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



 
         HEARING ON ALTERNATIVES TO STRENGTHEN SOCIAL SECURITY

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

                                HEARING

                               BEFORE THE

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

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 12, 2005

                               __________

                           Serial No. 109-22

                               __________

         Printed for the use of the Committee on Ways and Means




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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

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

                    Allison H. Giles, Chief of Staff

                  Janice Mays, Minority Chief Counsel


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


                            C O N T E N T S

                              ----------                              
                                                                   Page
Advisory of May 26, 2005 announcing the hearing..................     2

                               WITNESSES

Cato Institute Project on Social Security Choice, Michael Tanner.    78
Center on Budget and Policy Priorities, Jason Furman.............    62
Free Enterprise Fund, Institute for Policy Innovation, Lawrence 
  A. Hunter......................................................    54
The Lindsey Group, Hon. Lawrence B. Lindsey......................     6
Lyndon B. Johnson School of Public Affairs, University of Texas 
  at Austin, Hon. Kenneth S. Apfel...............................    48
MFS Investment Management, Robert C. Pozen.......................    10
Urban Institute, Tax Policy Center, C. Eugene Steuerle...........    35
Watson Wyatt Worldwide, Sylvester J. Schieber....................    16

                       SUBMISSIONS FOR THE RECORD

American Enterprise Institute, Alex Pollock, statement...........   155
California Retired Teachers Association, Sacramento, CA, Eva 
  Hain, statement................................................   160
Elia, Joyce, Mission Viejo, CA, statement........................   162
Englesby, Sue, Boise, ID, letter.................................   164
Fronek, Donald, Toney, AL, letter................................   164
Galvin, Cecile, Laguna Niguel, CA, statement.....................   165
Gould, Francis, Vista, CA, statement.............................   166
National Association of Disability Examiners, Lansing, MI, Martha 
  Marshall, letter...............................................   166
National Committee to Preserve Social Security and Medicare, 
  Barbara Kennelly, statement....................................   167
National Education Association, statement........................   169
Taniashvili, Patricia, Surry, ME, statement......................   173
Tucker, Deborah, Boynton Beach, FL, statement....................   173
University of Oklahoma College of Law, Norman, OK, Jonathan 
  Forman, statement..............................................   174
Ward, Douglas E., Oberlin, OH, statement.........................   177


         HEARING ON ALTERNATIVES TO STRENGTHEN SOCIAL SECURITY

                              ----------                              


                         THURSDAY, MAY 12, 2005

             U.S. House of Representatives,
                       Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to other business, at 10:17 
a.m., in room 1100, Longworth House Office Building, Hon. Bill 
Thomas (Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE

May 12, 2005

No. FC-8

                      Thomas Announces Hearing on

                       Alternatives to Strengthen

                            Social Security

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
alternatives to strengthen Social Security. The hearing will take place 
on Thursday, May 12, 2005, in the main Committee hearing room, 1100 
Longworth House Office Building, beginning at 10:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

BACKGROUND:

      
    In their 2005 report, the Trustees of the Social Security Trust 
Funds again reported that the Social Security program faces long-term 
financial challenges. In just three years, the leading edge of the 
baby-boomers will reach early retirement age. In 2017, just over a 
decade from now, Social Security will pay out more in benefits than it 
collects from payroll taxes. To make up the shortfall, the Treasury 
bills credited to the trust funds will have to be redeemed. Because no 
money has been set aside to pay these obligations, the government will 
have to raise taxes, cut spending, or increase the debt to honor these 
obligations, which are backed by the full faith and credit of the 
Federal government.
      
    By the time today's 26-year-olds are eligible to retire in 2041, 
the trust funds will be exhausted and Social Security taxes will only 
cover about three-fourths of promised benefits. In other words, 
inaction will lead to a 26-percent benefit cut.
      
    If Social Security's financial challenges are not addressed soon, 
temporary solutions--such as those adopted in 1983 when Congress last 
acted on Social Security--or dramatic benefit cuts or tax increases 
will be the only options available. According to the Social Security 
Trustees, the Comptroller General of the United States, and the Federal 
Reserve Board, the sooner lawmakers act, the more options are available 
to strengthen Social Security.
      
    Social Security's Trustees have urged Congress to address Social 
Security's financial challenges sooner rather than later. For more than 
a decade, several bipartisan councils and commissions, as well as many 
individual experts and policymakers, have laid out options and 
comprehensive proposals for strengthening Social Security. In addition 
to bringing the program's finances back into balance, experts have also 
called for updating Social Security benefits to better protect 
families, given changes in our society that have occurred since the 
program was created 70 years ago.
      
    In announcing the hearing, Chairman Thomas stated, ``The American 
people understand Social Security cannot meet its obligations in the 
future unless Congress takes action. We will examine potential 
solutions that will preserve Social Security for seniors and Americans 
nearing retirement, while improving retirement security for younger 
workers.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on solutions designed to strengthen Social 
Security to better meet the needs of 21st-century families.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
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May 26, 2005. Finally, please note that due to the change in House mail 
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technical problems, please call (202) 225-1721.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
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    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.
      

    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
business days notice is requested). Questions with regard to special 
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materials in alternative formats) may be directed to the Committee as 
noted above.

                                 

    Chairman THOMAS. I would like to move to the principal 
order of business before the Committee, and that is to begin to 
examine particulars within the area of our jurisdiction of 
Social Security. The last time this Committee looked seriously 
at Social Security was in 1983. To give you an idea of how much 
the world has changed, all you have to do is look at this 
Committee. There are only a few Members that are currently on 
this Committee that were on the Committee in 1983, the 
gentleman from New York, Mr. Rangel, the gentleman from 
California, Mr. Stark, and myself. I was the only Member of the 
Committee apparently here on the Subcommittee on Social 
Security. At that time, to a very great extent, our effort was 
to literally save Social Security and, in fact, had to delay 
the Cost of Living Adjustments (COLA) to be able to meet 
payments. That truly was in any definition of the term a 
crisis. What probably disappointed me the most was--and 
notwithstanding our response to meet that need--we never did do 
what I thought we should have done at that time; to examine 
some of the, I think you could use the term ``inequities'' that 
occurred over time as society aged; the way in which people 
work, especially women in terms of the home and outside of the 
home; the age difference in terms of longevity of our seniors; 
and a number of other aspects that were internal to Social 
Security that probably needed adjustment at that time. Now, as 
the chairman of the Committee on Ways and Means, I feel very 
strongly about what we need to address.
    I am pleased that a number of our witnesses addressed them 
specifically. I will be asking questions directed at what some 
folks will think are secondary issues. If we are going to look 
at this stuff once every quarter of a century, I think we do 
need to look at how much the society has changed and how we 
need to change the structure. We are going to do it in the full 
Committee and we are going to do it in the Subcommittee on 
Social Security. I will recognize, for the remainder of my 
time, the gentleman from Louisiana, the chairman of the 
Subcommittee on Social Security.
    Mr. MCCRERY. Thank you, Mr. Chairman. I commend President 
Bush for focusing on this issue and bringing the attention of 
the American people to this issue that begs for action by the 
Congress. I also commend the chairman of the full Committee, 
Mr. Thomas, for scheduling this series of hearings that we hope 
will provide the Committee with sufficient options, 
information, and knowledge to address the problems associated 
with the Social Security program. In the past, we have had a 
pay-as-you-go program funded by the payroll taxes of the 
current generation of workers to pay the current generation of 
retirees. In the past, that has been a reasonable approach due 
to the large number of workers, compared to the number of 
retirees.
    Unfortunately for those who might really like the pay-as-
you-go system, demographic changes are taking place, have taken 
place, and are continuing to take place in our country, which, 
in my opinion, makes the pay-as-you-go system less viable, and 
perhaps even unsustainable. So, I think it is incumbent upon 
this Committee, as the Committee of jurisdiction, to examine 
ways of financing the Social Security system that are smarter 
and better, particularly in view of the burden on future 
generations that a pay-as-you-go system might place. Mr. 
Chairman, I look forward to hearing from these distinguished 
gentlemen who have undoubtedly spent many hours thinking about 
the Social Security system and how to finance it and look 
forward to their testimony.
    Chairman THOMAS. I thank the gentleman. In some instances, 
it is literally years, and that is why we are privileged to 
have the witnesses in front of us. The gentleman from New York.
    Mr. RANGEL. Thank you, Mr. Chairman. Most of my time, I 
will be yielding to Congressman Levin to deal with the question 
of Social Security. I really, personally and politically, think 
that this sensitive issue screams out for bipartisanship. I 
think the President's 60 cities in 60 days did more to 
polarize. I thank you for your bipartisan approach to this 
panel. Since you have six people supporting private accounts 
and two that are not, this is a long way in terms of working 
together. We are going to have a problem here--and I think we 
are starting this off as a problem by not discussing with any 
of the Members prior to going and making privatization the one 
issue that we truly believe. It is like putting Kool-Aid on the 
table if we are going to, in a bipartisan way, try to save this 
system. As long as this is on the table, we are going to have a 
problem talking. I yield to Mr. Levin.
    Mr. LEVIN. Thank you, Mr. Rangel. As you have said, this 
hearing is a continuation of the course that was set out upon 
by the President in the State of the Union; diverting money 
from Social Security to set up private accounts. The President 
set out that course, he said it in the State of the Union, he 
sent his Administration out on a 60-day tour to promote it, and 
he held, recently, a press conference at the White House, where 
he reconfirmed that commitment, and really smoothed the road 
for the middle-class benefit cuts that are inherent in private 
accounts. Our chairman, Mr. Thomas, is now suggesting that we 
surround this basic issue with assorted other issues, but in 
this case--and I want to emphasize this--the Democrats and the 
American people will not lose sight of the tree being cut down 
in the middle of the forest.
    A brief look at history; our President when he ran some 
decades ago was for private accounts. In the nineties, Mr. 
Thomas, our chairman, introduced legislation to privatize 
Social Security, and, under that, half of the payroll taxes 
would have been diverted into private accounts and guaranteed 
Social Security benefits would have been cut in half. Today, as 
Mr. Rangel mentioned, the six witnesses who are brought forth 
by the Republican majority have all supported privatization of 
Social Security. So, let me just say, clearly, with that as the 
primary goal here of the Administration, we will stand in 
opposition to that, united with the American people, not 
because we oppose more ideas, but because we are opposed to bad 
ideas, including: the deep benefit cuts, the diversion of 
Social Security moneys in trillions to risky private accounts, 
the added benefit cut to the guaranteed benefit that would come 
from the offset, and the huge amount of borrowing.
    All of these changes will destabilize Social Security, 
undermining the strong public support that has insured it for 
generations of Americans, generations. No amount of tweaking or 
combining it with other provisions can make that a good idea. 
With private retirement programs--and we have heard this 
increasingly--built on shifting sands, Social Security stands 
as the basic guaranteed foundation for retirees, disabled 
workers, and surviving young children. So, I want to emphasize 
in closing what Mr. Rangel has said. It is our hope in this 
hearing that we can have a real discussion of what 
privatization would mean, and in doing so, our hope is that our 
colleagues will come to the same conclusion that most Americans 
have already reached. The President should drop his demand for 
private accounts, and in doing so, allow us to work, in a 
bipartisan way, as was done 20-some years ago, to strengthen 
Social Security and to ensure that it continues providing 
guaranteed benefits in the future.
    Chairman THOMAS. The Chair thanks the gentleman, and the 
Chair looks forward to working with the gentleman from Michigan 
in preparing a Members' panel for which he can provide Members 
of his party to discus their plans for saving Social Security 
on an ongoing basis. The Chair welcomes the panel. I know 
Members look at the witnesses' testimony prior to the hearing. 
I want to thank all of you, because taken in its entirety, it 
is one of the best syllabuses I have seen in going over the 
arguments pro and con. The Chair, to the best of his ability, 
would allow any of you to finish your sentences at this 
hearing. That wasn't necessarily the case at other hearings 
that I have noticed in terms of an attempt to discuss programs. 
Members are anxious to question you. We are each only going to 
have about 5 minutes. I don't know how long some of you can 
stay. The Chair is prepared to stay as long as is necessary to 
have as full and as complete a discussion as possible, and I 
will be making comments after you have provided us with your 
oral testimony. I will say to all of you that, without 
objection, your written testimony will be made a part of the 
record and I will just begin over to my left and we will just 
move across the panel. Mr. Tanner, there is no indication that 
the fact that you have a temporary location on the dais means 
anything about your presentation. It is just that this is one 
of our larger panels, but the Chair thought that it would be 
much better to have all of you together so you can actually 
have a dialog among yourselves, rather than, say, run two 
panels and then have someone say, ``The previous panel said,'' 
and so forth. So, the Chair apologizes, but I think in the end, 
we will have a much better chance of having as full a 
discussion as possible in the limited timeframe that we have. 
With that, Mr. Lindsey, if you will address us in any way you 
see fit with the time that you have.

STATEMENT OF LAWRENCE B. LINDSEY, PRESIDENT AND CHIEF EXECUTIVE 
         OFFICER, THE LINDSEY GROUP, FAIRFAX, VIRGINIA

    Mr. LINDSEY. Thank you, Mr. Chairman. Thank you very much 
for the invitation to be here today. I must say it is a 
pleasure. It is a particular pleasure since on the floor of the 
other body yesterday, I was referred to as the late Larry 
Lindsey----
    [Laughter.]
    Mr. LINDSEY. I can assure you that it is a pleasure to be 
here and alive and kicking. It is surprising to me that, in the 
discussion of Social Security, promoting national savings has 
not been at the center of the debate. Last year, we Americans 
spent on consumption, investment, and government $1.06 for 
every dollar we earned. We balanced our collective checkbook 
only by selling assets we owned and by borrowing directly from 
foreigners, including institutions like the People's Bank of 
China, to whom one might prefer not to be increasingly 
indebted. This borrowing is directly tied to an ever-growing 
trend for us to consume foreign-produced goods, at the expense 
of American production. Done right, the reform process offers 
enormous potential for improving our savings. The first part of 
any credible Social Security reform plan is to permanently 
eliminate the actuarial deficit in the system. Currently, the 
system has promised to pay out in present value terms $11 
trillion more than it will collect in revenue. There are a 
number of ways of closing this gap, but with different 
implications for national saving. For example, it would take a 
28-percent increase in payroll taxes enacted now to make sure 
that the government collected all the money it needed to make 
benefit promises over time. This would, if three conditions 
were met, temporarily increase savings. First, the government 
would have to not spend the extra money on non-retirement 
spending. Second, the adverse effects of the tax increase on 
the economy must not lower government revenue from non-payroll 
sources. Third, private citizens faced with declining 
disposable incomes must cover the entire shortfall from reduced 
consumption, not by increasing their savings.
    It is unlikely that these three conditions would be met, 
but even if they were, the savings increase would be temporary. 
Once Social Security payments caught up with enhanced revenue, 
the plan would forever be moving money from one set of people 
who would spend the money, workers, to another set of people 
who would spend the money, retirees. So, even in the best case, 
a tax increase would do nothing to increase national saving 
over the long run. Because these conditions are unlikely to be 
met, the tax hike would not produce the intended amount of 
increased national savings even in the short run and would 
likely lower national savings in the long run. The combined 
adverse effects on existing personal saving and the 
disincentive effects on working and entrepreneurship are likely 
to be significant. This would be particularly true of ideas to 
raise or eliminate the wage cap that determines both Social 
Security taxes and Social Security benefits. For example, 
Martin Feldstein calculated that eliminating the cap would 
reduce net Federal revenue, since the behavior response by 
entrepreneurs to a tax hike that took their tax rate back up to 
nearly 50 percent would reduce Federal income tax revenue, as 
well as produce lower than expected payroll tax receipts. 
Moreover, such entrepreneurial income would be taxed and would 
have funded business fixed investment.
    The second way to bring the system into balance is to 
change the formula for determining benefits now in a way that 
gradually reduces the current growth rate in real benefits. 
Currently, Social Security projects a 50-percent increase in 
benefits, even after inflation, over the next half-century. The 
system would be brought into balance by limiting future 
benefits to the level of benefits enjoyed by those retiring 
from the system now, while fully indexing those benefits to 
inflation. This could be coupled--and I would think it is a 
good idea--with a generous minimum Social Security benefit, 
thus making the system both more progressive and providing a 
better safety net, with little adverse effect on national 
saving. The $11 trillion in savings to the Social Security 
system by doing this could be viewed as a one-time improvement 
in the Federal Government's balance sheet by that amount, with 
an equivalent reduction for future retirees, as benefits would 
not rise as fast as they might now expect. Still, national 
saving would likely rise as a result in order to maintain the 
level of consumption retirement that the government previously 
promised but could not deliver.
    Individuals would have to gradually increase their personal 
saving during their working lives. This might not be easy for 
some folks. So, a second part of any Social Security reform 
plan that promotes national saving should include a personal 
account plan that helps people save and learn the benefits of 
saving by watching their own accounts grow. Most personal 
account proposals, including the President's, would allow 
workers to use a portion of payroll taxes currently collected 
and direct them into a personal account. It has been widely 
noted that any shortfall to meet current benefits would be met 
by government borrowing, and therefore, the personal accounts 
that are funded by government borrowing do not raise national 
saving directly but simply increases government borrowing to 
fund private saving. What is not widely understood or reported 
is that for individuals to establish such an account, his or 
her regular Social Security benefit would be adjusted 
prospectively by the amount of any payroll tax that was 
diverted into the personal account plus interest. As a result, 
there is no added strain on Social Security resources. In fact, 
the system as a whole is made better off since funds are 
automatically transferred from years where the system has a 
surplus or a relatively modest shortfall to years where the 
shortfall is much bigger. Properly designed, Social Security 
personal accounts strengthen and do not weaken the solvency and 
safety of the Social Security system. So, long-term----
    Chairman THOMAS. Mr. Lindsey, let me indicate, since you 
are the first and all of you really want to put a pound-and-a-
half of sugar in a one-pound bag, that hopefully, as we 
discuss, the other points will come out. To be fair, because I 
am going to hold Members to 5 minutes as much as I can, if you 
will kind of sum it up, the Chair would appreciate it.
    Mr. LINDSEY. I will do that, sir. What I would recommend, 
as a personal account plan to promote savings, is that what we 
need is for individuals to make an additional contribution, 
that would be matched in a progressive way from the government 
revenue. The resulting accounts would buildup much more 
quickly, generate more earnings, and provide far more funds for 
retirement. The employees' contribution would not affect their 
Social Security defined benefit in any way, but, as in the 
President's plan, the Social Security system as a whole would 
be made whole for any diversion of existing payroll taxes. This 
proposal is not a carve-out. Nothing is carved out or removed 
from the Social Security system. The dollars allocated to 
personal accounts impose no additional strain on the system. 
This proposal is not an add-on. There is no new entitlement. In 
fact, adding yet another entitlement to our system would be 
among the worst things we could do for national saving. So, 
given the critical importance of saving for our Nation's 
future, I think this approach is the best way of promoting 
savings over the long run. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Lindsey follows:]

  Statement of The Honorable Lawrence B. Lindsey, President and Chief 
        Executive Officer, The Lindsey Group, Fairfax, Virginia

    Mr. Chairman, members of the Committee, I am honored to have been 
asked to testify today on the issue of Social Security reform. It is 
surprising that the issue of promoting national saving is not at the 
center of the current debate over Social Security reform, and that will 
be the focus of my comments today.
    Last year Americans spent--on consumption, investment, and 
government--$1.06 for every dollar they earned. We balanced our 
collective checkbook only by selling assets we owned and by borrowing 
directly from foreigners, including institutions like the People's Bank 
of China, to whom one might prefer not to be increasingly indebted. 
This borrowing is directly tied to an ever growing trend for us to 
consume foreign-produced goods at the expense of American production. 
Done right, the reform process offers enormous potential for improving 
our national saving rate and thus reducing the amount we will be 
borrowing from foreigners over the next century.
    The first part of any credible Social Security reform plan is to 
permanently eliminate the actuarial deficit in the system. Currently 
the system has promised to pay out, in present value terms, $11 
trillion more than it will collect in revenue. There are a number of 
ways of closing this gap, but with different implications for national 
saving.
    For example, it would take a 28 percent increase in payroll taxes 
to make sure that the government collected all the money it needed to 
meet benefit promises over time. This would, if three conditions were 
met, temporarily increase saving. First, the government, in contrast 
with historical evidence, must not spend the extra revenue on non-
retirement spending. Second, the adverse effects of the tax increase on 
the economy must not lower government revenue from non-payroll tax 
sources. Third, private citizens, faced with declining disposable 
incomes, must cover the entire shortfall from reduced consumption, not 
by reducing their saving.
    Even if these three conditions were met, the saving reduction would 
be temporary. Once Social Security payments caught up with the enhanced 
revenue, the plan would forever be moving money from one set of people 
who would spend the money--workers--to another set of people who would 
spend the money--retirees. So, even in the best case, a tax increase 
would do nothing to increase national saving over the long run.
    But, because these conditions are unlikely to be met, a tax hike 
would not produce the intended amount of increased national saving even 
in the short run, and would likely lower national saving in the longer 
run. The combined adverse effects on existing personal saving and the 
disincentive effects on working and on entrepreneurship, are likely 
significant.
    This would be particularly true of ideas to raise or eliminate the 
wage cap that determines both Social Security taxes and Social Security 
benefits. Martin Feldstein calculated that eliminating the cap would 
reduce net federal revenue since the behavioral response by 
entrepreneurs to a tax hike that took their tax rate back up to nearly 
50 percent would reduce federal income tax revenue as well as produce 
lower than expected payroll tax receipts. Moreover, much of the 
entrepreneurial income that would be taxed would have funded business 
fixed investment. Thus, this particular tax idea would likely lower 
both national saving and economic growth.
    The second way of bringing the system into balance is to change the 
formula for determining benefits now, in a way that gradually reduces 
the current growth rate in real benefits. Currently Social Security 
projects a 50 percent increase in benefits, even after inflation, over 
the next half century. The system could be brought into balance by 
limiting future benefits to the level of benefits enjoyed by those 
retiring from the system now, while fully indexing those benefits to 
inflation. This could even be coupled with a generous minimum Social 
Security benefit, thus making the system both more progressive and 
providing a better safety net, with little adverse effect on national 
saving. The $11 trillion saving to the Social Security system of doing 
this could be viewed as a one-time improvement in the federal 
government's balance sheet of the same amount, but with an equivalent 
reduction for future retirees, as benefits would not rise as fast as 
they might now expect.
    But, national saving would likely rise as a result. In order to 
maintain the level of consumption in retirement that the government 
previously promised, but could not deliver, individuals would have to 
gradually increase their personal saving during their working lives. 
This may not be easy for some folks. So, a second part of any Social 
Security reform that promotes national saving should include a personal 
account plan that helps people save and learn the benefits of saving by 
watching their own accounts grow.
    Most personal account proposals, including the President's, would 
allow workers to use a portion of payroll taxes currently collected and 
direct them into a personal account. It has been widely noted that any 
shortfall to meet current benefits would be met by government 
borrowing, and that personal accounts that are funded by government 
borrowing do not raise national saving; it simply increases government 
borrowing to fund private saving.
    But it is not widely understood that for an individual to establish 
an account, his or her regular Social Security benefit would be 
adjusted prospectively by the amount of payroll tax that is diverted 
into a personal account plus interest. As a result, there is no added 
strain on Social Security resources. In fact, the system as a whole is 
made better off since funds are automatically transferred from years 
where the system has a surplus, or a relatively modest shortfall, to 
years when the shortfall is much bigger. Properly designed, Social 
Security personal accounts strengthen, and do not weaken, the solvency 
and safety of the Social Security system. So, long term national saving 
is not harmed in any way by this approach, and is likely to be 
increased.
    Still, the national saving opportunity of Social Security reform 
could be further enhanced. The best way is to allow workers to choose a 
plan where they would contribute more to their retirement in return for 
gaining ownership and a higher return on their existing payroll taxes. 
In effect, the government could match private contributions. Many 
companies successfully use this approach for their own 401(k) plans, 
but the Social Security match could easily be more generous.
    Consider, for illustrative purposes, a plan that asked employees to 
contribute 1\1/2\ percent of their wages to their own personal account, 
with no change in their current taxes. For only a slightly higher short 
run budget effect than the President's proposal, Social Security could 
offer a four-for-one match on employee contributions made on the first 
$10,000 of earnings and a one-for-one match on contributions made on 
earnings above that amount. A worker making $10,000 would thus 
contribute $150 a year to his account and be matched $600 from existing 
payroll tax revenue--producing a $750 account. A worker making $50,000 
would contribute $750 a year and be matched $1,200, producing a $1,950 
personal account. The resulting accounts would build up much more 
quickly, generate more earnings, and provide far more funds for 
retirement. The employee's contribution would not affect their Social 
Security defined benefit in any way. But as in the President's plan, 
the Social Security system would be made whole for any diversion of 
existing payroll tax revenue.
    Best of all, national saving would be enhanced unambiguously. The 
funds being contributed by workers would largely be net contributions 
to national saving. They would also involve the real attributes of 
ownership of capital since the worker would unequivocally have some 
``skin in the game.'' A high initial match rate would also create the 
right kind of incentives to change long term attitudes toward national 
saving, as well as being more progressive than the current Social 
Security system.
    This proposal is not a ``carve out.'' Nothing is carved out or 
removed from the Social Security system. The dollars allocated to 
personal accounts impose no additional strain on the Social Security 
system. This proposal is not an ``add on.'' There is no new 
entitlement. In fact, adding yet another entitlement to our system 
would be among the worst things we could do for national saving.
    Given the critical importance of saving to our nation's economic 
future, it is important to make the most of the once-in-a-generation 
opportunity to promote national saving offered by Social Security 
reform. The combination of gradual reductions in the promised rate of 
real increase in future benefits and a personal account system that 
promotes national saving--that is neither a carve out, nor an add-on--
is the best approach.
    Thank you.

                                 

    Chairman THOMAS. Thank you, Dr. Lindsey. Mr. Pozen?

    STATEMENT OF ROBERT C. POZEN, CHAIRMAN, MFS INVESTMENT 
               MANAGEMENT, BOSTON, MASSACHUSETTS

    Mr. POZEN. Thank you very much, Mr. Chairman, for this 
opportunity to testify. Let me begin by explaining progressive 
indexing, my proposal, and then I will address some issues that 
have been raised about that proposal. Progressive indexing 
divides workers into three main groups: low-wage workers, high-
wage workers, and median-wage workers. Low-wage workers would 
be everyone at $25,000 in average career earnings and lower; we 
would preserve, totally, all of their scheduled benefits. We 
would also preserve everyone's benefits who is in retirement or 
who would retire before 2012. High-wage workers would be 
defined as $113,000 in average career earnings and higher and 
we would price index their initial Social Security benefits so 
they would grow, but they would grow more slowly than the 
current schedule. Everyone in between, the median-wage workers, 
would receive a mix of price and wage indexing. That means that 
all of them would have their benefits grow by more than the 
Consumer Price Index, but not as much as the current schedule.
    What is the rationale for this proposal? I believe that 
when Social Security was passed, there were no Individual 
Retirement Accounts (IRA) or 401(k)s; there weren't really even 
very many defined benefit plans. Now, in 2004 alone, the tax 
revenue foregone for IRAs and 401(k)s was roughly $55 billion; 
if we include all private retirement programs, it was $100 
billion in that year alone. Most of those tax subsidies go to 
high-wage and to some degree middle-wage workers, and so, I 
believe in order to create neutral government support among 
wage groups, we need to do more for low-wage workers in Social 
Security. Very few of them have retirement programs like 
401(k)s or IRAs and they are totally dependent on Social 
Security.
    There are three main questions that have been raised. Also, 
there are technical questions that I deal with in my testimony. 
One is, some people say, ``it is nice that you protect the low-
wage worker, but what about the middle-wage worker?`` At 
$25,000 in career earnings, that constitutes roughly 30 percent 
of all workers who retire in the United States. If we look at 
the median-wage worker, I think it is really too easy a 
criticism, and, I think, an unfair criticism to say that those 
people are going to get less than scheduled benefits. If we 
have a large deficit and we protect low-wage workers, we are 
going to have to grow Social Security benefits slower for 
someone. If we look at the median-wage worker in 2045, then 
yes, it is true that person would get, under progressive 
indexing, 16 percent less than the schedule of benefits. 
However, if the system is not subject to a major reform, there 
would be an automatic, across-the-board, cut in 2042 and that 
person would suffer a 27 percent decrease in benefits. So, we 
really need to think about any ``cut'' relative to that 27 
percent decrease. Another criterion is purchasing power. In 
2045 under progressive indexing, the median worker would be 
looking at a 20-percent increase in the purchasing power of 
their Social Security benefits relative to today. So, yes, 
there is a reduction from the schedule, but it is actually much 
less than if the system defaulted, and, most importantly, for 
almost all workers under progressive indexing, they would get a 
substantial increase in purchasing power.
    Second, people say that they would like to have milder 
reductions from the schedule in the middle-wage workers, and I 
think that is a fair point. It is a political point that you 
will have to address. I think we have to just be realistic 
about what are the other alternatives. I suggested in my 
testimony that you could have a milder version of progressive 
indexing if Congress were willing to do something on the 
retirement age and I suggested, for instance, between the years 
2055 and 2079, you could move the retirement age back gradually 
from 67 to 69. That would be consistent with longevity 
expectations and it would allow you to put less freight on 
progressive indexing. We also know that people have suggested 
increases in payroll taxes, bringing more revenue into the 
system. Again, I think it is something that can be seriously 
considered, but people need to be realistic about how much you 
could get from various payroll tax increases. For example, if 
by 2012, the year progressive indexing begins, if we were to 
raise the payroll tax base from $90,000 to $150,000 and apply 
12.4 percent to that increment, that closes roughly one-quarter 
of the deficit of Social Security. So, we would still have to 
do a substantial amount of work on the benefits side. I believe 
that such an increase in the base from $90,000 to $150,000 is 
unfair to the workers in that wage group and that a fairer way 
to proceed would be to have a much lower rate, like 2.9 
percent, and have that applied from $90,000 all the way up to 
include all earnings, roughly on the Medicare model. Again 
though, that would only reduce the long-term deficit by about a 
quarter. So, we have to get realistic; even if we bring more 
revenue into the system, which some Members want to do, we 
still would have to combine that with some benefit constraints.
    The third issue, and it is clearly the most controversial 
issue, as a number of Congressmen have made clear, is the 
personal account. I have shown in a number of papers how 
progressive indexing could be combined with a 2 percent account 
along the lines of what the President has suggested. However, I 
want to make clear--and I have tried to in my testimony--that 
progressive indexing can stand alone. It alone closes 70 
percent of the long-term deficit of Social Security, going from 
$3.8 trillion to $1.1 trillion, or it can be combined with 
various sorts of personal accounts. I strongly believe that it 
is useful as part of a package to have personal accounts 
because it is very difficult to say to people that we are just 
going to have some benefit constraints and some payroll tax 
increases. I think we need to be creative in thinking about the 
personal accounts. I know Chairman Thomas has suggested that we 
broaden the discussion and I have tried to suggest a number of 
ideas. We could have, basically, enhancements to IRAs if we are 
going to slow the growth of benefits for median and higher 
workers. We could take the cap off the Roth IRA. That would be 
a measure that would match with slowing the growth of benefits 
of high-wage workers. We could also increase the low-income tax 
credits that are now available for people with income below 
$30,000 or $35,000 per year. We could expand these credits to 
help the median workers.
    Last, I would say that we can take this idea of a 2.9 
percent surcharge above the base and we could think of it in 
two parts. We could think of the 1.45 percent from employees 
going toward solvency and the other 1.45 percent from employees 
as being actually something similar to what Larry Lindsey just 
suggested, as sort of a presumptive enrollment in IRAs so that 
1.45 percent could go into an IRA. If people didn't want to 
enroll in an IRA, if workers didn't want to do this, they could 
opt-out. So, you could think of an IRA approach as applying to 
a part of the payroll tax a surcharge above the $90,000 base, 
and you could also think of a similar approach applied to all 
workers. All workers could have 1.45 percent of their wages 
presumptively put into an IRA, but if they didn't want to do 
that, they could opt-out. This would be a way in which we could 
encourage retirement savings, get over the inertia that a lot 
of people have in saving for retirement, and help buildup these 
other sources of retirement income if, as I think we will have 
to come to grips with, we are going to have to slow down the 
growth of Social Security benefits somewhat. Thank you very 
much, Mr. Chairman.
    Chairman THOMAS. Thank you, Mr. Pozen. I indicated I would 
try not to interrupt witness, so I didn't do so and cut you 
off.
    Mr. POZEN. I appreciate that.
    [The prepared statement of Mr. Pozen follows:]

  Statement of Robert C. Pozen, Chairman, MFS Investment Management, 
                         Boston, Massachusetts

Mr. Chairman and Committee Members:

    Thank you for this opportunity to testify before the Committee on 
Ways and Means. I strongly support the Committee's efforts to reach a 
bipartisan consensus on solvency for Social Security. We must first 
address solvency and then focus on what type of personal accounts 
(including add-on as well as carve-out accounts) might be appropriate 
as part of a legislative package.
    Our best chance of developing a viable legislative package is to 
link Social Security reform with enhancements to private retirement 
accounts, such as the 401(k) plan and the individual retirement account 
(IRA). In the past, Social Security and private retirement plans have 
been treated as separate legislative subjects; yet these are two 
sources of retirement income that are considered together by most 
workers. In 1933 when Social Security began, the 401(k) plan and IRA 
were unknown; today, these programs play an important role in helping 
to provide retirement security. So today we should evaluate the Social 
Security system in light of the existing incentives for private 
retirement programs, and we should consider possible expansions of 
these programs in connection with any Social Security reforms.
    In this testimony, I will first explain progressive indexing and 
respond to a few early observations about the proposal; second, 
evaluate the impact of progressive indexing on the middle class viewed 
from different perspectives; third, outline several alternatives for 
adding revenue to Social Security in connection with milder benefit 
reforms; and fourth, discuss a few approaches to increasing retirement 
income by enhancing different types of personal accounts.

I. Summary of Progressive Indexing
    Progressive indexing is a strategy to move toward Social Security 
solvency (with or without personal accounts) by reducing its long-term 
deficit from a present value of $3.8 trillion to $1.1 trillion. In 
general, progressive indexing would change the formulas for computing 
initial Social Security benefits at retirement for different groups of 
earners. In specific, progressive indexing would divide earners into 
three main groups as of 2012 (when progressive indexing begins): low 
earners with average career earnings of $25,000 per year and lower; 
high earners with average career earnings of $113,000 per year and 
higher; and, middle earners with average career earnings between 
$25,000 and $113,000 per year.
    Under progressive indexing, all low-wage earners (as well as all 
those retiring before 2012) would receive the current schedule of 
initial Social Security benefits--which increases average career 
earnings by the rate that American wages have risen over their working 
careers. By contrast, under progressive indexing, all high-wage earners 
would receive initial Social Security benefits that grow more slowly 
than the current schedule because their average career earnings would 
be increased by the rate at which prices have risen over their working 
careers. The initial Social Security benefits of median-wage workers 
would be increased by a proportional blend of price and wage indexing.
    The rationale for progressive indexing is simple. Low-wage workers 
are almost entirely dependent on Social Security benefits for 
retirement income; they have minimal participation in 401(k) plans and 
IRAs. On the other hand, almost all high-wage workers as well as most 
middle-wage workers do participate in private retirement plans. In 
2004, the federal tax revenues forgone for 401(k) plans and IRAs were 
$55 billion.
    Several technical concerns about progressive indexing have been 
raised. First, it has been observed that a flat benefit would result if 
progressive indexing were continued into the 22nd century. My proposal 
for progressive indexing runs until 2079, the end of the conventional 
period for measuring system solvency, at which time the benefits of the 
top-paid workers would still be 20% higher than the benefits of low-
wage earners.
    Second, some have questioned whether wages will continue to rise on 
average 1.1% faster than prices over the next century, as they have 
over the last century. This concern can be met by applying to the 
initial Social Security benefits of the top earners an index designed 
to reflect the historic difference between wage and price growth--for 
instance, the average annual increase in wages over their careers, 
minus 1.1% per year.
    Third, the argument has been made that progressive indexing is not 
progressive since its benefit reductions would constitute only a small 
fraction of the pre-retirement income of a millionaire. In fact, the 
reductions in Social Security benefits for a maximum earner would be 
significantly larger, in both dollar and percentage terms, than those 
of a median-wage worker under progressive indexing. These larger 
benefit reductions are justifiable precisely because they constitute 
only a small fraction of the income of any millionaire before or after 
retirement.

II. Impact on Median Workers
    Others have expressed a more substantive concern about the impact 
of progressive indexing on the median-wage worker, who will earn 
$47,000 in 2012 ($36,500 in 2005). It has been noted that such a worker 
retiring at age 65 in 2045 would receive 16% less under progressive 
indexing than scheduled benefits--$16,417 rather than $19,544 (in 2004 
constant dollars). Is this reduction from the schedule a ``benefit 
cut''? The schedule represents the benefits we have promised but do not 
have the money to deliver--this is why the long-term deficit of Social 
Security has a present value of $3.8 trillion. If the test of a 
politically viable reform plan is not reducing scheduled benefits for 
median-wage workers as well as for low-wage workers, then every 
politically viable plan to restore Social Security will fail.
    One relevant criterion is how a reduction in scheduled benefits 
compares to the reduction that would occur if the Social Security 
system goes into default. If Congress does not enact Social Security 
reform of a major nature, the system will default in 2041 and benefit 
levels will automatically be reduced by roughly 27% for all workers in 
2045. Thus, judged relative to payable benefits, the $16,417 received 
by the median-wage worker in 2045 would actually be an increase in 
benefits--$2,150 more than the $14,267 that the system can afford to 
pay in 2045 absent major reforms (in constant 2004 dollars).
    A second relevant criterion is whether that $16,417 received by the 
median-wage worker in 2045 under progressive indexing constitutes an 
increase or decrease in purchasing power relative to today's benefits 
for a similarly placed worker. That worker in 2045 would receive a 14% 
increase in purchasing power as compared to a similar worker today--
from $14,384 in 2005 to $16,417 in 2045 (expressed in 2004 constant 
dollars). In other words, median workers would be able to buy 14% more 
goods and services with their monthly checks from Social Security under 
progressive indexing in 2045 than they can buy with these checks today.
    A third criterion is the impact of Social Security reform on 
replacement ratios--the percentage of pre-retirement earnings replaced 
by post-retirement benefits. Under the current schedule for Social 
Security, the replacement rate would be 36% for a median-wage worker 
retiring at age 65 in 2045; under progressive indexing, the replacement 
rate for that same worker would decline to 30%. However, the above 
replacement rates do not include any post-retirement income from 
private retirement plans like the 401(k) and IRA. A majority of median-
wage workers already participate in such plans, and I would strongly 
support legislative measures to enhance participation rates for median-
wage workers.

III. Increases in Payroll Taxes
    Notwithstanding the above evaluations of the proposal for 
progressive indexing under alternative criteria, if Congress concludes 
that the reductions from scheduled benefits for median-wage workers are 
too large under the proposal, these can be softened by modifying the 
bend points and PIA factors utilized by the actuaries to implement the 
proposal. In that event, Congress could restore Social Security to 
solvency by adopting other benefit reforms (such as moving back the 
normal retirement age from 67 to 69 between 2055 and 2079), or by 
increasing revenue flow into the system. With regard to the latter 
approach, it may be helpful to calibrate the differential impact of 
various possible increases in payroll taxes on the system's solvency.
    As you are aware, the payroll tax rate of 12.4% currently applies 
to all earnings up to $90,000 per year. Should Congress decide to close 
the whole long-term deficit of Social Security through payroll taxes, 
it would have to extend this 12.4% rate to all earnings (assuming 
minimal retirement benefits were paid in connection with these new 
payroll taxes). Thus, attaining solvency for Social Security in this 
manner would require one of the largest tax increases in American 
history for all workers with earnings above $90,000 per year.
    Since such a huge extension of payroll taxes at 12.4% to all 
earnings does not appear to be politically viable, some commentators 
have suggested that the 12.4% rate be levied on all earnings up to 
$130,000 per year in today's dollars--which would automatically rise 
under current law to $150,000 per year by 2012. Yet even such a sharp 
jump in the earnings base subject to a 12.4% tax rate would close only 
one-fourth of the long-term deficit of Social Security. Moreover, this 
type of extension would be very unfair to those workers earning between 
$90,000 and $200,000 per year. Most of their earnings would be 
subjected to the 12.4% payroll tax, while most of the earnings of 
millionaires would escape this tax.
    If Congress chose to raise payroll taxes as part of a reform 
package, a more workable structure would be a surcharge of 2.9% on all 
earnings above $90,000--loosely based on the model of the Medicare tax. 
This structure would more fairly spread the burden among all high-wage 
earners, and would have roughly the same solvency impact as applying a 
12.4% tax rate to all earnings up to $130,000 per year in 2005. In both 
cases, the long-term deficit of Social Security would be cut by only 
one-fourth. Therefore, significant constraints on benefit growth would 
still be needed in order for the system to become solvent later this 
century.

IV. Types of Personal Accounts
    Progressive indexing can stand alone as a strategy to move toward 
Social Security solvency, or it can be combined with various types of 
personal accounts. In this context, personal accounts can play two 
useful roles. First, they can increase the retirement income of 
workers, especially those who would experience slower growth in their 
Social Security benefits under progressive indexing. Second, they can 
provide a political ``sweetener'' to a legislative package otherwise 
containing benefit constraints and tax hikes.

A. Carve-out Accounts
    Since progressive indexing would slow the growth of Social Security 
benefits for some workers, it could be combined with a personal 
retirement account (PRA) involving a voluntary allocation of a modest 
portion (such as 2% of earnings) of the 12.4% in payroll taxes. Any 
worker who made such an allocation to a PRA would have to accept lower 
traditional Social Security benefits since he or she would be paying in 
lower amounts to the traditional system and receiving the returns on 
his or her PRA in addition to traditional benefits. These lower 
traditional benefits should be calculated using an offset rate that is 
the same as the actual real rate of return on 30-year U.S. Treasury 
bonds, rather than an artificially selected rate such as a 3% real 
return. A PRA would have an excellent chance of providing a higher 
return than this actual real rate of return by investing consistently 
in a low-cost balanced account, comprised 60% of an equity index fund 
and 40% of a bond index fund, throughout the 30 to 35 years of 
someone's working life.
    Some have expressed concern that carve-out PRAs would not improve 
the solvency of the Social Security system and would increase 
government borrowing. However, as calculated by the Social Security 
actuaries, a combination of progressive indexing and a carve-out PRA 
with an allocation of 2% of earnings (limited to $3,000 per year with 
the limit indexed to prices) would make Social Security solvent by the 
end of 2079. No government borrowing would be needed until 2030 to 
finance this combination, and such borrowing would be completed before 
2079. Moreover, the government borrowing needed to finance this 
combination would be $2 trillion less than the government borrowing 
needed to finance the current schedule of Social Security benefits 
through 2079.

B. Add-on Accounts
    For those who oppose carve-out PRAs, progressive indexing could be 
combined with various forms of add-on accounts in a legislative 
package. It bears emphasis that add-on accounts themselves would not 
make Social Security solvent and would increase the budget deficit. 
However, a combination of progressive indexing and modest expenditures 
for add-on accounts could be designed to substantially improve the 
solvency of Social Security. Instead of creating a new set of add-on 
accounts, Congress should enhance the existing structure of IRAs in 
order to promote more retirement savings in the most efficient manner.
    One suggestion would be to transform the low-income tax credit for 
IRA contributions into a partially refundable tax credit. This would 
make the tax credit more effective for families with incomes below 
$40,000 per year, who often do not pay federal income taxes. Another 
suggestion would be to remove the income ceiling from the Roth IRA, 
which currently starts to phase out for families with incomes of more 
than $120,000 per year. Removing the income ceiling would be a 
political quid-pro-quo for high-wage earners with the slowest growth of 
Social Security benefits under progressive indexing. Yet another 
suggestion would be to allow all taxpayers to earmark a portion of any 
federal income tax refund for investment in an IRA. This would be a 
low-cost way to encourage retirement savings.

C. Opt-out Accounts
    As mentioned above, if Congress chose to raise the payroll tax 
base, the fairest approach would be to impose a 2.9% surtax on all 
wages above $90,000 per year. Under this approach, what kind of 
retirement benefits should be associated with such a surtax? One 
possibility would be to dedicate the 1.45% of the surtax that would be 
paid by employers to improving Social Security solvency (worth about 
0.25% of payroll), and allocate the 1.45% paid by the workers to a 
personal account invested in market securities. Since the allocation of 
this 1.45% would not divert existing payroll taxes from Social 
Security, the funding of these personal accounts would not involve 
incremental borrowing by the federal government. But such a personal 
account would effectively impose a mandatory IRA contribution on high-
wage earners. A more flexible form of this approach would be to 
allocate 1.45% of earnings above $90,000 to an IRA, subject to an opt--
out by the worker.
    If this more flexible approach were attractive to Congress, it 
could also be applied to workers with earnings below $90,000 per year. 
For example, employers could be required to presumptively allocate to 
an IRA 1.45% of the annual earnings of all full-time workers on the job 
for at least one calendar year with annual earnings of at least 
$24,000. This allocation would be in addition to the payroll taxes now 
paid by such workers, but they could opt out of the presumptive 
allocation of this 1.45% to an IRA simply by notifying their employer. 
In practice, this flexible approach would harness the forces of human 
inertia and tax incentives to encourage retirement savings, while 
allowing any worker the choice of not participating in this type of 
retirement program.

Conclusion
    Progressive indexing provides a fair and workable foundation for 
legislative efforts aimed at restoring solvency to the Social Security 
system. Many of the observations about progressive indexing can be 
resolved by careful legislative drafting, and the impact of progressive 
indexing on median-wage workers can be softened if Congress is prepared 
to adopt other benefit constraints or revenue raisers. Moreover, 
progressive indexing can be combined with various type of personal 
accounts that may be helpful in enacting a legislative package of 
Social Security reforms and encouraging retirement savings for American 
workers.
    Thank you again for this opportunity to testify on Social Security 
reform. I recognize that this subject is politically challenging for 
any elected official and greatly respect your efforts. I would be glad 
to answer any questions you might have on progressive indexing or 
related points discussed in this testimony.

                                 

    Chairman THOMAS. Dr. Schieber, it is nice to have you with 
us. Thank you for your testimony.

  STATEMENT OF SYLVESTER J. SCHIEBER, VICE PRESIDENT, WATSON 
                        WYATT WORLDWIDE

    Mr. SCHIEBER. Thank you very much, Mr. Chairman, Members of 
the Committee. In my day job, I work for a company, Watson 
Wyatt Worldwide, that often works with employers on the 
redesign of their retirement plans. In these projects, there is 
a tendency in many cases to move right to restructuring the 
plan without stepping back and thinking about the principles 
that are being pursued in doing so. In my prepared testimony, I 
actually lay out a set of principles that you might consider. I 
arrived at these by considering the historical goals that have 
been behind the system. One thing many people do not realize is 
that Franklin D. Roosevelt (FDR) played an extremely active 
role in formulating his proposals on Social Security. One 
aspect of his recommendation that was most important to him was 
that the system be funded as benefits were accrued. He said to 
do otherwise would lead to massive unfunded obligations that 
would burden future Congresses unfairly. The original 
legislation called for substantial funding of the pension 
obligations, yet FDR's wishes were never fulfilled. Some policy 
makers wanted to use the accumulating trust funds to increase 
benefits to early recipients. Others were concerned that the 
accumulating trust funds were not true funding, that the money 
was not being saved. By the early fifties, the system was 
running on a pay-as-you-go basis. This issue arose again after 
the 1983 amendments and has arisen as the trust funds have 
grown to more than $1.5 trillion. Yet few people believe these 
assets are true pension funding.
    Social Security today provides four kinds of insurance for 
active workers. It insures that workers who die and leave 
juvenile children, that their dependents will be taken care of 
economically, because they are no longer there to provide the 
means for their children's needs. No one is suggesting that 
this protection be significantly altered. It also insures 
against disability. While this program deserves careful review 
because it itself is underfunded, and because it is still 
relying on a definition of disability that is now a half-
century old and because there are significant administrative 
problems, no one is suggesting that we eliminate this sort of 
protection from our system. It insures against bad labor market 
outcomes in that it provides relatively larger benefits to low-
wage workers. This is a form of insurance that is a public good 
and will only be provided by government. If anything, this form 
of insurance should be bolstered. It also insures all of us 
against our own inability, or unwillingness, to begin preparing 
adequately for our retirement needs on a timely basis. It is 
this element of the system that FDR was adamantly committed to 
funding, and I believe he was absolutely correct in his 
insistence. It is here, more than any other element, that I 
believe our current system is badly flawed. Leaving aside 
whether today's trust fund is real funding, according to the 
Social Security actuaries, last year, the value of accrued 
benefits already earned under the system increased by $1 
trillion more than the increase in the trust fund balances. As 
FDR said, this is unfair to future generations.
    Some people argue that the transition costs from moving to 
a system that accumulates assets and allows them to be 
sequestered from other governmental fiscal operations will 
create massive transition costs. They are confusing the 
transition costs that we have with the current system with the 
costs associated with personal accounts. By the Social Security 
actuaries' estimates, the 75-year pay-as-you-go system is 
underfunded by $4 trillion in present value terms. That means 
we need an extra $4 trillion in assets today, or the present 
value of equivalent reductions in benefits or increases in 
taxes, in order to balance the system. We have a $4 trillion 
transition cost to deliver on with current law. The costs of 
the sort of individual accounts that President Bush has 
proposed, by comparison, is trivial, as I show in Table 5 in my 
prepared remarks. Having studied this system for nearly a 
quarter of a century now, I am totally convinced that FDR was 
extremely prescient in anticipating our current difficulties in 
failing to fund this program. Having grown up in Missouri as a 
boy, I am particularly impressed by FDR's successor, Harry 
Truman, who often said that those who ignore history are 
condemned to repeat it. We ought not leave the next generation 
the problems we are now incurring because we now know that FDR 
was right and are paying the price for not living by the 
insurance principles that he demanded as the basis for Social 
Security. Thank you.
    [The prepared statement of Mr. Schieber follows:]

   Statement of Sylvester J. Schieber, Vice President, Watson Wyatt 
                               Worldwide

    Mr. Chairman and members of the Subcommittee on Social Security of 
the Ways and Means Committee of the U.S. House of Representatives, the 
following is a discussion about issues I believe you should consider 
during 2005 in your deliberations about the future operations of our 
Old-Age, Survivors and Disability Insurance system--what most people in 
our society call Social Security. This discussion does not include a 
specific proposal for reform of our existing system. If you want a 
specific proposal, I can offer you one but there are already many 
proposals available including a number of them that I have helped 
develop over the years. Before offering you a new proposal, I would 
need to know what you wish to achieve with our Social Security program 
in the future including a set of principles that would serve as its 
foundation for future generations.
    I have a set of principles that I offer as a starting point for 
discussion. The remainder of my testimony here supports these 
principles. In brief:

      The early survivor and disability insurance programs are 
term insurance and should be preserved and modified as appropriate.
      The important ``safety net'' or progressivity of the 
existing Social Security system is insurance for workers against bad 
labor market outcomes and should be preserved and enhanced.
      ``Retirement savings'' under the auspices of Social 
Security should be real savings and not loans to be redeemed out of our 
children's consumption budgets.
      We should improve equity in the structure of benefits, 
especially between one and two-earner couples.
      We should continue to provide a floor of protection 
against longevity risk by providing basic benefits in the form of 
annuities.
      We should improve economic efficiency in the system, 
especially the linkage between contributions and benefits beyond 
foundation levels.
      We should assure long-term solvency, not simply postpone 
insolvency.
      We should assure that risks borne by individual 
participants are diversified and at tolerable levels--including skewing 
financial market risks toward those who are more able to bear it.
      Administrative costs should be kept at tolerable levels.
      Finally, fixing the system soon is extremely important.

    Among other things in my career, I have studied the history of our 
Social Security program to a somewhat greater extent than most people 
who will come before you. I wrote a book on Social Security in 1982 
entitled, Social Security: Perspectives on Preserving the System 
published by the Employee Benefit Research Institute. In 1998, I wrote 
a second book on the same subject with Professor John B. Shoven of 
Stanford University, The Real Deal: The History and Future of Social 
Security published by Yale University Press. For the sake of full 
disclosure here, I advocated in both of these books that our Social 
Security pension system should include an element of personal accounts 
in its structure. I did not come to this conclusion in either of these 
books because of ideological reasons. I reached the conclusion because 
I believe that it is ultimately the only way that one of Franklin D. 
Roosevelt's original and deeply held goals for the system can ever be 
realized. I continue to believe that today and I continue to advocate 
that personal accounts should be part of our Social Security system 
because I agree with FDR's strong belief in funding pension obligations 
as they are earned.
    In the following discussion, I touch on a number of issues that I 
believe are important to your deliberations. I start with FDR's 
statement about what our Social Security pension system was intended to 
achieve. I start here because I believe that FDR chose his language 
about this system carefully and that he deliberately meant what he 
said. I move on to discuss a problem that arose in the implementation 
of FDR's goals, a problem that many proposals today are attempting to 
correct. Next, I revisit the ``insurance principles'' that FDR espoused 
in his vision of the system because I believe we would benefit to a 
great degree by returning to them. I then take up a discussion about 
transition costs associated with reform of our Social Security system 
because I believe there is a great deal of confusion about how costs 
should be assigned to the rebalancing of the current system's financing 
versus the costs associated with individual accounts. In the final 
section of the discussion, I explore the differences in ``carve-out,'' 
``add-on'' and hybrid financing of personal accounts.

Background
    In June 1934, President Roosevelt established the Committee on 
Economic Security (CES) to explore the way in which our society could 
provide ``security against the hazards and vicissitudes of life,'' 
especially those associated with ``unemployment and old age.''\1\ FDR 
indicated that he thought a program of ``social insurance'' was the way 
to address these problems. The CES report, although dated January 15, 
1935, was not formally submitted to President Roosevelt until two days 
later, January 17. He transmitted it to the Congress on the latter date 
along with recommendations on legislation. The reason that there is a 
discrepancy in the dates on the CES report and its submission to the 
president is important in understanding FDR's intentions about the 
operation of our Social Security program.
---------------------------------------------------------------------------
    \1\ Franklin D. Roosevelt, ``Message to Congress Reviewing the 
Broad Objectives and Accomplishments of the Administration,'' June 8, 
1934.
---------------------------------------------------------------------------
    President Roosevelt's submission of the Social Security proposals 
to Congress was not the first time that he had been involved in 
developing public policy to provide income security to the elderly 
population. While he had served as governor, New York had implemented a 
state assistance program for the elderly. FDR considered the patchwork 
of state assistance programs as only a partial solution to the problems 
of income insecurity among the elderly. In November 1934, he addressed 
an advisory committee to the CES and laid out certain tenets of the 
evolving legislation. He said that when signing the Old-Age Pension Act 
while governor of New York he had expressed the ``opinion that the full 
solution'' to the old-age-income security problem could be achieved 
only on the basis of ``insurance principles. It takes so very much 
money to provide even a moderate pension for everybody, that when the 
funds are raised from taxation [that] a means test' must necessarily be 
made a condition of the grant of pensions.''\2\ By referring to 
``insurance principles'' he was saying that he believed the new Social 
Security benefit would have to be funded in order to be viable on any 
grounds other than means testing.
---------------------------------------------------------------------------
    \2\ Franklin D. Roosevelt, Address to the Advisory Council on the 
Committee on Economic Security on the Problems of Economic and Social 
Security, November 14, 1934.
---------------------------------------------------------------------------
    On the afternoon of January 16, 1935, President Roosevelt was 
reviewing the final package that had been prepared by the CES for 
submission to Congress when he discovered a table in the report showing 
that the old-age insurance program would be running a significant 
deficit after 1965 that would require a government contribution over 
and above the payroll tax sometime later, around 1980. He immediately 
suspected an error in the report and summoned Secretary of Labor, 
Frances Perkins, and the executive director of the CES, Edwin Witte, to 
help sort out the matter. Upon being informed that the deficit was an 
element of the package as designed, FDR insisted that it had to be 
changed. In regard to the prospect that the old-age insurance program 
he was proposing would require government subsidies in the future, 
Frances Perkins quotes FDR as saying: ``This is the same old dole under 
another name. It is almost dishonest to build up an accumulated deficit 
for the Congress of the United States to meet in 1980. We can't do 
that. We can't sell the United States short in 1980 any more than in 
1935.''\3\
---------------------------------------------------------------------------
    \3\ Frances Perkins, The Roosevelt I Knew (New York: The Viking 
Press, 1946), p. 294.
---------------------------------------------------------------------------
    FDR's statement ties back directly and consistently with his 
feelings at the time he had signed the old-age assistance law in New 
York while serving as governor when he said the full solution to the 
old-age problem could only be achieved through a program based on 
``insurance principles.'' It also follows from his statement to the 
Advisory Council the prior November when he said the old-age system had 
to be based on such principles. FDR clearly envisaged and intended to 
develop a plan that was contributory and self-supporting with an 
accumulation of a trust fund roughly commensurate with accruing benefit 
obligations.
    After the meeting between FDR, Secretary Perkins and Witte at the 
White House on the afternoon of January 16, the report was withdrawn 
from the President. Secretary Perkins set about polling the members of 
the CES and all agreed that the President's wishes on the funding 
matter were to be addressed. At the President's insistence, the 
offending table was taken out of the report and the package was 
modified to indicate that the schedules of tax rates and benefits 
included were merely one approach to providing old-age benefits that 
Congress might consider. The report was filed with the President the 
morning of January 17.\4\
---------------------------------------------------------------------------
    \4\ Edwin Witte, The Development of the Social Security Act, pp. 
74-75.
---------------------------------------------------------------------------
    The final provisions in the Social Security Act adopted in 1935 
called for a schedule of payroll taxes to begin at a rate of 1 percent 
each on workers and their employers on the first $3,000 of annual 
earnings. The initial payroll tax rate paid by workers and their 
employers was to increase in half-percentage point increments every 
three years until it reached 3 percent of covered wages in 1949. The 
contributory funding was projected to be adequate so that no added 
government contribution would be required to finance the old-age 
insurance benefits. By 1980, the trust fund was projected to grow to 
$47 billion.\5\
---------------------------------------------------------------------------
    \5\ Senate Report No. 628, 74th Congress, May 13, 1935, p. 9.
---------------------------------------------------------------------------
    Under the proposal that had been put forward by the Roosevelt 
Administration, the trust fund was to invest only in government bonds. 
For many people the thought of this accumulation, especially in the 
form of government bonds, was too fantastic to comprehend. At the time 
it was being considered, the total outstanding federal debt was only 
$27 billion and no one thought of the government running future 
deficits that could accommodate such accumulations. After all, the 
government had accumulated only a total of $27 billion in debt in its 
first 159 years of operations, and no one expected it to accumulate 
another $20 billion in the succeeding 45 years. Further, contemporary 
policymakers thought of paying down the debt after getting out of the 
Depression rather than seeing it grow in the future. There were a 
number of potential problems in the projected accumulation of the 
Social Security fund.
    From one end of the political spectrum, the critique of the Social 
Security Act focused on the relative levels of benefits that would be 
provided through the federal Old-Age Benefits program in its early 
years of operations and the state administered old-age assistance 
programs. The funding provisions, which President Roosevelt had 
insisted on when the Act was under development, meant that the old-age 
insurance program was not going to pay significant benefits until many 
years into the future. From the other end of the political spectrum, 
the critique of the original legislation focused on the notion that a 
trust fund invested in government bonds is, in reality, a scheme to 
borrow from future generations at the expense of fiscal discipline 
today. This argument was summarized by Senator Arthur Vandenberg:

          The Treasury collects [a] billion in pay-roll taxes--The 
        Treasury gets a billion in cash. It goes into the general 
        fund--Congress then takes it out of the Treasury by 
        appropriating a billion to the reserve--So the Social Security 
        Board hands the billion in cash back to the Secretary of the 
        Treasury and takes from him a special--IOU--The Secretary of 
        the Treasury has the billion of money--He can use the billion 
        either to retire regular Government-debt obligations in the 
        general market or--he can apply it on his current operating 
        deficit. As things are now going, we shall have deficits----
          What has happened, in plain language, is that the pay-roll 
        taxes for this branch of social security have been used to ease 
        the contemporary burden of the general public debt or to render 
        painless another billion of current Government spending, while 
        the old-age pension fund gets a promise-to-pay which another 
        generation of our grandsons and granddaughters can wrestle 
        with, decades hence.
          It is one of the slickest arrangements ever invented. It fits 
        particularly well into the scheme of things when the Federal 
        Government is on a perpetual spending spree. It provides a new 
        source of current revenue, which while involving a bookkeeping 
        debit, providentially eases the immediate burden of meeting 
        current debts and deficits.\6\
---------------------------------------------------------------------------
    \6\ Arthur H. Vandenberg, ``The $47,000,000,000 Blight,'' The 
Saturday Evening Post (April 24, 1937), vol. 209, no. 43, pp. 5-7.

    The funding principles espoused by Franklin D. Roosevelt began to 
unravel as early as 1939. Because of the concerns about the 
implications of funding the system, President Roosevelt agreed to 
convene an Advisory Council to study the matter. Based on its 
recommendations, Congress adopted several amendments to the original 
1935 legislation. Payments would begin in 1940 rather than 1942. The 
system would pay out benefits to spouses and other dependents of 
retirees or workers who died before retirement. Under the 1939 
Amendments, the trust fund was projected to hold a balance of $6.9 
billion in 1955 compared with $22.1 billion projected under the 
original legislation.\7\
---------------------------------------------------------------------------
    \7\ Senate Report No. 628, 74th Congress, May 13, 1935, p. 9 and 
Senate Report No. 734, 75th Congress, 1st session, p, 17.
---------------------------------------------------------------------------
    During World War II, the system shifted even further away from 
advance funding. Although President Roosevelt had gone along with the 
1939 Amendments' three-year delay in increasing the payroll tax, he 
opposed the subsequent delays. When Congress was considering the delay 
in the tax increase scheduled for January 1, 1943, FDR wrote the 
chairmen of the Senate Finance and House Ways and Means Committees. He 
argued that ``a failure to allow the scheduled increase in rates to 
take place under present favorable circumstances would cause a real and 
justifiable fear that adequate funds will not be accumulated to meet 
the heavy obligations of the future and that the claims for benefits 
accruing under the present law may be jeopardized.''\8\ President 
Roosevelt vetoed the Revenue Act of 1943 because it included a delay in 
the payroll tax increase, but the veto was overturned. At the end of 
1944, in signing H.R. 5565 which delayed the increase in the payroll 
tax from January 1, 1945 to January 1, 1946, the President's 
accompanying statement noted, ``I have felt in the past and I still 
feel that the scheduled rate increase, which has been repeatedly 
postponed by Congress, should be permitted to go into effect. The long-
run financial requirements of the Social Security System justified 
adherence to the scheduled increases.''\9\
---------------------------------------------------------------------------
    \8\ Franklin D. Roosevelt, letter to Honorable Walter F. George, 
Chairman, Senate Finance Committee, and Honorable Robert L. Doughton, 
Chairman, House Ways and Means Committee, October 3, 1942.
    \9\ Franklin D. Roosevelt, Statement accompanying the signing of 
H.R. 5564, ``An Act to fix the tax under the Federal Insurance 
Contributions Act, on Employer and Employees for calendar year 1945,'' 
December 16, 1944.
---------------------------------------------------------------------------
    On April 12, 1945, President Roosevelt died leaving behind the 
Social Security program as the central foundation of the welfare state 
in America. By the time he died, Social Security was well on its way to 
operating on the pay-as-you-go financing basis. By the mid-1950s, the 
concept was completely abandoned.\10\ After that, the program ran 
largely on a pure pay-as-you-go basis until the mid-1980s.
---------------------------------------------------------------------------
    \10\ Sylvester J. Schieber and John B. Shoven, The Real Deal, early 
chapters.
---------------------------------------------------------------------------
    At the beginning of the 1980s, the system was facing the prospect 
of coming up short on regularly scheduled benefit payments. Early in 
1983, Congress intervened just in time to avoid a partial default on 
current benefits, adopting a number of provisions to secure the 
program. At that time, there was absolutely no consideration of 
individual accounts as part of the solution. Over subsequent years, the 
trust fund has grown to approximately $1.7 trillion dollars. The trust 
funds are projected to peak at $3.6 trillion or so in 2022 in 2005 
dollars ($5.7 trillion nominal that year), after which they will begin 
to decline.\11\
---------------------------------------------------------------------------
    \11\ 2005 Annual Report of the Board of Trustees of the Federal 
Old-Age and Survivors Insurance and Disability Insurance Trust Funds.
---------------------------------------------------------------------------
    The implications and import of the accruing trust fund assets 
continue to be controversial. The general consensus seems to be that 
they do not add to national savings according to a number of empirical 
analyses. Several researchers have concluded that surplus revenues 
generated in national retirement income systems held in government 
bonds result in larger deficit spending in other elements of those 
governments' general fund accounts.\12\ That conclusion is not 
universally embraced,\13\ although the folks that dispute it have not 
presented comparable empirical evidence to bolster their conclusion.
---------------------------------------------------------------------------
    \12\ For example, see Kent Smetters, ``Is the Social Security Trust 
Fund Worth Anything?'' unpublished memo, The University of 
Pennsylvania, June, 2003; Sita Nataraj and John B. Shoven, ``Has the 
Unified Budget Destroyed the Federal Government Trust Funds?'' a paper 
presented at a conference sponsored by the Office of Policy, Social 
Security Administration and Michigan Retirement Research Consortium, 
Washington, D.C., 12-13 August 2004; and Barry Bosworth and Gary 
Burtless, ``Pension Reform and Saving,'' a paper presented at a 
conference of the International Forum of the Collaboration Projects, 
Tokyo, Japan, 17-19 February, 2004.
    \13\ For example, see Henry J. Aaron, Alan S. Blinder, Alicia H. 
Munnell and Peter Orszag, ``Perspectives on the Draft Interim Report of 
the President's Commission to Strengthen Social Security,'' 
(Washington, D.C.: Center on Budget and Policy Priorities and the 
Century Foundation, 2001); Paul Krugman, ``2016 and All That,'' New 
York Times (July 22, 2001) p. 13; Alicia H. Munnell and R. Kent Weaver, 
``Social Security's False Alarm,'' The Christian Science Monitor (July 
19, 2001), p. 11.
---------------------------------------------------------------------------
    Interestingly, in the political arena, this modern day debate is 
the same one that the Arthurs Altmeyer and Vandenberg carried on back 
in the 1930s. In almost the identical setting where Altmeyer and 
Vandenberg conducted the original debate, some 60 years later Senator 
Bob Kerrey (D-NE) and Ken Apfel, the Social Security Commissioner who 
served during the later years of the Clinton Administration, engaged in 
a parallel discussion in a Senate Finance Committee hearing. In this 
more recent version of the debate, Senator Kerrey summarized the 
conclusion that many observers have drawn over the last couple of 
decades:

          We are not prefunding . . . Are we holding the money in 
        reserve someplace? We are not prefunding! The idea in 1983 was 
        that we would prefund the baby boomers. We began to use it 
        immediately for the expenditures of general government. We 
        didn't prefund anything. What we are doing is asking people who 
        get paid by the hour to shoulder a disproportionate share of 
        deficit reduction. That's what we're doing! And the 
        beneficiaries on the other hand, they suffer under the illusion 
        inflicted by us very often, that they have a little savings 
        account back here. They are just getting back what they paid 
        in. They don't understand that it's just a transfer from people 
        that are being taxed at 12.4 percent.\14\
---------------------------------------------------------------------------
    \14\ Senator Robert J. Kerrey, CSPAN2 tape of Senate Finance 
Committee Hearing on Retirement Income Policy, August 1998.

Revisiting the Insurance Principles That FDR Embraced
    In 1935, when President Roosevelt insisted that what he called ``my 
Social Security program''\15\ be based on insurance principles he was 
thinking about the program in the context of providing retirement 
benefits. The original law did not provide many of the sorts of 
protection that are included in today's system. Indeed, in signing that 
original law, Roosevelt spoke of the system it created as being ``a 
cornerstone in a structure which is being built but is by no means 
complete.''\16\ Despite the fact that we have built on that cornerstone 
over the years, it may be worthwhile to review what FDR had in mind 
when he insisted that ``insurance principles'' be followed in the 
construction of Social Security.
---------------------------------------------------------------------------
    \15\ Arthur M. Schlesinger, Jr., The Age of Roosevelt: The Coming 
of the New Deal (Boston: Houghton Mifflin Co., 1959), vol. 2, p. 310.
    \16\ Franklin D. Roosevelt, Presidential Statement at the Signing 
of the Social Security Act, August 14, 1935.
---------------------------------------------------------------------------
    Insurance is a mechanism whereby a group of individuals can join 
together to spread the risk that they each individually face in regard 
to some contingency that creates an economic loss for those who incur 
that particular ``vicissitude'' of life. Consider, for example, a 
society comprised of 1,000 households where each family lives in their 
own home. Assume, for simplicity, that every family's home is worth 
$100,000 and that each year fire strikes one family's home completely 
destroying it. If every family attempted to cover this risk by itself, 
then each year one family would be faced with a devastating $100,000 
loss. On the other hand, if all of the families pooled together and 
each contributed $100 to a home-owners' fire insurance fund, each 
family would invest $100 per year to assure that no family incurred 
such a devastating loss.
    In order to understand what should be done in reforming our Social 
Security system, it is important to understand what it currently does 
and to rationally design reforms that preserve those elements we wish 
to preserve and to modify those that need to be changed to secure its 
ongoing operation. The current Social Security provides insurance for 
four hazards that workers face. It provides insurance for workers:

    1.  Who die and leave juvenile dependents;
    2.  Who become disabled and can no longer earn a living;
    3.  Who experience bad labor market outcomes; and
    4.  Who suffer from the myopia that workers have about making 
adequate protection for their own retirement needs.

    In addition, for retirees Social Security provides:

    1.  Longevity insurance because the benefits are paid in the form 
of an annuity;
    2.  Income protection against inflation in retirement because the 
annuity is indexed to account for increasing prices; and
    3.  Survivor benefits.

    In an insurance context, the nature of risks that are insured under 
Social Security vary considerably from one aspect of the program to the 
next.

Early-survivor insurance
    The early survivor program provides insurance protection against 
the vicissitude of workers dying and leaving juvenile children with 
insufficient resources to meet their economic needs. There are two 
factors that define the risk that workers incur in this case. One is 
the probability that they will die and the second is the probability 
that they have children. Over most of the working-age years, the 
probability of dying for most workers is quite low but rises gradually 
as workers age. In the younger years of the working career, the 
probability of having children under the age of 18 is relatively high 
but drops off significantly as people approach retirement age. To show 
what the exposure is here, I used the 1950 birth cohort life table from 
the Office of the Actuary and the incidence of individuals by age with 
dependent children under age 18 to derive Figure 1. The left panel 
shows the variation on a scale of 0.00 to 0.25 percent. It is intended 
to show that there is some variation in the exposure here. In no year 
does the line get as high as 0.25 percent meaning that in no year were 
there more than 2.5 people per 1,000 dying in this birth cohort and 
leaving juvenile children over most of their exposure period. The right 
panel in Figure 1 shows the same distribution on a scale of 0.00 to 100 
percent. It is intended to show that the risk exposure to this 
particular contingency is extremely small in the overall scope of 
things. That is not to say that when the contingency actually strikes a 
family that it has a devastating effect. Indeed, this is a case a lot 
like our opening hypothetical example of people having house fires.
    The probability of workers dying and leaving juvenile children with 
the need for economic support is a contingency that can be covered 
without significant expense to active workers. Indeed, there has been 
virtually no discussion of significantly modifying this element of the 
current system in any of the discussion about reforming it. As we look 
at reform options, we need to make sure that modifications made to the 
existing system do not result in unintended consequences in this area. 
There are certain public good features to the existing benefits and 
there are likely relative efficiencies that are realized by running 
them through government on a nationalized basis with mandatory 
participation for virtually all workers.
Figure 1: Probability of Death from One Year of Age to the Next for the 
        1950 Birth Cohort Times the Probability of Individuals Having 
        Dependent Children under Age 18 in 2003

        [GRAPHIC] [TIFF OMITTED] T4732A.000
        
Sources: Calculated by the author from data published by the Office of 
  the Actuary, Social Security Administration and U.S. Department of 
        Commerce, U.S. Census Bureau, Current Population Survey.

Disability insurance
    The case of disability insurance provided through our existing 
Social Security program is similar to early-survivor benefits. The 
incidence of disability under the Disability Insurance (DI) program by 
age in 1968 is reflected in Figure 2. Once again, the DI program has 
not been widely discussed in the same context that reform of the 
retirement system has been although a number of proposals would have 
implicit implications on benefit levels in the program. Part of the 
reason that DI has not been part of the discussion is that the 
incidence of disability is relatively low across much of the age 
spectrum and the overall cost of benefits is significantly less than in 
the case of the old-age retirement aspects of the system. As with 
early-survivor benefits, there are almost certainly public good 
features to the existing benefits and there are likely relative 
efficiencies that are realized by running them through government on a 
nationalized basis with mandatory participation for virtually all 
workers.
    Just because the DI system has escaped the same scrutiny as the 
retirement program in recent discussion about Social Security reform 
does not mean that the current disability program should not be 
included in these discussions. This element of the system is 
underfunded and contributes to the total underfunding in the combined 
systems. In addition, the determination of eligibility in the current 
system is tied to a concept of being unable to work that may have made 
sense in the mid-twentieth century when it was postulated but makes 
much less sense in the ``knowledge economy'' of the twenty-first 
century. Finally, there are a variety of administrative issues that 
also plague the existing Disability Insurance system. The potential 
reform of the disability programs is an issue that should be considered 
outside the realm of reform to the retirement plan or basic benefit 
structure of Disability Insurance or any other facet of Social 
Security.
Figure 2: Incidence of Disability under the Social Security DI Program 
        in 1998 by Age

        [GRAPHIC] [TIFF OMITTED] T4732A.003
        
Source: Office of the Actuary, Social Security Administration, ``Social 
 Security Disability Insurance Program Worker Experience,'' Actuarial 
                       Study No. 114, June 1999).

Insurance against bad labor market outcomes
    While we have not characterized it that way, the redistributive 
structure of our Social Security benefit formula is the primary way we 
provide insurance against bad labor market outcomes. At the outset of 
our careers, none of us knows for sure that we will succeed. It is not 
hard to find many examples of people born into the most modest 
circumstances who go on to be dramatically successful in their careers. 
It is not hard to find many other examples of people who seem to set 
off on a career marked for success who fail miserably along the way. 
The element of our Social Security system that pays a relatively higher 
monthly benefit to people who have not been as successful in the labor 
market as those who have is our way of helping the less fortunate have 
a reasonable standard of living in their latter years.
    Table 1 shows estimated internal real rates of return that will be 
realized by a set of prototypical Social Security program participants 
reaching age 65 in 2008 according to estimates developed by the Social 
Security actuaries. These workers are classified according to their 
marital and earning status and earnings levels over their working 
careers. If you focus on any particular column, you will see that the 
rate of return on lifetime contributions declines the higher up the 
earnings distribution that a worker ends up. This sort of ``social 
insurance'' provided by Social Security is not something that we can 
ever expect private insurance markets to provide. To the extent that 
there is a concern that people who are unsuccessful in their working 
careers not be forced to live out a retirement at a socially 
unacceptable level of living, this sort of mechanism almost certainly 
will have to be part of our retirement structure. Many reform proposals 
would maintain or strengthen this element of the current system. Part 
of the reason for that general support is the result of the broad 
dependence on Social Security for income security among the portion of 
the workforce at the lower end of the earnings distribution.

  Table 1: Internal Real Rates of Return for Various Earnings Level Scaled Workers Who Will Turn Age 65 in 2008
----------------------------------------------------------------------------------------------------------------
                                                                Real rates of return in percentages
                                  Career average ---------------------------------------------------------------
   Qualitative earnings level         indexed                                       One-earner      Two-earner
                                    Earnings a      Single male    Single female      couple          couple
                                                     (percent)       (percent)       (percent)       (percent)
----------------------------------------------------------------------------------------------------------------
Very low                                 $8,314            4.00            4.42            6.59            4.57
Low                                      14,965            2.87            3.35            5.42            3.39
Medium                                   33,256            1.82            2.35            4.40            2.31
High                                     52,624            1.18            1.74            3.73            1.64
Very high                                69,418            0.57            1.19            3.25
----------------------------------------------------------------------------------------------------------------
Source: Office of the Actuary, Social Security Administration, ``Internal Real Rates of Return under the OASDI
  Program for Hypothetical Workers,'' Actuarial Note, Number 2004.5, March 2005, p. 6.
a Career average earnings level wage indexed to 2003.

    The extent to which selected workers benefit from the insurance 
against bad labor market outcomes can be seen from Table 2 which shows 
a distribution of Social Security Primary Insurance Amounts (PIAs) for 
actual workers who retired in 2003 in comparison to the PIAs of the 
prototypical workers considered in Table 1. It is clear from this table 
that female workers tend to be skewed toward the lower end of the 
earnings distribution so they get a somewhat disproportionate share of 
this form of insurance provided by Social Security. While it is not 
reflected in the table, we know from other sources that older women in 
particular are at risk of living out their final years in poverty. 
Reform options that move the Social Security system more toward 
operating purely as a retirement savings system should include elements 
to maintain or enhance the income security protections built into the 
existing system for some particularly vulnerable members of our 
society, namely those who have not had a particularly successful 
working career.

   Table 2: Distribution of PIAs of Actual Workers Who Retired in 2003 Relative to Prototypical Scaled Workers
                                           Developed by SSA Actuaries
----------------------------------------------------------------------------------------------------------------
                                                                         Percent with PIA closest to qualitative
                                                                                       group level
                                                       Career average  -----------------------------------------
             Qualitative earnings level               indexed earnings                               Total, all
                                                             a            All males    All females     workers
                                                                          (percent)     (percent)     (percent)
----------------------------------------------------------------------------------------------------------------
Very low                                                       $8,314           9.4          34.0          20.8
Low                                                            14,965          14.1          32.6          22.7
Medium                                                         33,256          26.3          24.2          25.4
High                                                           52,624          38.1           8.5          24.3
Very high                                                      69,418          12.1           0.7           6.8
----------------------------------------------------------------------------------------------------------------
Source: Office of the Actuary, Social Security Administration, ``Internal Real Rates of Return under the OASDI
  Program for Hypothetical Workers,'' Actuarial Note, Number 2004.5, March 2005, p. 3.
a Career average earnings level wage indexed to 2003.

    There is another feature of Table 1 that policymakers ought to 
consider in any deliberations to modify Social Security. Earlier we 
looked at the columns in the table to consider the insurance feature in 
the system intended to protect low earners. It is also important to 
consider the lines in the table. One thing that is apparent when 
looking at the table in this fashion is the disproportionately high 
returns that single-earner couple participants in the system receive. 
This may have been an intended consequence back in the 1930s and even 
as recently as the 1960s and 1970s when most female spouses spent much 
of their prime working years as homemakers. In a modern era when the 
vast majority of women work outside the home during their prime working 
years, it is no longer clear that this characteristic is equitable 
especially taking into consideration that many non-employed spouses 
live in households where total income is relatively high. In this 
regard, spousal benefits may be considerably dampening the intended 
insurance feature of the system intended to skew benefits toward lower 
earners.
    Another aspect of modern times that is remarkably different than 
when Social Security's insurance features were configured back in the 
1930s, 1940s and 1950s is the prevalence of other income protection 
features in our retirement system. The dependence on Social Security 
for retirement security is not randomly distributed. That means that 
some types of reform have the potential to disproportionately 
disadvantage certain groups. This point can best be understood by 
looking at people on the cusp of retirement as James Moore and Olivia 
Mitchell have done.\17\ Their analysis uses Health and Retirement Study 
(HRS) data. The HRS is collecting longitudinal information on a 
representative sample of the U.S. population between the ages of 51 and 
61 in 1992. Sample members are being interviewed every two years.
---------------------------------------------------------------------------
    \17\ James F. Moore and Mitchell, Olivia S., ``Projected Retirement 
Wealth and Savings Adequacy,'' in Olivia S. Mitchell, P. Brett Hammond, 
and Anna M. Rappaport, eds., Forecasting Retirement Needs and 
Retirement Wealth. Philadelphia: University of Pennsylvania Press, 
2000, pp. 68-94.
---------------------------------------------------------------------------
    Moore and Mitchell used the 1994 wave of the HRS interviews to 
estimate the participating households' wealth levels just as most of 
them were approaching retirement. They included four classes of wealth 
in their calculations: 1) net financial wealth, including savings 
accounts, investments, business assets, and non-residential real estate 
less outstanding debt not related to housing; 2) net housing wealth; 3) 
pension wealth, or the present value of employer-sponsored retirement 
benefits; and, 4) the present value of Social Security benefits under 
current law.
    Table 3 has been derived from Moore and Mitchell's analysis. The 
wealth measure used here does not include net housing wealth because 
most homeowners do not sell their homes at retirement, or if they do, 
they tend to buy another one. This definition of wealth includes 
business assets and non-residential properties. We are interested in 
looking at the assets of these households that can be expected to 
generate a stream of income that can be used to finance consumption 
during retirement.

                             Table 3: Distribution of Wealth among the Near Elderly
----------------------------------------------------------------------------------------------------------------
                                                                     Retirement Purchasing Power from:
                                                         -------------------------------------------------------
                                                            Personal       Social
       Position in the Wealth Holding Distribution          Financial     Security       Pension    Total Wealth
                                                             Wealth        Wealth        Wealth       (percent)
                                                            (percent)     (percent)     (percent)
----------------------------------------------------------------------------------------------------------------
Bottom 10th                                                       3.4          93.6           3.0         100.0
\1/3\ from bottom                                                18.1          63.4          18.5         100.0
\2/3\ from bottom                                                29.9          35.7          34.4         100.0
Top 10th                                                         65.2          10.2          24.6         100.0
----------------------------------------------------------------------------------------------------------------
Source: James F. Moore and Mitchell, Olivia S., ``Projected Retirement Wealth and Savings Adequacy,'' in Olivia
  S. Mitchell, P. Brett Hammond, and Anna M. Rappaport, eds., Forecasting Retirement Needs and Retirement
  Wealth. Philadelphia: University of Pennsylvania Press, 2000, p. 72.

    Table 3 shows that the people at the bottom tenth percentile of the 
wealth distribution hold almost all of their wealth in the form of 
Social Security retirement benefits. Social Security benefits still 
account for almost two-thirds of total wealth for those households one-
third of the way up the wealth distribution. Those two-thirds of the 
way up have a rough parity in their wealth holdings between their 
social security annuity, employer-sponsored pensions and other 
financial wealth. Those at the top of the wealth distribution have very 
limited dependence on Social Security. The point of the analysis here 
is to show that for many workers reaching retirement age in our 
society, a disproportionate portion of their wealth has been 
accumulated under the auspices of Social Security. For many workers, 
however, Social Security is a relatively small share of their 
retirement security portfolio. We should be mindful that rebalancing 
Social Security by means of across the board reductions in benefits 
will have a highly skewed effect on future retirees. A 20 percent 
across the board reduction in Social Security benefits would reduce the 
total retirement wealth of those at the bottom 10th of the wealth 
distribution in Table 12 by nearly 19 percent. For those at the top 
10th of the wealth distribution, it would reduce the total retirement 
wealth by about 2 percent. To the extent that we might shift toward 
individual accounts as a portion of the national base of our retirement 
security system, we should be mindful of how such a change might alter 
the insurance protection provided to those with low lifetime earnings.
Insuring that workers make adequate provision for retirement income 
        needs
    The fourth sort of worker insurance provided by Social Security is 
distinctly different than the first three. For the overwhelming 
majority of workers, the prospect of reaching an advanced age is a near 
certainty and retirement patterns developed during the twentieth 
century suggest most people will end up with a period at the end of 
their lives when they no longer earn a direct wage. To the extent there 
is a public interest that elderly people maintain some minimum standard 
of living, it is reasonable to force people to ``save'' some portion of 
their earnings to provide for their needs when they no longer work. If 
we do not require that workers save, they may fail to do so on their 
own and become wards of the state. That was one of the most fundamental 
motivations for Social Security from Franklin Roosevelt's perspective.
    One of the amazing achievements of the U.S. Social Security pension 
system is that it has succeeded so well in providing a broad base of 
protection for our elderly citizens. Figure 3 shows the percentage of 
people ages 60 to 80 who reported receiving Social Security benefits in 
2003. When one takes into consideration that some 4 or 5 percent might 
still be in public pension plans outside of Social Security and that 
some simply failed to report correctly about their sources of income, 
it is clear the system is providing close to universal protection for 
those it is intended to cover.
Figure 3: Percentage of People by Age Who Reported Receiving a Social 
        Security Benefit in 2003

        [GRAPHIC] [TIFF OMITTED] T4732A.004
        
       Source: Author's tabulations of Current Population Survey

    Given the relative certainty that most workers will get old andmost 
will quit working before death this element of the program deserves 
separate and careful consideration. If one harkens back to the example 
that we described at the outset the implications of the phenomenon in 
Figure 3 become apparent. There, we had a case where one family in a 
thousand had their house burn down each year causing them a 
catastrophic loss. In that case, the risk of such a loss could be 
pooled across a large number of people and everyone could be protected 
by small annual contributions. Now consider trying to provide this same 
sort of protection where houses burned with certainty at a given age 
and where as many as one third to one half of them burned each year. 
The cost of providing protection explodes with the virtual certainty of 
the contingency occurring for everyone and the approach for securing 
against this sort of loss would be significantly different than where 
the incidence of the problem is small.
    Given FDR's fiscally conservative nature and the strong position he 
had taken on funding of the social insurance elements of the Social 
Security Act in 1935, he saw this legislation ``as protection to future 
Administrations against the necessity of going deeply into debt to 
furnish relief to the needy.''\18\ We know that FDR felt strongly about 
the funding of ``retirement'' benefits when he first submitted Social 
Security proposals to the Congress. His statements at the time he 
submitted the legislation and when he signed the bill indicate a clear 
concern about the long-run fiscal implications of running a pay-as-you-
go system. We know that he repeatedly resisted the shift toward pay-as-
you-go financing of the system once it was up and in operation. When he 
vetoed the Revenue Act of 1943 because of its provisions that shifted 
away from Social Security funding toward pay-as-you-go operations, it 
was only the second bill that he had vetoed in his 10-year tenure as 
president at the time.
---------------------------------------------------------------------------
    \18\ Franklin D. Roosevelt, Presidential Statement at the Signing 
of the Social Security Act, August 14, 1935.
---------------------------------------------------------------------------
    To show how alternative pension structures operate from an economic 
perspective, consider a theoretical worker who begins working at age 25 
earning $35,000 per year and attempts to save a bit of her annual 
earnings to provide for income needs during retirement. Assume this 
individual has perfect foresight and knows that her pay will increase 4 
percent per year until she reaches age 65, when she will retire and 
receive a pension that is 35 percent of her gross earnings in here last 
year of employment, a pension indexed for inflation which we assume to 
be 3 percent per year. To simplify the process of determining how much 
the worker should save, we assume she knows that she will live to be 
81.5 years of age. We also assume the worker anticipates receiving an 
annual rate of return on his assets of 5 percent per year. At 
retirement, roughly 60 percent of accumulated assets are attributable 
to interest earned on the lifetime contributions the worker has made.
    If everything goes according to plan, this worker will earn roughly 
$161,600 in her last year of employment. After her retirement savings 
are put aside, her disposable income will be approximately $135,700 
that year. As it turns out, this worker will need to save 10.3 percent 
of her annual earnings each year in order to fulfill her work and 
retirement plans. If she does that, she should be able to receive an 
annuity of $56,550 per year, a benefit that will grow from year-to-year 
during retirement at the rate of price inflation. The initial benefit 
will be about 39 percent of her disposable income in her final year of 
work where disposable income is her total wage minus what she has to 
contribute to a pension in order to finance her retirement income.
    This pattern of asset accumulation and net balances are reflected 
in Figure 4. Over the working period, the worker's steady saving plus 
interest accruing on accumulated assets gradually accelerate the growth 
in total assets. From a macroeconomic perspective, while the worker or 
the employer is contributing to the plan, these contributions are 
reflected as savings accruing in the economy. After retirement, the 
assets are steadily depleted over the worker's remaining lifetime and 
run out when he dies. Net savings over the worker's lifetime, in this 
example, are zero. Had she wished to leave a bequest to heirs, the 
worker would have had to save more during her working life or spend 
less during retirement.
Figure 4: Accumulated Savings of a Hypothetical Worker Participating in 
        a Funded Pension Plan

        [GRAPHIC] [TIFF OMITTED] T4732A.005
        
                   Source: Calculated by the author.

    If the same worker described above is covered by a pay-go 
retirement plan, the dynamics of her accumulating retirement wealth are 
considerably different than those in a funded pension plan. First, her 
annual contributions to the retirement system are paid out to current 
retirees. Second, rather than becoming part of an accumulation of 
capital that can be invested in the economy, in most cases her 
contributions merely purchase an entitlement to a retirement benefit. 
In other words, it results in an unfunded obligation--what Paul 
Samuelson has characterized as a ``consumer loan''\19\--that future 
participants in the system are obligated to pay when the current worker 
retires. The pattern of this transaction is reflected in Figure 5, 
which turns out to be a mirror image of Figure 4. In this case, the 
worker's ``accumulated savings'' from the worker's perspective is the 
sum of the obligations she is owed. It grows on a gradually 
accelerating basis until the worker reaches age 65, and then is paid 
off over the remainder of her lifetime as annual retirement benefits. 
From a macroeconomic perspective, however, deducting payroll taxes from 
a worker's compensation may reduce his or her consumption at that time, 
but the benefit paid to a retiree is usually used largely for 
consumption purposes. Thus, it has no positive effect on net savings in 
the economy.
---------------------------------------------------------------------------
    \19\ Paul A. Samuelson, ``An Exact Consumption-Loan Model of 
Interest with or without the Social Contrivance of Money,'' Journal of 
Political Economy (December 1958), vol.66, pp. 467-482.
---------------------------------------------------------------------------
Figure 2: Accumulated Savings of a Hypothetical Worker Participating in 
        a Pay-As-You-Go Pension Plan

        [GRAPHIC] [TIFF OMITTED] T4732A.006
        
                   Source: Calculated by the author.

    From the worker's perspective, the accumulation of pension rights 
through a pay-go social security system is no different from 
accumulating wealth through personal savings or a funded pension. In 
the life-cycle context, the primary motivation for workers to save is 
to provide for their consumption after they retire.
    In both the funded and pay-go pensions, the worker is deferring 
consumption from the working period to the retirement period. In an 
economic context, however, there is an important distinction between 
the two approaches. In the funded plan, the deferred consumption is 
used to purchase assets that will finance post-retirement consumption. 
In the pay-go plan, the deferred consumption establishes a claim on the 
productivity of the next generation of workers. If a significant share 
of their retirement consumption needs will be met by a mechanism that 
does not require savings, and indeed actually creates substantial 
liabilities, it has the potential to lower national savings rates. A 
funded pension system generates real savings.
    In recent years, there has been a considerable debate among 
economists about whether our accumulating Social Security trust funds 
represent real savings that will help to ameliorate the burden that the 
baby boom generations pose on the retirement system. Looking at this 
discussion in the context of the comparison of funded versus pay-as-
you-go financing helps to clarify the issue being debated.
    Looking back to Figure 4, it is clear that a retirement plan's 
aggregate contribution to savings is the extent to which assets 
accumulate to cover its net obligations. In an aggregate context, it is 
not the net of the annual contributions into a trust fund minus the 
payout of current benefits and administrative expenses. It is the 
extent to which accruing obligations in the plan are covered by the 
assets in the plan. In the case of private pensions, actuaries are 
required to estimate the accrued benefit obligations at each valuation, 
and plan sponsors are required to report the results to the federal 
government. These periodic tallies of assets and obligations in plans 
can be used to track the contributions of the system to national 
savings. Along similar lines, the Social Security actuaries have 
calculated something they have labeled the ``maximum transition cost'' 
for that system in recent years. The actuaries report that this measure 
``represents the transition cost for continuing the Social Security 
program in a different form, with all payroll taxes for work after the 
valuation date credited to the new benefit form. The maximum transition 
cost is equivalent to the unfunded accrued obligation of plan designed 
to be fully advance funded at the time of plan termination.''\20\ Once 
again, the tally of assets in the system and the accruing obligations 
allows us to assess the net effect of Social Security on national 
saving.
---------------------------------------------------------------------------
    \20\ Steve Goss, Alice Wade, and Jason Schultz, Unfunded 
Obligations and Transition Cost for the OASDI Program (Baltimore, MD: 
Office of the Chief Actuary, Social Security Administration, 2004), 
Actuarial Note 2004.1, p. 3.
---------------------------------------------------------------------------
    The results of the Social Security liability calculations and 
funding levels are presented in Table 4. The results that are shown 
there are as of the beginning of each year listed in the table. The 
asset values actually reflect those reported by the Social Security 
Actuaries as of the end of the prior year but one day's income would be 
relatively trivial in the context of the discussion here. The table 
shows that trust fund assets in the Social Security system grew by 
nearly $1.2 trillion between the beginning of 1996 and 2005, while 
total obligations increased by $6.8 trillion over that same period with 
unfunded obligations climbing by $5.6 trillion. Some people look at the 
trust fund growth and conclude that, between 1996 and 2005, Social 
Security contributed $1.2 trillion to U.S. saving. A number of studies 
cited earlier suggest that this accumulation of trust funds has 
actually been used to hide deficit expenditures elsewhere in the 
federal fiscal operations.\21\ Even if those dollars were accumulated 
to claim that they have added to national savings completely ignores 
the added $6.8 trillion of obligations created over the last decade for 
future generations of workers to finance. I strongly believe we need to 
find a savings mechanism to secure future benefit accruals for this 
sort of insurance. We need to return to the ``insurance principles'' 
that Franklin Roosevelt was advocating when he adamantly demanded that 
his Social Security program be funded. My own personal conclusion is 
that the only way we can do that is to create a system of personal 
accounts that are part of our Social Security program that will allow 
us to segregate the assets and keep them from being used to finance 
other government operations.
---------------------------------------------------------------------------
    \21\ See footnote 12 above.

           Table 4: Social Security Unfunded Accrued Obligations, Trust Fund Assets and Under Funding
----------------------------------------------------------------------------------------------------------------
                                                  Plan obligations      Trust fund assets   System under funding
                                                     (billions)            (billions)            (billions)
----------------------------------------------------------------------------------------------------------------
1996                                                 $9,421.60              $496.1               -$8,925.5
1997                                                  9,293.60               567.0                -8,726.6
1998                                                 10,167.80               655.5                -9,512.3
1999                                                 10,933.20               762.5               -10,170.7
2000                                                 11,726.00               896.1               -10,829.9
2001                                                 12,756.40             1,049.4               -11,707.0
2002                                                 13,374.30             1,212.5               -12,161.8
2003                                                 14,007.30             1,378.0               -12,629.3
2004                                                 15,027.00             1,530.8               -13,496.2
2005                                                 16,225.60             1,686.8               -14,538.8
----------------------------------------------------------------------------------------------------------------
Sources: Author's calculations of total plan obligations as sum of trust fund assets from the 2005 Annual Report
  of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds
  plus the unfunded accrued obligations from unpublished data from the Office of the Actuary, Social Security
  Administration.

Insurance protections provided in the retirement period
    It is also important to consider the post retirement benefits in 
the current system and how they might be addressed in Social Security 
reform proposals. The current system provides at least three sorts of 
insurance protection to the retiree population. The first is longevity 
insurance--protection against outliving one's resources--by providing 
its benefits in the form of an annuity. The second form of insurance in 
this aspect of the system is protection against erosion against the 
standard of living achieved while working by providing a benefit 
indexed for inflation during retirement. The third form of insurance is 
spouse and survivor protection provided to people in annuity status.
    One characteristic of individual accounts is the strong sentiment 
of ownership that develops around the accounts. This sense of ownership 
has the potential to be in conflict with the public interest in using 
the accumulated funds to provide retirement security on a broad basis. 
For example, if policymakers wish to assure that people achieve a level 
of income at least equal to the official poverty line, they may require 
that some portion of accumulated account balances be annuitized when a 
worker reaches retirement age. If policymakers do not impose an annuity 
requirement, some retirees will likely spend their resources prior to 
dying and then potentially present themselves for additional support at 
a cost to the public fisc--the classic moral hazard problem that often 
arises in situations like this. Similar concerns arise in regard to 
joint and survivor benefits. These issues will have to be explicitly 
addressed if individual accounts are part of Social Security reform.
Transaction Costs Associated with Social Security Reform
    In the discussion about Social Security reform and the prospect 
that individual accounts might be part of it, there has been a great 
deal of misinformation spread about the costs associated with 
transition that we will incur in implementing such reforms. In 
understanding the dynamics of transition costs associated with reform, 
it is important to segment the costs associated with various aspects of 
any reform.
    For the sake of discussion, consider the potential for reforming 
the current system without including any element of personal accounts 
as part of that reform. Each year the Social Security actuaries 
calculate the ``open group unfunded obligation.''\22\ This measure is 
an estimate of the funding shortfall under current law to deliver 
benefits now scheduled over the projection period. Traditionally, the 
actuaries have estimated this amount over the 75-year projection period 
covered in their annual valuation of the program. At the beginning of 
2005, they estimated the present value of this unfunded obligation to 
be $4.0 trillion. The interpretation of this value is that, if the 
trust funds held an added $4.0 trillion on January 1, 2005, then the 
scheduled collection of taxes over the next 75 years in combination 
with the trust fund balance and expected returns would cover expected 
expenditures over the period.
---------------------------------------------------------------------------
    \22\ The actuaries make a distinction here between the phrase 
``unfunded obligation,'' which is the focus of their calculation, as 
opposed to ``unfunded liability,'' which is the measure often 
calculated for underfunded employer-sponsored pensions covered under 
the Employee Retirement Income Security Act (ERISA). They note that the 
obligations under ERISA plans are contractual in nature but that is not 
the case with Social Security since Congress has retained the right to 
modify the plan in the future, including by cutting benefits accrued 
under existing law.
---------------------------------------------------------------------------
    So, we face a $4.0 trillion transition cost under current law no 
matter what we do with the program. Under law, the program does not 
have deficit spending authority, so benefits over the projection period 
must be fully financed through program revenues and assets. In other 
words, to comply with the law over the next 75 years, we must come up 
with an additional $4.0 trillion in new revenues in 2004 dollars, cut 
scheduled benefits by that amount or some combination of the two.
    In the 2005 annual trustees' report on the Social Security system, 
the open group unfunded liability was also calculated for an 
``infinite'' time frame. The estimate in this case was $11.1 trillion. 
This estimate has come under considerable criticism in some circles, 
although it was included in the annual report at the Trustees' 
insistence. The problem is that our demographics today are far more 
favorable than they will be in the future. That being the case, 
calculating adequate financing for the 75-year valuation period was 
different last year than it is this year. The basic valuation released 
in early 2004 covered the period 2004 through 2078, and the one 
released in April 2005 covers the period 2005 through 2079. Last year's 
valuation included 2004 and this year's valuation did not. This year's 
valuation includes 2079 and last year's did not. In terms of the actual 
calculations of the funding status of the program, 2004 was a good year 
because revenues exceeded expenditures, but in 2079, anticipated 
expenditures will significantly exceed revenues. If policymakers devise 
a reform that balances the program's finances over the current 75-year 
valuation period, it will be out of balance again next year because of 
this limited time period focus.
    In 1983, policymakers adopted policies they believed would fully 
finance the program over the 75-year valuation period. But lo and 
behold! We are once again confronting a program that is underfinanced, 
and a substantial share of the shortfall is due to the passage of time 
and the difference in valuation periods. This is why many policy 
analysts have advocated that we consider policy options that will 
provide financing stability well beyond the fixed valuation period. One 
way of measuring whether a particular adjustment to the program will 
deal with the long-term underfunding is to look at the infinite period. 
An alternative way is to focus on whether a particular adjustment 
results in sufficient financing to get through the traditional 75-year 
valuation period in a way that there is a substantial trust fund 
balance at the end of the projection period and that projected net 
income to the system at that time will be in relatively close balance 
to projected expenditures.
Financing the transition costs embedded in current law
    The most straightforward way to finance our way out of a $4.0 
trillion pension hole reflected by the unfunded obligations from an 
``ongoing'' perspective might appear to be either increasing 
contributions to the plan by that amount over some reasonable period, 
reducing benefits by that amount or some combination of the two. 
Proposals to accomplish any one of these options in the context of the 
current plan structure should be relatively transparent in terms of 
revealing how the transition costs will affect various segments of the 
population.
    We could simply raise the payroll tax rate starting virtually 
immediately by something around 1.9 percent of payroll. This would 
bring in approximately $4.0 trillion over the next 75 years in current 
present value terms, theoretically solving the financing problem for 
the formal 75-year valuation period. But it would not resolve the 
structural weaknesses in the system in the out years, and 15 or 20 
years down the road, the program would likely be facing as big a 
problem as it is today. It would also lead to an even larger 
accumulation of trust fund assets over the next two or three decades 
than is now projected under current law. Given that we have never been 
able to find an effective way to actually ``save'' these trust fund 
accumulations, I do not believe this approach will actually help us 
solve the current financing problems.
    An alternative to raising the payroll tax rate would be to 
eliminate the cap on covered earnings against which payroll taxes are 
assessed. This would represent a significant deviation from the 
underlying philosophy that has been the foundation of the program since 
its conception and initial passage in the 1930s. Specifically, the 
system has always based benefits on the range of earnings covered under 
the payroll tax with the understanding that it made little sense to 
provide the foundation benefit intended under Social Security all the 
way to the top end of the earnings distribution. If we are simply going 
to take the cap off of earnings covered under the system without 
providing a commensurate increase in benefits to high earners, we will 
be converting the program into a welfare transfer program. To quote 
Franklin Roosevelt, the program would simply be the ``dole under 
another name.'' He never intended it to be that and it will likely lose 
further support if that is what it is to become. If we intend to move 
in that direction, then one must ask why we would want to finance it 
simply by taxing high wage earners and not include general tax revenues 
from all people with high incomes. While there may be resistance to 
completely eliminating the cap on earnings covered under the payroll 
tax, some proposals would significantly increase the tax cap or apply a 
partial tax on up the earnings distribution.\23\
---------------------------------------------------------------------------
    \23\ Peter A. Diamond and Peter R. Orszag, Saving Social Security: 
A Balanced Approach (Washington, DC: Brookings Institution Press, 
2004).
---------------------------------------------------------------------------
    Another option for covering the costs of retaining the existing 
program is to reduce benefits. President Bush and most other advocates 
of reform have established principles that would largely concentrate 
any benefit reductions on future retirees. The one potential exception 
to this generally accepted guiding principle is the occasional 
suggestion that the consumer price index (CPI) be modestly adjusted to 
correct for what many economists believe is a tendency to overstate the 
rate of price inflation. The more likely mechanisms for reducing 
benefits would be to adjust the current benefit formula in some way or 
to raise the age(s) for benefit eligibility under the program. Once 
again, without an effective way to actually ``save'' the resulting 
trust fund accumulations, I do not believe this approach will actually 
help us solve the current financing problems.
Finding a way to partially fund Social Security obligations
    An Italian proverb says: ``If a man deceives me once, shame on him. 
If he deceives me twice, shame on me.'' In 1982, after my earlier 
reading of Social Security's history and the difficulties of funding 
pension obligations as they accrued in the fashion that Franklin 
Roosevelt wanted, I proposed transferring trust fund accumulations 
projected for the baby boomers' working careers into individual 
accounts. Further, I proposed that these accounts remain locked until 
workers reached retirement age, at which point the benefits would 
offset a portion of the benefits from the traditional Social Security 
pension.\24\ We did not institute such accounts when we amended Social 
Security in 1983 nor did we seriously consider them. In the intervening 
period, we have accumulated a trust fund that is estimated to be at 
$1.7 trillion today but we have not changed the fundamental pay-as-you-
go nature of the foundation to our national retirement system. If we 
insist on ignoring history, we will once again be condemned to 
repeating it.
---------------------------------------------------------------------------
    \24\ Sylvester J. Schieber,  Social Security: Perspectives on 
Preserving the System (Washington, DC: Employee Benefit Research 
Institute, 1982), pp. 259-261.
---------------------------------------------------------------------------
    Unquestionably, we could craft legislation tomorrow that would 
mathematically rebalance Social Security within the program's existing 
framework. But balancing the system in its current configuration would 
build up a much larger trust fund without doing anything to ensure that 
accumulations would be saved rather than squandered this time around. 
My objection to these approaches is that history has proven that we 
cannot actually save these trust fund accumulations to pay retirement 
costs down the road. What's the point of pursuing approaches that will 
do nothing to resolve the basic dilemma?
The Road to Accounts: Carve Out's, Add-On's and Hybrid Approaches
    There has been a great deal of discussion about the costs 
associated with creating personal accounts in the context of Social 
Security reform. Once again, I believe that the discussion has added 
little illumination to the policy matters that need to be addressed in 
reforming the system. Part of the problem is the use of the terms 
``carve out'' and ``add on'' do not precisely describe what is often 
being accomplished under various proposals.
    President Bush's general framework for financing individual 
accounts has generally been described as a ``carve out'' from the 
existing system. Indeed, his critics suggest that financing the 
benefits in the way he proposes to do so would cost trillions of 
dollars over the next decade or two. I believe that this assertion is 
confusing the transition costs associated with rebalancing the current 
system that the President proposes with the costs associated with 
creating the individual accounts themselves.
    In the earlier discussion about dealing with the transition costs 
associated with rebalancing the current system, we looked at those 
transition costs without considering the implications of individual 
accounts. Now to understand the implications of establishing individual 
accounts, it is important to look at them in isolation. To the extent 
we are concerned about interaction effects, we can come back and 
consider them later.
    Assume for the sake of discussion that we have a worker at age 55 
direct $1,000 of his payroll taxes into the sort of individual account 
that President Bush has suggested. Table 5 sorts out how this $1,000 
will be treated under two alternative scenarios. In both scenarios, I 
assume that the worker retires at age 65. For the sake of developing 
this example, I have assumed there is no inflation. Adding it would 
change the numbers but not the substance of the outcome. Under the 
president's proposal, at retirement, this worker would have his Social 
Security benefit determined under whatever benefit formula applies at 
that particular point in time. The lifetime value of his Social 
Security annuity would be reduced by $1,343.92 based on the accumulated 
value of the $1,000 he had withdrawn from Social Security at age 55--
that is, $1,000 compounded at 3 percent per annum over 10 years.

Table 5: Benefit Dynamics Associated with Personal Accounts in President
              Bush's Social Security Reform Recommendations


------------------------------------------------------------------------
Social Security lifetime benefit reduced by:
    $1,000 compounded at 3 percent per annum from the         $1,343.92
     time of deposit to  retirement date
Case 1:
Individual account value assuming 5 percent compounded        $1,628.89
 annual return
Segment of individual account that is required to be          $1,343.92
 annuitized at retirement
Retiree has extra lump sum of                                   $284.97
Case 2:
Individual account value assuming 1 percent compounded        $1,104.62
 annual return
Segment of individual account that is required to be          $1,104.62
 annuitized at retirement
Retiree realizes benefit loss of                              ($239.30)
------------------------------------------------------------------------
Source: Derived by the author.

    In Case 1, we assume that the worker has received annual returns of 
5 percent per year on his account. Under this assumption, the account 
would accumulate to $1,628.89 by the time he reaches age 65. Under the 
president's proposal, the worker would be required to annuitize 
$1,343.92 of that to replace the withdrawal he or she had made at age 
55. The extra $284.97 that is left after the required annuitization 
would be left for the worker to dispose of as he or she saw fit. As I 
look at this example, I do not see that there is any cost associated 
with this transaction. Instead of characterizing this approach as a 
``carve out,'' it would be more appropriate to characterize it as a 
diversion of the payroll tax. This individual has simply carried out an 
asset swap in his retirement portfolio, moving from a share of his 
retirement assets held in the form of Social Security accumulations to 
that share being held in an alternative form of financial asset. In 
this particular case, the extra $284.97 would be the return for 
undertaking this swap. Some analysts contend that we cannot consider 
this $284.97 a benefit from modifying the current system because the 
worker has taken on added risk in investing in assets in the financial 
markets.\25\
---------------------------------------------------------------------------
    \25\ Peter A. Diamond and Peter R. Orszag, Saving Social Security: 
A Balanced Approach (Washington, D.C.: Brookings Institution Press, 
2004)
---------------------------------------------------------------------------
    In Case 2, I assumed that the individual received only a 1 percent 
annual return per year on his investment in assets in his personal 
account. At retirement, his $1,000 has accumulated to only $1,104.62 
and he would be required to annuitize the whole amount. Since this is 
less than the annuity reduction to his Social Security benefit of 
$1,343.92, this worker would end up with $293.30 in reduced lifetime 
benefits under the modified system relative to staying completely in 
the central defined benefit system. In this case, the worker incurs a 
benefit reduction because he has decided to put a portion of his 
payroll taxes in the financial markets. President Bush's proposal would 
seek to minimize this sort of loss by requiring that workers invest in 
broad index funds and that they move toward fixed income investments as 
they approach retirement age.
    In the aggregate, I believe the added benefits associated with this 
sort of system would outstrip the losses but there is a concern about 
the distribution of gains and losses that policymakers should consider 
in constructing a complete reform package. No matter which of these two 
outcomes were to play out, to attribute the diversion of $1,000 from 
the Social Security fund to the personal account as a $1,000 transition 
cost associated with the reform of the system is wrong. Substantial 
numbers of workers would definitely benefit by participating in this 
sort of system. Even for those who realize a loss, that loss would be 
relatively minor to the overall size of the diversion of assets from 
the Social Security fund to their personal account.
    Another issue that has been somewhat controversial in considering 
the diversion of payroll taxes to finance personal accounts is the 
prospect that that it will exacerbate the expected cash-flow shortfall 
in Social Security financing in the transition period. When 
commentators suggest that introducing individual accounts as part of 
Social Security reform will incur massive amounts of new debt, they 
generally do not consider the net ramifications of reform on the 
system. The principles that President George W. Bush has stipulated for 
reform have frequently led to this criticism.
    President Bush has said that he wants individual accounts for 
younger workers but that he opposes benefit reductions for current 
retirees or those close to retirement age. He has also said that he 
opposes new taxes. Some prognosticators look at this combination of 
principles and conclude that individual account financing has to come 
out of the current revenue stream supporting the system. They contend 
that a system that is already under funded cannot sustain an even 
further drain on revenues to finance the individual accounts. While 
that may prove to be true, the principles also imply that modifications 
on the benefit side of the current system will reduce revenue 
requirements over the long term. In an economic sense, using a 
government bond to temporarily finance a shift in the structure of 
financing Social Security so as to reduce ``statutory obligations'' by 
an amount at least equivalent to the bond amount does not create a 
cost. Once again, it is simply a swap of one sort of obligation for 
another.
    Using government bonds to help finance the transformation of Social 
Security may create larger federal budget deficits in the near term 
than would exist under current policy, even if the transformation 
eliminates the long-term financing shortfall. This is because we do not 
account for Social Security obligations on an accrual basis, and 
issuing bonds would formally recognize obligations that are not 
recognized in the budgetary process today. It is not clear how 
financial markets might react. In one highly publicized private case a 
couple of years ago, a company issued billions of dollars of corporate 
bonds to raise the funds to cover unfunded pension obligations, and the 
financial markets seemed to recognize that the borrower was simply 
swapping one sort of obligation for another without any real financial 
implications. It is not clear that the financial markets or the public 
would react any differently if the federal government did exactly the 
same thing in restructuring Social Security.
    Some policymakers and analysts argue that instead of having the 
sort of transaction that President Bush has proposed, we should have 
``add-on'' financing of the personal accounts. This implies that new 
monies would be found to finance the accounts. President Clinton 
actually proposed the establishment of USA accounts outside the scope 
of Social Security to give low-wage earners a mechanism to accumulate 
personal account wealth. He proposed that these accounts be financed 
out of general revenues. A number of Social Security reform proposals 
would use ``add-on'' funds to create personal accounts within the scope 
of a reformed system. In most cases, these proposals would use money 
from general revenues to help finance the accounts. Personally, I am 
skeptical about such proposals because of the paucity of spare general 
revenues for as far as my eyes will allow me to see.
    I personally have been associated with two reform proposals that 
would require new contributions on covered earnings as a part of the 
transition to a system that includes personal accounts. Under these 
proposals, a portion of the current payroll tax would also be diverted 
to the personal accounts. In that regard, such proposals might be 
characterized as a hybrid to the proposals that might depend on 
financing personal accounts through one mechanism or the other. The 
reason that I favor some new money to help finance the individual 
accounts is because I believe our retirement system generally is 
underfunded. The creation of personal accounts alone under the auspices 
of Social Security will not sufficiently ameliorate our savings 
shortfall. I also believe that the added contributions should be 
mandatory because there are individuals all across the earnings 
spectrum who are saving inadequately to meet their future retirement 
income needs. Possibly my biggest problem with the suggestion that we 
can tap general revenues to finance individual accounts is that I was 
born and raised in the Show Me State. Someone is going to have to show 
me the source of the significant general revenues that will be required 
to solve this problem.
    A number of interesting opportunities to address a myriad of 
concerns present themselves when new money is introduced into the 
system. First among these is that the saving shortfall for workers who 
are not adequately saving for their retirement today can be 
ameliorated. Second, it gives policymakers greater opportunities to 
create meaningful personal accounts while maintaining the desirable 
insurance features in the current system. Third, it provides an 
opportunity to solve the current system's financing problems without 
having to intrude on any other revenue sources to get through the 
necessary transitions from the current system to the new one. Even to 
the extent there is some transition borrowing that might be required in 
this sort of reform, that borrowing could be financed completely with a 
temporary requirement that a portion of workers' personal account 
balances be invested in temporary transition bonds that would gradually 
be paid off over a 30 or 40 year period.
                               __________
    The analysis, conclusions and recommendations presented here are 
the authors and do not necessarily represent those of Watson Wyatt 
Worldwide or any of its other associates.

                                 

    Chairman THOMAS. Thank you very much. Eugene Steuerle, 
welcome back. I hope you and Mr. Apfel like the paint job. We 
have redone the room since you folks were with us, but nice to 
see you and we look forward to your testimony.

STATEMENT OF C. EUGENE STEUERLE, SENIOR FELLOW, URBAN INSTITUTE

    Mr. STEUERLE. Thank you, Mr. Chairman, Mr. Rangel, Mr. 
McCrery, Mr. Levin, and other Members of the Committee and the 
Subcommittee on Social Security. My testimony is largely driven 
by one major concern. Every year, we spend greater shares of 
our budget in areas where needs have actually declined, and yet 
we claim that we don't have enough money leftover for our 
children, for education, for young adult men and others whose 
real needs are growing or remain unattended. Right now, our 
legacy is to bequeath a government to our children whose almost 
sole purpose is our consumption in retirement. In my testimony, 
I address four major issues largely neglected in the debate on 
Social Security so far. First, close to one-third of the adult 
population is scheduled to be on Social Security. People 
already retire for about one-third of their adult lives and 
that percentage is growing. If people retired for the same 
number of years as when Social Security was young, they would 
retire about age 74 today and about age 78 in another 60 years; 
that is, 150 years, approximately, from when the system was 
first built. Every year, larger shares of benefits are going to 
those who are middle-aged and smaller shares are going to those 
who are old. I have begged top officials from the White House 
to the AARP not to take the retirement age off the reform 
table. This is an arithmetic point, it is not an advocacy 
point. At any given tax rate that you are willing to compromise 
on, an increase in the retirement age allows us to increase 
lifetime benefits, it allows us to increase replacement rates, 
it allows us to increase annual benefits, and it allows us to 
devote more resources to the truly old. One reason is that 
people work longer. There are more revenues in the system to be 
distributed.
    For similar reasons, if there are to be benefit cuts, an 
increase in working years causes among the least hardships of 
almost any benefit adjustment because there are more revenues 
in the system. Some groups have shorter than expected life 
expectancies and we need to be concerned about them, but come 
on. It is hardly protecting them to make it a national priority 
to give you, me, and those among us who are healthy a 20th, a 
21st, and a 25th year in retirement, so that we can supposedly 
protect the vulnerable. The way to protect vulnerable groups is 
to target provisions to them to through devices like minimum 
benefits. Now, a related means that we could use to increase 
the labor supply and make your job of reform easier is to 
backload benefits more. That is, to provide higher benefits to 
those who are truly old in exchange for lower benefits up front 
for those who are a bit younger.
    A second major concern I raise in my testimony is that 
Social Security is often quite unfair. Single heads of 
household--including these welfare recipients who we have now 
decided should work, as well as two-earner couples--face 
significant discrimination in the system. Each can receive 
hundreds of thousands of dollars less in benefits than people 
who pay less tax, work less, raise less children, and have less 
need. Some people are penalized for remarrying. Others get 
bonuses for marrying trophy spouses, and still others are 
rewarded for having or siring children later in life. These 
problems can be addressed by applying, to middle and upper 
income retirees, the types of equal justice benefit rules that 
we apply in private pension plans. Again, through devices like 
minimum benefits, we can actually improve the lot of the 
vulnerable at the same time. A third approach to reform is to 
change the default. Regardless of what other Social Security 
reform is undertaken, some rule should be adopted that 
automatically reacts to persistent projected deficits with 
balancing increases in retirement ages and/or reductions in the 
rate of growth of benefits for higher-earning workers. Last, a 
final set of proposals attempts to integrate in some pension 
and employee benefit reform, especially finding ways to 
increase pensions for lower- and middle-income workers. One 
conservative-liberal compromise that has many side benefits 
would be to combine a higher wage base for Social Security with 
a cap on the inefficient tax subsidies now going for health 
insurance. In conclusion, we can and should fix a system that 
now favors middle-age retirement; that reduces the share of 
resources every year that go to the truly old; that 
discriminates against single heads of households and working 
couples; and that, by default, automatically reduces the share 
of revenues available for children and for working families. 
Thank you.
    [The prepared statement of Mr. Steuerle follows:]

   Statement of C. Eugene Steuerle, Senior Fellow, Urban Institute, 
    Codirector, Tax Policy Center, and Columnist, Tax Notes Magazine

    Mr. Chairman and Members of the Committee:

    Thank you for the opportunity to testify on alternatives to 
strengthen Social Security. I must confess my frustration at how 
narrowly the Social Security debate has usually been focused. It's as 
if the public is being asked to choose a dog from the pound by looking 
only at its tail--or at best its hind legs--but not the whole dog. 
Since Social Security was first enacted, vast changes have occurred in 
the economy, life expectancy, health care, the physical demands of 
jobs, the labor force participation of women, the percentage of women 
who are left on their own to both raise children and work, the age at 
which one can be considered old, the consumption levels of the elderly 
relative to the non-elderly, and poverty levels of children relative to 
the old--to mention only some factors. Yet we often debate Social 
Security as if the type of system we want in 2080 should be determined 
by perceptions and measures of needs of a society in 1930, or 150 years 
earlier.
    The Social Security debate could and should be part of a larger one 
in which we engage our fellow citizens in choosing the best direction 
for society as a whole as better things happen to us in the way of 
longer lives and new health care goods and services. How can we really 
take best advantage of these new opportunities? How can we spread the 
gains from this increased level of well-being and wealth to create a 
stronger nation with opportunity for all? And how should we share the 
costs?
    Instead, the debate is upside down. Due to the ways we have 
designed our programs and our budgets, every year we spend greater 
shares of our national income in areas where needs have declined, and 
then claim we don't have enough left over for areas--such as education, 
public safety, children, and anti-terrorism--where real needs remain 
and have often grown. I sometimes imagine sitting in the Ways and Means 
Committee room when someone from the National Institutes of Health 
comes in claiming to have found a cure, though expensive, for cancer. 
The members of committee, trapped in the logic of our current budget, 
find that instead of celebrating this advance, they commiserate among 
themselves about the increased cost for Social Security.
    As a member of the baby boom generation, I remember youthful 
conversations among my cohort, regardless of political persuasion, that 
centered on what type of government we could help create to best serve 
society. As now scheduled, our legacy is to bequeath a government whose 
almost sole purpose is to finance our own consumption in retirement. 
Not only haven't we come close to paying for the government transfers 
we are scheduled to receive, but we plan to pay for them by dwindling 
almost to oblivion the rest of government that would serve our children 
and grandchildren.
    With the exception of the World War II period, programs for the 
elderly have been absorbing ever-higher shares of national income and 
of the budget for almost seven decades. Define ``lifetime benefits'' as 
the value, at age 65, of Social Security and Medicare benefits as if 
they were sitting in a 401(k) account that would earn interest but be 
drawn upon over retirement. In today's dollars, lifetime benefits for 
an average-income couple have risen from about $195,000 in 1960 to 
$710,000 today ($439,000 in Social Security and $271,000 in Medicare) 
to over $1 million for a couple retiring in about 25 years (over $1/2 
million in both Social Security and Medicare--see figure 1). We cannot 
provide a very large portion of the population $1/2 to $1 million 
packages of benefits and simultaneously encourage them to drop out of 
the workforce for the last third of their adult lives without affecting 
dramatically the services that can be provided through the budget to 
our children and to working families.
    The impact on the budget is especially large beginning around 2008 
because it is then that so many start moving from the working-age 
population into the retired population. Assume merely that Social 
Security, Medicare, and Medicaid continue on automatic pilot, that 
interest on the debt is paid, and that as a percent of GDP existing 
levels of revenues are allowed to rise only moderately and defense 
expenditures decline only modestly. Then by about 2015 no revenues are 
left for anything else--not for justice or transportation or education, 
not for wage subsidies or education or environmental clean-up or 
community development, not for the IRS or national parks--not even to 
turn on the lights in the Capitol. The pressure on the budget is not 
awaiting some magical date like 2018 or beyond. Social Security and 
Medicare are already spending much more than the Social Security tax 
for Social Security and Medicare, and even this accounting does not 
include all the other programs for the retired and elderly in the 
budget. The pressure on programs for children and working families is 
being felt right now, and the fight over the fiscal 2006 budget makes 
this glaringly apparent.
    Social Security is only part of this problem, but it is an 
important part for four reasons:

    1.  It sets the standard for how long we should work and who covers 
the costs associated with our longer lives and the new medical care we 
receive;
    2.  There are many inequities and inefficiencies in Social Security 
that are independent of its size;
    3.  By default (in absence of new legislation), Social Security is 
designed to absorb ever-larger shares of our national income, thereby 
squeezing out other programs, particularly discretionary expenditures, 
that are not treated equally in the budget process.
    4.  A number of related employee benefit reforms would likely 
increase private saving, enhance the well-being of low- and average-
income workers in retirement, and improve the solvency of Social 
Security.

MAJOR ISSUE ONE: LABOR FORCE PARTICIPATION
    The facts are simple. Social Security's current dilemma centers 
almost entirely on labor force issues--the drop in scheduled workers 
per retiree. Although more saving would be nice, whether in trust funds 
or accounts, we are not going to save our way out of this problem. 
Consider some of the consequences of the current system.

      The system has morphed into a middle-age retirement system.

      Close to one-third of the adult population is scheduled 
to be on Social Security within about 25 years. Including adults on 
other transfer programs, we are approaching the day when the majority 
of the adult population will depend upon transfers from others for a 
significant share of its support.
      People already retire on average for close to one-third 
of their adult lives.
      The average Social Security annuity for a man retiring at 
62 lasts 17 years, for a woman 20 years, and for the longer living of a 
couple at least 25 years. The numbers are even higher for those with 
above-average lifetime earnings.
      When Social Security was young--for instance, in 1940 and 
1950--the average worker retired at about age 68. To retire for an 
equivalent number of years on Social Security, a person would retire at 
age 74 today and age 78 in another 60 years (figure 2).

      Almost every year a smaller share of Social Security benefits 
goes to the most vulnerable.

      By constantly increasing benefits to middle-age retirees, 
at least as defined by life expectancy, smaller and smaller shares of 
Social Security benefits are being devoted to the elderly (figure 3). 
If progressivity is defined by how well the vulnerable are served, the 
system is becoming less progressive every year.

          The economy gets hit several ways, not just in terms of 
        costs.

      Among the most important, but ignored, sides of the 
Social Security budget equation is the decline in growth of the labor 
force, national income, and revenues (figure 4).
      When a person retires from the labor force at late middle 
age, national income declines. But the decline is borne mainly by other 
workers, not by the retiree. For instance, when a $50,000-a-year worker 
retires a year earlier, national income declines by approximately 
$50,000, but most of those costs are shifted onto other workers as the 
retiree starts receiving about $23,500 in Social Security and Medicare 
benefits (much more in the future) and pays about $18,300 less in taxes 
(figure 5).
      Saving declines because people retire in what used to be 
their peak saving years. For instance, when a person retires for 20 
years versus 15, he both saves for 5 years less and spends down his or 
society's saving for 5 years more.

    Believe it or not, there is tremendous opportunity in all of this. 
People in their late 50s, 60s, and 70s have now become the largest 
underutilized pool of human resources in the economy. They represent 
for the first half of the 21st century what women did to the labor 
force for the last half of the 20th century. I believe the labor demand 
is there, and it is mainly our institutions, public and private, that 
are blocking us from making full use of these valuable and talented 
people.
    What are some of the reforms that can address these problems?
    Increase the early and normal retirement ages. We should do this 
even if there were no long-term imbalance and even if all the saving 
were devoted back to Social Security. Increasing the retirement age 
would allow us to devote greater resources to the truly old, since it 
has no effect on benefits at later ages. Relative to other benefit 
cuts, it would provide higher annual benefits, since a delay of even 
one year in retiring can often increase annual income by 8 to 10 
percent for many individuals. At any given tax rate, it provides for a 
higher lifetime benefit since it results in increased revenues from 
working longer. It also provides relief for Medicare through higher 
Medicare taxes, and for the rest of the budget through higher income 
tax revenues.
    For all these reasons, an increase in the retirement ages 
(including the early retirement age, else it is just an across-the-
board benefit cut) causes the least hardship of almost any benefit cut.
    I recognize that some people are concerned about groups with 
shorter than expected life expectancies. But attempting to address 
their needs by granting many of us who are healthy a 20th and 21st and 
22nd year of transfer support and tens, if not hundreds, of thousands 
of dollars in extra benefits for retiring early is a very bad form of 
trickle-down policy. As discussed below, an increase in the retirement 
age can be combined with other provisions that help, rather than hurt, 
groups with shorter life expectancies.
    Backload benefits more. Whatever the level of lifetime benefit that 
is settled upon in a final reform package, actuarial adjustments can 
provide more benefits later and fewer earlier. These adjustments can 
take various forms: adjust benefits upward at the point that Social 
Security predicts that average life expectancy has fallen below, say, 
12 years (about age 74 in 2005) and downward in earlier ages; provide a 
lower up-front benefit in exchange for post-retirement wage indexing. 
This type of adjustment has all the right effects. It progressively 
moves benefits to later ages when people have less ability to work, 
lower income, and less help from a spouse to deal with impairments. It 
puts labor force incentives where they are most effective--in late 
middle age, including the 60s, when most people report being in fair, 
good, or excellent health.
     Provide a well-designed minimum benefit. A minimum benefit can be 
designed to help most lower-income households and to reduce poverty 
rates (using a poverty standard that is adjusted for living standards 
or wage-indexed) among the elderly. With such a minimum benefit in 
place, any of the age-of-retirement adjustments can actually increase, 
rather than decrease, the relative share of benefits for those groups 
with lower life expectancies, since their life expectancies are 
correlated with lower lifetime earnings. In fact, with a good minimum 
benefit, we can increase the income of low-income people and reduce 
poverty rates, even relative to current law.

MAJOR ISSUE TWO: SIGNIFICANT INEQUITIES AND INEFFICIENCIES IN THE 
        EXISTING SYSTEM
    Social Security consistently violates notions of equal justice by 
taxing more or paying less to those who are equally situated. Many of 
these inequities also have extremely perverse anti-work and 
inefficiency aspects. I have approached many analysts and advocates 
across the ideological spectrum, and none so far has disagreed that 
these problems ought to be addressed. Their one excuse for failing to 
tackle these problems is political: that to restore equal justice 
affects some current winners whose winnings might be reduced.
    The major cause of many of these problems is provisions that 
initially were meant to help some of those who might be vulnerable, but 
in fact did so in a poorly targeted way. These provisions are 
equivalent to going to a poor area of the city and dropping money off a 
roof. In particular, the Social Security spousal and survivor benefit--
unlike that in private pensions or even public pensions in most 
countries around the world--provides ``free'' transfers whose 
generosity increases the richer the person one marries. This benefit is 
free in the sense that no additional contribution is required; in the 
private pension system, standards of fairness argue for determining 
spousal and survivor benefits actuarially through higher contributions 
or a lower initial worker benefit. Nor was the ``free'' benefit 
designed around any measure of need. Listed below are some of the 
problems that result:

        Single heads of household face especially egregious 
        discrimination (the anti-welfare reform effect).

    Who doesn't get the ``free'' spousal or survivor benefit? The 
answer, of course, is those without spouses (from marriages with ten 
years duration or longer). Here are some of the consequences:

      When a mother is abandoned by her spouse, Social Security 
reduces her expected Social Security benefits without any change in the 
worker benefit owed to the father or to the spousal benefits he can 
pass onto to a new wife.
      Fewer benefits are paid to many single heads of household 
who work more, pay more taxes, and raise more children than to many 
spouses who don't work, don't pay taxes, and don't raise children. For 
instance, a single head of household who works for $20,000 a year for 
40 years and raises her children will get lifetime benefits of about 
$95,000 while paying taxes of $50,000, whereas a nonworking spouse who 
doesn't raise children but happens to marry someone making $100,000 a 
year will get about $250,000 in lifetime benefits and pay $0 in taxes.
      Low-income minority and less-educated women are among the 
groups most likely to need additional help--the original purpose of the 
spousal and survivor benefit--and the least likely to receive it.

        Two-earner households often receive substantially fewer 
        benefits than one-earner households (the anti_working woman 
        effect).

    The design of spousal and survivor benefits also discriminates 
against two-earner families, with women more likely than men to get no 
additional benefits for their additional contributions.

      A couple with each spouse earning $15,000 annually will 
get lifetime benefits of about $177,000, whereas a couple with one 
spouse earning $30,000 but paying no more in tax will get about 
$273,000--close to $100,000 more.
      If a single earner in a family increases his average 
earnings subject to tax, higher benefits are provided to the household. 
But if a spouse also works, the additional taxes she pays often do not 
increase the household's Social Security benefits. Many of these 
penalties tend to hit female labor force participants more than males, 
and couples who share child-rearing responsibilities more than those 
where one spouse takes on most of this effort. For example, a one-
earner couple with annual earnings of about $30,000 can expect a total 
lifetime benefit of around $273,000, whereas a couple with the $30,000 
split $25,500/$4,500 will get lifetime benefits of about $243,000--
little different than the amount if one spouse earned $25,500 and the 
other earned nothing.
      Benefits for the divorced are highly variable and often 
unrelated to need or contributions (the divorce roulette wheel effect).
      For the same contributions, someone who marries several 
times can multiply benefits relative to someone who marries only once. 
In the extreme, a worker can generate additional benefits for every 
spouse of 10 years or more--with no reduction in his or her own 
benefits. For example, if a high-wage male worker has three former 
spouses, all from marriages that lasted 10 years or longer, the spousal 
and survivor benefits payable on his earning record would be $710,000. 
Spousal and survivor benefits would be only $237,000 if he had only one 
spouse. In both cases, he is not required to share any portion of his 
own benefit.
      Someone who divorces after 10 years, less one day, of 
marriage gets nothing from the shared responsibility of the marriage, 
even if she is left taking care of the children. She will receive 
hundreds of thousands of dollars less in benefits than someone equal in 
all other respects who happens to divorce after ten years and one day.
      People who remarry are often subject to marriage 
penalties--if their new spouses have lower lifetime earnings than their 
former spouses (the marriage penalty effect). A woman divorced from a 
high-wage man after more than 10 years of marriage would receive about 
$237,000 in spousal and survivor benefits. However, if she remarries 
and her new husband is a low earner, her benefits would fall to about 
$101,000--a steep penalty for remarrying.
      A divorced person is often better off if her former 
spouse dies (the Agatha Christie effect). Upon death of a former 
spouse, the divorced person can start receiving the much larger 
survivor benefit; before death, only the smaller spousal benefit is 
provided. For example, a divorced woman whose high-wage spouse has died 
before she reaches normal retirement age would receive $373,000 in 
benefits. However, if both she and her husband live into retirement and 
then she dies at average life expectancy but her husband outlives her, 
she can only expect $186,000, as she will never receive his more 
generous survivor benefits.

        People who marry significantly younger spouses will find that 
        their contributions are much more likely to generate a higher 
        package of benefits for the household than are the 
        contributions of people who marry others of a similar age (the 
        trophy wife and husband effect).

    Again, Social Security spousal and survivor benefits are not 
actuarially adjusted for age. If a person marries someone a lot 
younger, he will be more likely to generate additional survivor 
benefits for which he has paid nothing extra.

        People who have children later in life are much more likely to 
        receive additional benefits, no matter how rich they are (the 
        Hollywood effect).

    With longer lives, higher divorce rates, and births at later ages, 
it is becoming more common for older people, especially men, to still 
have children in the home when they start receiving retirement 
benefits. Under current law, they often become eligible for children's 
benefits at the same time, regardless of need.

        People with long work histories face discrimination in the 
        system (the anti-worker effect).

    Someone who works 45 years at $35,000 a year gets substantially 
fewer benefits than someone who works 35 years at $45,000 a year--for a 
single male, $165,000 in lifetime benefits versus about $200,000. The 
system counts only 35 years of work, a rather perverse way of trying to 
achieve progressivity.
    Of course, there are ways to reform this system while still 
protecting the vulnerable.
    Determine family benefits for middle- and upper-income individuals 
in an actuarially neutral manner. Actuarial neutrality would apply 
private pension standards to middle- and upper-income households in 
making sure that benefits were shared equitably. Different forms of 
benefit sharing or earnings sharing could be tried. While transitioning 
to this type of system, cap existing types of family benefits that are 
not paid for out of additional contributions. Similarly, extend toward 
divorced persons the types of equity rules that apply in the private 
pensions system.
    Provide a minimum benefit that extends to spouses and divorced 
persons as well as workers. For the same level of expenditure, higher 
minimum benefits for lower-earning workers--as well as for spouses who 
have generated low worker benefits on their own records--would provide 
additional protections for the vulnerable. One should first require the 
actuarial adjustment, then figure out where additional levels of 
protection can best be granted. This would reduce the amount of 
transfers that are going free--without any additional contribution--to 
higher-income households. For those concerned with low-income women, 
whether single or survivors, it would improve their status overall.
    Count all years of work history. No one would think to deny some 
people their employer's 401(k) contributions because they worked more 
than 35 years. There is no legitimate reason in Social Security that 
all years of work should not be counted. Redistribution can always be 
made to low-earning workers through the benefit formula or a minimum 
benefit. This change would have an additional work incentive effect as 
well; under current law, many years of work result only in a pure 
additional tax, with no additional benefit generated.

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

MAJOR ISSUE FOUR: RELATED PRIVATE RETIREMENT AND EMPLOYEE BENEFIT 
        REFORMS
    We can only consume what we produce. That production comes from 
labor and capital. I have indicated that I consider the primary 
economic problem for Social Security is to take advantage of the vast 
pool of human talent and capital that we are wasting. There are a 
variety of ways to fix our private employment systems to enhance their 
ability to hire older workers and to induce greater saving.

        Most middle-class retirees_not just the poor_depend primarily 
        upon government in their retirement.

    Over two-thirds of those approaching retirement have less in 
accumulated wealth in all forms--retirement plans, housing, and saving 
accounts--than the value of their Social Security and Medicare benefits 
(figure 6).

        The personal account debate reflects a search for something 
        between a mandated Social Security system that for the most 
        part is pay-as-you-go and discourages saving by individuals, 
        and a private pension system that is not mandated, but 
        generates little in retirement saving for most citizens.

    I had hoped that the personal account debate would evolve toward 
figuring out how to address the difficult problem of promoting saving 
effectively. Our private pension system is not doing an adequate job of 
promoting saving, nor is our Social Security system. Some hybrid system 
may well be needed on this score.

        The Social Security tax base has been eroding for some time and 
        in ways that are causing other problems_such as the government 
        actually paying tax benefits in ways that increase the number 
        of uninsured.

    The earnings base for the Social Security tax has been eroding over 
time for two reasons: first, the earnings distribution has become more 
unequal; and, second, smaller percentages of compensation are being 
paid in the form of cash, rather than tax-deferred, compensation. In 
the latter case, the primary problem has been the growth in the percent 
of compensation paid in the form of health benefits. To make matters 
worse, the tax subsidy for employer-provided health insurance is 
expected to cost an additional $100 billion annually (in both income 
tax and Social Security tax revenues) within a few years. And that 
additional expense will likely increase, rather than decrease, the 
number of persons who lack health insurance. As designed, the subsidy 
encourages excessive growth in the cost of medical care, thus leading 
more employees to drop insurance.
    It is hard for government to force people to save or to control the 
dynamics of the bargains between labor and management. However, some 
prudential steps can be taken.
    Reduce the tax gaming. Taxpayers now borrow and take interest 
deductions, while deferring tax on interest and other capital income in 
their retirement accounts. In effect, they get tax breaks for making 
deposits, not for saving. Such interest deductions should be restricted 
when the interest and other capital income is not being subjected to 
tax.
    Provide an additional incentive for plans that do a better job at 
providing a portable benefit for all workers. Here is one example. Many 
types of contributions to 401(k) and other plans do not benefit from 
the FICA exclusion accorded many defined benefit plans. Making use of 
this FICA tax is an alternative way of financing increased deposits to 
retirement accounts--although it, too, should be paid for. I suggest 
that some additional incentive be made available to all plans where all 
workers in the firm are guaranteed that they will walk away at least 
with 6 percent of pay compounded over time by some reasonable interest 
rate. I would apply such a rule to employer and employee contributions 
and to any type of plan, whether defined benefit or defined 
contribution. Other pension tax benefits might be gradually reduced for 
plans that did not provide such a portable benefit. Adopting this type 
of rule could also allow for a simplification of pension discrimination 
rules.
    Make clearer in the law that employers can use opt-out, not just 
opt-in, methods of encouraging participation--without threat of 
lawsuit. Evidence seems fairly strong that the former method--where 
employees are included in a plan unless they formally choose to be 
excluded--results in much higher participation rates. In addition, 
default options can allow the employee contribution rate to rise when 
pay rises.
    Focus retirement plan incentives more on lower-wage workers. This 
might be done, for instance, through an increase in the savers credit. 
However, that credit should be reformed so the monies are more likely 
to make their way into retirement accounts (currently the credit is 
just a tax reduction that can easily be spent). The credit should also 
be made available for employer, as well as employee, contributions.
    Provide safe harbors for employers hiring or retaining older 
workers. Our current pension and retirement plan rules are designed for 
a world in which people had much lower life expectancies and labor 
force demands could more easily be met by all the baby boomers and 
women entering the workforce. That period is swiftly passing. Still, 
employers today are often fearful of retaining or hiring older workers 
because of threats of lawsuits under ERISA, the tax law, and age 
discrimination laws. Even when employers feel they are clearly acting 
within all these laws, the threat of lawsuit deters them from acting. 
Congress should provide safe harbors for the types of employee benefits 
that firms can provide when hiring or retaining older workers.
    Restore or at least prevent further erosion of the Social Security 
earnings base. The president and some others have offered to consider 
restoring the Social Security wage base to compensate for some of the 
former effects. But long-term projections of Social Security's solvency 
are also affected significantly by income and Social Security tax 
incentives to receive more and more compensation in nontaxable forms. A 
cap on employer-provided health insurance would go a long way not just 
to improve Social Security's solvency (allowing for higher benefits for 
the same Social Security tax rate), but also to help the health 
insurance market and help prevent the erosion of private health 
insurance coverage. One should also consider extending the Social 
Security tax to other preferred forms of employee benefits in an 
administrable way.
    Note that the combination suggested here--a higher wage base to 
compensate for the more uneven distribution of earnings, a cap on tax 
subsidies for health insurance to promote a more efficient market and 
greater health insurance coverage, and reduction in other 
inefficiencies caused preferences for other employee benefits--may 
represent a classic conservative--liberal compromise that has many side 
benefits to restoring solvency to Social Security.

CONCLUSION
    Social Security reform is possible, but focus needs to extend far 
beyond the narrow confines of the current debate. Many reforms are 
consistent with legitimate principles accepted by individuals of all 
political persuasions. We can and should fix a system that favors 
middle-age retirement in ways that reduce shares of resources for the 
truly elderly; that discriminates against single heads of households, 
working couples, and many others; and that by default automatically 
reduces the share of revenues available for programs for children and 
working families. We should also consider changes in the tax and 
related laws affecting employee compensation to restore solvency, 
increase private saving, make it easier for employers to hire older 
workers, and in other ways complement Social Security reform.

                       Summary of Recommendations

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

                                Figure 1

[GRAPHIC] [TIFF OMITTED] T4732A.007

                                Figure 2

[GRAPHIC] [TIFF OMITTED] T4732A.008

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

                                Figure 3

[GRAPHIC] [TIFF OMITTED] T4732A.009

                                Figure 4

[GRAPHIC] [TIFF OMITTED] T4732A.010

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

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

                                Figure 5

[GRAPHIC] [TIFF OMITTED] T4732A.011

                                Figure 6

[GRAPHIC] [TIFF OMITTED] T4732A.012

    C. Eugene Steuerle is a senior fellow at the Urban Institute, 
codirector of the Tax Policy Center, and a columnist for Tax Notes 
Magazine. Any opinions expressed herein are solely the author's and 
should not be attributed to any of the organizations with which he is 
associated.

                                 

    Chairman THOMAS. Thank you very much, Gene. Welcome back, 
Mr. Apfel. The time is yours.

  STATEMENT OF HON. KENNETH S. APFEL, SID RICHARDSON CHAIR IN 
  PUBLIC AFFAIRS, LYNDON B. JOHNSON SCHOOL OF PUBLIC AFFAIRS, 
          UNIVERSITY OF TEXAS AT AUSTIN, AUSTIN, TEXAS

    Mr. APFEL. Thank you, Mr. Chairman. Mr. Chairman and 
Members of the Committee, I have many, many memories of time 
spent in this historic room. This room has been witness to many 
historic events when Members of Congress with differing views 
came together for the common good. There are sharply divergent 
views today on how to proceed on Social Security and my remarks 
today are designed to make clear my very deep concerns about 
the two key proposals now being put forward by the 
Administration. My hope, however, is that as the debate 
unfolds, that this room will again be witness to action that 
brings us together for the common good. The first proposal, of 
course, relates to the privatization of Social Security. The 
Administration has proposed that private accounts be 
established and then paid for through cuts in future Social 
Security benefits. Some workers may do better than current law 
and some worse. The winners and losers will be decided by the 
market. In the case of a death of the worker, the private 
account would be passed on to heirs, but so would the future 
Social Security benefit cuts. It is, therefore, also entirely 
unclear which spouses or family Members will be better off or 
worse off under this scenario.
    With privatization, trying to retire at a time of down 
market conditions can be a very risky proposition and trying to 
buy an annuity at a time of economic instability can also be a 
risky proposition. Frankly, I would hate to see a future U.S. 
Social Security Commissioner urging America's older workers to 
just keep working until the markets come back. Social Security 
ought to represent a foundation of support that can be counted 
on in retirement no matter what happens to the markets. Now, 
the White House argues that current retirees will be unaffected 
by privatization proposals. I do not in any way question the 
sincerity of the White House on this matter, but the hard 
reality is that redirecting current payroll tax revenues erodes 
financing for Social Security, even if those revenues are 
somehow made up through trillions of dollars in government 
borrowing. These changes destabilize Social Security's current 
financing mechanisms and call into question whether and how 
benefit commitments made to current retirees will be made in 
the years ahead. Privatization is simply not a safe bet for 
current retirees.
    The President has also suggested that we change over to a 
system of sliding-scale benefit reductions to reduce future 
benefit commitments. About 70 percent of future retirees, those 
with earnings over $20,000 a year, would face major cutbacks. 
Replacement rates would plummet. In addition, many lower income 
survivors, divorced spouses, and others would see their 
benefits reduced. Once fully phased in, almost all workers 
would receive the same benefits regardless of lifetime 
earnings. This is a dramatic shift in Social Security policy 
because it breaks the link between what workers paid into the 
system based on their earnings and what they would earn in 
Social Security benefits. Now, it is true that the proposal 
exempts low-income workers from this aspect of the proposed 
benefit cuts, and I want to point out that the core objective 
of a progressive reform is basically sound--to make Social 
Security benefits structure more progressive and to soften the 
burden on low-income workers of restoring solvency. In 
addition, people with higher earnings are, on average, living 
increasingly longer lives than low-income workers, so higher-
income workers are receiving an increasingly higher share of 
benefits over time. While I have argued that modest benefit 
changes could be made in this area, Social Security benefit 
cuts of the magnitude contemplated by the President's proposal, 
I believe, are inappropriate and risk the long-term economic 
security of the middle class.
    Lastly, combining private accounts with these sliding-scale 
benefit cuts, as proposed by the White House, would lead to 
even more drastic change. After paying a lifetime of payroll 
taxes into Social Security, millions of persons would receive 
little or no Social Security defined benefits. This is due in 
part to deep and broad middle-class Social Security benefit 
cuts combined with the fact that the private accounts would be 
paid for through even deeper reductions in Social Security 
defined benefits. If adopted, where would such a policy lead 
us? I believe the long-term sustainability of the Social 
Security retirement system would be in peril if such an 
approach was enacted. This assertion is not empty rhetoric. I 
believe it from the bottom of my heart.
    What should we do? First and foremost, I do not believe 
that progress will take place until the decision to drop 
privatization has been made. We should drop consideration of 
privatizing part of Social Security. Once privatization is off 
the table, if added retirement savings is desired, and it 
should be, it should not come at the expense of Social 
Security. Second, Congress and the Administration need to come 
to a general agreement on whether added resources should be 
brought to bear to resolve the financing gap. In addition, an 
agreement is needed on the overall magnitude of the problem 
that you are trying to resolve. I am reminded of President 
Clinton's words after the failure of health reform. He bit off 
more than he could chew. I urge the Committee not to fall into 
the same trap. Rather than looking for permanent solvency by 
trying to solve a potential problem that may exist in 2100, I 
urge you to establish a more modest goal of success that would 
clearly be more easily achievable. Frankly, no one knows what 
our fertility rates or economic growth rates will be like 100 
years from now. Third, once privatization is no longer under 
consideration, I believe that Congress and the Administration 
need to come to agreement on the overall proportional mix of 
benefit and revenue changes needed to strengthen solvency. At 
that point, coming up with the detailed proposals for change, 
while clearly still a significant task, is one that I believe 
can be accomplished, taking into account the need for a more 
progressive benefit structure. And fourth, reform must be truly 
bipartisan. During my tenure as Commissioner at Social 
Security, I advised the Clinton Administration and Members of 
Congress on both sides of the aisle that a strong coalition for 
change must be truly bipartisan. I do not believe that changes 
should be enacted now, as some have recently been advocating, 
through a strong majority of Republicans, buttressed by a 
sliver of Members from the Democratic side of the aisle. 
Changes to Social Security must represent all Americans. Any 
other approach would only sow the seeds for future discord, 
when a long-term resolution of this issue is what the public 
really wants. In short, let us all come together and solve a 
manageable problem, not create a much bigger one by privatizing 
Social Security. Let us keep the word ``secure'' in Social 
Security for current and future generations.
    [The prepared statement of Mr. Apfel follows:]

 Statement of The Honorable Kenneth S. Apfel, Sid Richardson Chair in 
Public Affairs, Lyndon B. Johnson School of Public Affairs, University 
                   of Texas at Austin, Austin, Texas

    Mr. Chairman and Members of the Committee, it is an honor to be 
asked to testify today about the future of Social Security. I have 
many, many memories of times spent in this historic room. I sat through 
many hearings and mark-ups in the early 1980's the last time Congress 
made major changes to Social Security. In the late 1980's, I sat behind 
the dais when I served as a staff person to Senator Bill Bradley during 
the House/Senate Conference Committee on the Medicare Catastrophic Care 
legislation. And during the late 1990's and in 2000, I testified many 
times in this room during my service as the Commissioner of Social 
Security.
    This room has been witness to many historic moments--when Members 
of Congress with differing views came together for the common good. I 
have deep respect for what you do here, and I know first-hand how 
seriously you take your responsibilities to the American people.
    The future of our Social Security system is one of the most 
important issues facing this Committee in the early part of the 21st 
Century. There are sharply divergent views on how to proceed. From my 
experience, covering up the differences gets us no closer to coming 
together. My remarks today are designed to make clear my deep concerns 
about the two key proposals now being put forward by the 
Administration. My hope is that as the debate unfolds in the future 
that this room will again be witness to action that brings us together 
for the common good.
    It is clear that steps need to be taken to strengthen Social 
Security, given the demographic and economic changes that are now 
underway in America. I urge the Members, however, to be very careful in 
this area, because our Social Security laws serve as the foundation for 
our entire retirement system.
    It is hard to overstate the importance of Social Security. Without 
those monthly benefit payments, about half of all seniors in America 
would be living in poverty. Social Security provides the foundation of 
support for about one in six Americans--with benefit protections 
available over a lifetime, no matter how long one lives. Given the 
continued shift of retirement risks away from employers and toward 
individuals, the importance of that monthly inflation-protected Social 
Security benefit--something that can be counted on over a lifetime--
becomes all the more important for future generations. Our social 
insurance programs are critically important not only for today's older 
Americans, but also for the disabled, for widows, for families and for 
future generations.
    As the Committee deliberates on changes to Social Security, there 
are five issues I would like to address today. First, is the financing 
shortfall so large that drastic changes are needed in Social Security? 
Second, do private accounts help to strengthen Social Security? Third, 
does privatization in any way put the benefits of current retirees at 
risk? Fourth, are proposals to dramatically cut benefits--either alone 
or coupled with privatization--in the best interests of the young? And 
lastly, could the two key Social Security proposals made by the 
Administration--private accounts coupled with ``sliding scale'' benefit 
cuts--undermine the long term sustainability of our Social Security 
system?
Are drastic steps needed?
    On the first issue, the Social Security financing shortfall is 
manageable without drastic changes. A doubling of the senior population 
will certainly place strains on financing Social Security, but it's 
certainly not Armageddon. The system is now generating very large 
surpluses--about $150 billion this year. It's been running surpluses 
for more than the past two decades and will likely stay in surplus for 
many years to come. Legislative changes enacted in 1983 provided 
stability for about a half a century. That was a remarkable 
accomplishment.
    According to projections by the Social Security Trustees and the 
Congressional Budget Office, the Social Security trust fund will not be 
exhausted for several decades. The system will not be ``bankrupt'' 
after that time. Social Security revenues will still be sufficient to 
pay between 70 percent and 80 percent of today's benefit commitments. 
Social Security will be there in the future. I realize that many young 
people believe that Social Security will not be there for them, but the 
fact is that it will be there unless we choose to dramatically 
restructure our system.
    Social security's deficit over the next 75 years translates into 
about a half of one percent of GDP. Even if one uses an even longer 
time frame to measure the shortfall--into eternity-- a concept strongly 
rejected by the actuarial profession--then the shortfall is still only 
a little over 1 percent of GDP. Compare this shortfall to the fact that 
Social Security revenues now amount to about 5 percent of GDP. Does a 1 
percent shortfall represent a long-term challenge? Of course. Does it 
represent a crisis necessitating drastic action? Of course not.
    I've said for years that Social Security clearly faces a long-term 
and manageable challenge, and it's a challenge that we should face up 
to sooner rather than later. The continued drum beat that we are 
hearing, however, about an imminent crisis and bankruptcy seems aimed 
at eroding support for our social insurance system and building support 
for radical restructuring of the program.
Do private accounts help?
    The second question relates to whether the privatization of Social 
Security will help to solve the long-term Social Security shortfall. 
Absolutely not. Taking payroll tax revenues out of Social Security to 
create individual savings accounts makes the long-term financing 
problem bigger, not smaller. Unless benefits are drastically curtailed 
or other revenues increased, privatization only makes the financing 
problem worse.
    If a portion of payroll taxes is redirected away from paying Social 
Security benefits, Social Security's financing is weakened. Rather than 
running surpluses for many years into the future, the system may start 
running deficits almost immediately. Rather than a problem that is 
about a half a percent of GDP over the next 75 years, the shortfall 
could easily be more than double this size. And rather than trust funds 
having resources to pay benefits for several decades, the trust funds 
could be exhausted a decade earlier.
    Future benefit commitments will most likely have to be sharply 
curtailed if we privatize parts of Social Security. The Administration 
has proposed that these accounts be paid for through cuts in future 
Social Security benefits. Under the proposal, for every dollar in 
payroll taxes diverted from Social Security, the worker's future Social 
Security benefit would be cut by an equal amount, plus an interest 
charge equal to 3% above inflation. Under this proposal, some workers 
may do better than current law if they can beat the 3% above inflation 
cut. Some workers will do worse. The winners and losers will be decided 
by the market. In the case of the death of the worker, the private 
account would be passed on to heirs, but so would the future Social 
Security benefit cuts. It is therefore also unclear which spouses or 
family members will be better off or worse off under this scenario.
    There has been much debate over how many people will end up winners 
and how many will end up losers. Yale economist Robert Shiller predicts 
that about one third to two thirds of workers may be losers under the 
plan. I am not an expert in this area, but it is clear to me that there 
will be losers, and we won't know for sure how many would end up losers 
for decades to come, after we see how the markets actually perform.
    It can be argued that the benefits of individual accounts may 
offset some of these problems, but they do so by shifting more 
retirement risk to individuals. With privatization, a growing share of 
retirement income will be based on the returns of the market. Certainly 
stock market investments can lead to high returns over time. We all 
know, however, that what goes up also sometimes comes down. With 
privatization, trying to retire in a time of down market conditions can 
be a risky proposition. And trying to buy an annuity in a time of 
economic instability can also be a risky proposition.
    It is difficult to come to terms with the real life implications of 
these big shifts in policies. Let me provide an example. For years, the 
supporters of privatization have extolled the virtues of the Chilean 
privatized system. During my years as Commissioner, I met the head of 
Chile's system during a time of steep interest rate reductions in 
Chile. At the time, he was publicly urging older workers to delay 
retiring until the economic conditions improved so workers would not be 
forced into receiving inadequate annuities in retirement. This senior 
government official was urging older people to keep working until the 
bond markets came back.
    Do markets bounce back quickly? Sometimes they do. And sometimes it 
takes many, many years for markets to come back. The problem, of 
course, is that we can't predict future market conditions. If we 
privatize a part of our Social Security system, we could find ourselves 
in the same situation as Chile. Frankly, I would hate to see a future 
U.S. Social Security Commissioner urging America's older workers to 
``just keep working until the markets come back.'' Social Security 
ought to represent a foundation of support that can be counted on in 
retirement no matter what happens to the markets.
Does privatization put the benefits of current retirees at risk?
    The White House argues that current retirees will be unaffected by 
privatization proposals. I do not in any way question the sincerity of 
the White House on this matter, but the hard reality is that 
redirecting current payroll tax revenues erodes financing for Social 
Security, even if those revenues are somehow ``made up'' through 
massive government borrowing. These changes destabilize Social 
Security's current financing methods.
    The creation of private accounts within Social Security calls into 
question whether and how benefit commitments made to current retirees 
will be made in the years ahead. Adding $5 trillion in new borrowing 
over the next couple decades could put added pressures on the benefit 
promises made to current Social Security beneficiaries--maybe not today 
or tomorrow, but very possibly over the next decade or so. The risks 
are real not only for Social Security commitments, but also for 
Medicare commitments. Privatization is simply not a safe bet for 
current retirees.

How will the benefit cuts if made through ``sliding scale'' benefit 
        reductions affect young workers?
    The proposal for private accounts in and of itself does not restore 
long term solvency to Social Security. The Administration has now 
suggested further benefit cuts to make up for most of the shortfall. 
Will private accounts, coupled with major alterations in the benefit 
structure, be in the best interests of future beneficiaries? Again, the 
answer is no.
    The President has suggested that we change over to a system of 
``sliding scale'' benefit reductions to reduce future benefit 
commitments. This idea of simply using a sliding scale to calculate 
future benefit payments sounds appealing; the supporters of this change 
argue that for future generations, lower income workers would be 
protected and higher income workers would still be receiving the same 
level of Social Security benefits in real terms as current retirees.
    Let's put this proposal in proper context. Benefits for the average 
earner who is now age 25 would be cut by about 16% and the average 
newborn would see benefit cuts of about 28%. About 70% of future 
retirees--those with earnings over $20,000 a year, would face major 
cut-backs. In addition, many lower income survivors, divorced spouses, 
and others would see their benefits reduced. Once fully phased in, 
almost all workers would receive the same benefits regardless of their 
lifetime earnings. This is a dramatic shift in Social Security policy 
because it breaks the link between what workers paid into the system 
based on their earnings and what they would earn in Social Security 
benefits.
    Social Security currently replaces a little less than 40 percent of 
pre-retirement earnings, with somewhat lower levels projected for the 
future. Financial planners indicate that an adequate income in 
retirement requires post-retirement income to replace at least 70 
percent of pre-retirement income. If we moved to a sliding scale 
benefit cut scheme, Social Security's ``replacement rate'' for average 
workers would be about 25% in 75 years, falling to much lower levels in 
the future. The foundation of support that Social Security provides 
would be seriously eroded.
    It is true that the proposal exempts low wage earners from this 
aspect of the proposed benefit cuts. And I want to point out that the 
core objective of a progressive reform is basically sound--to make the 
Social Security benefit structure somewhat more progressive and to 
soften the burden on low income workers of restoring solvency. In 
addition, people with higher earnings are on average living 
increasingly longer lives than lower income workers, so higher income 
workers are receiving an increasingly higher share of benefits over a 
lifetime basis. In effect, the Social Security benefit structure over 
time is becoming less progressive. While I've argued for years that 
modest benefit changes could be made in this area, Social Security 
benefit cuts of this magnitude I believe are inappropriate and risk the 
long term economic security of the middle class.
    The proposal also has the inadvertent affect of failing to keep 
revenues and expenditures in balance as economic conditions change in 
the future. The Congressional Research Service recently concluded that 
``--paradoxically, if real wages rise faster than projected, price 
indexing would result in deeper benefit cuts, even as Social Security's 
unfunded 75 year liability would be shrinking.'' In other words, the 
smaller the long term shortfall, the larger the benefit cuts. That 
makes no sense.

Will private accounts coupled with ``sliding scale'' benefit cuts 
        destabilize Social Security?
    Combining private accounts with sliding scale benefit cuts as 
proposed by the White House would lead to even more drastic results. 
For the medium wage worker retiring a half century from now, the 
defined Social Security benefit would be cut by two thirds. For higher 
wage earners--those averaging about $60,000 today--Social Security 
defined benefits would be cut by about 90%.After paying a lifetime of 
payroll taxes for Social Security, millions of persons would receive 
little or no Social Security benefits. This is due in part to deep and 
broad middle class Social Security benefit cuts coupled with the fact 
that the private accounts would be ``paid for'' through even deeper 
reductions in Social Security defined benefits.
    If adopted, where would such a policy lead us? I believe the long 
term sustainability of the Social Security retirement system would be 
in peril if such an approach was enacted. And if Social Security goes 
away, so does the economic security of tens of millions of Americans. I 
urge the Committee to seriously consider the full implications of these 
measures before acting.
What should we do?
    I believe the path that we should follow is as follows:

      First and foremost, I do not believe that progress will 
take place on this issue until there is agreement to drop consideration 
of privatizing part of Social Security. Privatization makes the 
financing problem that we face much worse. It's not in the best 
interests of young and old alike--likely leading to drastic cuts in 
promised benefits for younger workers, as well as erosion in Social 
Security's financing, which could also put the benefits of current 
retirees at risk over time. We need a foundation of support that will 
be there no matter what happens to the markets. Once privatization is 
off the table, if added retirement savings is desired--and it should 
be--it should come not at the expense of Social Security. I suggest 
that the Committee consider 401-k and IRA changes to help low and 
moderate income workers save through changes in default rules or added 
retirement savings tax incentives targeted at low and moderate income 
families.
      Second, Congress and the Administration need to come to 
general agreement on whether added resources should be brought to bear 
to resolve the financing gap. In addition, an agreement is needed on 
the overall magnitude of the problem that you are trying to resolve. I 
am reminded of President Clinton's words after the failure of health 
reform: he bit off more than we could chew. I urge the Committee not to 
fall into the same trap. Rather than looking for ``permanent solvency'' 
by trying to solve a potential problem that may exist in the year 2100, 
I urge you to establish a more modest goal of success that would 
clearly be more easily achievable. Frankly, who knows what our 
fertility rates or our economic growth rates will be 100 years from 
now? I certainly don't.
      Third, once privatization is no longer under 
consideration, I believe that Congress and the Administration need to 
come to agreement on the overall proportional mix of benefit and 
revenue changes needed to strengthen solvency. I believe the American 
people will support a balanced approach. At that point, coming up with 
the detailed proposals for change, while clearly a significant task, is 
one that I believe can be accomplished, taking into account the need 
for a more progressive benefit structure.
      And fourth, reform must be truly bipartisan. During my 
tenure as Commissioner of Social Security, I advised the Clinton 
Administration and Members of Congress on both sides of the aisle that 
a strong coalition for change must be truly bipartisan. I do not 
believe that changes should be enacted, as some have recently been 
advocating, through a strong majority of Republicans, buttressed by a 
sliver of members from the Democratic side of the aisle. Changes to 
Social Security must represent all Americans. Any other approach would 
only sow the seeds for future discord, when a long-term resolution on 
this issue is what the public really wants.

    In 1983, the American people supported a balanced approach to 
legislative changes to the Social Security system that ensured solid 
financing for decades. I was an active participant in that process on 
the Senate side--I witnessed some of the debates that took place in 
this historic room. During my tenure as Commissioner and now as a 
professor in Texas, I have met with Americans to discuss the ongoing 
challenges we face. I believe that the American people will again 
support a balanced and bipartisan approach to strengthening Social 
Security for future generations.
    To summarize, a major restructuring of Social Security is 
unnecessary, given the manageable size of the long-term problem. 
Privatization makes the financing problem that we face much worse. It's 
not in the best interests of young and old alike--likely leading to 
drastic cuts in promised benefits for younger workers, as well as 
erosion in Social Security's financing, which could also put the 
benefits of current retirees at risk over time. Privatization coupled 
with sliding scale benefit cuts leads to very deep cut-backs in Social 
Security benefits for future middle class retirees and runs the risk of 
unraveling the entire Social Security system.
    In short, let us all come together and solve a manageable problem, 
and not create a much bigger one by privatizing Social Security. In the 
process, let us keep the word ``secure'' in Social Security for current 
and future generations.

                                 

    Chairman THOMAS. Thank you very much, Mr. Apfel. Dr. 
Hunter?

   STATEMENT OF LAWRENCE A. HUNTER, VICE PRESIDENT AND CHIEF 
 ECONOMIST, FREE ENTERPRISE FUND, AND SENIOR RESEARCH FELLOW, 
                INSTITUTE FOR POLICY INNOVATION

    Mr. HUNTER. Thank you, Mr. Chairman. Thank you for allowing 
me to express the views of the Free Enterprise Fund and the 
Institute for Policy Innovation. In addition to my written 
statement, I have a set of design principles that the Committee 
asked that I submit for the record, and I do so.
    Chairman THOMAS. Without objection.
    [The information was not received at the time of printing.]
    Mr. HUNTER. In my written statement, I explain why we 
believe the only way to make Social Security permanently 
solvent is to allow workers to invest about half the payroll 
tax through large personal retirement accounts. I point to the 
bill introduced by Committee Member Paul Ryan, H.R. 1776, as 
illustrative of how, contrary to conventional wisdom, properly 
designed, sufficiently large personal retirement accounts are 
the solution to Social Security's solvency problem. I call the 
Committee's attention to the way the Ryan bill improves 
retirement benefits for all workers and eliminates Social 
Security's long-run deficits without cutting promised future 
Social Security benefits, without raising taxes, and without 
hiking the retirement age. I also explain why, again, contrary 
to conventional wisdom, the transition to fully funded personal 
accounts is similar to a corporate workout. No new debt is 
required. Existing debt is simply refinanced to provide time 
and to free up cash to restructure the operation, making it 
more efficient and more productive in the future so that it is 
capable of providing better retirement benefits while repaying 
all of the debt. Part of that restructuring should be spending 
growth restraint in the rest of the budget and tax reforms to 
improve the Federal tax code and increase economic growth. I 
show in the statement why the notion of so-called ``transitions 
cost'' is a fallacy and how misconceptions about the nature of 
Social Security, as it has evolved through the years, have led 
the debate over personal accounts into what I believe is now a 
political cul-de-sac. I conclude that in the current political 
climate, it is highly unlikely that Congress will be able to 
generate a sufficient bipartisan consensus this year to fix 
Social Security permanently and that attempting to force too 
much too soon, before the time is right, is likely to be 
harmful and counterproductive. It may require another election, 
perhaps another Presidential election, before the country is 
ready to embrace comprehensive reform that transforms Social 
Security into a permanently solvent, prefunded market-based 
retirement system based on personal retirement accounts.
    Fortunately, it is not necessary to solve the entire 
problem this year. What Congress can do, and I urge the 
Committee to take the lead in doing, is to make a downpayment 
on solvency by stopping the 20-year-old raid on the Social 
Security surpluses and devoting those surpluses and interest 
due the trust fund to personal retirement accounts. Stop the 
raid; start the accounts. The Federal Government takes the 
Social Security surplus each year and uses that money to help 
finance all of its other programs, from foreign aid to welfare. 
The time has come to stop this inexcusable raid and return the 
surplus to workers to start their own individual personal 
accounts. The trust fund should not be treated as a slush fund. 
Indeed, the new version of the Ryan-Sununu bill introduced just 
a couple of weeks ago, phases in the accounts so that over the 
first 2 years, the account option is about half of its full 
size. The Ryan-Sununu phase-in allows workers, on average, to 
shift about 3.2 percentage points of the full 12.4 percent 
payroll tax into the accounts. The total annual Social Security 
surpluses projected over the next 10 years, counting tax 
revenues and interest on the trust fund bonds, is more than 
sufficient to finance this Ryan-Sununu phase-in option during 
that period. Mr. Chairman, I have attached to my testimony an 
appendix, which is a table that compares expected surpluses and 
the first 10-year phase-in of the reduced accounts.
    Congress should stop the raid on the Social Security trust 
fund and use that money to finance the first 10 years of Ryan-
Sununu. The surplus money would then go to finance the future 
retirement benefits of today's workers, as it was intended, 
rather than for other government spending. As Federal Reserve 
Chairman Alan Greenspan has observed, personal accounts are the 
only way to enact a true lockbox where the government can't get 
its hands on the money and individual workers hold the key. To 
free up the surpluses for the accounts, Congress must reduce 
its spending by an amount equal to the surplus of Social 
Security taxes or expenditures each year. That would amount to 
about $85 billion this year. That money belongs to the future 
retirement of working people, and Congress should never have 
been spending it in the first place. The government currently 
pays the interest on Social Security trust fund bonds by 
issuing new bonds to the trust funds each year. To the extent 
needed to finance the Ryan-Sununu accounts for the first 10 
years, those bonds would be issued instead into the accounts of 
each worker across the country. The bonds would be backed by 
the full faith and credit of the U.S. government and be 
marketable. Workers, consequently, would be free to choose, to 
sell those bonds on secondary markets and invest the proceeds 
in broader mutual funds if they desire. Those bonds, of course, 
would not represent new debt, but rather money the government 
already would owe to the trust fund under the current system. 
It would be highly desirable, also, to phase-in the budget 
process reforms over the next ten years contained in the Ryan-
Sununu proposal. Even the smaller accounts adopted for the 
first 10 years would make a substantial downpayment on solvency 
by reducing long-term deficits. Mr. Chairman, it is time for 
Congress to focus on what Social Security reform should be 
about, providing a better deal for working people. It is time 
for Congress to stop the raid on Social Security and use the 
surpluses to start personal retirement accounts. Thank you.
    [The prepared statement of Mr. Hunter follows:]

    Statement of Lawrence A. Hunter, Ph.D. Vice President and Chief 
 Economist, Free Enterprise Fund and Senior Research Fellow, Institute 
                         for Policy Innovation

Introduction
    Thank you, Mr. Chairman for allowing me to express the views of the 
Free Enterprise Fund on ways to strengthen Social Security through 
personal retirement accounts.
    The basic structure of Social Security has changed very little over 
the years but two things about the program have changed dramatically, 
both of them as a consequence of attempting to maintain the pay-as-you-
go system in the face of a steeply declining worker-to-beneficiary 
ratio. First, contribution rates (FICA tax rates) now comprise a 
greater share of workers' income than financial analysts say is 
necessary to pre-fund an adequate retirement income if funds are 
invested in real assets. Second, the rate of return workers enjoy on 
the FICA taxes they and their employers pay has gone from hugely 
positive to barely greater than zero.
    A seeming paradox arises. Everyone is coming to realize that Social 
Security is a very bad deal for today's workers at the same time many 
politicians who must confront Social Security's looming insolvency 
insist Social Security benefits are extravagant because they soon will 
exceed the revenue the system generates. It is disconcerting that 
politicians from both sides of the partisan divide propose making a bad 
deal worse for workers by cutting promised future benefits as a means 
of making Social Security ``solvent,'' which is to say they are 
proposing what works for Washington rather than what works for workers.
    When politicians are forced to reconcile their claim that Social 
Security currently makes extravagant promises with the painfully 
obvious reality that workers realize pitiful rates of return on their 
FICA contributions, they usually resort to a non sequitur. They point 
out that under the current benefits formula, which indexes future 
initial Social Security benefits to the rate of real wage growth in the 
economy, the level of initial Social Security benefits increases faster 
than inflation, as if that result somehow is unreasonable. Zero real 
growth in retirement benefits is a curious benchmark to set for a new 
pre-funded, market-based retirement system and an especially odd 
position for advocates of personal retirement accounts to take given 
that one would expect private investment income to increase over time 
at least as fast as private-sector wages. Moreover, this explanation 
fails to reconcile how benefits can be at the same time both a bad deal 
and extravagant.
    I urge the Committee to critically examine the logic behind the 
argument that the initial level of retirement benefits should not 
increase faster than the rate of inflation. If you do, I believe you 
will discover that underlying this belief is an unwarranted presumption 
that workers should not expect a positive real rate of return of any 
magnitude on the FICA contributions they make throughout their working 
careers. To appreciate how odd this sounds to workers being urged to 
support market-based personal accounts, consider the reaction one would 
get if he made a similar argument to investors in the private sector 
that they should not expect a rate of return on their investments 
greater than inflation. Such a suggestion would be met with 
incredulity. After all, dividends and capital gains are not welfare. 
Here, I suspect, is the crux of the matter. The only logical basis for 
concluding that Social Security retirement benefits should not increase 
faster than the rate of inflation is the premise that Social Security 
benefits are a form of welfare.
    While characterizing Social Security as welfare may have been valid 
in earlier days, when benefits far outstripped what workers paid into 
the system, it no longer applies. Moreover, low- and many middle-income 
workers today pay so much of their income in FICA contributions that 
they find it difficult or impossible to save much more for their 
retirement outside Social Security.
    American workers have a very keen sense of inconsistency on the 
part of politicians. They will become confused and then suspicious and 
eventually rebellious when they hear politicians on the one hand 
confirm their own sense that Social Security is a bad deal but then 
turn around and lecture them on the need to cut promised future 
benefits even more. In my opinion, a majority of the American people 
never will support a Social Security reform plan that is built on these 
contradictory notions.

Current Social Security Contribution Rate is Higher than Necessary to 
        Fund Full Blown Retirement Plan
    We still think of Social Security as a supplemental, back-up 
retirement program--and the benefits it promises certainly are less 
than adequate as the sole source of retirement income. The reality is, 
however, the FICA tax burden the program imposes on workers 
substantially exceeds the contribution rate a full-blown retirement 
plan would require to generate higher retirement benefits. While many 
people continue to think of Social Security as ``social insurance,'' it 
has, in fact, evolved into a very poorly designed, inadequate 
government-operated defined benefits plan built on a mountain of 
government debt and teetering on the brink of bankruptcy. Protestations 
of scholars and politicians to the contrary, that is how the vast 
majority of American workers perceive Social Security today.
    Workers have good reason to view Social Security this way. If the 
12.4 percent of their income workers and their employers currently 
contribute to Social Security were invested through personal retirement 
accounts in real, productive assets, the investment income from the 
accounts would be more than adequate to provide workers a secure and 
prosperous retirement at a level substantially above what Social 
Security currently promises but can't pay. So much so, in fact, that a 
portion of that 12.4 percent could be reserved by the government as 
true ``social insurance'' against disability and other calamities that 
might make it impossible for a relatively small number of workers to 
accumulate sufficient assets by the end of their working careers to 
enjoy retirement benefits at least as generous as Social Security 
currently promises.
    The personal retirement accounts plan introduced by Congressman 
Paul Ryan (H.R. 1776) and its Senate companion introduced by Senator 
John Sununu (S. 857) demonstrate this point conclusively. By allowing 
workers to invest between five and ten percent of their wages through 
personal retirement accounts--lower-wage workers would be able to save 
a larger share of their income--it is possible to generate sufficient 
investment income from the accounts to raise retirement benefits 
substantially above what Social Security currently promises but cannot 
pay. The Ryan/Sununu plan leaves in place more than enough of the 
current 12.4 percent FICA contributions (about four percentage points) 
to finance the disability program and a secure government safety net 
equal to the level of Social Security benefits currently promised while 
also reducing payroll taxes eventually about two percentage points.
    The large personal accounts created under the Ryan/Sununu plan 
would be so powerful they would eliminate Social Security's long-term 
financial crisis and eliminate Social Security deficits completely over 
time without the benefit cuts or tax increases or hikes in the 
retirement age. That is because so much of Social Security's benefit 
obligations, ultimately 95 percent, are shifted to the accounts, thus 
reducing the federal government's need to pay Social Security benefits. 
As the Chief Actuary stated in his analysis of the Ryan/Sununu plan, 
``the Social Security program would be expected to be solvent and to 
meet its benefit obligations throughout the long-range period 2003 
through 2077 and beyond.''

Social Security Is a Bad Deal for Today's Workers
    For most workers in the workforce today middle aged and younger, 
the real rate of return Social Security promises to pay them on the 
taxes they and their employers pay into the system would be one percent 
to 1.5 percent, or less. For many workers, it would be zero or 
negative.
    Allowing workers to invest a substantial portion of their FICA 
contributions in real assets through personal retirement accounts is 
the only way to avoid forcing workers to labor their whole lives for a 
pittance of a handout from the government in retirement. Attempting to 
overcome the declining worker-to-beneficiary ratio by raising the cap 
on the payroll tax would reduce the currently pitiful rate of return 
from Social Security even more for higher income workers. Cutting 
future benefits through so-called ``progressive price indexing'' would 
reduce that rate of return for all but the lowest income workers. Even 
for the low-income workers it supposedly ``protects,'' ``progressive 
price indexing'' would do nothing to improve their return. Raising the 
retirement age is just another way to reduce everyone's rate of return 
by making them work longer to receive the same level of benefits.
    All three conventional attempts to outpace the declining worker-to-
beneficiary ratio, i.e., to make Social Security as we know it 
``solvent'' without introducing personal retirement accounts, simply 
make a bad deal worse for workers by asking them to pay more, work 
longer and get less. This is precisely what the Congress did in 1977 
and again in 1983. It didn't work then, and it won't work now.
    President Bill Clinton recognized this reality back in 1998 when he 
said, ``We all know that there are basically only three options: We can 
raise taxes again, which no one wants to do . . . We can cut benefits . 
. . Or we can work together to try to find some way to increase the 
rate of return. . . . Even after you take account of the stock market 
going down and maybe staying down for a few years, shouldn't we 
consider investing some of this money, because, otherwise, we'll have 
to either cut benefits or raise taxes to cover them, if we can't raise 
the rate of return.''
    Small add-on accounts won't solve the problem either. Supplemental 
add-on accounts that attempt to fill in for cuts in guaranteed Social 
Security benefits (such as progressive price indexing) may succeed in 
maintaining the overall level of a worker's retirement income but will 
do so by raising workers' combined contribution rate and lowering the 
overall rate of return. With add-on accounts, workers would end up 
contributing even more than the already excessive 12.4 percent or not 
using the accounts and exposing themselves to the benefit cuts under 
price indexing. If small add-on accounts are accompanied by tax 
increases as well, the contribution burden increases yet again, and the 
rate of return falls commensurately. Add-on accounts, therefore, are 
just another way to force workers to pay more for the same level of 
benefits with an added element of risk.
    Another idea under consideration, I know, is to give workers 
greater incentives to save more for their retirement by reforming the 
tax code, expanding IRAs, 401(k)s and so forth. These are all good 
ideas but should not, in my opinion, be enacted as a substitute for 
fixing Social Security the right way, namely allowing workers to save a 
portion of the payroll taxes in personal retirement accounts. 
Eliminating the tax bias against saving and investing should be 
undertaken independently of Social Security, on efficiency grounds to 
make the tax code as neutral as possible between saving and 
consumption. In my opinion though, this tax reform should not be 
conceived as a means of offsetting cuts to promised future Social 
Security benefits. As I observed above, too many workers already find 
it difficult to impossible to save much beyond the 12.4 percent they 
are forced to pay into Social Security.

Two Persistent Myths about Social Security
    Just as the outdated image of Social Security as ``social 
insurance'' lingers on, so does the image of Social Security as some 
kind of welfare program. This image, contrary to current economic 
reality, has been reinforced by the legal status of the program over 
the years. Clearly, in the early days of the program, when workers 
received rates of return in excess of 15 percent, 25 percent, and even 
35 percent for the earliest cohort of beneficiaries born before the 
turn of the century, Social Security could be considered a ``welfare'' 
program, i.e., people were getting from government far more than they 
contributed to it.
    Today, I believe the willingness, indeed the enthusiasm, of some 
folks to cut promised future Social Security benefits arises from 
failing to take into account the reality that Social Security has 
evolved from ``social insurance'' (i.e., ``welfare'') into a very 
poorly designed, inadequate government-operated defined benefits plan 
perched on a mountain of debt and teetering on the brink of bankruptcy. 
If Social Security is viewed as welfare, workers' payroll taxes are not 
considered retirement contributions but rather as coerced tax payments 
that are used to pay welfare benefits to people who did not earn them. 
Thus, the welfare recipient (i.e., the Social Security beneficiary) 
should have no contractual right to the benefits. Neither should there 
be a moral, legal or political right for current workers to expect 
future workers to pay them welfare payments (i.e., Social Security 
benefits) when they retire even though they spent their entire working 
careers paying taxes to finance welfare (i.e., Social Security) 
benefits to their parents' and grandparents' generations.
    By definition, then, if Social Security is viewed as welfare, 
benefits promised in the future that cannot be financed by payroll 
taxes are ipso facto ``extravagant,'' ``unsustainable,'' and, 
therefore, legitimately can be reduced since workers have no moral, 
legal or political claim to them.
    Failing to recognize the changed reality of the situation--Social 
Security has evolved into a very poorly designed, inadequate 
government-operated defined benefit's plan built on a mountain of 
government debt obligations to future retirees--also leads to confusion 
about what actually transpires if and when the government attempts to 
stop the bleeding by transforming the system into a financially sound 
pre-funded retirement system.
    There is a widespread misconception that every dollar of payroll 
tax revenue ``re-directed'' or ``diverted'' into personal retirement 
accounts to begin pre-funding retirement benefits generates a new 
``transition'' cost because it ``siphons away'' a dollar from Social 
Security that otherwise would be available to pay current retirement 
benefits. If personal accounts are created, that revenue must be 
generated from some other source (higher taxes, existing revenue 
reallocated away from other spending, borrowing). This formulation of 
the so-called ``transition problem'' fails to recognize that every 
payroll-tax dollar directed into personal retirement accounts is 
actually a dollar less indebtedness incurred by the federal government. 
Every payroll-tax dollar not ``diverted'' into paying current 
retirement benefits (the real ``diversion'' is the current diversion of 
FICA contributions to pay current benefits) is actually a dollar that 
can be devoted to pre-funding future benefits, which in turn reduces a 
future liability of the federal government.
    There are no transition costs; there are only changes in cash flow, 
and compared to the size of the overall economy, those cash-flow 
changes are small.
    Allowing workers to place a share of their payroll taxes into 
personal accounts sufficiently large enough to pre-fund currently 
promised benefits actually reduces federal indebtedness. The temporary 
cash-flow crunch that results--the short-fall in available funds to pay 
all currently promised Social Security benefits--arises because the 
government would be borrowing less. Therefore, if the Congress turns 
around and decides to borrow funds to cover the cash-flow shortage, it 
would be simply substituting one form of debt with another. The net 
level of borrowing is unchanged. However, the federal government's 
long-run, off-balance-sheet liability that must be paid out of the 
federal treasury to pay future retirement benefits is dramatically 
reduced. Devoting current payroll tax revenue to pre-funding future 
retirement benefits will produce greater investment income in the 
personal retirement accounts than the government could count on in 
future payroll tax revenues at current tax rates. This gain will 
relieve government of the obligation to spend so much on retirement 
benefits in the future, eventually covering virtually all future 
retirement benefits out of the personal accounts and eliminating the 
federal unfunded liability altogether.
    In other words, contrary to conventional wisdom, sufficiently large 
personal retirement accounts do indeed solve the problem. It is only 
insufficiently large accounts--i.e., accounts not large enough to 
generate enough investment income to cover all promised Social Security 
benefits--that fail to solve the problem. Indeed, insufficiently large 
accounts leave a residual problem, which can only be covered by higher 
taxes, lower benefits or truly new borrowing.
    The irony is that an aversion to borrowing (which results from a 
misunderstanding of the role borrowing plays in the current program and 
the role it reasonably could play in creating personal accounts) has 
led many proponents of personal accounts in the name of ``fiscal 
prudence'' to reject large accounts and embrace small accounts, which 
only exacerbate rather than solving the solvency problem.
    This welter of confusion and disorientation has produced a 
fallacious chain of reasoning by even some proponents of personal 
retirement accounts:




False Premise:                                        Social Security is a welfare program so promised benefits
                                                  legitimately can be cut without breaching any moral, legal or
                                                                                          political obligation;
False Premise:                             Allowing workers to place a substantial portion of their payroll tax
                                              contributions into personal retirement accounts creates a net new
                                           cost that cannot be financed by borrowing without adding to national
                                                                                                  indebtedness;
False Conclusion:                           Personal Accounts, therefore, do nothing to solve Social Security's
                                                                                             financing problem;
False Corollary:                            Consequently, large cuts in promised future benefits, tax increases
                                           and/or new borrowing are required to restore solvency to the system;



    A real solution can be outlined as follows:

      Create sufficiently large accounts, which will solve the 
solvency problem;
      Address the cash-flow crunch created when workers are 
allowed to invest a sufficient amount of their payroll tax 
contributions through large accounts by:

        Restraining spending growth in the rest of the budget and 
reallocating the savings to help pay all promised Social Security 
benefits in full and on time;
        Enacting tax reforms to raise the after-tax returns to work, 
saving and investing, which will generate a dynamic revenue feedback 
effect to help pay all promised Social security benefits in full and on 
time;
        Refinance part of the outstanding Social Security liability by 
borrowing whatever is required after tax reforms and spending restraint 
are enacted to alleviate any remaining cash-flow crunch:

          Borrowing first from the funds workers save in their 
personal retirement accounts (i.e., issuing to the accounts new 
inflation-protected federal bonds backed by the full faith and credit 
of the United States Government with no restrictions on resale in the 
secondary bond market), and
          Borrowing outside the accounts in financial markets only 
as necessary to complete the refinancing.

Make a Down Payment on Solvency: Stop the Raid and Start the Accounts
    Let me conclude by moving from the theoretically desirable to the 
politically practical given the current political environment. In my 
opinion, the time is not yet ripe to enact a comprehensive reform. 
Instead, I encourage you to tackle the one issue on which there is near 
unanimous agreement on both sides of the partisan divide, ceasing to 
squander the Social Security surpluses, and instead allowing workers to 
save the excess payroll tax revenues in personal retirement accounts.
    For decades now, the Federal government has been raiding the Social 
Security trust fund to finance other government spending. The Federal 
government takes the Social Security surplus each year and uses that 
money to help finance all of its other programs, from foreign aid to 
welfare. The time has come to stop this inexcusable raid and return the 
surplus instead to workers to start their own, individual, personal 
accounts.
    Indeed, the new version of the Ryan/Sununu bill introduced a couple 
of weeks ago phases in the accounts so that over the first 10 years the 
account option is half of its full size. The Ryan/Sununu phase-in 
allows workers on average to shift about 3.2 percentage points of the 
full 12.4 percent payroll tax to the accounts. The total annual Social 
Security surpluses projected over the next 10 years, counting tax 
revenues and interest on the trust fund bonds, is more than sufficient 
to finance this Ryan/Sununu option during that period. (See Appendix)
    Congress should stop the raid on the Social Security trust funds 
and use that money to finance the first 10 years of Ryan/Sununu. The 
surplus money would then go to finance the future retirement benefits 
of today's workers, rather than for other government spending. As Fed 
Chairman Alan Greenspan has observed, personal accounts are the only 
way to enact a true lockbox where the government can't get its hands on 
the money to fuel further runaway spending on other programs.
    To free up the surpluses for the accounts, Congress must reduce its 
spending by an amount equal to at least the surplus of Social Security 
taxes over expenditures each year. That money belongs to the future 
retirement of working people, and Congress should never have been 
spending it in the first place.
    The government currently pays the interest on the Social Security 
trust fund bonds by issuing new bonds to the trust funds each year. To 
the extent needed to finance the Ryan/Sununu accounts for the next 10 
years, those bonds would be issued instead to the accounts of each 
worker across the country. Those bonds would be backed by the full 
faith and credit of the United States and be marketable. Workers, 
consequently, would be free to choose to sell those bonds on secondary 
markets and invest the proceeds in broader mutual funds if they desire. 
These bonds, of course, would not represent new debt, but, rather money 
the government already would owe to the trust fund under the current 
system.
    It also would be highly desirable to phase in the Ryan/Sununu 
budget process reforms over the next 10 years, including the spending 
limitation, which would reduce the rate of growth of Federal spending 
by one percentage point a year for eight years. This would produce net 
surpluses from the reform during the first 10 years and provide the 
foundation for expanding to the full Ryan/Sununu accounts subsequently.
    This reform would provide better benefits for working people from 
day one as the market returns earned by the accounts would be so much 
more than Social Security has even promised, let alone what it can pay. 
It would provide personal ownership and control for workers over their 
retirement funds, stopping the longstanding raid of the trust funds 
under the current system.
    It would empower low and moderate income workers to accumulate 
substantial personal savings and wealth for the first time, which they 
can leave in whole or in part to their families through inheritance. It 
would greatly boost the economy through lower effective tax rates and 
higher saving and investment.
    Finally, even the smaller accounts adopted for the first 10 years 
would make a substantial down payment on solvency by reducing the long-
term deficits of Social Security as the benefit obligations borne by 
the old Social Security framework would be substantially reduced and 
taken up by the personal accounts instead. If the accounts were 
expanded after 10 years to the full Ryan/Sununu level of 6.4 percentage 
points on average, the long-term deficits would be eliminated entirely 
through this effect, achieving permanent solvency for Social Security. 
The Chief Actuary of Social Security has scored the Ryan/Sununu bill as 
achieving exactly this result.
    This result, moreover, is achieved without cuts in future promised 
benefits or the tax increases that inevitably would accompany them. 
Since better benefits are going to be provided in the future by the 
accounts in place of benefits financed through the old Social Security 
framework, there no longer is any need to think about eliminating that 
old system's deficits through tax increases and benefit cuts.
    It's time for Congress to focus on what Social Security reform 
should be about, providing a better deal for working people. It's time 
for Congress to stop the raid on Social Security and use the surpluses 
to start personal retirement accounts.
    Thank you, Mr. Chairman.

                                                    Appendix
                                   Financing the First 10 Years of Ryan/Sununu
                                       With the Social Security Surpluses
                               (All figures in billions of constant 2005 dollars)
----------------------------------------------------------------------------------------------------------------
                                                                Total Social Security
                                      Social Security Cash        Surplus (Includes         Annual Transition
               Year                    Flow Surplus (Taxes       Interest Incomes on      Financing Needed For
                                       Minus Expenditures)          Trust Funds)               Ryan/Sununu
----------------------------------------------------------------------------------------------------------------
2006                                                   84.9                     183.6                     124.7
2007                                                   88.7                     194.7                     137.5
2008                                                   90.2                     204.3                     143.1
2009                                                     84                     206.3                     148.5
2010                                                   80.2                     210.9                     153.9
2011                                                   75.6                     215.1                     159.0
2012                                                   65.3                     213.2                     164.2
2013                                                   52.9                       209                     168.9
2014                                                   38.5                     202.5                     173.7
2015                                                   24.3                     196.3                     178.4
----------------------------------------------------------------------------------------------------------------
Source: 2005 Annual Report of the Board of Trustees of the Old-Age and Survivors Insurance and Disability
  Insurance Trust Funds, March 23, 2005, Table VI.F.7; Office of the Actuary, Social Security Administration,
  Estimated Financial Effects of the ``Social Security Personal Savings Guarantee and Prosperity Act of 2005,''
  April 20, 2005, Table 1b.c


                                 

    Chairman THOMAS. Thank you very much. Dr. Furman?

 STATEMENT OF JASON FURMAN, NON-RESIDENT SENIOR FELLOW, CENTER 
 ON BUDGET AND POLICY PRIORITIES, AND VISITING SCHOLAR, WAGNER 
  GRADUATE SCHOOL OF PUBLIC SERVICE, NEW YORK UNIVERSITY, NEW 
                         YORK, NEW YORK

    Mr. FURMAN. Thank you, Mr. Chairman and Members of the 
Committee, for inviting me here today. As you move forward on 
Social Security and pension reform, I would like to propose 
that you be guided by four goals. The first is a secure 
retirement. The second is ensuring the solvency of Social 
Security. The third is reducing our debt, both over the next 
decade and the decades to come, and finally, increasing our 
perilously low national savings rate. Social Security and 
pension reform can play a role in furthering all four of these 
goals, and it is somewhat better to act sooner rather than 
later. Even more important than acting in haste is to first 
obey the Hippocratic Oath: first, do no harm. Any proposal that 
moves backward on any one of these four goals, no matter how 
worthwhile it may seem, is something that I don't think this 
Committee should move forward on. In fact, one of the main 
proposals on the table is one that would move backward on all 
four of these goals simultaneously, and that is the President's 
Social Security plan that I would like to talk about now.
    First of all, in terms of benefits, the President has 
proposed no new revenues for Social Security and, in fact, 
would drain trillions of dollars of revenues from Social 
Security to put them into the private accounts. This 
necessitates dramatic benefit cuts, and there are two benefit 
cuts that he has proposed. The first is a sliding-scale benefit 
reduction that would apply to any worker who makes over $20,000 
a year--that is in 2005 dollars--and it would also, based on an 
analysis the White House released last week, apply to a 
substantial number of beneficiaries who make less than $20,000 
a year. The benefit cuts would grow dramatically over time for 
middle-class families. By 2075, the benefit cuts would be 
between 28 and 40 percent of scheduled benefits. That means 
replacement rates would be 28 to 40 percent lower. That is just 
the first benefit cut. The second one is the so-called benefit 
offset, which is designed to eventually repay the trillions of 
dollars that go into the private accounts. Every dollar you put 
into an account, your benefit gets reduced by that dollar, plus 
3 percent interest, plus inflation. Add that all together and 
it could reduce your benefit by 50 percent or more. The 
combination of these two benefit reductions would virtually 
eliminate the traditional rock-solid, guaranteed Social 
Security benefit, leaving it at 10 percent of your pre-
retirement income or maybe even less.
    Would accounts make up for this difference? Numerous 
studies have been conducted on this issue and my reading of the 
conclusion is that they may make up for the second benefit cut, 
although even that is far from guaranteed. For middle-class 
workers, they are unlikely to make up for the first benefit 
reduction also. Bob Shiller, a Yale financial economist, found 
that between 32 and 71 percent of the time, workers would end 
up losing money as a result of participating in the accounts, 
on top of the sliding-scale benefit reduction. What does the 
President's plan do for solvency? Despite having a very large 
reduction in benefits, it does less for solvency than many 
would think. The sliding-scale benefit reduction by itself 
would postpone Social Security's cash flow deficits by 2 
months. Social Security would still go into cash flow deficit 
in 2017 and would need to start redeeming money from the trust 
fund to pay benefits. I personally don't think that is the most 
important date, but for those who do, that should be a source 
of significant concern. The exhaustion of the trust fund would 
be postponed by a few years.
    When the proposal is combined with private accounts, much 
of the benefits for solvency you would get from the benefit 
reductions go away and the benefit reductions are just used to 
pay for those accounts. In particular, the combination of the 
President's accounts and the President's benefit reductions 
would create a cash flow deficit earlier than under current 
law, would exhaust the trust fund earlier than under current 
law, and we would need to find the money to pay for the 
benefits, and would only solve 30 percent of the 75-year Social 
Security shortfall. In addition, the President's plan would 
entail significant increases in the debt, $5 trillion over the 
next 20 years. The word ``transition costs'' is a misnomer 
because the debt would continue to grow over the current 
decades and stay elevated for at least 60 years. As a result, 
national savings at best would be unaffected, and more likely, 
for reasons I outline in my written testimony, would end up 
being reduced.
    There is a much better approach that this Committee could 
take. The first principle of that approach would be no debt-
financed accounts, not whether they call themselves carve-out 
accounts, not whether they call themselves add-on accounts, 
nothing that increases the national debt, not in the next 
decade, not in the next 50 years, not over an infinite horizon. 
Second, Social Security reform should be a balanced process, 
balanced both politically and balanced in the form that 
restoring Social Security solvency takes. Finally, we can do 
more to encourage people to save, even to help them save, 
separately from Social Security, and there are a number of 
bipartisan reforms to make savings easier, more automatic, and 
to increase incentives for moderate-income families while 
paying for those incentives that I would be happy to talk more 
about with the Committee at a future time. I look forward to 
your questions.
    [The prepared statement of Mr. Furman follows:]

  Statement of Jason Furman,\1\ Non-Resident Senior Fellow, Center on 
Budget and Policy Priorities, and Visiting Scholar, New York University 
      Wagner Graduate School of Public Service, New York, New York

    Mr. Chairman and other members of the Committee, thank you for the 
invitation to address you today. America currently faces major budget 
deficits and perilously low national savings. These problems are 
expected to grow significantly over the coming decades. At the same 
time, Americans are struggling to plan for their retirements. Reforming 
Social Security and our private pension system, if done correctly, can 
play a meaningful role in addressing these challenges.
---------------------------------------------------------------------------
    \1\ The views expressed in this testimony are mine alone.
---------------------------------------------------------------------------
    It is better to act sooner rather than later. But even more 
important than acting sooner is to obey the Hippocratic Oath: first, do 
no harm. If done in the wrong way, Social Security and pension reform 
could worsen our long-run fiscal outlook, depress national savings, and 
make retirement even less secure. President Bush's Social Security 
proposal would have all of these effects.
    In my testimony I will first discuss the fundamental goals of 
Social Security and pension reforms. Second, I will explain why 
President Bush's Social Security plan fails to satisfy these goals. 
Third, I will evaluate the idea of replacing the President's 
``carveout'' accounts with what proponents call ``add-on accounts.'' I 
favor ways to encourage moderate income families to save more, but if 
add-on accounts are not focused on that goal and fully paid for by 
offsets, they could set back our fiscal system and Americans' 
retirement security. Finally, I conclude.

             I. Goals of Social Security and Pension Reform

    Social Security and pension reforms should be guided by four 
principal goals:

    1.  Restore Social Security Solvency. If no changes are made, the 
Social Security Trust Fund is projected to become exhausted in 2041 and 
tax revenues will be sufficient to only pay 74 percent of scheduled 
benefits in that year.\2\ The pre-eminent goal of Social Security 
reform is to ensure that Social Security is sustainably solvent while 
using only dedicated revenue and avoiding abrupt and dramatic tax 
increases or benefit reductions in the future.
---------------------------------------------------------------------------
    \2\ Board of Trustees, Federal Old-Age and Survivors Insurance and 
Disability Insurance Trust Funds, The 2005 Annual Report of the Board 
of Trustees of the Federal Old-age and Survivors Insurance and 
Disability Insurance Trust Funds, (``2005 Trustees Report''). All 
estimates in this testimony are based on the Social Security Trustees' 
assumptions.
---------------------------------------------------------------------------
    2.  Address America's Fiscal Challenge--Both in the Short Run and 
Long Run. In fiscal year 2004, the federal government ran a unified 
deficit of $412 billion, or 3.6 percent of Gross Domestic Product 
(GDP). Over the coming decades, the combination of phased-in tax cuts, 
rising health costs, and demographic changes will inexorably lead to 
significantly larger deficits and debt. Deficits of this magnitude 
reduce economic growth, increase the likelihood of an economic crisis, 
and will inevitably require higher taxes or lower government spending 
in the future. Although Social Security is not the principal source of 
these deficits, well-designed Social Security reform can and should 
play a modest role in reducing deficits both in the short run and in 
the long run.
    3.  Strengthen Retirement Security.\3\ Financial planners recommend 
having enough income in retirement to replace about 70 percent of pre-
retirement income. Social Security plays a critical role in 
guaranteeing a comfortable retirement for most Americans: more than 
two-thirds of retirees rely on Social Security for more than half of 
their retirement income.\4\ But, the current Social Security system has 
some deficiencies, including high poverty rates for widows, high 
poverty rates for older beneficiaries, and the lack of an effective 
minimum benefit to ensure that retirees do not fall below the poverty 
line. To supplement Social Security, workers rely on defined 
contribution plans like 401(k)s and personal savings through IRAs and 
other vehicles. But about half of Americans work at companies that do 
not offer pensions and the current system provides little or no tax 
incentive to help moderate-income families save. Reform can strengthen 
retirement security by ensuring that future Social Security benefits 
are adequate, sustainable, and supplemented by additional savings.
---------------------------------------------------------------------------
    \3\ Strengthening disability security is also a critical priority 
but one that is beyond the scope of this testimony.
    \4\ Thomas Hungerford et al., ``Trends in the Economic Status of 
the Elderly, 1976-2000'' Social Security Bulletin 64:3, January 2003.
---------------------------------------------------------------------------
    4.  Increase National Savings. Increased national savings would 
lead to more investment, augmenting the capital stock and thus future 
economic output. Or, higher national savings would reduce the need for 
foreign borrowing, which means that Americans would be able to consume 
more of our future economic output. Increasing national savings is the 
only way to expand the economic pie. This is the only way to ameliorate 
the potentially painful tradeoff between future consumption by the 
young and future consumption by the old. In the last three years, net 
national savings has averaged 1.6 percent of GDP--the lowest level in 
seventy years. At the same time, investment was financed by an average 
4.8 percent of GDP in capital inflows from abroad, the highest level on 
record. Borrowing at this level is unsustainable and eventually this 
debt will need to be repaid. Social Security and pension reform can 
help increase private savings and reduce government dissaving (i.e., by 
reducing budget deficits).

    Reform should advance these four goals. Any reform that impedes 
progress on any of these goals must be rejected. For example, it would 
be easy to make Social Security sustainably solvent by transferring 
trillions of dollars to the Trust Fund, but that would be a fiscal 
disaster and it would hinder efforts to increase national savings. To 
give another example, it would be easy to provide new tax incentives 
for savings. But if these tax incentives are not fully paid for and 
well-designed they could worsen the long-run fiscal outlook and reduce 
national savings.

          II. The President's Social Security Reform Proposal

    The President has announced two parts of his Social Security plan. 
In his State of the Union Address on February 2, he proposed private 
accounts, to be paid for by reductions in traditional Social Security 
benefits.\5\ In his April 28press conference, the President proposed 
sliding-scale benefit reductions modeled on investment executive Robert 
Pozen's ``progressive price indexing'' plan (the White House fact sheet 
described this proposal as a ``sliding scale benefit formula'').\6\ The 
White House has not provided the full details of this plan, nor has it 
released the traditional Social Security actuaries' memo, which 
provides 75-year estimates of the financial effects of the proposal and 
its impact on beneficiaries.\7\ Nevertheless, the details the White 
House has released are sufficient to permit analysis of the proposal 
and its ability to meet the four principal goals of Social Security and 
pension reform.\8\
---------------------------------------------------------------------------
    \5\ White House, ``Strengthening Social Security,'' February 2005 
and Stephen Goss, Chief Actuary, Social Security Administration, 
``Preliminary Estimated Effects of a Proposal to Phase In Personal 
Accounts,'' February 3, 2005.
    \6\ White House, ``Fact Sheet: Strengthening Social Security for 
Those in Need,'' April 28, 2005. This analysis assumes that the 
President's plan would have the same magnitude of benefit reductions 
for retirees and survivors as the Pozen plan and that his plan would 
add a modest minimum benefit. This assumption is consistent with the 
White House fact sheet's explicit claim that ``this reform would solve 
approximately 70 percent of the funding problems facing Social 
Security.''
    \7\ The White House has released an actuaries' memo showing the 
financial effects of the first 10 years of individual accounts portion 
of the proposal.
    \8\ All estimates are based on the assumptions of the Social 
Security Trustees, unless indicated otherwise. Additional details 
underlying this analysis are available in Jason Furman, ``The Impact of 
President Bush's Proposal on Social Security Solvency and the Budget,'' 
Center on Budget and Policy Priorities May 10, 2005 and Jason Furman, 
``An Analysis of Using Progressive Price Indexing' To Set Social 
Security Benefits,'' Center on Budget and Policy Priorities, May 2, 
2005.
---------------------------------------------------------------------------
A. The President's Proposal and Social Security Solvency
    Normally the actuaries' analysis would show the impact of the 
President's proposal on solvency and the fiscal situation. In the 
absence of the traditional Social Security actuaries' analysis, I 
assessed the proposal using the data in the 2005 Social Security 
Trustees Report, as well as standard actuarial and fiscal estimates. My 
analysis is based on the actuaries' analysis of the Pozen proposal, the 
actuaries' analysis of similar private-account plans, and the 
actuaries' analysis of the President's private accounts through 2015.

The Impact of Sliding-Scale Benefit Reductions on Solvency

    The President has proposed sliding-scale reductions in Social 
Security benefits for retirees and survivors. Reductions would start in 
2012 and grow over time. This proposal would postpone Social Security's 
cash flow deficits by only about two months--Social Security would go 
into cash flow deficit slightly later in 2017. Although I do not 
believe the date of the onset of cash flow deficits is an analytically 
meaningful way to measure Social Security's challenges or the impact of 
alternative reforms, those who do believe the 2017 date is meaningful 
should be concerned about the negligible impact of the President's 
proposal.
    Any measure that does not eliminate the entire 75-year shortfall in 
Social Security will result in the Trust Fund becoming exhausted at 
some point in the next 75 years. The President's sliding-scale benefit 
reduction plan would push back the exhaustion of the Social Security 
Trust Fund by 6 years, to 2047. After that date, a roughly 15 percent 
across-the-board benefit cut--on top of the benefit cuts that the 
President has proposed--would be required to achieve solvency.
    The White House states that its ``reform would solve 70 percent of 
the funding problems facing Social Security''.\9\ But the White House 
has subsequently acknowledged that this statement refers to the deficit 
in the 75th year--2079--not to the cumulative deficit over the next 75 
years.\10\ Unlike the President's proposal, the Pozen proposal, as 
Robert Pozen states, would ``close the long-term deficit of Social 
Security by over 70%.'' One-sixth of the improvements in solvency in 
the Pozen plan come from reductions in disability benefits. Taking into 
account the President's promise to shield disability benefits and the 
President's promise to provide a modest minimum Social Security 
benefit, the President's plan will only close 59 percent of the 75-year 
deficit.\11\
---------------------------------------------------------------------------
    \9\ White House Fact Sheet, April 28, 2005.
    \10\ This is not the standard measure used to evaluate the effect 
of a proposal on Social Security solvency. It is, at best, a secondary 
measure, and one with significant weaknesses. One could design a plan 
that would not start until 2079, with no changes until that date, but 
that would eliminate the entire Social Security shortfall in 2079. Such 
a plan would fail to restore solvency over the 75-year period or to 
improve the fiscal outlook for the next seven and a half decades.
    \11\ Based on Peter Diamond and Peter Orszag, ``Reducing Benefits 
and Subsidizing Individual Accounts: An Analysis of the Plans Proposed 
by the President's Commission to Strengthen Social Security,'' June 
2002. In addition, this analysis assumes the President's minimum 
benefit is similar to the ones proposed in Commission Models 2 and 3.

---------------------------------------------------------------------------
The Impact of Individual Accounts on Solvency

    The President also proposes to allow workers to divert 4 percentage 
points of their payroll taxes (up to a maximum amount) into individual 
accounts. The President's proposal would require workers, in effect, to 
repay the ``loans'' these contributions represent through a reduction 
in their traditional defined Social Security benefit.
    Diverting payroll tax revenue to private accounts would reduce the 
revenue available to pay Social Security benefits and thereby advance 
the date when the program's benefit costs exceed its non-interest 
income.
    The combined effects of the President's benefit reductions and 
private accounts proposals would accelerate the date when Social 
Security's tax revenues no longer are sufficient to pay benefits to 
2011.\12\ As a consequence of the President's plan, Social Security 
will have to start using interest on the Trust Fund to pay benefits 6 
years earlier than under current law. Under the President's benefit 
reductions and private accounts proposals, the Trust Fund would be 
exhausted in 2030--11 years earlier than under current law.
---------------------------------------------------------------------------
    \12\ This analysis updates the projections in the actuaries' memo 
for the new projections in the 2005 Trustees Report. This date was 
2012, according to estimates by the Social Security actuaries based on 
the 2004 Trustees assumptions, see Stephen Goss, Chief Actuary, Social 
Security Administration, ``Preliminary Estimated Effects of a Proposal 
to Phase In Personal Accounts,'' February 3, 2005. This memo estimated 
that the accounts would cost $95 billion in 2011. This is larger than 
the $88 billion cash surplus for 2011 projected in the 2005 Trustees 
Report.
---------------------------------------------------------------------------
    Moreover, the President's Social Security accounts would increase 
the program's projected 75-year actuarial deficit by about 0.56 percent 
of payroll. The Social Security actuaries estimate that the deficit 
will be 1.92 percent of payroll. So, taken alone, the accounts would 
increase the size of the 75-year shortfall by nearly one-third.
    The accounts would substantially worsen Social Security's projected 
shortfall over the next 75 years because under the President's proposal 
reductions in Social Security benefits to repay the Trust Fund for the 
funds diverted into accounts would be made with a lag. Some of the 
funds diverted from Social Security to accounts over the next 75 years 
would not be repaid until after the end of the 75-year period.
    Because the accounts would increase Social Security's shortfall 
over the next 75 years, the net effect of the President's proposed 
benefit reductions and accounts would be to close only 30 percent of 
Social Security's 75-year shortfall. More than two-thirds of the 
shortfall would remain.\13\ To close this gap, the President's plan 
would require general revenue transfers amounting to $3 trillion in 
present value.\14\
---------------------------------------------------------------------------
    \13\ Some may try to argue that there would be a small cash-flow 
surplus in 2079 under the plan. This is misleading because it ignores 
the substantial interest payments--either by the general fund or by 
Social Security--associated with the accounts. The interest on the $3 
trillion in general revenue transfers that would be necessary to pay 
benefits through 2079 would be 4.2 percent of taxable payroll in 2079.
    \14\ According to the actuaries' memo, the Pozen plan would entail 
$1.9 trillion in general revenue transfers. The transfers under the 
President's plan are larger both because he is proposing larger 
accounts (Pozen has two percent accounts) and smaller benefit 
reductions (Pozen's plan would reduce disability benefits and does not 
contain a minimum benefit).
---------------------------------------------------------------------------
    The accounts would also worsen projected solvency over the infinite 
horizon, but by a smaller percentage. This is because in a significant 
percentage of cases the benefit offset required to make the accounts 
actuarially neutral will not be collected. For example, if an unmarried 
worker dies prior to retirement his or her entire account goes to his 
or her estate and the benefit offset is not collected.\15\ Or take the 
case of the higher-earner. In many cases, his or her entire Social 
Security benefit would be less than the benefit offset associated with 
the account. In those cases, the higher earners' entire traditional 
benefit would be wiped out but the Trust Fund would not collect the 
remainder of the benefit offset and solvency would be worsened. This 
case would apply to anyone with steady earnings at or above the payroll 
tax cap (now $90,000 a year) who retires after 2060. There are other 
such examples.\16\
---------------------------------------------------------------------------
    \15\ In the case of the Pozen plan, the benefit offset is taken 
directly out of the account and the account, if anything remains, is 
given to the estate.
    \16\ For a further discussion of this issue, see Peter Orszag, 
``Social Security Reform, Testimony Before the Senate Finance 
Committee,'' April 26, 2005.
---------------------------------------------------------------------------
B. The Fiscal Impact of the President's Proposal
    The President's Social Security proposal would result in a large 
increase in the debt held by the public, in the near-term and over the 
longer-term (i.e., the next 60 years).
    According to the Social Security actuaries, the President's 
accounts would cost $743 billion over the first seven fiscal years 
(from 2009 to 2015). Even this estimate is not fully reflective of the 
seven-year cost because the accounts would only be available to all 
workers for the last four of these seven years.\17\
---------------------------------------------------------------------------
    \17\ The accounts would not be available to all workers until 2011 
and they would not be phased fully in until 2041. That is the year in 
which the cap on the maximum amount that could be diverted to a private 
account each year would rise to a high enough level so that all workers 
could contribute a full 4 percent of their taxable earnings to the 
accounts.
---------------------------------------------------------------------------
    Over longer periods, the effect on the debt would be far greater. 
The President's accounts would add $1.5 trillion to the debt over the 
first ten years that the plan is in effect (from 2009 to 2018.) The 
accounts would cause the debt to increase by another $3.8 trillion in 
the decade after that, for a total of $5.3 trillion over the first 
twenty years.
    The sliding-scale benefit reductions that the President is 
proposing would reduce the debt by relatively modest amounts in coming 
decades. Over the first twenty years, those benefit reductions would 
reduce the debt by $400 billion. The combined effect of the accounts 
and the sliding-scale benefit reductions the White House is proposing 
would be to add $4.9 trillion to the debt over the first twenty years.
    The debt would continue to rise after twenty years, both in dollar 
terms and as a share of GDP, as shown in Figure 1. The accounts, by 
themselves, would lead to permanently elevated debt. Although the 
sliding-scale benefit reductions would eventually start to bring that 
debt down, the debt would remain elevated through 2067. This would lead 
to higher interest payments on the debt, increasing the burden for 
future taxpayers.

[GRAPHIC] [TIFF OMITTED] T4732A.013

    Some have argued that the additional debt associated with the 
accounts would not be a source of concern for financial markets or the 
economy more broadly. They argue that, over an infinite horizon, this 
debt diminishes or disappears and that as a result even the initially 
high levels of debt should be considered neutral from an overall fiscal 
position. The accounts causing no fiscal harm is the best case 
scenario. No one has argued that the debt associated with the accounts 
has any fiscal benefits.
    There is a significant probability that the debt associated with 
the accounts would harm the economy.\18\ The borrowing to pay for the 
accounts would take the form of ``explicit debt,'' that is government 
bonds. These bonds cannot be defaulted on and must be rolled over or 
serviced on an annual basis. This explicit debt would replace 
``implicit debt'' in the form of reduced future Social Security 
obligations. Implicit debt, however, is very different from explicit 
debt. It does not need to be rolled over or serviced on an annual 
basis. The total amount of implicit debt is based on projections and is 
not legally binding, unlike the tangible debt issued in the form of 
Treasury bonds.
---------------------------------------------------------------------------
    \18\ For an extended discussion of these issues see Jason Furman, 
William G. Gale and Peter R. Orszag, ``Should the Budget Rules Be 
Changed To Exclude the Cost of Individual Accounts,'' Tax Notes January 
24, 2005.
---------------------------------------------------------------------------
    Financial markets, both in the United States and abroad, are likely 
to be more troubled by the explicit debt than they currently are by the 
implicit obligations of the U.S. government. Federal Reserve Chairman 
Alan Greenspan testified that if financial markets did not distinguish 
between implicit and explicit debt, then the borrowing associated with 
accounts would have no impact on the market. But he went on to say, 
``But we don't know that. And if we were to go forward in a large way 
and we were wrong, it would be creating more difficulties than I would 
imagine.''\19\
---------------------------------------------------------------------------
    \19\ Alan Greenspan Testimony, February 16, 2005.
---------------------------------------------------------------------------
    The record is replete with nations undergoing fiscal crises because 
of explicit debt. No nation has undergone a fiscal crisis because of 
implicit debt.
    Furthermore, rational financial markets would understand that the 
eventual repayment of the debt associated with the President's accounts 
would be decades in the future and would depend on large and 
potentially politically unsustainable benefit reductions. To the degree 
that financial markets partially discounted these benefit reductions or 
factored in the possibility of a government bailout in the event of a 
major stock market crash, this added debt would have a significant 
impact.
    In summary, the accounts portion of the President's plan would 
result in permanently higher debt than the same plan without accounts. 
Even when combined with sliding-scale benefit reductions, the debt 
would be elevated for more than sixty years. It is important to 
remember that even from the vantage point of 2067, when the debt would 
be the same as under current law, the proposal would be judged a 
failure. The goal of Social Security reform is not to leave the debt 
the same as under current law, it is to significantly reduce the debt 
in order to help relieve future fiscal pressures. The debt associated 
with the President's accounts proposal would have no upside benefits 
and substantial downside risks.
C. The Impact of the President's Proposal on Retirement Security
    The President has not proposed any revenue increases for Social 
Security but instead is proposing to drain revenue from Social Security 
into individual accounts. Together, this necessitates very large 
reductions in traditional defined Social Security benefits. The 
President's plan includes two sets of benefit reductions. The first 
benefit reduction is a sliding-scale benefit reduction that would apply 
to all workers making over $20,000 per year (and, as explained below, 
to some beneficiaries making even less than $20,000 per year). The 
second benefit reduction is the benefit offset that would apply to 
workers who opt for private accounts. Together, as explained below, 
these proposals would greatly diminish Social Security--the core tier 
of retirement security. The large majority of Americans would rely on 
investments that are subject to market risk for the large majority of 
their retirement income. Accounts will not necessarily make up for 
benefit offsets. As a result, workers would be left with substantially 
lower retirement income than they enjoy under the current-law formula.

The First Benefit Reduction: Sliding-Scale Benefit Reductions

    The President is proposing to reduce benefits relative to the 
current-law benefit formula. This proposal would apply to the large 
majority of beneficiaries, whether or not they opt for accounts. Under 
the President's proposal Social Security would replace a smaller and 
smaller amount of recipients' pre-retirement income. These replacement 
rates are the most meaningful way to compare Social Security benefits 
over time.\20\
---------------------------------------------------------------------------
    \20\ Some have proposed comparing price inflation-adjusted benefit 
levels over long periods of time. This, however, is an inappropriate 
standard in measuring a retirement benefit. The expectations and needs 
for retirement income grow with income. The amount of money that was 
necessary for a secure retirement in 1940 would not provide enough 
today. According to the Congressional Research Service, price inflation 
was 58.6 percent lower than wage inflation since 1940 (Congressional 
Research Service, ``Memorandum: Estimated Effect of Price-Indexing 
Social Security Benefits on the Number of Americans 65 and Older in 
Poverty,'' January 28, 2005). Applying this adjustment to benefits 
would reduce the initial retirement benefit from $15,000 to $6,000. The 
later might be enough to meaningfully contribute to a secure retirement 
in 1940, but it would fall well short in 2005.
---------------------------------------------------------------------------
    Social Security replacement rates would be reduced for all 
beneficiaries who make over $20,000 annually.\21\ In addition, as 
explained below, replacement rates would be reduced for some 
beneficiaries who make less than $20,000 annually.
---------------------------------------------------------------------------
    \21\ Pozen specifies that the plan would effect people who make 
over $25,000 annually in the year 2012 in 2012 non-inflation adjusted 
dollars. This number is adjusted to 2005.
---------------------------------------------------------------------------
    The replacement rates would be reduced more for higher-income 
beneficiaries. The Social Security actuaries have estimated that the 
average worker (someone who currently earns $37,000) would see his or 
her replacement rate reduced by 16 percent in 2045 and 25 percent in 
2075 (see Table 1). A so-called ``high earner,'' someone with income 60 
percent above the average (or current earnings of about $59,000) would 
see his or her replacement rate reduced by 28 percent in 2045 and 42 
percent in 2075. The percentage reduction in benefits would be only 
slightly larger for people making $90,000 or $9 million annually.
    The percentage reductions in replacement rates for average workers 
under the President's proposal are larger than the reductions in any 
Social Security reform previously undertaken.

                                                                         Table 1
                                             Social Security Benefits Under Sliding-Scale Benefit Reductions
                                                     For Workers Retiring at Age 65 in Various Years
                                                            (inflation-adjusted 2005 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                        Current-law Formula              Proposal                      Change
                                                                   -------------------------------------------------------------------------------------
                                                                                                                                            Percentage
                                                                      Benefit     Replacement     Benefit     Replacement     Reduction      Reduction
                                                                                Rate (percent)              Rate (percent)                   (percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------

Scaled Low Earner (45 percent of the average wage, or $16,470 in 2005)----------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025                                                                   $9,718              49      $9,718              49          $0             0
2045                                                                   12,041              49      12,041              49           0             0
2055                                                                   13,413              49      13,413              49           0             0
2075                                                                   16,599              49      16,599              49           0             0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Scaled Medium Earner (average wage, or $36,600 in 2005)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025                                                                   16,009              36      14,984              34      -1,025            -6
2045                                                                   19,837              36      16,584              30      -3,253           -16
2055                                                                   22,097              36      17,545              29      -4,552           -21
2075                                                                   27,344              36      19,715              26      -7,629           -28
--------------------------------------------------------------------------------------------------------------------------------------------------------
Scaled High Earner (160 percent of the average wage, or $58,560 in 2005)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025                                                                   21,228              30      19,190              27      -2,038           -10
2045                                                                   26,302              30      19,858              23      -6,444           -25
2055                                                                   29,296              30      20,214              21      -9,082           -31
2075                                                                   36,254              30      21,100              18     -15,154           -42
--------------------------------------------------------------------------------------------------------------------------------------------------------
Steady Maximum Earner (taxable maximum, or $90,000 in 2005)
--------------------------------------------------------------------------------------------------------------------------------------------------------
2025                                                                   25,929              24      22,999              21      -2,930           -11
2045                                                                   32,153              24      22,829              17       -,324           -29
2055                                                                   35,751              24      22,666              15     -13,085           -37
2075                                                                   44,236              24      22,428              12     -21,808           -49
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Author's calculations based on Social Security Administration, Office of the Chief Actuary, ``Estimated Financial Effects of a Comprehensive
  Social Security Reform Proposal Including Progressive Price Indexing--INFORMATION,'' February 10, 2005 and Social Security Trustees, 2004 Annual
  Report. Note that all percentage reductions in benefits are taken directly from the actuaries' memo.

    The President's Social Security proposals have been widely reported 
as protecting benefits for the bottom 30 percent of the population, 
people earning less than $20,000 today. But a document that the White 
House gave reporters in a press briefing on May 4 contains charts which 
show that the bottom 20 percent of beneficiaries lose benefits, on 
average, under its plan.\22\ This happens because although the 
President's plan protects retirees who earn benefits based on their own 
earnings histories, it does not protect people who earn benefits based 
on someone else's earnings history. A substantial number of low-income 
beneficiaries, such as widows, surviving children and ex-spouses, would 
thus be subject to benefit reductions.
---------------------------------------------------------------------------
    \22\ White House, ``Interpreting the Benefit Estimates for the 
Pozen Provision,'' May 2005. For further analysis of this White House 
document, see Jason Furman, ``White House Distortions Mask Social 
Security Benefit Reductions,'' May 6, 2005.
---------------------------------------------------------------------------
    The White House analysis shows that average Social Security 
benefits for the bottom quintile of beneficiaries (aged 62 to 76 in 
2050), would be $866 a month under the current benefit structure, but 
only $822 a month under the President's plan. This represents an 
average benefit reduction of $528 a year for beneficiaries in the 
bottom quintile. In fact, the White House numbers are likely to 
understate the benefit reductions for these groups for reasons 
described in more detail elsewhere.\23\
---------------------------------------------------------------------------
    \23\ Jason Furman, ``New White House Document Shows Many Low-Income 
Beneficiaries Would Face Social Security Benefit Cuts Under the 
President's Plan,'' Center on Budget and Policy Priorities, May 10, 
2005.
---------------------------------------------------------------------------
The Second Benefit Reduction: The Benefit Offset for Private Accounts

    In addition to the first benefit reduction, workers who opt for the 
President's proposed private accounts would be subject to a second 
reduction in their traditional defined Social Security benefit.
    Under the President's proposal, workers could contribute up to 4 
percent of taxable wages to private accounts. These contributions would 
be capped at $1,000 in 2009, with the cap increasing thereafter by $100 
per year, plus wage inflation. By 2041, all workers would be able to 
contribute a full 4 percent of taxable payroll to their accounts. 
Workers who elect private accounts would have their traditional Social 
Security benefit reduced by their contributions to the accounts, plus 
an interest charge set at 3 percent above the inflation rate.
    The combination of the sliding-scale benefit reductions and the 
benefit offset associated with private accounts would radically 
transform retirement, leaving the average worker with a fraction of the 
benefit he or she is entitled to today. Consider an average worker 
retiring in 2055, the first worker who would be eligible to participate 
fully in the President's proposed accounts. The sliding-scale benefit 
reduction would reduce this worker's scheduled benefit by 21 percent. 
The benefit offset would reduce the scheduled traditional Social 
Security benefit by 45 percent. Together, these two benefit reductions 
would reduce the traditional defined benefit by 66 percent. This worker 
would have a guaranteed benefit of only $7,500 annually. The majority 
of the workers' retirement income would come from the individual 
account, pensions, and other savings--all of which is subject to market 
risk.
    These double reductions in benefits grow dramatically for higher 
income workers and workers retiring later, as Table 2 shows. For 
example, a worker making the equivalent of $59,000 in today's wage-
adjusted dollars and retiring in 2075 would see a 97 percent reduction 
in his or her traditional defined Social Security benefit. Virtually 
all of this workers retirement income would come from the individual 
account and other savings.

                                                     Table 2
                        Annual Social Security Defined Benefits (Excludes Account Value)
                                        (inflation-adjusted 2005 dollars)
----------------------------------------------------------------------------------------------------------------
                                                          Sliding-
                                           Current-law      Scale        Benefit        Total       Percentage
                                             Formula       Benefit     Offsets for     Defined        Change
                                                          Reduction    4% Accounts     Benefit
----------------------------------------------------------------------------------------------------------------

Workers Retiring in 2055 At Age 65------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Low earner                                    $13,413           -$0       -$4,507        $8,906            -34%
Medium earner                                  22,097        -4,522       -10,062         7,513            -66%
High earner                                    29,296        -9,082       -16,464         3,750            -87%
Maximum earner                                 35,751       -13,085       -19,949         2,717            -92%
----------------------------------------------------------------------------------------------------------------
Workers Retiring in 2075 At Age 65
----------------------------------------------------------------------------------------------------------------
Low earner                                     16,599            -0        -5,577        11,022            -34%
Medium earner                                  27,344        -7,629       -12,414         7,301            -73%
High earner                                    36,254       -15,154       -19,867         1,233            -97%
Maximum earner                                 44,236       -21,808       -32,557             0           -100%
----------------------------------------------------------------------------------------------------------------
Source: Author's calculations based on Social Security Administration, Office of the Chief Actuary, ``Estimated
  Financial Effects of a Comprehensive Social Security Reform Proposal Including Progressive Price Indexing--
  INFORMATION,'' February 10, 2005 and ``Preliminary Estimated Financial Effects of a Proposal to Phase In
  Personal Accounts--INFORMATION,'' February 3, 2005. Note that the 4 percent accounts are assumed to have a
  maximum contribution of $1,000 in 2009, growing by $100 per year plus wage inflation, along the lines proposed
  by the President.

    When Medicare premiums are deducted from Social Security benefits, 
the results are even more dramatic. Subtracting these premiums would 
leave little or no traditional Social Security benefit for anyone 
retiring after 2055 with an income that is above the equivalent of 
about $35,000 today. These workers would have to rely entirely on their 
private accounts for all of their other needs.
    The combination of sliding-scale benefit reductions and carveout 
accounts raise very serious concerns about the unraveling of Social 
Security. The benefit offset for the accounts is designed in such a 
manner that it would lead participants to devalue their traditional 
Social Security benefits (and all the associated disability insurance, 
life insurance, and other advantages) and overvalue their private 
accounts. Many Americans would appear to get little or nothing from 
their traditional Social Security contributions, while lower-income 
families would still get relatively more substantial benefits. This 
could lead to significant political pressure to shift more of Social 
Security into private accounts and reduce defined benefits for lower-
income workers.

Would Higher Returns on Accounts Make Up for These Benefit Reductions?

    Would the accounts the President is proposing help make up for 
these benefit reductions? The way the accounts are structured, a 
participant would need to get a rate of return (after subtracting 
administrative costs) that is more than 3 percent above the inflation 
rate to make up for the second benefit reduction, the benefit offset. A 
rate of return well above 3 percent would generally be needed to make 
up for both sets benefit reductions.
    In effect, the President's accounts are structured like a margin 
loan. If you do not get a high enough return to make up for the margin 
interest, you lose money on the account. If you come out ahead of the 
margin interest rate, your net retirement benefit only goes up by the 
degree to which your return exceeds 3 percent above inflation, not by 
the entire value of the account. In the words of former Securities and 
Exchange Commission Chairman Arthur Levitt Jr.:
    Every dollar you take out of traditional Social Security and put 
into a PSA must be paid back out of your Social Security benefit--plus 
interest. If this sounds a lot like margin investing, it should not be 
a surprise since the PSA plan is modeled on that concept: A worker 
investing in a PSA would hope--like a margin investor--that assets 
accrued were greater than debts (money lent plus interest). If not, he 
would end up with a smaller Social Security benefit than if he stayed 
in the traditional system. To come out ahead, then, an investor would 
have to earn a rate of return that exceeds the interest of the loan, 
plus expenses.\24\
---------------------------------------------------------------------------
    \24\ Arthur Levitt Jr., ``Reform is Good, PSAs Are Not So Good,'' 
Wall Street Journal, April 26, 2005.
---------------------------------------------------------------------------
    The President has proposed to set up ``lifecycle'' accounts as the 
default option for investors. These accounts would switch portfolio 
allocations towards bonds as a worker nears retirement. The goal is to 
capture potentially higher stock market returns while reducing the 
risks associated with stock market investment. Noted financial 
economist Robert Shiller, author of Irrational Exuberance, however, 
showed that ``lifecycle'' accounts do not provide a free lunch and are 
still subject to considerable risks.
    Shiller conducted a simulation using historic returns from 1871 to 
2004 to answer the question of whether or not workers would come out 
ahead of the 3 percent hurdle required to make up for the second 
benefit reduction.\25\ Using actual historical returns, Shiller found 
that workers opting for a ``lifecycle account'' modeled on the 
President's proposal would end up losing money 32 percent of the time. 
That is, 32 percent of the time workers would not even make enough to 
overcome the benefit offset. They would be worse off as a result of 
opting for the accounts.
---------------------------------------------------------------------------
    \25\ Robert Shiller, ``The Life-Cycle Personal Accounts Proposal 
for Social Security: An Evaluation,'' March 2005.
---------------------------------------------------------------------------
    Shiller found a median rate of return with the lifecycle accounts 
of 3.4 percent above inflation. That is above the 3 percent hurdle 
required to break even on the private accounts but well below the 4.6 
to 4.9 percent rate of return assumed by the Social Security actuaries. 
In most cases, this would not be enough to make up for the sliding 
scale benefit reduction.
    Shiller also conducted the simulation using what he considers more 
``realistic'' returns reflecting international experience. He finds 
that workers would lose money on the accounts 71 percent of the time. 
The median rate of return would be 2.6 percent. Professor Shiller 
concludes that the accounts are a bad deal. This is also the conclusion 
reached by Goldman Sachs Chief Economist Bill Dudley who concluded that 
the accounts are ``not an attractive proposition.''\26\
---------------------------------------------------------------------------
    \26\ William Dudley, ``Social Security Reform: Are Personal Savings 
Accounts Attractive?'' Goldman Sachs U.S. Daily Comment, February 23, 
2005.
---------------------------------------------------------------------------
    Even the more realistic returns assumed for the second part of 
Shiller's study are higher than the returns projected by a wide range 
of financial economists surveyed by the Wall Street Journal in 
February.\27\ In addition, a recent paper by economists Dean Baker, 
Brad DeLong, and Paul Krugman demonstrates that if economic growth 
slows as much as the Social Security Trustees project, stock returns 
are likely to be lower than in the past.\28\
---------------------------------------------------------------------------
    \27\ Mark Whitehouse, ``Social Security Reform Plan Leans on 
Bullish Market,'' Wall Street Journal, February 28, 2005.
    \28\ Dean Baker, Brad DeLong and Paul Krugman, ``Asset Returns and 
Economic Growth,'' March 2005.
---------------------------------------------------------------------------
    Moreover, even these lower rates of return do not take into account 
the additional risks associated with equity investment. Virtually all 
economists agree that any assessment of the likely outcome of this 
margin loan should take into account the additional risks associated 
with investing in equities. As Gary Becker, a Nobel Laureate in 
economics and supporter of individual accounts explains: ``There are no 
freebies from such investments since the higher return on stocks is 
related to their greater risk and other trade-offs between stocks and 
different assets.''\29\
---------------------------------------------------------------------------
    \29\ Gary Becker, ``A Political Case for Social Security Reform,'' 
Wall Street Journal, February 15, 2005.
---------------------------------------------------------------------------
    The Congressional Budget Office (CBO) uses what is known as ``risk 
adjustment'' in estimating the featured returns on private accounts 
established under Social Security plans. This means that CBO adjusts 
stock returns to reflect the higher risk that stock investments carry. 
Under CBO's analyses, private accounts ``are expected to earn an annual 
return of 3.0 percent [above inflation],'' after adjustment for 
risk.\30\ Risk adjustment makes the balances in private accounts (which 
are subject to market risk) comparable to the value of the guaranteed 
Social Security benefit (which is not subject to market risk).\31\ 
Without adjusting for risk, comparing the certain balance in a 
traditional benefit to the uncertain balance in a private account is 
misleading and economically meaningless.\32\
---------------------------------------------------------------------------
    \30\ Congressional Budget Office, ``Long-term Analysis of Plan 2 of 
the President's Commission to Strengthen Social Security,'' July 21, 
2004. CBO assumes a risk-adjusted rate of return on investment of 3.3 
percent, which is CBO's projected return on Treasury bonds, minus 0.3 
percent for administrative and management fees.
    \31\ Some have argued that the benefit under the traditional system 
is subject to political risk. But these same political risks also apply 
to total benefits under the system with accounts. The remaining 
traditional benefit could be reduced further, a tax could be applied to 
individual account accumulations or withdrawals, or the government 
could modify the interest rate used to calculate benefit offsets. There 
is no sense in which this political risk disproportionately applies to 
the current system and thus it does not effect the comparison of the 
level of benefits under the two plans.
    \32\ Office of Management and Budget, Analytical Perspectives, 
Fiscal Year 2006 Budget, February 2005, p. 421.
---------------------------------------------------------------------------
    Both CBO and the Office of Management and Budget use this risk-
adjustment methodology when estimating the returns that the Railroad 
Retirement Fund will earn on its stock investments for the purposes of 
official government accounting.
    From the perspective of risk adjustment, workers would not come out 
ahead if they opt for private accounts.\33\ Private accounts simply 
introduce substantial additional risk into the core tier of retirement 
security without doing anything to lessen the sliding-scale benefit 
reductions the President is proposing.
---------------------------------------------------------------------------
    \33\ This is true to the degree that Treasury yields are 3 to 3.3 
percent, as projected by the Social Security Trustees and CBO 
respectively. Workers, however, would be slightly better off from 
opting into the accounts because of the leakage: there is a chance they 
would not have to repay their full offset due to pre-retirement death, 
a high income, or other factors. All of these benefits, however, would 
be reflected in the reduction in solvency and thus would require 
correspondingly larger reductions in the traditional benefit. These 
would not be net benefits, just reallocations of existing benefits.
---------------------------------------------------------------------------
    Table 3 summarizes the scenarios described in this section for an 
average earner retiring in 2075 under the President's proposal. This 
worker is subject to a $7,629 sliding-scale benefit reduction and a 
$12,414 benefit offset. The table shows the account annuities the 
worker would get under alternative investment return scenarios.
    In the risk-adjusted case, the featured case in CBO analysis, the 
account exactly makes up for the benefit offset--leaving the worker 
subject to the full sliding-scale benefit reduction. Using what Shiller 
describes as ``realistic'' returns on a lifecycle account, the account 
would only get a 2.6 percent return and thus fall short of even making 
up for the benefit offset leaving the worker even further behind. 
Actual historical returns with a lifecycle account or the returns 
forecast by leading economists surveyed by the Wall Street Journal are 
both 3.4 percent--enough to make up for the benefit offset but not 
nearly enough to make up for the sliding-scale benefit reduction.

                                                     Table 3
                             Effect of Alternative Account Returns on Total Benefit
                                        (inflation-adjusted 2005 dollars)
----------------------------------------------------------------------------------------------------------------
                                                             Sliding
                                                              Scale        Benefit       Annual
                                                             Benefit       Offset        Account     Net Change
                                                            Reduction                     Value
----------------------------------------------------------------------------------------------------------------
Low Return Case (2.0%)                                      -$7,629       -$12,414      10,316        -9,727
Realistic Lifecycle Return (2.6%)                            -7,629        -12,414      11,774        -8,269
Risk-Ajusted Returns (3.0%)                                  -7,629        -12,414      12,414        -7,629
Historical Lifecycle Return (3.4%)                           -7,629        -12,414      14,125        -5,918
Wall Street Journal Survey (3.4%)                            -7,629        -12,414      14,125        -5,918
High Return Case (4.6%)                                      -7,629        -12,414      18,779        -1,264
----------------------------------------------------------------------------------------------------------------
Notes: Lifecycle returns are the annual internal rates of return on lifecycle accounts estimated by Shiller. For
  the ``historical'' sample the average stock return is 6.8 percent annually and the average bond return is 2.7
  percent annually. The Wall Street Journal returns uses the median returns from the Wall Street Journal survey
  on February 28, 2005, assuming the same portfolio proposed by the President's Commission to Strengthen Social
  Security.

D. The Impact of the President's Proposal on National Savings
    Raising net national savings should be a fundamental goal of any 
proposal to reform Social Security and pensions. This goal was 
unanimously accepted by the 1994-96 Advisory Council and endorsed by 
the President's Commission to Strengthen Social Security. Higher 
national savings leads to increased investment and/or reduced foreign 
borrowing. Either way, higher savings is the only way to increase 
consumption by the elderly without reducing consumption by the young.
    The President's accounts proposal (by itself and not counting the 
benefit reductions), does nothing to raise national savings and could 
even result in lower national savings.\34\ The President's plan would 
put money into accounts (representing saving) while contemporaneously 
financing these contributions with higher federal borrowing 
(representing dissaving). The net effect would be no increase in 
savings.
---------------------------------------------------------------------------
    \34\ The benefit reductions in the President's plan could lead to 
modest increases in national savings over time, although they would do 
relatively little to pre-fund Social Security by substantially 
increasing up-front savings. This subsection is concerned with the 
question of whether the accounts in the President's proposal would 
further or set-back the effort to increase national savings.
---------------------------------------------------------------------------
    One of the leading public finance textbooks, written by the current 
Chairman of the Council of Economic Advisers Harvey Rosen explains that 
``privatization'' by itself does not raise national savings:
    Hence, privatization can help finance future retirees' consumption 
only to the extent that it allows future output to increase. And the 
only way it can do this is by increasing saving.
    However, there is no reason to believe that privatization by itself 
would raise national savings. The government by itself has to finance 
its deficit one way or another. In order to induce private investors to 
accept government bonds that would have been bought by the Trust Fund, 
their yield has to go up (increasing the debt burden on taxpayers), or 
the yield on stocks must fall, or both. At the end of the day, all that 
takes place is a swap of public and private securities between the 
Trust Fund and private markets--no new savings is created.\35\ 
(emphasis added)
---------------------------------------------------------------------------
    \35\ Harvey S. Rosen, 2005, Public Finance Seventh Edition, p. 208. 
Rosen goes on to explain that ``sophisticated schemes'' that include 
additional out-of-pocket contributions could increase savings. The 
President's carveout accounts do not have any of the features Rosen 
identified as leading to higher savings.
---------------------------------------------------------------------------
    The primary effect of the President's accounts proposal is no 
change in national savings. As a result, the proposal fails to meet one 
of the principal goals for Social Security reform--increasing national 
savings. Further, two secondary effects could be important.
    First, the accounts would reduce savings if individuals treat them 
as net wealth and consequently decrease their 401(k)s and IRAs savings. 
The completely rational actor that inhabits economics textbooks should 
not change his or her savings as a result of the accounts: every dollar 
contributed to the account is matched by a dollar reduction in present 
value terms in future Social Security benefits. As a result, the 
accounts do not represent net wealth but are instead a loan. Workers 
will still need to save as much of their own money to enjoy a dignified 
retirement. But, the design of the President's accounts (and the way in 
which they are often described) could lead many people to ignore the 
benefit offset associated with the account and to incorrectly assume 
that the accounts represent new wealth. Such people could feel less 
need to save in the form of 401(k)s and IRAs.\36\ This would not just 
reduce national savings, it would also leave these people even less 
prepared for retirement.
---------------------------------------------------------------------------
    \36\ Douglas Elmendorf and Jeffrey Liebman provide evidence 
suggesting that individuals reduce savings by about 40 percent of the 
value of individual accounts but only increase savings by 25 percent 
for future reductions in Social Security benefits (like the benefit 
offset). As a result, they conclude that ``individual accounts are 
likely to crowd out some other household saving.'' Douglas W. Elmendorf 
and Jeffrey B. Liebman, ``Social Security Reform and National Saving in 
an Era of Budget Surpluses,'' Brookings Papers on Economic Activity, 
2:2000.
---------------------------------------------------------------------------
    Second, in theory the accounts could increase savings if the higher 
deficits associated with accounts lead to lower government spending 
and/or higher taxes. In this case, the government would not be 
completely financing the accounts with borrowing and national savings 
would increase. This theory depends on the behavior of the current 
government and future governments. The Bush administration has not 
claimed that if accounts were passed it would propose additional 
reductions in federal programs or higher taxes to offset the increased 
deficit. In fact, administration officials emphasize that they do not 
believe there is any need for such steps because, they contend, the 
accounts are fiscally neutral over the infinite future. In addition, 
the Bush administration has not included the short-run deficit impact 
of the accounts in its budget submissions. It would be imprudent to 
base a major policy on the hope that future government spending and/or 
taxes would change as a result.
    As a result, the President's accounts proposal, by itself, is 
likely to reduce national savings permanently. Even with the 
potentially offsetting effect of the sliding-scale benefit reductions, 
national savings would likely be lower and America as a whole would be 
poorer for several decades.

           III. Alternative Approaches to Encouraging Savings

    To encourage savings some have proposed ``add-on'' accounts for 
Social Security, additional savings incentives, and other pension 
reforms. Advocates argue that these approaches could sweeten a Social 
Security reform package that contains strong medicine such as the 
benefit reductions that the President proposed. But, if the sweetener 
is funded through deficit spending or does nothing to help make 
retirement more secure for most families, it could instead become a 
poison pill. Furthermore, if add-ons are poorly designed, they could 
reward the existing saving by those who need it least, while doing 
little to encourage future saving by the families who need help most. 
There are, however, promising approaches that could encourage savings 
and be enacted with or without Social Security reform.
A. The Fiscal Impact of Add-On Accounts
    In evaluating add-on accounts, the first and most important 
question is: do they increase the deficit and the debt? If the answer 
is yes, then the add-on accounts would be a step backwards.
    Any voluntary add-on accounts for Social Security would likely be 
ineffective and counterproductive. Only 5 percent of Americans are 
currently contributing the maximum to their IRAs and 401(k)s.\37\ There 
is no reason that a worker would make additional contributions to an 
add-on account when they already have other tax-advantaged ways to 
save. The only way to encourage add-on contributions would be to 
provide new tax incentives for contributions to the Social Security 
accounts. But if the new tax incentives are not fully offset by other 
changes, they would worsen the long-run fiscal situation and thereby 
undermine the main goal of Social Security reform.
---------------------------------------------------------------------------
    \37\ Craig Copeland, ``IRA Assets and Characteristics of IRA 
Owners,'' EBRI Notes, December 2002
---------------------------------------------------------------------------
    One example is Congressman Clay Shaw's proposal. He proposes to 
allow individuals to contribute 4 percent of payroll, up to a maximum 
of $1,000, into ``Social Security Guarantee Accounts.'' Instead of 
deducting this amount from payroll taxes and the Social Security Trust 
Fund (as the President proposes), the Shaw plan would instead fund 
these contributions with general revenue. The distinction between this 
approach to funding accounts and the President's carveout proposal is 
purely a matter of accounting; there is no economically meaningful 
difference.\38\ Both plans would fully fund individual accounts with 
contemporaneous borrowing. In fact, if anything the Shaw approach could 
be more problematic because it is less transparent about recording the 
costs of the new accounts.
---------------------------------------------------------------------------
    \38\ The President's plan and the Shaw plan have different 
mechanisms for repaying the account. This difference, however, is not 
inherent to whether or not the plan is structured as an add-on or a 
carveout.
---------------------------------------------------------------------------
    Another type of add-on account would graft proposals like 
Retirement Savings Accounts (RSAs) onto Social Security. For example, 
some Social Security reform plans have included a provision to allow 
workers at any income level to make up to $5,000 per year in additional 
contributions to their private accounts. Contributions get preferential 
tax treatment--neither interest earned on them nor withdrawals made in 
retirement would be taxed. (This tax treatment is the same as that is 
accorded to Roth IRAs.)
    These new tax savings would have little cost in the traditional 5--
or 10-year budget window because most of the tax benefits are 
deferred.\39\ The long-run cost, however, is substantial. A preliminary 
estimate is that creating a new $5,000 tax-free account would cost 
about 0.28 percent of payroll over 75 years or about $600 billion in 
net present value, over 75 years.\40\ This would worsen the long-run 
fiscal outlook.
---------------------------------------------------------------------------
    \39\ In fact, if the proposal allows workers to convert deductible 
IRAs to Roth-style savings accounts it can even appear to raise money 
in the first few years by, in effect, borrowing from the future at 
unfavorable rates.
    \40\ This is based on an extrapolation of a preliminary 10-year 
estimate by the Urban Institute-Brookings Tax Policy Center.
---------------------------------------------------------------------------
    Even otherwise desirable new tax incentives for savings--like 
extending and improving the saver's credit--could be counterproductive 
if they promoted retirement savings while increasing the long-term 
budget deficit.
B. Reforms to Promote Retirement Security
    Roughly half of households do not have an employer-sponsored 
pension. The typical household approaching retirement has a defined 
contribution account balance of $10,000.\41\ The assets and 
participation rates for moderate- and middle-income households are even 
lower.
---------------------------------------------------------------------------
    \41\ Peter Orszag, ``Progressivity and Saving: Fixing the Nation's 
Upside-down Incentives for Savings,'' Testimony Before the House 
Committee on Education and the Workforce, February 25, 2004.
---------------------------------------------------------------------------
    The economic evidence shows that savings incentives can be most 
effective at creating new savings when they target moderate-income 
families who are not saving much currently.\42\ In contrast, higher-
income families are generally saving a substantial amount already. 
Expanding savings incentives for these families is likely to lead them 
to shift their existing saving into tax preferred vehicles. As a 
result, no new savings is created.
---------------------------------------------------------------------------
    \42\ Eric Engen and William Gale, ``The Effects of 401(k) Plans on 
Household Wealth: Differences Across Earnings Groups,'' NBER Working 
Paper, 2000.
---------------------------------------------------------------------------
    The current tax system is ``upside down''--it gives the largest 
incentives to families that need them the least and are the least 
likely to save more as a result.\43\ Tax preferences for retirement 
savings, like deductions or exclusions, benefit families based on their 
marginal rates. If a family is paying no income taxes at all, then it 
does not benefit at all from tax incentives for savings. But these are 
precisely the families who need the most help saving and there is the 
most potential to genuinely increase savings among these moderate-
income families. Yet, families in higher tax brackets benefit more from 
the tax preferences for saving. In total, the Federal government 
incurred $184 billion in costs on annual tax expenditures in 2003 (in 
present value terms). Of this only 3 percent goes to the bottom 40 
percent of Americans while 49 percent goes to the top 10 percent of 
Americans.\44\
---------------------------------------------------------------------------
    \43\ For further discussion see Gene Sperling, ``A Progressive 
Framework for Social Security Reform,'' January 10, 2005.
    \44\ Leonard Burman, William Gale, Matthew Hall, and Peter Orszag, 
``Distributional Effects of Defined Contribution Plans and Individual 
Retirement Accounts,'' Tax Policy Center Discussion Paper No. 16, 
August 2004.
---------------------------------------------------------------------------
    Carveout accounts would not change the current system at all and 
would not encourage new saving; they simply represent, in effect, a 
loan that must be repaid out of defined Social Security benefits.
    Add-on proposals modeled on RSAs would make the current system even 
worse by giving more than 90 percent of the benefit of the tax 
expenditures to the top 10 percent of Americans. Expanding the maximum 
annual contribution to IRAs (raising it to $5,000 per person) would do 
nothing for the 95 percent of Americans who currently contribute less 
than the limit to their existing IRAs. Eliminating the income limit on 
Roth IRAs (currently set at $160,000 for married couples) would only 
provide benefits to high-income Americans.
    Expanded tax incentives could provide a windfall for high-income 
families that more than makes up for the reduction in their Social 
Security benefits. At the same time, these expanded incentives would 
not do anything to offset the reductions in benefits for middle-class 
families. To illustrate this point, consider the two hypothetical 
families. Both are subject to the President's sliding-scale benefit 
reductions and both have the option to contribute up to $5,000 annually 
to an account that accumulates tax free and can be withdrawn at 
retirement tax free:

      The Smiths make $400,000 annually and retire in 2055. 
Under the sliding-scale benefit reduction, their annual Social Security 
benefit is reduced by $13,085. At the same time, the Smiths put $5,000 
annually into the new tax-free savings account (previously they had 
saved this money in a taxable account). By the time they retire, the 
tax benefits associated with this account save them $250,000 in 
inflation-adjusted 2005 dollars.\45\ That is enough to buy a $17,000 
annuity--more than making up for their benefit reduction and leaving 
them ahead by $3,915 annually.
---------------------------------------------------------------------------
    \45\ A family making the maximum tax-free contributions to a 
balanced portfolio would have $750,000. If the contributions had been 
taxable, the family would only have accumulated $500,000. The 
difference is the cost of the tax cut.
---------------------------------------------------------------------------
      The Jones make $37,000 annually and retire in 2055. Like 
95 percent of families today, they do not make enough money to 
contribute the maximum to their existing 401(k) or IRA. They have no 
additional money to contribute to this new tax-free savings account and 
get no tax benefits from it. As a result, they do not have any 
additional money to make up for the $4,522 reduction in their Social 
Security benefit, leaving them behind by $4,522 annually.

    Expanded tax incentives could even make middle-class families worse 
off if they lead businesses to drop their existing pension coverage, 
hurting middle-income Americans. On reason owners and executives of 
small businesses offer pensions to their employees is to take advantage 
of the tax-favored savings themselves. If they had alternative options 
for themselves, they would have less incentive to set up plans for 
their employees. According to an analysis by the Congressional Research 
Service, ``some employers, particularly small employers, might drop 
their plans given the benefits of private savings accounts.''\46\
---------------------------------------------------------------------------
    \46\ Jane G. Gravelle, Congressional Research Service, ``Effects of 
LSAs/RSAs Proposal on the Economy and the Budget,'' January 6, 2004.
---------------------------------------------------------------------------
    In contrast, other proposals could enhance retirement security by 
overcoming obstacles to saving. Some proposals would not require any 
new tax incentives; they would simply make the process of saving easier 
and more automatic, overcoming a key obstacle to saving for many 
families. These proposals include making 401(k) contributions automatic 
and allowing taxpayers to split their tax refunds so that one part is 
deposited directly into an IRA.\47\
---------------------------------------------------------------------------
    \47\ See the Retirement Security Project at 
www.retirementsecurity.org for more details on these and other 
proposals.
---------------------------------------------------------------------------
    Alternatively, incentives for saving could be expanded. Currently, 
the saver's credit provides matching contributions for joint filers 
making up to $50,000 This credit is scheduled to expire in 2006. The 
credit could be extended and reformed to make it refundable and more 
effective. New research from the Retirement Security Project 
conclusively demonstrates that matching incentives encourage families 
to save more and that larger matches lead to more savings.\48\ But the 
research also suggests that institutional changes, like a simple 
matching plan that deposit money directly into the savings account, can 
be a more effective way to encourage savings. More work on translating 
this into policy is needed.
---------------------------------------------------------------------------
    \48\ Esther Duflo et al, ``Saving Incentives for Low- and Middle-
Income Families: Evidence from a Field Experiment with H&R Block,'' 
Retirement Security Project No 2005-5, May 2005.
---------------------------------------------------------------------------
C. Designing Proposals To Increase National Savings
    Two features are essential in any plan to provide new incentives to 
raise national savings:

    1.  First, the plan should be fully paid for without increasing the 
debt in the short run or the long run. Increased government borrowing, 
by itself, decreases national savings.
    2.  Second, the plan should be targeted at encouraging genuinely 
new savings, not simply at rewarding existing savings.

    RSA-style proposals fall short on both counts. They provide 
windfall tax breaks for people who are already saving and as a result 
do little to increase personal saving. And, if they are not paid for, 
RSA-style proposals result in increasing public dissaving over time. 
The net result is lower national savings, leading to a smaller capital 
stock and more foreign borrowing.
    In contrast, pension reforms and savings incentives that make it 
easier and more affordable for middle-class families to save would help 
raise personal savings. And, if these proposals are fully paid for 
without increasing the deficit, they would also contribute to higher 
national savings.

                             IV. Conclusion

    Social Security faces a challenge and it is better to address this 
challenge sooner rather than later. But before tackling Social 
Security's long-term solvency we should mind the words of the 
Hippocratic Oath and first, do no harm. Carveout accounts would do 
substantial harm: they would reduce the solvency of Social Security and 
add trillions of dollars to the debt while making retirement less 
secure and potentially reducing national savings. Add-on accounts that 
are financed by increasing the debt--either in the short run or the 
long run--would also be counterproductive and harmful.
    A balanced set of reforms that modestly increases Social Security's 
revenues while modestly decreasing benefits could ensure that Social 
Security is sustainably solvent. Such reforms would help reduce long-
term budget deficits and increase national savings. A series of reforms 
could also help strengthen retirement security by making it easier for 
families to save.
    Helping ensure that every American can have a stable and 
comfortable retirement must be foremost in our minds as we move forward 
to shore up Social Security for future generations.

                                 

    Chairman THOMAS. Thank you very much, Dr. Furman. Mr. 
Tanner?

 STATEMENT OF MICHAEL TANNER, DIRECTOR, CATO INSTITUTE PROJECT 
                   ON SOCIAL SECURITY CHOICE

    Mr. TANNER. Thank you, Mr. Chairman, Members of the 
Committee. I do appreciate the opportunity to appear before you 
today and I would like to congratulate the Committee on holding 
this hearing. I hope that it is an indication that we have 
moved beyond the sterile and unproductive debate about whether 
Social Security is facing a crisis or just a big problem, 
because as frightening as Social Security's financial problems 
are--and they truly are severe; the program will begin running 
a deficit in just 12 years and is facing unfunded obligations 
of about $12.8 trillion, if you include the cost of redeeming 
the Social Security trust fund as well as its other unfunded 
obligations after 2041--I believe, however, that Social 
Security reform must be about more than just achieving 
technical solvency. Now, that is not to downplay the importance 
of solvency. Any responsible Social Security reform would start 
the program toward sustainable solvency, not just in the short-
term but over the long-term. While it is necessary, Social 
Security solvency is not sufficient.
    We could be seizing upon this opportunity to build a new 
and a better retirement program, and that program should be 
based on the fundamental American values of ownership, 
inheritability, and choice. Under the current Social Security 
system, you have no legal, contractual, or property right to 
your benefits. What you receive from Social Security is 
entirely up to the 535 Members of Congress, but personal 
retirement accounts would give workers ownership and control 
over their retirement funds. The money in a worker's account 
would belong to that worker, and it is money that the 
politicians, with all due respect, could never take away. In 
short, workers would own their retirement. Because we don't own 
Social Security benefits under the current system, they are not 
inheritable. Millions of workers who die prematurely are not 
able to pass anything on to their loved ones, but with personal 
retirement accounts, workers would be able to build a nest egg 
of real inheritable wealth. For middle- and low-income workers, 
this may be the first time in their lives that they are able to 
accumulate such a nest egg.
    Finally, I point out that choice is part of the essence of 
America, yet when it comes to retirement, Social Security 
forces all Americans into a one-size-fits-all, cookie cutter 
retirement program; a system that cannot pay the benefits it 
has promised, and under which we have no right to the money we 
pay in. With personal retirement accounts, workers who want to 
remain in traditional Social Security would be free to do so, 
but workers who wanted a choice to save and invest for their 
retirement would have that option. With this goal in mind, not 
just to restore Social Security to solvency, but to build a 
better retirement program that would give workers more 
ownership, control over their money, and create an inheritable 
nest egg, the scholars at the Cato Institute developed a 
comprehensive proposal for creating privately invested, 
personally owned accounts as part of an overall reform of the 
Social Security system. This proposal is reflected in 
legislation, H.R. 530, that has been introduced by your 
colleague, Representative Sam Johnson, along with 
Representative Jeff Flake and 15 cosponsors.
    Under this proposal, workers under the age of 55 would have 
the option of diverting their half of the Social Security 
payroll tax, 6.2 percent of wages, to an individual account. 
The employer's portion of the payroll tax would continue to be 
paid into the Social Security system to provide survivors' and 
disability benefits, as well as to partially fund continuing 
benefits for those already retired or nearing retirement. 
Workers who choose the individual account option, and it would 
be a choice, completely voluntary, would forego any future 
accrual of Social Security retirement benefits under the 
traditional system. However, those workers who have already 
paid into the current Social Security system and, therefore, 
have accrued benefits, would receive credit for those benefits 
in the form of a recognition bond. Workers who do not choose 
the individual account option would continue to pay into and 
receive benefits from traditional Social Security. However, for 
those workers, the initial Social Security benefit formula 
would be adjusted to reflect price indexing rather than the 
current wage indexing. While we have called for this price 
indexing change across the board, and it is so reflected in the 
legislation by Representatives Johnson and Flake, I would also 
suggest that we look seriously at the proposal by Mr. Pozen for 
making this change progressive. The plan also calls for 
establishing a new minimum Social Security benefit, equal to 
100 percent of the poverty level, providing for a significant 
increase over the current minimum benefit. I have attached and 
entered into the record an original copy of a Cato study 
setting out the details of this proposal and the rationale, as 
well as a report on the Social Security actuaries' estimates 
that this program would restore Social Security to permanent 
sustainable solvency. I would suggest that, in the end, if our 
goal is more than technical solvency, more than just getting 
the lines on a chart to cross, if we really want the best 
possible Social Security system, then we need to have a Social 
Security system that gives workers ownership, control, 
inheritability, and choice as part of their retirement. Thank 
you, Mr. Chairman.
    [The prepared statement of Mr. Tanner follows:]

Statement of Michael Tanner, Director, Cato Institute Project on Social 
                            Security Choice

    Mr. Chairman, Members of the Committee
    I would like to applaud the Chairman and the Committee for holding 
these hearings today, and for your determination to go forward with 
trying to reform our nation's troubled retirement system. I hope that 
this means we are at last moving beyond the sterile and unproductive 
debate about whether Social Security is facing a ``crisis'' or just a 
big problem.
    Because whatever we call it, we cannot deny the fundamental facts. 
Social Security will begin to run a deficit in just 12 years--that is, 
it will begin to spend more money on benefits than it brings in through 
taxes. At that point, in order to continue to pay promised benefits, it 
will have to draw on the Social Security Trust Fund. We have seen much 
debate about the Trust Fund recently, with some suggesting that it 
guarantees Social Security's solvency until 2041, or even 2052. 
However, as Congressional Budget Office director Douglas Holtz-Eakin 
has noted ``[The Trust Fund] has no real economic resources--.The key 
moments for Social Security are in 2018. Cash-flow benefits will equal 
cash-flow payroll taxes, and then after that, the Social Security 
Administration will have to come back to the rest of the budget for 
additional resources to pay promised benefits.''
    Or as the Clinton Administration made clear in its FY2000 budget:
     ``These Trust Fund balances are available to finance future 
benefit payments--but only in a bookkeeping sense--. They do not 
consist of real economic assets that can be drawn down in the future to 
fund benefits. Instead, they are claims on the Treasury that, when 
redeemed, will have to be financed by raising taxes, borrowing from the 
public, or reducing benefits or other expenditures. The existence of 
Trust Fund balances, therefore, does not by itself have any impact on 
the government's ability to pay benefits.''
    This is not to say that the Federal government will default on the 
bonds in the Trust Fund. I am not doubting the ``full faith and 
credit'' of the U.S. government. However, that does not relieve the 
Federal government from the obligation to find the money with which to 
redeem those bonds, currently $1.6 trillion in present value terms. To 
put it in perspective, think of it this way. In 2018, the first year 
after Social Security begins running a deficit, the shortfall will be 
roughly as much as the Federal government spends on such programs as 
Head Start and the WIC program. The cost rises rapidly thereafter. By 
roughly 2023, the cost of redeeming enough Trust Fund bonds to pay all 
the promised Social Security benefits would be nearly as much as the 
cost of funding the Departments of Interior, Commerce, Education, and 
the Environmental Protection Agency. By 2038, well before the 
theoretical exhaustion of the Trust Fund, you can add the Departments 
of Veterans Affairs, Energy, Housing and Urban Development, Justice, 
NASA, and the National Science Foundation. Simply redeeming the Trust 
Fund will begin to squeeze out all other domestic spending priorities.
    Beyond 2042, once the Trust Fund is exhausted, the deterioration in 
Social Security's finances only increases--and never gets any better. 
Overall, the present value of Social Security's unfunded obligations 
run to nearly $12.8 trillion (approximately $1.6 trillion to redeem the 
Trust Fund, and $11.1 trillion in unfunded benefits thereafter).
    However, as troubling as these numbers may be, I believe that the 
debate over Social Security reform should not solely--or even 
primarily--be a discussion of solvency. Yes, solvency is important, and 
any responsible Social Security reform plan should restore the program 
to solvency, not just short-term actuarial solvency, but permanent, 
sustainable solvency.
    Still solvency is not enough. Instead, Social Security reform 
should strive to build the best possible retirement system for our 
children and our grandchildren. Thus, Social Security's current 
situation should not be seen as either a crisis or a problem, but as an 
opportunity to build a new and better program, based on the fundamental 
American values of ownership, inheritability, and choice.
    Under the current Social Security system you have no legal, 
contractual, or property rights to your benefits. What you get receive 
from Social Security is entirely up to the 535 members of Congress. But 
personal retirement accounts would give workers ownership and control 
over their retirement funds. The money in your account would belong to 
you--money the politicians (with all due respect) could never take 
away. In short, they would own their retirement.
    Because you don't own you Social Security benefits, they are not 
inheritable. Millions of workers who die prematurely are not able to 
pass anything on to their loved ones. But personal retirement accounts 
would enable workers to build a nest egg of real, inheritable wealth.
    Choice is part of the essence of America. Yet when it comes to 
retirement, Congress forces all Americans into a one-size-fits-all, 
cookie-cutter retirement program, a system that cannot pay the benefits 
it has promised and in which we have no right to the money we pay in. 
With personal retirement accounts, workers who want to remain in 
traditional Social Security could do so. But younger workers who want a 
choice to save and invest for their retirement would have that option.
    With this goal in mind, not just to restore Social Security to 
solvency, but to build a better retirement program that would give 
workers more ownership and control over their money, scholars at the 
Cato Institute drew on our 25 years of experience studying 
SocialSecurity, and developed a comprehensive proposal for creating 
privately invested, personally owned accounts as part of an overall 
reform of the Social Security system. This proposal became the basis 
for legislation introduced, on July 19, 2004, by your colleague Rep. 
Johnson along with 18 original co-sponsors.\1\ Rep. Johnson, together 
with Rep. Jeff Flake and 11 co-sponsors, reintroduced the bill in the 
109th Congress, on January 21, 2005.\2\
---------------------------------------------------------------------------
    \1\ HR 4895.
    \2\ HR 530.
---------------------------------------------------------------------------
    Under this proposal, workers under the age of 55 would have the 
option of diverting their half of the Social Security payroll tax (6.2 
percent of wages) to an individual account. The employer's portion of 
the payroll tax would continue to be paid into the Social Security 
system to provide survivors and disability benefits, as well as to 
partially fund continuing benefits for those already retired or nearing 
retirement. Workers choosing the individual account option would forgo 
any future accrual of Social Security retirement benefits. However, 
those workers who have already paid into the current Social Security 
system, and therefore have accrued benefits, would receive credit for 
those benefits in the form of a recognition bond. This fully tradable 
bond would be a zero coupon note maturing on the date of the 
recipient's normal retirement age.
    Workers who do not choose the individual account option would 
continue to pay into and receive benefits from the current Social 
Security system. However, for these workers, the initial Social 
Security benefit formula will be adjusted to reflect price-indexing 
rather than the current wage-indexing. The result will be to restore 
Social Security benefits to a level payable with Social Security's 
available revenue, while ensuring that future retirees continue to 
receive the same level of benefits as those retiring today, on an 
inflation-adjusted basis. This change will be phased in over a 35-year 
period, beginning in 2014.
    This should not be seen as a benefit ``cut.'' Indeed, benefits will 
be higher in the future than they are today. While it is true that 
future benefits would be less than what Social Security promises, such 
comparisons are meaningless because unless there is a substantial 
increase in taxes, the program cannot pay the promised level of 
benefits.
    That is not merely a matter of conjecture, but a matter of law. The 
Social Security Administration is legally authorized to issue benefit 
checks only as long as there are sufficient funds available in the 
Social Security Trust Fund to pay those benefits. Once those funds are 
exhausted, in 2041 by current estimates, Social Security benefits will 
automatically be reduced to a level payable with existing tax revenues, 
approximately 73 percent of current benefit levels.\3\
---------------------------------------------------------------------------
    \3\ In practice, rather than reduce each check sent to 
beneficiaries, the Social Security Administration would stop sending 
out checks altogether until it accumulates sufficient funds to pay 
``full'' benefits. When those funds are exhausted, checks would again 
be withheld until sufficient funds accumulate, leading to checks 
starting and stopping several times over the course of a year. The net 
effect would be that total annual benefits would be reduced by the same 
amount as if each month's benefits had been proportionally reduced.
---------------------------------------------------------------------------
    This, then, is the proper baseline to use when discussing Social 
Security reform. Social Security must be restored to a sustainable 
level regardless of whether individual accounts are created.
    As the Congressional Budget Office puts it:
    A number of recent proposals to reform Social Security call for 
changes in the program's benefits. The effects of those proposals are 
frequently illustrated by comparing the new benefits to those expected 
to arise under the policies put in place by current law--showing 
whether they would be higher or lower and by how much. However, because 
of scheduled changes in benefit rules, a growing economy, and 
improvements in life expectancy, the benefits prescribed under current 
law do not represent a stable baseline. Their value will vary 
significantly across future age cohorts. Thus, focusing on differences 
from current law will not fully portray the effects of proposed benefit 
changes.\4\
---------------------------------------------------------------------------
    \4\ David Koitz, ``Measuring Changes to Social Security Benefits,'' 
CBO Long-Range Fiscal Policy Brief no. 11, December 1, 2003.
---------------------------------------------------------------------------
    I would also note that, although the Cato Plan and HR 350 apply the 
wage-index/price-index change to all income levels, if I were rewriting 
the proposal at this point, I would give very serious consideration to 
the blended approach advocated by Mr. Pozen. Doing so would refocus 
Social Security benefits on those who need it most, and make the system 
more progressive.
    The plan also called for establishing a new minimum Social Security 
benefit equal to 100 percent of the poverty level, providing a 
significant increase over the current minimum benefit. I have attached 
the original Cato study setting out the details of the proposal and 
their rationale.
    The plan has been scored by the Social Security Administration's 
Office of the Actuary (OACT), which concluded that it would eliminate 
Social Security's long-range actuarial deficit'' and would restore the 
system to permanent ``sustainable solvency.'' I have attached a study 
that the Cato Institute released last month exploring OACT's findings 
in detail, as well as a copy of OACT's original actuarial memo. 
However, to summarize, OACT found that:

      The ``transition cost'' (in present value) would be 
approximately $6.5 trillion. This is roughly half the $12.8 trillion 
unfunded liability of the current system. That is, the ``6.2% 
Solution'' ultimately saves taxpayers $6.3 trillion.
      The legislation also compares very favorably to other 
Social Security reform plans. In terms of giving workers more control 
and ownership of their retirement funds, the ``6.2% Solution'' clearly 
provides the most ``bang for the buck.''
      On a cash-flow basis, the legislation does require 
significant short-term transfers of General Revenue. However, by 2046, 
the system would begin running surpluses, allowing any short-term debt 
to be repaid. Indeed, by the end of the 75-year actuarial window, the 
system would be running surpluses in excess of $1.8 trillion (in 
constant $2005)
      Much of the short-term cash-flow shortfalls are due to 
the redemption of recognition bonds, not to the diversion of payroll 
taxes to the individual accounts. These recognition bonds convey many 
benefits in terms of ownership as well as speeding the date at which 
Social Security changes from deficit to surplus. They are essentially a 
prepayment of future Social Security benefits, and not a new expense. 
The Johnson-Flake bill is the only Social Security reform bill with 
recognition bonds. The costs of Johnson-Flake also include the cost of 
increasing the minimum Social Security benefit to 100% of poverty, a 
significant increase over the current minimum Social Security benefit.
      Individual accounts would eventually accumulate assets in 
excess of $38 trillion (in constant $2005). That would lead to 
substantial new savings, new investment, and economic growth.
      Once short-term debt is paid off, the employer portion of 
the payroll tax could be reduced to 3.04%. This would pay for 
disability and survivors' benefits.

    In short, the SSA analysis shows that Johnson-Flake can provide 
large individual accounts while restoring Social Security to permanent 
sustainable solvency, and can do so in a fiscally responsible manner. 
While the up front costs will be significant, they will be less than 
for other big account plans, and eventually those costs will be more 
than offset by the savings to the system.
    In addition, younger workers who chose the individual account 
option could receive retirement resources substantially higher than 
what traditional Social Security can actually pay them.
    Finally, Johnson-Flake gives workers ownership and control over 
their retirement income. It would give low- and middle-income workers 
the opportunity to build a nest egg of real, inheritable wealth. It 
provides younger workers with greater choice. In short, if we measure a 
Social Security program not just as a matter of dollars and cents, but 
as a matter of human liberty and individual dignity, Johnson-Flake 
provides a better way to take care of our retirement.
    Thank you.

                                 

    Chairman THOMAS. Thank you very much, Mr. Tanner. I know 
all of us want the best system, and part of this is reflected 
in the fact that more than 20 years ago, there were some things 
I thought we ought to do and we didn't get to them. As the 
least Ranking Member of the minority party at the time, I 
didn't have a whole lot of influence on what we did or how we 
did it. Do you agree, in essence--and Dr. Furman, this is a 
quote that I found from you in the May 5th Wall Street Journal 
article basically saying, although everyone has a plan and 
there are going to be criticisms for or against various 
approaches--and obviously that is our job, to listen to all of 
the approaches and then, to the best of our ability, decide 
what we do.
    Basically, the gist of Dr. Furman's quote was that the 
dumbest possible plan you can imagine is doing nothing. Is 
there general agreement that that is probably a good starting 
point for us? So, for those who just wish the issue would go 
away, maybe we do owe a bit of a debt of gratitude to the 
President for being up front on this issue. I know we had no 
time to contemplate other changes we might want to make back in 
1983, and the idea that we are going to wait a Congress, or we 
are going to come back two Congresses, or we will wait for a 
Presidential change, it is amazing how quickly 20 years go by. 
Right now, I think 20 years, in my opinion, is a fairly 
luxurious timeframe that we can't afford. Does everyone agree 
with that, basically? Okay.
    Mr. FURMAN. If I can, I certainly don't know anyone who 
thinks that we should let the trust fund get exhausted in 2041 
and cut benefits by 26 percent across the board. I know I don't 
support that. I don't think anyone does. What I think would be 
even worse, though, is actually adding to the debt and 
exhausting the trust fund even earlier and making Social 
Security's financial position worse. That is something that the 
President's plan would do.
    Chairman THOMAS. Well, I understand, but obviously, we 
don't think that is our goal, nor did any of those folk in 
earlier times when they made decisions that, in fact, I think 
have exacerbated our situation. They didn't intend to do that, 
and to a certain extent, they didn't anticipate the changing 
society. Next question--very briefly, Mr. Apfel.
    Mr. APFEL. I just wanted to say that it would be good to do 
something, absolutely, but doing something that takes us in the 
wrong direction would be a bad thing to do. We have three 
options: to do something that is basically good, do nothing, 
and do something that would be basically contrary to the 
economic security of middle-class Americans. I would urge that 
we should take a little more time before doing something very 
bad, and clearly, the two proposals that are before us, I think 
are very risky.
    Chairman THOMAS. Hopefully, we would take all the time in 
the world not to do something bad. In fact, we would never do 
it, rather than waiting a while and then doing it. In his 
testimony, Dr. Steuerle was a bit more specific about changes 
within the Social Security structure, although many of you 
alluded to it in your testimony. Do you think if we are going 
to undergo an attempt to solve the problems of Social Security, 
and, of course, solvency--and I will ask you a question about 
that in a minute--is our goal, outside, an ultimate goal? 
Should we be looking at those anomalies in part created by an 
aging society on the question of widows and their compensation, 
versus non-working widows of well-off husbands, versus widows 
of not-well-off husbands, two-earner versus one earner, the 
low-income floor? That is a worthy pursuit, isn't it, in terms 
of inside Social Security? Does anyone say we shouldn't waste 
time looking at those issues to try to get fairness within the 
structure? Okay, see? There is a plus; we are all together 
here.
    In one way or another, some explicitly addressed the 
question of time and age. We did that in 1983 and it was a very 
difficult political problem. We created a 10-year hiatus on our 
way to 67, which ironically means that people are going to beat 
the distance between 65 and 67 in the 1983 plan actuarially 
before the plan actually reaches the 67. So, we have fallen 
behind, in essence, in trying to create a time-relationship. 
There are a couple of ways of looking at it, and I know there 
is a lot of controversy, so I think most Members understand the 
downside. If you raise the early minimum age, you jeopardize 
folks on a disability question. If you raise the age higher, 
you have to work longer, but it is clear that some adjustment 
there should be looked at. The narrow question I want you to 
address is, should we continue to chase the age change? I 
think, Mr. Pozen, you suggested going from 67 to 69. Dr. 
Furman, when I read your March 21st analysis from your Center 
on Budget and Policy Priorities, I was intrigued by a phrase 
you had on page nine which said, ``Changes in the benefit or 
tax structure under which benefits, payroll taxes, or the 
normal retirement age are indexed to longevity would be much 
better at directly tying the size of the benefit or tax changes 
to the program's solvency needs.'' I don't know whether that 
was because of space, but that was dropped out of your more 
recent editions. Should we look at the question of age 
extension and/or longevity? Is that inevitably something that 
you have got to look at?
    Mr. POZEN. Yes, Mr. Chairman, I think it is something that 
needs to be looked at. I think the idea of modifying retirement 
age through longevity indexing would give people more choice. 
Rather than saying that the retirement age is moved back from 
67 to 69, you would say you can choose to retire at 67, 68, or 
69, but if you retire at 67, we now give you the actuarial 
equivalent of retiring at 69. That means that you get lower 
monthly benefits, but you get more monthly benefits because you 
are retiring earlier. So, I think that is probably a better way 
to proceed than just moving the retirement age back absolutely. 
Then the second issue with which you are very familiar with, is 
how soon can you do this? Any such change would have to be 
phased in.
    Chairman THOMAS. Any strong objection? He, in his 
testimony, said 69, and I think I sold him on longevity. So, 
are we moving in a way in which we are coming together? Dr. 
Schieber?
    Mr. SCHIEBER. I think we probably do agree. If you compare 
where we are today to, say, 1960, if you look at a typical 
male, he is retiring about 3 years earlier today than he 
retired back then and he is living about 3 years longer. We 
have extended his retirement period by about 50 percent. Well, 
if you are going to extend the retirement period by 50 percent, 
then it is going to cost a lot more. If you are in a situation 
where you are being stressed for funds to finance this, as we 
continue to add to life, one of the things that we ought to 
look at is whether or not people could remain engaged a bit 
longer. It would be awfully hard to make a case that work today 
is of such a nature that we ought to be retiring a lot earlier 
than we used to, because we can't bear the burden.
    Chairman THOMAS. I would tell the gentleman, just be a 
little cautious in that statement. For those of us who came 
from families in which physical labor was the way in which the 
bread was put on the table, I know that my father, in terms of 
his plumbing activities, was pretty--the phrase, I guess, would 
be pretty ``used up``--by the time he was 65. Of course, he 
went through the Depression, as well, and had grown up on a 
farm, so he got some early wear and tear.
    Mr. SCHIEBER. The number of those jobs in our economy are 
diminishing, and many of the tools that are available to people 
who have those kinds of jobs are reducing the burden upon them. 
Maybe we do need a transition benefit of some sort for people 
who do have physical labor jobs, but I think we have to be 
careful about making the rules for all because we have got a 
small number who have that problem.
    Chairman THOMAS. The one thing that I am interested--I know 
how difficult it was politically for us to make that age shift 
in 1983. If you did do something like longevity, you wouldn't 
have to visit it as frequently to make adjustments with the 
assumption that people are going to continue to live longer. 
Gene?
    Mr. STEUERLE. Mr. Chairman, I think we have to be honest--I 
can say this because I don't have to run for office, but this 
system has evolved or morphed into a middle-age retirement 
system. As long as we say 62 is old, then it sounds like those 
of us who say we can increase the retirement age sound like we 
are hitting on the old; and for a long time, being old was 
correlated with being poor.
    The people who are old, who are more likely to be poor, are 
those in their late seventies, eighties, and nineties. Many 
retirees, I think, now, are being deluded. They are going into 
retirement at 62 with a decent income and, for a typical 
couple, just a typical couple, their annuity lasts 25 years. 
For a longer-living couple, it often lasts 30 or 35 years. They 
often don't have the resources when one of them lives to 85, 
90, and beyond, that they thought would be available at 62. 
Sometimes the government comes in the back door and has to back 
up the system with Medicaid and a lot of other supports. I 
tried to make very clear in my testimony that, even if we 
devoted all of the revenues from increasing the retirement age 
back to Social Security, and even if we had a current system 
that was totally solvent, if we increased the retirement age, 
we get more revenues in the system. We can increase replacement 
rates. We can protect the old better. We can actually give a 
higher package of lifetime benefits on an actuarial basis 
because we would have more revenues to spend. Increasing the 
retirement age just moves everything in the right way in terms 
of protecting the old, the needy, and everything else, and I 
think we just have to be honest about that basic fact.
    Chairman THOMAS. Well, being honest and getting enough 
votes to pass it are sometimes two different things and I am 
trying to deal in that world. My time is running short, so I 
want to focus you on a couple of other arguments, and Dr. 
Schieber, I think some of it came from your excellent history, 
which was condensed in a useful way from FDR and the origins of 
Social Security, and his very strong belief that it shouldn't 
be a part of the dole. The irony of increasing the payroll 
taxes is, in fact, a form of that direct transfer from the rich 
to the poor. Personal accounts, and I have heard a number of 
descriptions of personal accounts, I know particular personal 
accounts are the target of much discussion. Just the concept of 
personal accounts, does anyone here disagree with the idea that 
the concept of personal accounts is more consistent with the 
concept of a retirement insurance system than basically our 
current pay-as-you-go system? Don't personal accounts kind of 
really talk about an insurance system on an annuity or a 
premium? I am asking questions. I think that is the role of the 
Committee.
    Mr. SCHIEBER. If you--insurance is a process of pooling 
risks across a large group of people where there is a 
relatively small probability of something happening. If you 
look at our disability insurance program, there aren't a lot of 
people as they go through their working careers who become 
disabled. There aren't a lot of people who die and leave 
juvenile children. So, let us say you had a thousand people 
living in a society and they had a house, each of them, worth 
$100,000, and one of those houses in this society burns down 
each year. There are two ways that losses can be covered. One, 
they can each put $100 into a pool each year and then there 
will be resources to cover the damage, and nobody suffers a 
catastrophic loss. Alternatively, there is no insurance and 
when the house burns down, one family in the society has a 
$100,000 loss and everybody else is perfectly fine. When you 
have a small contingency of something happening, you can do 
that through the sort of system we are running to cover 
disability. When you have a high probability--95 percent of the 
people who start to work at the early 20s end up retiring at 
some juncture--we are no longer talking about 1 in 1,000. We 
are talking about 95 percent. If you want to secure those 
benefits over time, especially given the demographics that we 
have, you have to figure out how to save. You have to figure 
out how to accumulate some wealth so there is something 
financial that actually secures that benefit in retirement, and 
this is a mechanism to do it.
    Chairman THOMAS. Okay. Personal accounts----
    Mr. FURMAN. If I----
    Chairman THOMAS. Dr. Furman----
    Mr. FURMAN. Yes, that question----
    Chairman THOMAS. You mentioned the question of increased 
net savings. Dr. Lindsey talked about increased net savings. Is 
it a high priority, medium priority, or a low priority that if 
we talk about personal accounts, we take into consideration 
making sure that however they are structured, they increase net 
savings?
    Mr. FURMAN. Let me just say, right now, families have a 
tremendous number of opportunities to save and invest, if they 
want to play the slot machines, they can do that as well. They 
only have one rock-solid retirement guarantee and that is their 
Social Security benefit. That is not a--you don't have a choice 
of getting a Social Security benefit if it is not in the law. 
That is not an option you have. You have lots of other options. 
So, taking that option away from people----
    Chairman THOMAS. I understand what you said----
    Mr. FURMAN. Reducing that benefit to pay for something that 
you can do already, which is to invest, is not something that I 
think makes very much sense at all.
    Chairman THOMAS. I understand your concern about a 
particular type of personal account, but I thought you 
mentioned in your testimony the idea of making sure that we 
increase net savings.
    Mr. FURMAN. I think that is an important goal of any 
reform, and you are only going to get that if we ensure that 
any new incentives we have are paid for, or that we better 
utilize our existing savings.
    Chairman THOMAS. I understand, but you can also set up 
personal accounts that don't create net savings.
    Mr. FURMAN. If you don't pay for your accounts, you will 
not increase savings.
    Chairman THOMAS. Yes, but I am saying you can do that. 
There are people here fully capable of doing that. Dr. Lindsey?
    Mr. LINDSEY. Mr. Chairman, I think it is a high priority, I 
think it is important that when the Committee thinks through 
dealing with this problem, it consider not just Social 
Security, but broader economic issues. What I would like to add 
to what Mr. Furman said in response to your earlier question, 
the way to think about a personal account, I think, is as a 
discretionary account. Some people want to retire earlier. Some 
people want to retire later. Some people want to be prepared 
for their nineties. One of the distinctions that came from your 
question about early retirement is that a personal account 
within the Social Security system allows the worker or retiree 
more discretion over when he or she retires than a one-size-
fits-all solution.
    Chairman THOMAS. Finally, in partial response to my friend 
from Michigan and from others who couldn't possibly comprehend 
why, if the President has offered us an opportunity to look at 
Social Security we shouldn't look at other retirement aspects 
in an aging society, I want to refer Members to, if you haven't 
noticed it, page 20 of Dr. Schieber's testimony. In terms of 
distribution of retirement structure: on the bottom tenth, from 
personal financial wealth, 3.5 percent; from Social Security, 
94 percent; from pension wealth, three percent; and at the top 
tenth, 65 percent from personal, 10 percent from Social 
Security, and 25 percent from pension. If, in fact, you have 
that significant difference between the lowest tenth to the top 
tenth, to only address Social Security and say you have 
addressed retirement in an aging society is to miss the point 
that some people count on two-thirds of their money from 
personal financial--in fact, 90 percent of their money from 
personal and retirement pension funds and others 90-plus 
percent from Social Security. To only deal with Social Security 
is to ignore what else is going on in the society and simply to 
make the point, read the paper about United Airlines and the 
question of pensions, the changing world of defined benefit 
versus defined contribution, and your ability to put your own 
money away.
    Dr. Furman, I agree there are a lot of ways to do it, but 
frankly, we haven't been as creative or focused as we should, 
because to a certain extent, you have to incentivize people to 
put their money away. They have to see a reason to give up a 
current consumption for deferred gratification. My last 
question, how many of you believe it is fair, it is 
appropriate, and it is a responsible thing to do that, if we 
are going to offer volunteer programs, in whatever area we are 
beginning to make changes in the retirement package, that we 
create a system in which, even in a voluntary structure, people 
are automatically put in and they have the option of opting 
out? Does anyone think that is not something we should look at?
    Mr. FURMAN. Again, Mr. Chairman, unless you know what they 
are opting into, it is impossible to answer that question, so--
--
    Chairman THOMAS. Well, they wouldn't be opting into it. 
They would be opting out, because we would put them into it and 
they would have the option of coming out----
    Mr. FURMAN. Right. If your plan is to say your future 
Social Security benefit is going to be reduced if you are in 
this account, then opting people into that account, in fact, 
even having that option in the first place, I think would be a 
mistake. So, we are talking about----
    Chairman THOMAS. Even with their ability to opt out----
    Mr. FURMAN. A 401(k), their participation in 401(k) is more 
automatic, I think that is a very good idea, and Congressman 
Emanuel has----
    Chairman THOMAS. Mr. Apfel?
    Mr. APFEL. If it is opting out of parts of the defined 
benefit of Social Security, then I would have some deep 
concerns----
    Chairman THOMAS. No. I wouldn't think that that would be 
what we are talking about. We would not do that.
    Mr. APFEL. I would like to come back to the retirement age 
issue, I hope before the end of the hearing, which is one of 
the questions----
    Chairman THOMAS. There are a lot of people anxious to ask a 
lot of questions and I have used my Chairmanship. Last 
response, and then I will recognize the gentleman from New 
York.
    Mr. STEUERLE. I will just comment briefly. As you know, 
there is a broad liberal-conservative coalition examining this 
opt-in/opt-out issue, not with respect to, say, Social 
Security, but with respect to putting employees into 401(k) 
plans. You will also note in my testimony that I think one way 
to try to get through this divide over personal accounts is to 
think of them more as a private pension rather than a Social 
Security issue. Politically, the fight over personal accounts 
really is not over personal accounts. President Clinton had a 
personal account proposal, as does President Bush. The fight is 
actually over revenues for the remaining system. That doesn't 
mean we can't separately work on a system to try to beef up 
assets, real assets, for people. Yes, real assets contain 
risk--that is a legitimate concern--but we don't want a world 
where we don't have real assets.
    Chairman THOMAS. I want to thank you all because you have 
helped this Committee in shaping future full Committees and 
Subcommittees with the subject matter, especially that in which 
you all agree we ought to be looking at it. Thank you very 
much. The gentleman from New York?
    Mr. RANGEL. Thank you, Mr. Chairman. Let me thank all of 
you for being here. It is so difficult to frame the questions 
because we don't have a bill before us, but just for openers, 
how many of you believe that the Congress cannot fulfill its 
responsibilities to present and future beneficiaries of Social 
Security without having a private account as a part of that 
bill? Two of you believe that we cannot deal with the subject 
of fulfilling Social Security, that we have to have private 
accounts on the table, right?
    Mr. TANNER. I believe that if you try to come up with the 
gap between promised benefits and the amount of expected 
revenue in the system, some $12.8 trillion, and you try to do 
that simply through the tax side or through benefit side----
    Mr. RANGEL. I didn't say that----
    Mr. TANNER. Then you are going to either cripple the 
economy or severely reduce benefits for workers in ways that I 
think would be disastrous.
    Mr. RANGEL. We could do it, though. That would be our 
political decision, since one of you made it----
    Mr. TANNER. I question whether the economy could sustain 
the type of tax increases that would be required.
    Mr. RANGEL. Okay. Well, let me say this. A lot of you are 
using Roosevelt and Moynihan and Truman, but I haven't heard 
one live Republican yet that is telling us what they want to 
do. When the Chairman and other Members of Congress met with 
the President, he asked us not to do anything until he put his 
plan together. Since that time, he has gone to 60 cities in 60 
days, not to sell private accounts, which I thought he was 
going to do, but to educate the American people how serious the 
problem is, and now he says the Congress should come up with 
the answer. So, I guess he is out of it.
    So, I don't know, with all of the great ideas that you 
gentlemen have, as to what this has got to do with where the 
President wants us to end up--except he made it clear to me 
that with anything that he is going to sign, private accounts 
has to be made a part of it. We hear a lot from Chairman Pozen 
when the President speaks, as opposed to most of the other 
White House people. I think that they always describe you as 
the Democrat. Now, I have been in Congress a long time and I 
have had a lot of distinguished people testify before the 
Committee, but I don't ever recall since I have been here where 
they identify a professional by his party label, assuming you 
are a Democrat.
    Mr. POZEN. I am a Democrat. I am proud to say that there 
are certain people on the Committee that I have supported, 
Congressman Neal, Congressman Emanuel----
    Mr. RANGEL. Is that intellectually----
    Mr. POZEN. It is a political issue as to why the President 
chooses to do that, but I do think that the concept of 
progressive indexing is supported by page 20 that the Chairman 
pointed to in Syl Schieber's testimony, because what it shows 
is that for the bottom one-third----
    Mr. RANGEL. I am not getting to the substance. I am just 
saying, since you are so proud of being a Democrat, that really 
doesn't help in terms of intellectually being right or wrong on 
the issue, does it?
    Mr. POZEN. I agree, Mr. Rangel. I am not the one who touts 
my being a Democrat. I am a registered Democrat and----
    Mr. RANGEL. That doesn't really improve or diminish you----
    Mr. POZEN. No, it doesn't improve or diminish the quality 
of my ideas. I agree with that.
    Mr. RANGEL. The White House goes out of its way to identify 
you more by your party label than by what you are saying. 
Having said that, I think all----
    Mr. POZEN. I would hope that the White House agrees with 
the concepts in progressive indexing.
    Mr. RANGEL. Take my word for it, your name would not have 
been projected as much as it is if you were not a Democrat, but 
I am proud of the fact that you know how to deal with them 
because we may have to come to you for communication, because 
we don't know where they are coming from, or what they want to 
do. I totally believe that all of you should believe that an 
issue as sensitive as this, where most of the people on Social 
Security, no matter what any of you say, believe that their 
benefits are guaranteed, and their kids believe it, and their 
grandkids who are interested believe that they are entitled to 
this benefit. If we are going to have any type of revolutionary 
change, if we are going to repair the system, there has to be 
some pain involved in it, some political pain. How you can do 
this in a partisan way, I have no idea. How the President can 
say it is up to the Congress to repair it, I have no idea.
    Having said this, I think the reason people believe that 
these benefits are guaranteed is that we are borrowing $2 
trillion to give the tax cuts to the wealthiest people in this 
country. How do we, in a partisan way, share with them that 
this system that didn't take into consideration wealth or 
poverty, but substitute it with dignity, to say that at the end 
of the day, whether you are disabled, whether you are a 
survivor, whether you are retiring, there will be a cushion for 
you and you can depend on it. Now we have a situation, Mr. 
Pozen, where--I assume most of your training has been in 
investment banking. You understand that, and closing budgets. 
Clearly, in looking at your biography, there is no indication 
that you have dealt with social services, or the problems of 
the poor, or people that are surviving, or how many kids went 
to school, and I suppose other people have different views 
about it, but basically, your background has been in the 
investment market, is that true?
    Mr. POZEN. My background has been in the investment market, 
though I have worked with various nonprofits in the Boston area 
on a series of----
    Mr. RANGEL. When I retire, that is what I hope to run, a 
nonprofit. That is where the real money is.
    [Laughter.]
    Mr. RANGEL. Having said that, it would seem to me that if 
we are going to work together on this, we are going to have to 
find some way to communicate and try to see how we can get 
people to believe that they will be better off with the changes 
in the private sector. Do you believe that, if people believe 
that they have some benefits guaranteed, that you could 
guarantee that the market is going to work for them? That is, 
if the market fails, as we see things happening today with the 
airlines, that there would be a safety net for those people who 
found their benefits reduced by Social Security, but found an 
increase in the private accounts? Could you give any type of 
suggested way that you in this business can say, trust us, that 
you are going to be better off with this system?
    Mr. POZEN. I do believe in the safety net of Social 
Security and I think----
    Mr. RANGEL. No, no. I was talking about the private 
sector----
    Mr. POZEN. The private sector. I think that what I am 
trying to propose is that we keep the defined benefit, the 
guaranteed benefit for the low-wage worker, who----
    Mr. RANGEL. I understand that----
    Mr. POZEN. Is not able to deal with this risk very well.
    Mr. RANGEL. I am just saying that if the bottom falls out 
and the market doesn't work, is there some way that we 
politically can say not to worry because your government will 
never let you down? Can we do that?
    Mr. POZEN. I think that is what we are trying to do, by 
preserving the schedule of benefits for all low-wage workers.
    Mr. RANGEL. I am not talking about low-wage workers.
    Mr. POZEN. If we were to try to guarantee against a fall in 
the stock market fall, I think that would be a bad idea.
    Mr. RANGEL. Okay. So, I am not disagreeing with you, but at 
the end of the day, if someone was to tell me in a townhall 
meeting: Rangel, I know you are not thinking about coming home 
and telling me I am not going to get my check. Even though 
there are people that believe that the system is going to 
collapse, the day that we don't provide some benefit is the day 
we are out of business. They believe that they are entitled to 
these benefits. There is no way legally that we can tell them 
that, even if they are successful with the private accounts, 
there is going to be a guarantee in whole or in part, is there?
    Mr. POZEN. I think to the extent that we bring in private 
accounts, and they are invested in the stock market, we will 
not be able to guarantee the return.
    Mr. RANGEL. So, I would be stuck with the position that, we 
are asking you to trust us, because, we think by taking a 
gamble on the market, you will get a higher yield. The truth of 
the matter is, we can't give you a guarantee. Now, the 
President oftentimes talks about the moneys that people have 
contributed to the general revenue funds, that what they get or 
have given has been an IOU or bond. Really there is a trust 
fund that is not worth the paper it is written on. You, being a 
lawyer and recognizing what full faith and credit means, do you 
agree with the President that the trust fund IOUs that have 
full faith and credit of the U.S. Treasury and this country are 
not worth the paper that they are written on?
    Mr. POZEN. I don't know if that is what the President 
really meant to say----
    Mr. RANGEL. We will straighten that out. What do you think 
about the bonds?
    Mr. POZEN. I believe that the special Treasury bonds that 
are now held by the Social Security trust fund are good money. 
They will be repaid. As we all know, at some point, they are 
going to run out and I think that the crucial thing----
    Mr. RANGEL. I am not talking when they run out. Everything 
runs out----
    Mr. POZEN. They are good, but we know----
    Mr. RANGEL. Anyone running a bank that would tell you that 
your deposits aren't worth anything should be run out of the 
bank, wouldn't you think?
    Mr. POZEN. I don't know about----
    Mr. RANGEL. It would be misleading the people in believing 
that their money won't be there when they need it. Well, we 
will get to that. Let us talk about this poverty stuff. My mom 
threatened to disinherit me and my sister when we tried to get 
her to leave her apartment. She had her pension check from the 
Internal Ladies Garment Workers Union and she had her Social 
Security check. She was so proud of having this because she 
never considered it welfare. She considered herself 
independent, having worked all of her life. We hear a lot of 
talk on the other side about class warfare, but the dignity of 
people that have enjoyed Social Security--they knew they were 
Americans, that they put into the system, and they weren't 
treated as though--especially by the Congress as though you get 
what you get when the Committee on Appropriations decides what 
it is going to be. Do you believe that this is a very sensitive 
area, to separate those who made $20,000 and have them as low-
income and the other people over $20,000 as middle income, and 
then you have the higher income? Don't you think you are taking 
away something from the integrity of the system from a social 
point of view by means testing it?
    Mr. POZEN. Means testing would mean that people with 
incomes over a certain amount would get nothing, but 
progressive indexing is not means testing. What I am proposing 
is to create a progressive scale of benefits. We already have 
differentials for people's benefits based on the level of 
contribution, based on their wage level. What I am trying to 
say is that, given the point that was made by either Ken or 
Jason that longevity for higher-wage workers is going up faster 
than for low-wage earners, given the fact, as Mr. Schieber 
points out, that one-third, the lower one-third of wage 
earners, are more dependent on Social Security and have few 
IRAs or 401(k)s, what we are trying to do is provide a sliding 
scale of benefits, which we already do, but make it more of a 
sliding scale to help make sure that the people who need Social 
Security the most are getting the most.
    Mr. RANGEL. They used to call that means testing, but I 
assume that we have to find words to----
    Mr. POZEN. I don't think we really----
    Mr. RANGEL. No? Okay. Well----
    Mr. POZEN. We have a sliding scale----
    Mr. RANGEL. The benefits will be based on income.
    Mr. POZEN. Benefits are now based on wage levels. We would 
just be making it a little more of a sliding scale in light of 
these other factors.
    Mr. RANGEL. Now, the President often talks about those 
people in Congress that have 401(k)s and Thrift Savings Plans, 
and if it is good enough for them, it should be good enough for 
the American people. Do you believe the way he uses the 
statement is accurate? Is he offering the people the same thing 
that we enjoy as Members of Congress?
    Mr. POZEN. I understand that you, as a Member of Congress, 
have Social Security, and that the 401(k)s and IRAs would be 
supplemental to Social Security.
    Mr. RANGEL. That is----
    Mr. POZEN. So, I am not sure----
    Mr. RANGEL. That is true----
    Mr. POZEN. Congressman, I am not representing the President 
here----
    Mr. RANGEL. Well, he is representing you.
    [Laughter.]
    Mr. RANGEL. Now, if you want to put some distance from it, 
we can talk, but as long as he is projecting you, who truly 
understands what he wants to do--he hasn't given us anything. 
He said the problem is ours. He promised us a bill. We don't 
have it. So, we have the Thomas plan, we have the Shaw plan, we 
have got the McCrery plan, we have got your plan, and----
    Chairman THOMAS. You got any that way?
    Mr. RANGEL. Well, the thing is that, I don't really think 
that we should rush out and do more harm than good. As long as 
you have got to come up with something, we are prepared to say 
that we really think that this plan here is a detriment to us 
coming together in a bipartisan way. Having said that, you made 
it clear that the President is not talking about what the 
Congress has got. We have our plan in addition to Social 
Security. We can take money out of our plan. Out of your plan, 
you can't take money out, is that correct?
    Mr. POZEN. As I said, my plan for progressive indexing 
stands with or without private accounts. I have tried to make 
clear in my testimony how it could be combined with certain 
types of accounts. It can be combined with IRAs and 401(k)s. It 
can be combined with other things. In itself, it would reduce 
the long-term deficit by 70 percent and it would provide more 
of a sliding scale than we have now for benefits.
    Mr. RANGEL. My last question is, do any of you believe that 
we can successfully come up and pass a bill without a 
bipartisan support for it? Any of you? I don't have any further 
questions.
    Chairman THOMAS. Does the gentleman from Florida wish to 
inquire?
    Mr. SHAW. Yes, I do, Mr. Chairman. Mr. Apfel, you made a 
statement which troubles me. You mentioned that you think that 
private accounts, personal accounts, individual accounts, 
should be off the table. Now, as you recall the days when you 
were with the Clinton Administration, and I was Chairman of the 
Subcommittee on Social Security, never once did anybody in the 
U.S. Congress, that I am aware of, say to President Clinton 
that he had to take certain things off the table or put it on 
the table as for purposes of trying to negotiate. I don't think 
that is the right way to negotiate. I also recall that 
President Clinton did support some form of individual accounts. 
He saw the need for that. In fact, Mr. Archer met with him 
individually in his office, as I had met with him, and 
discussed moving the plan forward.
    So, I think that we need to clear the air here, and I think 
for anybody who is serious about negotiation, whether they are 
head of the Democrat party, the Republican party, whoever they 
are, who really care about saving Social Security should come 
to the table. I think also that it is important, and I think 
that the Chairman said something just offhand at the end of Mr. 
Levin's remark a while ago, that he would be glad to listen and 
have hearings for any of the Democrats that had a plan that 
would save Social Security. Unfortunately, the silence is 
deafening. There is no plan. The only plan that is out there 
that I can see that the Democrats have is they want the 
President to negotiate with himself and then lose, and that is 
a tragedy.
    Dr. Furman, you mentioned something that troubles me 
greatly. You said that people have the option of investing 
right now into individual accounts. I am sorry. People who are 
going paycheck to paycheck do not have that option. Their 
option, the only option they have is to pay their rent and 
light bill and their grocery bill, and those people have no 
chance of ever accumulating any personal wealth unless we go 
forward with a plan of Social Security that takes care of these 
people. So, saying that these folks, these low-income people 
can take care of themselves is an absolute fallacy and I think 
it is a tragedy when we see that Members of Congress here would 
pass up the opportunity for low-income people to create some 
wealth during their lifetime. It is indeed a tragedy.
    Mr. APFEL. Mr. Shaw, you----
    Mr. SHAW. Now I want to address the question of guaranteed 
plans. There are two guaranteed plans that have been put 
forward by Members of this Committee. I put one forward and Mr. 
Ryan put one forward. In either plan, they had individual 
accounts, yes, but they also had a guarantee by leaving the 
existing structure in place that existing obligations would be 
adhered to not only for today's retirees, but for future 
retirees. This has to be the objective. It is very important 
that when you try to negotiate and push something together that 
you know what you are going after. You know what you are 
working toward instead of just absolutely sitting back and 
criticizing each other. That is a tragedy. One of the Members 
of Congress said not long ago that the party of the New Deal 
has become the party of the No Deal, and that is too bad. That 
really is too bad. I think that even Roosevelt himself 
recognized that future changes would have to be made.
    The point has been made by some of the Members of the 
panel, and I think a very good point, that maybe we should look 
forward to 20, 30, 40, 50 years instead of 75 years and beyond, 
and perhaps that is where we will have to go at the end of all 
of this, because none of the plans out there contemplate a cure 
for cancer. None of the plans out there. The lifespan of the 
American people is going to be expanded tremendously over the 
next decades, and it is a wonderful thing. Anything we do and 
anything we accomplish here today is going to have to be 
modified by future Congresses to make allowances for this great 
gift of life that is going to be extended by medical research. 
This is a wonderful time that we live in, but it is a troubling 
time. We need to be sure that our older Americans are taken 
care of. That should be the objective of every Member of this 
body and every Member of this Committee. Let us get rid of the 
politics. It is about the next generation. It is not about the 
next election.
    Mr. APFEL. Could I address the question of Mr. Shaw?
    Mr. SHAW. I yield back.
    Chairman THOMAS. The gentleman's time has expired, and this 
will occur with a number of witnesses. The Chair would 
encourage anyone who wishes to make a response in a written 
way, and it will be shared with the full Committee. I also 
believe that, for those of you who wish, return arrangements 
can certainly be arranged for you, both at the full Committee 
and the Subcommittee level. The Chair recognizes the 
gentlewoman from Connecticut, and would the gentlewoman yield 
just very briefly?
    Mrs. JOHNSON. Yes, sir.
    Chairman THOMAS. I thank the gentlewoman for yielding. I 
would respond to my colleague and others about the 75-year 
solvency question versus sustained solvency. We are all 
familiar with the usual 10-year window that we use, which means 
no one looks at the 11th year, and a lot of things can happen 
over an 11-year life that you don't see in the 10-year life. My 
only concern about not focusing on, to a degree, sustained 
solvency is that when you look at 75 years, this year is good, 
next year is good, 2008 gets kind of worrisome, but every time 
you move along the current time line, 2008 meaning baby boomers 
begin coming in, we are adding at the back end of the 75 years, 
a much less desirable year. What we did in 1983 was focus on 75 
years. We just didn't pay attention to what happens over the 
first 20, and when you add the last 20, the 75 years disappear.
    So, if you are going to really try to make it 75 years, you 
have to look through. You have to run through the tape. You 
have to look beyond the 75 years to make sure that the bottom 
doesn't fall out the next year. So, when you say sustained, it 
may be 80 or 85 or 90 and you are going to fall short. Everyone 
knows that, but if you don't take that approach to it, it isn't 
going to be 75 years, it will be 20, and I thank the 
gentlewoman for yielding.
    Mrs. JOHNSON. Thank you, Mr. Chairman. Mr. Apfel, I would 
urge you to provide us in writing some better understanding of 
the proposals that President Clinton put forward, because he 
put forward a number that involved reaching into the private 
market to expand the resources of Social Security, both in the 
individual account or indirectly investing government money. 
How he governed those mechanisms are vague in my mind, so that 
would be helpful to us. Also, Mr. Furman, I would like to ask 
you to provide in writing some enlargement of the last sentence 
of the conclusion of your testimony. You were eloquent in 
shooting down most of the ideas that had been brought up. You 
also say at the end of your testimony--first of all, you say it 
is better to address this challenge sooner rather than later, 
and then you say, a balanced set of reforms that modestly 
increases Social Security revenues while modestly decreasing 
benefits could ensure that Social Security is sustainably 
solvent. I would certainly like for you to fill that out for 
me. There is not time for me to do it on my questioning time, 
which is now depleted anyway, but we need to know, what does a 
person like you, who raises some interesting points about the 
components of a solution that have been put on the table, 
thinks might be a modest program that could provide us with 
sustainable solvency.
    [The information follows:]

    Additional information from Jason Furman
    Congresswoman Nancy Johnson asked me to elaborate on my 
statement in my written testimony that ``A balanced set of 
reforms that modestly increases Social Security's revenues 
while modestly decreasing benefits could ensure that Social 
Security is sustainably solvent.''
    Social Security benefits are expected to exceed Social 
Security revenues by 1.92 percent of payroll over the next 75-
years. The only way to restore solvency to Social Security is 
to reduce benefits or raise revenues. Every dollar raised in 
revenues is one dollar less required in benefit reductions.
    A variety of plans restore solvency over 75 years using 
Social Security trustees assumptions, including a plan 
developed by economists Peter Diamond and Peter Orszag and 
another plan developed by former Social Security Commissioner 
Bob Ball. In addition, Congressman Wexler has submitted a plan 
that appears to restore 75-year solvency under Congressional 
Budget Office assumptions. All of these plans merit serious 
consideration.
    All of them include very progressive new sources of 
revenue, including raising the ceiling on payroll taxes and/or 
charging a lower tax rate above the cap. In addition, the Ball 
plan dedicates revenues from a reformed estate to Social 
Security. In addition, both the Diamond-Orszag and Ball plans 
gradually raise payroll tax rates.
    The Ball and Diamond-Orszag plans include modest benefit 
reductions, including correcting the Consumer Price Index used 
to calculate Cost-of-Living Adjustments (COLAs). In addition, 
the Diamond-Orszag plan increases benefits relative to the 
current schedule for workers with low incomes and reduces them 
for workers with middle--or higher incomes. Specifically, the 
Diamond-Orszag partially applies longevity indexing to benefits 
in addition to reducing the 15 percent PIA factor and making 
benefit adjustments to stabilize the ``legacy debt'' associated 
with Social Security. These benefit reductions are 
substantially less than the reductions proposed by investment-
executive Robert Pozen.
    Even more important than the individual provisions is the 
overall balance. Specifically any plan should be:

      Balanced between revenue increases and benefit 
reductions.
      Protect replacement rates to the greatest degree 
possible to ensure that Social Security remains a key component 
of the core tier of retirement security.
      Progressive, ensuring that the highest-income 
Americans contribute their fair share to restoring the solvency 
of Social Security.
      Economically sound so, for example, the plan 
robustly restores solvency in the face of uncertainty about the 
future and does not, for example, deliver larger benefit 
reductions when Social Security is more solvent.
                              ----------                              

    I want to add something to this debate, because we cannot 
reform Social Security without addressing some of the 
inequities of the program, and they were not intentional 
inequities. Life was different. Now, life involves most women 
working before they have their children, after they have their 
children, or maybe just after they have their children, and it 
involves women living many, many decades on their own after 
retirement. I have been working on an idea that would overcome, 
to me, one of the really absurd aspects of our current Social 
Security system. No matter how hard I work, the fact that I 
stayed home 20 years to take care of my children gives me 20 
zeroes in 35-year calculation. So, I think, frankly, that was 
much harder work than anything I have done since then, and I 
think we need to impute some level of income to women for at 
least 10 years of being home with their children because the 
evidence is just overwhelming in terms of the importance of 
parents in children's lives. So, I want to correct that 
injustice by changing the way we calculate earnings for women. 
I know this will have cost impacts, but do you have any 
thoughts on other inequities that we need to address? The 
President has proposed having no Social Security benefit that 
is below the poverty income. I absolutely agree with him on 
that, and the guarantee of that. How would you propose we 
recognize the changes in women's lives and the terrible 
disparity--some of you mentioned the problem for couples, but 
on this particular issue of imputing income to women, I would 
be interested in your thoughts. Mr. Apfel?
    Mr. APFEL. First, I would say I remember our discussions on 
this in Connecticut when I held a town meeting with you in 
Connecticut. This issue came up and you had the same passion on 
this issue that you have now.
    Mrs. JOHNSON. That is right.
    Mr. APFEL. I think that this is an issue that needs to be 
looked at carefully. I think that there are a number of things 
that Social Security does that are very, very important for 
women, but there are also some problems that need to be looked 
into. So, there is nothing wrong with trying to figure out a 
way to improve a system to make it better. These are profoundly 
important benefits for women. Women are the majority of all 
beneficiaries and live longer than men. We all know these 
things. Something in this area, I think, should be looked into. 
I would also point out that President Clinton's proposals were 
in addition to Social Security, not taking away from the Social 
Security defined benefits. The core question here is not 
whether more individual savings is needed. It is whether we 
want to have a system----
    Mrs. JOHNSON. My time has expired, but I just would remind 
you that money coming into Social Security now goes into the 
general fund, and you all know that. You also know what we do 
with general fund dollars; it accumulates debt. Money going 
into a private account would go into an account. It is 
tangible. There has got to be some difference between flowing 
dollars into a tangible account that can be cashed in and 
dollars going into the general fund. If China wants to recoup a 
bond, they sell it in the private market and we pay China. We 
can't do that with Social Security. There is a difference 
between the money that goes into an account. This is a longer 
discussion, but thank you for all your ideas and we will 
continue to pursue this.
    Chairman THOMAS. Does the gentleman from California, Mr. 
Stark, wish to inquire?
    Mr. STARK. Thank you, Mr. Chairman. I just want to set to 
rest this issue of Democrats coming up with a plan. When one 
party controls the White House and the Senate and the House and 
they can't get anything done, they tend to blame the minority, 
and that is kind of--that is a cop out. Republicans control the 
entire Federal government, and if they can't get something done 
with Social Security, then it rests on their shoulders. When it 
came time to pass a lousy prescription drug benefit, or the 
budget, they got their leadership back with the lobbyists from 
those foreign trips, and they kept us there and, by golly, they 
got it done. So, if you could get your leadership back with 
those lobbyists who are going to write your legislation and get 
to work, then the Republicans don't need us. They could go 
ahead and pass a plan. To suggest that the reason they are not 
passing a plan is because we don't have one is sophistry. It 
just doesn't wash. They are in charge, and if they can't run 
the place, then they ought to quit and we will get back and run 
it well as we used to.
    Mr. Furman, the President has proposed some benefit cuts 
for the middle class. In this stacked jury, and when I get up 
in front of a jury, I certainly hope the Chairman won't select 
my jury, but in this stacked jury, I have been hearing this 
discussion of income relating. Now, that is really a euphemism 
for cutting middle-class benefits, but you may call it in your 
answer, Mr. Furman, what you please. In these benefit cuts, he 
had a benefit cut for everyone who earned more than $20,000 a 
year--that is $10 an hour--and an additional privatization tax 
which further reduces the benefits. Can you give me an overview 
of the impact of all these cuts that are supposedly progressive 
cuts and whether they are due to the guaranteed benefit for the 
middle class, which the Republicans don't care much about?
    Mr. FURMAN. I will be happy to, and very briefly, before 
that, a lot of people who make less than $20,000 a year, 
probably about half the people that make that, would also see 
their benefits reduced by this plan. The particular types of 
people are widows, children whose parents have died, divorced 
spouses, people who are getting the benefit on the basis of 
someone else's work history who might have made $30,000 a year 
and is thus middle class by this definition. They themselves 
are very poor and are seeing their benefits cut, so I would not 
accept the assumption that people less than $20,000 a year are 
protected by this plan. They are not. In terms of middle-class 
families, the types of benefit reductions you would see 
relative to the benefits scheduled in current law are for a 
middle-class family retiring in 2055, 21 percent to 31 percent, 
and those benefit reductions would grow over time. On top of 
that, what you described as the privatization tax, or the 
benefit offset, would be another $10,000, $15,000 taken out of 
your benefit. It would leave you with a benefit of a few 
thousand dollars a year plus an account on top of that, but 
only a few thousand dollars of rock-solid----
    Mr. STARK. Do you mean $2,000 or $3,000?
    Mr. FURMAN. If you take a family making about $50,000, 
$60,000 a year retiring in 2055, they would get a benefit of 
$4,000 a year----
    Mr. STARK. Members of Congress get that in 2 months.
    Mr. FURMAN. That is all they would get. In addition, they 
would have an account, and that would be subject to market 
risk. In terms of the traditional defined benefit, it would be 
a few thousand dollars.
    Mr. STARK. What would that account pay them, if anything?
    Mr. FURMAN. The account is subject to market risk, and 
Professor Shiller's studies say that 32 to 71 percent of time, 
you would end up losing money by choosing to participate in 
those accounts.
    Mr. STARK. Suppose it made money. You put part of your 
payroll tax in over a period of time. Take a quick cut at that 
apple. What would that be, if you would annuitize that great 
account in the sky.
    Mr. FURMAN. You would get a certain amount. Table 3 in my 
written testimony goes through a variety of rate of return 
assumptions. If you take one from a survey that the Wall Street 
Journal did of ten prominent financial economists, if you got 
the rate of return that those ten people were projecting, not 
even counting the extra costs of risk, they found out you would 
come out about $6,000 behind if you were retiring in 2075 and 
you take into account both benefit reductions.
    Mr. STARK. It sounds like a heck of a deal. Could I yield 
the balance of my time to Mr. Levin?
    Mr. LEVIN. There isn't much time. Thank you.
    Chairman THOMAS. I tell the gentleman he has 6 seconds 
left.
    [Laughter.]
    Mr. LEVIN. To Mr. Hunter, you say----
    Chairman THOMAS. The gentleman's time has expired.
    [Laughter.]
    Chairman THOMAS. When we come back to you, Sandy, I will be 
generous on your five, okay? Does the gentleman from 
California, Mr. Herger, wish to inquire?
    Mr. HERGER. Yes. Thank you, Mr. Chairman, for putting 
together this panel, this outstanding panel, for so 
aggressively--in a positive role--going after this issue which 
affects our Nation, our children, and our grandchildren. I 
applaud you for your efforts. Dr. Lindsey, critics of the 
President's plan to create personal accounts assert that it 
would cost trillions of dollars. Would you explain why the U.S. 
economy would not be worse off, and would likely be better off, 
under the President's proposal to establish personal accounts?
    Mr. LINDSEY. The personal account plan leaves the Social 
Security system whole because the benefit adjustment that 
occurs saves Social Security money for all the money that is 
moved into the personal account. So, I don't think that it is 
an accurate statement to say that there is a cost here or that 
Social Security is made weaker. In fact, the Social Security 
system is made whole under the personal account proposal.
    Mr. HERGER. Thank you. Mr. Pozen, your plan has been 
accused of cutting benefits for middle-income Americans. Under 
your plan, would future retirees get less than today's 
retirees, even after adjusting for inflation?
    Mr. POZEN. No, they would get considerably more on a 
purchasing power basis. They would get 20 to 30 percent more on 
purchasing power. The ``cuts'' mean less than the scheduled 
benefits that we can't afford.
    Mr. HERGER. Mr. Pozen, again, which promises a higher rate 
of benefit growth to medium-wage workers, aggressive price 
indexing,or benefits that are payable under current program?
    Mr. POZEN. If we don't have major reform, the benefits 
payable under the current program would be about 26 percent 
less in 2041 and progressive indexing would give them a better 
deal than that.
    Mr. FURMAN. If I could say one thing about that, on the 
progressive price indexing, the trust fund would be exhausted 
in 2047. At that point, an additional 15 percent across-the-
board benefit cut on top of the sliding scale benefit 
reductions would be required. When you take both of those into 
account, it is no longer necessarily the case that you are 
better off under payable. If you are doing a genuine apples-to-
apples comparison, comparing the current system and what would 
happen when the trust fund was exhausted, you have to apply the 
same standard to the President's plan, and you look at what 
happens when the trust fund is exhausted in that plan.
    Mr. POZEN. Mr. Herger, I would disagree strongly with that.
    Mr. HERGER. Mr. Pozen, would you like to comment?
    Mr. POZEN. Yes. I would disagree strongly. I think that we 
do not--that analysis is only correct if we think we have to 
get to a zero percent present value----
    Mr. FURMAN. The payable benefits do. They are based on 
zero----
    Mr. HERGER. Mr. Chairman, I have asked Mr. Pozen to 
comment. Thank you.
    Mr. POZEN. My plan with progressive indexing slows down the 
growth of entitlements so that in 2079 as scored by the chief 
actuary, the amount of money coming into the system would be 
roughly the amount that goes out. I don't think it is necessary 
to reach zero present value of the deficit today. What we need 
to do is to get the financing of the system to the point where 
we can carry the mortgage, and we can carry the mortgage if we 
reduce the entitlements and benefit growth by roughly 70 
percent.
    Mr. HERGER. Dr. Steuerle, would you like to comment?
    Mr. STEUERLE. Yes, Mr. Herger, I would just like to comment 
that there are a variety of ways of doing what is called 
progressive price indexing. The bottom line is that we all know 
the system is imbalanced and we all know that, one or another, 
the middle class and the upper class are going to pay to bring 
it back in balance. We are not going to impose reform costs on 
the poor. We can cut benefits, we can increase taxes, and we 
can pick which generation is going to pay, but one way or the 
other, we are going to have to pay to get it back in balance. 
What we then need, given the variety of ways we can do things 
like progressive price indexing, is to sit down, roll up our 
sleeves, and look at the data on who we can protect, how we can 
protect them, and alternative ways of doing it. This is not, 
again, an advocacy stance. There are a variety of ways to deal 
with these issues, but we have to admit up front that one way 
or another, either through slower growth in benefits or higher 
taxes, somebody has got to pay to restore balance, and I am 
guessing it is going to be the middle class or the upper class.
    Mr. HERGER. Well, I want to thank you again. This idea of 
doing nothing and the fact that the Democrats have no plan, and 
with knowing how we have more and more people retiring with 
fewer people paying in, I want to thank those of you who are 
presenting a plan with the courage of coming forward, and I 
thank you very much. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Louisiana, the chairman of the Subcommittee on Social 
Security, wish to inquire?
    Mr. MCCRERY. Yes, Mr. Chairman. Thank you. Mr. Pozen, I 
believe, or at least you have been quoted as saying that under 
your progressive indexing plan, that workers making under some 
figure, I don't know if it is $20,000 or $23,000 or $25,000, 
would continue to have their initial benefit calculation 
indexed to the wage index.
    Mr. POZEN. That is correct, but progressive indexing 
doesn't begin until 2012.
    Mr. MCCRERY. Right.
    Mr. POZEN. People $25,000 a year at that point would be 
fully protected under progressive indexing as to their current 
schedule.
    Mr. MCCRERY. Could you explain what you mean by people 
making $25,000 or less?
    Mr. POZEN. Those would be people who, at retirement, would 
have average career earnings per year of $25,000 or less. When 
the actuaries compute your initial Social Security benefits, 
they calculate your average career earnings and then they 
adjust it upward by the amount that wages have gone up during 
your career.
    Mr. MCCRERY. Thank you. So, Dr. Furman's comments about 
your proposal affecting people who make less than--in fact, he 
used some high percentage, half, maybe, of all people making 
less than $20,000 a year would be cut, that is simply apples 
and oranges, isn't it?
    Mr. POZEN. I think it is a very different analysis that he 
is making and he is trying to bring in people who might be 
widows of somebody who was in a certain situation. These are 
complex issues that should be dealt with, but I think the basic 
thrust of the protection is still at $25,000.
    Mr. FURMAN. I would be happy to provide for the record a 
White House document showing the bottom 20 percent get their 
benefits reduced.
    Mr. MCCRERY. It doesn't matter. If you are talking about 
two different things, it doesn't matter. You can provide all 
the back-up you want. Mr. Pozen, I would hope as----
    Chairman THOMAS. If the Chairman would suspend briefly, 
does the gentleman refer to a document that responds to Mr. 
Pozen's plan?
    Mr. FURMAN. The White House did an analysis--it was 
released last week--entitled, ``Interpreting Benefit Estimates 
for the Pozen Provision.'' That is the title of the White House 
analysis----
    Chairman THOMAS. Does Mr. Pozen agree with the----
    Mr. FURMAN. It shows that low-income, the bottom 20 
percent, get less under----
    Chairman THOMAS. Dr. Furman, I want to know if Mr. Pozen--
--
    Mr. POZEN. I haven't had a chance----
    Chairman THOMAS. If the participants on the panel could 
just get along, we could move a lot----
    Mr. POZEN. I haven't had a chance to study that, Mr. 
Chairman.
    Chairman THOMAS. Well, obviously, the Chair will take 
whatever official documents are listed, but the description of 
those will be suspended, to analyze if, in fact, it is an 
attempt to respond to the plan that Mr. Pozen has, because he 
is here. Thank you, gentlemen, and it won't count against him 
on his time.
    Mr. MCCRERY. Thank you, Mr. Chairman. It should be clear 
that Mr. Pozen, when he talks about people, whose incomes are 
less than $25,000 will continue to get the wage index 
calculation, it is referring to retirees who have an average 
monthly wage of $25,000 or less.
    Mr. POZEN. An average annually.
    Mr. MCCRERY. I am sorry, annually. That is their average 
over their 35 years of work history.
    Mr. POZEN. Correct.
    Mr. MCCRERY. Mr. Pozen, as a Democrat, I would hope that 
you would get a little tired of your fellow Democrats 
mischaracterizing not only your plan, but the President's 
proposals, for example, the continued use of the word 
privatization. Mr. Apfel used it ad nauseam today. Democrats on 
the panel here use it ad nauseam. Nobody is talking about 
privatizing Social Security. Get over it. If you refuse to take 
part in this debate on honest terms, then you are going to have 
a hard time getting to a bipartisan solution. We are being 
patient, trying to work through a number of options, and we 
have you here today hoping to learn more about some of your 
ideas. Unless we discuss this in honest terms, we are going to 
get nowhere. We are not privatizing. We are not proposing to 
privatize. Neither is the President.
    Means testing, another example. It is clear that Mr. 
Pozen's plan is not means testing. It is not means testing. It 
is further income-relating the benefits. The system is 
already--these are two different things. You either know it or 
you don't. The level of ignorance that is being shown is 
getting pretty steep here. I am beginning to think that they 
are doing it on purpose.
    Mr. APFEL. Mr. McCrery?
    Mr. MCCRERY. No. In addition to that, the double-cut that 
Dr. Furman talks about, there is no double-cut. If you don't 
choose the voluntary account, there is no double-cut. It is 
voluntary. We are not forcing anybody to take an account, and 
if they don't, there is no double-cut. Even if they do, there 
is no double-cut because they are getting the money up front in 
their account that they would have gotten later, in the off-
years. So, a lot of this disingenuous and sometimes outright 
misleading discussion that is being done by Democrats is 
counterproductive. It is not helping. We want to sit down with 
you and talk honestly about how to solve this problem, but you 
are making it very, very difficult, and I would hope that you 
would begin to sit down and talk meaningfully and honestly and 
substantively about what you want to do.
    President Clinton up here on an ABC program--it is in 
today's Associated Press (AP) release--said, ``I think the 
Democrats should say what they are for, on Social Security, in 
the next couple of weeks.'' I do too, President Clinton, and I 
hope, finally, we can get somebody to make clear what benefit 
cuts and what tax increases, which is what Dr. Furman and Mr. 
Apfel have said very--that is their solution, tax increases and 
benefit cuts. Fine. Show us what benefit cuts and tax increases 
you want us to implement. Then we can begin the discussion. 
Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Michigan, the Ranking Member on the Subcommittee on Social 
Security, wish to inquire?
    Mr. LEVIN. I sure do.
    [Laughter.]
    Chairman THOMAS. The gentleman has 5 minutes and 6 seconds.
    [Laughter.]
    Mr. LEVIN. Look, the person who has made this difficult is 
the President of the United States of America. He set the 
agenda. He determined the first order of business. He comes 
forth in his State of the Union and says, my answer to the 
Social Security shortfall, which he grossly exaggerated by 
calling it ``bankrupt,'' is private accounts. If you don't like 
the term, I am sorry. It is privatization, and the Cato 
Institute used to use that term. It is privatization. The 
problem you have is not our silence, it is our voices. We have 
addressed the first item on the agenda, set by the President of 
the United States, and so have the people of the United States 
of America. They don't like changing Social Security into 
private accounts. They don't want the replacement of the 
guaranteed benefits with private accounts, and you don't want 
to listen to this; we are going to continue to make clear what 
the ramifications are. Now I am going to ask Dr. Furman--Mr. 
Pozen, I want to go back. There is an effort to mask here--I am 
not saying you are doing it intentionally. I am not going to 
call you a Democrat or a Republican. I think you have worked 
for Governor Romney, who is a Republican. I don't care what you 
are. I want to talk about what the implications of what you 
have proposed.
    So, I want to go back and have Dr. Furman talk about what 
happens when you combine major benefit cuts that fall on the 
middle class, and Dr. Furman, you can--at some point, somebody 
is going to have to do something or other. Let us talk about 
what has been proposed here. Dr. Furman, talk in terms of the 
replacement rate. By the way, you are so right, Mr. Apfel; the 
former President of the United States, Mr. Clinton, never 
talked about diverting Social Security into private accounts. 
So, Dr. Furman, set the record straight. What is the result of 
combing what Mr. Pozen has proposed, what the President of the 
United States said makes sense, with private accounts. Just say 
it straight.
    Mr. FURMAN. Your traditional rock-solid guaranteed Social 
Security benefit would replace between about zero and 10 
percent of your pre-retirement income. Everything else would be 
privatized, private, whatever you want to call it. Zero to 10 
percent would be your Social Security benefit of your pre-
retirement income, a couple thousand dollars a year.
    Mr. LEVIN. So, essentially what would happen over time is 
that the guaranteed benefit portion of a person who opted for 
private accounts would shrink, shrink, shrink, is that true?
    Mr. FURMAN. That is correct. You look at the equivalent of 
somebody making $59,000 a year, retiring in 2075, will get a 
Social Security benefit of $1,000. It will barely replace any 
of their pre-retirement income. Everything else will be 
private.
    Mr. LEVIN. If that is the purpose here, to replace Social 
Security with private accounts, and you can argue about what 
the rate of return would be, and Dr. Shiller has put forth what 
the rate of return and why it would be a bad deal. The reason 
people are not buying what the President has proposed is a 
combination of what Dr. Furman has said straight out. When you 
combine the privatization with the sliding-scale cuts, plus 
what has happened to the stock market, what is happening in 
retirement benefits, what is happening is that defined benefits 
are being replaced by defined contribution plans and Social 
Security remains the foundation more and more of security. Mr. 
Pozen, when the President says someone making over $20,000, 
that is in today's terms, $25,000, years from now, everybody 
making over that is well off, the working people are saying 
clearly to the President of the United States and to all of 
you, that is a total turn-off.
    We will sit down on a bipartisan basis when it is 
understood that we and the American people have responded to 
the first item on the agenda posed by the President of the 
United States, and that is privatization, personal accounts, 
whatever you want to call it. We showed that in 1983, when two-
thirds of the votes in this House for shoring up Social 
Security came from Democrats, and Dr. Hunter, when you talk 
about raiding the Treasury, talk to them on the Republican 
side. Talk to them and don't talk to us who supported proposals 
in 1993 that put this country on a path to no longer raid 
Social Security. Talk to them.
    Mr. POZEN. I would just like to clarify for the record that 
the chief actuary in the proposal that I made does not have 
these very small defined benefits left. In 2075, for the median 
worker----
    Mr. LEVIN. This is on somebody's time. This is when you 
combine the private accounts.
    Mr. POZEN. It all depends on what type of private account 
you combine with progressive indexing.
    Mr. LEVIN. Okay.
    Mr. POZEN. I propose the 2-percent account----
    Mr. LEVIN. No, we are talking about the President's 
account, Mr. Pozen, the President's account.
    Chairman THOMAS. The gentleman's time----
    Mr. POZEN. I want to distinguish that very carefully from 
what I have proposed.
    Chairman THOMAS. The gentleman's time has expired, and I 
would indicate to you, Mr. Pozen, that on any response that any 
witness did not feel they had adequate time to respond--as you 
may notice, you may have something to offer, but it is declined 
by the individuals. It shouldn't be declined by the Committee. 
So, we look forward to any written responses you may have on 
any question that was asked of any witness but you didn't have 
a chance to respond to. The gentleman from Michigan--the other 
gentleman from Michigan.
    Mr. CAMP. Thank you, Mr. Chairman. We have had some 
references to artificial parameters before, my friends on the 
other side, before the debate. President Clinton said, and I 
quote, ``I think the Democrats should say what they are for on 
Social Security in the next couple of weeks. They have got time 
to put together a program.'' He goes on to say, ``I think the 
Democrats should have a plan and they should talk to the 
President and Congressional Republicans about it.'' We are 
talking about trying to help the savings rate in this country. 
Mr. Pozen, your plan for progressive indexing obviously does 
help those at lower income levels. Are there other ways of 
helping lower income workers, maybe through programs like the 
Safe Credit Program, which has a match and a retirement plan, 
or a 401(k), that you might also discuss?
    Mr. POZEN. Yes. As I say in my testimony, I would strongly 
support enhancing the Low-Income Tax Credit for workers between 
roughly $25,000 a year and $50,000 a year because, 
unfortunately, given the deficit of the Social Security system, 
we can't preserve everybody's scheduled benefits and we could 
encourage them to save more. That credit just started a few 
years ago. Some of it needs to be made refundable. It needs to 
be made more attractive, and I think that would be a very 
constructive way to approach a package here.
    Mr. CAMP. Dr. Lindsey, in response to one of the Chairman's 
questions, you referenced discretion in retirement, and trying 
to have more discretion in retirement. Do you see any problem 
with actuarially affecting retirement benefits to allow 
retirees a variety of ages to retire from? Right now, it is 62 
or 67. Is there any problem you see in a range of ages of 
retirement, allowing workers more choice and more discretion 
based on their decisions about when they would like to retire?
    Mr. LINDSEY. I think one thing the Chairman said, which is 
quite right, is that there are a large number of people in 
society who either have jobs that they can't continue or have 
their lives change late in life. What we have is a one-size-
fits-all system. One thing we should recognize, and 
Congresswoman Johnson said the same thing, is that life has 
changed. The one advantage that has not been mentioned enough 
about moving toward more discretion through personal accounts 
is that it gives people a chance to fine-tune their Social 
Security benefits in a way that best meets their needs, and I 
think the public now is more educated. The public knows what 
they need. We have a more diverse set of lifestyles. What we 
should do with personal accounts within the Social Security 
system is give people more power over their own lives and more 
discretion.
    Mr. CAMP. I am interested in your views on the economic 
impact of raising the Social Security cap. As a former Treasury 
official and accomplished economist, what would be the impact 
on jobs, for example, of an increase in the payroll cap from, 
say, $90,000 to $135,000, particularly as a lot of small 
businesses would be in that range? Have you seen a study of 
that kind?
    Mr. LINDSEY. I think the best study was done by Martin 
Feldstein, President of the National Bureau of Economic 
Research. What he pointed out was that the behavioral response, 
in the particular example he mentioned, which I think he 
actually did $120,000, was that the government would only take 
in about 30 percent of the net revenue that was anticipated. If 
you remove the cap entirely, the government would actually lose 
revenue under doing such a plan, and that is with a very modest 
behavioral elasticity. It is actually very similar to the 
elasticity model currently used by the Joint Committee on 
Taxation. So, I think that is a losing proposition. In 
addition, you mentioned jobs. You are right. That would be a 
tax directly on entrepreneurship. On all tax increase 
proposals, I would urge the Committee to think about the fact 
that American workers are now competing with workers all around 
the world, and when you raise taxes on American workers or 
American employers, you are making America less competitive 
with countries all around the world. So, the adverse effects of 
the way we adjust the system are very, very important to think 
about.
    Mr. CAMP. Thank you very much. Mr. Pozen, you have the low-
income earner level at $25,000 a year in your proposal and the 
high-income earner at $113,000. What impact would there be to 
moving that low-income level up to, say, $35,000 and moving 
those figures around? Is there a particular reason why you have 
those particular numbers?
    Mr. POZEN. Well, $25,000 a year was chosen because it 
represented 30 percent of all workers. If you see Syl 
Schieber's chart, that lower third are the ones who are 
primarily dependent on Social Security. When you go up the 
income scale, the workers are much less dependent on Social 
Security. You could move $25,000 up to $35,000 or $40,000, but 
you will lose a considerable portion of the solvency deficit 
reduction because the median wage earner in 2012 will probably 
be about $47,000. So, you could cover workers up to $35,000 a 
year in career earnings, roughly another ten percent, bringing 
it up from 30 to 40 percent of the workforce, but you would 
have solvency issues. So, it is a perfectly reasonable thing to 
do. We just have to come to grips with the fact that then we 
are going to need other benefit constraints or we are going to 
have to have more revenue in the system. There are no free 
lunches here.
    Mr. CAMP. All right, thank you, and I thank the entire 
panel for their excellent testimony today. Thank you, Mr. 
Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Maryland wish to inquire?
    Mr. CARDIN. Thank you, Mr. Chairman, and thank all of our 
witnesses for being here. I guess I just have a problem in that 
the suggestions that are being made here would bring a 
fundamental change to Social Security, where Social Security 
would be a smaller amount of an individual's retirement 
security for future generations, whether that individual be in 
the lower income or middle-income or higher-income. It is one 
thing if that is good policy. It is another thing if we are 
doing this because of the fiscal concerns that we have about 
the solvency of Social Security, and it seems to me that is the 
driving force. It is not to modernize the system for good 
policy, it is to deal with the fiscal challenge. So, let me 
just pose a caveat here or a concern here. In 2001, we passed a 
major tax change because we had a huge surplus that was 
projected, and we found out that our 5-year projections weren't 
very good. We missed that pretty badly, as to what happened 
during that 5-year period, or 10-year period.
    So, when we start talking about fundamental changes in 
Social Security based upon 75-year projections when we can't 
project very well for 2 years or 5 years, I am concerned as to 
whether you all have looked at other projections that have been 
made. The Congressional Budget Office (CBO) says it is going to 
be until 2052 that we have money, rather than 2041, which the 
actuaries are using. The actuaries nine years ago had projected 
the Social Security solvency problems to be 12 years earlier 
than it is today. My point is that these are moving numbers 
that move pretty quickly. If we are making fundamental changes 
based upon the solvency numbers, have you really thought out 
these fundamental changes if, in fact, the financial issues 
aren't as dire as we think they are going to be? Maybe just to 
point out, in response to some of my Republican friends about 
what we should be doing, and I know Democrats are united and 
pretty strongly voice that it starts with eliminating the 
carve-out from Social Security for private accounts because we 
don't want to dig the hole deeper. We don't want to take money 
out of Social Security and it is difficult to come up with 
solutions that add more revenue or deal with benefits when the 
problem is made more difficult because the President's private 
accounts carve-out from Social Security.
    One of the suggestions that has been made, I haven't heard 
too much discussion from the panelists, is around the Social 
Security trustees to act as fiduciaries--we had that discussion 
at an earlier time in our Committee--so that they actually take 
the Social Security money, invest it as any prudent trustee 
would for any type of a pension plan, and getting a better 
return; in other words, getting more revenue into Social 
Security and extending the solvency of Social Security without 
raising taxes. That would deal with a good part of the problem. 
Instead, we seem to be focusing on benefit cuts. It is a 
discussion that we need to have, but I must tell you, I get 
very concerned about benefit cuts that are related to income 
that are not predictable, and I heard you, Mr. Pozen, talk 
about this, but we don't know what the future is going to hold 
on these different indexes. These are projections and they may 
very well be means testing the benefits in Social Security if 
someone gets zero out of the Social Security system or a 
minuscule amount of money out of the Social Security system 
that Dr. Furman is talking about.
    So, before we start down this path of allowing Social 
Security indirectly to be means tested, meaning that it no 
longer is a universal Social Security program, we had better be 
pretty sure of the numbers we are working with. Recent history 
has taught us that we can't make these long-term projections, 
and I am somewhat disappointed by the tone of the panel in 
being so certain about their proposals and the needs for their 
proposals, when history has taught us that this has not been 
the case in projecting the problems of Social Security. My last 
point, Mr. Chairman, we did make major changes in the Social 
Security system to deal with the baby boomer generation. That 
was 1983. I was not part of Congress, but they made an effort 
to deal with 75-year solvency. It is time for us to look at it 
again. It is time for us to make adjustments, but I really 
question whether the fundamental changes that are being 
suggested by some of these panelists are the right way for us 
to proceed. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. The Chair thinks it 
will be useful, and I will pass it out to all Members and make 
it a part of the record so that they can see the series of 
votes dealing with the issue in 1983 on the floor of the House. 
There were two particular amendments. The chairman of the 
Subcommittee on Social Security, J.J. Pickle, had an amendment 
which extended the retirement age, and the gentleman from 
Florida, Mr. Pepper, offered an amendment that raised the 
payroll tax. The gentleman might be interested in the partisan 
break in terms of supporting fundamental change versus raising 
the payroll tax, and we will make that a part of the record.
    [The information follows:]

                            1983 Amendments

    January 20, 1983 (Commission Report Issue Date)

      Report of the National Commission on Social 
Security Reform was issued to President Reagan on January 20, 
1983.

    March 9, 1983 (House passed bill)

      The House passed H.R. 1900 (Social Security Act 
amendments 1983) by a vote of 282 [97R, 185D] to 148 [69R, 
79D].
      Pickle amendment (raise the normal retirement age 
to 67 for those turning age 62 in 2022): approved 228 [152R, 
76D] to 202 [14R, 188D].
      Pepper amendment (raise payroll taxes from 6.2% 
to 6.73% beginning in 2010): failed by a vote 132 [IR, 131D] to 
296 [165R, 131D].

    March 23, 1983 (Senate passed bill)

      The Senate passed H.R. 1900 (Social Security Act 
amendments 1983) by a vote of 88 [47R, 41D] to 9 [6R, 3D].

    March 24., 1983 (final passage)

      Final passage of the conference report (H.R. 
1900--the Social Security amendments 1983) by both chambers.
      House vote 243 [80R, 163D] to 102 [48R, 54D].
      Senate vote 58 [32R, 26D] to 14 [8R, 6D].
                              ----------                              

    Chairman THOMAS. Does the gentleman from Minnesota wish to 
inquire?
    Mr. RAMSTAD. Thank you, Mr. Chairman. I want to thank all 
the experts on the panel here today. Let me ask you, Mr. Pozen, 
regarding your proposal for progressive indexation, a number of 
my constituents have come forward already at a town meeting, at 
several town meetings, middle-income earners, and they are 
concerned about projected benefits under your plan. Now, I read 
your testimony as saying that retirement savings would make up 
for reduced Social Security benefits for median-wage earners. 
Is that a correct statement?
    Mr. POZEN. Correct.
    Mr. RAMSTAD. Do you have any, aside from saying we should 
provide more incentives for 401(k)s and other retirement 
savings vehicles, do you have any empirical, or any of the 
other witnesses, any empirical data, projections that would 
support that quid pro quo that you maintain is there?
    Mr. POZEN. We know that the replacement ratio for median 
workers under progressive indexing in, say, 2045 would fall 
from about 36 percent to 30 percent. We know that something 
like 50 to 75 percent of all median workers now participate in 
some form of private retirement program, and we know that if we 
want to encourage people to participate more, we have empirical 
evidence to support two strategies.
    One is to the extent that we have any sort of matching 
program or refundable tax credit which plays that equivalent 
role, that has a big positive effect in terms of people's 
participation. The second strategy is the sort of proposal that 
has been discussed here about presumptive enrollment, in which 
people are presumptively enrolled in a 401(k) plan, or a 
program like that, and then they have to opt out, that 
overcomes inertia and really brings up the participation rates. 
So, those are two practical strategies that we could adopt to 
encourage people to make up the decline in the replacement 
rate. Most of them already are making up some, if not all of 
that, and we could do more to increase replacement by these 
private retirement plans.
    Mr. RAMSTAD. I also would like to ask you, Mr. Pozen, your 
plan, as I read it, would apply progressive indexing to workers 
with disabilities, as well as retired workers. Why did you 
choose not to hold workers with disabilities harmless pursuant 
to benefit in current law?
    Mr. POZEN. That is a good question and I think that I have 
always tried to say that the whole issue of disability needs to 
be dealt with separately. Under my plan, I don't try to address 
all the disability aspects. I would be receptive to a hold 
workers with a disability harmless, but that would involve some 
issue in terms of solvency, which we would have to address 
either through other benefit constraints or increases in 
revenues. So, we can do that, it is just a question of 
enumerating the cost.
    Mr. RAMSTAD. Please, Mr. Apfel?
    Mr. APFEL. Mr. Ramstad, I think it is important to also 
look--this was mentioned briefly before, and I think we should 
provide something in the record--at ancillary beneficiaries, 
such as low-income widows. The worker may very well have been 
protected at the levels that Mr. Pozen has talked about, but 
when that person dies, that is going to have an effect on 
benefits. So, kids, widows, some of the ancillary 
beneficiaries, who are easy to forget about, need to be looked 
at very, very carefully. These are low-income families who 
would be affected by the proposal. So, it is not quite 
appropriate to say that low-income people are protected. It 
just needs--the details need to be worked out very, very 
carefully and I think we should try to provide some of that for 
the record.
    Mr. RAMSTAD. Please, Dr. Steuerle.
    Mr. STEUERLE. Mr. Ramstad, again, this is one of those 
examples where, I think if we sit down and work, we can really 
address the issues. As you may know, I suggested something not 
too different from Mr. Pozen, a wage indexed minimum. Now, 
there are different types of wage indexed plans. For the same 
cost as some forms of progressive price indexing, you can use a 
minimum benefit to protect people at a higher level and you can 
protect more disabled people, you can protect more widows and 
spouses. The disadvantage is for, say, someone making $70,000, 
you don't do as much wage indexing for their base; that is, for 
someone who is much higher income, you may not provide as much 
benefit increase over time. In Mr. Pozen's proposal, everybody 
gets some benefit increase over time, no matter how high their 
income level, until you hit the very top. I know that this is a 
technical issue, but there are ways to address these issues, I 
think, that can protect more people at the bottom and that, 
independently of issues like personal accounts, would please 
people across the table.
    Mr. RAMSTAD. Well, I want to thank you again. Thank you for 
those responses. I must say in conclusion, Mr. Chairman, for 
the first time after listening to this panel and the dialog 
here, I am more convinced than ever that we can arrive at a 
bipartisan, pragmatic, and common sense solution to the Social 
Security dilemma which may not be a crisis today in terms of an 
imminent danger, but it sure as heck is a looming crisis and a 
problem we need to deal with. So, thank you very much, all of 
you gentlemen. I yield back.
    Chairman THOMAS. I thank the gentleman for his comments, 
and I, too, agree that we could reach that description that you 
just provided. My only question is, do we have enough votes to 
pass it? Does the gentleman from Washington wish to inquire?
    Mr. MCDERMOTT. Thank you, Mr. Chairman. Today's hearing is 
important because I think we really need to deal with this 
issue. I find it interesting that all the people picked by your 
staff think that privatizing Social Security is a good idea. 
Assuming you and the President realize that privatizing Social 
Security is as dead as disco, as far as Democrats are 
concerned, the sooner we will get to the serious business of 
doing something about this whole proposal. It is not going to 
happen until you make that decision. The President the other 
day, though, finally, after he was driven out of the weeds by 
his trip on the road, found that he had to admit that the 
privatization scheme required slashing benefits for the middle 
class. Adding insult to injury, we now know the President's 
plan will only close about one-third of the funding gap.
    Now, here we are today, having this hearing, pretending 
that privatization is actually going to work. We are pretending 
people will be better off losing half of their benefits. Mr. 
Chairman, even you can't defy gravity. The President's proposal 
eviscerates the guaranteed benefits of Social Security. Now, 
let us go to the chart. What you see there, currently, Social 
Security provides over one-third of pre-retirement income to 
retirees. The President would slash----
    Chairman THOMAS. If the gentleman would yield briefly, on 
the back chart, for those in the audience, you can see what the 
gentleman from Washington is talking about. We will try to get 
the television for us, but in the meantime, the gentleman has 
provided us with charts and Members can look at the charts that 
he has in front of them. Thank you. Go ahead.
    [The information follows:]

    [GRAPHIC] [TIFF OMITTED] T4732A.014
    
    [GRAPHIC] [TIFF OMITTED] T4732A.015
    

    Mr. MCDERMOTT. Social Security provides--thank you, Mr. 
Chairman. That is good clarification. It provides over one-
third of pre-retirement income for retirees. The President 
would slash these benefits to almost nothing for a middle-class 
person that today earns $58,000. That is what Dr. Furman just 
talked about. Now, since when do we expect less for our 
children than we do for ourselves? I know some of you are 
saying, well, we are going to make it up with the stock market. 
Mr. Furman, is it likely that private accounts will make up 
these benefit cuts?
    Mr. FURMAN. I don't know what is going to happen to the 
stock market. Mr. Pozen is more likely to. In my written 
statement, I presented six alternative scenarios, one that is 
used by CBO, one that is used by the actuaries, one that 
appeared in the Wall Street Journal, Shiller. In every one of 
the six, U.S. stock market returns are not enough to make up 
for those benefit reductions.
    Mr. MCDERMOTT. Thank you. So, those numbers sound similar 
to what numbers I have come up with, and your point, if you get 
that, you will see now with your stock account, that is how 
much--that red is how much you are going to make up. If you are 
at $58,000 today, that is what is going to happen to your 
Social Security. Even considering the rosiest, and this is the 
rosiest one out of the private accounts, the returns will still 
not make up the benefit. Now, the President's privatization 
means everyone's retirement will be tied to Wall Street--
everyone's. Now, Mr. Furman, or Dr. Furman, you are familiar 
with Robert Shiller, the Yale economist, aren't you? Is he a 
good, reputable man?
    Mr. FURMAN. I think he is considered one of the top 
financial economists.
    Mr. MCDERMOTT. He wrote a book called Irrational Exuberance 
and in it he examined the cycles of the stock market. These 
were the two long-term downturns in the last century. The first 
period begins in 1929 and the second period begins in 1967. 
Shiller pointed out that once you consider the impact of 
inflation and dividend payments, that people in the market 
before these slumps had to wait nearly 20 years to make their 
money back.
    I will put up a slide here. This is the 1967 one. This 
slide shows the last market slump. It began in 1967. A dollar 
invested in stocks in 1966 would have been worth less than a 
dollar when you made computations on inflation and you made 
dividend computations. You would have to go all the way to 1985 
to come back to the same value you put in. Now, this is 
important because you don't get to choose when you are going to 
retire. Just look at Bill here for a second. He looks nervous, 
right? He can't choose when he is going to hit retirement age. 
So, during 40 of the last 76 years, the market has been down. 
Mr. Furman, people in defined contribution plans are already at 
risk in the market. If we privatize Social Security, aren't we 
putting people in double jeopardy with having their defined 
contributions at their work or whatever or their 401(k)s or 
whatever, and then we add Social Security, it is really putting 
people at double jeopardy.
    Mr. FURMAN. I would call it 100 percent jeopardy. The 
entire benefit would be in the market.
    Mr. MCDERMOTT. Lastly, let me say something about----
    Mr. MCCRERY. [Presiding.] The gentleman's time has expired.
    Mr. MCDERMOTT. If anybody thinks that is a fair way to go, 
we are willing to vote on it. Just bring it up and put it on 
the table.
    Mr. MCCRERY. I thank the gentleman. Mr. Nussle?
    Mr. NUSSLE. Thank you, Mr. Chairman, and I want to thank 
all of our witnesses. It has been a very interesting--let me 
restate that. Your portion of this has been very interesting 
and I appreciate your testimony. I have held a lot of town 
meetings in Iowa and have a lot of chance to talk to a number 
of constituents and their concerns are much broader than Social 
Security. They are concerned about health care. They are 
concerned about their pensions. Certainly with the news that we 
have seen lately, they are concerned about their savings, 
prescription drugs, the value of their house, taxes, on and on. 
That, to me, is retirement security, and I think part of the 
reason why this debate, while certainly important, is far too 
focused and narrow because retirement security is much broader 
than that.
    It is also troubling, because I do think that there is 
widespread understanding that we do have a challenge, a problem 
that we do need to deal with, and thus far, at least, we hear 
that there is opposition to personal accounts, there is 
opposition to progressive indexing. Basically, not too many 
changes are being suggested. The one that kind of gets hinted 
at, that I hear particularly from those who don't have a 
proposal that they are interested in questioning, is increasing 
taxes or changing the earnings base. In fact, I have had some 
Iowa constituents that have asked me that. There is kind of 
this popular, almost Internet, e-mail, however you want to put 
it, that basically goes like this. All you have to do is 
increase the earnings that are subject to the tax and this will 
take care of itself. Just increase that and it will take care 
of itself, from $90,000. I guess my question would be, is that 
true, and let me start with Mr. Lindsey on that point.
    Mr. LINDSEY. No. Even under the most narrow set of 
assumptions, you might delay the point of daily insolvency, if 
that is what you want to use as the parameter, by four to 6 
years. More importantly, as just about every economic study has 
shown, when you raise those taxes, you create an incentive 
effect across the government, not just Social Security tax 
revenue, but also income tax revenue. To use, again, Martin 
Feldstein's example, he believes that we would actually see a 
reduction in total government revenue as a result of 
eliminating the wage cap completely. At the very least, 
whatever the number is, you will not get the projected 
increase. In addition, what you are doing is you are taxing 
American workers and American businesses and American 
entrepreneurs and you are not taxing Chinese workers or Indian 
workers or European workers or anyone else you would want to 
compete against. So, if we live in a globalized economy, I 
don't see the benefit to the American economy or American 
retirees of making us carry an ever-increasing burden of these 
costs while others do not.
    Mr. FURMAN. Mr. Nussle, if I could----
    Mr. NUSSLE. I actually--I am sorry. I am asking----
    Mr. FURMAN. I have actual numbers for the question you 
asked from the Social Security actuaries.
    Mr. NUSSLE. Okay. What are your actual numbers?
    Mr. FURMAN. It is worth the Committee, if you are 
considering this proposal, being guided by that. A memo dated 
February 7th says that if you make all earnings subject to the 
payroll tax but retain the cap for benefit calculations, that 
would reduce the 75-year deficit by 2.2 percent of payroll. 
That is larger than the entire projected deficit. So, according 
to the Social Security actuaries' memo, eliminating the cap but 
retaining it for the purpose of calculating benefits would 
eliminate the 75-year deficit.
    Mr. NUSSLE. That wasn't the question, and that is not the 
popular e-mail chain letter that seems to be out there. So, I 
appreciate--again, this is, I think, what was being discussed 
earlier. You are comparing apples with oranges. The second 
thing I wanted to just ask Mr. Lindsey about in particular is 
this issue about increasing the payroll tax. I think you went 
into this, but this is important because this whole notion that 
you are talking about, particularly in the lower income, lower-
skilled, entry level jobs that are in direct competition right 
now with, as you said, China as an example, I would think that 
an increase in the payroll tax on the front end would be a 
gigantic drag on our ability to compete in that world market 
that you are talking about.
    Mr. LINDSEY. American workers are now competing on a global 
basis and the assumptions we had in the past, in the thirties 
or the forties or the fifties, when we were creating this 
system, did not take that fact into account. I think what we 
really have to begin to do is focus on American 
competitiveness. That is going to be the key to the solvency of 
the Social Security system. The words ``guaranteed benefits'' 
have come up. Yet in 1978, with very, very little notice, 
President Carter and the Congress cut benefits. The same thing 
had to happen in 1983. So, what benefits--what those two, I 
think, point out is that the solvency of the system depends on 
the economy, and the only way you can protect future retirees 
is to have a robust U.S. economy. When we did not have a robust 
economy, such as in 1978, we ended up cutting benefits quite a 
bit.
    Mr. NUSSLE. Thank you.
    Mr. MCCRERY. Mr. Johnson?
    Mr. JOHNSON. Thank you, Mr. Chairman. Mr. Tanner, I would 
like to get into a little more detail with you about the 
recognition bonds that are an important and unique part of H.R. 
530, our bill. Those bonds represent the amount of benefits 
that people have earned up through the time they opt into 
personal accounts. Everybody is saying it is your money, but as 
you know, it is not. The Supreme Court says it isn't. It is the 
government's money. We want to make it their money, and I 
wondered if you could talk about the recognition bond. It is a 
zero coupon bond and I wonder if you could describe that term, 
for those who might not be familiar with it.
    Mr. TANNER. Certainly. We are talking, essentially, about a 
bond that does not have any particular attributed interest rate 
to it. It has a face value, if you will, equal to the lifetime 
accrued benefit that an individual has earned, and it is 
payable on a certain date. In this case, it would be their 67th 
birthday. So, the bond would simply be issued on a particular 
day, and then it would be redeemable on their 67th birthday. 
The value of that bond would be based on the accrued lifetime 
benefits that the individual has earned. As you said, this 
would lock in the level of benefits that the individual has 
earned and give them actual ownership of it. I know that there 
have been several people today who have said that Social 
Security is a guaranteed, rock-bottom guaranteed, benefit. The 
fact is, it is not guaranteed either legally, as you have 
mentioned, under Fleming v. Nesser, nor economically, since 
Social Security cannot pay the future level of promised 
benefits. Recognition bonds are a way of locking in benefits 
for those individuals.
    Mr. JOHNSON. Well----
    Mr. FURMAN. With benefits under the President's plan, the 
accounts wouldn't be guaranteed, either. There is an offset 
rate set at 3 percent that reduces your benefit.
    Mr. JOHNSON. I am not talking about the President's 
proposal at this point, thank you very much.
    Mr. FURMAN. The accounts can be taxed.
    Mr. JOHNSON. That bond you talk about is fully tradable, 
meaning that a person can sell it in the open market, but they 
have to deposit the cash into a personal retirement account. 
So, Mr. Tanner, could you describe what people can do with 
their recognition bonds after they opt into personal accounts?
    Mr. TANNER. Certainly. Individuals who are risk averse 
could simply leave that money in their account and simply, at 
retirement, redeem that bond and then move that into either a 
program payment withdrawal system, or an annuity system, or 
even take part of it in a lump sum above the poverty level. 
They would simply leave that portion in their account. Other 
individuals might choose to sell it on the market, as long as 
they redeposited the funds from that sale back into their 
account, and then that money would be reallocated along the 
lines of their portfolio, which I believe under your 
legislation would be a default of a 65 stock/35 bond portfolio, 
and thereby they would actually earn a better rate of return 
than what Social Security benefits would be providing them. So, 
that would be a boost in their benefits at retirement.
    Mr. JOHNSON. A bonus, if you will, to those who are in 
their forties when they opt into that system.
    Mr. TANNER. A premium. That money, as well as these 
benefits, would be fully inheritable. As you know, under the 
current Social Security system, if you die before retirement or 
after retirement, you might not be able--you can't leave the 
money to your heirs. Under your proposal, the recognition bonds 
would be property, the same way as the money in the individual 
account, and an individual dying in their fifties or sixties 
would be able to take that money and pass that on to their 
wife, their children, their church, or their favorite charity, 
wherever they want to send that money.
    Mr. JOHNSON. What you are saying is, the Social Security 
money that has been input up to date during their working 
period, is their money.
    Mr. TANNER. I think we have been very misleading to people 
in letting them believe that somehow, the money they pay into 
Social Security belongs to them. The fact is, as the Supreme 
Court ruled, it is simply a tax, and then there is a government 
spending program no different than, say, farm price supports 
that later on the government decides to allocate to 
individuals. There is not a connection between what you pay in 
and what you get out. Under your bill, what you are saying is 
that the money that they pay into the Social Security system, 
both the money they paid in the past and the money they paid in 
the future, would belong to them, become their property. It is 
a unique feature of your legislation and I think it is one of 
the things that most recommends it.
    Mr. JOHNSON. Thank you. In your testimony, you say 
comparisons to Social Security's promised benefits are 
meaningless since current law can't be paid. Often, we see the 
press use the term ``benefit cuts.'' Compared to what today's 
retirees are receiving or compared to what is payable, benefits 
aren't being reduced at all. Would you clarify that issue?
    Mr. TANNER. Yes. I think this is one of the most unfair 
challenges that opponents of personal accounts make, or 
opponents of the progressive price indexing. They have been 
particularly unfair, I think, to Mr. Pozen in saying that, 
somehow, that any reduction in the growth of future benefits is 
somehow a cut. The fact is, the projected level of benefits in 
the future cannot be paid. We simply cannot meet those 
promises. All we are talking about doing is bringing those 
promises in line with reality. You might as well say that 
somehow the Social Security reform program doesn't send every 
senior to Disneyland. It would have about as much reality as 
saying that we are cutting Social Security benefits by simply 
bringing them in line with what actually can be paid.
    Mr. JOHNSON. I thank the panel. Thank you, Mr. Chairman.
    Mr. MCCRERY. Mr. Lewis?
    Mr. LEWIS OF GEORGIA. Thank you very much, Mr. Chairman. 
Let me thank the Members of the panel for being here today. 
This debate about Social Security is really about whether we 
will honor the commitments we have made as a nation and as a 
people. Are we going to honor the commitment we have made to 
our seniors, disabled, and the children who have lost a parent? 
Social Security is a sacred trust, a covenant, a guaranteed 
benefit. A few days ago, the President said it again, that 
there is no trust fund, no trust fund. As I have said, there 
was a trust fund when the President decided to spend it on tax 
cuts. There was a trust fund when he decided to spend it on the 
war in Iraq, but there is no trust fund when it comes to use 
the trust fund for its intended purpose, to pay Social Security 
benefits. It is amazing, unreal, unbelievable to me. I happen 
to believe, Mr. Chairman, we have a moral obligation, a 
mission, and a mandate to pay those funds back. Every working 
American has paid toward that surplus and we expect it to be 
there to pay benefits. Mr. Apfel, is there a Social Security 
trust fund, and when you were Social Security Commissioner 
under President Clinton, what happened to the Social Security 
trust fund surplus?
    Mr. APFEL. There is a Social Security trust fund. It is, by 
law, available for one thing, and that is paying benefits for 
current and future beneficiaries. The moneys, as they are taken 
out of that trust fund to pay individuals, that money, 
therefore, is not going to be available to pay benefits for 
future beneficiaries. During the Clinton years, one of the very 
important things that took place was, we were starting to pay 
down debt with those trust funds, which puts us in a stronger 
position, I believe, to be able to grow as a nation. We were 
saving as a nation in terms of overall government savings. That 
is what took place during part of the Clinton Administration. 
It was one of the things that left me with some optimism that 
we would be able to resolve this issue, given that change in 
fiscal climate. So, during the years at the end of the Clinton 
Administration, those moneys were used to pay down debt, which 
put us in a stronger position in terms of overall national 
savings. The only purpose for those funds is to pay benefits 
for Social Security beneficiaries.
    Mr. LEWIS OF GEORGIA. They are dedicated, destined to pay 
benefits and nothing else and nothing less.
    Mr. APFEL. Yes.
    Mr. LEWIS OF GEORGIA. Thank you. Dr. Furman, the President 
has described his across-the-board cut as affecting the well-
off, the well-heeled, the rich. As I understand it, everyone 
with incomes over $25,000 would get a benefit cut. Do you, or 
do you think most Americans view these people as well off?
    Mr. FURMAN. It is up to most Americans to decide, but I 
think most people making $35,000 a year probably don't consider 
themselves rich. Percentage-wise, the benefit reductions in the 
plan for someone making $55,000 or $60,000 are almost the same 
as they are for people making $6 million a year.
    Mr. LEWIS OF GEORGIA. Dr. Furman, if I might continue with 
you, will young people in particular be burdened by the 
President's privatization plan because they face the greatest 
benefit reduction and also will bear the burden of all of this 
unbelievable, God-forsaken debt?
    Mr. FURMAN. That is correct. They would see the largest 
change in their Social Security benefits.
    Mr. LEWIS OF GEORGIA. Mr. Apfel, Dr. Furman, there is a 
story in the Los Angeles Times today, and I believe it ran in 
the AP yesterday, that the President's proposal will reduce 
benefits for widows, the disabled, survivors. Could you--have 
you seen this story? Have you read this story? Would you like 
to elaborate?
    Mr. APFEL. I haven't read the story, but we have talked 
about this today. If you do two things, you cut benefit 
commitments in Social Security by creating private accounts and 
you do the indexing proposal, the income-based cuts, it is 
going to have a secondary effect on lower income people, many 
lower income people, widows, the disabled, and so forth. So, a 
number of people would be affected by this who are in the lower 
income categories. I also point out again that this is shifting 
risk to individuals. It is saying that if the markets do fine, 
then maybe things are going to be fine, but if the markets 
don't do fine, then that puts individuals at risk in terms of 
their overall security. That will be true for every person, 
rich and poor, who is in the system.
    Mr. LEWIS OF GEORGIA. Thank you very much. My time has 
expired. Thank you.
    Chairman THOMAS. [Presiding.] I thank the gentleman, and 
obviously, we are all following various newspaper stories with 
great interest and I find it amazing that people prefer 
predictions to the future, as to reality, versus what has 
occurred in the past, which is certain, but that is what this 
is partly about. Does the gentleman from Missouri wish to 
inquire?
    Mr. HULSHOF. I do, Mr. Chairman. Thank you for the 
recognition, and let me just say at the outset, the view up 
here is----
    Chairman THOMAS. I tell the gentleman it was a real 
pleasure to call on him looking directly across the upper dais 
rather than looking down over the years, and so welcome to the 
upper level. Be careful. There is less oxygen up here.
    [Laughter.]
    Mr. HULSHOF. Thank you, Mr. Chairman. I respect the 
gentleman who just inquired, the gentleman from Georgia, who is 
a friend, and he spoke of a sacred trust and he used the word 
``covenant'' and he used the word ``promise.'' Many of us are 
going to have the opportunity--this is graduation season and 
many of us will speak to young graduates that are leaving the 
college life and getting ready to embark upon a work career, 
and we are going to speak of hope and optimism and promise. I 
wonder what my friend from Georgia or some of you on the panel 
would say. What is the promise that we can say to that 
generation that is just beginning the workforce?
    Mr. Pozen, I applaud all of you being here, but I am 
particularly encouraged, Mr. Pozen, because I have cut out 
articles. Many of you have been well published, and 
particularly Mr. Pozen. I have got an article that you wrote 
that was at least published in the Wall Street Journal on 
Tuesday, May 3, and let me just paraphrase or actually quote 
the second paragraph of this editorial. ``Judging any reform 
plan relative to scheduled benefits is misguided. The schedule 
represents the benefits we have promised, but do not have the 
money to deliver.'' I think as this rhetoric--the Chairman of 
the Subcommittee on Social Security very passionately talked 
about, if we really are serious about coming up with a solution 
to these long-term demographic challenges, I think we need to 
tuck away the rhetoric. Let me just--Mr. Apfel, it is great to 
have you back. I got to know you, of course, when you were the 
Commissioner and you would come to the Subcommittee on Social 
Security. Do you agree with that statement, that basically 
judging a reform plan relative to scheduled benefits, is that 
misguided?
    Mr. APFEL. I think that is one of two ways to look at 
benefits. One is scheduled benefits and one is what we have the 
financial resources to pay, given the laws that exist now. I 
think looking both ways makes sense. Looking one way or the 
other way alone does not make sense. I think looking--
particularly when you look 30 and 40 and 50 years out--we have 
more uncertainty when trust funds are going to be gone because, 
let us face it, the further out one gets, the more uncertain 
one is about these projections. So, it may very well be that in 
the year 2040 or 2050, that the trust funds will be gone and 
under the laws, benefits will be lower. I think you have to 
look at both models if you want to be able to make accurate 
projections.
    Mr. HULSHOF. I just got in the mail, as many, probably 
millions of Americans do, and that is my Social Security 
Administration statement. I should have brought it. I read it 
very carefully, because the very first page--and I would 
encourage not just my colleagues here, but all Americans that 
get that statement, instead of turning to the inside to see 
what that projected benefit is going to be, to spend some time 
and read the very beginning part of that because it is a very 
cogent, non-manipulative way to describe the challenges ahead. 
It states very clearly that under the current system, that in 
the year 2041, as the actuaries tell us, that only 73 percent 
of benefits, or thereabouts, are going to be able to be 
covered. I think part of what the President is trying to do is 
present the challenge to the American people, and then through 
their elected representatives, hopefully fashioning some sort 
of a solution.
    Mr. APFEL. Mr. Hulshof, much of that language was language 
that I inserted during my tenure. Under current projections and 
under current laws, that language has been included for some 
time because I think it is important to help the American 
people understand that we do face a long-term challenge.
    Mr. HULSHOF. I would just say again, as we embark upon 
this--to me, politics is the art of the possible, and I would 
look to my colleagues on the other side to fashioning a 
bipartisan solution. Part of that--and Mr. Pozen, let me just--
the red light is on, but my final comment would simply be, what 
part of voluntary do we not understand? If I am, as a 
graduating senior from a distinguished university like the 
University of Missouri in Columbia this weekend, and I am 
entering the workforce, and if I choose--if I have more 
confidence in the existence of flying saucers or unidentified 
flying objects than the fact that Social Security is going to 
be there for me in its present form, why can't I opt out 
voluntarily if that is the path that we choose? Again, I 
appreciate the Chairman yielding and look forward to continuing 
this discussion.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Massachusetts, Mr. Neal, wish to inquire?
    Mr. NEAL. I do. Thank you, Mr. Chairman. Before I get to 
the Social Security issue, Mr. Lindsey, since you are here, is 
it still your position that the war in Iraq is going to cost 
more than $300 billion?
    Mr. LINDSEY. I am not sure that was ever my position.
    Mr. NEAL. Well, the Administration said it was going to 
cost $60 to $80 billion at the time, and I was just curious, 
because you seemed to suggest, with great clarity at the time, 
that it would be over $300 billion, and it seems to me as 
though your credibility is unquestioned on this issue.
    Mr. LINDSEY. Thank you for the compliment, Mr. Neal.
    [Laughter.]
    Mr. NEAL. It is the rest of the Administration I am worried 
about.
    Mr. LINDSEY. What I think is important with regard to the 
issue is that we consider not just the costs, as with all 
economic things, what you get for your money, and I think that 
is an issue that is going to play out----
    Mr. NEAL. I want to thank you for that comment, based on 
the Administration's performance and forecast. That is very 
important. Also, the Chairman referenced the future of Social 
Security and how difficult it is to look at all these things. I 
know something about Social Security. My sisters and I know 
something about it. We would be happy to share that experience 
with the doubters, as to what it really means in the real 
world. When I hear people discuss it, particularly those in 
academic circles who treat it as though it is an esoteric 
issue, it really is important to millions of Americans. That 
leads me to the question I want to raise with Dr. Furman 
because I know that Mr. Apfel has had a chance to talk to it. 
Would you address the President's proposal as it relates to 
survivor benefits, Dr. Furman?
    Mr. FURMAN. Yes. Under current law, survivors' benefits are 
computed in the same way that retirees' benefits are. You 
calculate what you are entitled to based on what you earn, and 
then a child gets a fraction of that or a spouse would get that 
amount. The President would change that formula for retirees. 
The exact same formula would apply to survivors, as well, so 
that includes small children, widows, and these are a lot of 
situations where you look at the benefit cuts. They can be, on 
the order of over a lifetime, $50,000, $100,000. The account, 
even if you inherit it, is not going to come close to making up 
for that in a lot of circumstances.
    Mr. NEAL. How does the President's present calculation 
work?
    Mr. FURMAN. The present calculation is basically, you 
calculate the benefit as if you are calculating a retiree's 
benefit, and then if there is a spouse, they would get the full 
amount. If there are children under the age of 18, they would 
get a fraction of that amount.
    Mr. NEAL. Mr. Apfel, do you have any idea off the top of 
your head how many children across America receive survivors' 
benefits?
    Mr. APFEL. I will have to give you the exact number for the 
record. There are clearly millions, about three kids. I can get 
give you the exact number for the record.
    Mr. NEAL. So, one could argue with some accuracy that 
because moms and dads paid into that proposal and then died 
prematurely, and not because, incidentally, they wanted to die, 
but they died prematurely, that the children received, might we 
argue, insurance benefits?
    Mr. APFEL. They do receive insurance benefits, social 
insurance benefits, progressively determined, and that provides 
a remarkably important foundation of support. The life 
insurance component of Social Security is worth the equivalent 
of $400,000 per family. So, it is a critically important 
benefit, and I know about it. When my wife was a young girl, 
her dad died and she received Social Security benefits. So, 
this is a critically important benefit, and we have to be very 
careful here about what happens to those added benefits through 
these proposals.
    Mr. NEAL. The people who are familiar with Mr. Roosevelt's 
initiative when he offered it in 1935, I think that half the 
people 65 years or older in America lived below the poverty 
line, is that correct?
    Mr. APFEL. About half.
    Mr. NEAL. About half. Today, that number is inside of 10 
percent?
    Mr. APFEL. That number is now 10 percent. In 1959, it was 
about 35 percent. So, if Social Security benefits were somehow 
gone tomorrow, about half of all older Americans would be back 
to living in poverty, the day after tomorrow. No one is 
proposing such a thing, thank heavens, but----
    Mr. NEAL. How many women in America rely solely upon Social 
Security for their retirement benefit, do you know off the top 
of your head?
    Mr. APFEL. For older, uninsured women, the figure is about 
a third. Social Security is for virtually all of their income, 
virtually all of their income.
    Mr. NEAL. So, for those women perhaps in my mom's 
generation and others, for some women who didn't work at the 
time, they rely solely today on the benefit of the spouse?
    Mr. APFEL. Not a majority, but it is somewhere between a 
quarter and a third of all these families----
    Mr. NEAL. A most significant number, we would all agree?
    Mr. APFEL. Absolutely.
    Mr. NEAL. Yes, sir, go ahead.
    Mr. APFEL. Mr. Neal, I again point out, I think there are 
ways, regardless of what size program you want, that we can fix 
up survivors' and spouses' benefits to do better by low-income 
survivors who are not in many cases well treated. Added 
benefits are paid for at the margin, with additional taxes and 
most benefits going to those who marry the richest people.
    Mr. NEAL. I don't dispute in an academic setting that you 
are of good intent, pure heart, and good motive. What I am 
worried about is the Administration, as they try to settle 
benefits based upon the debt that has been run up in this 
country--I think that is what we have to be mindful of. I thank 
the Chairman for yielding me the time.
    Chairman THOMAS. I tell the gentleman we have the ability 
to change the law, and one of the first questions I asked the 
witnesses was, were there areas inside the Social Security 
system that could be addressed because of inequities that have 
been there a long time--way before the 1983 changes--that 
weren't addressed by the 1983 changes? Frankly, if you examine 
on the margin, creating a much fairer, more equitable Social 
Security system for those who most need it costs surprisingly 
little money, based upon the amounts of money that we are 
talking about looking for, to make changes.
    That is already on the Subcommittee agenda and I am going 
to make sure that they look at all the ideas that were 
presented here and in other places because I want to state it. 
On the margin, given the problems we have with solvency, making 
the system fairer and more equitable, better especially for 
those who rely on it, is going to be one of the things we do, 
if we do anything, and I want to thank the gentleman for his 
focus in that particular area. Does the gentleman from Kentucky 
wish to inquire?
    Mr. LEWIS OF KENTUCKY. Yes. Thank you, Mr. Chairman. Back 
in February, the government Accountability Office (GAO) 
prepared a statement for the Committee on the Budget, and in 
that statement, GAO said that absent reform of Social Security, 
the Nation will ultimately have to choose among escalating 
Federal deficits and debt, huge tax increases, and/or dramatic 
budget cuts. As GAO's long-term budget simulation shows, 
substantive reform of Social Security is critical to saving our 
fiscal future. Taking action soon would also serve to reduce 
the amount of change needed to ensure that Social Security is 
solvent, sustainable, and secure for current and future 
generations. The GAO also, before this Committee, gave us a 
startling number; future unfunded liabilities and debt is 
somewhere around $43 trillion, almost four times the size of 
the economy. Social Security is a big chunk of that.
    It seems to me like we need to start doing something about 
it now rather than later. As far as personal accounts, I don't 
care whether you call them private accounts, personal accounts, 
individual retirements, whatever you call them, it seems to me 
like the American people would rather have the money in their 
hands than in the hands of politicians who are in Congress. For 
the last 50 years, the last few decades, Congress has been 
spending the Social Security trust fund money. So, who is 
better able to handle their money, Congress or them? I 
personally have faith in the American people. I have faith in 
my 22-year-old daughter to be able to handle her personal 
affairs better than politicians here in Washington.
    By the way, I really take offense to anyone who challenges 
my concern and my interest in this issue when I have an 88-
year-old father that depends on Social Security. I have a 32-
year-old son and a 21-year-old daughter that is depending on a 
retirement sometime in their future. I am looking out for their 
best interest, and I think their best interest would be 
allowing them to make choices that--they can certainly do a 
better job than what has been done here, especially when we are 
facing $43 trillion of unfunded liabilities and debt of which 
Social Security is a big chunk. I just can't believe that 
anyone wants to stick their head in the sand and do nothing 
about this problem, absolutely nothing.
    You talk about the stock market? Well, listen, if we do 
nothing, the benefits for future retirees is going to be cut 30 
percent. That is not a good deal. So, looking at some of these 
opportunities to make it a better system and putting everything 
on the table and saying, oh, we are going to have to take this 
off, we are not going to--the Democrats have offered nothing. I 
really think they need to--this thing about liberal Democrats, 
what are they liberal about? They don't want change for 
anything. They want to use the same old tired ways of governing 
in this country that have failed and continue to fail, and they 
do not want to come up with any reform, any changes. They just 
want to stick to the old way of doing things that are broken. I 
am like Jim. I think some people around here need to get a 
life. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Arizona wish to inquire?
    Mr. HAYWORTH. Mr. Chairman, I thank you very much for the 
time. To the witnesses, thank you all for this discussion. I 
suppose we reaffirm today that politics and policy are 
inseparable, and that is scarcely a profundity on my part. 
Hearing some of the concerns, or those notions expressed as 
concern, that somehow it is the intent of someone to hurt 
survivors or to hurt the disabled or--well, that may not be the 
intent, but that will be the result. I hope we can put that to 
rest. In terms of bona fides, if we can get away from all sorts 
of stereotypes on either side of the aisle, and for purposes of 
full disclosure, my parents are in their early seventies. They 
depend on Social Security as the cornerstone of their 
retirement. So, all the demonization and all the villainy and 
the venom that is going to come here inevitably at campaign 
time really ought to be set aside, and perhaps for the purposes 
of this discussion, we can do so.
    Mr. Pozen, welcome. You discussed with my colleague, Mr. 
Ramstad, earlier the notion of holding harmless disabled 
workers. Now, I think it is important to reaffirm that 
protecting this segment of Social Security beneficiaries is 
vital. This is a population that depends on Social Security. We 
have a time-honored responsibility to those people who are 
disabled. What budget impact would there be if disabled workers 
are held harmless under what we might call Pozen indexing, or 
wage versus price indexing, or any form of indexing?
    Mr. POZEN. I don't have the exact numbers, but my rough 
estimate would be that instead of solving 70 percent of the 
solvency gap in Social Security, you would probably bring it 
down to 65 percent or 60 percent. It all depends on how many 
types of situations you protect. I think Gene makes an 
excellent point. We have to distinguish in all these cases 
between a widow who is in poverty and the widow of a very 
wealthy person. Similarly, if somebody worked for Goldman Sachs 
for 20 years and then was disabled, we shouldn't really be 
spending a lot of Social Security benefits on them. So, it 
would depend on the exact design of the protections. I think 
everyone is in agreement that we need, generally, to protect 
these various classes, but I think we need to start to 
distinguish between those people in these classes who are 
relatively affluent, and those people who are not.
    Mr. HAYWORTH. So, discernment as part of public policy and 
a recognition of where----
    Mr. POZEN. Absolutely.
    Mr. HAYWORTH. Yes, sir.
    Mr. SCHIEBER. In my statement, I said the place you should 
start is on deciding what your principles are. If you want to 
protect people who have young children, then that is what your 
goal is and you design the plan around it. The idea that the 
President makes the law, it is not in the civics lessons I took 
when I was young. I thought the laws were made here. They are 
not made here?
    Mr. LEVIN. The President has input.
    Mr. SCHIEBER. Well, the President certainly has input, but 
the laws are made here. You decide what your principles are and 
then you design the plan around it. You can design a plan that 
protects survivor benefits. You can design a plan that protects 
disability benefits. You are adults. You know what you want. 
Figure out what you want and design a plan. The people at this 
table, once you tell us what you want, can design a plan in a 
couple days for you.
    Mr. HAYWORTH. I think that is important again to reiterate. 
At times, we are criticized for maintaining that this is a 
study of the obvious. What has happened here, we could look at 
a different venue in much the same way. When President Kennedy 
challenged us to put a man on the moon and return him safely to 
Earth in the decade of the sixties, President Kennedy didn't 
lay out, okay, we are going to have Project Mercury and Gemini 
and Apollo and a Saturn 5 will go to the moon with a lunar 
module. That was left to others to decide. The President 
proposes, the Congress disposes, and despite, sadly, some of 
the grandstanding and the speech making and the demonization of 
the intent, whether from the executive branch or here in the 
legislative branch, I believe there are core principles that, 
it may not profit people in the short-term politically to agree 
to, for whatever reason, but certainly would benefit this 
country to agree to. I think, to remind those who happen to 
join us to see what we are doing, we are setting up the notion 
of where we should go. Again, as we have this panel of experts, 
Mr. Chairman and my colleagues, the fact is, we can learn from 
all of these people and we can embrace some common goals. I 
thank the Chairman for the time. I thank the panel again for 
its testimony.
    Chairman THOMAS. The Chair would indicate that on the floor 
of the House, we are currently in a 15-minute vote and it will 
be followed by a 15-minute vote. I will ask the gentleman from 
Louisiana if he wishes to inquire now. Otherwise, the Committee 
will stand in recess, or after the gentleman from Louisiana 
inquires, the Committee will stand in recess. We have about ten 
minutes, so you have 5 minutes to make it. Let me say to the 
panel, first of all, thank you very much. I hope you can stay. 
The Chair's intention is to have all Members of the Committee 
inquire. You will get some appropriate ironman recognition.
    [Laughter.]
    Chairman THOMAS. I also will tell you that during that 
half-an-hour, there is some food available in the back, if you 
would like to eat, as well, if it meets your standards, and we 
will reconvene one-half-hour after the gentleman from Louisiana 
concludes his inquiry. The gentleman from Louisiana.
    Mr. JEFFERSON. Thank you, Mr. Chairman. Wow. I will 
briefly, in reference to someone before me, talk about--I want 
to talk to you about two of them. First, there is an AP story 
out today which quotes a White House official. It says, 
roughly, that 15 percent of all retirees under President Bush's 
plan would probably not be able to pass along a Social Security 
inheritance, a figure that rises to 30 percent for those with 
lower lifetime wages. That is fairly a quote from a White House 
official. I don't know what his name is. There has been a lot 
of talk about the inheritability of these accounts as a 
principle reason why there ought to be adherence to them. So, 
given that that is an important idea, central to the 
President's privatization ideas, and given the fact that 
persons of color have lower lifetime wages on the average, as 
another example, the President has talked about the need to 
make these accounts available, particularly for African-
Americans, who he has talked about having lower life 
expectancies, it seems, to take some of the progressivity out 
of the idea of the present plan, and out of the notion of 
progressive indexing being helpful to these populations. So, 
with that in mind, I would like to ask Dr. Furman and Dr. Apfel 
to comment on the effect of the President's proposal on 
individuals with lower lifetime wages, particularly as it 
affects this issue of inheritability that the President has 
talked so much about.
    Mr. FURMAN. I will answer briefly, and then--one of the 
things--I don't doubt the sincerity of a lot of people, like 
Mr. Pozen, that they want to protect survivors and they want to 
protect the most vulnerable. Social Security has an exceedingly 
complicated formula that is used to determine benefits, and 
when you start changing that formula dramatically, you have 
dramatic effects that maybe you didn't even realize or intend. 
I, myself, was even surprised at the White House analysis last 
week showing how much of the bottom 20 percent of Americans 
would get their benefits reduced by the plan. It was actually 
beyond what I had expected. So, it is not a question just of 
sincerity, it is a question of executing the plan well, and 
there have been many, many years to address these problems and 
they still haven't been addressed.
    In terms of your particular question, Social Security is a 
very progressive program. African Americans disproportionately 
benefit from that. Anything that reduces the traditional 
approach of Social Security and supplements it with something 
that isn't progressive, like accounts, will leave African 
Americans worse off. It is also important to understand how the 
inheritance works. Under the President's plan, you inherit the 
account. You also inherit the benefit cut. If your husband 
agreed to have his benefits cut, you don't just get his money. 
You get his additional benefit offset, as well.
    Mr. APFEL. There is a second issue, too, that needs to be 
addressed which has to do with annuities. The President's 
proposal calls for mandatory annuities up to the poverty level. 
With our current Social Security system, we have a mandatory 
annuity system. There are tradeoffs to annuities and mandatory 
annuities, and there are also risks in terms of rates of return 
for the annuities. Trying to retire at time of down market 
conditions for the stock market can affect the balances coming 
in. Then requiring an annuity at that point in time depends a 
lot on what the interest rate conditions are at that point in 
time. So, one of the things that hasn't received a lot of 
attention, has to do with both market volatility as well as 
annuity volatility, the volatility in the annuity world. For 
lower income people to be required with their savings to 
purchase an annuity and not other people creates some issues 
that I think need to be fully thought through. The Social 
Security system is a mandatory annuity system, but to say that 
for property, low-income people must buy an annuity and others 
do not creates some real tradeoffs.
    Mr. JEFFERSON. I want to ask one other thing while I have 
another half-minute or so. Someone earlier read from an AP 
article dated Friday, May 6, with President Clinton's remarks. 
Just to add, there are also some remarks by Senator Lincoln 
Chaffee of Rhode Island, and basically what he says is that the 
President should call the Democrats' bluff on this private 
accounts business by talking his talk of personal accounts and 
then forcing Democrats to come to the table to discuss the 
plans. As they say, they will discuss them if he drops the 
plans. You combine that with President Clinton's remark that in 
2 weeks, he feels Democrats ought to have something together in 
2 weeks. So it sounds, frankly--if you read all this together 
and take it all in context, this is a plan that Democrats have 
been talking about, it sounds like to me, asking the President 
to drop the insistence on private accounts and, at the same 
time, going to the table to bargain about it. Is this what you 
have heard in exchanges out there from Democrats?
    Mr. APFEL. Well, certainly, if it is true that 
privatization is being dropped, but I don't think it has been--
--
    Mr. JEFFERSON. Oh, no, no. I am saying this is a proposal 
from Senator Chaffee, that the President could sharpen his 
pitch if he dropped these and brought Democrats to the table.
    Mr. APFEL. I would think that if privatization was dropped 
tomorrow, there would be a greater likelihood of coming 
together on a benefit and tax package that will be able to 
strengthen Social Security for the long term. I think 
privatization is the biggest obstacle to seeing that take 
place.
    Chairman THOMAS. You can sure take that statement to the 
bank. I think you will find that, if privatization comes off 
the table, then a progressive payment becomes the item that has 
to be dropped, ad nauseam, point after point, because frankly, 
there is no interest in engaging. In 1983, and I will place it 
in the record, the vote on the changes in Social Security, the 
Pickle amendment to sustain a change in the fundamental 
structure, i.e., increase the retirement age, had 152 
Republicans voting aye and 188 Democrats voting no. That 
fundamental change was sustained by the minority, the 
Republicans. The Pepper amendment to simply raise the payroll 
tax even beyond the amount that we had raised plus the 
acceleration that we had put in the underlying bill, there were 
165 Republicans that voted no and there were 131 Democrats that 
voted no. A hundred-and-thirty-one voted yes. The Republicans 
sustained not going back to the same old, same old of the 
payroll tax.
    So, on both the idea of fundamental reform and not going 
back to the payroll tax, it was the minority that controlled 
the choice in front of Congress, not the majority who had, at 
the time, the opportunity to make the kind of specific changes 
we were talking about and to begin to anticipate the 
fundamental aging of the society, with additional changes. 
Their goal and their desire and their votes at that point was 
to go back to the payroll tax. The Committee stands in recess 
until 2:15 p.m., and the offer is available.
    [Recess.]
    Chairman THOMAS. The Committee will reconvene, and if all 
of our guests could find seats, I would appreciate it. The 
Chair wants to thank the witnesses, and if there is anyone who 
has plans that won't allow them to stay until all the Members 
who wish to inquire have inquired, we understand that. We 
appreciate the time that you have already provided us. With 
that, I would recognize the gentleman from Pennsylvania, if he 
wishes to inquire.
    Mr. ENGLISH. Thank you, Mr. Chairman, and indeed, I do. I 
have to say, this is a panel which has been refreshing not only 
for its expertise but for its diversity. Taking in some of the 
presentations that have been made, I guess my first question 
would be for Dr. Steuerle. You made the point that 
demographically, people are living longer, and part of the 
solution of a reform of Social Security, through marginal 
change, would be to raise the retirement age. One of my 
concerns would have to do with the guy on the shop floor who 
has been working in a physically demanding job since he was in 
his teens and he is ready to retire, and typically, he will 
retire anyway around 62 years old. I believe that tends to be 
the pattern for most people coming through a skilled but highly 
physically challenging work. Given that kind of experience with 
blue collar jobs, is it realistic to talk about raising the 
retirement age? Can we expect people to continue to undertake 
physically demanding jobs up until the age of 70? How would you 
deal with the early retirement age?
    Mr. STEUERLE. Thank you, Mr. English. You raise some of the 
very difficult issues. As I expressed earlier, my concern is 
that if you look at Social Security when it was first formed in 
1940 or 1950, the average age of retirement when jobs were very 
physically demanding was 68 for men. Now the average age of 
retirement is 63, whereas 68 years of age in 1940, if you take 
into account life expectancy, is equivalent to about 74 today. 
So, if people today were retiring about as they did in 1940, 
they would be retiring at about 74, on average. Instead, they 
are retiring at 63. You go out another 60 years--and mind you, 
we are talking about fixing a system 60 years in the future--
people would notice even if retiring with the same life 
expectancy. So, we have the dilemma that the system is becoming 
more and more a middle-age retirement system--is giving 
benefits to all of us, including you and me, to retire when we 
still might have 20 or 25 years of life expectancy left.
    The dilemma is, how can we protect some people who really 
do have to retire without giving benefits to everyone to retire 
at middle age. Close to a third of adults are scheduled, 
roughly, to be on Social Security in the near future if they 
retire at the same age as they do now. I think there are 
several things you could do. One, I think you do have to retain 
a good disability system to help people who are disabled. For 
lower income people--and these include the people who have the 
blue collar jobs--I don't know that we can actually give them a 
different retirement age. I don't know how to distinguish 
between types of jobs that well. I do think that one can 
increase something like minimum benefits so that their expected 
lifetime benefits, even though they might have to work another 
year, will actually even higher. So maybe they only get 12 
years of retirement instead of 13, whereas you and I only get 
20 instead of 21, but we can do more for them to increase their 
lifetime benefits, and we can increase the replacement rates a 
lot in those later years.
    Mr. ENGLISH. That could be one piece of the puzzle. Another 
piece of the puzzle has to be how we generate revenue, and how 
we generate revenue consistent with the principles of the 
system. Dr. Schieber and Dr. Lindsey, I wonder if you could 
briefly comment with the remaining portion of my time. Many 
have proposed to eliminate the cap on the payroll tax as a way 
of generating additional revenue to address all or part of the 
problem in Social Security, yet it seems to me that that would 
have an enormous impact on the economy, particularly on small 
unincorporated businesses, and significantly change the extent 
to which individuals pay for and contribute to their own 
retirement. Your comment, Dr. Schieber, and then Dr. Lindsey.
    Mr. SCHIEBER. This morning we heard considerable concern 
about turning this into a welfare program, yet we have heard 
discussion about a proposal that would take the cap off of 
earnings for purposes of raising the payroll tax but 
maintaining the cap for defining benefits. That would seem to 
me to be the ultimate conversion of Social Security into a 
welfare program. Today, you get benefits based on the income 
that you have paid taxes on, and you would now have a whole set 
of your income that generated no benefit at all. I would say if 
you want to move in that direction, why would you constrain 
yourself just to earned income?
    Take somebody like Warren Buffet. Warren Buffet takes 
$100,000 in compensation, in pay, out of his company each year, 
but we know he takes a bit more than that out of the whole 
thing. Why would you just want to constrain this on people who, 
I guess I would characterize as having the misfortune of 
earning their income through their labor services as opposed to 
other things they do? It seems to me that would turn this into 
the ultimate welfare program, and if you want to do that, then 
you really should look at lowering benefits and making this 
affordable.
    Mr. LINDSEY. A related question----
    Mr. ENGLISH. Very quickly.
    Mr. LINDSEY. Means testing. I wasn't sure whether you would 
continue to adjust benefits as income rises. It is a little bit 
like losing money on each unit and trying to make it up on 
volume if you do it that way. That, I think, is one of the 
problems. If you didn't do that, then you would, in fact, be 
officially means testing by any definition.
    Mr. ENGLISH. Thank you.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Tennessee, Mr. Tanner, wish to inquire?
    Mr. TANNER OF TENNESSEE. Thank you very much, Mr. Chairman, 
and I want to thank the panel. This has been a very interesting 
exchange. I want to agree with Mr. English, the diversity and 
so on has been refreshing. I think we have covered Social 
Security to the extent that we need to. I want to change the 
subject, if I might, because this is a very interesting 
academic exercise, but in my view, Social Security is a five-
mile-an-hour tropical breeze and there is a hurricane two miles 
offshore and we are in a beach house, and that is the budget 
deficit and the trade deficit. Since we started this hearing, 
by my figures, we have in your name and mine, this country has 
borrowed from foreign sources $191-plus million just since we 
started this hearing. We are borrowing over $1 billion a day 
and have been with no end in sight under anybody's scenario. 
The best the Administration can offer is to cut the deficit in 
half in 5 years, and unless one has the ability to repeal the 
laws of arithmetic, I don't know how that is going to happen 
with the budget not including expenses that we know we are 
going to incur.
    So, this is a very interesting academic exercise about what 
will happen in 2075. The problem is, the country is going to 
financially collapse long before then if one believes what the 
Director or Comptroller General said, David Walker, that, if we 
make the tax cuts permanent, as some in this body want to do 
and as some of you gentlemen have suggested we ought to do as 
public policy, and do nothing else, by 2040, under their 
calculations, every dime that comes to the U.S. Treasury will 
be going to pay interest on the national debt. Of course, we 
all know that the country will financially collapse long before 
that occurs. Now, the one thing I want to say, does anyone 
believe seriously that we can have a strong Social Security 
dollar and a nonexistent or weak U.S. Treasury dollar? No one 
would make that argument, yet that is exactly, in my judgment, 
where we are headed.
    Just in the last 48 months, we have transferred $50 billion 
a year out of the tax base to interest, 84 percent of that $50 
billion going overseas because foreigners have financed 84 
percent of our borrowing, in terms of real money, in the last 
48 months. No one, I don't think, any economist would seriously 
argue that this is a sustainable course of action for this 
country to take. So, I would simply like to ask, do you or do 
you not agree with David Walker's assessment of our current 
budget situation, and do you or do you not agree that one can 
never have a strong Social Security system when the underlying 
U.S. Treasury is broke or nonexistent? Thank you very much, Mr. 
Chairman, and I would be interested as to anyone who wants to 
respond.
    Mr. FURMAN. I think that is a very good question, and we 
have a very large budget deficit today, $412 billion last year, 
the largest on record in dollar terms, and we have a projected 
very large deficit in the future, $43 trillion, according to 
GAO. I think we need to be addressing both of those. Now, first 
of all, some Social Security plans would reduce the deficit in 
2075 and increase it enormously today. I think that is the 
wrong way to go.
    I think it is also important to understand where these 
deficits come from. The deficit last year didn't come from 
Social Security. Social Security, in fact, ran a significant 
surplus. As we look forward over the next 75 years, of the $43 
trillion we heard about before, $12 trillion were the tax cuts 
that were passed, assuming they are extended, $9 trillion was 
the prescription drug bill. Half of our long-term deficit was 
passed and signed into law in the last 5 years. Social Security 
is a trivial portion of it. Now, addressing Social Security 
could help, and I think one should do that, but you shouldn't 
fool yourself into thinking that that is the main source of the 
problem or the main way to get out of it.
    Mr. SCHIEBER. The idea that Social Security ran a surplus 
last year is classic Enron accounting. The actuaries calculate 
a number each year. They estimate what the total accrued 
liability is under the system. If we just shut the system today 
and paid off the liabilities that we owe ourselves, last year, 
it was around $13.5 trillion. The most recent calculation is 
around $14.5 trillion. We earned a trillion dollars' worth of 
benefits that we didn't fund at all last year.
    Mr. FURMAN. Those are over--over 75 years----
    Mr. SCHIEBER. Those are 75-year numbers.
    Mr. FURMAN. Oh, sorry. That doesn't make any sense for a 
government program that we know----
    Mr. SCHIEBER. It doesn't make any sense to----
    Chairman THOMAS. Could we have one witness speak at a time, 
and I believe----
    Mr. SCHIEBER. It doesn't make any sense if we don't want to 
look at what we are doing to ourselves. We are running up 
massive bills that our children simply will not be able to pay 
and we need to address this problem and we need to address it 
right now.
    Mr. FURMAN. I agree with that, that the tax cuts----
    Chairman THOMAS. Time has expired. Does anyone else want to 
give a quick response?
    Mr. TANNER OF TENNESEE. Just very quickly, Mr. Chairman, I 
couldn't agree more that we have a problem with the size of 
government spending in this country. The problem is not the 
question of whether or not we borrow or whether or not we tax 
in order to fill that spending. The problem is the spending and 
the Congress's inability to get a rein on spending, which 
includes mandatory entitlement spending, including Social 
Security, Medicare, and Medicaid. If you can't get a handle on 
those programs in the future, the amount of borrowing, or the 
amount of taxes necessary to pay all those benefits, are going 
to cripple the economy.
    Chairman THOMAS. We may have to shift to written 
statements, or if you guys are clever enough, when someone else 
asks a question, you can work your answer in on the next round. 
I would only respond, Dr. Furman, that when you talked about 
how much the tax cuts were going to be, you used a phrase, if 
they are made permanent, which clearly allowed you to 
extrapolate into the future. Then, when you talked about a 
surplus for Social Security, had you said, if they are made 
permanent. Since we know they are permanent, you have to 
extrapolate into the future, and I believe that was the point 
that was being made, just because we have a very short-term 
surplus.
    Mr. FURMAN. I used the same assumption. The deficit in 
Social Security under current law is precisely zero trillion 
dollars because benefits are reduced automatically in 2041. I 
was assuming that we continue to pay benefits at the current 
level in calculating that in exactly the same way I was doing 
for the tax cuts.
    Chairman THOMAS. I am sure colleagues on this side of the 
aisle will agree with you in terms of the benefit cuts that are 
supposed to take place in 2041, just as they are willing to 
support modest, understandable, and controllable adjustments 
beginning today. Does the gentleman from Illinois, Mr. Weller, 
wish to inquire?
    Mr. WELLER. Thank you, Mr. Chairman. I want to express my 
gratitude for the patience of this panel as this has been a 
long but important hearing. I would like to direct a couple of 
my questions to individuals on the panel and I would like to 
begin with Commissioner Apfel. What years were you the Social 
Security Commissioner?
    Mr. APFEL. From 1997 to 2001.
    Mr. WELLER. Okay, 1997 to 2001, so President Clinton was 
President during that time, correct?
    Mr. APFEL. Yes.
    Mr. WELLER. Because there is a lack of Democrat ideas when 
it comes to fixing Social Security for the long term, I thought 
I would discuss the one Democrat idea that has been on the 
table for a long time, and you probably recall President 
Clinton's ``Save Social Security First'' State of the Union 
speech. It got great applause, both sides of the aisle. We all 
thought it was great. President Clinton, at that time, proposed 
investing the Social Security in the stock market. Were you 
Social Security Commissioner at that time?
    Mr. APFEL. Yes, I was.
    Mr. WELLER. So, was President Clinton's proposal your idea?
    Mr. APFEL. I was involved in discussions in the White House 
about it. I supported it. What the President said at that point 
in time, when we had large budget surpluses growing, was let us 
use those budget surpluses to save Social Security first, I 
believe a courageous----
    Mr. WELLER. Now, did President Clinton propose using 
payroll taxes to be invested in the stock market or did he 
propose general revenue funds?
    Mr. APFEL. What the President proposed is that some, about 
15 percent of the Social Security surpluses, which would be 
payroll tax surpluses, would be invested to try to get a 
slightly to modestly higher rate of return. That is a debatable 
issue as to how much of an increased rate of return----
    Mr. WELLER. As one of the architects of President Clinton's 
plan to invest Social Security payroll taxes in the stock 
market, what was your projected growth that you anticipated for 
those funds when invested in the stock market?
    Mr. APFEL. At the time, the investing in equities--if I am 
remembering correctly, the actuaries projected that it would 
resolve about a third of the long-term shortfall in Social 
Security through some collective investments. Since----
    Mr. WELLER. So, what was the rate of growth? Did you have a 
projected-percent growth? Our Thrift Savings Plan that almost 
every Member of Congress has, as well as our mailman, the 
Thrift Savings Plan stock fund has about an 8 percent rate of 
growth over the last 10 years. The bond fund has about a 4 
percent rate of growth. That is what has been demonstrated.
    Mr. APFEL. Those were projections from the actuaries. I 
would have to get back to you on the specifics. I would say 
that since that time, there has been quite a bit of debate 
about what those rate of returns would be. The fundamental 
difference between individual accounts and collective 
investment is the individual risk that is involved. If we have 
collective investment, if there is a decline in the markets, 
then there is, over time, a source of pooled resource to be 
able to use to provide benefits.
    Mr. WELLER. Commissioner, you stated that you endorsed, as 
one of the architects, President Clinton's plan to invest 
Social Security trust fund dollars in the stock market, and 
today you stand by that endorsement. You still believe that 
that is a good idea.
    Mr. APFEL. I think that it is one of the options that 
should be seriously considered. I still generally think that it 
is a good thing to explore, yes.
    Mr. WELLER. Okay. Thank you.
    Chairman THOMAS. Would the gentleman yield on that?
    Mr. WELLER. Sure. I would be happy to yield to the 
Chairman.
    Chairman THOMAS. Was that structure mandatory or voluntary?
    Mr. APFEL. Pardon me?
    Chairman THOMAS. Was it mandatory or voluntary?
    Mr. APFEL. It was centrally invested funds by----
    Chairman THOMAS. So, individuals didn't have a choice as to 
whether or not they were going to do the risky scheme of 
playing the stock market.
    Mr. APFEL. What the President proposed were voluntary add-
on individual savings accounts coupled with the use of 
surpluses----
    Chairman THOMAS. No, no, no, the investment in the stock 
market. I was focusing on the investment in the stock market.
    Mr. APFEL. It was a collective----
    Mr. FURMAN. One thing to stress here----
    Mr. WELLER. Mr. Furman, I am not speaking with you, but to 
Commissioner Apfel.
    Chairman THOMAS. I thank the gentleman for yielding.
    Mr. WELLER. Thank you, Mr. Chairman, and reclaiming my 
time, as I understand it, again, President Clinton proposed, as 
you say, collective, if I can use that term, investment of 
Social Security trust fund dollars in the stock market at that 
time, and Commissioner, you indicated you still feel that that 
is an idea that we should look at, is that correct, yes or no?
    Mr. APFEL. Yes. If we look at State and local pension 
funds, we see not an insignificant share that is invested in 
diversified portfolios, and one of the things that I think is 
worth exploring is whether to do the same thing with Social 
Security. The thing that I think is new, from my perspective 
over the last several years, is that the question about the 
rates of return has received a lot more attention, and those 
rates of return could be less----
    Mr. WELLER. Commissioner, I would note, the best way to 
look at projected rates of return is to look at history, and 
over the last 10 years, I know in my own personal Thrift 
Savings Plan, and my money is in the S&P 500 plan, the C plan, 
that has grown at a rate of 8 percent, on average, over the 
last 10 years. The bond funds have grown at an average rate of 
4 percent. Outside economists tell us that the rate of return 
on Social Security is about eight-tenths of 1 percent.
    Mr. APFEL. Well, it is really----
    Mr. WELLER. So, as you noted when you proposed investing in 
the stock fund as the Social Security Commissioner, those 
numbers have panned out, so thank you----
    Mr. FURMAN. There is a reason every Fidelity fund says, 
past performance is no guide to future returns.
    Mr. WELLER. Mr. Furman, I did not ask for your opinion.
    Mr. APFEL. Could I have the last response to that, because 
I think that, clearly, trying to have Social Security----
    Chairman THOMAS. The gentleman from Illinois controls the 
time, and he gets to say if he wants you to respond.
    Mr. WELLER. Thank you, Mr. Chairman. I will allow the 
Commissioner to--I realize my time is expired, but 
Commissioner, please.
    Mr. APFEL. Thank you, sir. Trying to compare rates of 
return in a social insurance system and an investment system is 
apples to oranges. Trying to determine how an 
intergenerationally financed system that pools resources could 
compare if the money was available to be used in investments is 
comparing apples to oranges, not an appropriate comparison.
    Mr. WELLER. Thank you, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. I have to go back 
to Adam Smith and the marketplace and think that one over. Does 
the gentleman from Texas wish to inquire?
    Mr. DOGGETT. Thank you, Mr. Chairman, and thank you to the 
witnesses. It is my belief that Americans ought not to be 
misled into viewing this hearing as representing some type of 
academic discourse about the best ways to preserve Social 
Security for future generations, nor should anyone be deluded 
into the notion that those who are committed to replacing 
Social Security with a risky privatization plan are down and 
out in the polls and that they have given up on that approach. 
Anyone who believes, as I do, that we need to preserve and 
strengthen Social Security and who underestimates our chairman, 
Mr. Thomas, and who underestimates the ideological fervor 
behind this privatization movement, anyone does that at their 
peril and at the great risk to anyone who depends on a Social 
Security check. One Capitol Hill newspaper has already reported 
that a privatization plan will be before the House in July, and 
only a week ago, Chairman Thomas announced that less than a 
month from this very moment, he would probably have a bill 
before us, quote, ``to fix Social Security for all time.'' 
Well, we have got some steers down in Texas that have been 
fixed for all time and my concern is that the same thing is 
about to happen to Social Security.
    There is no doubt that Social Security faces a clear and 
present danger, that Social Security is in crisis, and it is a 
crisis that results from those who control decision making here 
in Washington and who zealously believe that community 
solutions, as opposed to individual independent plans, are just 
somehow inherently flawed. They think that every initiative 
that has public in front of it, as in public education, or 
``social'' in the title, such as Social Security, needs to be 
eliminated in the form we have known them in the past. They 
think that this great country can rely on the principle of 
every person for themselves, and if you fall behind, well, you 
just need to tighten your belt and get by on your own. If they 
can destroy a community solution that is as effective and 
successful as Social Security has been for this last many 
decades, they think they can destroy the belief in government 
as a source of a solution to any social problem, today is 
merely the prelude to a preconceived conclusion. What is 
driving this privatization effort has very little to do with 
concerns over solvency and everything to do with the demands of 
ideology.
    With all due respect to the testimony of all the witnesses 
here, whether I agree with you or not, the most remarkable 
aspect of this hearing is not who is sitting at this witness 
table, but who is not there. There is a giant gap in that 
witness table, as crowded as you are around it, and it is a gap 
unfilled by anyone who is here testifying for the Bush 
Administration. There is no Administration spokesperson to 
answer questions about specific legislation of a President who 
insists that privatization is non-negotiable, that it is the 
linchpin of his Social Security plan. Perhaps that is because 
the last Administration spokesperson who did sit where you are, 
who appeared here, Treasury Secretary Snow, admitted that this 
Administration plans to raid the Social Security trust fund for 
every dollar in it, $2.6 trillion over the next decade, and 
that President Bush will spend every one of those dollars. I 
have a question for Mr. Apfel, but Mr. Emanuel says he needs to 
leave and I yield a minute to him. I would like to come back if 
I have any more time.
    Mr. EMANUEL. I would like to thank my colleague from Texas. 
I will pass on to former President Clinton all the warm 
comments that he has received from the other side of the aisle, 
for the fact that I am sure--if you can all sign a card, I will 
pass it along. When he introduced his 1993 budget, which did 
not receive a single vote from the Republicans, it put us on an 
economic plan toward reducing the deficit. We added 12 years to 
the life of the Social Security trust fund, which was the first 
step to saving Social Security. I agree with Mr. Lindsey. The 
best thing you can do for Social Security is to have a growing 
economy, and that is exactly what happened in 1993.
    To all those who mentioned ``Save Social Security First,'' 
take a stroll down memory lane. ``Save Social Security First'' 
was about not doing tax cuts. It was, in fact, about investing 
the surplus in Social Security and allowing, in fact, general 
investments by the Social Security Administration to get a 
slightly better return and also allowing us to invest in Social 
Security and strengthen the Nation's saving rates, as well as 
the individual saving rate. In fact, what has happened over the 
last 5 years is the reverse of ``Social Security First,'' which 
was a tax cut that ended up spending the surplus, plus whatever 
else we had in Social Security.
    So, to all those who want to claim President Clinton's 
mantra, in fact, in the last 4 years, we have done everything 
opposite of what he suggested; that is, A, build a surplus, and 
B, save Social Security first before you have done a tax cut 
that raided it. I am sure his heart will be warmed by the kind 
comments that were said here. As somebody who participated in 
the Administration and also as somebody who represents over 
28,000 employees from United Airlines, they all enjoy the 
security that comes with Social Security after what happened to 
them. Thank you very much to my colleague from Texas for 
yielding the time.
    [The prepared statement of Mr. Emanuel follows:]

 Opening Statement of The Honorable Rahm Emanuel, a Representative in 
                  Congress from the State of Illinois

    Thank you for holding this important hearing on ``Alternatives to 
Strengthen Social Security.'' I also want to thank our distinguished 
witnesses for joining us today.
    President Bush's privatization plan does nothing to address Social 
Security's future solvency issues. In fact, as U.S. Comptroller General 
David Walker said at a recent Ways & Means Committee hearing, 
privatization would ``exacerbate'' Social Security's long-term solvency 
problems.
    The President would borrow $1.8 trillion in the first ten years 
alone on top of record breaking deficits and debt, and ``progressive 
indexing'' would cut benefits for middle-class families by 40 percent 
to pay for private accounts. That is not a recipe for economic growth 
or retirement security.
    Although Social Security faces long-term solvency challenges, we 
have time to address them in a fiscally responsible, deliberative way. 
We should look to the 1983 bipartisan Greenspan Commission as the model 
for the right way to approach these issues.
    Social Security is secure for the next several decades. According 
to the Congressional Budget Office, Social Security can pay full 
benefits through 2052 and more than 70% indefinitely thereafter through 
payroll tax receipts. Social Security is not about to go ``bust'' or 
bankrupt, as President Bush has claimed.
    The more the public learns about President Bush's plan, they less 
they like it. The fact is that Americans like the security in Social 
Security. For millions, it is the linchpin of their retirement incomes.
    It is clear that privatization is not going to happen. But with 
savings rates at historic lows, declining from 10 percent in 1980 to 
just 1 percent in 2004, there is an emerging bipartisan consensus on 
the need to work together on new initiatives to increase family savings 
outside of Social Security.
    We need to look no further than yesterday's news about United 
Airlines to see the importance of Social Security's guaranteed 
retirement benefit. The announcement that United Airlines received 
permission to dump its pensions on the Pension Benefit Guaranty 
Corporation means reduced retirement benefits for millions of families.
    First it was the steel industry, now the airlines and autos may be 
next. Once, individuals could build a three-legged stool for 
retirement: a company pension, personal savings and Social Security. 
But with the decline of pensions and falling savings, Social Security 
is now the only leg remaining for millions of middle-class families.
    At the same time, middle-class families are being squeezed by job 
uncertainty, real wages falling at their fastest rate in fourteen years 
and rising gasoline, health care and education costs. Middle-class 
families face more risk today, not less. They believe that the 
``ownership society'' should come with a warranty: a rock-solid, 
guaranteed Social Security benefit.
    I commend Chairman Thomas for expanding the debate to include long-
term savings. I have proposed four savings initiatives that can be 
implemented immediately: legislation to make it easier for employers to 
automatically enroll employees in 401(k) plans; a permanent and 
refundable saver's credit; direct deposit of tax refunds into 
retirement accounts; and a Universal 401(k) that is portable from job-
to-job. There is no shortage of good ideas in both parties, and enough 
overlap that we can pass savings legislation this year.
    We should work together to strengthen Social Security for the long-
term while protecting its guaranteed benefit for our seniors. President 
Bush's vision of privatization and benefit cuts for the middle-class 
will take the security out of Social Security. He should remove 
privatization from the table and work with us on real solutions to 
protect Social Security and enhance family savings.
    Thank you, Mr. Chairman.

                                 

    Chairman THOMAS. Does the gentleman from Florida wish to 
inquire, and would he yield to the Chairman?
    Mr. FOLEY. Yes, I would, Mr. Chairman.
    Chairman THOMAS. Before my friend leaves, there was a 
different view on what happened, because, frankly, what 
happened was, the Democrat majority, along with President 
Clinton, passed one of the highest tax increases in the history 
of the United States. The American people elected a Republican 
Congress the didn't spend all that revenue that had been raised 
with that tax increase and the surpluses began after the 
Congress became a Republican majority and not during the 
Democrat majority.
    Mr. EMANUEL. Will you yield, Mr. Chairman?
    Chairman THOMAS. That is the view from the Congress.
    Mr. EMANUEL. Will you yield, Mr. Chairman?
    Chairman THOMAS. It is the gentleman from Florida's time, 
and he can yield if he so chooses.
    Mr. FOLEY. I also want to remind our listeners that it was 
the tax on Social Security beneficiaries that was part of that 
1993 plan. So, if you were receiving Social Security, in order 
to raise revenue, the President's plan was to tax Social 
Security proceeds. So, they played a shell game. I don't know 
where we came up with the fixed steer analogy from Texas, but 
on Social Security reform, the Democrats are truly shooting 
blanks.
    I would like to ask Mr. Apfel, during his tenure, haven't 
we seen a lot of expansion of disability claims that may be not 
meritorious, a lot of new characteristics, a lot of new ways in 
which parents can enter their children in Supplemental Security 
Income (SSI), based on a diagnosis that is loosely constructed 
in order to gain family benefits?
    Mr. APFEL. Generally, no. It is my belief that the 
disability program in the United States, relative to most other 
developed countries, has a relatively low disability population 
in terms of comparison to a lot of other countries. There were 
changes that were made for children in 1996. Mr. McCrery was 
heavily involved. I was heavily involved in those during my 
tenure----
    Mr. FOLEY. You don't sense any fraud and abuse?
    Mr. APFEL. I am sure that there has to be some, but I do 
not think that this is a system, the disability system, that is 
rife with fraud and abuse, no, I do not. Is there a need for 
reexamination of disability definitions given the changes that 
have taken place? Generally, yes. I think our system is a 
relatively--comparing us to many other countries, we have a 
relatively lean and a very inexpensive disability system. I 
would urge the Committee to go very, very cautiously about 
major changes to the disability rolls.
    Mr. FOLEY. Mr. Pozen, I was humored by the Ranking Member's 
constant request of explaining why you have been listed as a 
Democrat. Well, I think it is because you are an endangered 
species. You are one willing to step up and at least offer 
suggestions, so I applaud you for that. Thank you.
    I would like to ask Mr. Furman, you have gone through great 
detail, and I was very impressed by your thorough review of the 
system, your critique of the side accounts. You also stated a 
minute ago that in 2041, we can pay the benefits we are paying 
today, is that your comment, under the current system?
    Mr. FURMAN. No. My comment was when you talk about there 
being a $4 trillion deficit or an $11 trillion deficit, you are 
assuming that current scheduled benefits are continued. If you 
did not, just looked at the deficit under current law, there is 
no deficit at all because benefits are automatically reduced.
    Mr. FOLEY. Did you take a chance to look at any mechanism 
by which we can create solvency? Forget accounts. We don't go 
to accounts. What would they be?
    Mr. FURMAN. There are a number of plans that are out there.
    Mr. FOLEY. Specific, yours. You have looked very thoroughly 
at the numbers. You must have crunched numbers.
    Mr. FURMAN. Peter Diamond and Peter Orzag have a plan. 
Former Social Security Commissioner Bob Ball has a plan. There 
are a number of plans and they are all----
    Mr. FOLEY. What would your thoughts be? Raise rates, 
retirement age?
    Mr. FURMAN. Let me----
    Mr. FOLEY. Just so I know academically how you came up with 
your numbers.
    Mr. FURMAN. The analysis of the President's plan doesn't 
depend on any particular plan, but these other plans I referred 
to, to get sustainable solvency, one of them with much, much 
smaller benefit reductions than what the President's plan 
contemplates----
    Mr. FOLEY. Are they reductions?
    Mr. FURMAN. Some of those plans have very moderate 
reductions in them.
    Mr. FOLEY. Moderate reductions?
    Mr. FURMAN. Moderate----
    Mr. FOLEY. So, it is all in the eye of the beholder. Our 
reductions, your reductions, in order to save it, you have to 
have reductions.
    Mr. FURMAN. Once you add in the private accounts, you are 
talking about a 97 percent reduction. I think anyone would 
describe that as pretty large.
    Mr. FOLEY. Forget the private accounts for a minute. Let us 
talk about the real system. We can academically debate private 
accounts. I support them. I think they are good.
    Mr. FURMAN. I would love----
    Mr. FOLEY. They should be part of the program, but 
ultimately, you still have to fix the program, the system. It 
is collapsing under its own weight. We ignore the obvious if we 
sit here and say it can fix itself. Let us just skip this can 
down the road. I think all of our witnesses testified, there is 
not enough money in the system.
    Mr. FURMAN. Oh, I have testified to that----
    Mr. FOLEY. So, all I am looking for is some clear voice to 
come out of this room on either side of the aisle and say, here 
is how we fix the system. We will take care of these new ideas 
possibly later. How do we fix the system systemically?
    Mr. FURMAN. If you would get the President to agree to only 
talk about private accounts in academic seminars, then I would 
agree to sit down and talk to him about what to do about 
reforming it.
    Mr. FOLEY. The only thing----
    Mr. FURMAN. It is not an academic question for him.
    Mr. FOLEY. In defense of the President, if somebody tells 
me to bake a cake and says, I will give you every ingredient 
but the six eggs, the cake won't take. So, in respect to the 
President, I don't think you can discuss a plan without at 
least discussing every option. I thought Senator Leahy was 
profound on Fox this weekend when asked the question. He said, 
the President, we have got to have everything on the table, but 
except, but except. Well, I don't know how you do it if you 
don't at least have the academic exercise. We may be proven 
wrong. I welcome that debate, but to ignore it is a half-baked 
cake.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Wisconsin wish to inquire?
    Mr. RYAN. I do----
    Chairman THOMAS. Prior to inquiring, would he yield to the 
Chair?
    Mr. RYAN. I will.
    Chairman THOMAS. I thank the gentleman. On the subject of 
disability, there can be some examination of the program, but 
as far as the Chair is concerned, there should be no discussion 
about the fact that once someone goes through the process of 
being determined disabled, they should not have to wait 24 
months to go onto Medicare. The 24-month provision was put in 
by the former majority to save money. That is not the way you 
should save money in this system, and I would hope there would 
be no disagreement that we would make that change as we look at 
other unfair structures that have been there for far too long. 
I thank the gentleman for yielding.
    Mr. RYAN. I thank the Chairman. A couple points I want to 
make, then I want to ask a question of you, Mr. Furman. Number 
one, and I just missed the last few go-arounds, so maybe this 
was covered, but no one is talking about undoing a Social 
Security safety net. No one is talking about not having a 
safety net. One thing that has not been discussed here today is 
the issue of generational fairness, and that is something that 
isn't discussed here. Let me give you a case in point. Current 
seniors, my mother, she is 70 years old. She gets about a 5 
percent rate of return on her payroll taxes that she paid now 
in her retirement. I, at my age, and most workers in my cohort 
are going to get about a 1 percent rate of return on our 
payroll taxes that we pay. My children, I have three young 
toddlers, right now, they are scheduled to get a negative one 
percent rate of return on their payroll taxes that they pay 
when they retire. That is assuming we can come up with the $4 
trillion today we would need to set aside to pay them their 
promised benefits that we don't have the money for.
    So, if you do not use personal accounts as a part of the 
solution, then you are confining future generations for sure to 
get much worse benefits relative to today's seniors. Only 
through personal accounts can you achieve an equal measure of 
benefit under today's standards. Now, the word privatization 
has been used over and over and over and over. No one is 
talking about giving people some of their payroll taxes and 
going outside of Social Security, taking it to a stockbroker 
and wishing them good luck, have a nice day, hope you invest it 
well. That would be privatizing it. No one is talking about 
that. What we are talking about is a system inside of Social 
Security, run by Social Security, overseen by Social Security, 
managed by Social Security, where workers would have a 
voluntary option of choosing a fund within the Social Security 
system like we have with our Thrift Savings Plan. So, we are 
not talking about going outside of the system.
    The last point I want to make is in the form of a question 
to you, Mr. Furman, and that is, looking at your testimony, on 
page seven, you refer to explicit debt versus implicit debt and 
you say that the borrowing to pay for personal accounts takes 
the form of explicit debt. Explicit debt are bonds that cannot 
be defaulted on and actually have to be paid, whereas the 
current system of implicit debt, the total amount of implicit 
debt is based upon projections and it is not legally binding. 
So, my question is this. If the rock-solid guarantee that we 
have, that you refer to, is an implicit debt that is not 
legally binding, yet, if you are a worker and you choose a 
personal account and your money goes into a Treasury bond, that 
is explicit debt that they actually have to pay you your 
benefit; isn't it more of a solid guarantee that you are going 
to get your benefit if you choose a personal retirement account 
if it is just the form of a Treasury bond?
    Mr. FURMAN. Two questions. One is, financial markets treat 
explicit debt very differently than implicit debt. Social 
Security has a $4 trillion implicit debt. I have absolute faith 
that Congress is going to eliminate that entire implicit debt 
before it ever materializes----
    Mr. RYAN. That guarantee is based on Congress willing to do 
that, right?
    Mr. FURMAN. I believe Congress will do that.
    Mr. RYAN. We have to hope Congress will do that, right?
    Mr. FURMAN. I certainly hope Congress does that. The second 
thing is a private account is no more guaranteed. The Supreme 
Court has said you can change the tax rate. You can tax 
withdrawals from the account. You can tax accumulations. You 
can change the offset. You can change the accumulation. If you 
got into problems of solvency in a private account system, 
those private accounts could be reduced just as easily as the 
traditional----
    Mr. RYAN. You are saying we can't bind the hands of a 
future Congress, right?
    Mr. FURMAN. That is correct, but what we can do is insulate 
people against market risk.
    Mr. RYAN. Right.
    Mr. FURMAN. The current benefit insulates them against 
market risk. An account doesn't. They are both subject to the 
same political risk. Whether that is small or large, I leave it 
up to your judgment, but they are no different in the two 
cases.
    Mr. RYAN. Let me ask you this. Since the current benefit is 
up to what a future Congress will do, and we can't tie the hand 
of a future Congress, the benefit guarantee in the future for 
people is whatever Congress chooses to give it----
    Mr. FURMAN. Congress has historically honored those 
commitments----
    Mr. RYAN. Sure.
    Mr. FURMAN. In fact, it has generally, in the past, had 
raised benefits over time----
    Mr. RYAN. Well, we changed benefits----
    Mr. FURMAN. That benefit is not subject to market risk.
    Mr. RYAN. That is the problem we are in.
    Mr. FURMAN. Your account is subject to market risk. All of 
the other risks in terms of what Congress can do, you all could 
change the tax rate to 100 percent on our income, take all our 
income.
    Mr. RYAN. Let me ask you this----
    Mr. FURMAN. There are a tremendous number of risks you 
there. You can't get rid of all of them----
    Mr. RYAN. My time is running out. Let me ask you this. You 
and I are about the same age and you and I are probably going 
to get a 1 percent rate of return if all things go well and we 
come up with the money to pay this unfunded liability. If you 
were given the personal account option, like the President's 
plan provides, what would you do? Would you take it?
    Mr. FURMAN. It would make no financial sense for me to take 
it. I could do the same exact financial transaction right now 
by selling some of the bonds in my portfolio and using the 
money to buy stocks.
    Mr. RYAN. Do you have a 401(k) in a portfolio?
    Mr. FURMAN. I have a portfolio and I have bonds in it and I 
could sell them. The President's plan gives people the option 
of borrowing at a relatively unfavorable interest rate. I 
wouldn't recommend that anyone do that.
    Mr. RYAN. So, you would say, I am going to trust a future 
politician for my benefit rather than getting a bond in my 
account that they have to honor?
    Mr. FURMAN. That is not the way--the President's plan 
doesn't change that in any respect. It takes a benefit offset 
out of your existing benefit. It doesn't give you any more 
security in any meaningful political sense, and it gives you 
less security in a market sense----
    Mr. RYAN. Mr. Schieber, do you want to respond?
    Mr. SCHIEBER. Mr. Ryan, if we are going to fix your benefit 
by somehow filling this $4 trillion hole in, your rate of 
return almost certainly has to fall because you are going to 
have to put more taxes in to deliver that benefit, and you 
can't only look at the benefit side of this program. If you are 
going to be taking more money off of people's table, it is 
going to have as much of an economic effect as you are, if you 
adjust their benefit.
    Mr. RYAN. Thank you. My time has expired.
    Chairman THOMAS. I know a lot of you want to respond. 
Again, I can assure you, written responses to those questions 
will be read by the Committee. The Chair is tempted to ask the 
Members of the panel which tenth are you in, in Dr. Schieber's 
structure, based on some of the analysis of how you really 
wouldn't have to rely on Social Security and, therefore, it 
doesn't make any difference. The gentleman from, by gosh, North 
Dakota?
    Mr. POMEROY. Thank you, Mr. Chairman. I admire Dr. Schieber 
very much. I have known him many years. I would just like to 
take one slight issue with what you just said, that basically 
you cut benefits and that hurts, or you do something else and 
it is going to hurt the same people. One idea for filling part 
of the hole, for example, would be we could reference back to 
the debate on the estate tax that my friend, Mr. Hulshof, and I 
had a few weeks ago. We have an estate tax set at $6 million 
per couple, moving to $7 million per couple in the year 2009. 
That would eliminate the estate tax problem for 99.7 percent of 
the people in this country. We could dedicate the overage as a 
dedicated revenue stream into the Social Security trust fund. 
That would take care of--we are running the numbers--some 
substantial percentage of the shortfall, potentially roughly 
equivalent to the benefit cut proposed in this progressive 
indexing scheme. So, because 99.7 percent wouldn't have any 
estate tax, that is one form of contribution to the trust fund 
that really would not be reflected in reduced economic 
consequence to the individual recipient. You know what? I want 
to get this down to brass tacks. You can respond in writing, my 
time is going to go so short. I expect you will respond.
    It is one thing for a Ph.D. Yale economist and a smart, 
albeit rightward leaning, economist-type from Wisconsin to talk 
about how they would make these funds work and what the best 
investment strategies might be. I am thinking of how this all 
works for your average family on Social Security. In North 
Dakota, the benefit is $834, average benefit. As I look at the 
risk on the private savings side, questions about pensions, 
conversions of pensions to defined contribution plans, defined 
contribution plans that raise issues relative to whether people 
are participating, whether people are saving enough, whether 
they are investing wisely, whether they are managing the assets 
through their retirement years, managing their longevity risk; 
nothing but questions, nothing but risk.
    It seems to me that an investment strategy that basically 
acknowledges the risk they already have on the private savings 
side and adds risk into the foundation of income in retirement, 
Social Security is a risk-on-risk investment proposition. Now, 
people don't really manage risk portfolios in that fashion. You 
augment risk by less risk. So, risk-on-risk, at the end of the 
day, I believe, is going to really expose people. One in three, 
we know, depends upon that Social Security check for 90 percent 
or better of their income, two in three for most of their 
income. Now, how much risk do you want to put into that 
foundation? To me, it just flies right in the face of 
economics. I thought it was very interesting when the Secretary 
of Labor was here. She denied having taken any action with the 
Pension Benefit Guaranty Corporation (PBGC) portfolio, but 
indeed, she voted and signed the minutes of a board motion that 
moved the equity position of PBGC from 30 percent down to 15 to 
20 percent. If you look at risk, I am much more comfortable 
with risk in an aggregated class, like a pension fund, than one 
person with one account. How they do determines how they do. 
So, I think that there is a little schizophrenia even within 
the Administration. Equities are bad for PBGC, although the 
Secretary of Labor either didn't know or denied her action 
inappropriately, versus Social Security, where risk is good, 
let us jump all over it.
    I want to get to the benefit cut issue that was discussed 
earlier by Congressman McDermott, and I think this really gets 
to the nub of the question. I would either ask Mr. Apfel or Dr. 
Furman to address this. The bottom line, when we talk 
intergenerational fairness, it looks to me like the progressive 
indexing reduction reduces the Social Security benefit to a 
dimension that that benefit, even when added to the private 
account, cannot produce an income replacement benefit that we 
presently enjoy under Social Security. In other words, the 
future generation is going to get less by way of a retirement 
benefit, private account and Social Security, than what Social 
Security now provides. That certainly does not seem like 
intergenerational fairness to me. I would like Apfel and Furman 
to address that.
    Mr. APFEL. Briefly, it seems to me that if our goal is to 
replace somewhere around 70 percent of pre-retirement earnings, 
which seems to be about the minimum, then there ought to be a 
Social Security foundation that can be counted on no matter 
what happens to individual investments that ought to represent 
a significant piece of that. Combining these two proposals as 
the President has, both the privatization and the reduction in 
the guaranteed benefit, coupled with the middle-class benefit 
reduction that has been proposed, means that Social Security, 
that foundation, is going to be replacing an infinitesimal 
share over time for a very large number of people and growing 
over time. I think that is just putting too much on individual 
savings for the future; that is, putting individuals at risk 
over time if the foundation is going to become smaller and 
smaller and smaller. From what I have seen of the numbers, it 
doesn't seem to me that many people will be living with more 
income. Not only will there be losers, for sure, but I think 
that it is likely that there are going to be a lot of losers, 
potentially, compared to current law.
    Mr. POMEROY. I thank the Chair and yield back.
    Chairman THOMAS. Thank you. Does the gentleman from Texas, 
Mr. Brady wish to inquire, and will the gentleman yield to the 
Chair very briefly?
    Mr. BRADY. I would yield to the Chairman.
    Chairman THOMAS. In 1983, we extended the age of 
retirement. Would you define that as a benefit cut?
    Mr. APFEL. It wasn't actually--Mr. Chairman, I was heavily 
involved with those discussions, not as a Member but as a staff 
person----
    Chairman THOMAS. It wasn't a benefit cut?
    Mr. APFEL. It was a benefit reduction.
    Chairman THOMAS. What percentage of the population was 
affected by that benefit cut?
    Mr. APFEL. At that point, for the people who were then on 
the rolls, none. It was----
    Chairman THOMAS. No, no, no. The question you just 
responded to was a prospective one in terms of the future, not 
the current rolls. I am asking you about the change in age. Is 
it a benefit cut? The answer is yes. How many did it affect? 
One hundred percent of the population. All I am doing that for 
is to understand, if we are going to argue on the point of no 
change in this structure and that certain things are ruled off 
the table, by definition, you cannot reach an agreement which 
will address the problem in front of us. That would truly 
reduce this discussion to an academic exercise, and one of the 
things we have as a responsibility, is to answer real problems, 
not dance on the head of a pin. The gentleman from Texas?
    Mr. BRADY. Thank you, Mr. Chairman.
    Mr. POMEROY. Mr. Chairman, I just have a point of inquiry, 
Mr. Chairman. Point of inquiry.
    Chairman THOMAS. Although that is not a recognizable 
motion, I am certainly willing to recognize the gentleman.
    Mr. POMEROY. I thank the Chairman. I enjoy my working 
relationship with the Chairman. I do want to inquire in terms 
of are we going to proceed the rest of the afternoon where you 
can do a counter-rebut to every----
    Chairman THOMAS. I tell the gentleman, if he noticed, I 
gave the time to the gentleman from Texas and the gentleman 
from Texas yielded a portion of his time to me.
    Mr. BRADY. If I may reclaim my time----
    Mr. POMEROY. I thank the Chairman for that clarification.
    Chairman THOMAS. The gentleman from Texas.
    Mr. BRADY. I find those questions helpful, because it is 
important to know or at least be consistent on what effects and 
options there are across the board for future retirees. I have 
a district in east Texas that is perhaps a lot like America. It 
has some very wealthy neighborhoods. It has some very, very 
poor communities. Out of the 11 counties in my district, nine 
of them are heavily Democratic, some of them very strong in 
union areas. I have done about 30 Social Security workshops. 
People are smart. They get this. They know there is a serious 
problem with Social Security. They know the trust fund is 
really a debt. They know we have been spending the money. I 
have noticed just in the last two-and-a-half months in our 
workshops, whereas I used to spend the whole time on the 
problem, how we got there, what the future looks like, things 
like that, now they go right to the solutions. They want to 
know the ideas. They want to know real solutions to this 
problem.
    We are thankful that we have models all around us that we 
can look at, not just the Federal employee retirement system, 
but in Texas, the Galveston model. It worked for 24 years, 
voted in by the workers themselves. They get, on average, about 
twice their retirement paycheck as Social Security would have 
provided. They have a disability program that would embarrass 
the Social Security system, and they have a death benefit of 
between $75,000 and $220,000 plus keeping the account, with 
interest, itself. So, we have got some models to look at. My 
seniors, my workers, even our young people we talk to, they 
have an interest in personal accounts. They normally come down 
to this. If we can make sure the workers can't touch that 
account, if we can make sure the government can't touch that 
account, and if we can find a good, responsible way to start 
those, they have real, real interest in it because their 
thought is putting real money in a real account, seeing it grow 
steadily over the years, as it has in Galveston and in other 
programs. They see that as a way, one way, of really addressing 
this. So my question is, to the panelists who see personal 
accounts as part of the long-term solution, dealing with the 
issue of prefunding, and perhaps I can start with Mr. Lindsey, 
what ideas do you have for prefunding these accounts to start 
them in a way that we can afford it and that really moves us 
forward?
    Mr. LINDSEY. I think it is obviously, the more you can--
first of all, the question of prefunding gets to the question 
about ownership. I think that if one establishes personal 
accounts, it is more difficult for the Congress to spend the 
money. Mr. Furman is technically correct that Congress can 
always change the rules on anything, but whereas history 
indicates that there has been no reluctance to spend the money 
when it is in a trust fund, I think in the case of IRAs or any 
other account or the Thrift Savings Plan, the Congress has 
respected private ownership, and I think that that would be one 
of the ways you would proceed. A necessary condition for 
prefunding the system would be to establish some kind of a 
private claim that Congress would resist. Prefunding the system 
obviously increases the savings rate, obviously strengthens the 
economy, and it is one way that the government can use compound 
interest to help solve the problem. As was pointed out earlier, 
President Clinton proposed using compound interest, investing 
the Social Security trust fund in the market. The only question 
is, can you protect it from being spent, and the reason for a 
personal account is to prevent that money from being spent.
    Mr. TANNER. Congressman, if I might real quick----
    Mr. BRADY. Yes, sir.
    Mr. TANNER. Just on that point, today, we released a letter 
from 450 major U.S. economists, including five Nobel Laureates, 
saying that the only way to really fix Social Security is to 
include personal accounts as part of that, that that is the 
only way to really build ownership rights and the only way to 
deal with the funding issue, and this is to include individual 
accounts. So, this is certainly, among economists, the 
respected way of achieving this.
    Mr. BRADY. Well perhaps, Mr. Chairman, I could ask for a 
response by letter for any Members who want to respond to that 
and any ideas on how to fund and how to finance the prefunding 
response we make that work, and I yield back, Mr. Chairman. 
Thank you.
    Chairman THOMAS. Without objection.
    [The information was not received at the time of printing.]
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from Colorado, Mr. Beauprez, wish to inquire?
    Mr. BEAUPREZ. I do, Mr. Chairman. Thank you very much. 
First of all, Commissioner Apfel, I think an observation is 
necessary, not really a question, but I was intrigued by your 
dialog with the gentleman from Illinois earlier and 
specifically the part about the utilization of market forces, 
compound interest, as Mr. Lindsey just referred to, as a 
solution kicked around back during the Clinton Administration. 
My observation, quite frankly, sir, is that the major thing 
that has changed since then is that that was President Clinton, 
and now it is President Bush talking about using those same 
market forces as perhaps a portion of the solution to our 
Social Security challenge. I think that is the most significant 
change that has occurred.
    A second observation, if I might, and Mr. Furman, I find 
this one just striking, and I am going to refer to Mr. 
Schieber's chart once again, the oft-cited chart today, on your 
page 20 of your testimony. It is fairly clear, I guess 
surprising to none of us, that the working poor are the ones 
who have the fewest options to provide for their retirement 
benefits, and yet, Dr. Furman--I am not going to ask you a 
question, sir, so you don't have to reach for the button--the 
observation is this, that the very portfolio which--and I was 
going to ask you this question, but you have already given us 
the answer--that you, I assume, probably have, and I assume to 
take advantage of the market, and I assume to build retirement 
benefits and wealth for yourself, you would want to deny to the 
working poor when we have in front of us, at least, a concept 
to do just that, to give these people, people like my parents 
and I were for a good long part of our life, frankly, an 
opportunity at ownership in the United States of America that 
formerly, and currently, tragically, for mostly just the 
wealthy, has been available. You are going to deny that to the 
working poor who have already fewer options. I find that very 
inconsistent with the logic that usually prevails from that 
side of the aisle.
    My third observation, if I might, is that when I was an 
employer, and I proudly was until I came to this Congress just 
a few years ago, one of the days of great celebration was when 
we instituted 401(k)s and deferred compensation plans that took 
advantage, Mr. Lindsey, of compound interest, rate of return, 
market ownership, those things that we are talking about here 
today, and I have no doubt why they were celebrating that. They 
understood that.
    So, here is my question, and I don't think we have really 
gone this direction, although, Mr. Lindsey, you did just hint 
at it. If we can create these things called personal accounts 
that we have a concept out there of doing, and over a course of 
years there is another class of investors out there, and thus a 
pool of investment capital--something I as a banker always 
thought was one of the most limiting things to economic 
expansion--that creates jobs that the working poor say they 
always need, and I agree. Access to capital--do we not have the 
potential, Mr. Lindsey, of providing enormous economic stimulus 
through this newfound investment capital source?
    Mr. LINDSEY. Absolutely. In fact, I think one of the points 
that actually Mr. Pomeroy made earlier was the need that we 
have in this country to save more and to be able to invest 
more. That is going to be the ultimate foundation here. I would 
commend the personal accounts, A, as a way of restraining 
spending, and B, in my testimony, what I recommended was a way 
of increasing the saving rate using Social Security reform as 
an option, but you are right on.
    Mr. BEAUPREZ. I thank the gentleman. A further observation. 
If someone wants to opine in the time I have remaining, I would 
invite that. We have all--all of us, I am sure, on this 
Committee, probably every Member of Congress, have been 
counseled, lobbied, by all kinds of constituent groups. One 
thing that is absolutely obvious to me is that two groups who 
came to me and said, I would just assume you not change 
anything, were the folks from my State, Colorado, with the 
Public Employees Retirement Account (PERA), and the Federal 
employees who have the Thrift Savings Plan. I asked why is 
that, and they said it was because they had a personal account. 
I can direct that money and it is working. Does anybody want to 
offer an opinion contrary to that, why that is a bad idea? Sir?
    Mr. APFEL. I think the Federal employees who now have that 
system also have Social Security. It is one of the great things 
about the system----
    Mr. BEAUPREZ. Are we not talking about that same 
possibility?
    Mr. APFEL. Well, I----
    Mr. BEAUPREZ. Some of both.
    Mr. APFEL. It seems to me that----
    Mr. BEAUPREZ. Yet I have heard resoundingly today that we 
want to deny that choice to a substantial part of American 
working people, and I, for the life of me, don't get it. I 
yield back, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. Does the gentleman 
from California, Mr. Thompson, wish to inquire?
    Mr. THOMPSON. Thank you, Mr. Chairman. I appreciate the 
opportunity to talk to these witnesses today. I just want to 
commend my colleague from Tennessee, Mr. Tanner, who has 
already left us, for bringing up the issue of the impossibility 
of having a strong Social Security dollar and a weak U.S. 
dollar. I think he was right on. The fact that we have this 
tremendous debt, $7.7 trillion today, a $425 billion deficit, 
and that doesn't even take into account the $160 billion that 
was borrowed from Social Security to make ends meet this year, 
and now this discussion about Social Security, and you can call 
it whatever you want, privatization or personal accounts, and 
the fact that this adds an additional $2 trillion to that debt, 
I think puts us in a pretty tough spot.
    We have heard from some today that Social Security is a bad 
deal and that private accounts will make things fairer. I don't 
think it is fair that we continue to pass bills that we don't 
pay for, that we talk about proposals that are going to cut 
benefits to workers and that we compile a mountain of 
additional debt for future generations. Mr. Tanner spoke 
clearly about this, but I think it is important to note that in 
this Committee room, we saw--and I will pass this out for you 
if you would like to see it, this was from the Administration--
that if things continue to go the way they are going, by 2040, 
we will take in as many Federal dollars as it will take to pay 
the interest on our National debt. So, if we continue to do 
things the way we are, in this regard, we are going to cut 
everything, Social Security, Medicare, Medicaid, all other 
programs, and I think that is important to this discussion. Mr. 
Pozen, if you would be so kind to clear something up for me.
    Mr. POZEN. Sure.
    Mr. THOMPSON. The President in April made mention of there 
being no Social Security trust fund. I don't remember exactly 
what he said, but basically, there is no money there. There is 
no trust fund. It is a bunch of IOUs. I think this caused a 
great deal of concern, and I think it derailed the important 
debate that we should be having. This trust fund, is it there? 
Is there money?
    Mr. POZEN. We do have a trust fund, but some people are 
under the impression that these surpluses have been building up 
and are invested by that trust fund. That, unfortunately, 
hasn't been the case----
    Mr. THOMPSON. Not what view people have, but is there a 
trust fund and is it backed by the full faith----
    Mr. POZEN. There is a trust fund, but it doesn't have the 
surpluses invested. Instead, it has special issue Treasury 
bonds which are good money. They will be redeemed, but Congress 
will have to appropriate the money or borrow the money to fund 
these redemptions. So, I think it is a bit of a confusing 
issue, but we should not say that the trust fund bonds will be 
dishonored. They will be honored----
    Mr. THOMPSON. Reclaiming my time, the same action that 
Congress would have to take to make good on any notes that we 
have, debt to foreign countries----
    Mr. POZEN. Yes, but this is $4 trillion debt, roughly equal 
to the amount of publicly held Treasury debt that has built up 
over the last 30 years. So, it is a big number.
    Mr. THOMPSON. Thank you. Mr. Furman, in some of your work, 
you have suggested that, in analyzing this progressive index 
plan, medium-wage income folks, $36,500, will see a benefit cut 
of about 28 percent, is that correct?
    Mr. FURMAN. In fact, that number is based on the actuaries' 
office.
    Mr. THOMPSON. Well, this is particularly interesting to me, 
because the average median income in the seven counties in my 
district is $36,499, and Social Security tells me that the 
average person in my district gets a monthly check of $936. I 
think it is important to note that while we talk about a 
percentage here and a percentage there, that this means that 
the average benefactor in my district making $936 a month is 
going to see a reduction down to about $673 a month. So, that 
is a $260 cut that they are going to receive, and I think that 
is real money and I think the real dollars mean something to 
the people who depend upon Social Security to make ends meet at 
home.
    Mr. POZEN. Excuse me, Mr. Thompson, but I think you are 
just applying a percent----
    Mr. THOMPSON. No. I have got a limited amount of time. 
Sorry. Mr. Apfel, to explore this just a little bit more, in 
your testimony, you said that workers making about $60,000 will 
see about a 90 percent cut in their Social Security?
    Mr. APFEL. That is the defined benefit cut, combining both 
the private account, the reduction in the Social Security 
benefit, and the middle-income reduction through the sliding-
scale system.
    Mr. THOMPSON. So, working on the same information that I 
got from the Social Security Administration, folks who make 
$60,000 a year in my district are going to see a cut of $1,750 
a month from their monthly check. I just think it is important 
to put numbers with that, because this is critical for the 
well-being of folks who depend on this guaranteed benefit, 
whether or not they have add-on benefits, private accounts, 
other investments, this guaranteed benefit component of 
whatever their portfolio may be. Thank you.
    Chairman THOMAS. Does the gentlewoman from Pennsylvania 
wish to inquire?
    Ms. HART. I do, Mr. Chairman.
    Chairman THOMAS. Prior to that, would the gentlewoman yield 
to the Chair?
    Ms. HART. I certainly will, Mr. Chairman.
    Chairman THOMAS. I tell the gentleman from California, if 
he is concerned about those numbers and wants to sit down and 
work with the Chairman to make sure that any structure we 
create doesn't at all entertain those kinds of numbers, the 
Chair is very excited to do that as long as the gentleman from 
California doesn't tell me what I have to not be able to think 
while we are sitting down and discussing, and as long as the 
gentleman from California doesn't tell me what I can't put on 
the table. I would love to sit down with the gentleman and make 
sure that the gentleman's concerns are completely alleviated as 
we address the shortfall in Social Security. I don't know 
whether the ground rules that I just offered you would be 
acceptable.
    Mr. THOMPSON. You wouldn't be able to put any wine from 
other States or other countries on the table.
    Chairman THOMAS. It is understood that if two Californians 
are going to noodle over a program, it will preferably be with 
wine from your district. We make wine in my district, but I 
don't have a place called Napa in my district.
    [Laughter.]
    Mr. THOMPSON. I will bring the wine.
    Chairman THOMAS. I will bring the ideas.
    [Laughter.]
    Chairman THOMAS. The gentlewoman from Pennsylvania. Thank 
you for yielding.
    Ms. HART. Thank you, Mr. Chairman. As long as he doesn't 
bring the w-h-i-n-e, I would join you. I would like to give Mr. 
Pozen an opportunity, if he could do it in 15 seconds, to 
finish responding to Mr. Thompson.
    Mr. POZEN. Yes. I think there would be no reduction in 
benefit levels from today. The Social Security benefits of the 
workers in these examples would all grow. Every one of them 
would grow, and the purchasing power of their benefits would 
grow. So, they would grow in real terms and in nominal terms.
    Ms. HART. Thank you. I actually want to take off on some of 
the subject matter that Mr. Beauprez started with, but first, I 
want to reemphasize something that I think we are not keeping 
at the front of our minds that I think is important, and that 
is that when Social Security was set up, there were gobs of 
workers working for every person who was retired and receiving 
Social Security benefits. Those who don't see some urgency in 
us looking at this program and restructuring this program now, 
I think are ignoring the fact that the demographics have 
changed so drastically that we now only have 3.3 workers 
working for every person who is receiving Social Security 
benefits. That in itself is a problem, but don't forget that 
these people who are receiving these benefits are going to be 
receiving them for a much longer period of time. There is huge 
stress on the system and it is just going to grow. Birth rates 
are down. Within the next 20 years or so, there will only be 
two people working for every person on Social Security. We are 
going to get to the point where we can't even operate a pay-as-
you-go system very quickly, very quickly.
    Now, I understand that people in the income bracket of 
those here at the table, and probably the Members, are not 
going to be terribly affected by changes in Social Security. We 
are not going to be dependent upon Social Security benefits for 
our retirement, but let me tell you, most of the people in my 
district are, and I have spent a lot of time out there 
listening to people and talking with them and listening to 
their ideas about this. I can tell you that the people who seem 
to be the most interested in this are the people who are going 
to be most affected. I had a gentleman stand up at a meeting 
not too long ago--he probably makes about $35,000 a year--and 
he said to me, ``Why can't I invest more than 4 percent 
myself?`` People are a lot more sophisticated today than they 
were in 1935 and 1950, as far as investments, and I think some 
of the panelists have actually been quite disrespectful to the 
American people when they suggest that these people are just 
going to starve if we give them the opportunity to invest some 
money. For God's sake, if they made enough money to set aside 
to invest, they would love to, and that is why this gentleman 
and many others have come up to me and asked for us to make 
sure we give them an opportunity to actually receive a little 
more bang for that buck.
    Twelve-point-four percent is a lot of money. One of the--I 
can't remember which witness, but one of you said that if 12.4 
percent were invested out of your paycheck in a retirement 
plan, that alone could pay your retirement benefit. That might 
have been Mr. Tanner--I am not sure--but one of you had 
something to that effect in your testimony, and I think that is 
an important point to make. The question that I would like to 
ask is, mostly I am going to start with Mr. Pozen because I 
think you work a little bit in the investment field. I would 
expect that most of your clients, or your company's clients, 
are not folks that I am talking about.
    Mr. POZEN. I think most of the low-wage workers, 
unfortunately, don't have enough to invest.
    Ms. HART. Right. I have been supportive of personal 
retirement accounts, and they are personal retirement accounts 
because we are not handing the money over so that, as Harry 
Reid said, they can take it and lose it in Vegas. This is a 
very carefully invested account. Mr. Chairman, did you use my 
time?
    Chairman THOMAS. The Chair is watching the time and the 
gentlewoman hasn't been indicated--the Chairman hasn't told the 
gentlewoman her time has expired.
    Ms. HART. Oh, thank you, Mr. Chairman.
    Chairman THOMAS. However----
    [Laughter.]
    Ms. HART. My quick question which I will ask for a very 
quick answer is, does it make sense in your view that we allow 
people to get a piece of the pie who currently don't have 
enough extra money to invest?
    Mr. POZEN. The answer is yes, if we can get them in a 
balanced account with a long-term investing program with good 
diversification.
    Ms. HART. I yield back.
    Chairman THOMAS. There you go. He saved you 2 minutes. Does 
the gentleman from Indiana wish to inquire?
    Mr. CHOCOLA. Yes, Mr. Chairman. Thank you. Thank you all 
for being here. Thanks for your patience. A little later today, 
I hope to get on an airplane and fly back home to Indiana, and 
tomorrow morning, I hope to be able to take my 14-year-old son 
to school, to eighth grade. He retires, maybe in 2052, when I 
think any projection would say the trust fund is exhausted. He 
is actually interested in this idea, and so I look forward 
tomorrow morning when I take him to school to kind of share 
with him all your ideas on how we are going to solve this 
problem for him and all his classmates. As I go across the 
panel, I think I have a pretty good idea what I can tell him. 
Commissioner Apfel, I think I can tell him what at least you 
used to think when you were Commissioner. I am not sure I can 
tell him what you think today. Dr. Furman, I really am 
struggling on what to tell him you think the solution is. I can 
tell him what you are against, but I want to be able to share 
with him what you are for. Can you help me out?
    Mr. FURMAN. Sure. I think one idea is something we heard 
about before, which is to take the revenue from the reformed 
estate tax, raise the exemption to $7 million, get almost 
everyone off of the estate tax, and the remainder dedicate to 
Social Security. That would be a step we could move forward. I 
would rather do that than cut benefits of the same magnitude 
that have been proposed by the President for the middle class.
    Mr. CHOCOLA. You think the small businessowners--we should 
not repeal the estate tax for the small businessowners, but let 
me just ask you, you earlier referred to the Diamond-Orzag 
plan, I think. Is that a plan that you think is a viable 
potential solution?
    Mr. FURMAN. I think that is certainly an option that this 
Committee should consider. In fact, it is the only plan the 
chief actuary has ever scored that gets sustainable solvency 
without general revenue transfers.
    Mr. CHOCOLA. Doesn't that plan increase taxes by increasing 
the taxable earnings base, increasing payroll taxes, and 
imposing an additional tax on all income above the taxable 
earnings base? So, is that essentially the solution you think I 
ought to suggest to my son, that we raise taxes?
    Mr. FURMAN. We have a $4 trillion deficit here. Every 
dollar that we can get on the revenue side is one dollar less 
of benefit reductions. If your plan is $4 trillion of benefit 
reductions, that will solve the problem and that is a perfectly 
reasonable plan. If you think that is too much in the way of 
benefit reductions, then you need additional revenue. Every 
dollar of revenue is one dollar less of benefit reductions.
    Mr. CHOCOLA. Let me ask----
    Mr. FURMAN. If you aren't willing to get that revenue, you 
have to be willing to accept the responsibility for proposing 
those benefit cuts.
    Mr. CHOCOLA. Let me ask Dr. Hunter, I think a long time ago 
in your opening statement, you said something to the effect 
that transition costs were not new or additional debt. Could 
you expand on that a little bit?
    Mr. HUNTER. Every time payroll taxes come in the door 
today, they are, in effect, borrowed and spent. It has been 
characterized as an implicit debt, but it is a debt 
nevertheless. It is a debt obligation of the Federal 
government. If rather than spending that money, we invest it or 
allow workers to invest it in a personal account, that is a 
dollar less that the government is borrowing. So, every dollar 
that goes into personal accounts is actually a reduction in 
debt.
    Now, that does create a cash flow crunch. So, if the 
government turns around and borrows a new dollar to alleviate 
the cash flow crunch, it hasn't borrowed an additional dollar. 
It simply refinanced the old debt, and that is a classic 
corporate workout. You refinance the debt to free up cash and 
then it gives you time to restructure, and what you are talking 
about with personal accounts is restructuring. It creates 
larger profits, more productive outcomes, and allows the 
personal accounts to generate higher benefits. It is not rocket 
science. It is not voodoo. It is not magic. We do it all the 
time in the corporate world. People do it all the time with 
their homes. It is very straightforward.
    Mr. CHOCOLA. One other thing I think my son and many others 
struggle with is that we debate these particular ideas and not 
a package of good ideas, and I think ultimately, the solution 
is going to have to be a package of good ideas, and Mr. Pozen, 
I think I have heard you talk about that. Could you just 
comment on that?
    Mr. POZEN. Yes. I think the legislative solution has to be 
a package. If we just have benefit constraints, which I think 
we need, and increases in revenues by raising the payroll tax 
base, we have to provide some, what I call, sweetener, some 
positive aspect to the package so that voters will feel good. 
We also should enhance their retirement income through other 
measures, whether it be expanding the Roth IRA or the Low-
Income Tax Credit. So, I think we definitely have to think of a 
package.
    Mr. CHOCOLA. So, it is somewhat misleading to be only 
isolating our comments and criticisms on one particular idea at 
a time.
    Mr. POZEN. Yes. I think that is unfortunate. I think we 
sometimes take one particular idea and push it to a limit when 
we are realistically talking about a combination of ideas.
    Mr. CHOCOLA. Yes, sir?
    Mr. STEUERLE. I have got a list of about 12 or more 
proposals in the back of my testimony--some of which have not 
been discussed much at all--that I think would help restore 
solvency. As I have indicated earlier, I think that we have a 
middle-age retirement system and I think before measuring 
success in terms of replacement rates, or in terms of giving 
them savings accounts, we can go an extraordinary way if we 
build a base system of protection that protects the people who 
are truly old. For people with 12 or 15 years of life 
expectancy left, we should give them a really good minimum 
benefit. We could do that in the current system. We could even 
wipe out poverty among the elderly. Start with that as a base, 
and then buildupon it. Build in private saving if we want a 
private saving component. If some people want more middle-age 
retirement, build it upon the base. That is the way I would 
buildup the system.
    One warning I would give--and I think there is a tendency 
in politics to ignore it--is I don't believe there is a free 
lunch. I am afraid that both the trust fund accounting issue 
and the personal account issue at times get off into the notion 
that somebody can move money around and provide a free lunch. 
If I take money from you and give it to me, I might be better 
off, but you are going to be worse off. There is no free lunch. 
Everything you do budgetarily as our Representatives involves 
taking from one person and giving to the other. Hopefully, you 
do it in a way in the long run enhances the economy, but it is 
not free.
    Mr. CHOCOLA. Thank you all. I yield back, Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. The Chair knows the 
gentlewoman from Ohio wishes to inquire.
    Ms. TUBBS JONES. Thank you, Mr. Chairman, and thank you to 
the witnesses for sitting so long. Just in response to the free 
lunch, the poor people in this Nation have been watching the 
rich people and those who are better off than them have free 
lunch for a lot of years and they are worried about the only 
free lunch that they have relied on, for years and years and 
years, being removed. What I am talking about, is not a free 
lunch; I am talking about Social Security. When I go out, and I 
have done probably ten or 12 sessions on Social Security, 
talking to the people of my Congressional district, Social 
Security is something they earned. It is not a welfare benefit. 
I think that we really need to be clear that, the people who 
have paid into Social Security have paid out of their checks 
and they are expecting that all of us, regardless of our party, 
are going to guarantee them that benefit that they have earned 
that President Roosevelt said it would not be someone that they 
would be administered unto, but it would be the money paid out 
to those who have earned it.
    It is my belief that there is no way that we can continue 
all of the programming of Social Security disability, survivor 
benefit, retirement benefit, if we take money out of that pot 
to create a private fund. I have talked to lots of my 
constituents and what I say to them, in addition to that is, if 
your children are the age of my colleague over there, 14, talk 
to them about saving and creating their own retirement account 
and not relying upon Social Security. We should be debating and 
discussing, what are we going to do to increase the dollars 
from Social Security without causing those Social Security 
dollars to be indebted in order to create a private fund. It 
was never intended to be a private fund. It was never intended 
to be an individual account. It was not created like that. The 
people aren't expecting that from them. Those that are want to 
change a program that has been in place and has been good to 
seniors and administered for 1 percent of its cost for 75 or 
more years. I want to go to Dr. Furman. There were several 
answers you wanted to give that you cut off from. Please feel 
free to use a little bit of my time.
    Mr. FURMAN. Well, thank you very much for that. If I went 
to my employees and told them I gave them a 401(k) plan, they 
would all cheer. If I then told them, oh, but by the way, I am 
taking away your Social Security benefit, I think they would 
be, at the very least, a little bit less excited than they were 
at first blush, and that is, in effect, the way the President's 
plan works. There are ways to encourage families to save and 
moderate-income families to save, and I take a back seat to no 
one on that. We have the Savers Credit right now. It is the 
only tax incentive for moderate-income families to save. It 
expires in 2006. The President, that is the only tax thing 
passed in 2001 that he has not proposed to extend. It is the 
only thing that helps middle and moderate-income families save, 
and it is the only part of the tax cut that he wants to expire. 
If you genuinely care about encouraging wealth creation for 
moderate-income families, there are a lot of ways to do it that 
will genuinely make them more wealthy, not just cut your Social 
Security benefit and give you something else, and that would be 
an excellent step one could take if it was paid for, so thank 
you.
    Ms. TUBBS JONES. The difference between a Thrift Savings 
Plan that I and my colleagues enjoy and Federal employees enjoy 
and the proposal of a private account under Social Security 
is----
    Mr. FURMAN. The difference is that somebody who retires 
with a Thrift Savings Plan is going to get about half of the 
income they need in retirement from Social Security. That is 
the floor. It is a pretty minimal floor. On top of that, they 
are going to build using their 401(k)s and IRAs. I think more 
middle-income families do need to be able to build on top of 
that with 401(k)s and IRAs and we should be able to help them 
to do that. If you don't want----
    Ms. TUBBS JONES. Well, the proposed private account that is 
being proposed under Social Security is not the same kind of--
that is going to be a deduction from----
    Mr. FURMAN. Those plans don't say, ``here is your floor, we 
are building on top of it.'' They pull the rug out from under 
you, and subject you entirely to the market. That is a 
completely different thing from a 401(k) plan. It has nothing 
to do with wealth creation for moderate-income families.
    Ms. TUBBS JONES. Last, deficit spending causes a dilemma 
for private, for Social Security going out into the future, is 
that correct?
    Mr. FURMAN. That is exactly right. I think that is exactly 
right. I agree with Gene. There is no such thing as a free 
lunch. Private accounts don't add money to Social Security, 
they take it out of it. They make what you need to do even 
larger than what you would otherwise need to do.
    Ms. TUBBS JONES. Mr. Chairman, I am giving you 2 seconds 
back. Thank you very much.
    Chairman THOMAS. I thank the gentlewoman very much. To 
conclude this particular hearing, it is a real pleasure for the 
Chair to recognize the newest member of the Committee, and I 
just want to assure you, Mr. Nunes, that every other Member who 
is more senior to you warmly welcomes you to the Committee 
because all of them were at one time in your position and they 
aren't anymore.
    Ms. TUBBS JONES. Thank God.
    Chairman THOMAS. The gentleman from California is 
recognized.
    Mr. NUNES. Thank you, Mr. Chairman, and it is a pleasure to 
be here with you, my colleague from California, and to come 
into the Committee for the first time on a very important 
debate called Social Security. One of the advantages of going 
last, if there is an advantage, is that I have gotten to hear 
everyone's testimony. I have been fortunate to hear Mr. Ryan, 
about his plan. We have heard about Mr. Shaw's plan, Mr. Bush's 
plan, Mr. Thomas's plan, and several plans have been discussed. 
Mr. Tanner pointed out that 450 economists, I think, today 
wrote a letter. Some of the Nation's most important economists 
have said that we can't solve the Social Security crisis 
without some type of private account, and I think there is 
something to be said for that. Referring back to the plans that 
have been discussed up here by my colleagues on the Committee 
on Ways and Means, I would like a yes or no answer to this 
question, please, and we will start with Mr. Lindsey. Did you 
hear any of the Democrats today offer a plan to save Social 
Security, Mr. Lindsey?
    Mr. LINDSEY. No.
    Mr. NUNES. Mr. Pozen, did you----
    Chairman THOMAS. The Chair would hasten to explain the 
rules, and that is a Member has every right to ask whatever 
question he so chooses. There is no obligation on the part of 
the witness to respond directly or otherwise.
    Mr. NUNES. Thank you, Mr. Chairman.
    Chairman THOMAS. There is an occasional free lunch.
    [Laughter.]
    Mr. NUNES. Mr. Pozen?
    Mr. POZEN. I heard a witness say the Orzag-Diamond plan, 
but I haven't yet heard any Congressperson say they were 
willing to propose that package of several tax increases and 
benefit constraints. It is an honest plan, but I haven't heard 
a politician adopt it yet.
    Mr. NUNES. Mr. Schieber?
    Mr. SCHIEBER. No.
    Mr. NUNES. Dr. Steuerle?
    Mr. STEUERLE. Pass.
    [Laughter.]
    Mr. NUNES. Mr. Apfel?
    Mr. APFEL. You asked whether elected officials have 
proposed plans?
    Mr. NUNES. Any today during this hearing where we have been 
discussing what to do about the future of Social Security.
    Mr. APFEL. I have not heard any plans that did not increase 
borrowing dramatically to pay for Social Security to solve the 
long-term solvency problem.
    Mr. NUNES. Have you heard plans, at least proposed, by the 
Republican side of the aisle?
    Mr. APFEL. That entailed drastic levels of new borrowing 
that I think put Social Security benefits at risk.
    Mr. NUNES. That is fair enough that you have your points on 
the legislation, but at least there have been plans that have 
been offered for discussion, which I think is important to have 
all of you here to analyze that, these plans, and add to the 
discussion, and I want to thank all of you for dedicating a 
large portion of your life to trying to solve these problems 
that we face with Social Security. I appreciate your opinion 
that there are problems with the plans on this side of the 
aisle. Well, it is better than having no plan, in my opinion. 
Dr. Hunter?
    Mr. HUNTER. I did not hear any plans from the other side of 
the aisle today, but I will tell you, and the good news is 
that, especially before this last Presidential election, I 
spent many hours on Capitol Hill talking to Democrats on this 
side and on the other side of the Capitol, and I will tell you 
that there are many who are very interested in personal 
accounts, and that is the reason I started off this morning by 
saying--it seems like a long time ago now--that unfortunately, 
the political climate may not be right to do it all, right now. 
That is the reason I encourage the Committee to do what I think 
is perhaps possible, and with the Chairman's leadership this 
may actually happen, because everyone, everyone in the country 
realizes it is wrong to spend the surplus, and a good number of 
your colleagues on both sides of the aisle recognize that the 
best thing to do with those surpluses is to invest them. We can 
have an interesting debate on how they should be invested, but 
I think we have a real opportunity here, and you may not get 
very many Democrats right now, but I have confidence this is a 
long process and this is a beginning, and I commend the 
Chairman for holding this hearing.
    Mr. NUNES. Thank you. Dr. Furman?
    Mr. FURMAN. It has been a long hearing, and I may have 
missed it, but I actually didn't hear anyone on the Republican 
side, on this side, embrace any specific steps to improve 
solvency in terms of reducing benefits or raising revenues. If 
you want to transfer general fund revenue to Social Security, 
you can extend solvency, but I didn't hear any specific steps. 
In fact----
    Mr. NUNES. You heard specific plans laid on the table?
    Mr. FURMAN. The one specific step I heard from anyone here 
today that would improve our long-run fiscal outlook was Mr. 
Pomeroy and the estate tax proposal. I don't think I heard 
anything else that would, but you can correct me if I am wrong, 
if anyone--now, I have heard a lot of things from the panel, 
Bob Pozen's ideas, what a lot of other people have. I didn't 
hear anyone up there embracing them. I only heard about ideas 
that would cost money, not save money.
    Mr. NUNES. Thank you, Dr. Furman. Mr. Tanner?
    Mr. TANNER. Yes. I heard several proposals on the 
Republican side. The proposal by Representative Johnson, by Mr. 
Ryan, by Mr. Shaw, all of them scored by the Social Security 
actuaries as restoring Social Security to permanent sustainable 
solvency. From the Democratic side, I did not hear any 
proposals at all for restoring solvency or fixing any of the 
other problems within Social Security, which is really a shame, 
because this used to be a very bipartisan issue. Members like 
your former colleague, Charlie Stenholm, or Members from the 
other body like Senator Robb, Senator Kerry, Senator Moynihan--
all who supported individual accounts at one time or another 
and were very willing to take up Social Security reform in a 
bipartisan manner--are gone and it seems to be now simply a 
matter of misinformation and very partisan debate on that side 
of the aisle and it is a shame. I say this as someone who is 
not a Republican, that I am very disappointed.
    Mr. NUNES. Thank you, Mr. Tanner. This being my first day 
on the Committee, Mr. Chairman, I am a little bit disappointed 
to hear none of my colleagues on the Democrat side of the aisle 
offer any alternatives. I hope that the next hearing when I get 
to attend a full Committee hearing that we will actually have 
some ideas by the Democrats that have been laid out on the 
table. Until then, unfortunately, the Republicans have to 
debate amongst ourselves. We have many different ideas, and we 
are using many of your ideas and many of the proposals that 
have been put upon the table. It sure would be nice to have at 
least some input from the Democrat side of the aisle. With 
that, Mr. Chairman, thank you for the welcome to the Committee.
    Chairman THOMAS. The gentleman's time has expired, and the 
Chair would hope that Members are on this Committee to, first 
of all, listen. Even if they have an idea of how they might 
want to solve the problem, have the courtesy of listening to 
other ideas, so that their ideas can be tested in the crucible 
of competition on ideas, i.e., which one does the best with the 
least and all the other criteria that we use to judge between 
plans. So, the Chair is not upset at this time that individual 
Members haven't formed or are willing to come forward with a 
particular plan.
    What the Chair is concerned a little bit about, having been 
on this Committee and on the Subcommittee at the time that we 
looked at it previously, more than 20 years ago, I can't recall 
at any time a Member telling another Member, you cannot come to 
the table with a particular idea or I won't come to the table 
to discuss ways in which you can deal with this issue. That is 
new. That is shocking to this Chairman. It is sad that people 
would spend the time and energy to get elected to office, the 
time and energy to get on this Committee, and then say, you 
have to drop your ideas before you get to hear mine. I have no 
problem with them bringing their ideas. I have a problem with 
people telling me I can't bring mine, and that is not to say 
that my idea may be an idea that is out there. I just don't 
think you should say that about any idea if you are here to try 
to solve problems for the American people.
    I want to thank all of you. I think it is one of the best 
panels we have had in a long time, and I say that with no 
exception, because I don't want someone to sit there and not 
express how they feel based upon particular subject matter. We 
need the interaction between all of you very bright and 
talented people who have, as the gentleman from California 
said, spent years looking at this subject matter. It is not 
easy subject matter to deal with. Everybody says it is easier 
than Medicare. I will simply offer this evidence. We have 
changed the Medicare law three times, and we are probably going 
to change it another five. We have not addressed Social 
Security in more than 20 years. This opportunity, in the 
Chair's opinion, cannot be missed, even if the changes are at 
least shoring up to move on to additional discussions as we 
mature and grow in our knowledge about how we can make changes. 
More importantly, as we know we have to respond to the aging 
Americans, the aging society, and the fact that today's 
seniors, I believe, are far more competent and knowledgeable 
and understanding than seniors in the thirties, on the ways in 
which they can assist in taking care of their own lives. The 
hearing stands adjourned.
    [Whereupon, at 3:41 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]
      Statement of Alex J. Pollock, American Enterprise Institute
    Linking ownership of property to liberty in a free society is 
deeply embedded in the American political philosophy, going back to the 
ideas of John Locke and the Founding Fathers. Personal Social Security 
accounts as vehicles for the expansion of ownership of financial assets 
are very much in keeping with American tradition. Congress should seek 
to make such accounts a reality.
    In the discussions of personal accounts, all proposals so far have 
begun with diverting cash from Social Security taxes, resulting in a 
diminution of receipts by the Treasury Department. Could personal 
accounts be created without diverting tax receipts?
    Consider the mandatory savings function of the Social Security 
system, which currently works as follows: Social Security taxes are 
collected by the Internal Revenue Service and deposited in the general 
fund at the Treasury Department, where they are spent on benefits but 
also on other federal programs. All the cash is spent; nothing is 
saved. Upon receipt of borrowed or ``invested'' Social Security funds, 
the Treasury issues bonds to the Social Security Trust Fund. The bonds 
represent Treasury liabilities held indirectly for the public.
    I suggest creating personal accounts without diverting any cash 
from payroll taxes. This could be done by changing the current 
structure in one key respect: the Treasury could issue bonds directly 
to personal accounts, bypassing the ``middle man'' role of the Social 
Security Trust Fund, thereby creating ``your own trust fund.''
    The personal accounts would thus be created by putting Treasury 
securities in them, not cash. The current Trust Fund is an unnecessary 
``middle man'' between the citizens and the U.S. Treasury, who are the 
only actual principals involved. Cutting out this middle man makes the 
relationship much clearer and more honest, while making the citizens 
direct owners of top quality retirement assets.
    There are perfect Treasury bonds for these accounts: Treasury 
Inflation Protected Securities (TIPS). Inflation poses the largest 
threat to retirement savings, and these default-free instruments also 
fully protect against that threat, thereby minimizing risk.
    This should be a purely voluntary program; individuals could elect 
to remain in the current program or to receive TIPS in their personal 
accounts instead of future benefit payments of equal economic value. 
After a certain restricted period, individuals could choose to reinvest 
their assets in other financial instruments, although I believe a many 
would simply stay with the TIPS ``default option.'' Ownership through 
personal accounts would also allow for account holders to bequeath 
their assets to future generations.
    Think how much more meaningful direct ownership of these Treasury 
bonds in a personal account--in ``your own trust fund''--would be for 
American individuals and families than the obscure operations of the 
current Trust Fund which few understand. In my opinion, this would be 
an extremely popular alternative--simple, easy to understand, and 
attractive. By analogy to the federal employees' thrift plan, it could 
be thought of as ``a G-Fund for everybody.''
    This proposal would result in greater and more widely distributed 
ownership of financial assets among American households. It would 
provide assets with no default risk and no inflation risk, with the 
ability to pass them on to future generations. It would establish a 
stronger and more understandable financial relationship between 
government and citizens, since Treasury securities are much more 
inviolable contracts than are off-balance sheet future political 
promises.
    Given the opportunity, I believe the majority of Americans would 
prefer to accumulate inflation-protected retirement assets they 
actually own. They should be given this choice.
                               __________

 A New Approach to Personal Social Security Accounts: ``Your Own Trust 
                                 Fund''

    By transforming Social Security, at least in part, to a program of 
greater personal property for the average American, voluntary personal 
accounts would be a key structural reform.
    But most current proposals for personal accounts also have serious 
disadvantages: they are complicated, to many people they are confusing 
and they require diverting a portion of payroll taxes away from the 
U.S. Treasury. How can there be effective management for millions of 
small accounts? Isn't the stock market too risky? Won't many people be 
confused by being forced to make choices they do not understand? Who 
can be sure the benefits are worth the costs and risks?
    There is, however, a better way to launch Social Security reform 
using private accounts and inflation-indexed Treasury bonds (or 
``TIPS''), which will deliver all of the benefits of personal accounts 
with none of the costs or risks cited by their opponents.
    I propose creating personal accounts with an extremely simple and 
clear financial structure, without diverting any payroll tax receipts 
away from the U.S. Treasury, and with low cost and efficient 
operations. The results will be greater ownership of risk-free assets 
throughout American households, ability for inheritance, clear links 
between one's own efforts and retirement savings, and complete clarity 
in the dealings between the government and the citizens. The transition 
could begin promptly.
    The essential proposal is this: Social Security tax payments by 
individuals and employers, and Social Security tax receipts by the 
government would remain the same as they are now. No cash would be 
diverted, and the Treasury would have the same cash receipts from 
Social Security taxes as it does now. But in exchange, Treasury would 
not issue bonds to the Social Security trust fund. Instead it would 
issue bonds--specifically, inflation-indexed bonds or ``TIPS''--
directly to the personal accounts of the individual citizens 
themselves, which would become in effect their own personal trust 
funds. These accounts would not receive cash but would automatically 
receive the safest possible investment for retirement savings.
    This is proposed as a voluntary alternative covering the portion of 
Social Security taxes which represents mandatory savings. Everyone 
would be given the choice to participate in the proposed personal 
accounts or stay in the current Social Security program. It is very 
probable that a large majority would choose the personal accounts if 
they are designed as recommended, but this should be a purely voluntary 
option.
    This financial structure transparently shows the real transaction 
which is taking place between the two real principals involved: the 
American citizen and the U.S. Treasury Department. It cuts out the 
unnecessary and confusing ``middle man'' role of the Social Security 
trust fund, which in fact is simply a Treasury liability.
    The government's total obligations would not increase. Some 
Treasury debt would shift from being owned by the trust fund on behalf 
of the citizens to being owned directly by the citizens themselves in 
their own personal trust fund accounts. The bonds in the personal 
accounts would represent an increase in Treasury debt owned by the 
public, but would be issued, like bonds now sent to the government's 
trust fund, as automatic private placements.
Simplicity
    The simplicity of the proposed approach would remove from the 
current political debates many distracting issues, such as whether we 
could afford the transition costs, whether personal accounts would be 
too risky, whether Wall Street would reap a bonanza, and whether 
operating costs would be too high. It would make unnecessary the 
proposed delay in implementation until 2009.
    It would also remove a central objection made by the opponents of 
personal accounts: that Social Security must be a moral imperative, an 
inviolable promise and part of the social contract. Nothing could make 
Social Security more imperative, inviolable, and a contract than to 
turn it into a U.S. Treasury bond. Indeed, the only advantage which 
might be argued for the current Social Security structure over the 
proposed personal accounts is that the current structure leaves open 
the possibility for the government to renege on its promises and reduce 
benefits. This is presumably not an argument that opponents of personal 
accounts will wish to emphasize.
    How much of the current structure should be replaced by the 
proposed personal accounts? The answer reflects the fact that Social 
Security has two components: first, a mandatory savings program for 
retirement and old age, applicable to citizens of all levels of income; 
and second, a welfare or safety net program providing a minimum 
retirement income and disability insurance.
    The second component by definition requires commingling of funds 
and should remain as it is. This would include the disability portion 
of Social Security and the provision of a minimum retirement income for 
low income households.
    The proposed personal accounts apply to the first or mandatory 
savings component: which is what most Americans think their Social 
Security payments should be. A meaningful portion, ideally the 
entirety, of Social Security taxes which represent mandatory savings 
should have available this personal account option.
    The simplicity of the proposed change in the mandatory savings 
function is easy to see by reviewing the current structure of Social 
Security and contrasting it with the proposal.
Current Structure for Mandatory Savings
    The current Social Security structure handles the mandatory savings 
function with the following process:

    A. Cash from the citizen, both directly from wages and indirectly 
as employer contributions which could otherwise have been wages, is 
sent to the government as Social Security taxes.
    B. Social Security cash goes to the U.S. Treasury.
    C. Treasury spends the cash.
    D. Treasury issues a Treasury debt obligation to the Social 
Security program. This debt is the trust fund. It is part of the total 
Treasury debt outstanding.
    E. The Social Security program has an obligation to pay the citizen 
benefits later.
Personal Accounts and Diversion of Cash
    Under all proposals for personal Social Security accounts so far 
put forward, some portion of the citizen's cash would not be sent to 
the government, but deposited instead in an individually owned 
retirement account.
    Numerous political and financial objections have been made to this 
idea. Objections to current personal accounts proposals include:

     1.  The lost payroll taxes would take cash away from the Treasury.
     2.  Assuming that this cash loss would not be offset by increased 
taxes, the national debt must correspondingly increase.
     3.  This would require the bond market to absorb large increased 
sales of Treasury debt, perhaps pressuring domestic and foreign capital 
markets and resulting in upward pressure on interest rates and 
additional downward pressure on the dollar.
     4.  The individual accounts would impose difficult and 
intimidating decisions about how to invest the cash, which many people 
may not be equipped to make or indeed wish to make.
     5.  In trying to make these decisions, owners of their own 
retirement funds may be induced to take excessive risk--to ``roll the 
dice'' or ``play the slots.''
     6.  Personal accounts call into question the government's 
commitment to future Social Security benefits, which should be 
inviolable promises.
     7.  Supplying mutual funds to millions of small accounts would 
cause high operating costs.
     8.  The program would create large windfall profits for Wall 
Street firms.
     9.  Investments in personal accounts may not appropriately match 
the duration of investments with long-term retirement needs.
    10.  Transition costs mean that implementation needs to be delayed 
for several years.

    The proposed new design for personal accounts addresses every one 
of these objections.
    To achieve the social advantages of personal accounts, and to a 
significant extent enhance the philosophy of personally owned assets, 
is a major and highly desirable structural reform in and of itself. 
However, it also offers the possibility, as discussed below, to address 
the long run excess of social security benefit expense versus income.
A New Structure for Personal Accounts
    In the proposed structure, there would be no diversion of cash from 
the Treasury. Social Security payroll taxes paid to the government and 
cash received by the Treasury would stay the same as under the current 
structure. If voluntarily chosen by the citizen, the portion of these 
taxes representing mandatory savings would be earmarked for personal 
accounts. However, these accounts would not receive cash, but 
automatically receive an appropriate Treasury inflation-indexed 
security.
    The mandatory savings function would thus work as follows:

    A.  Social Security taxes would be sent to the government, as they 
are now. Treasury's cash receipts would be the same as they are now. 
There would be no cash shortfall.
    B.  Treasury would spend the cash, as it does now.
    C.  Treasury would issue a Treasury debt obligation, but to the 
citizen's personal account, not to the trust fund--thereby creating 
``your own trust fund.''

    That is all. Thus the citizen would have a risk-free investment 
very well suited for retirement savings: an inflation-indexed Treasury 
security. Treasury debt owned by the public in personal accounts has 
increased, but debt owned by the trust fund has decreased. Treasury 
owes the citizen directly and clearly, rather than indirectly and 
confusingly through the trust fund ``middle man.''
    Since the savings are now in the form of a directly owned, actual 
Treasury bond instead of future Social Security benefits, there must of 
necessity be an equivalent reduction in future benefits to offset the 
acquired Treasury security. The trust fund does not receive Treasury 
bonds but by the same taken has reduced future benefit obligations. For 
the citizen, the replacement of future benefits with actual assets of 
course applies only on a going-forward basis, as the personal accounts 
grow. All benefits earned by past Social Security taxes, before the 
private accounts transition, would remain unchanged.
    The proposed structure is quite similar to a historically tried and 
true long-term savings program: payroll deduction for the purchase of 
U.S. savings bonds. It is also similar to a very popular option under 
the Thrift Savings Plan for federal government employees: the ``G 
Fund,'' which invests solely in U.S. Treasury obligations.
    Such analogies, as well as the basic simplicity of the structure, 
would make it easy for the public to understand. Would most people 
choose to create their own portfolio of Treasury inflation-indexed 
bonds rather than hoping for future payments from off-balance-sheet 
political promises? I think they would.
Relation to Future Benefits
    If the economic value of the bonds acquired in the personal 
accounts is exactly equal to the economic value of the reduction in 
future off-balance-sheet future benefit promises, we would have created 
the many advantages of ownership, but the aggregate Social Security 
fiscal deficit would remain unchanged. However, this trade-off could be 
given a progressive structure, analogous to recent proposals for 
progressive changes to Social Security indexation formulas, for high-
income households.
    In other words, for the majority of households the TIPS exchange 
ratio would be 1 to 1, but for high income households it could be 
greater than 1 to 1. Since many of these households believe that in any 
case, their Social Security taxes will inevitably increase or their 
future benefits be reduced, or both, the trade in exchange for 
achieving personal accounts could be viewed as advantageous. The 
transition to personal accounts would then reduce the Social Security 
deficit in addition to its other attractions.
The Specific Treasury Bond
    The perfect candidate for which Treasury obligations should be 
issued to the personal Social Security accounts is clear: Treasury 
Inflation Protected Securities (TIPS). TIPS by definition preserve 
purchasing power against inflation, the single greatest risk and an 
essential consideration for retirement savings.
    The TIPS would be issued in automatic private placements for each 
personal account. Because all the TIPS involved will be book-entry 
securities in fully automated form, small accounts and small amounts 
could be easily handled, and operating costs will be low.
    Suggestions for how the details of this would work follow. Details 
could obviously vary around the essential structure.
    The TIPS should have maturities based on the individual's expected 
retirement date. For example, a twenty-five-year-old with an expected 
retirement age of sixty-five might in the first instance receive a 
forty-year TIPS. Note that it is proposed to consider creating long-
term TIPS to match the needs of retirement savings. All interest and 
inflation adjustments should simply accrue, as with typical savings 
bonds, so there is no problem of investing small amounts of cash. 
Laddering maturities as discussed below would result in a sensible 
pattern of cash flow during retirement.
    The average real return of government bonds (i.e. the yield net of 
inflation) in the long term is approximately 3 percent. The long-term 
TIPS to be privately placed in the personal accounts with a restricted 
period could have a real yield of about this same 3 percent. In an 
average inflation of 2 or 3 percent, for example, this would result in 
a compound annual return of 5 or 6 percent, respectively. A 3 percent 
real yield would match the real 3-percent discount rate often used in 
calculations of the value of future Social Security benefits.
    For ownership to be effective, the TIPS received in the personal 
accounts must be negotiable securities. However, it would make sense to 
have a period after each private placement during which sale would be 
restricted. After that, the citizen would be entirely free to sell in 
order to make other eligible investments, if desired, provided of 
course that all proceeds and investments must stay in the retirement 
account until qualified for withdrawal.
    The appropriate length of the restricted period before the 
privately placed TIPS would become negotiable must be defined. A 
starting suggestion would be five years, to insure a smooth transition, 
while also allowing the future addition of private asset categories.
    The maturities of the TIPS should be based on expected retirement 
age but should not all mature at that date, which would cause a 
difficult decision point and large reinvestment risk. The idea of 
buying an annuity upon retirement does not address this problem, since 
if at that time interest rates are low, annuities will be unattractive 
to purchase--not to mention the need to address the credit risk of the 
annuity writer. A preferable approach would be to automatically ladder 
the maturities of the TIPS in the personal accounts to spread cash 
receipts from maturing bonds over the retirement years. Recall in this 
context that the safety net component of Social Security would also 
continue to function.
    Individuals who choose to continue working past retirement age 
would continue to accumulate assets in their personal accounts. This 
would provide an incentive to reduce the extended period of retirement 
which is a central cause of Social Security's fiscal deficit without 
having to mandate changes in retirement age that would naturally be 
inappropriate in many individual cases.
    In sum, the personal accounts would represent a voluntary way to 
hold mandatory savings. Continuing to hold the TIPS past their 
restricted period would also be voluntary.
    But no investment decisions or risks would be forced upon the 
citizen. Especially considering those who might feel confused or 
intimidated, no action would be required to have a very sensible and 
safe investment, with zero credit risk and guaranteed inflation 
protection, very suitable for retirement savings, automatically 
provided. This means that there is a robust ``default case,'' an 
important element in a system of choices.
    A safe prediction is that a significant proportion of these 
securities would never be sold, but would be held to maturity. There 
would be no rush and no pressure on the individual to have to do 
anything, unlike the case of having to invest cash. In addition, the 
restricted period should comfort any observers who might fear the 
possibility, however unlikely, of a large initial outflow of TIPS into 
the market.
Benefits for an Ordinary Couple
    Suppose an ordinary couple signed up for the personal account 
option when they were both twenty-five years old, with a household 
income of $50,000 per year. What might their personal account 
retirement assets look like at age sixty-five, assuming the ``default 
case'' of simply holding their TIPS?
    As an example, assume the real yield on TIPS is 3 percent, average 
inflation of 2.5 percent, real wage increases of 1.5 percent, and half 
the Social Security tax represents mandatory savings devoted to 
personal accounts. At age sixty-five they would own investments 
totaling over $800,000. If they worked to age seventy in line with 
their greater expected longevity and health, the personal account 
investments would total $1.15 million.
    Now suppose two-thirds of the Social Security tax represents 
mandatory savings which generate TIPS for the personal account. At 
sixty-five, the investments would be more than $1 million; and at age 
seventy, more than $1.5 million.
    These would be real assets, really owned by ordinary Americans.
Conclusion
    The proposed approach would lead to personal Social Security 
accounts as a key transition and structural reform. It addresses all of 
the objections to private accounts, as follows:

     1.  There would be no cash shortfall to the Treasury.
     2.  There would be no increase in the total national obligations. 
Treasury debt owned by the public would increase, but Treasury debt 
owned by the ``trust fund'' would decrease. Off-balance-sheet future 
benefit liabilities would also decrease. If the suggested progressive 
structure were adopted, future liabilities would decrease by more than 
the value of the TIPS issued, thus reducing the Social Security 
deficit.
     3.  There would be no need to market more Treasury debt--the bonds 
involved would automatically be privately placed in the personal 
accounts.
     4.  No difficult choices would be imposed on individuals--if they 
do nothing, a very safe and appropriate retirement investment is 
automatically provided. The default case is robust.
     5.  There is no pressure to take risk or ``roll the dice.'' TIPS 
are the exact opposite of the rolling dice. In particular, they 
directly address the biggest risk to retirement savings, namely 
inflation.
     6.  The best way to make the promises of the government truly 
inviolable is to make them into an explicit Treasury bond.
     7.  The use of TIPS would allow a low cost, efficient book entry 
system.
     8.  With investments automatically provided, there is no windfall 
for Wall Street, and small accounts can be handled efficiently.
     9.  Appropriate long-term investments matched to retirement needs 
are automatically provided.
    10.  The proposal would allow prompt implementation of personal 
accounts.

    Moreover, the idea is simple and easy to understand. As a voluntary 
alternative to build personal ownership of long-term savings, I believe 
having ``your own trust fund'' would be readily chosen by a majority of 
Americans.

                                 

   Submission of Eva Hain, California Retired Teachers Association, 
                         Sacramento, California
    Chairman Thomas and members of the Committee, my name is Eva Hain 
and I am president of the California Retired Teachers Association. We 
are a non-profit organization with 53,000 members, and we represent the 
interests of the 170,000 retirees who receive a pension from the 
California State Teachers Retirement System (CalSTRS). I want to thank 
you for convening these hearings on alternatives to strengthening 
Social Security, America's fundamental safety net for retirees.
    We believe that a basic premise of strengthening Social Security is 
to keep faith with its promise of ensuring that older Americans do not 
fall into poverty at the end of their working lives.
    The CalSTRS system is not integrated with Social Security, so many 
of our members are victims of the Windfall Elimination Provision and 
the Government Pension Offset. These two penalties remove that 
financial safety net and we find our members suffering from unexpected 
income losses late in life. Many women are plunged into poverty when 
their husbands die and they are denied any survivor's benefits from 
Social Security due to the Government Pension Offset. Other teachers 
find their summer work, when they typically paid into Social Security 
in order to support their families during the school-year break, is 
discounted in retirement when they receive thousands of dollars less 
than they would have if they had not been teachers.
    The underlying assumption seems to be that teachers have their own 
pension and that should protect them from poverty. The sad truth is 
otherwise. CalSTRS conducted analyses in 1998 and 2005 on the adequacy 
of the pension benefit they provide, and in both instances found many 
lagging behind the amount of income they need to maintain an adequate 
lifestyle in retirement. Even with long years of teaching service, 
California educators who retired before 1998 were only able to replace 
about 58 percent of their income--far below what experts consider to be 
adequate. The typical female retiree receives less than $2,000 a month 
from her teacher's pension, hardly sufficient in a high-cost state like 
California. Unlike Social Security, which provides full cost-of-living 
increases annually, teachers' pensions in California are only protected 
at 80 percent of their original purchasing power.
    In addition, many of our members only found out about the WEP and 
GPO when they filed for their benefits. By then, it was too late to 
make alternative financial plans to ensure a secure retirement. Worse, 
many others mistakenly receive benefits for years and then are forced 
to pay back all money received--in one instance more than $40,000. In 
most instances, these people relied in good faith on estimates of 
benefits provided by the Social Security Administration itself. The 
Social Security Administration itself has admitted that it overpays 
upwards of $335 million a year in mistaken benefits. If Social Security 
doesn't know who is affected by these penalties, how can we expect that 
those subject to them will understand them?
    Beyond the policy itself, you have to understand the personal 
financial suffering many people have endured because of these 
penalties. We have collected many, many such stories from our members 
and I want to share some of those with you today.
    Ruth Benjamin of San Diego had planned on Social Security payments 
of approximately $800 per month when she retired, because that is what 
the Social Security Administration told her to expect. Instead, due to 
the GPO, she receives only $216 per month plus a teacher's pension of 
about $700 per month. Her husband is a retired New York City Police 
Department officer, who receives a police pension of approximately 
$1,500 per month plus a Social Security benefit of $1,000 per month. In 
their retirement planning, they opted to take a higher police pension 
without survivor's benefits because they believed Ruth would be 
adequately provided for with her teacher's pension and Social Security. 
Now, if she becomes a widow, she will have to survive on income of less 
than $1,000 per month due to these penalties.
    Wanda Moore of Fresno was married for 38 years to her husband, a 
barber. He paid into Social Security for 40 years and died before 
collecting any benefit. She was initially told she would receive a 
survivor's benefit of $496 per month from Social Security before that 
payment was eliminated under the GPO because of her teacher's pension.
    Carol Huntsman of San Diego began her teaching career at age 36 and 
was only able to teach for 20 years before retiring in 1996 with a 
monthly pension of $700. The twenty previous years she had worked in 
Social Security-covered employment was reduced in value by 60 percent, 
or $223 per month under the WEP. Fortunately in 2000 her teachers' 
pension was increased under a law that provided minimum pensions to 
teachers with 20 years or more of service.
    Georgia Beno of Santa Ana taught for 32 years before she retired in 
1989. She receives a pension of about $2,100 a month now. But she lost 
$900 a month income from Social Security when her husband died in 1999 
and she was told she was ineligible for a survivor's benefit. Since 
then, her health insurance and rent and other expenses continue to 
increase. She hasn't taken a vacation in four years, digs into her 
savings each month to meet expenses and still has to rely on her family 
to help pay her bills.
    Claire M. Koronkiewicz of Palm Springs taught for 30 years in 
California before retiring in 1986. Today she receives a teacher's 
pension of about $1,800 per month, after taxes. Her husband, a Purple 
Heart veteran of General Patton's 3rd Army, had a modest income as a 
worker in the floral industry in Los Angeles for 30 years. He died at 
age 65 after receiving three years of Social Security benefits. Claire 
was told she was eligible for $374 per month in survivor's benefits--
before that was eliminated under the GPO. Since then, she has had to 
sell her home because it was too expensive to maintain and has dipped 
into her savings earlier than planned to meet her living expenses.
    Marylyn McInnes of Visalia taught for 31 years before retiring in 
1998. Her husband owned his own carpet cleaning business for 15 years 
and, as a self-employed individual, paid both the employee and employer 
shares of the Social Security tax. He received Social Security for 2 
years before he died. When Marylyn applied for her widow's benefit, she 
was told she did not qualify because of her teacher's pension and she 
lost $400 a month in income.
    Elbert Bade of San Diego had a 20-year career in the U.S. Air 
Force. When he retired from the Air Force, he had a choice of a second 
career as a teacher or in the aerospace industry. Unaware of the GPO 
and WEP, he figured his future retirement income--assuming money from a 
teacher's pension and Social Security--and determined that he could 
afford to become a teacher. He taught for 23 years and retired in 1997. 
When he applied for Social Security, he was informed of the penalties 
and saw his retirement income reduced by $8,400 a year. ``Teaching's a 
great career and very satisfying but no one tells you they're going to 
jerk your Social Security because you were a teacher,'' he told us.
    What all of these people have in common is that they worked hard at 
public service jobs all of their lives. They raised families and took 
care of themselves. They recognized they wouldn't receive a full Social 
Security benefit, but they believed they would receive what they had 
earned and been promised.
    There is yet another unintended consequence of these penalties. 
California, like many states, faces severe teacher shortages in the 
years ahead--an estimated 100,000 new teachers will be needed in the 
next 10 years just to replace retirees; more will be needed to 
accommodate our growing population. Many of our best teachers come from 
other professions. Typically they are unaware that they are giving up 
significant Social Security benefits in retirement to make a switch to 
public service, often at a lower salary than they were receiving from 
their first career. An estimated 50,000 current teachers fit this 
profile, and will retire with 20 years of less teaching service. That 
means a substantially smaller teachers' pension and a significant loss 
of Social Security income. They willingly make the sacrifice in salary 
during their working life; they are forced to sacrifice in retirement.
    We recognize that there are financial challenges facing Social 
Security, if not a crisis. We appreciate, however, that growing numbers 
of Congressional Representatives understand that these penalties have 
not had the intended effect, that they penalize hard-working people of 
modest means. I would note that 251 Congressional Representatives have 
already signed on to HR 147, which would repeal these penalties. Any 
reform of the Social Security system must restore its foundation in 
fairness. On behalf of the California Retired Teachers Association, I 
would say that you can do no less.
    Thank you.
    The California Retired Teachers Association, founded in 1929, is 
the state's largest organization dedicated to protecting the interests 
of retired educators who receive pensions from the California State 
Teachers Retirement System.

                                 

         Statement of Joyce R. Elia, Mission Viejo, California

    Thank you for giving me this opportunity to write to you.
    As the Committee reviews the multitude of issues associated with 
Social Security, I ask members to consider correcting a ``fix'' that 
was initiated in 1983, and, to also not make similar mistakes this time 
around (such as privatization which will line the pockets of Wall 
Street and cost billions of dollars to implement). Congress has made 
the same mistake as many corporations recently in the news--they have 
``spent'' the hard-earned pension funds of workers during the stock 
market's heyday and have now been ``caught short''. Workers in this 
country have had enough of the corporate greed and fiscal 
irresponsibility of government. We are tired of ``paying'' for 
everyone's mistakes, while the corporate CEOs continue to live the 
``good life'' with no understanding, and with a complete lack of 
conscience, of how the ``real'' people in this country live.
    The private sector continues to follow the government's lead in 
cheating employees out of their retirement benefits (United Airlines, 
possibly General Motors, to name a few), with the government's 
blessing. At the same time, like Congress, the retirements for the 
``chosen few'' are preserved. The hardworking, tax-paying individuals 
of this country deserve better and we expect you to act responsibly. 
President Bush espouses a Christian ethic. There is absolutely nothing 
``Christian'' about defrauding American workers with high taxes and 
erosion of their pensions.
    As a current government (court) employee and former private sector 
employee, I am seeking your support of HR 147, ``Social Security 
Fairness Act,'' to eliminate the Government Pension Offset (GPO) and 
Windfall Elimination Provision (WEP) to Social Security. This 
legislation was enacted in 1983, during a period when Congress was 
looking for ways to reduce the cost of Social Security. Their decision 
to place that burden on the backs of government workers and teachers 
has created a fraudulent and discriminatory solution which wrecks 
financial havoc on the lives of affected individuals.
    The GPO and WEP will greatly affect mine and millions of other 
Americans' ability to collect the full Social Security benefits that 
they have earned and to which they are entitled. This is a non-partisan 
issue that transcends politics and affects voters of all parties.
    Three years ago, a co-worker returned from her ``retirement 
planning session'' crestfallen to learn that the small pension which 
she had earned working for the Orange County Superior Court was going 
to dramatically impact the receipt of her earned (as well as her 
ability to collect her husband's earned) social security benefits. Her 
situation will become worse, should her spouse predecease her. She will 
not be eligible for any spousal benefits, which he worked a lifetime to 
earn in his effort to provide for his wife. At the time, I was totally 
unaware of these two laws and their impacts. I had worked in the 
private sector for many years before ``retiring'' to raise a family.
    When I returned to the workforce in 1994, to work as a Senior 
Administrative Assistant to the CEO of the South Orange County 
Municipal Court (unified to Superior Court in 1998), I was not informed 
by the County/Court that paying into the County retirement system would 
negatively impact my ability to collect mine and/or my husband's hard-
earned Social Security benefits. The County retirement plan is 
predominantly self-funded by employees, with only a small portion of 
the contribution coming from LOCAL (not Federal) taxes. I erroneously 
assumed that any pension I earned would supplement my earned Social 
Security benefits. These laws force me to either leave my job, friends 
and an important part of my life prior to ten years of service 
(vesting) or relinquish my own and my spousal rights to Social 
Security. It punishes me for doing what the government told me to do--
plan for the future. (I would have been better off staying at home and 
letting the government subsidize me.) The outcome is discriminatory and 
dishonest, as well as disheartening, to a loyal hard-working employee.
    The laws are arbitrary and selective--being particularly 
discriminatory to women. Women receive only half the average pension 
benefits received by men and these laws further reduce that small sum.
    Please preserve teachers' and government workers' retirement 
benefits that they have paid for and deserve by passing HR147, which 
will repeal legislation which in actuality is ``legalized fraud,'' 
(i.e., the government has taken, or in many cases, continues to take 
monies via social security taxation, which it has no intention of 
returning by way of future benefits). Numerous teachers and public 
workers (many of whom are single Moms), have part-time employment to 
make ends meet. From those private-sector checks, social security is 
being deducted--when under current laws, that money will never be 
returned. If private companies acted in such a manner, they would be 
charged with FRAUD.
    I have included a briefing paper which expands on the legislation's 
impacts.
    I urge Congress' support and passage of this important legislation. 
I also urge Congress to look into other areas for savings: reduction/
restructuring of Congressional retirement benefits; reduction in 
foreign national benefits, fairer taxation, to name but a few.
    I do not support private accounts OR melding government/teacher 
pensions into Social Security. This practice would place yet another 
undue burden on this class of individuals. Their pensions should be 
treated in the same manner as private sector retirement plans--separate 
and apart from Social Security.
    Additionally, Congress makes it increasingly difficult for 
individuals and families to save for their retirement, especially when 
the interest on SAVINGS accounts are taxed.

                                 

                                                 Boise, Idaho 83706
                                                        May 4, 2005

    Members of the House Ways and Means Committee

    I am extremely concerned about the future solvency of the Federal 
Old-Age and Survivors Insurance and Disability programs. I applaud 
President Bush for focusing attention on this important problem. I do 
not support his effort to change Social Security from a defined benefit 
program to a defined contribution program. Private accounts carved out 
of Social Security will only make the program's future insolvency 
worse.
    I was born in 1955 in north Idaho, where my father was an 
independent logger. He was killed in a logging accident when I was four 
years old. If it hadn't been for OASDI benefits, I don't know how my 
family would have survived. The benefits were small, but my mother was 
able make every penny count. I didn't realize until I was much older 
just how little income we had, or how poor we were. My mother had lived 
through the stock market crash, the Depression and WWII--so `frugal' 
was her middle name, and she taught me well. I strongly believe in 
individual responsibility, personal financial planning and saving for 
your own future. But life is not an even playing field; many events 
outside of an individual's control present barriers to adequately 
providing for your own future financial well being. We must retain the 
Social Security safety net's ability to help keep people who have 
experienced hardships out of poverty.
    Because I have personal experience and know the value of OASDI 
benefits, I have read widely about numerous proposals to `reform' 
Social Security, from many different sources, including the Social 
Security Board's 2004 report, the Cato Institute, Reuters, NCPERS, I 
follow the daily happenings through many media sources, and I. These 
are my thoughts concerning a sound proposal to reform SS, I hope you 
will incorporate them into any legislation that Congress writes:

    1.  Immediately end the practice of using surplus OASDI revenues to 
fund other government programs.
    2.  Immediately end the practice of purchasing apparently worthless 
U.S. Treasury bonds with the surplus OASDI revenues. I call the bonds 
`apparently worthless' since it seems the federal government does not 
intend to take the actions necessary to honor the obligation to pay 
back the `IOUs' when they come due.
    3.  Immediately begin investing the surplus OASDI revenues in low-
risk equity markets to gain a higher rate of return than with U.S. 
Treasury bonds, but without the risks being placed on workers.
    4.  Raise, or better yet, eliminate the payroll cap on which SS 
payroll taxes are paid.
    5.  NO `personal accounts' carved out of the current SS system. 
402(k)s, IRAs, etc., are readily available not to everyone--make it 
easier if not mandatory that employers make options available for 
workers to contribute to retirement saving plans through payroll 
deduction outside of the Social Security system, and automatic that 
workers contribute--they would have to deliberately opt out.

    OASDI is not a retirement investment program, it is a social 
insurance program designed to reduce poverty among those most at risk--
a safety net for older people and people with disabilities who do not 
work, cannot work, or cannot earn enough to sustain their independence 
and autonomy, and the surviving family members of workers who have 
died. Our country cannot turn its back on these citizens.
    I thank the Ways and Means Committee for this opportunity to give 
you my views. I ask Congress to do its job; thoughtfully, timely, and 
in a bipartisan way. Please, do what is right for all of our citizens. 
Preserve the Social Security safety net.
            Sincerely,
                                                 Yvonna S. Englesby

                                 

                Statement of Don Fronek, Toney, Alabama

    Social Security Comments:

    I am 67 and currently receiving Social Security Benefits after 40 + 
years as an Electrical Engineer and college professor. I have long 
followed the progress of the Social Security system. I too, agree that 
the system needs to be changed so that others in the future may have a 
retirement benefit.
    The current system takes in payroll money, pays out benefits, and 
deposits the remainder of the payroll money (called the Social Security 
Surplus) into the U.S. Treasury General Fund. The Social Security 
surplus money is spent immediately by the Federal Government and an 
equivalent dollar amount IOU is given to the Social Security Trust 
fund. When the time comes to pay back these IOU's, the Federal 
Government has no money set aside to do this. The first question 
immediately comes to mind, ``why allow the Federal Government to spend 
the Social Security Trust Fund?'' If this were not done, Social 
Security would be able to pay benefits longer. By investing the Social 
Security Trust fund in non-Government securities, the fund would last 
even longer.
    So, it is obvious to me that stopping the Federal Government from 
spending the Social Security Surplus (Trust Fund moneys) would be the 
first step in solving the many financial problems that will occur for 
the Social Security entitlement program in the future years. My 
question is ``why hasn't this happen long before now''.

                                 

        Statement of Cecile M. Galvin, Laguna Niguel, California

    Thank you for giving me this opportunity to write to you.
    Workers in this country have had enough of the corporate greed and 
fiscal irresponsibility of government. We are tired of ``paying'' for 
everyone's mistakes, while the corporate CEO's continue to live the 
``good life'' with no understanding, and with a complete lack of 
conscience, of how the ``real'' people in this country live.
    The private sector continues to follow the government's lead in 
cheating employees out of their retirement benefits. The hardworking, 
tax-paying individuals of this country deserve better and we expect you 
to act responsibly. They are defrauding American workers with high 
taxes and erosion of their pensions.
    As a current government (court) employee and former private sector 
employee, I am writing to enlist your support of S-349, ``Social 
Security Fairness Act,'' to eliminate the Government Pension Offset 
(GPO) and Windfall Elimination Provision (WEP) to Social Security.
    These are penalizing social security laws that were passed some 
years ago. I will be affected by these laws twofold. First, I have been 
a judicial secretary in the court system for almost 22 years. Prior to 
these years, I worked as a secretary and paid into social security and 
am eligible to receive social security benefits. Why? because I earned 
them. Had I known that I would lose two thirds of my SS when I applied 
for a position with the Orange County Municipal Court, I would not have 
applied. This was never communicated to us in writing or otherwise.
    When I married in 1957, as a wife of a brand new Ensign in the U.S. 
Navy I did not work. Most wives did not work at that time because of 
our life long commitment to our marriage and the anticipation of having 
children. By 1965, we were the proud parents of six children. It took 
every ounce of our income and loans to raise them and put them through 
private schools and private universities and we would not have it 
otherwise. Today, because of our ultimate sacrifice, we do not own a 
home, we do not have any savings and we live from month to month. This 
is our life and I will continue to work because my paycheck is not 
enough to cover our expenses and we are both in our 70's. Since I am 
still working, I am collecting S.S. and we need every bit of that along 
with my paycheck to make ends meet.
    I am now faced with a dismal future with regards to my retirement 
since I turned 71 on August 17, 2004. Secondly, when I retire, why 
should I lose my husband's portion of SS if he qualified for it? 
Thirdly, if he should die before me, I would get nothing. How is that 
just? Would you leave your wife in the same predicament? How about your 
mother? Working wives should have the same rights to a spouse's full 
benefits as non-working wives. That is only right
    This is not double dipping for us; it is double dipping for the 
U.S. Government which puts us in the poverty arena and so I will have 
to continue working until my demise or until I am unable. I would like 
your views on this topic. Have they approached you regarding these 
specific laws? This is a non-partisan issue and goes beyond politics 
because everyone has a relative, relatives or friends that will retire 
some day. What will you say to public employees and teachers when they 
find out that they are no longer entitled to the benefits of the SS 
system that they paid into?
    Hopefully, I will be guaranteed the retirement benefits paid for 
and deserved. I urge Congress' support and passage of this important 
legislation.
    Thank you very much for your attention to this matter that so 
greatly affects the quality of life for seniors in this country.

              Social Security should be fixed--not broken.

                                 

            Statement of Francis L. Gould, Vista, California

    Thank you for giving me this opportunity to write to you.
    I am a veteran, having served in the United States Marine Corps for 
22 years with tours in Vietnam and participation in numerous combat 
operations.
    However, my Social Security benefits are offset because of my 
military service and will be further offset because I work for the 
State of California in a judicial capacity. So I personally take a 
double offset from monies promised and earned legitimately under my 
participation in Social Security.
    Further, my wife will have her Social Security entitlement, through 
me, reduced because of my double offset.
    I wish to remind you of the millions of citizens who legitimately 
earned Social Security credits and are entitled to full faith and 
credit of our expectations.
    The private sector continues to follow the government's lead in 
cheating employees out of their retirement benefits (United Airlines, 
possibly General Motors, to name a few), with the government's 
blessing. At the same time, like Congress, the retirements for the 
``chosen few'' are preserved. The hardworking, tax-paying individuals 
of this country deserve better and we expect you to act responsibly. 
President Bush espouses a Christian ethic. There is absolutely nothing 
``Christian'' about defrauding American workers with high taxes and 
erosion of their pensions.
    As the program is now administered, we have been duped. In effect 
the government has committed legal fraud in inducing us to participate 
in this program and is now committing on an on-going basis, grand 
theft, in taking it from us.

                                 

                       National Association of Disability Examiners
                                            Lansing, Michigan 48911
                                                       May 25, 2005
The Honorable Bill Thomas, Chairman
Committee on Ways and Means
United States House of Representatives
2208 Rayburn House Office Building
Washington, DC

Dear Mr. Thomas:

    On behalf of the National Association of Disability Examiners 
(NADE), I want to thank you and the members of your committee for your 
work in investigating alternatives to strengthen Social Security. This 
is indeed a topic that has captured the attention of our organization 
and the American public.
    NADE is a professional association whose mission is to advance the 
art and science of disability evaluation. The majority of our members 
work in the State Disability Determination Service (DDS) agencies and 
are responsible for the adjudication of claims for Social Security and 
Supplemental Security Income (SSI) disability benefits. Our members are 
very interested in what the future holds for the Social Security 
Disability Insurance (DI) program--both for its professionals and for 
its beneficiaries.
    We have read with interest the testimony provided at the hearing 
before your committee on May 12, 2005. While there was some limited 
discussion regarding the Social Security disability program, we were 
concerned that this critical program did not receive broader 
consideration.
    Social Security is absolutely vital to millions of Americans and 
the need to strengthen and preserve it for future generations has been 
widely discussed. However, while people with disabilities have a major 
stake in the Social Security reform debate, in much of the public 
discussion and analysis of the issue very little has been mentioned 
about how they, and their family members receiving auxiliary benefits, 
will be affected.
    With the passage of the Americans with Disabilities Act, our 
government made a commitment to people with disabilities. That 
commitment must continue to be honored by giving very careful 
consideration to how changes in Social Security's funding or benefit 
structure will impact the disability program and the beneficiaries who 
depend on it.
    We commend your ongoing efforts to provide a thorough analysis of 
the myriad of challenges that confront the Social Security program. One 
of these challenges is to strengthen Social Security, while protecting 
people with disabilities. Our organization looks forward to working 
with you in that quest.
            Sincerely,
                                                 Martha A. Marshall
                                                          President

                                 

 Statement of Barbara Kennelly, National Committee to Preserve Social 
                         Security and Medicare

    Chairman Thomas, Ranking Member Rangel, and Members of the 
Committee:
    The National Committee to Preserve Social Security and Medicare 
represents over 4 million members and supporters who are united in 
their opposition to the privatization of Social Security. The members 
of the National Committee understand better than anyone the importance 
of Social Security. Every day, over 47 million Americans--one out of 
every four households--experience the success of Social Security 
firsthand. This great program is the single largest source of 
retirement income in the United States, and each year it keeps 12 
million seniors out of poverty. Social Security, unlike virtually any 
other retirement vehicle, provides a sound, basic income that is 
adjusted for inflation and that lasts as long as you live.
    The members of the National Committee are seniors who have long 
experience with the unpredictability of life. They understand the true 
value of Social Security not just for themselves, but for younger 
Americans as well. In fact, older Americans see Social Security as part 
of their legacy to their children and grandchildren.
    National Committee members fervently believe in Social Security. 
They have experienced firsthand the ``hazards and vicissitudes'' of 
life and believe in a collective societal sharing of risk to guard 
against them. They also truly believe carving private accounts out of 
Social Security will ultimately result in the dismantling of Social 
Security as we know it. At a press conference on April 28, President 
Bush re-affirmed his determination to carve private accounts out of 
Social Security, placing American's retirement security at risk while 
passing along trillions of dollars of additional debt to our children 
and grandchildren.
    At the same time, President Bush announced his support for a plan 
to cut Social Security benefits for middle and higher-income Americans. 
The plan would make substantial cuts in benefits for over 70 percent of 
future retirees. All workers earning more than a modest $20,000 a year 
today would see significant reductions in their Social Security checks. 
A worker who earns about $37,000 today--hardly a royal sum--would 
suffer a 28 percent benefit cut. A person who earned $60,000 would 
experience a reduction of over 40 percent. Ultimately, Social Security 
would be converted from a broad-based retirement income security plan 
into a retirement plan solely for the poor. Hard-working, middle-class 
Americans would be the big losers.
    In addition to targeting middle-class Americans, the President is 
insisting on his plan for private accounts. Such accounts not only do 
nothing to improve Social Security's solvency, but, by diverting 
payroll taxes out of Social Security, private accounts actually 
accelerate insolvency. Diverting 4 percentage points of payroll taxes 
into private accounts, as the President has recommended, would drain 
the Trust Fund so quickly that the program would face a cash-flow 
problem in 2011 rather than 2017 as under current law. Moreover, the 
Trust Fund would become unable to pay full benefits by 2030, a decade 
earlier than if no payroll taxes had been diverted into private 
accounts.
    The creation of private accounts requires a massive infusion of 
funding spanning multiple generations. These costs are often obscured 
but are unavoidable in such a vast systemic change. Today, Social 
Security is a pay-as-you-go program, which means the payroll taxes paid 
by today's workers go to pay the benefits of today's retirees. Under 
privatization, however, today's workers must also fund their own 
accounts.
    The result of privatization is that generations of workers end up 
paying twice--once to pay the benefits that have already been earned by 
current retirees, and then again to fund their own benefits, whether 
through borrowing, tax increases, cuts in future benefits, or some 
combination. A study conducted for the National Committee in 1997 
concluded that every single generation living at the time of 
privatization would end up worse off financially than if nothing at all 
had been done to strengthen Social Security. More recent projections by 
other organizations, including the Congressional Budget Office, have 
reached similar conclusions.
    The non-partisan Center on Budget and Policy Priorities has 
estimated that President Bush's private account proposal would cost an 
additional $5 trillion in new borrowing in the first 20 years alone. 
Our current public debt--which is the accumulation of all our nation's 
borrowing until this point in history--stands at $4.5 trillion. This 
single proposal, therefore, would double the debt we have accumulated 
throughout this nation's history in only two decades and require 
trillions of dollars of additional borrowing in future years. This ten 
trillion dollars in federal borrowing comes to $34,000 of debt for 
every man, woman and child in America. A child born today would still 
be repaying the debt well into middle age.
    The impact of trillions of dollars in additional borrowing on 
financial markets is unclear, with miscalculation potentially resulting 
in catastrophic consequences. Acceptance of the additional borrowing 
requires lenders to rely on assurances by current legislators that 
their successors 50 years in the future will follow through on the 
dramatic benefit cuts privatization plans will require.
    The magnitude of the cost of private accounts is so great that the 
dramatically larger borrowing must be accompanied by cuts in benefits. 
These cuts reduce benefits above and beyond any changes needed to 
restore Social Security's solvency. Thus, the President's private 
account plan not only imposes substantial middle-class benefit cuts and 
massive new borrowing, it subjects those people who opt for private 
accounts to a ``retirement tax'' in the form of additional reductions 
in their benefits. For every dollar a person transfers into his private 
account, he must pay back that dollar upon retirement out of his Social 
Security benefit--plus 3 percent interest above inflation, regardless 
of the actual balance in his account. Even a low-inflation environment 
like today's still generates about 3 percent inflation, so in order to 
come out ahead, accounts today would have to earn over 6 percent. 
Economists project that over time, this so-called ``clawback'' or 
``offset'' of benefits will reduce the Social Security benefit by 
almost half. When the two types of benefit cuts required by the 
President's plan are combined, they effectively phase-out Social 
Security benefits for all but the lowest-income workers over time.
    To paraphrase Arthur Levitt, former Chairman of the SEC, from a 
recent editorial:
    ``Borrowing against one's Social Security to invest in the markets 
is a risky strategy that would only make sense for certain high net-
worth investors who can afford to lose their entire investment. For the 
majority of workers who make less than $50,000 a year, private accounts 
are not a good investment not just because the odds of coming out 
behind are high, but also because these investors very likely may have 
nothing to fall back on if they lose that money.''
    Privatization places the risks of achieving an adequate retirement 
income entirely on the individual. However, markets go up and markets 
go down, and woe to the person who must retire in a declining market. 
Any system based on private accounts will necessarily place a 
tremendous burden of ``market timing'' on future retirees. Looking at 
markets that are averaged out over the long-term masks the dramatic 
fluctuations accounts experience on a daily basis. Moreover, requiring 
a person to annuitize his or her private account balances adds another 
unpredictable variable--interest rates at the time of annuitization--to 
an already complex calculation. As a result, workers with exactly the 
same salary histories would inevitably be subject to dramatically 
different incomes from their private accounts based entirely on their 
date of retirement.
    The last issue I would bring to the Committee's attention is the 
impact of private accounts on current retirees. Many proponents of 
private accounts seem to believe that seniors are mostly motivated by 
self-interest, and, if they can simply be convinced that their own 
checks are not at risk, they would sit this battle out.
    In my conversations with seniors, I find two schools of thought. 
First, there are a number of seniors who do not believe the 
Administration's assurances that they would not be impacted by private 
accounts. These seniors look at the long-term impact of the required 
borrowing and reach the conclusion that even if they are ``held 
harmless'' initially, carrying that amount of debt simply is not 
sustainable over time. They believe that, once budgetary pressures 
build high enough, budget cutters will necessarily look for deeper cuts 
in programs such as Social Security, Medicare and Medicaid. The current 
budget debate in Congress only serves to confirm their suspicions. Few 
seniors have other sources of income, so any reductions in these 
programs would have a dramatic impact on them.
    But even those who believe they will be protected are not heading 
for the sidelines. That is because they truly believe in Social 
Security--in its guaranteed benefits, in its progressivity, in its 
insurance elements. And they believe in Social Security so 
passionately, they want to preserve it for their children and 
grandchildren. I have seen this passion to protect Social Security at 
every town hall meeting in which I have participated. Senior's 
opposition to privatization is not dissipating--if anything, it is 
growing stronger.
    Private accounts that replace Social Security's guaranteed benefits 
do not supplement Social Security, they undermine it. The more people 
realize the trade-offs required to restructure Social Security--the 
additional risk, the substantial middle-class benefits cuts, and the 
massive new federal borrowing--the more their support for privatization 
drops. Through their opposition, the American people are stating loudly 
and clearly that they prefer to strengthen the current system rather 
than entrusting their retirement security to the uncertainties of the 
investment markets. Because of this, Congress should renounce replacing 
guaranteed Social Security benefits with risky investment accounts, 
burdening middle-class Americans with major cuts in Social Security 
benefits, and saddling all Americans with massive new federal debt.

                                 

            Statement of the National Education Association

Chairman Thomas and Members of the Committee:

    The National Education Association (NEA) respectfully submits the 
following comments for inclusion in the record of the Ways and Means 
Committee hearing on Social Security privatization.
    NEA represents 2.7 million educators working in America's public 
schools. Many of our members, along with millions of other public 
employees, rely on Social Security to help ensure a secure retirement. 
Teachers and education support professionals, like the majority of 
middle class Americans, rely on Social Security for their future. 
Educators are particularly vulnerable in their retirement security, 
both because of their comparatively low salaries and increasing attacks 
on their pension plans.
    Social Security is more than a retirement plan. It is our nation's 
most successful social insurance program. Proposals to privatize the 
system have thus far ignored the impacts on children who receive 
survivor benefits and persons with disabilities who rely on Social 
Security to survive. The impacts on these most vulnerable populations 
cannot be ignored.
    NEA has three priorities for any Social Security legislation moving 
through Congress:

      Opposing any efforts to privatize Social Security;
      Ensuring that public employees who are enrolled in and 
have paid into other retirement security plans are not mandated to 
participate in Social Security; and
      Repealing unfair offsets--the Government Pension Offset 
and Windfall Elimination Provision--that deny earned Social Security 
benefits to many public employees.

THE CASE AGAINST PRIVATIZATION
    NEA strongly opposes any privatization of Social Security. Social 
Security is the cornerstone of the social safety net for America's 
retired workers and should not be subject to risky, unproven schemes. 
Privatization carries great risk and will jeopardize the secure 
retirement of many Americans.

Private Accounts Lack the Important Social Insurance Properties of 
Social Security
    Social Security adjusts for inflation; is guaranteed to last an 
entire lifetime, no matter how long; is shielded from stock market 
losses; and is payable to multiple beneficiaries across generations 
(e.g., to surviving family members for their lifetime). Private 
accounts and defined contribution pension plans have none of these 
protections. Workers investing in private accounts will assume 
responsibility for the risks that are currently covered by Social 
Security protections. This could lead to many retired employees needing 
extra support in their elderly years--a time when they should live with 
a sense of peace and security.

Private Accounts Would Turn Social Security into an ``Individual 
Insecurity'' Program
    Rather than just shifting ``ownership'' of retirement assets from 
the government to workers, Social Security privatization shifts an 
inordinate amount of risk away from the government and onto American 
workers. The United States' experience with defined contribution 
pensions and 401(k) plans shows that many people fail to understand 
even the most basic aspects of investment and that many make bad 
investment decisions (e.g., failing to diversity their investments). 
Unfortunately, many people simply do not have adequate financial 
experience, training, or time to do a good job managing their own 
accounts.

THE IMPACT OF PRIVITIZATION
Impact on Women
    Women comprise over three-quarters of NEA's membership. Therefore, 
NEA has a particular concern about the impact of Social Security 
privatization on women. Women traditionally have lower lifetime 
earnings than their male counterparts, and women in the education 
profession face comparatively lower salaries than many other 
professionals.
    Although privatization proposals say that participation in private 
accounts would be voluntary, the benefit cuts in the plan would be 
mandatory for everyone. These cuts would be devastating for women, who 
rely more on Social Security than men do. Nationally, 20 percent of 
adults receive Social Security benefits, including 22 percent of women 
and 18 percent of men. About 24 million women, 18 million men, and 3 
million children rely on Social Security benefits. Women comprise 58 
percent of all Social Security beneficiaries aged 65 and older.
    According to the National Women's Law Center, without Social 
Security, more than half of women over 65 would be poor. Social 
Security helps level the playing field for women, who on average earn 
less then men and have fewer years in the workforce. In contrast, 
privatization would provide benefits based only on worker 
contributions, disproportionately penalizing women for time spent out 
of the workforce for childcare and care of the sick and elderly.
    Social Security pays benefits that cannot be outlived, with annual 
cost-of-living adjustments. These features are particularly important 
to women because they tend to live longer than men but have fewer 
assets when they reach retirement. Savings in individual accounts could 
be drained by health costs, bad luck, or misjudgment in investments, or 
simply outliving one's savings.
    Finally, women are much more likely than men to receive Social 
Security benefits as family members when a worker dies, retires, or 
becomes disabled. For a young family, Social Security provides the 
equivalent of a life insurance policy worth over $400,000 and a 
disability insurance policy worth over $350,000, according to the 
Social Security actuaries.

Impact on Ethnic Minority Communities
    NEA has a diverse membership serving an increasingly diverse 
population. Some ten percent of NEA members are African Americans. 
Representation in the education profession of Hispanics is also 
growing. Ethnic minority students in our nation's schools have risen 
from 30 percent in the late 1980s to almost 40 percent today. Over the 
next twenty years that percentage may well reach 50 percent.
    Given the diversity of our membership and the students and 
communities they serve, NEA has a strong interest in the impact of 
policy decisions on minority communities. In fact, NEA is currently 
engaged in an outreach project designed to strengthen partnerships with 
minority communities in support of public education. We are, therefore, 
deeply concerned about the impact of privatizing Social Security on 
populations such as African Americans and Hispanics.

Impact on African Americans
    Proponents of Social Security privatization have claimed that the 
current program is unfair to African Americans. For example, President 
Bush has asserted that ``African-American males die sooner than other 
males do, which means the system is inherently unfair to a certain 
group of people.'' However, while it is true that the current life 
expectancy for African American males at birth is only 68.8 years, this 
does not mean that an African American man who has worked all his life 
can expect to die after collecting only a few years' worth of Social 
Security benefits. African Americans' low life expectancy is largely 
due to high death rates in childhood and young adulthood. African 
American men who make it to age 65 can expect to live, and collect 
benefits, for an additional 14.6 years.
    Due to certain demographic trends, African American communities 
benefit from the Social Security program in several ways:

      Social Security is the only source of retirement income 
for 40 percent of African American seniors. In 2002, the average 
monthly benefit for African American men receiving retired worker 
benefits was $850, and for women was $683. The Social Security 
Administration estimates the poverty rate for elderly blacks would more 
than double--from 24 percent to 65 percent--without Social Security.
      Social Security survivors insurance provides significant 
help to African American children who would otherwise find themselves 
poor because of a parent's death. African Americans make up 
approximately 13 percent of the American population. Twenty three 
percent of all children receiving Social Security survivor benefits in 
2002 were African American. A recent study by the National Urban League 
Institute for Opportunity and Equality showed that the benefit lifted 
one million children out of poverty and helped another one million 
avoid extreme poverty (living below half the poverty line). The 
National Urban League study also found that an African-American man 
dying in his thirties would only have enough in his private account to 
cover less than two percent of the survivors' benefits now provided by 
Social Security to his widow and children.
      African American families benefit from disability 
insurance. In 2002, 13 percent of the population was African American; 
however, 17 percent of disabled workers receiving benefits were African 
American.
      African American women in particular rely 
disproportionately on the non-retirement aspects of the program because 
they have a higher rate of disability than whites of either sex. 
African American women often survive deceased husbands. While African 
Americans make up 9 percent of all female beneficiaries, African 
American women constitute 18 percent of female disabled worker 
beneficiaries.

Impact on Hispanics
    Like African Americans, Hispanics benefit from Social Security in a 
number of ways;

      Social Security is the only source of retirement income 
for 41 percent of elderly Hispanics. In 2002, the average monthly 
benefit for Hispanic men receiving retired worker benefits was $859, 
and for women was $619.
      The guaranteed benefit and cost-of-living adjustments of 
Social Security are important to Hispanics. An important feature of the 
Social Security system is its provision of a guaranteed benefit for 
workers and their spouses, which continues until death, with a cost-of-
living adjustment (COLA) each year to index for inflation. Social 
Security beneficiaries cannot outlive the income, and their purchasing 
power does not erode over time. Because Hispanics tend to have higher 
life expectancies at age 65 than the majority of the population, 
elderly Hispanics will live more years in retirement and benefit from 
Social Security's cost-of-living protections. Hispanic men who were age 
65 in 2004 can expect to live to age 85, compared to age 81 for all 
men. Hispanic women who were age 65 in 2004 can expect to live to age 
88, compared to age 85 for all women.
      Social Security disability benefits are important to 
Hispanics. Hispanics have a higher work disability rate than other 
Americans. While disability data from the Census show that the overall 
work disability rate was 11.9 percent in 2000, the work disability rate 
for Latinos was 16.7 percent. Thus, Hispanics are more likely to be in 
need of the disability benefits that the Social Security system 
provides. Private accounts would not provide disability protection.

PROGRESSIVE PRICE INDEXING
    NEA is also deeply concerned about the President's most recent 
proposal, which would alter the benefit structure through progressive 
indexing. While the President has described the proposal as reducing 
benefits for the most affluent Americans, it would result in large 
benefit reductions for middle-class workers, as well. In fact, seven of 
every ten workers would be affected.
    The benefit reduction for middle-class workers such as educators 
would be large. A teacher making $35,000 today would be subject to 
benefit reductions more than half as large as those imposed on people 
at the highest income levels. A worker making $60,000 today would be 
subject to benefit reductions that are nearly as large (as a percentage 
of his or her promised benefits) as the reductions that would be 
imposed on someone making several million dollars a year. For a 
$60,000-a-year worker who retires in 2045, the benefit cut would equal 
25 percent, or about $6,500 a year.
    For many workers, cuts would be deeper than if no action were taken 
and Social Security became insolvent. For workers who now make about 
$55,000 or more, Social Security benefits would be cut more deeply 
under the progressive indexing proposal than if nothing were done to 
restore Social Security solvency. Perhaps even more troubling is the 
fact that the benefit cuts would apply not only to retirees, but also 
to survivors, and people with disabilities.

THE CASE AGAINST MANDATORY COVERAGE
    NEA opposes mandating participation of all public employees in the 
Social Security system. Educators in twelve states (Alaska, California, 
Colorado, Connecticut, Illinois, Kentucky, Louisiana, Maine, 
Massachusetts, Missouri, Nevada, and Ohio) as well as selected 
districts in three additional states (Georgia, Rhode Island, and Texas) 
do not pay into Social Security. Instead, these states maintain 
separate retirement systems for educators. Some Social Security reform 
proponents have suggested requiring Social Security participation for 
all public employees as a means of strengthening the system.
    A federal mandate for public employee participation in the social 
security system would be detrimental to teachers and other public 
employees and would create financial burdens for states and city 
governments. Mandatory coverage would weaken existing state and local 
retirement plans that often offer benefits superior to Social Security. 
Mandatory coverage would also increase the tax burden on public-sector 
employers, eventually leading to reductions in the number of new hires, 
limits on employee wage increases, reduced cost-of-living increases for 
retirees, and reductions in other benefits such as health care. 
Mandating coverage of public employees will not solve the social 
security system's financial difficulties. In fact, the amount of money 
gained by mandating coverage would be relatively small and would not 
solve the long-term Social Security crisis.

REPEAL OF SOCIAL SECURITY OFFSETS
    NEA strongly supports full repeal of both the Government Pension 
Offset (GPO) and the Windfall Elimination Provision (WEP), both of 
which unfairly reduce earned Social Security benefits of some public 
employees. The GPO reduces public employees' Social Security spousal or 
survivor benefits by two-thirds of their public pension. The WEP 
reduces the earned Social Security benefits of an individual who also 
receives a public pension from a job not covered by Social Security.
    The offsets penalize people who have dedicated their lives to 
public service by taking away benefits they have earned.  Nine out of 
ten public employees affected by the GPO lose their entire spousal 
benefit, even though their spouse paid Social Security taxes for many 
years.  The WEP causes hard-working people to lose a significant 
portion of the benefits they earned themselves. The loss of income 
forces some people into poverty. Some 300,000 individuals lose an 
average of $3,600 a year due to the GPO--an amount that can make the 
difference between self-sufficiency and poverty. Impacted people have 
less money to spend locally and sometimes have to turn to expensive 
government programs like food stamps to make ends meet.
    The impact of the GPO and WEP is not just felt in those states in 
which public employees are not covered by Social Security. Because 
people move from state to state, there are affected individuals 
everywhere. The number of people impacted across the country is growing 
every day as more and more people reach retirement age.
    Finally, the GPO and WEP discourage people from entering/staying in 
the profession. Individuals who worked in other careers are less likely 
to want to become teachers if doing so will mean a loss of earned 
Social Security benefits. The GPO and WEP are also causing current 
educators to leave the profession, and students to choose courses of 
study other than education. Non-Social Security states are going to 
find it increasingly difficult to attract quality educators as more 
folks learn about the GPO and WEP.
    NEA supports the Social Security Fairness Act (H.R. 147), 
introduced by Representatives McKeon (R-CA) and Berman (D-CA). This 
bipartisan legislation would correct the inequities in the current 
system by fully repealing both the GPO and the WEP.

CONCLUSION
    NEA urges Congress to:

      Reject efforts to privatize Social Security;
      Oppose mandatory Social Security coverage for public 
employees; and
      Repeal the Government Pension Offset and Windfall 
Elimination Provision.

    Thank you for the opportunity to submit these comments.

                                 

          Statement of Patricia Hall Taniashvili, Surry, Maine

    I got my first job in the summer of 1960, working as a proofreader 
in a newspaper office in coastal North Carolina. Social Security taxes 
were deducted from my paycheck at that time.
    After I received my B.A. degree in 1964, I taught Freshman 
Composition at Valparaiso University in Valparaiso, Indiana for a year. 
Social Security taxes were deducted from my paycheck at that time.
    From the fall of 1965 until the spring of 1968, I taught English 
(all students) at Washington County High School in Valparaiso. Social 
Security taxes were deducted from my paycheck at that time.
    After my two children were born, I returned to teaching at Hobart 
Junior High School in Hobart, Indiana, where I taught English and 
French from 1974-1979. Social Security taxes were deducted from my 
paycheck at that time.
    In 1980 I moved to Maine, and taught English and French at Calais 
High School in Calais until the spring of 1989. In order to supplement 
my low salary, I worked during the summers at the tourist information 
office there. Social Security taxes were deducted from that paycheck at 
that time.
    In 1989 I moved to Lamoine, Maine, and taught English for a year 
and a half at Sumner High School in Gouldsboro.
    I spent 1991 teaching English as a foreign language in Tbilisi, 
Republic of Georgia; at that time Georgia was a member of the U.S.S.R.
    In early 1992 I returned to Maine, and began teaching French and 
Spanish at Ellsworth High School in Ellsworth, Maine, where I am still 
employed. Once again, in order to supplement my inadequate teaching 
salary, I started working during the summers at Kneisel Hall (a chamber 
music school and concert series) in Blue Hill. Social Security taxes 
were deducted from that paycheck during that time.
    I don't know when I will be able to retire. My Maine State Teachers 
Retirement pension will not cover my living expenses, especially since 
I do not own a house and must pay rent every month. I estimate that my 
Maine State Teachers Retirement pension) will be approximately $20,640 
a year. Our health insurance cost will be well over $700 a month out of 
my $1,720 a month. This leaves me with $1,000 or less per month BEFORE 
taxes.
    Thanks to the Windfall Elimination provision, my full Social 
Security pension to which I am entitled will be reduced to only 
approximately $178 a month at age 62, approximately $293 at 65 and 10 
months, or $495 at age 70.
    If I had stayed in Indiana to teach, I would have my Indiana 
teachers' retirement pension plus the full Social Security pension to 
which I am entitled. Why am I being discriminated against because I 
moved to Maine? What have I done to have my Social Security pension 
cut?
    The final insult and irony is that after I retire from teaching, I 
will have to once again supplement my income by working at a part-time 
job--from which Social Security taxes will be deducted. I will never be 
permitted to collect the full benefit to which I am entitled from this 
work.
    For all of my working life, I have accepted the low pay given to 
teachers because I love teaching and I love the kids I work with. Now I 
am faced with the fear that I will have to keep working for an 
indefinite time, because I can't afford to retire, even though I'd like 
to plan on it. Another fear that I have is that I will get sick and not 
be able to work, yet not be able to afford not to.
    The WEP has put me in an untenable position financially and 
personally. The elimination of a portion of my Social Security pension 
is unfair and immoral. The repeal of this law would make a huge 
difference to me.

                                 

          Statement of Deborah Tucker, Boynton Beach, Florida

    Our government made a commitment to me which has not been 
fulfilled; and collected funds from me and just kept these 
contributions for the benefit of others. I am the widow of a bronze 
star holder who was in that ``dependent'' state for 28 years during 
which all and full required payments for social security were made with 
the clear promise for retirement benefits. Because of need, I entered 
full time employment as a social worker in an Illinois public school at 
age50. . .unable to build the quite comfortable pensions allotted to 
those who had been in that public sector for all, or most of their work 
experience. I also worked part time, paying into both the teachers' 
retirement system and social security at the same time. I expected that 
I would receive benefits in accord with payments made throughout my 
whole life as do all others such as friends who have never worked; 
those who worked in the private sector who receive both work pensions 
and social security; and those who have all of their years in those 
public schools. Even non citizens receive benefits in line with their 
contributions.
    I retired at age 70 and received NOTHING from the 28 years of 
marital payments (Why did we pay?); and then, as a second punishment I 
receive only 40% of what my own earned benefits should have been (Why 
did I pay the full amount?)..How many citizens would feel contented if 
they paid for something they did not receive? Everyone with whom I have 
spoken have been shocked and extremely grateful that they are not in my 
situation and enjoying the benefits of old age. I am still working part 
time and guess what??? I am still paying into social security. How can 
the members of Congress look away from the injustice and not try to 
affect fairness?

                                 

 Statement of Jonathan Barry Forman, University of Oklahoma College of 
                         Law, Norman, Oklahoma

    I am pleased to submit this statement for the record that you are 
compiling on Alternatives to Strengthen Social Security. I am 
submitting this statement in my individual capacity as the Alfred P. 
Murrah Professor of Law at the University of Oklahoma. This statement 
suggests how a two-tiered Social Security system could help ensure that 
every elderly American has an adequate income throughout her retirement 
years. The first tier would provide a basic Social Security benefit to 
every older American, and those benefits would be paid for out of 
general revenues. In addition, every worker would also earn a second-
tier retirement benefit based on earnings paid for with a much-reduced 
system of payroll taxes and held in individual accounts. Those 
individual accounts could be funded, defined contribution accounts, or 
they could be hypothetical accounts like those found in ``cash 
balance'' pension plans in the private sector and in the ``notional 
account'' Social Security systems in Italy, Poland, Sweden, and several 
other countries.

REFORMING SOCIAL SECURITY
    The Social Security system includes two programs that provide 
monthly cash benefits to workers and their families. The Old-Age and 
Survivors Insurance (OASI) program provides benefits to retired workers 
and their dependents and to the survivors of insured workers, and the 
Disability Insurance program provides benefits to disabled workers and 
their dependents.\1\ A worker builds protection under these programs by 
working in employment that is covered by Social Security and paying the 
applicable payroll taxes. At present, about 96 percent of workers are 
working in covered employment.
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    \1\ See generally Jonathan Barry Forman, Making Social Security 
Work, 65 Ohio State Law Journal 145 (2004).
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    The OASI Program is, by far, the larger of these two programs, and 
it is usually what people mean when they talk about Social Security. In 
November, 2004, for example, the program paid benefits to almost 40 
million retired workers and their families, and the average benefit was 
about $898 per month.\2\
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    \2\ Social Security Administration, OASDI Monthly Statistics, March 
2005, Table 1 (April 2005), available at .
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    These Social Security retirement benefits are incredibly important 
for the elderly population. For example, in the year 2000, Social 
Security provided 100 percent of income for 20 percent of elderly 
households and more than half of the income for another 44 percent of 
elderly households.\3\ Of particular note, Social Security has been 
especially successful in reducing the level of poverty among the 
elderly. With Social Security, only 9 percent of beneficiaries in the 
year 2000 were poor; without it, 48 percent would have been poor.\4\
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    \3\ Social Security Bulletin, Annual Statistical Supplement: 2001, 
18 (2002), available at .
    \4\ Id. at 9.
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SOCIAL SECURITY RETIREMENT TAXES
    Social Security retirement benefits are financed primarily through 
payroll taxes imposed on individuals working in employment or self-
employment that is covered by the Social Security system. For 2005, 
employees and employers each pay a tax of 5.3 percent on up to $90,000 
of wages earned in covered employment, for a combined OASI rate of 10.6 
percent (the lion's share of the total 15.3 percent of payroll that is 
collected for OASI, DI, and Medicare).\5\ Self-employed workers pay an 
equivalent OASI tax of 10.6 percent on up to $90,000 of net earnings 
(again, out of the total 15.3 percent that is collected for OASI, DI, 
and Medicare).
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    \5\ Social Security Administration, Cost-of-Living Increase and 
Other Determinations for 2005, 69 Federal Register 62,497 (2004).
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    Additional revenue for Social Security comes from the income 
taxation of Social Security benefits.\6\ The actual amount to be 
included is determined by applying a complicated two-tier formula. 
Basically, single taxpayers with incomes over $25,000 (and married 
couples with incomes over $32,000) must include as much as half of 
their Social Security benefits in income, and single taxpayers with 
incomes over $34,000 (and married couples with incomes over $44,000) 
must include as much as 85 percent of their Social Security benefits in 
income.
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    \6\ I.R.C. Sec. 86.
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SOCIAL SECURITY RETIREMENT BENEFITS

Worker Benefits. Workers over the age of 62 generally are entitled to 
Social Security retirement benefits if they have worked in covered 
employment for at least 10 years. Benefits are based on a measure of 
the worker's earnings history in covered employment known as the 
average indexed monthly earnings (AIME). The AIME measures the worker's 
career-average monthly earnings in covered employment. In that regard, 
the AIME takes into consideration only covered earnings up to the 
maximum applicable annual earnings cap. For example, no more than 
$90,000 of 2005 earnings could count toward a Social Security 
retirement benefit.
    The starting point for determining the worker's AIME is to 
determine how much the worker earned each year through age 60. Once 
those so-called ``benefit computation years'' and covered earnings for 
those years have been identified, the worker's earnings for years prior 
to age 60 are indexed for wage inflation. This indexing ensures that 
the same relative value is given to wages no matter when they are 
earned. The year that the worker turns age 60 is the year used for 
indexing the earnings of prior years, and this indexing makes the 
earnings early in the worker's career comparable to earnings in later 
years. Earnings in and after age 60 are not indexed but can enter into 
the benefit computation formula.
    The highest 35 years of earnings are then selected, and the rest of 
the years are dropped out. The AIME is then computed as the average 
earnings for the remaining 35 years.
    The AIME is then linked by a formula to the monthly retirement 
benefit payable to the worker at full retirement age, a benefit known 
as the ``primary insurance amount'' (PIA). Historically, ``full 
retirement age'' was age 65, but it is gradually increasing to age 67 
for workers born after 1959 (reaching age 62 in or after 2022 and 
reaching 67 in or after 2027). For a worker turning 62 in 2005, the PIA 
is equal to 90 percent of the first $627 of the worker's AIME, plus 32 
percent of the AIME over $627 and through $3,779 (if any), and plus 15 
percent of the AIME over $3,779 (if any). Note that the benefit formula 
is designed to favor workers with relatively low career-average 
earnings.
    A worker's benefits may be increased or decreased for several 
reasons. Most importantly, benefits are indexed each year for inflation 
as measured by the increase in the Consumer Price Index.
    Also of critical importance, workers who retire before their full 
retirement age have their benefits actuarially reduced. For example, a 
worker who turned 62 in 2003 and had yearly earnings throughout her 
career equal to the average wage would be entitled to a worker benefit 
starting at full retirement age (65 and two months) of $1,258 a 
month.\7\ If she, instead, started to draw her benefit at age 62, that 
benefit would be actuarially reduced by about 20 percent, to $964 per 
month.\8\ As the full retirement age slowly increases to age 67, the 
actuarial reduction from the full retirement age of 67 to the early 
retirement age of 62 will increase to 30 percent.
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    \7\ Committee on Ways and Means, U.S. House of Representatives, 
2004 Green Book: Background Material and Data on Programs within the 
Jurisdiction of the Committee on Ways and Means, Section 1, Social 
Security: The Old-Age, Survivors, and Disability Insurance (OASDI) 
Programs, 1-49 (Table 1-16) (2004).
    \8\ Id. at 1-20 to 1-21, 1-49 (Table 1-16).
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    On the other hand, benefits payable to workers who choose to retire 
after their full retirement age are actuarially increased through the 
delayed retirement credit. The delayed retirement credit increases the 
monthly benefit to be paid to a worker who delays receipt of benefits 
past full retirement age by 8 percent for each year of delay.
    Finally, the so-called ``retirement earnings test'' reduces the 
benefits of individuals who have not yet reached full retirement age 
and who continue to work after starting to draw Social Security 
retirement benefits. In 2005, for example, these early retirees will 
lose $1 of benefits for every $2 of annual earnings over $12,000.

Family Benefits. Spouses, dependents and survivors of the worker may 
also receive additional monthly benefits. These family benefits are 
also based on the worker's primary insurance amount (PIA). In 
particular, a retirement-age wife or husband of a retired worker is 
entitled to a monthly spousal benefit equal to 50 percent of the 
worker's PIA. Consequently, a retired worker and spouse generally can 
claim a monthly benefit equal to 150 percent of what the retired worker 
alone could claim. Also, a retirement-age widow or widower of the 
worker is entitled to a monthly surviving spouse benefit equal to 100 
percent of the worker's PIA.
    Like worker benefits, family benefits are subject to the retirement 
earnings test. In addition, under the so-called ``dual-entitlement 
rule,'' when an individual can claim both a worker benefit and a 
benefit as a spouse, survivor, or dependent of another worker, only the 
larger of the two benefits is paid to the individual.

SOCIAL SECURITY IS IN FINANCIAL TROUBLE
    The Social Security system operates largely on a pay-as-you-go 
basis. Social Security benefits are primarily paid out of current-year 
Social Security payroll taxes, and the Social Security Trust Funds 
maintain only enough reserves to cover a few years of benefits. In 
2004, for example, the Old-Age and Survivors Insurance Trust Fund 
collected $473 billion in payroll tax contributions, paid out $415 
billion in benefits, and had $1.5 trillion on hand at the close of the 
year.\9\
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    \9\ Social Security and Medicare Boards of Trustees, 2005 Annual 
Report of the Board of Trustees of the Federal Old-Age and Survivors 
Insurance and Disability Insurance Trust Funds 19 (Table III.A1) 
(2005), available at .
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    Unfortunately, however, the long-term picture is bleak. Social 
Security retirement and disability benefits will exceed trust fund 
income starting around 2017, and the system will be unable to pay full 
benefits after about 2041.\10\ The Trustees of the Social Security 
Trust Funds estimate that the deficit over the traditional 75-year 
projection period is about 1.92 percent of payroll, and the unfunded 
liability of the system is $4.0 trillion.\11\
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    \10\ Id. at 2.
    \11\ Id. at 59 (Table IV.B.6).
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    The primary reason that Social Security is in financial trouble is 
that people are living longer and retiring earlier. As a result, there 
are a lot of Social Security beneficiaries, and there are fewer workers 
to support them. Of course, it is great that we are living longer, and 
it is terrific that we can expect to have long and leisurely 
retirements. But it has led to the current financing problem.
    Social Security must either find new sources of revenue, or 
benefits will have to be cut. According to the Trustees of the Social 
Security Trust Funds, the system could be brought into actuarial 
balance by an immediate increase in payroll taxes of 15 percent, an 
immediate reduction in benefits of 13 percent, or some combination of 
the two.\12\ Any delay in reform will mean even larger tax increases 
and/or benefit cuts in the future, and that is one of the reasons that 
President George W. Bush has put Social Security reform at the top of 
his second-term agenda.
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    \12\ Id. at 3, 55.
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SOME THOUGHTS ABOUT REFORM
    The Social Security system was designed in the 1930s, and it is 
time to reconsider its structure with an eye on what we want the system 
to do today and into the future. Ideally, the system should ensure that 
every elderly American has an adequate income throughout her retirement 
years. One way to achieve that result would be to have a two-tiered 
Social Security system.

The Basic Social Security Benefit. The first tier of this new Social 
Security system would provide a basic Social Security benefit to every 
older American. For example, the government might guarantee every 
retiree a first-tier benefit equal to, say, 100 percent of the poverty 
level. In the year 2005, for example, the poverty level for a single 
individual is $9,570, yielding a monthly benefit of about $798.\13\
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    \13\ Department of Health and Human Services, Annual Update of the 
HHS Poverty Guidelines, 70 Federal Register 8,373 (2005). $797.50 = 
$9,570  12.
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    That benefit, $798 per month, would be the benefit payable to every 
individual at full retirement age. In that regard, there is every 
reason to think about increasing the full retirement age to 70 and 
increasing the minimum retirement age to 65. If a $798-per-month 
benefit were payable at age 70, then the actuarially-reduced benefit at 
age 65 would be about 30 percent less, or $558 per month.
    Benefits paid in subsequent years would be increased for inflation, 
as measured by the Consumer Price Index. In any event, these first-tier 
benefits would terminate at death.
    These first-tier benefits would replace the current Supplemental 
Security Income (SSI) program and all of the redistributive features of 
the current Social Security system. Also, like the current SSI program, 
these first-tier benefits would be paid for out of general revenues.

An Additional Earnings-Related Benefit. In addition to the first-tier 
benefit, every worker would also earn an additional retirement benefit 
based on earnings. These second-tier benefits would be financed with a 
much-reduced system of payroll taxes. In effect, each worker would have 
an individual account--like an individual retirement account (IRA) or a 
401(k) account. Each worker's payroll tax ``contributions'' would then 
be credited to her account, along with investment income on the balance 
in that account. The accounts themselves could be funded, defined 
contribution accounts. Or they could be hypothetical accounts like 
those found in ``cash balance'' pension plans in the private sector 
(and in the ``notional account systems'' now used in Italy, Poland, 
Sweden, and several other countries).\14\
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    \14\ In a hypothetical account system, each worker gets a 
hypothetical individual account. Payroll tax contributions from workers 
and employers are credited to those accounts, and each year those 
accounts are also credited with investment interest. For example, a 
simple plan could allocate 4 percent of salary from each worker into 
her account each year and credit her account with 7 percent interest on 
its beginning-of-the-year balance. Each worker would receive quarterly 
reports showing the growing balance in her account.
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    At retirement, the balance in a worker's second-tier individual 
account would typically be used to purchase an additional inflation-
adjusted annuity over and above the individual's first-tier benefit. 
Workers with large enough account balances might also be allowed to 
take partial lump-sum distributions. In the case of any worker who died 
before withdrawing all of her funds, the balance in her account would 
go to her spouse or other heirs.

Replace Spousal Benefits with Earnings Sharing. Finally, Social 
Security spousal benefits should be replaced with an ``earnings 
sharing'' system. Under earnings sharing, the current Social Security 
system's spouse and surviving spouse benefits would be eliminated. 
Instead, each spouse in a married couple would be credited with one-
half of the couple's combined earnings during marriage. At retirement, 
each spouse's second-tier benefit would be based on her half of the 
married couple's earnings during marriage plus whatever she earned 
before or after the marriage.
    Instead of tinkering with the Social Security system, I believe 
that we should redesign it. In the 21st century, it would make sense 
for Social Security to provide every elderly American with an adequate 
income throughout her retirement years. A two-tiered Social Security 
system could achieve that result, and we should be able to solve Social 
Security's financing problem at the same time.

                                 

              Statement of Douglas E. Ward, Oberlin, Ohio

    Thank you for giving me this opportunity to write to you.
    I would like to state that I paid the required 40 Quarters into 
Social Security from the ages of 16 to 28 years old. I worked during my 
teen and young adult years in Illinois under Social Security. I then 
moved to Ohio to work at a better position, which was not under Social 
Security. I knew I had the required 40 quarters, else I may not have 
taken the new position in Ohio.
    I now find that 55% of my social security, which I was counting on 
(i.e.: $500.00/mo has been reduced to $226.00/mo.) I have also 
discovered that when I die, my wife will not received any of my Social 
Security benefits due to the Offset provisions of Social Security.
    I guess I should not have taken a career in Local Government work, 
since the Federal Government is taking away my legally earned Social 
Security retirement benefits. I believe that payment of my earned 
social security benefit would not bankrupt the system.

                                 
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