maloney, for her opening statement.
    Mrs. Maloney. Thank you so much, Madam Chair. I am glad 
that you are focusing on this important issue.
    I certainly welcome the distinguished witnesses that we 
have here today.
    One of my amendments is up in a markup in another 
committee. I am going to summarize my remarks and defer to the 
Ranking Chairman for the continuation.
    I just feel that this is extremely important, and that we 
need to look at what has happened in other countries. In many 
of the other countries it has not been successful.
    To give one example, the U.K. adopted voluntary individual 
accounts very similar to the plan put forth by the 
administration. Many workers who switched lost money and have 
now switched back to the traditional plan. The scandal forced 
the government to introduce a variety of reforms and aggressive 
enforcements. Currently, financial firms are now repaying $22 
billion to individuals who were given unsuitable 
recommendations.
    At retirement under the plan being put forth by the Bush 
administration, workers would pay back the amount they 
contributed to private accounts, with interest, through a 
reduction in their guaranteed security benefit. The interest 
rate would be 3 percent above the rate of inflation, which is 
the same that they would get if they had left their money in 
the trust fund invested in Treasury notes.
    I would like permission to place into the record a research 
paper that was written recently by Yale economist Robert 
Schiller that demonstrates that if workers invest in life-cycle 
accounts, which President Bush has suggested as the appropriate 
default investment option, about 70 percent of workers would be 
worse under private accounts than if they had stayed in the 
traditional system and they would not make more than they have 
to pay back.
    Very problematic is the cost of transition. Earlier, Alan 
Greenspan testified that these private accounts will do nothing 
to help the solvency of the current Social Security system, but 
will add a great deal of debt. The administration's proposal 
includes zero funding for the President's proposal for private 
accounts, and thus would rely on increased government borrowing 
to pay the transition costs at a debt of over $7 trillion and 
over $450 billion deficit. This is very troubling to me. The 
administration estimates that the President's private accounts 
would add another $754 billion to the public debt in the 
current budget window.
    Because this does not start until 2009 and then phases in 
gradually, the true costs are truly much, much higher and Vice 
President Cheney has conceded that it would be trillions. The 
plan would add an estimated $1.4 trillion of public debt in the 
first 10 years, followed by another $3.5 trillion in the second 
decade. The increases in debt are large and longstanding. The 
additional debt would continue to grow relative to the size of 
the economy, reaching 35 percent of GDP. I mean, that is truly 
frightening to me. If other countries should decide that they 
do not want to hold much of that debt, we would be looking at a 
very, very serious economic situation.
    Another problem with privatization is the high cost of 
administrative and marketing that is estimated to be 30 percent 
from the worker's point of view, which is a great deal of 
money. I must say that I certainly support the Thrift Savings 
Plan. I would support a similar plan on top of Social Security 
as it exists now for federal employees, but that this system is 
one that has served our public well for so very long, and we 
should really look at the experience of other countries before 
dismantling a system that has served so many for so long and so 
well.
    I have quite a lengthy statement. I am going to ask to have 
the entire statement placed in the record.
    I would like to yield to the Ranking Member, and I will be 
right back after I offer my amendment in my markup in the other 
room.
    Mr. Frank. I assume there will be an opening statement on 
the other side first.
    Mrs. Maloney. Okay.
    Chairman Pryce. And then we will come back.
    All right. Now, I would like to recognize the Vice Chairman 
of the committee, Mrs. Judy Biggert.
    Mrs. Biggert. Thank you, Madam Chairman. I would like to 
thank you for holding this important hearing today.
    As we work to establish solvency in the current Social 
Security system and find additional ways to increase the 
savings rate, I think it is prudent to examine programs that 
work or do not work, both within our own country and abroad. We 
know that our Social Security system works now, but it will not 
work in the near future. We know that programs like the Thrift 
Savings Plan for federal workers and 401(k) retirement plans 
have inspired Americans to save more, to save over longer 
periods of time, and to gain a return on investments that trump 
any return that the government could give them.
    Today, I look forward to hearing from the witnesses about 
the benefits of personal account programs for individuals, 
things to avoid when setting up such accounts, and elements 
that should be included in these accounts.
    With that, I yield back the balance of my time.
    Chairman Pryce. Thank you, Ms. Biggert.
    The gentleman, the Ranking Member of the committee.
    Mr. Frank. Thank you, Madam Chair.
    First, on the question of Social Security, I do want to 
note my dismay to read in today's New York Times the headline--
let me read the first sentence: ``The Bush administration has 
warned the nation's biggest labor federation that union-run 
pension funds may be breaking the law in opposing President 
Bush's Social Security proposals.''
    That is an outrageous effort to coerce people out of 
exercising their political rights. The notion that you have to 
be careful about advocacy is one which this administration has 
been very uneven in applying.
    Apparently, it is okay to use taxpayer money to create 
phony videos and pass them off as objective news reports, but 
if a labor union decides that it would not be in the interests 
of its members for this bill to go forward, they are going to 
be threatened. I hope that the unions will ignore this threat. 
It is a gross example of the wrong kind of politicization.
    Secondly, I am glad that we are having this hearing because 
I think it helps us make a couple of points. First, as I read 
the early rhetoric about letting people have private accounts, 
it had a strongly libertarian thrust. It was an individual 
should make the decisions, not the government; that we should 
free people to do what they want with their own money.
    I have noted with some interest that as we have progressed 
to specifics, the individual choice involved has gotten 
narrower and narrower and narrower. We ought to be clear that 
what we are now being told should happen with regard to Social 
Security accounts severely restricts what the individuals can 
do.
    That leads to a third point. President Clinton once 
suggested that Social Security funds could be invested in 
stocks to some extent, and that would increase the return for 
Social Security as a whole, with individuals still having their 
entitlements, but with more money coming into the fund. At the 
time, a number of people, including Chairman Greenspan of the 
Federal Reserve, expressed grave opposition to this, saying 
that it would be a terrible idea to let the federal government 
make these picks of what stocks should be in there.
    But as I read the current proposal, we are getting back to 
that. The current proposal is not to let individuals decide 
fairly freely where to put their money, but to create some 
limited choices for them. The federal government presumably 
would be the one ultimately making those limited choices.
    So the difference between what President Clinton proposed 
and what we are currently seeing is not, it seems to me, on 
whether or not the federal government has some influence over 
where the money goes, but whether or not we continue to have 
this guarantee to people or whether they are more at risk.
    I was also struck, and I am not going to be able to stay 
for the whole thing, but I was pleased to see in Ms. James's 
testimony, actually, let me just say this. I have heard a lot 
from some of my Republican colleagues about the 
inappropriateness of America looking to foreign countries to 
make American policy. We have certainly heard that with regard 
to the Supreme Court, and we have often heard that this is 
America and we will make our own decisions, and borrowing from 
foreign countries is really not what we need to do.
    I am glad to see that that I think somewhat silly notion 
has been waived in the interests of trying to get support in 
some ways for Social Security, since we have other systems that 
have done that, and the silliness of ignoring the experience of 
others. Now, everybody has joined into that.
    One of the things that struck me as I read over Ms. James's 
statement was at the bottom of page two and the top of page 
three, saying that, ``every country that has a personal account 
system also has a minimum pension, most commonly 20 percent to 
30 percent of the average wage. This is designed to protect 
workers from both financial market and labor market risk.'' So 
far, we, America, do not have a minimum pension in our current 
system or in the proposed new system. I think that is a very 
relevant point of comparison.
    As I understand the President's proposal, with progressive 
indexation and with the private accounts taking a significant 
chunk, up to one-half of what you put in, it does not seem to 
me that we would reach that 20 percent to 30 percent minimum.
    The final point I want to talk about is on progressive 
indexation. I want to congratulate the administration on its 
mathematical flexibility. When we are talking about the point 
at which we begin to reduce people's Social Security from what 
they would currently be legally entitled to, the President says 
he wants to protect low-income people and we will begin to go 
to a progressive, i.e. reductive, approach to their Social 
Security benefits as they get into middle and upper income.
    Apparently for these purposes, for the purposes of reducing 
the benefits of Social Security below what they now are, middle 
income starts at about $30,000. What strikes me is when we talk 
about tax cuts in this climate in Washington today, middle 
income seems to start at about $150,000. So whether or not you 
are considered middle income apparently varies. If it is a 
question of giving you a tax cut, it is much higher. If it is a 
question of when we can reduce your benefits, it is much lower.
    The last point I would simply note again is, and I have 
been asked, and others, and I always want to repeat this on 
Social Security, what is the approach. It is clear that from 
now until 2018, unlike any other aspect of the federal 
government, the Social Security system will take in more money 
than it pays out. So for the near term, it seems to me we have 
a very easy solution: put the money back.
    Chairman Pryce. The Chair recognizes Mr. Neugebauer for a 
brief opening statement.
    Mr. Neugebauer. Thank you, Madam Chairwoman, for having 
this hearing.
    This is probably one of the most important things that I 
think that this Congress can do for the future of our children 
and grandchildren. I have two grandsons that are 4 and 6. I 
want them to have a better plan.
    I think we lose the debate here sometimes about Social 
Security. We are really talking about if we were going to start 
over today, would we put the same system in place today that we 
have? I think the answer overwhelmingly from the people in the 
19th District is no, we would not. We would go to a system of 
ownership.
    I had a 75-year-old constituent call me yesterday. She 
said, ``Congressman, please, please, please allow our 
grandchildren and children to have accounts that will give them 
a better return on their money.'' She worked in the private 
sector for a while and has Social Security, but she also opened 
up an IRA and she said it is amazing how much money that IRA 
accumulated in a relatively short 10-year period. She said it 
is a wonderful supplement to the income we have today.
    The problem with Social Security today is that it yields 
about 2 percent to the folks. I do not think there is probably 
anybody in this room that would accept a 2 percent return on 
their money. The other problem with it is it is not a system of 
ownership. So today when families are trying to make retirement 
decisions, they cannot make retirement decisions because they 
are relying on the whim of Congress in the future of what those 
benefits are going to be.
    So what we do need to do is we need to come to a system 
that gives ownership to the American people and to our children 
and grandchildren in the future, and then figure out how to 
also at the same time reform the system that we have to ensure 
its solvency. But why would we perpetuate a system that we know 
today is giving a poor return to our citizens? Because we are 
afraid to address some of those important issues. I think these 
kinds of decisions, Madam Chairwoman, are great discussions, 
ones that we need to have.
    We are going to hear about a very successful program, the 
TSP program. But I also want to talk about the fact that there 
are examples, as Mr. Frank was talking about, looking to other 
countries. We can look to examples in our own country today, 
where teachers systems in Texas, for example, opted out of the 
Social Security system many years ago because they realized 
that it was a poor return on their investments.
    Now, those people that put basically the same amount of 
money into their retirement system in the teacher retirement 
system in Texas, their retirement benefits are three to four 
times what their counterparts that have been paying into the 
Social Security system for the same period of time. I think 
that is compelling evidence of what ownership does for 
families's abilities to address retirement issues in the 
future.
    Again, I thank the Chairwoman for having this very 
important hearing today.
    Chairman Pryce. Thank you.
    At this time, I would like to introduce our distinguished 
panel of witnesses, and we can get on to hearing from them.
    Mr. Gary Amelio is the Executive Director of the Federal 
Retirement Thrift Investment Board, which administers the 
Thrift Savings Plan. He joined TSP in 2003 with 22 years of 
private sector experience in private sector pensions and 
investment matters.
    Dr. Estelle James is a consultant and Professor Emeritus at 
the State University of New York at Stonybrook. Dr. James is 
recognized as a scholar on pension and retirement reform in 
developing countries. She has written selected papers and 
reports on the subject and has conducted World Bank seminars 
and workshops on Social Security reform in such countries as 
Hungary, Thailand, China and Poland.
    Mr. Patrick Purcell, who is a Specialist in Social 
Legislation for the Congressional Research Service, has written 
numerous reports on pension and retirement reforms for 
civilians and federal workers. He recently gave a well-received 
lecture on retirement reform at the University of 
Pennsylvania's Wharton School Impact Conference sponsored by 
the Wharton School's Pension Research Council.
    Mr. Francis Cavanaugh was the first Executive Director of 
the Federal Retirement Thrift Investment Board. He is a 
recognized author and scholar in the area of market financing 
of debt securities, having penned the book, ``The Truth About 
National Debt: Five Myths and One Reality,'' and other 
publications.
    We welcome all the witnesses here today and recognize them 
for a 5-minute summary of their testimony. Without objection, 
your more lengthy statements can be made part of the record.
    We will begin with Mr. Amelio.
    Thank you all for being here.

     STATEMENT OF GARY AMELIO, EXECUTIVE DIRECTOR, FEDERAL 
               RETIREMENT THRIFT INVESTMENT BOARD

    Mr. Amelio. Good morning, Chairman Pryce and members of the 
subcommittee. My name is Gary Amelio and I am the Executive 
Director of the Federal Retirement Thrift Investment Board, an 
independent agency charged with administering the Thrift 
Savings Plan. I was appointed June 1, 2003 and serve as the 
managing fiduciary of the TSP. Prior to my appointment, I had 
23 years of private sector experience in the employee benefits, 
tax and fiduciary industry.
    Although the board has no express position regarding 
proposals to change Social Security, I am pleased to discuss 
the successes and lessons learned by the TSP.
    Since 1987, the TSP has grown to 3.4 million participants 
with a total of $155 billion in account balances. I often 
comment that Congress could not have provided a better 
structure when it created the TSP. Congress fashioned the plan 
with a goal of providing retirement savings for federal 
employees at low administrative cost and with a limited number 
of funds that track broad investment markets. This simplified 
structure has protected the plan from political manipulation 
and consequently enabled the TSP to gain the confidence of 
federal employees and become the largest and arguably most 
successful defined contribution plan in the world.
    The TSP's participation rate significantly exceeds the 
industry average, primarily I believe because participants find 
the plan simple to grasp. The TSP participants also enjoy low 
administrative costs. Last year, expenses were just six basis 
points or 60 cents for every $1,000, which is rock bottom in 
the industry. I like to say that the TSP is the most 
inexpensive legal investment in the world. It is perhaps 
cheaper than illegal investments, but I do not know that.
    Through the years, the TSP and Congress have worked 
together to improve the plan. The TSP recently modernized its 
recordkeeping system to accommodate daily valuation and in the 
next couple of months life-cycle funds will be available to 
provide professionally designed asset allocation models 
appropriate for participants's investment time horizons. Last 
year, Congress improved the plan by approving the board's 
recommendation to eliminate open seasons.
    In 1986, the concept of allowing federal employees to 
invest in a retirement savings plan which included private 
securities was untested. By mandating a sound and simple 
structure protected from political manipulation, Congress 
created a plan which passed the test, gained the confidence of 
federal employees, and strengthened their retirement security.
    This concludes my summary comments. I ask that my extensive 
written statement be entered into the record. I would be 
pleased to respond to any questions.
    Thank you.
    [The prepared statement of Gary Amelio can be found on page 
48 in the appendix.]
    Chairman Pryce. Dr. James?

STATEMENT OF ESTELLE JAMES, CONSULTANT AND PROFESSOR EMERITUS, 
                       SUNY, STONY BROOK

    Ms. James. Thank you.
    My comments are based on work that I did while I was lead 
economist at the World Bank for 9 years, and continuing 
research that I did after leaving the Bank. I am still involved 
in that research.
    Over the past 25 years, more than 30 countries spread 
across Latin America, Eastern and Western Europe, Australia and 
Hong Kong have adopted social security reforms that include 
funded privately managed plans, usually based on personal 
accounts. Contributions to these accounts range from 2.5 
percent to 12.5 percent of wages and they are projected to 
supply between 30 percent and 90 percent of total benefits. The 
accounts are basically part of the social security systems in 
these countries.
    In Latin America and Eastern and Central Europe, the 
accounts were created by a carve-out. In industrialized 
countries such as Australia, Switzerland, Netherlands and 
Denmark, employers have long provided employer-sponsored plans 
on a voluntary basis, as we do in the United States. At some 
point, governments decided everyone should be covered by these 
plans because only half of the labor force was covered on a 
voluntary basis. So governments made these plans mandatory and 
they were in effect an add-on for employers that did not 
provide these plans previously.
    It is interesting. This kind of option has not been 
discussed in the United States, but it is obviously one way 
that we could go.
    Now, I am going to discuss how these 30 countries handled 
three issues: The issue of administrative costs, which is 
crucial; how to control risk and protect low earners; and how 
to make payouts. I would like to put this in the context of two 
over-arching themes. First, workers do not have free rein over 
the funds in these accounts, as Mr. Frank said. There is a lot 
of control and regulation over the accounts. I think it is very 
important to realize that complete government control is at one 
end of the continuum, and complete free choice and ownership is 
at the other end.
    Most of these countries are somewhere in the middle. ``In 
the middle'' is where I think we should be. The important 
question is: Where do you position yourself in the middle? How 
much choice? How much control?
    The U.K. ran into trouble when it gave too much choice and 
too little regulation. On the other hand, I could cite other 
countries that had complete government control and wasted the 
funds, had low rates of return and political manipulation. So I 
would say being at either end of the continuum is not the place 
to be.
    The second point is that details really matter a lot. 
Seemingly small changes in rules, really the fine print, can 
determine whether you consider the outcomes good or bad. So it 
is really important to get down into the trenches and look at 
those details.
    I would like to just make a brief comment about each of 
those three issues, and then I will be glad to answer 
questions. Administrative costs are obviously very important 
because if you pay an expense ratio of 1 percent of assets per 
year, when you retire that will reduce your final pension by 20 
percent, which is obviously a large chunk. So keeping those 
costs low is very important. The Chilean system has been 
criticized for having high costs. People are very concerned 
about that.
    In this connection, it is important to realize that costs 
are going to be high at the beginning. There are high startup 
costs. Many of the numbers quoted from Chile were their high 
startup costs. Currently, the expense ratio in Chile is 1.2 
percent of assets per year, and it is slated to go down to .7 
percent over the lifetime of a full career of a worker. This is 
lower than the average mutual fund and 401(k) in the United 
States.
    However, I believe we should be able to do much better in a 
mandatory system by exploiting economies of scale and 
eliminating marketing expenses. The key point here is that the 
most important cost is the fixed recordkeeping costs per 
account, which I estimate we could keep to about $20 per 
account if we are careful. That is based on estimates of low-
cost mutual funds and the Thrift Savings Plan.
    If we keep to that number, then that means that once the 
average account size reaches $7,000, the expense ratio will be 
less than 30 basis points. So I would estimate that in the long 
run, we should be able to operate at 30 basis points or less. 
This will take us 8 or 10 years to get to that point. This is I 
think consistent with the plans that are floating around.
    However, if people are allowed to jump out of this basic 
system once their accounts reach a certain size, such as 
$5,000, we will never reach that $7,000 point and then the 
administrative costs for everyone will be higher as a 
percentage of assets. So this little detail that you might not 
even think of looking at will really determine the expense 
ratio and therefore the subtraction from the final pension. It 
is an example of how details matter a lot.
    In terms of controlling risk and protection of low earners, 
there are many techniques that we are familiar with: 
diversification, of course, in companies and sectors and 
international diversification, the life-cycle funds that have 
been mentioned. I can talk about them later on if you are 
interested. But in addition, every country, as Mr. Frank 
mentioned, every country that has a personal account system 
also has a minimum pension.
    The variation in size of the minimum pension is actually 
quite substantial, from 15 percent to 40 percent, but you could 
say that there is a sort of concentration between 20 percent 
and 30 percent of the average wage. That does set a floor and 
it protects workers both from financial market and labor market 
risk. That is something we could think about having here. We do 
not have it in our present system, by the way, without personal 
accounts.
    Chairman Pryce. Dr. James, I just need to remind you to be 
mindful of the clock. I know you have another point to get to.
    Ms. James. Okay, yes. I am moving on to the other point. 
Thank you.
    Payouts. Every country with personal accounts restricts 
payouts. Most European countries require annuitization to 
ensure that workers will have a life-long income. In Latin 
America, workers are given a choice between annuities or 
gradual withdrawals. In Chile where they have this choice, two-
thirds of all retirees have chosen to annuitize.
    Lump-sum withdrawals are not permitted unless the pension 
meets a very high threshold, which varies across countries, but 
it is about 70 percent of the worker's own wage and roughly 200 
percent of the poverty line, depending on country. So the 
threshold you choose for lump-sum withdrawals is an extremely 
important detail that matters.
    Some countries require that annuities be indexed. Many of 
them require that the annuity should be joint in order to cover 
surviving spouses. This is very important for women, obviously. 
In Latin America, women can keep the joint pension in addition 
to their own pension. Whereas in the United States, as you 
know, women who work in the labor market have to give up their 
own pension if they take the widow's pension. We have to 
choose. In Latin America in their personal account systems, 
women can keep both. As a result, women's expected lifetime 
benefits relative to men's have increased in the new systems.
    So my final point just goes back to the point that details 
are very important. You really have to look at them. The 
accounts can be good or bad depending on the details. The 
experience of other countries shows if we carefully structure 
the choice of asset managers, the investments and the payouts, 
and we provide a pension floor, including personal accounts as 
part of our Social Security system, should be able to continue 
to provide lifetime income security for the elderly in a cost-
effective and low-risk way.
    Thank you.
    [The prepared statement of Estelle James can be found on 
page 79 in the appendix.]
    Chairman Pryce. Thank you. Your full statement will be in 
the record, and hopefully you can get to some of your other 
points.
    Ms. James. Thank you. I put a lot of work into all the 
research. I am delighted when people read it and think about 
it.
    Chairman Pryce. Mr. Purcell?

STATEMENT OF PATRICK PURCELL, SPECIALIST IN SOCIAL LEGISLATION, 
                 CONGRESSIONAL RESEARCH SERVICE

    Mr. Purcell. Madam Chairwoman and members of the 
subcommittee, my name is Patrick Purcell. I am a Pension 
Specialist with the Congressional Research Service. Thank you 
for inviting me to talk to you today about the thrift plan for 
federal employees.
    We already have two distinguished other panelists who are 
very expert in the thrift plan, so I am going to talk a little 
bit very briefly about the legislative history.
    In the legislative history of the thrift plan, two things 
stand out: First, Congress chose then and has maintained to 
this day a system in which all of the funds that invest in the 
private sector are index funds. This was a carefully considered 
choice. As the House committee report on the legislation stated 
at the time, the three funds authorized as passively managed 
funds, not subject to political manipulation. A great deal of 
concern was raised about the possibility of political 
manipulation of large pools of thrift plan money. This 
legislation was designed to preclude that possibility.
    Likewise, the Senate committee report stated: ``Another 
concern the committee wrestled with was the potential for 
market manipulation through political pressure. The committee 
specifically designed the plan to avoid this problem. The 
legislation provides for three investment funds that are all 
essentially self-managed.''
    The second item that stands out in the legislative history 
is the strong interest that Congress showed in establishing the 
independence and authority of the Federal Thrift Investment 
Board. The legislation established the Thrift Board as an 
independent government agency, which is required by law to 
operate the plan solely in the interest of plan participants. 
The law charges the thrift board with responsibility for 
developing the investment policies of the plan and overseeing 
the management of the plan. The law authorizes the board to 
appoint an executive director who runs the plan on a day-to-day 
basis.
    Three members of the board, including the Chairman, are 
appointed by the President. The President chooses a fourth 
member in consultation with the Speaker of the House and the 
House Minority Leader, and a fifth member in consultation with 
the Senate Majority and Minority Leaders. Members are subject 
to Senate confirmation and serve 4-year terms. All members are 
required by law to have substantial experience in managing 
financial investments and pension plans.
    Its independence is furthered by the fact that the federal 
retirement board receives no appropriations from Congress. 
Administrative expenses are paid through agency contributions 
that are forfeited by employees who leave federal service 
before they have vested, and by charges against participant 
accounts. Congress maintains oversight of the thrift plan 
through the House Committee on Government Reform and the Senate 
Committee on Homeland Security and Governmental Affairs.
    In summary, as we have heard and we will hear from Mr. 
Cavanaugh, the thrift plan is a key component of federal 
employees's retirement benefits. It is an efficient provider of 
retirement savings accounts to the federal workforce, which has 
achieved high participation rates and low administrative costs.
    I have a longer statement to be entered in the record. This 
concludes my opening remarks, and I would be happy to answer 
any questions the subcommittee might have.
    [The prepared statement of Patrick Purcell can be found on 
page 118 in the appendix.]
    Chairman Pryce. Thank you, Mr. Purcell.
    Mr. Cavanaugh, welcome.

  STATEMENT OF FRANCIS X. CAVANAUGH, PUBLIC FINANCE CONSULTING

    Mr. Cavanaugh. Thank you. Madam Chairwoman and members of 
the subcommittee, I welcome this opportunity to discuss the 
important subject of establishing individual accounts in the 
Social Security system. I will focus on the administration's 
proposal.
    The critical question, of course, is cost. Individual 
accounts are proposed to provide a higher investment return 
than would be realized by the Social Security trust fund. On 
this basis, individual accounts would not be feasible for the 
68 million employees of 98 percent of the businesses in the 
United States. That is the 5.6 million small businesses with 
fewer than 100 employees.
    To understand the cost of individual accounts for small 
businesses, we must first understand why 85 percent of them do 
not now have retirement plans for their employees. A major 
reason is that the 401(k) industry has found that it cannot 
profitably provide services for a company for less than 
approximately $3,000 a year, even though they enjoy economies 
of scale from combining thousands of employers in their 
centralized computer systems.
    Further significant economies of scale would not be 
realized by a central TSP-type agency because there would still 
be millions of small business workplaces to be reached. Nor can 
we assume that a new central government agency would be more 
efficient than the major 401(k) providers who now serve this 
market. Thus, the annual cost for an employee of a company with 
10 employees would be $300, or 30 percent of the President's 
proposed initial annual individual account contribution of 
$1,000, and most U.S. companies have fewer than 10 employees.
    These figures confirm the findings of a number of earlier 
studies by the Department of Labor and the Employee Benefit 
Research Institute. Obviously, substantial government subsidies 
would be necessary to make individual accounts attractive to 
employees of small businesses. If all Social Security taxpayers 
participated in the individual account program, the 
administrative costs would be more than $46 billion a year, 
which would be a subsidy to support an uneconomic function.
    In addition to the above costs, which are based on what the 
current providers are actually charging for establishing and 
serving 401(k) plans on the market, there are overwhelming 
practical obstacles to modeling individual accounts on the TSP 
or on private 401(k) plans.
    First, the TSP is administered by just one employer, the 
United States Government, with an extensive network of agency 
personnel payroll and systems staff to provide the essential 
employee education, retirement counseling, payroll deduction, 
timely funds transfers and error-correction functions. These 
essential employer services in 401(k) plans could not possibly 
be performed by small business employers or by a new TSP 
central agency.
    Second, the TSP is computerized, like all other large 
plans, with investments made promptly after contributions are 
deducted from the employee's paycheck. With individual 
accounts, it would be up to 22 months after payday under 
current Social Security Administration procedures before 
individual accounts could be credited.
    Third, the TSP is balanced to the penny every day. The 
Social Security system is never balanced. Each year, there are 
billions of dollars in unreconciled discrepancies.
    Fourth, the TSP and the federal employing agencies have a 
very effective communications system. TSP mailings consistently 
have reached more than 99 percent of employees, but 25 percent 
of Social Security Administration mailings are returned as 
undeliverable. Since individual accounts are certainly not 
feasible for employees of small businesses in particular, the 
only practical way to give them high returns is to invest part 
of the Social Security trust fund in equities. The likely 
increase in trust fund earnings would be an effective way to 
help maintain the solvency of the trust fund.
    Every state in the United States has authorized public 
retirement fund investment in stocks, which can now be done 
through broad-based index funds which avoid the problem of 
direct government control over particular companies. As shown 
in the chart on page eight of my prepared statement, there is 
even less government influence over private companies under the 
trust fund alternative than under the Thrift Savings Plan or 
the administration's plan, less government influence.
    In conclusion, Madam Chairman, the administration's plan 
for universal individual accounts is not feasible from a cost 
standpoint. The only practical way for the Social Security 
system to capture the higher returns available from investments 
in stocks is to diversify the Social Security trust fund 
investments and the trust fund alternative compared to 
individual accounts would be less disruptive of financial 
markets, would save tens of billions of dollars a year in 
administrative costs, and could be effective virtually 
immediately, rather than the 2009 starting date proposed for 
individual accounts.
    The multi-trillion transition costs of individual accounts 
would be avoided. The additional trust fund earnings would go a 
long way toward strengthening Social Security finances and 
would thus reduce, if not eliminate, the need for significant 
tax increases or benefit reductions.
    Thank you for your attention. I hope that my longer 
prepared statement will be included in the record.
    [The prepared statement of Francis X. Cavanaugh can be 
found on page 67 in the appendix.]
    Chairman Pryce. Certainly, without objection, it will be.
    Thank you very much for your abbreviated testimony. I know 
that there is a lot that you all could offer up, and hopefully 
we will get to some of that in the questions.
    Let me just start by saying that as a federal employee I am 
a participant in TSP and have enjoyed much success in that 
program. My own State of Ohio is one of a half-dozen states 
that has begun to offer a 401(k)-like retirement accounts 
through which eligible employees can invest in a handful of 
state-screened mutual funds or other portfolios. But we have 
not had as much success as TSP in Ohio.
    Along with that, I would just like to offer up that I have 
a very friendly mailman. I see him when I am home. He stops in 
and we chat, and he likes to talk about all kinds of things we 
do here in Washington. He informed me the other day that if 
President Bush wants to really sell personal accounts, he 
should get the postal force out, because he and his wife have 
just made so much money in their Thrift Savings Plan and it is 
the best thing that ever happened to them, and he should just 
get all of the postal carriers from all over the country to 
come and share their experience.
    So my question is, what are the key features of TSP that 
makes it so successful, and participation rates so very high, 
compared to, for instance, what we have in Ohio? Maybe you are 
not familiar with that, but I just kind of described it, so if 
you have any insights, that would be great.
    Mr. Amelio. The size of the plan helps to keep the costs so 
low. We have large dollar-amounts, as well as a large number of 
participants, which you would not get from any individual state 
in order to spread the cost.
    Secondly, the index funds that we utilize are about the 
lowest-cost investment that you can find. I am a very large 
proponent of them. We are able to minimize costs.
    So if you combine those two features, the large size of the 
plan with the index funds, I think we are well managed. We do 
everything internally in terms of administration. That is how 
we keep the costs relatively low.
    Chairman Pryce. Mr. Purcell, and then Dr. James?
    Mr. Purcell. One thing I think that contributes to the high 
participation rate is the generous match. The federal 
government, of course, makes a 1 percent contribution on behalf 
of all employees covered by FERS regardless of whether the 
employee contributes, but then there are matching contributions 
so that in effect if you contribute 5 percent, your employing 
agency contributes an additional 5 percent. So that is a very 
strong incentive for participation.
    Chairman Pryce. Yes.
    Doctor?
    Ms. James. Yes. Well, I think you also have to look at the 
wage-base. That is, the average wage of the employee group and 
the average contribution size, because ultimately that is what 
determines the size of the account.
    As I said in my remarks, if you have larger accounts, you 
are dividing this fixed recordkeeping cost per account by a 
much larger number. So you can track the TSP costs over time 
and you can see that that expense ratio falls directly as the 
average size of the account increases, given the fact that 
those recordkeeping costs are largely fixed per account, 
whether it is $1,000 or $50,000.
    Chairman Pryce. You mentioned a $20 amount per account. Is 
that over 1 year or what period of time?
    Ms. James. Well, $20 is my kind of benchmark number. I take 
that out of looking at mutual funds which have recordkeeping 
costs, and that is the low end of the cheesy, the lower 
administrative cost mutual funds operate at about $20 per 
account in recordkeeping.
    Chairman Pryce. Per year?
    Ms. James. It is per year. And it is my estimate of TSP, 
because I have been unable to get the exact numbers from TSP, 
but it is my estimate of the ballpark that that is.
    Chairman Pryce. Let's real quickly switch over to Chile. 
What are the downsides of their system? You mentioned the high 
cost. What would you recommend us to do differently if we were 
to model from that? During our research on reforms in other 
countries, what are the mistakes we want to really be careful 
about?
    Ms. James. Chile and most of the Latin American countries 
use the retail market, that is pension funds that met certain 
rules and regulations could enter. They could approach the 
individual worker and try to attract the individual worker. So 
it was a direct pension fund-to-worker relationship. Most of 
the countries in Latin America and Eastern and Central Europe 
have used that approach.
    I do not think that is the best approach for us because 
that is a costlier approach. It involves reaching a lot of 
little people with little accounts. It involves high marketing 
expenses. Marketing expenses can be half of total expenses in 
many of these countries. So I think the approach used in the 
Thrift Savings Plan, which is using the institutional market, 
aggregating the small accounts, using a competitive bidding 
process, using passive investments which Latin America could 
not use because they did not have indexes, they did not have 
markets the way we do.
    So we have at our disposal institutions that they did not 
have. These can help us keep costs low by competitive bidding, 
passive investment, which keeps the investment part of the 
account practically to zero. I mean, if you index to the S&P 
500, your investment costs are virtually nothing.
    Chairman Pryce. My time has expired. We will allow Ms. 
Maloney to proceed. Thank you.
    Mrs. Maloney. Thank you so much.
    I thank all the panelists. There has been a lot of 
discussion about the Thrift Savings Plan, which is a great 
success, but this plan, of course, is in addition to Social 
Security. I would certainly support a similar Thrift Savings 
Plan for anybody in addition to Social Security.
    My question, and I would ask Mr. Cavanaugh to begin this, 
what problems might arise if the Thrift Savings Plan really 
becomes the substitute for Social Security?
    Mr. Cavanaugh. If the Thrift Savings Plan or individual 
accounts became a substitute for Social Security, well, that 
would be way beyond any of the current proposals.
    Mrs. Maloney. Or a portion of it, a portion.
    Mr. Cavanaugh. A portion, well, if you take some of the 
proposals, the President's portion for the individual accounts 
would be up to $1,000 in the first year. It would go up $100 
each year thereafter, and eventually people could put in 4 
percent of pay, but it would be over 30 years before the higher 
income people would get to that.
    That is relatively modest compared to total savings or the 
savings investment in the Social Security trust fund. I think 
the major question there in terms of impact is whether it is 
cost-effective. As I indicated in my prepared statement, it 
would not be. The expense ratio which the administration says 
would be .03 percent, according to my calculation based on the 
current market, it would be over 10 times that amount.
    So to me, it is a nonstarter. I do not see how the program 
could get off the ground. I would bet that if the Congress 
enacted anything like the President's current proposal, you 
would have to recall it within 6 months, once you found that 
there is no market there, and the costs that would be required.
    Mrs. Maloney. Dr. James, building on the high cost, I am 
also concerned about the cost of transition. The plan would 
increase federal debt by, most economists's estimates, by about 
$5 trillion in the first 20 years and by increasing amounts 
after that. The transition costs of pension systems in 
Argentina contributed really to the country's financial 
difficulties. Of course, the United States is not Argentina, 
but we certainly have a huge national debt now of over $7 
trillion.
    How would you address the problem of the large transition 
costs? Shouldn't an honest proposal for private accounts 
include a way of paying for these costs other than simply 
increasing the federal debt?
    Ms. James. Actually, on individual accounts, I agree with 
you on that point. I think that how we handle the transition 
costs is crucial. In the case of Chile, they accumulated a 
fiscal surplus before starting this system. They started out 
with a surplus that helped cover the transition costs. We are 
not in that position, unfortunately.
    Part of the object of an individual account system is to 
increase national saving. We have a very low national saving 
rate. Individual accounts would build up personal saving, but 
if we finance the transition purely through debt finance, then 
there would be a commensurate increase in public dis-saving, 
which would cancel it out, and we would not get the net 
increase in national saving that we desire.
    So I do think that is a crucial issue. My own personal view 
is that we should do one of two things. Either we should come 
up with a transition-financing plan that does not rely 
exclusively on debt finance. There are two ways of doing that: 
cutting government spending or raising taxes. I think we should 
face that squarely.
    The second way of doing it would be to use an add-on, 
rather than a carve-out. If you use an add-on, you do not have 
transition costs. You also do not have those offsets, the loan 
that gets subtracted at the end.
    So there are virtues to that. I think that if you use an 
add-on, a voluntary add-on really would not be different from 
what we have now in the form of IRAs and other voluntary plans. 
So it would have to be a mandatory add-on, which would become 
part of the overall Social Security system. So I think we 
either need a transition financing plan, or we should go the 
route of at least a partial add-on approach. That is my 
opinion.
    Mrs. Maloney. Okay. My time is up, but I am also very 
concerned about the lower benefit because of the payback that 
you have to pay back into the system.
    Ms. James. But if there is an add-on, there is no payback.
    Chairman Pryce. The gentlelady's time has expired.
    The Chair recognizes Ms. Biggert, the Vice Chairman of the 
committee.
    Mrs. Biggert. Thank you, Madam Chairman.
    Dr. James, Mr. Cavanaugh in his testimony expressed some 
skepticism that small companies could manage the burden of 
administering participation in a personal accounts system. He 
also indicated that the economies of scale from outside 
management groups would not be available to them. Would you 
agree with that analysis?
    Ms. James. You mean if you required every employer to 
provide its own plan? It was not clear to me exactly what model 
Mr. Cavanaugh had in mind, because certainly the plans that we 
are talking about, that are being discussed now, would not be a 
company-by-company plan.
    Mrs. Biggert. I think probably it would be rather than like 
the Thrift Savings Plan, where there is a huge plan, that that 
would be a lot of little companies who would be managing the 
personal accounts.
    Ms. James. No, I do not think it would work that way. I 
think the idea is there would be a large pool, and under the 
current plan that is being discussed, as I understand it, the 
small company would not even be involved in what was going on 
because money would continue to be withheld. If you used the 
carve-out approach, then some portion of that would be at the 
aggregate level subtracted off and put into people's accounts. 
It would not involve company-by-company costs.
    Mrs. Biggert. Would it involve, though, there still has to 
be somebody who administers it.
    Ms. James. Yes, certainly that is true. I think the 
collection would be done through the Internal Revenue Service, 
just as Social Security taxes are now collected. And then there 
would have to be a recordkeeping mechanism, that is what I was 
referring to, that would keep track of how much of that money 
went into each person's account.
    This is done in Sweden, by the way. They have centralized 
recordkeeping through the tax collection system. They have 
centralized recordkeeping for all their workers. Workers then 
choose among 600 mutual funds. They have a lot of choice there, 
but the mutual funds do not even know which individuals are 
going with them.
    Rather, an aggregate pot of money goes to the mutual funds 
that workers have chosen. And they of course are now 70 basis 
points, and they expect it to be getting down to about 30 or 40 
in the future. But they manage to give so much choice and keep 
costs low because they really have a price control system. I do 
not think we would want a price control system. That is why I 
think we would have to go the other route and use competitive 
bidding.
    Mrs. Biggert. But of course, Sweden is a lot smaller 
country----
    Ms. James. Yes, it certainly is.
    Mrs. Biggert.--than we are. And so to have one agency that 
would manage this whole thing, don't you think that it would 
probably be farmed out to various companies who deal in these 
type of funds to manage those?
    Ms. James. I think it would need to be done. I think there 
are substantial economies of scale in the recordkeeping 
function. Even mutual funds outsource to two or three large 
companies that do all the recordkeeping because of the 
economies of scale.
    So I think you would either have one large system or you 
would have a small number of regional systems as we have for 
Medicare, for example. I do not think you would have a lot of 
small companies doing this. That would not be an efficient way 
to go.
    Mrs. Biggert. I think in your testimony that you agreed 
with Mr. Cavanaugh that startup costs could be quite high 
initially. You suggested that amortizing startup costs over 
time is a way to ensure that costs are not so crippling in the 
beginning, besides having a surplus, which would be probably 
the best, if that were possible.
    Ms. James. Yes, yes.
    Mrs. Biggert. Have other countries done amortization?
    Ms. James. Well, for example, the countries that have used 
the retail approach where pension funds have entered on a 
competitive basis, you see that in fact their costs in the 
early years were higher than their fees. They actually made a 
loss in the early years which they recouped later on. The 
estimate is that the break-even point comes somewhere after 5 
or 10 years.
    So in a sense they have amortized in that way. If we did 
this in a more centralized way, we would need a policy decision 
about that. What they did was their own private competitive 
approach. We would need to make that policy decision, and I 
think we would amortize over a large number of years so that 
the costs would be spread across more cohorts.
    Mrs. Biggert. Okay, thank you.
    I yield back.
    Chairman Pryce. I recognize Mr. Frank.
    Mr. Frank. Thank you, Madam Chair.
    Dr. James, I have a copy of a paper that was on your Web 
site, ``Why Personal Accounts?,'' authored by you and Deborah 
James. I assume there is a connection.
    Ms. James. My daughter.
    [Laughter.]
    Mr. Frank. Good. It is nice to promote family.
    Ms. James. She is one of the baby boomers.
    Mr. Frank. I appreciate the balance with which you approach 
this, because you do advocate private accounts, but within a 
certain context. Ms. Maloney got at some of these, and I would 
like to go further.
    The minimum pension, one of the bullet points on page three 
of the paper, a minimum pension should be, you said, between 20 
and 30 percent. Under the system that the President has 
proposed, you could put up to half of your money into private 
accounts ultimately, as I understand it, but we also would have 
that reduction in a progressive way.
    Do you have any sense, that if I retired, say, making about 
$50,000 a year and I put about half into that, when you say a 
private pension, would that refer to the amount of Social 
Security I would get from the other half? Or do you mean in 
addition to that?
    Ms. James. I do not exactly understand.
    Mr. Frank. You say there should be a private pension of 20 
to 30 percent in your statement, in addition. Would that be met 
by the part of your Social Security that was not in the private 
account, if it was 50-50?
    Ms. James. You mean the minimum pension?
    Mr. Frank. Yes.
    Ms. James. You know, different countries handle the minimum 
pension----
    Mr. Frank. Right. But what would you propose for us? A 
minimum pension should be added to offset labor and financial 
market risk.
    Ms. James. You are reading from the paper.
    Mr. Frank. From the paper, yes.
    Ms. James. The little thing. Right. Well, I have my own 
sort of complicated view of what a minimum pension is and how 
it might be handled. I think of the public and the private part 
as together encompassing Social Security. So I do not think of 
just the traditional part.
    Mr. Frank. I agree. Let me ask you this.
    Ms. James. And I would think the minimum would apply, in my 
view, the minimum would apply to the total, and I would like to 
see it also linked to years worked per worker, so that people 
who work longer get a larger return, and that is complicated.
    Mr. Frank. Let me just put it this way. Under our current 
system, if we were to do what has been proposed, allow private 
accounts with up to half and then do that progressive 
indexation, would the residual pension part be adequate in your 
judgment?
    Ms. James. I am sorry. I do not----
    Mr. Frank. Let me try again. Suppose we adopted what the 
President had proposed. You are aware of that?
    Ms. James. Yes.
    Mr. Frank. Up to half could go into private accounts.
    Ms. James. I think he has 4 percentage points going in. 
Right?
    Mr. Frank. Yes, up to half of what----
    Ms. James. It is a little bit less than half.
    Mr. Frank. Right.
    Ms. James. Yes.
    Mr. Frank. And also progressive indexation, as he calls it.
    Ms. James. Yes.
    Mr. Frank. If that is all we did, would that meet your 
standard for an adequate minimum pension?
    Ms. James. Oh, well, no. There is no minimum in there.
    Mr. Frank. Okay. Thank you.
    Ms. James. Nor is there a minimum in our current system.
    Mr. Frank. I understand that, but we are talking about 
changes.
    Ms. James. Yes.
    Mr. Frank. In fact, on that subject, you do say also in the 
paper, wage indexation of the traditional benefit should 
continue. If you switch to price indexation, the benefit would 
call drastically relative to the wages and contributions that 
rise over time. Many seniors will end up way below the average 
standard of living.
    So that you would not support the progressive indexation as 
it has been proposed, at least not at the level of cut-off 
where it now is?
    Ms. James. I think progressive indexation is better than 
pure price indexation.
    Mr. Frank. That is not what I asked you.
    Ms. James. If I were----
    Mr. Frank. Dr. James, excuse me. I am trying to deal with 
this.
    Ms. James. I understand. I want to tell you what my----
    Mr. Frank. I am asking you for your opinion. If you do not 
want to give it, just tell me.
    Ms. James. No, no. I want to----
    Mr. Frank. All right. This is what you said. Wage 
indexation should continue.
    Ms. James. Yes.
    Mr. Frank. There has been a proposal that it should not 
continue at a fairly low level of cutoff. I am just asking for 
your opinion on that.
    Ms. James. Yes. I would like to see the current replacement 
rate be maintained into the future out of the two parts of 
social security, including the accounts.
    Mr. Frank. All right. I appreciate that.
    Ms. James. That would be my objective in structuring a new 
system. I would try to make sure that the relationship of the 
pension to the wage remained where it is today, but I would 
think of the two income streams as contributing to that.
    Chairman Pryce. Thank you. The gentleman's time has 
expired.
    Mr. Frank. Dr. James, I am kind of disappointed. I was 
really trying to have a straightforward conversation. I gather 
you are kind of reluctant to look like you might disagree with 
the administration. I do not think we have a good discussion if 
you feel constrained in that way.
    There are other things in the paper. Would you mind if I 
put some of these in the record?
    Ms. James. No. I am delighted to put it in the record.
    Mr. Frank. Thank you.
    Chairman Pryce. I recognize Mr. Pearce.
    Mr. Pearce. Thank you, Madam Chair.
    Mr. Amelio, when I called the TSP office and asked them the 
relative costs, and I know you cannot give it exact, but they 
tell me the cost of administering the plan is about .001, and 
maybe even as low as 0.006, 1/10 of 1 percent down to 60 
percent of 1/10 of 1 percent. Is that about right?
    Mr. Amelio. The cost on a basis point level would be 0.006. 
That is six basis points. If you take our entire budget and 
divide it among the participants, it comes to approximately $26 
per participant per year. That is 100 percent of the cost.
    Mr. Pearce. Right, 0.006.
    Mr. Amelio. A basis point would be 0.001. You would have to 
get another----
    Mr. Pearce. Yes, I understand.
    Mr. Cavanaugh testified that the administrative costs would 
be at least 10 times that. If we went from three million 
participants, or three-and-a-half million, whatever you have 
now, to 40 million, because we are told that 40 million baby 
boomers are going to go into retirement. Let's say that only 
another 10 million or 15 million, so if we go from 3 to 15 
million people in the plan, can you see where you 
administrative costs are going to go up by 10 times?
    Mr. Amelio. If we increase the number of participants 
substantially, is that your question, Congressman?
    Mr. Pearce. Yes.
    Mr. Amelio. The costs may go up marginally. They would not 
go up incrementally. In other words, if we doubled the number 
of participants in our plan, we would not necessarily double 
the amount of costs in our plan, no.
    Mr. Pearce. So the cost structure might stay the same, but 
not increase dramatically.
    Mr. Amelio. With respect to the TSP, that is correct, yes.
    Mr. Pearce. Mr. Cavanaugh, in your testimony you declare 
that the system of personal accounts would not work because 
private companies like my company, and I have a small company, 
at one point we had 50 employees. I never visualized, when I am 
sitting here talking about Social Security reform, I never 
visualized that I would do anything more as an employer than 
what I do right now. I simply get the employee to fill out a W-
2 for the Internal Revenue; maybe a W-4; maybe add a little bit 
of WD-40 to make it work well when I send it in, but I do not 
do much.
    I do collect the taxes from my employees, and I write the 
check for myself, and I send that to Social Security. Your 
whole assumption in saying that personal accounts will not work 
is that I am suddenly going to take the administrative function 
from Social Security away from Social Security and start doing 
it myself. I never conceived of that as we are sitting here in 
the broad stage of discussion.
    Would your opinion about the personal accounts sustain if 
we did not make your initial assumption that I, as an employer, 
was going to take over the Social Security Administration's 
functions? If we do not make that assumption, if we instead 
leave the functions with Social Security, will your evaluation 
stand in the same position?
    Mr. Cavanaugh. The problem is, and I speak in terms of the 
current market, the market looked at this problem years ago. 
They thought since they had already provided 401(k) plans 
successfully for large corporations----
    Mr. Pearce. My question, sir, if you would address that, is 
will your perception stand if you do not go in with your 
initial assumption? The assumption of your entire argument is 
that I as an employer am going to take the function of Social 
Security Administration, which I never believed that that plan 
would do.
    You say that small companies cannot administer 401(k)s and 
that they do not have them. All I do right now with Social 
Security is I take the money from my employees; I write a check 
to Social Security or the government.
    I think that is all that we would be doing if we had 
personal accounts. The administration would slide over to an 
agency like TSP. I would not be required to find people to 
administer the plan. I do not have people to administer a plan 
right now. With four or five employees, it just does not get 
that far.
    But I do not perceive the initial assumptions that you 
make, and we come to a different conclusion. My question is, 
would your conclusion stand if you do not make your initial 
assumption? If we instead expect Social Security to set up a 
TSP plan, would your conclusions still stand in the same 
position they do now?
    Mr. Cavanaugh. Yes. My conclusion would still stand because 
if you do not do anything more as a small company than deduct 
the tax and send it in to IRS, which is what you say you are 
doing now, that is not what the administration or any of the 
individual account proponents are talking about.
    They are talking about a 401(k)-type plan. The industry, 
when they try to bring these 401(k)-type plans, such as is 
proposed now, to small business, they have found that if the 
business has less than 10 employees, they do not want to talk 
with them, because there is too much involved beyond what you 
are talking about in terms of taking money----
    Mr. Pearce. My time has elapsed. In due respect, I never 
think that the plan that we are talking about is going to be 
set up that way. I think that what we are talking about is that 
the money will be sent to Social Security and a person can opt 
with Social Security to put some in a personal account, and it 
will be very similar to the TSP plan that we have, and that TSP 
plan will be administered by an administration very much like 
we have.
    Chairman Pryce. The gentleman's time has expired.
    Mr. Pearce. Thank you, Madam Chair.
    Chairman Pryce. Ms. Moore, the gentlewoman from Wisconsin.
    Ms. Moore. Thank you, Madam Chair.
    I would like to yield 3 minutes to Mr. Frank.
    Mr. Frank. Thank you.
    I want to try again, Dr. James. It says in this paper here, 
wage indexation of the traditional benefit should continue. Do 
you still believe that?
    Ms. James. Yes.
    Mr. Frank. Then even if we have private accounts, you would 
still want there to be wage indexation and not price 
indexation?
    Ms. James. I would want it to be wage indexed.
    Mr. Frank. Good. Okay.
    Ms. James. But could I add something to that? Because I do 
think we are going to need to have to figure out some way to 
save money on that traditional part so other changes would have 
to be made.
    Mr. Frank. Right.
    Ms. James. For example, raising the retirement age is one 
thing.
    Mr. Frank. I understand. But another change you mentioned, 
and again you mentioned it, but I think you believe that if we 
do not stick with wage indexation, even with private accounts 
there could be a reduction in the cost of living, in the 
standard of living of people. That is what you said, Dr. James.
    Ms. James. Yes.
    Mr. Frank. Okay, second question then. On the transition 
costs, you say they should not be debt-financed as the current 
proposal is.
    Ms. James. Right.
    Mr. Frank. Here is what you say, instead the limit could be 
raised on earnings subject to payroll tax. You note that 
recently most of the wage increase has been above the $90,000.
    Ms. James. That is right.
    Mr. Frank. Or better still, a surtax on all incomes could 
be imposed. Do you still prefer those methods, to debt?
    Ms. James. Yes, I still do.
    Mr. Frank. Okay. So you are for private accounts, but with 
wage indexation remaining and an increase in retirement age, 
and it being financed, the transition, by some increase in 
taxation. Is that correct?
    Ms. James. That kind of plan. You know, I was outlining 
something very briefly and I still stand by the----
    Mr. Frank. I am not putting words in your mouth. You put 
this on your Web site.
    Ms. James. That is right.
    Mr. Frank. I did not have a search warrant. I really just 
read it. Thank you.
    I yield back.
    Ms. James. If I could just add to that. Consistent with 
what I said, I think that personal accounts have the propensity 
to improve our system, but I think how you do it and how you 
get there----
    Mr. Frank. I understand that. What I will say is this, 
there are various ways to do it. I should have added also that 
you propose that personal accounts be partly with an additional 
contribution and partly out of Social Security. So yes, if you 
are talking about increasing taxes one way or the other, 
raising the retirement age, keeping wage indexation, and 
financing them partly by additional and partly from, that is a 
good proposal. Nothing that we have seen resembles it, that is 
all, other than yours.
    I yield back.
    Ms. Moore. Thank you. This is a very distinguished panel 
and I would love to ask all of you questions, but I guess I 
want to pursue the line of questioning that Mr. Pearce started 
with Mr. Cavanaugh, and indeed with Dr. James. I want a 
clarification on the cost of the thrift saving plan.
    It is my understanding, Mr. Cavanaugh, that the reason that 
you think that cost efficiencies could not be realized is 
because literally 200 million workers and all of those 
employers would have to have payday of the very same day as the 
federal government; they would all have to submit the 
paperwork. There are now about 13,000, thousands of telephone 
counselors that would be needed. Could you just explain that a 
little bit more?
    To follow up, Dr. James, can you explain to me why you 
believe that we could avoid the transition costs when the 
thrift saving plan and the federal government under Social 
Security enjoys not paying those costs because it buys those 
Treasury bills itself and does not have to pay, and it is not 
the retail approach. So I am very confused as to how you think 
we could avoid those costs.
    Thank you.
    Ms. James. Who is going to answer first?
    Ms. Moore. It is up to you.
    Mr. Cavanaugh. Go ahead, Estelle.
    Chairman Pryce. There are 48 seconds remaining, so divide 
it up appropriately.
    Ms. James. Are you referring to the transition costs or the 
startup costs? Transition costs come from a carve-out. The 
startup costs are the costs that you have to incur to get the 
IT system going and get the whole system established. Which are 
you referring to?
    Ms. Moore. Well, you are the one that is telling us that--
--
    Ms. James. Well, I think the startup costs, you cannot 
avoid. There are going to be startup costs. My proposal for 
that is that it should be amortized over many years because in 
fact it will serve many future cohorts of workers.
    With respect to transition costs, that is a whole other 
story. There, I think you need a transition cost financing plan 
which would come partly out of taxes, partly out of cuts in 
government spending. These are the possible places it could 
come from. I think it should not come exclusively from debt 
finance.
    Chairman Pryce. The gentlelady's time has expired.
    I recognize Mr. Neugebauer.
    Ms. Moore. The witness will not be allowed to answer me, 
Madam Chair?
    Chairman Pryce. We are up against a series of votes and I 
think she completed her sentence. So we will go on.
    Ms. Moore. Thank you.
    Mr. Neugebauer. Thank you, Madam Chairman.
    Mr. Amelio, I have a TSP account. Do I have an account 
number, or do you use my Social Security number?
    Mr. Amelio. Your account is recognized by your name and 
your Social Security number.
    Mr. Neugebauer. So at payday, you get an electronic 
notification that I have withdrawn a certain amount of money, 
and that information from all the federal employees is sent to 
you electronically, is it not?
    Mr. Amelio. There are 130 payroll offices throughout the 
federal government. Each of those payroll offices transmits to 
us. I believe we actually receive money on a daily basis, 
although every other week are the heaviest transmissions.
    Mr. Neugebauer. But you probably receive that 
electronically, is that correct?
    Mr. Amelio. They are all electronic. Yes, sir.
    Mr. Neugebauer. And so when we are talking about a system 
where we are going to divert, and one other question, and you 
do not own any securities in TSP? You contract, when I give you 
money, you give money to a fund that is tracking the S&P, but 
your organization does not buy stocks every day. It just 
invests into the funds that you have contracted with. Is that 
correct?
    Mr. Amelio. The fund holds five investments. One of them 
is, of course, the G Fund or Treasury securities. The other 
four are index funds. They are managed by Barclay's, which has 
to get an award by competitive bidding. There are commingled 
funds, which are similar to, but not identical to mutual funds. 
We hold funds. We do not hold individual securities.
    Mr. Neugebauer. Right. So you hold the funds. So really 
what we are talking about, and this notion of having employers 
managing accounts, is not the president's proposal.
    The proposal on the table is, or one of the proposals that 
have been brought forward is basically taking Social Security, 
where we already have account numbers, we already have names, 
and so basically transitioning that money rather than into the 
federal treasury, a portion of that, 2 percent or 4 percent, 
whatever the number is, is transitioned into an account that 
says Randy Neugebauer now has $100 more in his retirement 
account this month through the new personal account system than 
he had last month.
    At the end of the month now when I get a statement, it says 
so much went into TSP, and then it says so much went into 
Social Security. But you know what the balance in my Social 
Security account is? It is zero. I have a balance in my TSP 
account.
    What we are talking about, we already have a very 
sophisticated collection system in place with the IRS. It has 
accounts in the Social Security numbers. That is very easily 
transitioned, and that information and those funds transferred 
to a third-party provider that we would contract for, and then 
everyone would have an account. So I think to just kind of 
scare people off that this is going to cost $200 for $1,000, 
you know, I think that is bad information.
    One of the things that I wanted to ask Dr. James about, 
what is your perception of the downside of going to private 
accounts? Some people are worried about the benefits being 
less, but we already have seen a track record where actually 
the returns are better.
    So if you want to put a floor on what the benefits would 
be, it looks like to me we are actually from an annuity 
standpoint, actually reducing the potential for liability, even 
if we looked at a minimum guarantee as staying on the current 
system, or are going to a system where we are investing a 
portion of those funds in a higher account.
    Ms. James. I am sorry. I do not exactly----
    Mr. Neugebauer. I think the point some people were trying 
to say, is there a minimum retirement level that we think you 
would maintain.
    Ms. James. I think I was asked about whether there should 
be a minimum pension built into our system. I would favor a 
minimum pension that was tied to years of work so that people 
who work many years at low rates of pay are assured of a 
certain minimum relative to the average wage. I think that 
would also help to assuage some of the fears that with an 
individual account you might experience bad investment returns, 
and that would be particularly bad at the low end of the income 
scale where people would have a hard time cushioning.
    So a minimum pension is one way to assure people that if 
they invest and if there is a prolonged period of poor 
investment returns, people who had worked most of their lives 
would be assured of a certain minimum standard of living. That 
is what I would favor and I think it would help to overcome 
some of the fears of accounts.
    Chairman Pryce. The gentleman's time has expired.
    Mr. Neugebauer. My time has expired.
    Chairman Pryce. We will go on to recognize Ms. Waters.
    Ms. Waters. Thank you very much. I appreciate this hearing. 
I think this is very important. We still all have a lot to 
learn.
    I was interested in the discussion about the minimum 
account guarantee. Do you know if the President has adopted 
this kind of thinking of a guarantee for those who may find 
themselves at risk because they have invested in ways that cost 
them? Do you know if this concept has been included in anything 
that has been produced by the President and this 
administration?
    Ms. James. As far as I know, that is not in the current 
plan. As you know, we do not have a lot of details about the 
current plan. I have not seen that. It also is not in our 
current system, let me reiterate. So we have to put it in that 
perspective.
    Ms. Waters. Well, but it is a little bit different. The 
reason I like the idea, if we ended up going that way, for some 
kind of a minimum guarantee, is that the current system 
guarantees you that for as long as you live, that Social 
Security check will be deposited in your account. We have that 
guarantee.
    Ms. James. Right.
    Ms. Waters. Even out through the year 2042, it guarantees 
that 80 percent of it would be there. Most people agree you 
could do some very simple things, as you suggest doing, in the 
way that you have the minimum guarantee, while the transition 
costs I suppose of all of this, or increasing or lifting the 
ceiling on the payroll tax. You talk about using that for 
transition costs. Is that right?
    Ms. James. I think in the piece that Mr. Frank referred to, 
I talked about how that could be financed by raising the 
payroll tax or having a surtax on incomes is one way to finance 
the transition. That is right.
    Ms. Waters. Okay. But I suppose what I am getting it is, 
number one, that I like the idea of the minimum guarantee; that 
we do have a guarantee now. And even at 2042 where 80 percent 
perhaps could only be guaranteed if in fact you lifted the 
ceiling on the amount of payroll taxes and increased that 
somewhat, we could fully fund Social Security, in the same way 
that you describe that you could fund transitional costs. Is 
that correct?
    Ms. James. It would require a substantial increase to fund 
the entire Social Security benefit. Your question actually gets 
to a very key point. If we are going to put more revenue into 
the system, should it go into the traditional benefit or should 
it go into personal accounts.
    Ms. Waters. That is right. What I did not hear was, because 
I keep hearing this huge amount that it would take to 
transition and to set up these accounts, whether you are 
suggesting that you lift the ceiling, you lift the payroll 
taxes to finance that.
    Ms. James. If I could just respond to that, because it is 
really the central question and I think we ought to focus on 
that a little bit in the broader debate. One problem with 
raising taxes and putting more revenue into the traditional 
system, is that in the interim period, over the next 30 or 40 
years, that will be building up the trust fund. You then have 
to ask how will the money in the trust fund be invested.
    Now, right now the money in the trust fund is invested 
exclusively in government bonds. There is some evidence that 
that actually increases the government's deficit; that it is 
not only invested in government bonds that would have existed 
otherwise, but it encourages additional deficit finance because 
here is this pot of money sitting there that only the 
government gets access to.
    Now, if this increases the government deficit, then 
eventually taxpayers are left with a larger set of obligations 
that they have to fulfill. That will simply result in a larger 
taxpayer burden down the road. In other words, really the 
question is can we effectively save in this way by simply 
building the trust fund. The proposal to put all that extra 
revenue into the trust fund would run the danger that we really 
would not be saving; that it would be in the trust fund, but it 
would become an additional government deficit.
    Ms. Waters. I understand that, but I would have to look 
closely at that deficit argument to see if really that is what 
happens. What worries me a bit about this discussion of the 
private accounts even, particularly about your take on this, 
that a minimum guarantee as done in other countries that you 
have identified, would give you some kind of safety net.
    What I am really concerned about is this: Over the past 
several years, last two years or so, even in the TSP accounts, 
those people that were heavily invested in one of those markets 
lost money. With these investment accounts, if you are in your 
last couple of years of retirement and you do not have a 
minimum guarantee, and you lose the money that you are allowed 
to invest, how then do you recoup it? What do you do? Because I 
think we have seen some evidence of that in TSP, even though it 
is considered pretty good. I mean, it is pretty safe.
    Chairman Pryce. The gentlelady's time has expired. I would 
be happy to allow a brief answer, and of course we can submit 
further questions.
    Ms. James. Right. I will make my answer very brief. I am 
sure you know the historical data. All we have is the past. We 
do not know for sure what the future will hold. Historically, 
we know that for any 20-year period in the past, you would not 
have lost money. You would have come out ahead with a stock 
market investment rather than bonds. Now, the future may be 
different and no one is proposing all this money should be put 
into the stock market. So that is part of my answer.
    Another part of the answer is, I think people should move 
out of stocks gradually as they are approaching retirement age. 
I think waiting until the last moment is dangerous for the very 
point you mentioned. The market could fall on the day that you 
decide to move out. So I think a gradual move-out during the 5 
to 10 years prior to retirement is the way that I would 
recommend doing this.
    Finally, I think we are mostly concerned about the low end 
of the spectrum in this regard, and that is where I think some 
kind of minimum guarantee would be useful.
    Ms. Waters. Thank you, Madam Chair.
    With unanimous consent, just to raise the question of who 
is going to tell Ms. Mary Jones how to do that strategy. I am 
at retirement age and nobody told me. So where do they get this 
information from?
    Ms. James. It has to be built in. It has to be structured. 
You cannot depend on individuals to think it through.
    Ms. Waters. That is right. That is absolutely true. Thank 
you.
    Chairman Pryce. Thank you.
    We are at a vote now, and the Chair notes that some members 
may have additional questions for this panel. They are 
encouraged to submit them in writing. Without objection, the 
hearing record will remain open for 30 days for members to do 
so and for the witnesses to place their responses in the 
record.
    We are very, very grateful to all of you for spending time 
with us this morning. It was most informative, and thank you 
for being here.
    This hearing is adjourned.
    [Whereupon, at 11:45 a.m., the subcommittee was adjourned.]


                            A P P E N D I X



                              May 5, 2005

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