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




 
THE RETIREMENT POLICY CHALLENGES AND OPPORTUNITIES OF OUR AGING SOCIETY

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              MAY 19, 2005

                               __________

                           Serial No. 109-18

                               __________

         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 
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current publication process and should diminish as the process is 
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                            C O N T E N T S

                               Page______
Advisory of May 12, 2005 announcing the hearing..................     2

                               WITNESSES

Congressional Budget Office, Douglas Holtz-Eakin, Director.......     7
Social Security Advisory Board, The Honorable Hal Daub...........    19
Center for Strategic and International Studies, Richard Jackson..    24
Employee Benefits Research Institute, Dallas L. Salisbury........    27
The Brookings Institution, Peter R. Orszag.......................    35
National Center for Policy Analysis, John C. Goodman.............    51

                       SUBMISSIONS FOR THE RECORD

Americans for Secure Retirement, Walter Welsh, statement.........   107
California Retired Teachers Association, George Avak, Sacramento, 
  CA, statement..................................................   108
Merrill Lynch and Co., Inc., Bruce E. Thomspon, Jr., statement...   110
University of Massachusetts Boston, Boston, MA, Yung-Ping Chen, 
  statement......................................................   120


THE RETIREMENT POLICY CHALLENGES AND OPPORTUNITIES OF OUR AGING SOCIETY

                         THURSDAY, MAY 19, 2005

                              ----------                              

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:15 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-9

                    Thomas Announces Hearing on the

                    Retirement Policy Challenges and

                   Opportunities of our Aging Society

    Congressman Bill Thomas (R-CA), Chairman of the Committee on Ways 
and Means, today announced that the Committee will hold a hearing on 
the retirement policy challenges and opportunities of our aging 
society. The hearing will take place on Thursday, May 19, 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:

      
    Seventy-eight million Baby Boomers are heading toward retirement 
and eligibility for a number of Federal and State benefits, including 
Social Security, Medicare, and Medicaid. Those Baby Boomers and the 
generations that follow will live longer in retirement as the average 
life expectancy at age 65 has increased from about 14 years in 1940 to 
18 years today, and is expected to increase to 22 years in the future. 
In addition, American families are having fewer children. As a result, 
over the next 30 years, the number of people age 65 and older will 
double, while the number of adults under age 65 will increase by less 
than 15 percent.
      
    In preparation for the retirement of the Baby Boomers and the aging 
of America, Congress has a responsibility to review current retirement 
policies and programs to ensure that they are as strong as possible. 
Americans over age 65 receive, on average, 42 percent of their income 
from Social Security, 21 percent from pension and retirement plans, 14 
percent from income on assets, and 22 percent from wages.
      
    Pensions, personal savings, and wages were all intended to 
supplement Social Security income. However, only 40 percent of 
Americans own a defined contribution pension or an Individual 
Retirement Account. More than half of those with such plans have saved 
less than $15,000 in the account. Furthermore, the personal savings 
rate for Americans has declined to less than 2 percent of after-tax 
income. For these reasons, encouraging personal savings and 
strengthening other savings vehicles must be part of any debate on 
retirement security.
      
    In announcing the hearing, Chairman Thomas stated, ``The Baby Boom 
generation will redefine aging in America, just as it has every other 
segment of life. It is critical for Congress to review the programs 
that will serve an aging population and make the necessary adjustments 
now to provide Americans with a secure retirement.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on strengthening retirement security policy 
in order to meet the needs of an aging population.
      

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    Chairman THOMAS. Good morning. As we all know, in 2008, the 
first of the Baby Boomers will be eligible for early 
retirement. With each passing year, the portion of the Federal 
budget consumed by those who are retiring will continue to 
grow. Currently, it equals about 42 percent. That is up from 28 
percent in 1980. It is expected to increase to about 55 percent 
in the near future. I want to commend the witnesses because, 
Members and others who have read the testimony, there is a 
surprising recurrence of a theme through each of the 
presentations; notwithstanding there is a relatively broad 
political spectrum represented, either in terms of the 
individual who has written the materials or the assumed group 
that they may represent.
    We focused on Social Security in the initial hearing, and I 
know that is what generates all the heat and light and 
discussions. I am very, very concerned about the question of 
retirement and savings, in part for this reason. I believe over 
the last two decades every

measure that was put into law to ``assist'' Americans to save--
because we are all concerned about the net savings rate--was 
done with, as I said, honest and good intentions. The 
difficulty is Americans, in living their lives, don't live 
their lives along the neat cubbyholes in which the 
jurisdictions of congressional Committees is established; and 
that oftentimes, what was a good intention has created either a 
counter-force or a cancellation or a total failure in terms of 
limited government resources to achieve the desired result.
    If politics--and I don't mean partisan politics or other 
kinds of politics, but politics--can be defined as the process 
of determining who gets what, when, and how, this hearing--and 
if necessary, subsequent hearings--about examining what the 
Federal Government had done to assist people in determining who 
gets what, when, and how, needs to be, I think, fundamentally 
examined. Because essentially, that percentage that I discussed 
of the Federal Government that is going to retirees goes to 
retirees, in a very great extent, using only one criterion, and 
that is age. We are already engaged in the greatest inter-
generational transfer of wealth in the history of the world. I 
think it is entirely appropriate to examine the question of who 
gets what, when, and how.
    It is very tempting politically to talk about groups and 
the fact that perhaps benefits are going to be adjusted, or 
that certain groups get this or get that. The Chair's goal is 
to challenge the Members of this Committee, from an 
institutional point of view. Because all those other Committees 
with their limited jurisdiction have performed an honest and 
earnest duty; but it is this Committee uniquely in the House of 
Representatives that has a broader jurisdiction, the entire Tax 
Code, under our jurisdiction in which, to the extent that we 
can create a meaningful and useful Federal assistance in 
savings, that should be our goal.
    Obviously, there is going to be discussion on the changing 
role of defined benefits versus defined contributions; the 
multiplicity of saving instruments, what works, what doesn't 
work; government attempts to incentivize those who tend not to 
have appropriate wherewithal to save. I think to a certain 
extent there is a discussion about the Tax Code and the value 
of a marginal tax rate, and the behavior associated with the 
last dollar taxed, and to what extent do you change behavior on 
where and how that last dollar is taxed. I think when you talk 
about savings and focusing on savings, it is almost an inverse 
relationship in which, if we spend our time talking about 
people who are going to save anyway and attempt to create 
incentive systems that change the way in which they save, 
rather than allowing them to save, we are perhaps not 
maximizing the use of that Federal dollar.
    I think it becomes important, as you move down the income 
scale where people do make a decision as to whether they are 
going to save or not, how we do it. I think it is absolutely 
essential at the bottom of the income level that we be as 
creative as we can and as inclusive as we can in setting up 
structures to assist people to save; that we do so in a way 
that those least able to save are most comfortable and have an 
opportunity to save. That was the theme that I thought I 
detected through each of your testimonies. That is why I 
decided not to deliver a general theme; but rather focus on 
that particular area. The Chair will now recognize the 
gentleman from New York for any comments he may wish to make.
    Mr. RANGEL. I wish this Chair had had a written statement, 
so that I could follow more clearly where you would like to 
take this Committee. We have been challenged by the President 
on the problems that we face in Social Security. Now you are 
challenging us in terms of coming up with some type of solution 
to the problem. Now this panel is going to challenge us to 
provide incentives for savings and to improve our pension 
benefits. It looks like the Social Security problem still 
remains a ``third rail.''
    I do hope that since I couldn't find it in the Chairman's 
opening remarks, that the panel kind of helps me. Because I 
don't know what question was raised to you to respond, but I do 
hope that you know that many of us are here to try to avoid 
getting savings connected with Social Security, because we 
think that we should deal with that, and that it is very 
important, but we should deal with it separately. So, you may 
be taking this to health care, to housing for senior citizens, 
to retirement funds, and a variety of other things. I would 
believe, Mr. Chairman, that solvency of the Social Security 
system is a big enough problem for us to start to tackle. 
However, I will wait and see where this takes us, and maybe 
with the benefit of some of your Republican colleagues who 
understand where you are going better than I do, will have a 
better idea as to when we are going to deal with the problem of 
solvency. I would like to yield a minute to Richard Neal, 
before I yield to Sandy Levin during my 5 minutes.
    Mr. NEAL. I thank you, Mr. Rangel. Mr. Chairman, I applaud 
you for holding this hearing to examine how we can make 
retirement more secure. I know that all of us as Democrats are 
interested in working with you on legislation that would help 
achieve that end. What concerns me, though, Mr. Chairman, is 
that some have suggested that your strategy is to pass a 
retirement bill that does not contain private accounts, and 
then to add them during a conference Committee. We are eager to 
work with you to address Social Security's financing 
challenges, but we cannot be party to anything that would 
substitute private, personal, or individual accounts for Social 
Security's guaranteed benefits. Before we commence this hearing 
on retirement security, Mr. Chairman, might you be willing to 
clarify for Members of this Committee and to those who are 
watching this Committee that you will not add private accounts 
to a conference report, if they are not included in a House-
passed bill?
    Chairman THOMAS. Tell the gentleman I will take a minute to 
respond to him, but I don't want to take the time of the 
Ranking Member, which I believe he is going to yield to the 
Ranking Member on the Social Security Subcommittee. Well, no, 
it is on your time, and your time is going. So, you use the 
rest of the time, and I will respond.
    Mr. LEVIN. Welcome to all of you. Your testimony today is 
going to widen the circle of issues relating to retirement 
security discussed in the testimony before this Committee. Let 
me just say what we on this side very much believe; that 
efforts to widen the lens cannot blur an appropriate focus on 
Social Security privatization. That was the centerpiece of the 
President's State of the Union address, his 60-day tour, and 
his recent press conference. It has also been very much stated 
by Members of this Committee. We responded going to the public, 
and the more the public has heard, the less they like the 
proposals.
    So, now you are going to discuss with us the issues that 
are facing our country in the coming years. Indeed, I think 
this will come out; the changing picture as to pension programs 
in the private sector really fortifies the understanding the 
public has had about the strength of Social Security, a 
guaranteed benefit. think this will come out in the testimony; 
that since 1983, the number of defined benefit plans has been 
going down. Also, the recent pension failures I think have 
provided a stark reminder to the country about the importance 
of the Social Security guarantee. will just finish--my time is 
up--that we need to consider broader issues of retirement. What 
is standing in the way of having a truly bipartisan discussion 
of this is the President's demand for private accounts. We want 
to strengthen Social Security, not to replace it. Thank you, 
Mr. Chairman.
    Chairman THOMAS. I thank the gentleman. will respond to my 
colleague from Massachusetts on his inquiry. I believe that the 
President has proposed some changes to Social Security; I don't 
believe he has demanded them. think it is incumbent upon us to 
at least examine, consider, and move forward. The Chair has no 
interest in playing ``Gotcha.'' This is, I think, a 
fundamentally important issue in front of us. I think the 
President should be commended by placing the larger question of 
aging Americans and their retirement security--of which, 
obviously, one of the fundamental core issues is Social 
Security--in front of us.
    I thought it was incumbent upon us, given our knowledge, 
jurisdiction, that if Social Security is presented to us, it 
would be a derogation of duty not to look at pensions and 
savings, and argue that only dealing with Social Security would 
be an adequate addressing of aging Americans' needs. It just 
seemed to me logical and obvious to take the opportunity, 
especially on the area of integration and coordination, of 
looking at the question of retirement. We began with the 
hearing looking at Social Security. We certainly are going to 
return to Social Security in great detail. Because as the 
Subcommittee examines Social Security, there are clearly some 
internal adjustments for particular groups currently receiving 
Social Security, who need to be addressed on basically a 
fairness theme.
    I think it is entirely appropriate. believe the people who 
are in front of us wrote their papers with, I think--in my 
opinion, what I got out of it--a degree of gratefulness that we 
are talking about the larger picture beyond Social Security, 
which could afford us a chance to begin to build some links and 
institutionally address the issues that I think need to be 
addressed if we are looking at aging Americans and their 
retirement.
    So, I would just tell the gentleman from Massachusetts I 
have an interest in producing a product, and I believe that my 
colleagues on my side of the aisle have an interest, in 
producing a product which is a responsible one and should 
elicit bipartisan support at the end of this legislative 
process. If it does not, that is of course the choice of each 
individual Member. That doesn't say that the product shouldn't 
have gotten bipartisan support. This Chairman has no interest 
on a subject of this import to play ``Gotcha'' in any way.
    Mr. RANGEL. Mr. Chairman, this is very interesting. I hope 
that you have shared your views on where you would like to go 
with your Republican colleagues, because this is the first we 
have heard of this from you. It logically follows, if you are 
going to use the jurisdiction of this Committee to try to get a 
better package for our older Americans leading toward savings 
and retirement, do you intend to include health care or 
Medicare as a part of that package; since getting old and 
retiring and having savings and getting health care would use 
all of the tools that we have to make older people's life have 
a better quality?
    Chairman THOMAS. The Chair will respond, and then begin 
recognizing the panel, because it is appropriate. The Chair is 
pleased to hear the gentleman talk, somewhat similar to the way 
the Chairman talked back in January, about where we need to go. 
I do think, having examined Medicare in some detail just a 
short time ago, probably it would not be on the agenda in the 
timeframe we want to try to address other aspects of retirement 
security. However, since we didn't fundamentally address long-
term care in the Medicare package, at least from our 
Committee's jurisdiction, which is limited in terms of content 
but affords us an opportunity to examine it from the Tax Code 
direction, that might be appropriate.
    I do think the bulk of our focus should be on those areas 
that are within the broad jurisdiction of the Committee, 
principally commonly called the three legs of the retirement 
stool: pensions, personal savings, and Social Security. 
However, based upon what is occurring in the real world and 
what is occurring in terms of our opportunities, what used to 
be called pensions are looking more and more like personal 
savings, based upon the transitions that are occurring in the 
pension arena.
    It is principally this Committee's responsibility. believe, 
as I said, we would not be fulfilling our responsibility if we 
simply looked at Social Security, or we simply looked at 
pensions, or we simply looked at savings. All of them are 
essential. More and more, there is a need to integrate and 
coordinate those areas, to maximize the opportunity for 
Americans, who are living longer, to have an enjoyable 
retirement for those years that continue to be added to 
Americans' lives. With that, I would like to recognize the 
panel. Your written testimony will be made a part of the 
record. You may address us in the time that you have as you see 
fit. It seems appropriate that I will just start to my left, 
your right, and recognize the Director of the Congressional 
Budget Office, Dr. Holtz-Eakin, welcome him, and give you the 
floor.

   STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Mr. HOLTZ-EAKIN. Well, Mr. Chairman, Ranking Member Rangel, 
Members of the Committee, the Congressional Budget Office (CBO) 
is pleased to have the chance to be here today to talk about 
coming demographic changes and their implications for the 
economy and for the budget. I will keep my remarks brief, and 
focus them around three of the charts that are included in the 
written testimony, and hopefully in front of you. Let me begin 
with the demography. It is now understood that as the Baby Boom 
ages, that as longevity rises in the future, and that as 
fertility remains below those rates which we saw in the 
'fifties and 'sixties, the United States will become much 
older, and the ratio of those of retirement age to working age 
will rise and stay elevated for the foreseeable future. Now, 
what are the implications of this for the many potential 
policies that face the Congress, many of which are in the 
jurisdiction of this Committee? Well, lesson number one is it 
would be useful to anticipate these shifts and to set in place 
both economic reactions and also policies for those reactions, 
so as to minimize the difficulties. will come back to that.
    Lesson two, perhaps less widely recognized, is that the 
native-born population has below replacement fertility rates at 
this point; so that for the foreseeable future, net population 
increase will be dictated by the rate of immigration into the 
United States. Immigration, as a result, is a key policy issue 
that will cut across economic, budget and security aspects of 
policymaking. Now, as we shift to an older population, the 
economy will undergo transformations in all of its markets. 
Goods markets will change. The kinds of services and products 
that an older population desires will rise relative to those in 
other areas of the economy. Labor markets will be influenced by 
the pace at which seniors depart into retirement and the degree 
to which they do it on a full-time or part-time basis. Capital 
markets will be influenced deeply by the saving, particularly 
of the Baby Boom generation, and the resultant ability to 
accumulate productive assets in the U.S. economy.
    This suggests that it will be very important to maintain 
flexible economic markets going forward that will permit the 
shifts that are necessary to accommodate an older population, 
in goods markets; in labor markets, to maintain a neutrality 
between those who wish to continue working and those who do 
not, those who wish to work part-time versus those who wish to 
continue full-time; and in capital markets as well. Another 
implication is that it is important to recognize that aging, 
per se, doesn't matter so much if the population has pre-funded 
its retirement consumption. To the extent that the economy as a 
whole has put away resources to finance consumption, those 
resources will be sufficient to both pay for the consumption, 
and also to accommodate the withdrawal of seniors from the 
labor market. Then the third lesson is that we need to 
certainly maintain policies that support sufficient economic 
growth--and in particular, national saving--in order to 
maintain the resources to meet these rising demands.
    Now, in the testimony, we go through some computations that 
suggest we will not automatically grow our way out of these 
challenges, and I refer you to those. I won't belabor them. 
That suggests that in fact policy choices will be at the center 
of the kinds of things that we do in this Nation. Now, I want 
to put up this chart as an example of the kinds of challenges I 
am referring to. This is a chart that we used for a 
Subcommittee hearing on long-term care services. It doesn't 
have to be long-term care, and it is not necessary that it be 
health. It is illustrative of the kinds of influences that we 
will see. The first is that on the demography, with the rising 
number of seniors 85 and older, the oldest old, and the rates 
of impairment, we will see in the future a rising demand for 
this particular kind of service in the economy.
    Now, the demography will also cut another way. At the 
moment, the largest form of finance for this kind of service is 
donated care by family members and friends, 36 percent. With 
the smaller families in the future, and with the changing 
demography, it will be less easy to supply these services in 
that way, and they will be more likely to migrate to market 
provision. The second-largest form of finance at the moment, 
out-of-pocket payments, as a result, will have to come from 
those seniors themselves, if this is done through private 
markets. The question is: Will they save sufficiently, pre-fund 
these services, or not; or will the burden fall on their 
children or some other helper?
    Alternatively, you can imagine the financing being shifted 
to current government programs, Medicare or Medicaid. In fact 
the same issues arise there. Will the Nation as a whole have 
pre-funded these costs, and be easily able to accommodate them; 
or will they be shifted to the younger generation through the 
tax system, to finance these programs? So, the long-term care 
is an example of the kinds of issues that will face the economy 
and the budget and policy as the demography takes place. It 
goes without saying that in this context it will be useful to 
use all economic resources efficiently, and to make sure we get 
the most out of the dollars that we have accumulated. We talk a 
little bit about that in our testimony. So, the message so far 
is that there are some things that are likely to happen.
    Chairman THOMAS. If the gentleman would suspend briefly, 
without objection, the Chair would allow the witnesses to wind 
down for a minute or so beyond the 5 minutes.
    Mr. HOLTZ-EAKIN. Thank you.
    Chairman THOMAS. Because I think it is important that the 
message be coherent and whole.
    Mr. HOLTZ-EAKIN. Thank you very much.
    Chairman THOMAS. Without objection.
    Mr. HOLTZ-EAKIN. I will close briefly. The first comments 
are about what is likely to happen. The second focus on things 
which could or should happen as a matter of policy and economic 
adjustment. My closing remarks will focus on what cannot 
happen. What you see in front of you is a current law 
extrapolation of the Federal budget. The most striking feature 
of this is the rising spending dominated by the mandatory 
programs, Social Security, Medicare, and Medicaid. There are 
lots of ways to draw this picture numerically, but 
qualitatively the same stylized facts emerge. To the extent 
that we maintain current programs and simply proceed on auto-
pilot, spending is likely to outstrip revenues. As that 
happens, the increased borrowing will have a corrosive effect 
on the performance of the U.S. economy. Alternatively, taxes 
would need to be raised; which would equally be detrimental, 
given the levels to which the spending will rise.
    It will be essential to take this path and alter it; 
largely because this path is a path of financing consumption, 
not saving through the Federal budget. And the key issue is to 
pre-fund and save as a Nation for these challenges. This is not 
just a budgetary problem. There are mirror images of both the 
Social Security problem in the defined benefit world in the 
private sector; there are mirror images of Medicare and 
Medicaid and private health care costs. These are pressing 
economic challenges. I thank the Chairman and the Committee for 
holding a hearing that encompasses these, and I look forward to 
answering your questions.
    [The prepared statement of Mr. Holtz-Eakin follows:]
Statement of Douglas Holtz-Eakin, Director, Congressional Budget Office
    Mr. Chairman and Members of the Committee, I am grateful for the 
opportunity to appear before you to discuss the challenges presented by 
projected changes in the makeup of the U.S. population. Those changes--
together with, notably, rising health care costs--will produce a set of 
intertwined challenges for the budget and the economy. As a result, in 
the coming decades the United States will face economic shifts that 
will necessitate fundamental decisions about spending, taxation, and 
other economic policies that fall under the jurisdiction of this 
Committee.
Demographic Changes
    Over the next few decades, several demographic shifts are expected 
to occur. First, members of the large baby-boom generation will reach 
retirement age. Second, life spans are projected to continue to 
increase. Third, fertility rates are anticipated to remain well below 
the levels of the 1950s and 1960s. Taken together, those developments 
imply a significant and lasting increase in the number of elderly 
people in the population (see Figure 1). Those same demographic factors 
are projected to lead to a sharp slowdown in the rate of growth of the 
labor force. In addition, families will be smaller than in the years of 
the baby boom, leaving fewer children to help care for elderly parents. 
And with fertility rates expected to remain at or below replacement 
rates for the native-born population, immigration is projected to 
account for most of the population growth in the long run.
Figure 1. Size of the Population Age 65 and Older Compared with the 
        Population Ages 20 to 64 (Ratio)

        [GRAPHIC] [TIFF OMITTED] T6385A.001
        

    Source: Congressional Budget Office based on Social Security 
Administration, The 2005 Annual Report of the Board of Trustees of the 
Federal Old-Age and Survivors Insurance and Disability Insurance Trust 
Funds (March 23, 2005), Table V.A2 (intermediate assumptions).
Ecomonic and Budgetary Challenges
    The choices made by the growing share of older households will play 
a large role across the economy: the goods and services they demand 
will affect what the economy produces; the rate at which they choose to 
exit--in whole or in part--from the labor force will affect labor 
markets; and the decisions they make about savings will be a key 
determinant of the national accumulation of productive assets. By 
preserving flexible markets for goods, labor, and capital, the United 
States will probably adjust smoothly in response to market incentives. 
But significant challenges remain.
    Some of the future economic challenges posed by demographic changes 
stem directly from the structure of federal programs. In and of itself, 
an increase in the share of the elderly in the population need not 
present a problem. If each individual or household adequately prepared 
for retirement through its own saving, a greater share of elderly in 
the population would place no burden on younger people or the economy 
in general. However, a substantial share of the elderly's consumption 
is currently provided by government programs such as Social Security, 
Medicare, and Medicaid. Those programs have made important 
contributions to economic well-being in the United States. However, 
they are largely financed not by past savings in the economy as a 
whole, but by contemporaneous taxes. As the share of the elderly rises, 
current levels of taxation will be insufficient to finance those 
programs as they now operate.
    For example, Social Security outlays are projected to rise from 4.3 
percent of gross domestic product (GDP) to 6.3 percent in the next few 
decades, largely as a result of the aging of the baby-boom generation 
(see Figure 2). Thereafter, outlays will continue to rise slowly from 
continued increases in people's life spans, reaching about 6.6 percent 
of GDP by 2080. In addition, state and local pension programs that have 
not been adequately funded will face pressures similar to those faced 
by Social Security.
Figure 2. Social Security Outlays and Revenues Under the Scheduled-
        Benefits Scenario (Percentage of GDP)

        [GRAPHIC] [TIFF OMITTED] T6385A.002
        

    Source: Congressional Budget Office.
    Notes: Based on the Social Security trustees' 2005 intermediate 
demographic and long-run economic assumptions and CBO's January 2005 
short-run economic assumptions.
    Revenues include payroll taxes and income taxes on benefits but 
exclude interest credited to the Social Security trust funds; outlays 
include scheduled Social Security benefits and administrative costs.
    Under current law, outlays begin to exceed revenues starting in 
2019; beginning in 2044, scheduled benefits cannot be paid.

    The aging of the population also will lead to growth in the number 
of Medicare beneficiaries. That growth, along with continued increases 
in the cost of health care, is projected to generate a potentially 
dramatic rise in Medicare spending. Furthermore, the steady increase in 
the number of the oldest seniors (those age 85 and older)--from 1.5 
percent of the population in 2000 to 5.0 percent in 2040--is projected 
to lead to a rise in the demand for long-term care services, including 
those paid for by Medicaid and Medicare (see Figure 3). That increase 
in demand will probably be heightened because in the future, the 
elderly will have fewer family members available to care for them than 
do the current elderly: declines in fertility imply fewer children per 
parent, and a greater share of women in younger cohorts work outside 
the home. Those trends will reduce the availability of informal care 
provided by family members and friends--currently the largest source of 
long-term care (see Figure 4).\1\ Furthermore, such trends could, in 
turn, raise the reliance on out-of-pocket payments, necessitating 
greater saving unless those costs are to fall on the young.
---------------------------------------------------------------------------
    \1\ See Congressional Budget Office, Financing Long-Term Care for 
the Elderly (April 2004).
---------------------------------------------------------------------------
Figure 3. People Age 65 and Older as a Share of the U.S. Population
        (Percent)

        [GRAPHIC] [TIFF OMITTED] T6385A.003
        

    Source: Congressional Budget Office based on Bureau of the Census, 
U.S. Interim Projections by Age, Sex, Race, and Hispanic Origin, Table 
2a, ``Projected Population of the United States, by Age and Sex: 2000 
to 2050'' (March 18, 2004), available at www.census.gov/ipc/www/
usinterimproj/natprojtab02a.pdf

Figure 4. Estimated Percentage Shares of Spending on Long-Term Care for 
        the Elderly, 2004

        [GRAPHIC] [TIFF OMITTED] T6385A.004
        

    Source: Congressional Budget Office.

    Given those increases in demand, if costs per beneficiary continued 
to rise as fast as they have in the past, overall federal outlays for 
Medicare and Medicaid could climb from about 4 percent of GDP to more 
than 20 percent by 2050 (see Figure 5). Aging and increases in health 
care costs may also raise the demand for spending by other federal 
programs, including military retirement programs and the veterans' 
health care system.\2\
---------------------------------------------------------------------------
    \2\ See Congressional Budget Office, The Potential Cost of Meeting 
Demand for Veterans' Health Care (March 2005).
---------------------------------------------------------------------------
Figure 5. Total Federal Spending For Medicare and Medicaid (Percentage 
        of GDP)

        [GRAPHIC] [TIFF OMITTED] T6385A.005
        

    Source: Congressional Budget Office. See The Long-Term Budget 
Outlook (December 2003).

    Aside from its impact on federal mandatory spending, the aging of 
the population presents economic challenges because retirement 
consumption is not always adequately prefunded by saving in the private 
sector. For example, many private-sector defined-benefit pension plans 
have not been properly funded, and an aging population can create some 
of the same pressures on those underfunded plans as it does on Social 
Security. Those pressures are projected to lead to higher net outlays 
for the government's Pension Benefit Guaranty Corporation as rising 
numbers of plans are unable to provide full benefits (see Figure 6).
Figure 6. Net Outlays for the Pension Benefit Guaranty Corporation
        (Billions of dollars)

        [GRAPHIC] [TIFF OMITTED] T6385A.006
        

    Source: Congressional Budget Office.

    Moreover, whether through bad luck or poor planning, many people 
reach retirement age without enough resources to maintain their 
preretirement standard of living. Studies of savings levels suggest 
that as many as one-quarter of the baby-boom generation have failed to 
accumulate significant savings.\3\ Those people may experience 
significant declines in their standard of living upon retirement unless 
they receive some sort of assistance, whether from family members or 
government programs.
---------------------------------------------------------------------------
    \3\ See Congressional Budget Office, Baby Boomers' Retirement 
Prospects: An Overview (November 2003).
---------------------------------------------------------------------------
    Alternatively, those individuals may choose to work longer; indeed, 
even those without pressing financial needs may consider that option. A 
relevant consideration is the degree to which private and government 
retirement plans are neutral with respect to the retirement age, 
providing neither an incentive to depart the labor force nor a 
requirement to extend working years.
    Health care is a key part of consumption for both the young and the 
old. Rising health care costs threaten the current health insurance 
system for workers and retirees covered by private plans. Rapidly 
rising health insurance premiums are likely to reduce both the 
percentage of people who have health insurance and the 
comprehensiveness of the insurance held by those who are covered. As 
premiums rise, workers may be less willing to accept lower wage 
increases in exchange for keeping their health insurance. And employers 
may not wish to maintain increasingly costly benefits for retirees, 
especially since health spending for retirees does not contribute 
directly to a productive workforce, as might health insurance for 
current employees. Moreover, as noted above, given that a large portion 
of long-term care is now donated, an aging population may put a burden 
on younger generations even aside from the taxes required to finance 
government-funded care.
    Despite those challenges, growth in productivity is currently 
projected to continue to raise people's living standards over time. 
However, it is very unlikely that productivity growth could by itself 
``solve'' the projected budgetary shortfalls. Growth in productivity 
stems from two factors: growth in the amount of productive capital per 
worker, and technological advances that increase the amount of goods 
and services that can be produced by a given level of capital and 
labor--so-called total factor productivity (TFP). The rate of growth of 
TFP would have to shift upward in a very unlikely way to close just the 
budgetary gap in Social Security--and that gap is only a small part of 
the rise in consumption demands for the economy as a whole. For 
example, if the future growth of TFP was a full percentage point faster 
than its postwar average, over three-quarters of Social Security's 
projected 75-year actuarial balance would be erased. However, 
historical data on TFP growth suggest that such a sustained high rate 
of growth is quite implausible, with the probability of such a shift 
well under 1 percent. Moreover, even under such a scenario, Social 
Security would eventually begin to run cash flow deficits and exhaust 
its trust funds.
    As for the amount of capital per worker, that will depend largely 
on national saving and wealth accumulation. In general, however, the 
impact of an aging population on the budget will tend to reduce 
national saving. By 2050, government spending is projected to climb to 
well above its historic share of GDP and considerably higher than the 
historical average share of revenues, which is about 18 percent (see 
Figure 7). The levels of borrowing implied by that outlook could have a 
corrosive or, eventually, contractionary effect on productivity.
Figure 7. A Scenario for Total Federal Spending and Revenues 
        (Percentage of GDP)

        [GRAPHIC] [TIFF OMITTED] T6385A.007
        

    Source: Congressional Budget Office.
    Note: CBO categorized this scenario as one of high spending and 
lower revenues. The scenario is explained in detail in CBO, The Long-
Term Budget Outlook (December 2003), pp. 6-12.

    Moreover, the United States is unlikely to be able to borrow such 
sums on a sustained basis, even from international markets (especially 
given that aging populations in the rest of the developed world are 
likely to put similar pressures on budgets in other countries). 
Therefore, at some point, it is almost certain that spending will have 
to be cut or that taxes will have to rise. To the extent that increased 
taxes involved higher marginal rates on labor and capital income, they 
would tend to discourage work and saving, and therefore reduce economic 
output. For example, the Congressional Budget Office (CBO) has 
estimated that if all projected spending was financed by higher taxes, 
GDP could be 6 percent lower by 2050 than if spending was cut instead. 
(Although those estimated effects are significant, they are small 
relative to the projected growth of GDP over the next 50 years.)
    More generally, choices about the degree to which budgetary 
adjustments should be addressed by changes in taxes or spending, and 
about when those changes should occur, involve fundamental issues 
concerning the distribution of burdens within and across generations. 
At some point, policymakers need to make choices about who will bear 
the cost of bringing commitments into line with projected resources. 
The longer those decisions are deferred, the greater the share of the 
cost that will tend to be borne by future generations. In addition, 
exempting certain groups--such as current beneficiaries and those near 
retirement--from the changes increases the burden that other groups 
must bear. In evaluating how to distribute the impact of policy 
changes, however, it is useful to note that because productivity is 
expected to continue to rise, future generations are projected to have 
a higher standard of living than current ones.
Ways to Encourage Economic Efficiency
    A paramount consideration is to ensure the continued accumulation 
of physical capital, technologies, and workers' skills to sustain 
economic growth. Policies that increased overall economic efficiency 
could lessen the impact of bringing commitments into line with 
available resources. For example, tax policies that involve lower 
marginal rates can reduce distortions that currently tend to discourage 
work and saving. Of course, the goal of reducing distortions must be 
balanced against consideration of the fairness of the distribution of 
taxes.
    In addition to addressing the great pressure to increase federal 
spending, revisiting the structure of financing those outlays may be 
useful as well. For example, the income tax as currently configured 
operates somewhat like a high-end surtax. A large fraction of lower-
income taxpayers now receive a net subsidy from the income tax, while a 
much smaller number of high-income taxpayers pay most of the taxes (see 
Table 1). To the extent that that structure is embraced or extended, it 
may be useful to minimize the distortions imposed in raising revenue by 
explicitly designing the tax to reflect the economic lives of the key 
taxpayers. Alternatively, it may be desirable to return the tax to a 
broader base in the population.
Table 1. Effective Federal Tax Rates and Shares of Federal Tax 
        Liabilities, 2002

        [GRAPHIC] [TIFF OMITTED] T6385A.008
        

    Source: Congressional Budget Office.
    Notes: A household consists of the people who share a housing unit, 
regardless of their relationships.
    Income categories are defined by ranking all people by their 
comprehensive household income adjusted for household size--that is, 
divided by the square root of the household's size. Quintiles, or 
fifths, contain equal numbers of people.
    Comprehensive household income equals pretax cash income plus 
income from other sources. Pretax cash income is the sum of wages, 
salaries, self-employment income, rents, taxable and nontaxable 
interest, dividends, realized capital gains, cash transfer payments, 
retirement benefits plus taxes paid by businesses (corporate income 
taxes and the employer's share of Social Security, Medicare, and 
federal unemployment insurance payroll taxes), and employee 
contributions to 401(k) retirement plans. Other sources of income 
include all in-kind benefits (Medicare, Medicaid, employer-paid health 
insurance premiums, food stamps, school lunches and breakfasts, housing 
assistance, and energy assistance). Households with negative income are 
excluded from the lowest income category but are included in totals.

    By contrast, payroll taxes take a larger share of the income of 
lower earners because they are levied only on labor income and are 
capped. A large part of payroll taxes do not represent a pure tax on 
the margin, because with higher earnings, workers not only pay higher 
taxes but also eventually qualify for higher Social Security benefits. 
Therefore, the payroll tax in principle should not discourage work as 
much as the legislated rates would seem to imply. However, workers 
might not fully realize the connection between current earnings and 
future benefits. In that case, the payroll tax would distort work 
decisions more strongly. If so, it may be desirable to moderate the 
extent of the payroll tax, or increase economic efficiency by 
clarifying the link between contributions and eventual benefits.
    In general, a broader issue is whether a system that replaced the 
various types of taxes that are currently employed with a more 
integrated whole could be more efficient and fair.
    Given the large scale of health care consumption, increased 
efficiency in that sector could yield significant benefits. From an 
economic perspective, a key problem with the current system is the lack 
of connection between those who are well-informed, those empowered to 
make decisions, and those who bear the cost of care. The result is that 
current health care spending is inefficient. For example, some regions 
of the country use many more medical services than others, on average, 
with no evident benefit in terms of health outcomes. Health insurance, 
depending on how it is provided, can also lead to excess spending: 
although insurance against uncertain health care costs has great value, 
to the extent that people are insured they do not face the direct cost 
of care and have little incentive to constrain costs. Furthermore, the 
tax preference given to employment-based insurance, a principal source 
of insurance in the U.S. population, may tend to bias the health care 
system toward higher spending.
    At present, there is little consensus regarding clear-cut steps to 
improve the efficiency of the health care system. However, several 
incremental changes have received attention. Proponents of limiting 
medical malpractice awards argue that implementing such changes would 
reduce medical liability premiums, health insurance premiums, and the 
practice of defensive medicine. CBO has found that tort reforms would 
ultimately reduce medical liability premiums by an average of 25 
percent to 30 percent from the levels that would otherwise occur, but 
total health care costs would fall by only about 0.5 percent. The more 
difficult question is whether there might be harder-to-detect, long-
term shifts in practice patterns.
    Another policy already being implemented to some extent for 
chronically ill patients is disease management. Disease management may 
entail various combinations of enhanced screening, monitoring, and 
education; the coordination of care among providers and settings; and 
the use of best medical practices to try to identify chronic conditions 
more quickly, treat them more effectively, and thereby slow their 
progression. Unfortunately, although a few studies indicate that 
disease management programs could be designed to reduce overall health 
costs for selected groups of patients, to date little research directly 
addresses the issues that would arise in applying disease management to 
the broader population (including Medicare patients, who tend to be 
older and sicker).\4\
---------------------------------------------------------------------------
    \4\ See Congressional Budget Office, An Analysis of the Literature 
on Disease Management Programs (October 2004).
---------------------------------------------------------------------------
    The fact that a relatively small number of patients account for a 
large share of medical expenditures suggests another possible cost-
reduction strategy: identify potentially high-cost patients in advance 
and find effective intervention strategies to reduce their spending. A 
CBO analysis of Medicare patients suggested some promising strategies 
to identify patients who are disproportionately likely to incur high 
costs.\5\ However, such identification does not by itself restrain 
costs. The extent to which targeted beneficiaries reduced their 
spending would ultimately rest on the costs of identification and the 
ability to devise and implement effective strategies to change 
beneficiaries' use of medical services.
---------------------------------------------------------------------------
    \5\ See Congressional Budget Office, High-Cost Medicare 
Beneficiaries (May 2005).
---------------------------------------------------------------------------
    In short, none of the approaches discussed above alone appears to 
provide a silver bullet to stem rising health care costs (or increase 
benefits for the same cost). However, taken together, in conjunction 
with other changes that more closely link the quality of care with its 
cost, such policies could move the system toward greater efficiency.
    In closing, the demographic shifts facing the United States will 
place a premium on the accumulation of economic resources required to 
provide for the needs and wants of an older population. The structures 
of government programs will have important influences on the ability of 
the economy to sustain high levels of growth.

                                 

    Chairman THOMAS. I thank the gentleman. The next witness is 
the Honorable Hal Daub. He is here under the auspices of the 
Social Security Advisory Board, but some of us remember him 
fondly as a Member of Congress and a colleague on the Ways and 
Means Committee. Hal, welcome.

STATEMENT OF HON. HAL DAUB, CHAIRMAN, SOCIAL SECURITY ADVISORY 
                             BOARD

    Mr. DAUB. Thank you very much, Mr. Chairman. Congressman 
Rangel, it is nice to see you; Members of the Committee. Thanks 
for inviting me to testify today. will briefly summarize the 
main points of my full statement. That statement reflects the 
findings and recommendations of the bipartisan Social Security 
Advisory Board's recent report, which I hope you each have or 
have received, a copy of which I'm holding in my hand; which is 
entitled, ``Retirement Security: The Unfolding of a Predictable 
Surprise.'' And it was adopted unanimously by the board. The 
board's conclusions match up well with the title of this 
hearing and its underlying assumptions. We must deal with the 
Social Security issue in the broader context of retirement 
policy, generally. And we need to approach the very significant 
challenges of an aging society, as Doug just well showed, with 
a recognition that they are indeed challenges, but they are 
also opportunities to make our retirement security programs 
better meet their objectives. Social Security is a foundational 
element of our retirement security system. For some older 
Americans, it provides all, or nearly all, of their retirement 
income; and for many, it represents half or more of their 
income.
    Important as it is, Social Security is far from the entire 
picture. Employment-based pensions, income from savings and 
other assets, and earnings from employment together provide 
about 60 percent of the income of the aged. Certainly, 
restoring the solvency of Social Security must be a high 
priority. And effective retirement policy must also encourage 
and facilitate increased availability of, and participation in, 
employment-based private retirement programs and the higher 
levels of individual savings. We need to make sure that younger 
workers entering the labor market fully understand that 
retirement security begins at that point. It is not something 
that just happens when you get old; rather, retirement security 
needs to be seen as a long-range proposition that you build 
during your working years so that you can have an adequate 
income in your retirement years.
    I think this hearing very correctly recognizes that to 
address retirement security we need to deal in an integrated 
way with Social Security, Medicare, and Medicaid. For the aged, 
growing premiums and other out-of-pocket medical costs reduce 
the income available to meet other needs. Increasing medical 
costs limit the ability of employers to provide retiree pension 
and health benefits, and threaten to create immense budgetary 
pressures. We think of Social Security as retirement income. 
For many older Americans it ultimately merges with the 
financing of their long-term costs through the Medicaid spend-
down. Is it not the time to elevate our commitment to long-term 
care protection to equal our commitment to expanding 
homeownership, and to do so by providing effective tax 
incentives for individuals to build that protection for their 
future?
    So, we have many challenges to meet, if we are to continue 
the policy enunciated 40 years ago by the Older Americans Act 
of, and I quote, ``An adequate income in retirement in 
accordance with the American standard of living.'' There is no 
reason why that cannot be done. We have a strong economy, and a 
vibrant, flexible workforce. We have developed an array of 
instruments for retirement security that are fundamentally 
sound. We need to see this as a rare opportunity to review our 
overall retirement security system and adapt it to meet the new 
demographic realities of this coming century. Mr. Chairman, I 
would like to step aside, if I might, in my role as Chairman of 
the Social Security Advisory Board for a moment, and leave the 
Committee with an outline of a five-part proposal that I have 
been working on as an individual to restore Social Security 
solvency. The first four elements that I propose restore the 
75-year solvency. They have two elements that raise revenue, 
and two elements that change benefits. will briefly summarize 
them. You have the full outline of it in your possession.
    I would, to raise revenue, gradually increase the taxable 
maximum to cover 90 percent of the wages over the next 10 
years. That is where we were in 1983. I bring into Social 
Security all new, prospectively, state and local employees and 
benefit changes. I would have a small reduction in the cost of 
living adjustment, never by more than 1 percent, and usually 
half a percent or less; and a continuation of the scheduled 
increases in retirement age to, very gradually, 69 and a half; 
and phase those increases in, with a parallel phase up of the 
initial retirement age to 65 and a half. That would start in 
the year 2023, and can be completed in the year 2042. I believe 
that we need to move to a mixed system that would maintain the 
basic Social Security guarantees, but would incorporate a 
modest individual account feature. I would suggest starting 
with workers that are under age 42, and creating for them 
forced savings funded by 2 percentage points of the current 
Social Security tax rate. My outline describes the proposals in 
more detail. I would be happy to discuss this proposal with any 
Members of the Committee. Thank you, Mr. Chairman.
    [The prepared statement of Mr. Daub follows:]

Statement of The Honorable Hal Daub, Chairman, Social Security Advisory 
                   Board (former Member of Congress)

    Mr. Chairman, Congressman Rangel, Members of the Committee. Thank 
you for inviting me to testify on behalf of the Social Security 
Advisory Board at this most important hearing.
    In 1994, Congress passed the legislation that set up the bi-
partisan Social Security Advisory Board. In that law, you gave us a 
number of responsibilities. One of those was to examine and make 
recommendations about how the Social Security programs can work with 
other public and private programs to assure economic security in 
retirement. Over its history but especially in the last year or so, the 
Board has been focusing its attention on that issue, and we have 
recently issued a report, Retirement Security: the Unfolding of a 
Predictable Surprise. \1\ The report addresses that mandate and also 
addresses the subject of today's hearing.
---------------------------------------------------------------------------
    \1\ The report is available on the Board's website: www.ssab.gov 
and the Committee has also posted a copy
---------------------------------------------------------------------------
    First of all, I think it is important to recognize that we start 
this century in a lot better shape than we started the last century. 
For typical American workers at the start of the last century, there 
was no retirement policy. You commonly could expect to work until you 
died, and you were likely to die a lot sooner. There was very little in 
the way of private pension programs and no Federal programs to provide 
retirement income or health protection in old age.
    Today we have a vastly different situation. As a result of advances 
in medical care and technology, older Americans are enjoying longer and 
healthier lives. We have the Social Security and Medicare programs to 
provide a base of income and health protection and enable our older 
citizens to leave the labor force and enjoy many years of retirement. 
For many of our citizens--although still not enough--that base of 
income and health protection is supplemented by employer-sponsored and 
individual pensions, savings, and health benefit plans. Many of our 
older citizens also have other assets to rely upon, including home 
ownership for more than 80 percent of those 65 and over. And we have 
the important safety-net programs for the needy of Supplemental 
Security Income and Medicaid.
    So, as we look to the future, we are starting from rather solid 
ground. But we also know that ahead lie changes to which the Nation 
simply has no choice but to respond. Those changes can be viewed as a 
shock or surprise but, fortunately, as the Board's report says, they 
represent a predictable surprise. The primary challenge that we face is 
the aging of our society as a result of the twin demographic shifts of 
lower birthrates and longer lives. We currently have a workforce that 
has benefited from the postwar baby boom, the increased participation 
of women workers, and large improvements in skills and education 
levels. But the oldest of the baby boomers turn 60 next year and we can 
clearly see a future in which the ratio of the retirement age 
population to the working-age population will be growing substantially. 
Moreover, with continually increasing life spans, the population of 
those in their 80s and 90s and beyond will also be growing and placing 
increasing demands on our ability to provide health services and long-
term care. And, as we all know, the costs of health care have been and 
continue to rise at unsustainable rates.
    So we do, as a Nation, face serious challenges ahead. But, as you 
so aptly noted in the title of this hearing, we need to look at these 
challenges of our aging society also as opportunities. The various 
public and private programs that now combine to provide retirement 
security have grown up over the years without much conscious attention 
to how they relate to each other. I think it is fair to say that, on 
the whole, these programs provide our older citizens with an excellent 
level of retirement security. But the fact that all of these elements 
of our current retirement security system face the serious challenges 
of an aging society gives us the opportunity to reexamine them in a 
coherent manner, to identify the areas in which there are gaps in 
protection, or inappropriate targeting that may leave some of the aged 
with too little or, in some cases, too much protection. We can update 
these programs to take account of the changes that have taken place and 
are taking place in the composition of our society and our workforce. 
We can identify ways to strengthen these programs, to validate or 
improve their targeting, and to remove unnecessary barriers that 
prevent them from fulfilling their purposes.
    Before looking at the individual parts of our retirement security 
system, however, we need to reflect on the basic question of what is 
the objective of our retirement income policy. Forty years ago, in 
1965, Congress enunciated a national policy in the Older Americans Act 
in these terms: ``An adequate income in retirement in accordance with 
the American standard of living.'' I believe that policy formulation 
has stood the test of time and should continue to guide us as we look 
to strengthening the various elements of our retirement security 
system. As we consider changes to various programs, we need to 
continually assess whether they help us as a Nation to achieve that 
policy goal.
    The Social Security program is, of course, a foundational element 
in assuring America's older citizens a base of retirement security. It 
is particularly important for those in the lower and middle parts of 
the income distribution. About 30 percent of the aged get all or nearly 
all of their cash income from Social Security and 59 percent of the 
aged get half or more of their income from the program. So it is 
vitally important that we move promptly to restore the solvency of 
Social Security so that it can continue to play its role in providing a 
base of income security for those who are retired and so that America's 
workers can know with reasonable confidence what they can expect from 
it as they plan for their future retirement. As the Advisory Board has 
pointed out many times over the past several years, there are many 
different options for restoring Social Security solvency. But if we do 
not act now, the range of available options will narrow, and the ones 
remaining will be more difficult and disruptive.
    While restoring the solvency of Social Security is a pressing need 
that presents significant challenges, it also give us the opportunity 
to examine whether some aspects of the program could be better targeted 
to the 21st century population it now serves. The basic construct of 
the program is sound, with a benefit formula that recognizes the need 
to replace a greater portion of the pre-retirement earnings at the 
lower end of the scale in order to maintain an adequate standard of 
living. Over the last third of a century, largely because of Social 
Security, the poverty rate among the aged has been cut from nearly 25 
percent to a little over 10 percent. That is a remarkable achievement, 
but in changing the program we should look for the opportunity to do 
even better, and we need to look for aspects of the program that have 
not done so well. For example, older women, particularly those who are 
widowed, divorced, or single still have poverty rates approaching or 
exceeding 20 percent.
    We also need to remember that Disability Insurance is a significant 
part of the Social Security program. It provides vital income support 
for 8 million disabled workers and their family members, and it 
accounts for about 17 percent of the overall deficit in the program. As 
changes are made in the retirement aspects of Social Security, it will 
be important to make sure that those changes appropriately address the 
needs of disabled workers. Moreover, as we look to a future where our 
major challenge is the increasingly unfavorable workforce/beneficiary 
ratio, we must find ways to make the disability program more responsive 
to the desires of impaired individuals to maintain their independence 
and continue productive participation in the workforce.
    While Social Security plays a foundational role in income security 
of Americans in retirement, it is, by no means, the whole story. For 
those over 65, Social Security benefits provide 39 percent of their 
income. About a quarter of the income of the aged comes from continuing 
participation in the workplace, and about a third comes from pension 
and asset income. About four out of ten aged households report having 
retirement income other than Social Security, and there is some reason 
to think that may understate the reality. It is ``good news'' that so 
many older Americans enjoy employment-based pension income in addition 
to their Social Security. That certainly is a major contribution to 
meeting the goal of an adequate income in retirement. But it could be 
better news. Over the past 20 years, participation in employment-based 
retirement plans has been fairly flat at about 50 percent despite tax 
incentives to participate. The percent that are covered by a plan at 
some point in their life is a bit higher at 60 percent but still leaves 
room for improvement.
    There is a well-known and accelerating shift from traditional 
pension plans that offer defined benefits as lifetime annuities to 
defined contribution plans of the 401(k) variety. To a considerable 
extent, this reflects the changing realities of the workplace in a 
highly competitive, globalized economy where career employment with a 
single company is no longer the norm. This trend could shift somewhat 
in the future labor-short economy where employers may have greater need 
to encourage long-term employment. In any case, there currently are 
substantial retirement assets in both types of plans. Both are 
important to meeting the national goal of an adequate income in 
retirement. And, in both cases, there is a need to reexamine policies 
to encourage employers to maintain and offer these plans and to modify 
them in ways that will encourage increased participation by employees. 
Regulation is needed to protect plan participants, but there is equally 
a need to simplify the regulatory burden in establishing and 
maintaining private pensions and to clarify regulatory standards such 
as those surrounding hybrid plans. Funding standards need to be 
reexamined to encourage practices that will strengthen the funding of 
plans. In the case of defined contribution plans, consideration needs 
to be given to the many suggestions that researchers have made for ways 
to increase participation rates by employees and to encourage the 
appropriate use of plan assets to provide income in retirement.
    The challenge of an aging society is something the Board has called 
a predictable surprise, but I think we need to worry that, for too many 
of our fellow citizens, it may come as a real surprise. A survey by the 
Employee Benefits Research Institute found that only four out of every 
ten workers have even tried to calculate how much they will need to 
live comfortably in retirement. Household savings as a percent of 
income has been declining for many years and now is less than 2 
percent. In addition to providing tax incentives for savings, Congress 
and the Administration have made some admirable attempts to focus more 
attention on the need for savings. And the Social Security Advisory 
Board has spoken with some individual employers and some employer-
sponsored organizations that are also trying to promote awareness in 
this area. But much more needs to be done. Promoting the need for 
lifetime retirement planning and making financial education widely 
available must become a national priority.
    The predictable surprise that we face in retirement policy is 
fundamentally a result of the demographic shifts, which will alter the 
relationship in size of the working age population and the retiree 
population. We have an opportunity to moderate that challenge to the 
extent that we can find ways to increase the workforce by providing 
incentives for older workers to continue in productive employment. To a 
certain extent that is already happening. About a quarter of the income 
of those age 65 and over comes from employment. The labor force 
participation of older men declined steadily over most of the last half 
of the 20th century, but it began to level out in the 1980s and seems 
to be slowly rising. Some employers are now recognizing the advantages 
that older workers can bring to workplace and are making accommodations 
to facilitate part-time or intermittent employment. That phenomenon may 
strengthen as we face increasing labor shortages in the future. Still, 
as Congress deals with changes in Social Security and other retirement 
income programs, it needs to be sensitive to the importance of assuring 
that policies and program rules facilitate and encourage continued 
labor force participation of older workers.
    Retirement security for older Americans involves not just the cash 
income from Social Security, savings, and pensions but also the very 
important component of health care. The challenges facing the income 
support program are substantial, but they are swamped by the health 
care issues, which involve not just the coming shift in the relative 
numbers of workers and beneficiaries, but also the continually rising 
unit costs of medical care, and the greatly increasing numbers within 
the aged population of those who are very old and require constant 
care. Regardless of how the financing is accomplished, the costs of all 
these programs at any given point in time have to be met from what the 
workforce at that time is able to produce.
    Future increases in the cost of health care for the aged will put 
severe strains on the financing of Medicare and Medicaid, complicate 
the Nation's ability to finance Social Security and other budgetary 
priorities, and undermine the ability of employers to provide retiree 
health benefits. Moreover, these cost increases will also eat into the 
adequacy of the cash income of the aged through large escalation in 
premiums and other out-of-pocket costs. A July 2004 memo from the CMS 
Actuary projected that a typical age-65 beneficiary with typical 
medical costs would see premiums and out-of-pocket costs for parts B 
and D of Medicare rise from about 35 percent of the average Social 
Security benefit in 2006 to 91 percent in 2078. If we are to have a 
rational and successful retirement security policy, the health care 
part of that policy must be viewed as much more than simply a question 
of financing. We need to find ways to rationalize the health care 
system, constrain its costs, and improve the quality of care.
    For many older Americans, long-term care is already a major element 
in their retirement security and that will be become increasingly the 
case as the population ages. The number of Americans aged 85 or older 
will grow from about 4 million at the start of this century to nearly 
10 million by 2030 and over 20 million by 2050. At the same time the 
need for long-term care is increasing, society will face increasing 
challenges with respect to the supply of workers to provide such care 
in formal situations and the availability of family members to provide 
such care on an informal basis. In the recent past, the Nation has 
experienced substantial improvements in the availability, diversity, 
and quality of long-term care. Nursing home providers have shown their 
commitment to care quality both through their embrace of government 
programs and their creation of their own Quality First program. But, 
sustaining gains in quality will be a challenge that will depend to a 
considerable extent on assuring the continuing stability of funding. 
While some progress has been made in encouraging advance funding of 
long-term care through insurance, the results relative to future needs 
are still minimal. More attractive tax incentive policies for the 
purchase of long-term health care insurance seem imperative.
    As we stand here at the start of a new and different century, it is 
clear that we face significant challenges in continuing to meet the 
goal America set for itself of enabling our older citizens to have an 
adequate income in retirement in accord with the American standard of 
living. But, I think it is important to realize that these challenges 
are not a sign of weakness but rather arise out of our Nation's 
strengths and successes. We are living longer and healthier lives. We 
have seen great improvements in medical care and technology. We have a 
strong economy and a vibrant workforce, which offers the men and women 
of this country a wide range of opportunities to pursue employment that 
utilizes their talents and rewards their efforts.
    Much of the media coverage of the issues relating to Social 
Security and Medicare and the other elements of retirement security has 
been precisely wrong. These challenges we face are not a matter of 
institutional failure or partisan assignment of blame or even shared 
pain. This is one of those moments that come but rarely in our history, 
a moment when elected policymakers truly have the opportunity to 
consolidate our past achievements and move them to a higher plane. Our 
Nation's instruments of retirement security, as they have developed 
over the past century are a magnificent success story. Our and your 
challenge and opportunity is to strengthen those institutions and make 
the necessary changes to assure that in this coming century they will 
be an even greater success story. I have every confidence that the 
members of this Committee can work together to seize that opportunity 
and meet that challenge.

                                 

    Chairman THOMAS. I thank the gentleman very much. Our next 
witness is Dr. Richard Jackson, Global Aging Initiative, Center 
for Strategic and International Studies. Dr. Jackson.

   STATEMENT OF RICHARD JACKSON, DIRECTOR AND SENIOR FELLOW, 
GLOBAL AGING INITIATIVE, CENTER FOR STRATEGIC AND INTERNATIONAL 
                            STUDIES

    Mr. JACKSON. Thank you, Mr. Chairman, Ranking Member 
Rangel, Members of the Committee. It is an honor to have the 
opportunity to testify before you today. The aging of America 
promises to usher in one of the greatest social transformations 
that our Nation has ever experienced. Rising life spans are a 
great personal boon, but they also pose a great collective 
challenge. Graying means paying. It means paying more for 
pensions, more for health care, more for social services for 
the elderly.
    According to the Congressional Budget Office's long-term 
projections, spending on Social Security, Medicare, and 
Medicaid, a large and rising share of which pays for long-term 
care for the elderly, is due to rise from 8 percent of the 
economy today to 18 percent by 2050. To put the number in 
perspective, just the growth alone, 10 percent of GDP, is two 
and a half times everything the United States now spends on 
national defense, even after the post-9/11 buildup. In the end, 
an aging America is going to have to fundamentally rethink its 
system of senior entitlements. In my view, a workable solution 
will have to reflect three fundamental new realities.
    The first reality is the ongoing rise in life expectancy. 
If Social Security's retirement age had been indexed to 
longevity since the program was founded, workers would today, 
already today, be waiting until age 73 to begin collecting 
benefits. Yet far from rising, retirement ages have actually 
fallen significantly over the course of the post-war period. In 
the future, Americans are going to have to split this marvelous 
longevity dividend between extra years of work and extra years 
of leisure. The second reality is the transformation in the 
economic status of the elderly. As recently as the early 
seventies, it was possible to argue that age was a reasonable 
proxy for financial need. This argument is no longer plausible. 
Over the past three decades, the median income of households 
headed by adults aged 65 and over has risen by close to 50 
percent, after inflation; while the median income of households 
headed by adults under age 45 has been at a virtual standstill.
    Counting in-kind benefits like Medicare, the elderly 
poverty rate is now as low as the rate for younger adults, and 
is actually half the rate for children. An aging America will 
have to reconsider whether age alone is a sufficient criterion 
for blanket access to public benefits. The third reality is the 
declining viability of pay-as-you-go social insurance. The pay-
as-you-go paradigm made a lot of sense back in the fifties or 
sixties, when there were five or six workers for every retiree. 
With the end of the Baby Boom, however, the demographic 
underpinnings of the paradigm collapsed. In the future, workers 
will have to pre-fund more of their own retirement income out 
of greater savings during the working years. Now, at the Center 
for Strategic and International Studies (CSIS) Global Aging 
Initiative, we have looked closely at the vulnerability of the 
major developed countries to the rising costs of old-age 
dependency. am happy to report that the United States enjoys 
some enviable advantages.
    We are actually the youngest of the developed countries 
today and, thanks to our relatively high rate of fertility and 
substantial net immigration, we will remain the youngest for 
the foreseeable future. We also, along with our more favorable 
demographics, have a relatively inexpensive Social Security 
system. Incredibly, several European countries spend more today 
on public pensions for the elderly than we will be spending in 
2040 after the last of the Baby Boomers have retired. Outside 
the United States and the other English-speaking countries, 
retiree dependence on government benefits is almost absolute. 
In the United States, private pensions, as well as higher rates 
of elderly labor force participation than in most countries, 
help take pressure off government budgets.
    None of this means that the United States can afford to be 
complacent. Although we spend less per capita on pensions for 
the elderly than most other countries do, we spend more on 
health care. Although we have a well developed private pension 
system, nearly half the private sector workforce still has no 
coverage at all, even a meager 401(k) that can be cashed out 
long before retirement. And let me wrap up here. Confronting 
the aging challenge will require today's adults to make 
difficult tradeoffs between their own future retirement income 
and the living standards of their children. Making these 
tradeoffs won't be easy, but I think that we have to make them. 
commend you for looking at this issue. At stake is whether an 
aging America will be able to meet the needs of a larger number 
of elderly, while still making room for the hopes and 
aspirations of youth. Thank you, Mr. Chairman. That concludes 
my testimony.
    [The prepared statement of Mr. Jackson follows:]

Statement of Richard Jackson, Director and Senior Fellow, Global Aging 
       Initiative, Center for Strategic and International Studies

    Thank you, Mr. Chairman. It is an honor to have the opportunity to 
testify before the Ways and Means Committee today.
    The aging of America promises to usher in one of the most 
fundamental social transformations that our nation has ever 
experienced. Over the next few decades, it will restructure the 
economy, reshape the family, and redefine our cultural self-image. 
Perhaps most fatefully, it will push a growing share of the nation's 
resources towards an ever-larger elderly population whose 
``entitlement'' to public benefits has come to rest on age alone.
    In the days of Thomas Jefferson or Abraham Lincoln, your odds of a 
random encounter with an elderly American were about one in forty. 
Today, they are about one in seven. A generation from now, they will be 
between one in four and one in five.
    Longer life spans are a great personal boon, but they also pose a 
great collective challenge. Graying means paying--more for pensions, 
more for health care, more for social services for the elderly. 
According to the Congressional Budget Office, federal spending on the 
three major senior entitlements--Social Security, Medicare, and 
Medicaid, a large and rising share of which pays for long-term care for 
the elderly--is due to grow from 8 percent of the economy today to 18 
percent by 2050. To put that number in perspective, just the projected 
increase in spending--10 percent of GDP--is two and one-half times 
everything the United States now spends on national defense, even after 
the post 9-11 build up.
    The growth in senior entitlements should obviously be of concern to 
conservatives, since it is inconsistent with the goal of limited 
government. But it should also be of concern to liberals, whose vision 
of progressive government is being increasingly crowded out by 
retirement and health-care spending on the middle- and upper-income 
elderly. By 2050, according to the CBO's long-term budget projections, 
spending on Social Security, Medicare, and Medicaid is on track to 
consume three-quarters of all noninterest outlays.
    In the end, an aging America will have no choice but to rethink its 
whole system of senior entitlements. The goal must be to fashion a new 
system that is capable of ensuring a decent standard of living for the 
old without imposing a crushing burden on the young. In my view, a fair 
and sustainable solution to the aging challenge will need to reflect 
three fundamental realities.
    The first reality is the ongoing growth in life expectancy. Since 
Social Security was established, life expectancy at age sixty-five has 
risen by five years, or by roughly one month per year. Few demographers 
believe that the pace of improvement will slow--and a growing number 
expect that it will accelerate as breakthroughs in biomedicine begin to 
unlock the secrets of the aging process itself. Yet far from rising to 
reflect the new demographic circumstances, average retirement ages have 
fallen over the course of the postwar era. In the future, America will 
need to split its longevity dividend between extra years of work and 
extra years of leisure. Encouraging later retirement and longer 
worklives could achieve large fiscal savings without hurting the living 
standards of the elderly. It would also have enormous benefits for the 
economy, and, many gerontologists believe, for the elderly themselves.
    The second reality is the transformation in the economic status of 
the elderly. Until the early 1970s, it was possible to argue that age 
was a reasonable proxy for financial need. This argument is no longer 
plausible. Over the past three decades, the real median income of 
households headed by adults aged 65 and over has risen by nearly one-
half, while that of households headed by adults under age 45 has 
remained virtually stationary. Today, elderly household income per 
capita is about on par with the national average--and that's before 
taxes, where the elderly enjoy considerable advantages. Counting in-
kind benefits like Medicare, the elderly poverty rate is now as low as 
the rate for any age group and is just one-half the rate for children. 
Yet most senior benefits are disbursed through programs that write 
checks regardless of financial need. An aging America will have to 
reconsider the equity and affordability of making age alone a blanket 
criterion for access to a public subsidy.
    The third reality is the declining viability of pay-as-you-go 
social insurance. The pay-as-you-go paradigm made sense back in the 
1950s or 1960s, when workers outnumbered retirees five or six to one. 
With the end of the baby boom, however, the demographic underpinnings 
of the paradigm collapsed. In the future, workers will have to prefund 
more of their own retirement income through greater savings during the 
employment years. Over the long run, funded systems have decisive 
advantages over pay-as-you-go systems in aging societies like our own. 
At the macro level, they can help shield government budgets from 
demographic pressures while maintaining adequate rates of savings and 
investment. At the micro level, they can offer workers higher benefits 
at any given contribution rate than pay-as-you-go systems can. This is 
why, from Germany to Australia, countries around the world are moving 
in the direction of greater reliance on funded retirement savings. Even 
Sweden, Europe's quintessential welfare state, has added a mandatory 
second tier of funded personal accounts to its public pension system.
    At the CSIS Global Aging Initiative, we have looked closely at the 
``vulnerability'' of the major developed countries to rising old-age 
dependency costs. As it turns out, the United States enjoys a number of 
enviable advantages. To begin with, we are now the youngest of the 
developed countries--and, thanks to our relatively high rates of 
fertility and net immigration, we are likely to remain the youngest for 
the foreseeable future. The UN projects that the elderly share of the 
U.S. population will reach 21 percent by 2050, up from 12 percent 
today. Meanwhile, the elderly share of the population will climb to 28 
percent in Germany and to 36 percent in Italy and Japan. Although the 
United States will have to cope with a dramatic slowdown in workforce 
growth when boomers retire, Europe and Japan are heading toward a 
future of workforce and population decline. By the middle of the 
century, according to the UN, there will be 19 percent fewer working-
age Germans than there are today, 32 percent fewer working-age 
Italians, and 33 percent fewer working-age Japanese. The Japanese 
government actually projects the date there will be only one Japanese 
left.
    Along with more favorable demographics, the United States also has 
a relatively inexpensive Social Security system. Incredibly, several 
European countries already spend more today on public pension benefits 
for the elderly than we will be spending after the last of the boomers 
have retired. Thanks to a strong work ethic, flexible labor markets, 
and model age discrimination laws, the United States also has a 
relatively high elderly labor-force participation rate. As of 2000, 18 
percent of Americans aged 65 and over were still on the job, compared 
with 6 percent of Italians, 5 percent of Germans, and 2 percent of 
Frenchman.
    Finally, there is our large and innovative private pension system. 
Outside the United States and the other English-speaking countries, the 
dependence of the elderly on public benefits is close to absolute. The 
typical French, German, or Italian retiree receives between 75 and 85 
percent of his or her income in the form of a government check, 
compared with about 50 percent for the typical American. In the United 
States, private pensions, along with higher elderly employment, help 
take pressure off government budgets. According to Intersec, a standard 
source for international pension data, U.S. pension funds own roughly 
60 percent of global pension assets. France, Germany, and Italy 
combined own just 2 percent.
    None of this means that the United States can afford to be 
complacent. Although we spend less per capita on public pensions for 
the elderly than most other developed countries, we spend more on 
health care. Despite the size of the U.S. private pension system, 
nearly half the private workforce remains entirely uncovered, even by a 
meager 401(k) that can be cashed out long before retirement. Reform 
must also reckon with a powerful senior lobby--and an entitlement ethos 
that considers public benefits earned rights, tantamount to personal 
property.
    Mr. Chairman, America stands on the threshold of a great 
demographic transformation without precedent in its history. I have 
focused on the fiscal dimensions of the challenge. The implications of 
the aging of America, however, reach far beyond the impact on public 
budgets. America's businesses will have to cope with a deficit of 
entry-level workers, while its families will have to cope with a 
surplus of frail elders. Slower growth in the workforce may translate 
into slower growth in the economy. Even the nation's ability to 
maintain its security commitments could be affected as armed forces 
experience chronic manpower shortages and defense budgets come under 
relentless pressure from rising retirement costs.
    Confronting the aging challenge will require today's adults to make 
difficult trade-offs between their own future retirement consumption 
and their children's living standards. These trade-offs are not easy to 
make in a democracy that has difficulty focusing on slow-motion crises. 
But make them we must. At stake is whether America will be able to meet 
the needs of a growing number of old while still making room for the 
hopes and aspirations of youth.
    Mr. Chairman, that concludes my testimony. Thank you again for the 
opportunity to share my views on this vitally important issue with you 
and the Committee's members.

                                 

    Chairman THOMAS. Thank you very much, Dr. Jackson. Our next 
witness is Dallas Salisbury. Mr. Salisbury is at the Employee 
Benefits Research Institute. Mr. Salisbury.

STATEMENT OF DALLAS L. SALISBURY, PRESIDENT AND CHIEF EXECUTIVE 
         OFFICER, EMPLOYEE BENEFITS RESEARCH INSTITUTE

    Mr. SALISBURY. Mr. Chairman, Congressman Rangel, and 
Members of the Committee, it is an honor to be here today. The 
announcement of this hearing underlined the changing 
demographics of our country, and the absence of savings by most 
Americans. The CBO numbers that we started with are compelling 
in terms of the challenges that produces, and longevity is 
probably the most significant of those factors, if what we are 
considering is retirement income adequacy and lifetime economic 
security. As has been previously noted, a quarter of current 
retirees rely entirely on Social Security; two-thirds primarily 
on Social Security. And the changes in the private and public 
pension systems as we have known them only will increase the 
reliance on Social Security or personal savings going forward.
    One-third of today's retirees--and that is the highest 
number in our Nation's history--have supplementation from 
annuity income pensions for Social Security; 13 percent have it 
from public employee pensions; less than 20 percent now from 
private employer pensions. Of those over age 85 in the retired 
population today, 39 percent have pension supplementation; of 
those who most recently retired, only 29 percent. So, we have 
seen rapid and substantial decline. About 10 percent of all 
workers 21 to 64 now own an IRA, in spite of over 30 years of 
effort. About 21.7 percent own both a defined contribution 
account--401(k), 403(b), Federal Thrift Plan, you name it--and 
an IRA. And about 9.2 percent own both an IRA and another 
account. About 8 percent own both a defined benefit and a 
defined contribution account. If you look at the overall 
numbers, 43 percent of private workers now participate in some 
type of plan at work, but 57 percent do not. In the public 
sector, 75 percent are covered by some type of supplemental 
plan; 25 percent are not.
    The most significant change in the system beyond that is 
ERISA in 1974 defined for the first time a pension plan as both 
defined benefit or defined contribution. Prior to that, the 
dictionary definition applied: a monthly annuity for life. And 
even in our defined benefit pension systems, we now see that 
over half of those plans in the private sector primarily pay 
individuals lump-sum distributions, not annuities. The 
significance of that, given the importance of increasing 
longevity, is that the risk of living too long is now one 
increasingly placed on the individual; as opposed to that risk 
being borne by others. Savings efforts have been effective, if 
one looks at growth over time. The numbers are still amazingly 
small. If one looks at today's 401(k) plans, the average 
account balance is $51,000. That is up from $37,000 in 1996. 
Median account balances are now at $18,000. That is up from 
$11,600 in 1996.
    One should note that for workers with 30 years of service 
and aged 60, the average is now $168,000. To put that into 
context, those receiving an average Social Security benefit 
today of roughly $10,000 per year, the amount of money it would 
take to purchase that annuity in the private market, assuming 3 
percent future indexation, would be approximately $150,000. So, 
individuals are far, far, far short in their accumulations of 
being able to match even the base Social Security average 
benefit. The termination of the United Airlines pension plans 
has focused new attention on defined benefit plans. I think it 
is worth noting that today about 23 million workers in the 
private sector are active participants in those plans. That is 
roughly the same 23 million in count that were in those plans 
some 20 years ago. So, the system has not, if you will, eroded 
dramatically in terms of the number of people covered, but 
during that same period of time, the private sector workforce 
has increased by 29 million workers. So, essentially, as a 
percentage of the workforce and of the growth of the labor 
force, we are seeing very little in the way of new coverage.
    Why? Pensions have traditionally been available in the 
manufacturing industry. We know manufacturing has declined. 
They have traditionally been a matter of union bargaining. We 
know that unions have declined. They traditionally have been a 
function of large employers. We know that most growth in the 
labor market of the last decade or two has been among small 
employers. Finally, the most significant change is that over 
half of the plans, I would underline, pay lump-sum 
distributions. I will close on a personal note. My father just 
is about to turn 92; my mother, 89. They live outside of 
Seattle, Mr. McDermott's area. And they did save. They 
accumulated. The year they retired, their Social Security 
income represented 18 percent of their final income. Last year, 
it represented 78 percent of their income. Why? Because they 
lived much longer than they had anticipated. The importance of 
a base annuity income is there in the statistics. It is 
important for all individuals. The defined benefit annuity and 
the annuitization out of defined benefit and defined 
contribution plans must be encouraged.
    The only other income they now have is the annuity that 
they were required to take from a defined benefit pension plan. 
The lump-sum distribution from their profit-sharing plan has 
long since been dissipated. They sold their home on a 20-year 
contract. Dad assumed age 85 would be good enough; it wasn't. 
They owned an apartment house. They sold it on a 25-year 
contract. That income ended at the age of 90. So, even for 
those who seek to plan effectively to make the right decisions, 
who save aggressively, that issue of longevity, of life 
expectancy, of not knowing how long you will live, is a 
challenge and a risk that all of us face, and is a dynamic that 
the other witnesses have noticed drives the issues of long-term 
care, retiree medical, and so many other of the issues. Mr. 
Chairman, I commend you for putting all of these issues on the 
table, in terms of underlining the vital role that Social 
Security plays today.
    [The prepared statement of Mr. Salisbury follows:]

    Statement of Dallas L. Salisbury, President and Chief Executive 
             Officer, Employee Benefits Research Institute

    Chairman Thomas and members of the committee: My name is Dallas 
Salisbury. I am president and chief executive officer of the 
nonpartisan Employee Benefit Research Institute (EBRI). I am pleased to 
appear before you today to testify on retirement policy challenges and 
opportunities for our aging society. All views expressed are my own, 
and should not be attributed to EBRI. I have personally worked on 
retirement and pension issues since joining the Labor Department in 
1975 as it was organizing to fulfill its responsibilities under the 
Employee Retirement Income Security Act of 1974 (ERISA). I was later on 
the staff of the Pension Benefit Guaranty Corporation, before joining 
EBRI in 1978.
    Established in 1978, EBRI is committed exclusively to data 
dissemination, policy research, and education on financial security and 
employee benefits. EBRI does not lobby or advocate specific policy 
recommendations; the mission is to provide objective and reliable 
research and information. All of our research is available on the 
Internet at www.ebri.org

What Are Retirement Programs Delivering?
    The announcement of this hearing underlines the changing 
demographics of our country in the decades ahead and the absence of 
savings by most Americans.
    The need to do better as a nation is made clear by the financial 
status of today's retiree population. One-quarter of current retirees 
rely totally on Social Security for their income, and have no outside 
resources. Two-thirds rely primarily on Social Security for their 
income. One-third have annuity income from a pension plan: About 13% 
have annuity income from prior public-sector employment and 20% from 
prior private-sector employment. Overall, today's workers are saving 
more than those who went before them, but they are not saving enough--
and many are not saving at all.
    The hearing announcement referenced individual retirement accounts 
(IRAs). Research shows that at the height of IRA usage in 1986, just 
over 16% of taxpayers made contributions; but currently, more recent 
tax data show that less than 3% of taxpayers now contribute in any 
year. Research also shows that the primary source of new dollars 
flowing into IRAs is from rolling over lump-sum distributions from both 
defined benefit and defined contribution employment based retirement 
plans, which are the primary source of individual savings in the nation 
today.
    Research shows that:

      About 10% of all workers ages 21 to 64 now own only an 
IRA.
      About 21.7% own only a defined contribution plan personal 
retirement account.
      About 9.2% own both.

    In the case of IRAs, this does not represent an increase since the 
1990s. For personal retirement accounts at work it represents a 19.3% 
increase, from 18.2% to 21.7%.
    Average and median account balances in all plans have continued to 
grow. The most recent research available finds average 401(k) balances 
for the employee's current employer (and ignoring any balances still 
residing with previous employers or rolled over to IRAs) at over 
$51,000 (compared with $37,000 in 1996), and median balances at about 
$18,000 (compared with $11,600 in 1996). For workers with more than 30 
years of service and now in their 60s, average balances are now about 
$168,000.
    Research updated this month finds that a current 401(k) participant 
who is assumed to always work for employers offering a 401(k) plan 
could reasonably expect 401(k) balances and IRA rollovers for money 
originating in 401(k) plans to replace between 51% (for those in the 
lowest income quartile) and 67% (for those in the highest income 
quartile) of final five-year average income. This is in addition to 
between 52% (for the lowest income quartile) and 16% (for the largest 
income quartile) of income coming from Social Security. That research 
underlined the challenges of our mobile workforce, showing an 
alternative hypothetical scenario in which workers are assumed to 
randomly change jobs without regard to the existence of a 401(k) plan 
for subsequent employers. In that case, the replacement rate from 
401(k) balances and IRA rollovers for money originating in 401(k) plans 
is closer to 25% of final income.
    Recent news stories about the termination of United Airlines' 
pension plans have focused new attention on defined benefit pension 
plans. When ERISA was enacted, these were the primary source of 
retirement coverage for American workers. About 27% of private sector 
workers were active participants in these plans in 1984 compared to 20% 
today. The actual number of workers participating in these plans has 
remained at about 23 million to 26 million over that period, while the 
private workforce increased by 29 million The actual number of workers 
participating in these plans has increased from 23 million to 26 
million in that period, but the private-sector workforce increased by 
29 million over this same period.
    Among the growing number of workers who are saving at work through 
programs like the Federal Thrift Savings Plan (TSP) and 401(k)s, 
research has now documented a number of things:

      More than a quarter of those who could participate in a 
savings plan do not--but automatic enrollment with an opt-out could 
dramatically increase participation and final retirement income. Recent 
research suggests that for today's young low-income workers, automatic 
enrollment would increase median final replacement rates from 401(k) 
plans and IRA rollovers of money originating in 401(k) plans by 61%.
      Less than 8% contribute as much as they could legally 
contribute. Extrapolation of the research findings above suggests that 
a default to a high initial contribution rate, or a base automatic 
contribution by the employer, could increase final account balances, 
assuming that a choice of a higher default contribution rate will not 
be offset by a decline in participation.
      Many participants in plans do not diversify their 
investments, and more than three-quarters make no changes in their 
allocations and do not rebalance--but the 2005 Retirement Confidence 
Survey found that large numbers would welcome pre-diversified 
investment options like those now being implemented in the Federal 
Thrift Savings Plan.
      Surveys indicate that even among investors, large numbers 
do not know the difference between a stock and a bond.
      Surveys find that the public does not know when they will 
be eligible for Social Security, how long they are likely to live, how 
much they need to save for retirement, and much more.
      401(k) plan data show that more than half of participants 
have less than $18,000 in their accounts.
      Someone who turns 65 this year and has no other source of 
income than the average $10,000-a-year Social Security benefit would 
need about $140,000 to purchase an immediate indexed annuity that would 
pay out that amount. That gives you an idea of how small most savings 
are in America, even among those who have savings.

    With changing demographics, projected financing shortfalls in 
public programs such as Social Security and Medicare, and a transfer in 
responsibility for retirement savings and distribution decisions from 
employers to individuals, there is a greater need than ever before for 
all individuals to actively plan and save for their long-term personal 
financial security. Without action on the part of individuals, we could 
at least experience greater income difficulties for Americans as they 
age, and at worse a dramatic decline in the standard of living of 
retirees and an increase in elderly poverty. Therefore, financial 
education--and the financial literacy to which it leads--are of great 
national importance.

Have the Nation and Work Force Radically Changed?
    The nation and the workforce have not changed as much over recent 
decades as the headlines and magazine covers would often have us 
believe. In the so-called ``good old days,'' about one-third of workers 
spent an entire career with just one employer; today, that is down to 
about 18% of the workforce. At the height of defined benefit pension 
coverage, about one-third of retirees had pension income in retirement; 
today, among recent retirees, it is now about 31% and declining--and 
this decline will continue over decades. In other words, most workers 
have always had to save for themselves in order to have income on top 
of Social Security in retirement. Today, we do more to make that 
possible than at any other time in history, and we know more than ever 
about how to get workers to undertake voluntary savings. Mandated 
savings, like that which occurs in a defined benefit retirement program 
such as Federal Employee Retirement System (FERS), avoids leaving the 
results to chance; but as programs like the Federal Thrift Savings Plan 
(TSP) have shown, we now know that the right combination of education, 
payroll deduction, automatic features in savings programs, and pre-
diversified investment options can increase participation and savings.

What Can Data and Surveys Tell Us About Social Security Reform?
    First, as I already noted, Social Security is either the only or 
the primary income source for the majority of American retirees.
    Second, for a growing number of workers, Social Security will be 
the only annuity income protection they have against the risk of 
outliving their money. At 91, my father has had a much longer life than 
he anticipated, and with each passing year Social Security becomes 
increasingly important to Dad and Mom. Few plan their spending in 
anticipation of living to that 10% probability. My Mom and Dad saved 
and made intelligent annuity decisions, but they did not expect to be 
alive this long. At birth their average life expectancies were below 
age 50, and by the time they hit 65, their average life expectancies 
were still well shy of 80.
    Third, Social Security annuities and pension annuities save the 
marriages of retirees' children. This pay-as-you go system 
automatically transfers funds from working kids to their parents 
without guilt. More important, it does it without having to negotiate 
with your spouse on a monthly basis how much money to send to your 
respective ``in-laws.'' Just think for a moment about how that monthly 
session would go for you or your children.
    Fourth, Social Security does not allow access to funds for reasons 
other than death, disability, or retirement. We know from IRAs and 
defined contribution plans (like the Federal Thrift Savings Plan) that, 
given a chance to borrow or take hardship withdrawals, millions will do 
it--thereby eating into their future retirement savings.
    Decades of data underline that compulsion in savings and 
distribution produce better retirement income results than open 
individual choice. If the policy objective is choice, that does not 
matter. If the policy objective is life-long retirement income 
adequacy, it does matter.

What Do Data and Research Tell Us About Individual Account Design?
    First, that either mandatory participation or a default into a 
savings account gains the highest levels of participation.
    Second, that a matching contribution increases the amount that 
workers will contribute.
    Third, that individuals, given choices, will place a high 
percentage of assets in ``safe'' investments, many will concentrate a 
significant percentage of their 401(k) portfolio in company stock, and 
a significant percentage appear not to have changed their mix of 
investments once set in place--but individuals have a high rate of 
acceptance of investment options that automatically diversify and 
rebalance the account.
    Fourth, that individuals will generally take a lump-sum 
distribution at retirement, rather than an annuity, if given a choice, 
due to what economists describe as the ``wealth illusion.'' Surveys 
indicate there is an absence of understanding of life expectancy and 
the primary pooling virtue of an annuity, and the fact that a lump-sum 
will only last you until average life expectancy, whereas an annuity 
(pooled with other retirees) can provide a monthly payment as long as 
you live.
    Fifth, rules that require funds to be left in a retirement plan or 
rolled over at job change will dramatically increase account balances 
at retirement and the income replacement they will provide.
    Different policy objectives would lead to different conclusions on 
which of these design features to select, but the research is available 
to allow design to be matched to objectives.

Social Security Reform Alternatives: Comparing Benefits
    A major issue Americans need to understand while making decisions 
about savings and work place retirement programs relates to what and 
when Social Security will pay. Social Security is the most widely 
recognized and utilized retirement income program in the United States. 
As I noted, it is the only source of income for 25% of retirees, and 
the primary source of income for 66% of retirees. Whatever results from 
Social Security reform, Americans will need to understand how the 
program works and how it affects their overall financial future. This 
won't be easy to do: Even though Americans have been getting annual 
benefit statements for years, only 18% of respondents in the 2005 
Retirement Confidence Survey knew the age at which they would be 
eligible for full benefits. Clearly, most people do not read or 
understand their Social Security benefit statements.
    There are a number of Social Security reform scenarios under 
consideration. Given the projected funding shortfall currently facing 
Social Security, the promised benefit is not projected to materialize 
(with intermediate assumptions), unless changes are made by either 
reducing benefits or raising revenues.
    EBRI research shows how people in different stages of the life 
cycle will fare under various courses of reform. If the nation settles 
on including some sort of individual accounts in Social Security, EBRI 
research shows the only way to achieve greater returns, other than 
taking a reduction of benefits, is to ensure the accounts are invested 
in diversified portfolios and not simply more ``safe'' bond funds, 
assuming past returns are an indication of future returns. However, 
government regulation tells us that we should not assume that the past 
is an indicator of the future, so there is still a risk related to 
future outcomes. Our research compares ``Model 2'' from the President's 
2001 Commission to Strengthen Social Security (which appears to have 
the principles for an individual account plan favored by the Bush 
administration) \1\ with three basic options:
---------------------------------------------------------------------------
    \1\ See the President's Commission to Strengthen Social Security 
report for a further discussion of this model, as well as the other 
models that were offered by the commission at www.csss.gov/reports/
Final_report.pdf.

      Current-law benefits with taxes raised to cover the 
shortfall over the 75-year actuarial period, by removing the existing 
$90,000 wage cap and including all workers.
      Maintain current benefits until the revenue shortfall 
occurs, and then impose a ``cliff'' benefit cut.
      A gradual reduction in current-law benefits.

    Under current law, a 30-year-old person (born in 1975) and 
currently making around $16,500 a year would receive an initial annual 
Social Security retirement benefit of $11,200 in today's dollars.\2\ 
Here is how that individual would fare under the three basic options 
compared with the projected $11,200 initial annual current-law Social 
Security benefit:
---------------------------------------------------------------------------
    \2\ The $10,000 annual salary is 27 percent of the average wage, 
$16,500 is 45 percent of the average wage, $36,500 is 100 percent, 
$55,000 is 150 percent, $72,500 is 200 percent, and $95,000 is 260 
percent. Each worker maintains this percentage of the average wage 
throughout his or her career.

      Under the cliff benefit cut, where the cut begins in 
2042, this individual's benefit would still be $11,200, since he or she 
would reach the normal retirement age before the steep cut goes in 
effect.
      If, instead, benefits were cut gradually, so that one 
generation doesn't face the full impact of the funding deficit, this 
individual's benefit would fall to $9,600.
      Under Model 2, if approximately half of the individual 
account was invested in the equity market and historical rates of 
return were achieved, the annual benefit would be $12,500. Instead, if 
the entire account were invested in Treasury bonds to avoid the risk of 
investing in the equity market, the annual benefit would be $10,400.

    As this shows, even if a person invested a portion of their payroll 
tax in an individual account, certain investment allocations would 
actually result in a reduced benefit over other options.
    However, for a 20-year-old born 10 years later (in 1985) and 
currently earning the same amount, the initial Social Security benefit 
under current law would be $12,500 a year. What then?

      Because this individual will reach the normal retirement 
age after the date when Social Security's revenues will fall below its 
costs, the steep reduction caused by the cliff benefit cut option would 
reduce his or her initial benefit to $7,700.
      If the benefit reductions were gradual, the benefit would 
be $9,800.
      Under Model 2 individual accounts, the benefit would 
range from $10,800 to $15,700, depending upon the investment of the 
account assets.

    Again, any benefit an individual account provides would fluctuate 
widely according to early decisions this individual makes.
    What about a higher-income, older individual? For example, a 50-
year-old individual (born in 1955) and currently earning about $72,500 
would have a current-law benefit of $23,200--the same benefit as 
waiting until the revenue shortfall. Under the gradual reduction in 
benefits, her or his benefit would be $22,900. Under Model 2 individual 
accounts, this person's annual benefit would range from $21,000--
$21,300, depending on the investments. So, this individual would be 
better off not contributing to an individual account.
    What about someone who is born in 2015? Assuming this individual 
has average annual earnings of $55,000 in 2005 dollars, his or her 
current-law benefit would be $36,500. Under the cliff benefit cut 
option, the benefit would fall to $22,700, and under the gradual 
reduction in benefits to $24,500. The individual account plan would 
provide benefits ranging from $19,500--$31,700, depending on the 
investments. Again, early decisions about investing will greatly impact 
this person's standard of living long after they are made.
    The bottom line: There are some significant differences in 
outcomes, which depend on when someone is born, how much he or she 
earns, and how any funds in an individual account are invested. 
Nevertheless, a few basic conclusions can be drawn from this analysis:

      Lower-income people are more likely to do better under an 
individual account plan structured like Model 2 than are higher-income 
individuals, relative to the other options.
      Twenty-something-year-olds and younger individuals (born 
in 1985 and after) will benefit the most from reform action now, as 
opposed to waiting.
      Model 2 benefits with historic equity rates of return, 
are the average level of many possible scenarios; because there can be 
wide variations around an average, the resulting benefit could vary 
significantly from this average benefit.
      Everyone, regardless of age, income, and personal 
retirement goals, should be educated on issues of savings, life 
expectancy, investment allocation, and the basics of Social Security.

    The benefits and replacement rates presented above are for very 
specific individuals who have steady earnings. They are not the 
benefits individuals should expect if they have a very different 
earnings pattern. Full results of this research were published in the 
May 2005 EBRI Issue Brief and can be accessed at www.ebri.org.

Conclusion
    Unfortunately, no matter how you look at the statistics, the bottom 
lines are the same:

    1.  Financial literacy in the nation is not good.
    2.  Most Americans are not planning for their future by taking 
control of their current financial situation and saving for retirement 
and other life events.
    3.  To change that, we need to sustain and expand the national 
effort to increase the number of savings programs, the rates of 
participation, the preservation of balances upon job change, and the 
preservation of balances over the full life cycle.

    America is a land of great opportunity. However, many of its 
citizens are passing on their often one-time chance to build wealth and 
to have financial security by spending beyond their means, not properly 
planning for life's unexpected events, failing to invest in their own 
retirement savings, making bad decisions about debt, and not 
participating in their employers' retirement plans. We feel the 
greatest shame is that these actions are often done out of simple 
ignorance.
    The financial security of the nation, including the financial well-
being of my parents, their four children, their six grandchildren, and 
their six great-grandchildren, depend on it.
    Mr. Chairman and members of the committee, I commend you for 
exploring these topics, and thank you for the opportunity to meet with 
you today.

                                Appendix

401(k) Accounts: What the EBRI / ICI Database Shows
    To understand Americans' retirement plan investment activity and 
decisions, EBRI maintains the EBRI/ICI 401(k) database. This is the 
world's largest repository of information about individual 401(k) plan 
participant accounts. As of Dec. 31, 2003, the EBRI/ICI database 
includes statistical information on 15.0 million 401(k) plan 
participants, in 45,152 employer-sponsored 401(k) plans, holding $776.0 
billion in assets. The 2003 EBRI/ICI database covers approximately 35% 
of the universe of 401(k) plan participants, 10% of plans, and 41% of 
401(k) plan assets. The EBRI/ICI data are unique because they cover a 
wide variety of plan record keepers and, therefore, a wide range of 
plan sizes offering a variety of investment alternatives. In addition, 
the database covers a broad range of 401(k) plans, from very large 
corporations to small businesses.
    The most recent findings from this database indicate the portion of 
401(k) balances invested in equities increased in 2003, reflecting the 
strength of equity prices. Beyond the market-driven changes, 401(k) 
plan participants do not appear to have made significant asset 
reallocations or to have made changes in their loan activity. Buoyed by 
strong equity market returns and ongoing contributions, 401(k) account 
balances increased in 2003. Among participants with accounts since 
year-end 1999, the average account balance increased 29.1% by from 2002 
to 2003. The principal findings as of year-end 2003 are as follows:

Asset Allocation
      On average, at year-end 2003, 45% of 401(k) plan 
participants' assets were invested in equity funds,\3\ 16% in company 
stock, 9% in balanced funds, 10% in bond funds, 13% in guaranteed 
investment contracts (GICs) and other stable value funds, and 5% in 
money funds.
---------------------------------------------------------------------------
    \3\ ``Funds'' include mutual funds, bank collective trusts, life 
insurance separate accounts, and any pooled investment product 
primarily invested in the security indicated (see page 6 for 
definitions of the investment categories used in this paper). Unless 
otherwise indicated, all asset allocation averages are expressed as a 
dollar-weighted average.
---------------------------------------------------------------------------
      Equity securities--equity funds, the equity portion of 
balanced funds, and company stock--represented 67% of 401(k) plan 
assets at year-end 2003, up from 62% in 2002, generally reflecting the 
strong performance of the equity markets relative to fixed-income 
securities.
      Other asset allocation patterns do not seem to have been 
affected by the strong stock market performance:

    Younger participants still tended to hold a higher portion of their 
accounts in equity assets and older participants tended to invest more 
in fixed-income assets.
    The mix of investment options offered by a plan, particularly the 
inclusion of company stock or GICs and other stable value products, 
significantly affects the asset allocation of participants in a plan.
    About 13% of the participants in these plans held more than 80% of 
their account balances in company stock.

Changes in Asset Allocation Over Time
    Knowing how people currently participate and allocate their 
employment-based retirement savings, we need to know what workers do 
over time. Research shows that few participants make changes in their 
asset allocations over time. Allocations in equity funds from 1999 to 
2002 were generally constant. Reports from individual 401(k) 
administration firms suggest that nearly 90% of participants make no 
changes over time.

Annual EBRI Retirement Confidence Survey
    For the 15th year in 2005, EBRI and Matthew Greenwald & Associates 
have conducted the country's most established and comprehensive study 
of the attitudes and behavior of American workers and retirees towards 
all aspects of saving, retirement planning, and long-term financial 
security, the Retirement Confidence Survey (RCS). This annual survey is 
a random, nationally representative survey of 1,000 individuals age 25 
and over. The survey contains a core set of questions that is asked 
annually, allowing key attitudes and self-reported behavior patterns to 
be tracked over time. We also add special questions each year.
    This year's findings shed light on a number of issues relevant to 
financial literacy related to retirement planning and savings. We found 
that:

      Employers with a retirement plan can help their workers 
achieve investment diversification through the investment options they 
offer. Employers looking to help employees make more informed 
investment allocations may be able to do so more efficiently by 
offering lifestyle or lifecycle funds. Among participants not currently 
offered these types of funds, 23% say they would be very likely to 
participate in a lifecycle fund, 21% would be very likely to 
participate in a lifestyle fund, and 15% would be very likely to 
participate in a managed account.
      Half or more think they would be much more or somewhat 
more likely to participate if there was a provision that automatically 
raises workers' contributions by a fixed amount or percentage when they 
receive a pay raise (55%).
      A third said a managed account would persuade them to 
participate (35%).
      Automatic enrollment in 401(k) plans, as opposed to 
waiting for the worker to sign up, could also increase plan 
participation and savings. Non-participants appear to accept automatic 
enrollment--40% say they would be very likely to stay in the plan if 
their employer automatically enrolled them in one, and 26% would be 
somewhat likely to do so.
      Workers are more likely to save through the work place 
than on their own. More than 8 in 10 eligible workers say they 
participate in a work-place retirement savings plan (82%); 38% of 
workers have an individual retirement account (IRA). Promoting plans 
that allow automatic withdrawals from individual bank accounts may not 
significantly increase nonwork-place savings. In this case, ignorance 
is not the issue: Nearly 7 in 10 of those who do not currently use 
automatic withdrawals for retirement savings are already aware that 
they have this option (68%).

    The views expressed in this statement are solely those of Dallas L. 
Salisbury and should not be attributed to the Employee Benefit Research 
Institute (EBRI), the EBRI Education and Research Fund, any of its 
programs, officers, trustees, sponsors, or other staff. The Employee 
Benefit Research Institute is a nonprofit, nonpartisan, education and 
research organization established in Washington, DC in 1978. The 
testimony draws heavily from research publications of the Employee 
Benefit Research Institute, but any errors or misinterpretations are 
those of the witness.

                                 

    Chairman THOMAS. Thank you very much, Mr. Salisbury. I 
don't know how old you are, but what is in one sense a very 
positive story is, I think, a story that more and more 
Americans will be telling, if we don't take seriously the job 
of looking at other aspects of retirement. And thank you very 
much for your testimony. Dr. Peter Orszag, from the Brookings 
Institution, welcome.

  STATEMENT OF PETER R. ORSZAG, DIRECTOR, RETIREMENT SECURITY 
 PROJECT, JOSEPH A. PECHMAN SENIOR FELLOW IN ECONOMIC STUDIES, 
   THE BROOKINGS INSTITUTION; CO-DIRECTOR, TAX POLICY CENTER

    Mr. ORSZAG. Thank you, Mr. Thomas and Mr. Rangel and other 
Members of the Committee. Public policies have not kept pace 
with the shift from defined benefit to defined contribution 
plans that other witnesses have already spoken about. As a 
result, workers bear more responsibility for their own 
retirement saving. We have not given them the tools and 
incentives they need in order to navigate this new system 
successfully.
    In particular, the system is way too complicated. In the 
face of that complexity, too many people freeze, and therefore 
wind up not saving. You don't need to be a mechanic to drive a 
car, and you shouldn't need a PhD in financial economics to 
navigate the pension system. Second, the incentives for too 
many families are weak or non-existent. The system is based on 
tax deductions and exclusions. Three-quarters of American 
families are in the 15 percent marginal bracket or below, and 
therefore receive very weak incentives to participate in tax-
preferred accounts. Furthermore, as I will describe in a 
moment, we actually penalize some of those families who do 
save, by disqualifying them from various different benefits.
    Now, all is not lost. There is a growing body of evidence 
suggesting the way toward improvement; including a new study 
that the Retirement Security Project undertook with H&R Block 
which showed that the combination of a transparent incentive 
for saving and an easy way to do so generated meaningful and 
very substantial increases in saving; with contributions to 
IRAs, for those offered a 50-percent match, that were eight 
times as high, on average, as contributions among those who 
were not offered a match. So, specifically, what should we do? 
What should we do to improve the accounts, the 401(k)s and IRAs 
that we already have? My testimony lays out four specific 
changes that I think would be quite beneficial.
    First, we should create an automatic 401(k). You should be 
in the plan, unless you opt out. Your contribution rate should 
be increasing over time, unless you opt out. You should be 
invested in a diversified index fund, unless you opt out. And 
your funds should roll over automatically when you switch jobs, 
unless you opt out. Evidence suggests very strongly that these 
steps have substantial benefits. For example, if you are in the 
plan unless you opt out, participation rates, even for those 
lower earners below $20,000 in earnings, new employees, go from 
15 percent to 80 percent. I don't think that there is a single 
step that we could take to boost participation as much as just 
simply changing the defaults.
    Second, there is more than $200 billion a year in income 
tax refunds that are issued. That is a savable moment. That is 
the best opportunity for many households to put money into an 
IRA, and we currently make it very difficult for them to do so. 
It should be the easiest thing in the world to take part of 
your income tax refund and put it into an IRA. You should be 
able to check a box on your 1040, and put part of your refund 
into an IRA. Again, significant potential for saving there. If 
we got even half of those refunds saved, that would be a very 
substantial increase in our net national saving rate.
    Third, we need to extend stronger incentives for retirement 
saving further down the income distribution. The study that I 
just mentioned shows very clearly that even low-income 
households will save if they are presented with incentives to 
do so and we make it easy for them to do so. There is the base 
in current law, the saver's credit, which is scheduled to 
expire next year. That credit should be extended; it should be 
strengthened; and it should be extended down the income 
distribution to help middle- and lower-income families, and not 
just middle- to upper-middle-income families.
    Finally, the asset tests under many means-tested benefit 
programs were written at a time when 401(k) and IRA plans were 
sort of supplementary pension plans that were not the base 
plan. Therefore, defined benefit plans are typically excluded 
from the asset test under Medicaid, food stamps, and 
Supplemental Security Income (SSI) and other programs; but 
401(k)s and IRAs are often included. That means that if any 
moderate- to low-income households actually do save, we hit 
them over the head by disqualifying them the next time there is 
an economic downturn from those means-tested benefit programs. 
Doesn't make any sense. SSI, for example, exempts defined 
benefit plans; does not exempt 401(k)s and IRAs. It is purely a 
historical accident. We should fix that. Furthermore, the rules 
are very complicated and arbitrary. An example: In food stamps, 
401(k)s are exempted, but IRAs are not. That means that if a 
moderate-income household follows the advice of a financial 
advisor and rolls the funds over from a 401(k) into an IRA when 
switching jobs, we disqualify them from food stamps. Doesn't 
make any sense. That whole area should be significantly cleaned 
up.
    Now, I just gave you four ideas about what to do. I think 
there are several things that you should not do. And in 
particular, coming back to Mr. Thomas' comment about bang for 
the buck, there are various proposals that are floating around 
that would generate significant tax subsidies for households 
that are already well prepared for retirement simply to shift 
other saving that they would have done anyway into the tax-
preferred accounts. I would include among these things the 
retirement savings account proposal, which is basically a Roth 
IRA with no income limit. The Roth IRA income limit for married 
couples is $150,000. If you get rid of the income limit, it is 
very clear where the tax benefits go. Most of those tax 
benefits do not correspond to increased saving. They correspond 
to simply asset shifting, moving money from other accounts into 
the tax-preferred account. You are not getting good bang for 
the buck there.
    Similarly, increasing the contribution limits, the amounts 
that can be put into 401(k)s and IRAs: Only about 5 percent of 
401(k) participants are at the maximum amount. Only about 5 
percent of those eligible for an IRA put in the maximum amount 
today. Raising the maximum amount that can be put away doesn't 
do anything to help the bulk of the middle class and moderate-
income families, who are not contributing the maximum. 
Furthermore, increasing those contribution limits will mostly 
generate, again, asset shifting. Not good bang for the buck. 
So, in conclusion, Mr. Chairman, there are many common-sense 
steps that we could take to improve the 401(k)s and IRAs that 
we already have, on top of Social Security. My view is that we 
should come together and get those reforms done. thank you for 
your patience and letting me go over.
    [The prepared statement of Mr. Orszag follows:]

    Statement of Peter R. Orszag, Joseph A. Pechman Senior Fellow, 
                       The Brookings Institution

    Mr. Chairman and other members of the Committee, thank you for 
inviting me to testify before the Committee this morning.\1\ The past 
25 years have seen a dramatic shift in our nation's pension system away 
from defined benefit plans and toward defined contribution accounts 
such as 401(k)s and IRAs. Our public policies, however, have largely 
not been updated to reflect the increased responsibility that has been 
placed on workers to prepare for their own retirements. To this end, my 
testimony makes two central points.
---------------------------------------------------------------------------
    \1\ The views expressed here are those of the author alone. Much of 
this testimony is based upon joint work with Len Burman, Peter Diamond, 
Esther Duflo, William Gale, Robert Greenstein, Mark Iwry, Jeffrey 
Liebman, and Emmanuel Saez. I also thank the staff of The Retirement 
Security Project and Tax Policy Center for their contributions and 
assistance, Bernie Wilson and other officials at H&R Block for their 
work on the matched savings experiment described below, and The Pew 
Charitable Trusts for its support of The Retirement Security Project.
---------------------------------------------------------------------------
    First, retirement security can be substantially improved and 
strengthened through a series of common sense reforms that would make 
the defined contribution pension system easier to navigate and more 
rewarding for American families. A growing body of empirical evidence, 
including a path-breaking new study conducted by The Retirement 
Security Project in conjunction with H&R Block, suggests significant 
benefits if we make it easier for middle- and lower-income households 
to save for retirement and increase their incentives to do so.
    My testimony highlights four key policy changes to improve 
retirement security for middle- and lower-income households: (a) 
automating 401(k) plans to reduce the decision-making burden on 
workers, (b) implementing split tax refunds so that workers could 
deposit part of their tax refund into a retirement account, (c) 
revamping the existing Saver's Credit so that it provides a more 
effective and transparent matching incentive for retirement 
contributions, and (d) reducing the steep and confusing implicit taxes 
on retirement saving often imposed through means-tested benefit 
programs such as Food Stamps, Medicaid, and Supplemental Security 
Income. Both sides of the Social Security debate can embrace these 
common sense reforms to make the individual accounts we already have, 
in the form of 401(k)s and IRAs, work better.
    Second, too much of our existing tax preferences for retirement 
saving simply subsidize asset shifting into tax-preferred accounts by 
households who are already well-prepared for retirement, undermining 
the public policy benefit from the tax incentives. Contributions to 
tax-advantaged retirement accounts that are financed by shifting other 
assets into the accounts do not increase private saving, and the 
empirical evidence suggests that is often what occurs, especially among 
higher-income households.\2\ Such households, furthermore, tend to be 
better prepared for retirement in any case. Policy changes to bolster 
retirement saving should instead be focused on middle- and lower-income 
households who typically have few other assets that could be shifted 
into tax-preferred saving and who are not fully taking advantage of 
existing opportunities to save.
---------------------------------------------------------------------------
    \2\ Early research on 401(k)s found that the saving plans raised 
saving at all levels of income. Subsequent research, which has improved 
upon the statistical techniques of earlier work, has tended to find 
that 401(k) plans have not increased saving among relatively high-
income households, but may have raised saving of low-income households. 
See, for example, Eric M. Engen and William G. Gale, ``The Effects of 
401(k) Plans on Household Wealth: Differences Across Earnings Groups,'' 
Working Paper 8032 (Cambridge, Mass.: National Bureau of Economic 
Research, December 2000), and Daniel Benjamin, ``Does 401(k) 
Eligibility Increase Saving? Evidence from Propensity Score 
Subclassification,'' Journal of Public Economics 87, no. 5-6 (2003): 
1259-90.
---------------------------------------------------------------------------
    Expanded income tax deductions, higher contribution limits, and 
higher income limits are all inconsistent with the objective of 
encouraging saving among middle- and low-income households, and would 
therefore only exacerbate the serious flaws in the existing system. The 
vast majority of middle- and low-income households are in low marginal 
income tax brackets, so that policies based on expanded tax deductions 
(as opposed to credits or matching contributions) do little to help 
them. Similarly, expanding income or contribution limits on tax-
preferred retirement accounts would do little to help these households, 
since the vast majority are not contributing the maximum amounts 
already allowed and are also not affected by existing income limits. 
Instead, expanded deductions, higher income limits, and increased 
contribution limits are likely to result mostly in substantial asset 
shifting, as high-income households move saving from other forms into 
the tax-preferred one. In other words, such proposals are likely to 
represent an expensive tax subsidy for saving that high-income 
households would have done in any case. Since the nation's fiscal 
outlook is already dismal, reducing tax revenue to provide further 
subsidies for asset shifting among households already well-prepared for 
retirement seems misguided from a public policy perspective.
    In addition to these two core points, my testimony highlights two 
others. First, ill-advised policies that result in yet more subsidized 
asset shifting should not be the ``price'' of enacting sound policies 
to help middle- and lower-income families. Second, any new preferences 
for retirement saving, whatever their merit, should be fully offset 
both over the short term and the long term. The proliferation of back-
loaded tax preferences for saving, in which budgetary costs are 
disguised in the short run, underscores the need for extending the time 
horizon over which proposals should be offset beyond the traditional 
10-year period.

I.  Increasing Retirement Security for Middle- and Low-Income 
        Households
    The trend over the past two decades away from traditional, 
employer-managed plans and toward saving arrangements directed and 
managed largely by employees themselves, such as 401(k)s and IRAs, is 
in many ways a good thing. Workers enjoy more freedom of choice and 
more control over their own retirement planning. But for too many 
households, the 401(k) and IRA revolution has fallen short.
    The most vivid manifestation of the shortcomings of today's private 
pension arrangements is the simple fact that many families approaching 
retirement age have meager retirement saving, if any.\3\ In 2001, half 
of all households headed by adults aged 55 to 59 had $10,000 or less in 
an employer-based 401(k)-type plan or tax-preferred savings plan 
account. These households clearly have the option to save: Most workers 
have accounts available to them in which they could save money on a 
tax-preferred basis for retirement, and almost all households lacking 
such an option could contribute to an IRA. The problems lie elsewhere 
and are essentially twofold.
---------------------------------------------------------------------------
    \3\ For a broader discussion of these issues, see William G. Gale 
and Peter. R. Orszag, ``Private Pensions: Issues and Options,'' in 
Agenda for the Nation, edited by Henry J. Aaron, James M. Lindsay, and 
Pietro S. Nivola (Brookings, 2003), pp. 183-216; Peter R. Orszag, 
``Progressivity and Saving: Fixing the Nation's Upside-Down Incentives 
for Saving,'' Testimony before the House Committee on Education and the 
Workforce, February 25, 2004; and J. Mark Iwry, ``Defined Benefit 
Pension Plans,'' Testimony before the House Committee on Education and 
the Workforce, Subcommittee on Employer-Employee Relations, June 4, 
2003. These and other related publications are available on The 
Retirement Security Project website 
(www.retirementsecurityproject.org).
---------------------------------------------------------------------------
    The first problem is that the system is too complicated. My 
colleague, William Gale, has remarked that you don't have to be a 
mechanic to drive a car and you shouldn't need a Ph.D. in financial 
economics to navigate the pension system. In the face of the difficult 
choices presented by the current system, many people simply 
procrastinate making any decision, which dramatically raises the 
likelihood that they will not save enough for retirement within the 
current system.
    The second problem is that for the vast majority of middle- and 
low-income households, existing incentives to save for retirement are 
weak or non-existent. (Indeed, in some cases described further below, 
federal policy actually penalizes those who save for retirement in a 
401(k) or IRA.) The primary policy tool used to encourage participation 
in employer-based retirement plans and IRAs is a set of deductions and 
exclusions from federal income tax. The immediate value of any tax 
deduction or exclusion, though, depends directly on one's income tax 
bracket. For example, a taxpaying couple with $6,000 in deductible IRA 
contributions saves $1,500 in tax if they are in the 25 percent 
marginal tax bracket, but only $600 if they are in the 10 percent 
bracket.\4\ The income tax incentive approach thus provides the 
smallest benefits to the middle- and lower-income families in the lower 
marginal tax brackets, who are the ones most in need of saving more for 
basic needs in retirement. Furthermore, as a strategy for promoting 
national saving, the subsidies are poorly targeted. Higher-bracket 
households are disproportionately likely to respond to the incentives 
by shifting existing assets from taxable to tax-preferred accounts. To 
the extent such shifting occurs, the net result is that the pensions 
serve as a tax shelter, rather than as a vehicle to increase saving. In 
contrast, middle- and lower-income households, if they participate in 
pensions, are most likely to use the accounts to raise net saving.
---------------------------------------------------------------------------
    \4\ Some of this difference may be recouped when the contributions 
are withdrawn and taxed, if families who are in lower tax brackets 
during their working years are also in lower tax brackets during their 
retirement.
---------------------------------------------------------------------------
    To address these two key problems with 401(k)s and IRAs, policy-
makers should make saving for retirement easier and increase the 
incentives for middle- and lower-income households to save for 
retirement. Let me give two specific examples of how saving can be made 
easier, and two specific examples of how incentives could be bolstered 
for middle- and lower-income families.\5\
---------------------------------------------------------------------------
    \5\ For further information on these and other common sense reforms 
to bolster retirement security, see www.retirementsecurityproject.org.
---------------------------------------------------------------------------
A. Making It Easier to Save
    To make it easier for households to save, policy-makers should 
encourage greater adoption of automatic 401(k)s and allow part of 
income tax refunds to be deposited directly into a retirement account.

Automating the 401(k) 
    A 401(k)-type plan typically leaves it up to the employee to choose 
whether to participate, how much to contribute, which of the investment 
vehicles offered by the employer to select, and when to pull the funds 
out of the plan and in what form. Workers are thus confronted with a 
series of financial decisions, each of which involves risk and a 
certain degree of financial expertise. Many workers shy away from these 
decisions and simply do not choose. Those who do choose often make poor 
choices.
    To improve the design of the 401(k), we should recognize the power 
of inertia in human behavior and enlist it to promote rather than 
hinder saving.\6\ Under an automatic 401(k), each of the key events in 
the process would be programmed to make contributing and investing 
easier and more effective.
---------------------------------------------------------------------------
    \6\ William G. Gale, J. Mark Iwry, and Peter R. Orszag, ``The 
Automatic 401(k): A Simple Way to Strengthen Retirement Savings,'' 
Retirement Security Project Policy Brief No. 2005-1, March 2005.

      Automatic enrollment: Employees who fail to sign up for 
their company's 401(k) plan--whether because of simple inertia or 
procrastination, or perhaps because they are not sufficiently well 
organized or are daunted by the choices confronting them--would become 
participants automatically, although they would preserve the option of 
declining to participate. In other words, workers would be included 
unless they opted out, instead of being excluded unless they opt in.
      Automatic escalation: Employee contributions would 
automatically increase in a prescribed manner over time, for example 
raising the contribution rate as a share of earnings whenever a worker 
experiences a pay increase, again with an option of declining to 
increase contributions in this fashion.
      Automatic investment: Funds would be automatically 
invested in balanced, prudently diversified, low-cost vehicles, such as 
broad index funds, life-cycle funds, or professionally managed funds, 
unless the employee makes other choices. Such a strategy would improve 
asset allocation and investment choices while giving employers 
reasonable protection from potential fiduciary liabilities associated 
with these default choices.
      Automatic rollover: When an employee switches jobs, the 
funds in his or her account would be automatically rolled over into an 
IRA, 401(k) or other plan offered by the new employer. At present, many 
employees receive their accumulated balances as a cash payment upon 
leaving an employer, and many of them spend part or all of it. 
Automatic rollovers would reduce such leakage from the tax-preferred 
retirement saving system. At this stage, too, the employee would retain 
the right to override the default option and place the funds elsewhere 
or take the cash payment.

    In each case--automatic enrollment, escalation, investment, and 
rollover--workers can always choose to override the defaults and opt 
out of the automatic design. Automatic retirement plans thus do not 
dictate choices any more than does the current set of default options, 
which exclude workers from the plan unless they opt to participate. 
Instead, automatic retirement plans merely point workers in a pro-
saving direction when they decline to make explicit choices of their 
own.
    These steps have been shown to be remarkably effective, as research 
by Richard Thaler and others has demonstrated. For example, one of the 
strongest empirical findings from behavioral economics is that 
automatic enrollment boosts the rate of plan participation 
substantially (Figure 1).\7\ As the figure shows, automatic enrollment 
is particularly effective in boosting participation among those who 
often face the most difficulty in saving.
---------------------------------------------------------------------------
    \7\ Brigitte Madrian and Dennis Shea, ``The Power of Suggestion: 
Inertia in 401(k) Participation and Savings Behavior,'' Quarterly 
Journal of Economics 116, no. 4 (November 2001): 1149-87; and James 
Choi and others, ``Defined Contribution Pensions: Plan Rules, 
Participant Decisions, and the Path of Least Resistance,'' in Tax 
Policy and the Economy, Vol. 16, edited by James Poterba (MIT Press, 
2002), pp. 67-113.
---------------------------------------------------------------------------

    Figure 1: Effects of automatic enrollment on participation rates

[GRAPHIC] [TIFF OMITTED] T6385A.009


    Source: Madrian and Shea

    Despite its demonstrated effectiveness in boosting participation, 
automatic enrollment is relatively new--and a small but growing share 
of 401(k) plans today include this feature. According to a recent 
survey, about one-tenth of 401(k) plans (and one-quarter of plans with 
at least 5,000 participants) have switched from the traditional ``opt-
in'' to an ``opt-out'' arrangement.\8\ Since automatic enrollment is a 
recent development, it may become more widely adopted over time even 
with no further policy changes. But policy-makers could accelerate its 
adoption through several measures. Some of these policy measures would 
be appropriate only if automatic enrollment were adopted in conjunction 
with other features of the automatic 401(k), especially automatic 
escalation:
---------------------------------------------------------------------------
    \8\ Profit Sharing/401(k) Council of America, 47th Annual Survey of 
Profit Sharing and 401(k) Plans (2004).

      First, the laws governing automatic enrollment could be 
better clarified. In some states, some employers see their state labor 
laws as potentially restricting their ability to adopt automatic 
enrollment. Although many experts believe that federal pension law 
preempts such state laws as they relate to 401(k) plans, additional 
federal legislation to explicitly confirm that employers in all states 
may adopt this option would be helpful.
      Second, some plan administrators have expressed the 
concern that some new, automatically enrolled participants might demand 
a refund of their contributions, claiming that they never read or did 
not understand the automatic enrollment notice. This could prove 
costly, because restrictions on 401(k) withdrawals typically require 
demonstration of financial hardship, and even then the withdrawals are 
normally subject to a 10 percent early withdrawal tax. One solution 
would be to pass legislation permitting a short ``unwind'' period in 
which an employee's automatic enrollment could be reversed without 
paying the normal early withdrawal tax.
      Third, Congress could give plan sponsors a measure of 
protection from fiduciary liability for sensibly designed, low-cost 
default investments. If workers are automatically enrolled, their 
contributions have to be invested in something--and some firms are 
worried about fiduciary liability for these default investments. A 
targeted exemption from fiduciary liability given a prudent default 
would provide meaningful protection under the Employee Retirement 
Income Security Act of 1974 (ERISA), thus encouraging more employers to 
consider automatic enrollment. Defining a range of prudent defaults 
would enhance this safe harbor.
      Fourth, Congress could establish the federal government 
as a standard-setter in this arena by incorporating automatic 
enrollment and automatic escalation into the Thrift Savings Plan, the 
defined contribution retirement saving plan covering federal employees. 
The Thrift Savings Plan already has a high participation rate, but if 
automatic enrollment increased participation by even a few percentage 
points, that would draw in tens of thousands of eligible employees who 
are not currently contributing. The Thrift Savings Plan's adoption of 
automatic enrollment, along with automatic escalation, would also serve 
as an example and model for other employers.
      Finally, broader adoption of automatic enrollment and the 
other key pieces of the automatic 401(k) could be encouraged by 
reforming the regulations governing nondiscrimination in 401(k) plans. 
Many firms are attracted to automatic enrollment because they care for 
their employees and want them to have a secure retirement, while others 
may also be further motivated by the associated financial incentives, 
which stem in large part from the 401(k) nondiscrimination standards. 
These standards were designed to condition the amount of tax-favored 
contributions permitted to executives and other higher-paid employees 
on the level of contributions made by other employees. In recent years, 
however, employers have had the option to satisfy the nondiscrimination 
standards merely by adopting a 401(k) ``matching safe harbor'' design. 
The matching safe harbor provision exempts an employer from the 
nondiscrimination standards that would otherwise apply as long as the 
firm merely offers a specified employer matching contribution. It does 
not matter whether employees actually take up the match offer--all that 
matters is that the offer was made. Firms using this safe harbor may 
have less interest in widespread employee participation in 401(k)s than 
other firms, thus posing an obstacle to wider adoption of automatic 
enrollment. Policy-makers should consider various ways of addressing 
this obstacle.\9\
---------------------------------------------------------------------------
    \9\ One possibility is to change the existing rules so as to allow 
the matching safe harbor only for plans that feature automatic 
enrollment and the other key parts of the automatic 401(k). Plan 
sponsors currently using the matching safe harbor could be given a 
transition period to meet the new requirements. Another possibility is 
to explore a much broader reform of the nondiscrimination rules, under 
which automatic 401(k) plans would be given preferential treatment 
relative to other plans.

    In sum, a growing body of evidence suggests that the judicious use 
of default arrangements--arrangements that apply when employees do not 
make an explicit choice on their own, and that could be overridden by 
employees at each decision point--holds substantial promise for 
expanding retirement saving. Retooling America's voluntary, tax-
subsidized 401(k) plans to make sound saving and investment decisions 
more automatic, while protecting freedom of choice for those 
participating, would require only a relatively modest set of policy 
changes--and the steps taken thus far are already producing good 
results. Expanding these efforts will make it easier for millions of 
American workers to save, thereby promising greater retirement 
security.

Allowing part of a tax refund to be deposited into an IRA
    Most American households receive an income tax refund every year. 
For many, the refund is the largest single payment they can expect to 
receive all year. Accordingly, the more than $200 billion issued 
annually in individual income tax refunds presents a unique opportunity 
to increase personal saving.
    Currently, taxpayers may instruct the Internal Revenue Service to 
deposit their refund in a designated account at a financial 
institution. The direct deposit, however, can be made to only one 
account. This all-or-nothing approach discourages many households from 
saving any of their refund. Some of the refund is often needed for 
immediate expenses, so depositing the entire amount in a saving account 
is not a feasible option. Yet directly depositing only part of the 
refund in such an account is not possible.
    Allowing taxpayers to split their refund could make saving simpler 
and, thus, more likely--especially if combined with the stronger 
incentives to save discussed below. The Administration has supported 
divisible refunds in each of its last two budget documents, but the 
necessary administrative changes have not yet been implemented. The 
Internal Revenue Service could provide a split refund option by 
administrative action without the need for legislation. Although 
implementation does raise a variety of administrative issues, none of 
these administrative issues presents an insuperable obstacle, and 
implementation should move ahead more aggressively than currently 
planned.
    Once refund splitting was implemented, a key obstacle that might 
limit participation, is the need for the tax filer to have an IRA to 
receive the refund. If a household does not already have an IRA, an IRA 
would have to be set up, which may be a significant impediment in some 
cases. One possibility would be to allow taxpayers who do not already 
have an IRA, to direct on their tax return that the government open an 
IRA in their name at a designated ``default'' financial institution 
that has contracted with the government to provide low-cost IRAs for 
this and related purposes. Another possibility, suggested by Professor 
Peter Tufano of Harvard Business School, is to allow tax filers to 
elect part of their refund to be invested in a government savings bond, 
which would not require an IRA to be created in their name.
    In summary, allowing households to split their tax refunds and 
deposit part of them directly into an IRA would make saving easier. 
Since federal individual income tax refunds total some $228 billion a 
year, even a modest increase in the proportion of refunds saved could 
represent a significant increase in saving.

B. Increasing the incentive to save
    In addition to making it easier to save, policy-makers should 
significantly expand the incentives for middle- and lower-income 
households to do so.
    A new study conducted by The Retirement Security Project in 
conjunction with H&R Block underscores the significant effect that 
incentives have on retirement contributions, even among middle- and 
low-income households.\10\ The study reports evidence from the first 
large-scale, randomized field experiment ever conducted regarding the 
effects of matching rates on the willingness of low- and middle-income 
families to contribute to IRAs.
---------------------------------------------------------------------------
    \10\ Esther Duflo, William Gale, Jeffrey Liebman, Peter Orszag, and 
Emmanuel Saez, ``Saving Incentives for Low- and Middle-Income Families: 
Evidence from a Field Experiment with H&R Block,'' Retirement Security 
Project Policy Brief No 2005-5, May 2005.
---------------------------------------------------------------------------
    Since the study may prove useful to policy-makers struggling with 
how to encourage contributions by middle- and lower-income households, 
I will briefly describe both the experimental design and the results. 
The experiment was run in 60 H&R Block tax preparation offices in the 
St. Louis metro area from March 5th to April 5th, 2005. It was built 
around the Express IRA (X-IRA) product offered by H&R Block, which 
allows clients to make IRA contributions at the time of tax preparation 
and to fund those contributions with part or all of their federal 
income tax refunds or from other sources. In effect, through its X-IRA, 
H&R Block allows clients to split their anticipated refund between 
contributions to a retirement account and other uses.
    Each client preparing a tax return in one of the 60 H&R Block 
offices during the period was randomly assigned to one of three match 
rates for X-IRA contributions: zero (the control group), 20 percent, or 
50 percent.\11\ By randomizing the matching rate across tax filers, the 
study was able to identify not only the impact of the presence of a 
match, but also how variations in the matching rate affect both take-up 
and contribution levels.
---------------------------------------------------------------------------
    \11\ Contributions were matched up to $1,000, a limit that applied 
separately for each spouse for married tax filers. Each client, 
including those in the control group, received a waiver of the $15 set-
up fee for opening an X-IRA. The minimum X-IRA contribution is $300.
---------------------------------------------------------------------------
    Figure 2 shows the effect of the match rate on participation rates, 
and Figure 3 shows the effect on average contributions, among those in 
the different match groups. Figure 2 shows that the match had a 
significant effect on participation rates; participation rose from 3 
percent to 17 percent as the match rate increased from zero to 50 
percent.

            Figure 2: Effect of match rate on participation

[GRAPHIC] [TIFF OMITTED] T6385A.010


    Figure 3 shows that the effects on overall amounts contributed were 
even stronger. Deposits made by individuals (i.e., excluding the match 
from H&R Block) in the match groups were between four and eight times 
higher than with no match.

        Figure 3: Effect of match rate on average contributions

[GRAPHIC] [TIFF OMITTED] T6385A.011


    The positive effect of incentives on participation and 
contributions was stronger among married filers than among singles, and 
stronger among higher-income households than lower-income households. 
Nonetheless, the effects remained striking and significant even among 
low-income households. Figure 4, for example, splits the sample into 
EITC recipients and non-EITC recipients and shows the effects of the 
match rate on participation; the 50 percent match generated a 
substantial increase in participation rates even among EITC recipients.
    Interestingly, the study found more modest effects on take-up and 
amounts contributed from the existing Saver's Credit, which is 
described below and provides an effective match for retirement saving 
contributions through the tax code. We suspect that the differences 
reflect the way in which the implicit match from the Saver's Credit is 
presented, the complexity associated with the variation in credit rates 
under the Saver's Credit and its non-refundability, and the fact that 
the match in the experiment was highlighted and explained to clients by 
H&R Block's tax professionals.

     Figure 4: Effect of match rate on EITC and non-EITC recipients

[GRAPHIC] [TIFF OMITTED] T6385A.012


    Taken together, the results suggest that the combination of a clear 
and understandable match for saving, easily accessible saving vehicles, 
the opportunity to use part of an income tax refund to save, and 
professional presentation and explanation of the match and its 
advantages could generate a significant increase in retirement saving 
participation and contributions, even among middle- and low-income 
households. Below I suggest ways in which the fundamental insights 
provided by this new research could be implemented.
Revamping the Saver's Credit
    The Saver's Credit, enacted in 2001, in effect provides a 
government matching contribution, in the form of a nonrefundable tax 
credit, for voluntary individual contributions to 401(k) plans, IRAs, 
and similar retirement saving arrangements.\12\ The Saver's Credit 
applies to contributions of up to $2,000 per year per individual. As 
Table 1 shows, the credit rate is 50 percent for married taxpayers 
filing jointly with adjusted gross income (AGI) up to $30,000, 20 
percent for joint filers with AGI between $30,001 and $32,500, and 10 
percent for joint filers with AGI between $32,501 and $50,000. The same 
credit rates apply for other filing statuses, but at lower income 
levels: the AGI thresholds are 50 percent lower for single filers and 
25 percent lower for heads of households.
---------------------------------------------------------------------------
    \12\ For more detail on the Saver's Credit, see William G. Gale, J. 
Mark Iwry, and Peter R. Orszag, ``The Saver's Credit: Expanding 
Retirement Savings for Middle-and Lower-Income Americans,'' Retirement 
Security Project Policy Brief, No. 2005-2, March 2005.

                                             Table 1: Saver's Credit
----------------------------------------------------------------------------------------------------------------
                       AGI range for:
----------------------------------------------------------------------------------------------------------------
                                                                                         After-tax
                                                                                            cost
                                                                                        incurred by   Effective
                                                                           Tax credit    individual   after-tax
              Joint filers                     Singles       Credit rate   for $2,000    to create     matching
                                                                          contribution     $2,000        rate
                                                                                          account
                                                                                          balance
----------------------------------------------------------------------------------------------------------------
0-$30,000                                         0-$15,000          50%        $1,000       $1,000         100%
----------------------------------------------------------------------------------------------------------------
$30,001-$32,500                             $15,001-$16,250          20%          $400       $1,600          25%
----------------------------------------------------------------------------------------------------------------
$32,501-$50,000                             $16,251-$25,000          10%          $200       $1,800          11%
----------------------------------------------------------------------------------------------------------------
Note: Figures in table assume that couple has sufficient income tax liability to benefit from the nonrefundable
  income tax credit shown, and do not take into account the effects of tax deductions or exclusions that might
  be associated with the contributions or any employer matching contributions.

    The credit represents an implicit government matching contribution 
for eligible retirement saving contributions. The implicit matching 
rate generated by the credit, though, is significantly higher than the 
credit rate itself. The 50 percent credit rate for gross contributions, 
for example, is equivalent to having the government match after-tax 
contributions on a 100 percent basis. Consider a couple earning $30,000 
who contributes $2,000 to a 401(k) plan or IRA. The Saver's Credit 
reduces that couple's federal income tax liability by $1,000 (50 
percent of $2,000). The net result is a $2,000 account balance that 
cost the couple only $1,000 after taxes (the $2,000 contribution minus 
the $1,000 tax credit). This is the same result that would occur if the 
net after-tax contribution of $1,000 were matched at a 100 percent 
rate: the couple and the government each effectively contribute $1,000 
to the account. Similarly, the 20 percent and 10 percent credit rates 
are equivalent to a 25 percent and an 11 percent match, respectively 
(Table 1).
    The results of the recent randomized experiment suggest that the 
presence of an easily understandable and transparent 50 percent match 
significantly raises participation in and contributions to IRAs. The 
results confirm the basic idea behind the existing Saver's Credit: 
offering a stronger incentive to save to low- and moderate-income 
households can encourage them to contribute significantly more to 
retirement accounts. The study also suggests, however, that the 
existing Saver's Credit could be made more effective in encouraging 
additional contributions. Some options to do so are already under 
active discussion among policy-makers.
    First, it is possible that the credit would be more salient and 
effective if it were redesigned as a matching contribution that goes 
into the account, rather than a tax credit. As the table on the 
previous page shows, the current design results in a substantially 
higher implicit match rate than the credit rate. Instead of the current 
design in which a tax credit generates cash for a worker, it may be 
desirable to have matching contributions made directly to a worker's 
account.
    Second, the non-refundability of the current credit complicates its 
presentation and substantially reduces the number of people eligible 
for it. In 2005, 59 million tax filers will have incomes low enough to 
qualify for the 50 percent credit.\13\ Since the existing credit is 
non-refundable, however, only about one-seventh of them actually would 
benefit from the credit at all by contributing to an IRA or 401(k). 
Furthermore, only 43,000--or fewer than one out of every 1,000--filers 
who qualify based on income could receive the maximum credit ($1,000 
per person) if they made the maximum contribution. These are the 
households who have sufficient tax liability to benefit in full from 
the Saver's Credit but sufficiently low income to qualify for the 
highest match rate. The incentives provided by a matching program for 
retirement contributions should be extended to lower-income working 
families.
---------------------------------------------------------------------------
    \13\ These estimates are generated by the Urban-Brookings Tax 
Policy Center microsimulation model.
---------------------------------------------------------------------------
    One possible revamping of the credit would thus take the following 
form:

      Eligibility: Tax filers would be eligible if they have 
made IRA or 401(k)-type contributions and have Adjusted Gross Income 
below the qualifying thresholds.\14\
---------------------------------------------------------------------------
    \14\ In addition, eligibility would be restricted to filers age 18 
or over who are not full-time students and are not claimed as 
dependents on another return. These eligibility conditions are the same 
as the existing Saver's Credit.
---------------------------------------------------------------------------
      Match rate: The government would match 50 percent of 
first $2,000 in contributions made by eligible tax filers to an IRA or 
401(k)-type plan. Each spouse in a couple filing a joint return would 
be eligible for a match on up to $2,000. The match would be made 
regardless of the tax filer's income tax liability.
      Phase-out: The maximum eligible contribution would fall 
from $2,000 to $0 linearly between $30,000 and $50,000 in Adjusted 
Gross Income for joint filers (the phase-out would occur from $15,000 
to $25,000 for singles and married filing separately; and from $30,000 
to $40,000 for heads of households).
      Matching contribution deposited to account: The matches 
would be deposited directly to the IRA and 401(k) accounts of eligible 
taxpayers after the tax return has been processed.
      Anti-gaming rules: A variety of protections could be 
enacted to ensure that tax filers did not ``game'' the system.

    A matching contribution of this type offers significant potential 
to help correct the nation's upside-down tax incentives for retirement.
Reducing the implicit taxes on retirement saving imposed by asset tests
    Another way of increasing the incentives for middle- and low-income 
households to save is by removing penalties imposed on such saving. In 
particular, the asset rules in means-tested benefit programs often 
penalize any moderate- and low-income families who do save for 
retirement in 401(k)s or IRAs by disqualifying them from the means-
tested benefit program. The asset tests thus represent a substantial 
implicit tax on retirement saving.
    The major means-tested benefit programs, including Food Stamps, 
cash welfare assistance, and Medicaid either require or allow states to 
apply asset tests when determining eligibility. Similarly, the 
Supplemental Security Income (SSI) program applies such an asset test. 
The asset tests may force households that rely on these benefits--or 
might rely on them in the future--to deplete retirement saving before 
qualifying for benefits, even when doing so would involve a financial 
penalty. As a result, the asset tests penalize low-income savers.
    The asset tests represent one of the most glaring examples of how 
our laws and regulations have failed to keep pace with the evolution 
from a pension system based on defined benefit plans to one in which 
defined contribution accounts play a much larger role. At the time the 
rules were developed, defined benefit plans were the norm and were 
generally disregarded in applying the asset tests. In part because they 
were not viewed as a primary pension vehicle when the rules were 
written, defined contribution accounts like 401(k)s and IRAs were not 
exempted. Since then, the pension system has shifted away from defined 
benefit plans, and defined contribution accounts have become more 
dominant. Yet the rules have largely not been updated since, so many 
programs still exempt defined benefit plans while counting 401(k)s and 
IRAs. (As one example within the jurisdiction of this Committee, the 
asset test within SSI generally counts all resources ``deemed 
accessible'' to an individual. As a result, both IRAs and 401(k)s are 
generally counted toward the SSI asset limit, but defined benefit plans 
do not count as assets for current employees.) Treating defined benefit 
and defined contribution plans similarly would be much more equitable 
and would remove a significant barrier to increasing retirement saving 
by low-income working households.
    The effect of counting 401(k)s or IRAs within the asset tests is 
not only unfair, it also likely discourages saving for retirement. 
Furthermore, the rules applied under the means-tested benefit programs 
are confusing and often treat 401(k) accounts and IRAs in a seemingly 
arbitrary manner. As just one example of the complexity, workers who 
roll their 401(k) over into an IRA when they switch jobs, as many 
financial planners suggest they should, could disqualify themselves 
from the Food Stamp program.
    Asset tests in means-tested programs, as currently applied, thus 
constitute a barrier to the development of retirement saving among the 
low-income population.Disregarding saving in retirement accounts when 
applying the tests would allow low-income families to build retirement 
saving without having to forgo means-tested benefits at times when 
their incomes are low during their working years.\15\
---------------------------------------------------------------------------
    \15\ A forthcoming paper from The Retirement Security Project will 
examine these changes in more detail. Policy-makers considering 
introducing accounts within Social Security should also be careful to 
ensure that such accounts would not be counted under the asset tests 
included in various means-tested benefit programs.
---------------------------------------------------------------------------
II.  Avoiding Further Tax Subsidies for Asset Shifting
    The four common sense reforms described above could significantly 
bolster retirement security for millions of Americans. However, some 
policy-makers seem inclined to couple these proposals with a number of 
other provisions that would expand income and contribution limits on 
tax-preferred retirement accounts. Although they may initially sound 
similar to those above, such proposals are fundamentally different: 
Rather than bolstering retirement security among middle- and lower-
earners, proposals to increase income and contribution limits would 
generate significant asset shifting and be of primary benefit to 
households who are already disproportionately well-prepared for 
retirement. Policy-makers should not be tempted by a ``deal'' under 
which substantial new tax subsidies for this type of asset shifting 
would be created in exchange for sensible policies to bolster 
retirement security among middle- and lower-income households.
The problems with the Retirement Savings Account proposal 
    The Retirement Savings Account (RSA) proposed by the Administration 
is basically a Roth IRA with no income limit. (The proposal may be 
presented as ``creating a Retirement Savings Account'' rather than 
eliminating the income limit on Roth IRAs. The RSA, however, is 
virtually identical to the Roth IRA except that, unlike the Roth, the 
RSA has no income limit.) Simply removing the income limit on the 
existing Roth IRA, though, would have no direct benefit for the vast 
majority of American households who are already under the current 
income limit.
    Since access to Roth IRAs currently begins to be curtailed at 
$150,000 for couples and $95,000 for singles, the only people who would 
directly benefit from eliminating the cap are married couples with 
incomes above $150,000 or singles with incomes above $95,000.\16\ 
Analysis using the retirement saving module from the Urban-Brookings 
Tax Policy Center (TPC) model suggests that three-quarters of the tax 
subsidies (in present value) from removing the income limit would 
accrue to the three percent of households with cash income of more than 
$200,000. More than 25 percent of the benefits would accrue to the 0.6 
percent of households with cash income of more than $500,000. More than 
40 percent of households with cash income of above $1 million would 
receive a tax benefit, averaging $1,500 per year in present value. As 
noted below, it is very unlikely that such households would respond to 
this tax break by increasing their saving (rather than asset shifting).
---------------------------------------------------------------------------
    \16\ A frequent claim by advocates of removing the Roth IRA income 
limits is that eliminating the limits could allow financial services 
firms to advertise more aggressively and thereby encourage more saving 
by middle-income households. Two points are worth noting about this 
``advertising effect'' argument. First, the advertisements used in the 
past (for example, prior to 1986, when there were no income limits on 
deductible IRAs) suggest that much of the advertising was designed to 
induce asset shifting among higher earners rather than new saving among 
lower earners. For example, one advertisement that ran in the New York 
Times in 1984 stated explicitly: ``Were you to shift $2,000 from your 
right pants pocket into your left pants pocket, you wouldn't make a 
nickel on the transaction. However, if those different `pockets' were 
accounts at The Bowery, you'd profit by hundreds of dollars . . . 
Setting up an Individual Retirement Account is a means of giving money 
to yourself. The magic of an IRA is that your contributions are tax-
deductible.'' Second, advocates of substantial benefits from 
advertising point to the experience with IRAs after 1981, when access 
was expanded to include all wage earners, and before the Tax Reform Act 
of 1986, when income limits were imposed on deductible IRAs. It is true 
that participation rates in IRAs declined after the 1986 reform, even 
among those below the new income limits. But the declines were somewhat 
modest in an absolute sense. After all, some decline in IRAs may have 
been expected given the rise in 401(k) availability (which could 
substitute for IRAs) and the reductions in marginal income tax rates 
(which reduces the advantage to saving in an IRA). Data from the IRS 
Statistics of Income suggest that 5.0 percent of those with Adjusted 
Gross Income of $20,000 or less in 1984 contributed to an IRA; in 1988, 
2.4 percent of those with Adjusted Gross Income of $20,000 or less 
contributed to an IRA. In other words, the decline amounted to only 
about 2.5 percent of that income group--and some decline would have 
been expected for the reasons just mentioned. More broadly, with 
respect to the pre-1986 era without any income limits, the 
Congressional Research Service concludes that ``There was no overall 
increase in the savings rate--despite large contributions to IRAs.'' 
This suggests that any contributions to IRAs were mostly asset shifting 
from other accounts, rather than new saving.
---------------------------------------------------------------------------
    Expanding the tax subsidies from Roth IRAs to high-income 
households would also significantly reduce revenue over the long term. 
The full cost, however, is not obvious during the 10-year budget 
window: The revenue loss on a Roth IRA does not occur when the funds 
are contributed (as under a traditional IRA), but rather when they are 
withdrawn free of tax. Therefore, the full revenue effect does not 
manifest itself for several decades--when the budget will already be 
under severe pressure from the retirement of the baby boomers.
    It is thus crucially important not to be misled by the revenue 
changes over the first few years. Instead, the changes should be 
examined in terms of their ultimate effect, or their effect in present 
value (which transforms the future revenue losses into their equivalent 
amount, with interest, today). The Congressional Research Service (CRS) 
has estimated that eliminating the income limit on Roth IRAs will, 
after two decades or so, reduce revenue by $8.7 billion a year. The Tax 
Policy Center estimates suggest a cost by 2010 of roughly $5 billion a 
year in present value.\17\ To avoid fiscal gimmicks, policy-makers 
should offset the cost of backloaded new tax preferences over periods 
longer than the traditional 10-year budget window.
---------------------------------------------------------------------------
    \17\ In addition to the revenue costs associated with removing the 
income limit on Roth IRAs, policy-makers should recognize that 
perpetuating a $5,000 maximum contribution to IRAs is expensive. The 
CRS has estimated that perpetuating the $5,000 contribution limit on 
the Roth IRA, rather than allowing it to revert to the $2,000 limit 
that was in effect prior to the enactment of the 2001 tax legislation, 
would reduce revenue in the long term by $20 billion per year.
---------------------------------------------------------------------------
    The revenue loss from removing the income cap on Roth IRAs might be 
worth the cost if it were likely to trigger significant increases in 
private saving. Instead, the result would likely be substantial 
shifting of assets from taxable accounts into the tax-advantaged IRAs 
by households with incomes above $150,000. In commenting on a similar 
proposal in the late 1990s, then-Treasury Secretary Robert Rubin 
explained, ``--if you don't have income limits, then you're going to be 
creating a great deal of benefit for people who would have saved 
anyway, and all of that benefit will get you no or very little 
additional savings.''\18\
---------------------------------------------------------------------------
    \18\ Press briefing by Secretary of Treasury Robert Rubin, National 
Economic Advisor Gene Sperling, OMB Director Franklin Raines, and Chair 
of Council of Economic Advisers Janet Yellen, June 30, 1997.
---------------------------------------------------------------------------
The problems with raising the contribution limits to IRAs and 401(k)s
    Another common proposal would increase the maximum amount that can 
be saved on a tax-preferred basis, such as by raising the amount that 
can be contributed to an IRA or 401(k). Yet only about five percent of 
401(k) participants make the maximum contribution allowed by law, and 
only about five percent of those eligible to contribute to IRAs make 
the maximum contribution. Increasing the maximum contribution amounts 
would thus be unlikely to have much effect on the vast majority of 
families and individuals, since they are not currently making the 
maximum allowable contribution. Instead, raising the contribution 
limits would largely provide windfall gains to households already 
making the maximum contributions to tax-preferred accounts and saving 
more on top of those contributions in other accounts.
    An unpublished study by a Treasury economist found that only four 
percent of all taxpayers who were eligible for conventional IRAs in 
1995 made the maximum allowable $2,000 contribution at that time.\19\ 
The paper concluded: ``Taxpayers who do not contribute at the $2,000 
maximum would be unlikely to increase their IRA contributions if the 
contribution limits were increased whether directly or indirectly 
through a backloaded [Roth] IRA.'' Similarly, the General Accounting 
Office has found that the increase in the statutory contribution limit 
for 401(k)s would directly benefit fewer than three percent of 
participants.\20\
---------------------------------------------------------------------------
    \19\ Robert Carroll, ``IRAs and the Tax Reform Act of 1997,'' 
unpublished mimeo, Office of Tax Analysis, Department of the Treasury, 
January 2000. See also Craig Copeland, ``IRA Assets and Characteristics 
of IRA Owners,'' EBRI Notes, December 2002.
    \20\ General Accounting Office, ``Private Pensions: Issues of 
Coverage and Increasing Contribution Limits for Defined Contribution 
Plans,'' GAO-01-846, September 2001. The GAO also found that 85 percent 
of those who would benefit from an increase in the 401(k) contribution 
limit earn more than $75,000. (These figures reflect the effects of 
other changes included in EGTRRA that have already taken effect, such 
as the elimination of the previous percentage cap on the amount of 
combined employer-employee contributions that can be made to defined 
contribution plans.)

                     Table 2: 401(k) participants making the maximum  contribution  in  1997
----------------------------------------------------------------------------------------------------------------
                                                        Number of total                        % in income class
               Household income (AGI)                    contributors         % of total         contributing
                                                           (thous.)          contributors           maximum
----------------------------------------------------------------------------------------------------------------
Under $20,000                                                     2,695                7.6%                  1%
----------------------------------------------------------------------------------------------------------------
$20,000 to $40,000                                                8,914               25.0%                  1%
----------------------------------------------------------------------------------------------------------------
$40,000 to $80,000                                               15,020               42.1%                  4%
----------------------------------------------------------------------------------------------------------------
$80,000 to $120,000                                               5,739               16.1%                 10%
----------------------------------------------------------------------------------------------------------------
$120,000 to $160,000                                              1,624                4.6%                 21%
----------------------------------------------------------------------------------------------------------------
$160,000 and over                                                 1,673                4.7%                 40%
----------------------------------------------------------------------------------------------------------------
  TOTAL                                                          35,666              100.0%                  6%
----------------------------------------------------------------------------------------------------------------

    Source: Author's calculations based on Congressional Budget Office, 
``Utilization of Tax Incentives for Retirement Saving,'' August 2003, 
Table 2.

    Other recent studies have reached similar conclusions, finding that 
the fraction of individuals constrained by the limits that were in 
place prior to enactment of EGTRRA was very small.\21\ Table 2 presents 
information from the Congressional Budget Office on workers constrained 
by the previous 401(k) limits in 1997. Only six percent of all 401(k) 
participants made the maximum contribution allowed by law. Only one 
percent of participants in households with incomes below $40,000 made 
the maximum contribution. Among participants in households with more 
than $160,000 in income, by contrast, 40 percent made the maximum 
contribution.
---------------------------------------------------------------------------
    \21\ See, for example, David Joulfaian and David Richardson, ``Who 
Takes Advantage of Tax-Deferred Saving Programs? Evidence from Federal 
Income Tax Data,'' Office of Tax Analysis, U.S. Treasury Department, 
2001.
---------------------------------------------------------------------------
    Again, the problem is that most of the response to increasing the 
contribution limits is likely to be shifting of assets from other 
accounts. The expanded tax preference thus would mostly translate into 
subsidizing saving that would have occurred anyway, rather than 
encouraging new saving.
    Furthermore, at least with regard to increasing IRA contribution 
limits, the increase in the amount of tax-free saving that taxpayers 
would be able to do outside of retirement plans could reduce the 
incentives for small and medium-sized businesses to offer qualified 
plans, which could reduce opportunities for middle- and lower-earners 
to save in a convenient way. With a higher IRA limit, many business 
owners and managers may find that they can meet all of their demands 
for tax-free saving without the hassle and expense of maintaining an 
employer-sponsored plan. 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.'' \22\ 
Higher IRA limits may thus actually reduce retirement security for 
middle- and lower-earners by making it less likely that they would have 
a convenient and easy way to save.
---------------------------------------------------------------------------
    \22\ Jane G. Gravelle, Congressional Research Service, ``Effects of 
LSAs/RSAs Proposal on the Economy and the Budget,'' January 6, 2004.
---------------------------------------------------------------------------
Conclusion
    In conclusion, bolstering retirement security on top of Social 
Security need not be contentious and divisive. Over the past 25 years, 
the ways in which Americans save for retirement has changed and more 
responsibility has been shifted to workers, but our policies have 
failed to keep pace. We should make it easier for middle- and lower-
income households to save for retirement and increase the incentives 
for them to do so, and my testimony highlights four specific ways in 
which this could be done. Especially in light of the nation's dire 
long-term fiscal gap, however, policies that disproportionately result 
in yet more government-subsidized asset shifting among households who 
already tend to be adequately prepared for retirement should not be the 
price of enacting proposals to improve the retirement security of 
millions of Americans.

                                 

    Chairman THOMAS. Thank you very much for your mindfulness 
of the time. Dr. John Goodman has been before us before--nice 
to have you back--from the National Center for Policy Analysis. 
Dr. Goodman.

   STATEMENT OF JOHN GOODMAN, PRESIDENT, NATIONAL CENTER FOR 
                        POLICY ANALYSIS

    Mr. GOODMAN. Thank you, Mr. Chairman, Members of the 
Committee. I appreciate the opportunity to be here this 
morning. In just 3 years, the first of the Baby Boomer 
generation will qualify for early retirement. And by the time 
my generation is through, 77 million of us will quit working 
and paying taxes, and will begin drawing benefits instead. 
Along the way, this development will create an enormous 
financial strain on Social Security, Medicare, Medicaid, the 
Veterans Administration, and every other program for the 
elderly. In fact, it will be nothing short of a fiscal tsunami.
    Many people think that this is a problem in the distant 
future. In fact, it is a problem that is already upon us. Last 
year, for the first time in the last several decades, Social 
Security and Medicare combined spent more than they took in. 
That means that last year, for the first time in some time, 
these two programs, instead of contributing to the general 
revenues of the budget, took from the general revenues. They 
took about $45 billion. Now, over the next 5 years, that number 
will soar. It will triple in 5 years. Five years after that, it 
will double. Five years after that, it will double again. And 
so if we look out just 15 years, to the year 2020, we are going 
to need $750 billion on top of the payroll tax, just to keep 
our commitments to senior citizens. If we threw in the amount 
we are going to pay for seniors under Medicaid, we would exceed 
a trillion dollars in just 15 years. By 2030, it is two 
trillion; by 2040, it is four trillion. These numbers are so 
large that they boggle the mind. So, perhaps the best way to 
view them is in terms of the money that is available to pay.
    In just 5 years, we will need almost one out of every ten 
general income tax dollars in order to make up the deficits in 
Social Security and Medicare, to keep our commitments to 
seniors. What this means is that the Federal Government will 
have to cease doing one out of every ten other things that it 
does, in order to keep our promises. That means we are going to 
need 10 percent from the Defense Department, 10 percent from 
education, 10 percent from energy. And if we don't get all that 
money, we have got to raise taxes by 10 percent. By 2020, it is 
more than one out of every four income tax dollars; which means 
that we need a fourth of everything else the government is 
doing, or we have got to raise taxes by that much. By 2030, it 
is half. By 2050, it is three-fourths. And if we threw Medicaid 
into the equation, by the time today's college students retire, 
in order to keep all our promises to them, we are going to need 
the entire Federal budget. So, it is no surprise that many of 
them say in polls that they are more likely to see a UFO.
    Why is this happening? It is happening because we have a 
chain letter approach to funding retirement benefits. Instead 
of saving and investing, each generation of retirees is 
depending upon the next generation of workers to pay its 
benefits. It is becoming increasingly obvious that in the 21st 
century a chain letter approach to paying for pension and 
health care benefits simply will not work. And what that means 
is we need to move as quickly as possible to a funded system in 
which each generation pays its own way. Regardless of the form 
we adopt, we have made promises we cannot keep. And as a 
consequence, in the future, future generations will have to 
rely more on private savings than past generations have relied. 
And yet, as the need for savings grows, our savings rate is 
falling to shockingly low levels. Now, we at the National 
Center for Policy Analysis have made a number of proposals to 
improve and reform the private saving system. Some of them we 
have made with Peter Orszag of the Brookings Institution, and I 
would commend those to you. I have also worked with Larry 
Kotlikoff to make several proposals on how we could move our 
income tax system to a consumption-based system. And that 
almost by definition encourages saving and discourages 
consumption. Whatever we do, the ideal would be to reduce 
future taxpayer burdens at the same time that we increase 
current savings. If we could achieve the ideal, we would avert 
much of the pain that appears in our future. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Goodman follows:]

  Statement of John C. Goodman, President, National Center for Policy 
                        Analysis, Dallas, Texas

    In 2011, the first group of baby boomers will reach the age of 65. 
Some will begin claiming early retirement in just three years. By the 
time they are through, 77 million of them will have ceased working and 
paying taxes and will have begun receiving taxpayer-funded health care 
and pension benefits. This will create a financial train wreck for 
Social Security, Medicare and Medicaid and all other programs for the 
elderly. Other countries in the developed world face even bigger 
problems. In Japan, Europe and North America, the number of retirees 
will double over the next 25 years while the number of taxpayers will 
grow by only 10 percent. The economic consequences of these changes are 
dire: higher taxes, slower growth and lower living standards relative 
to what otherwise would have occurred.\1\
---------------------------------------------------------------------------
    \1\ Laurence Kotlikoff, Hans Fehr and Sabine Jokisch, ``Aging, the 
Word Economy and the Coming Generational Storm,'' National Center for 
Policy Analysis, Policy Report No. 273, February 4, 2005.
---------------------------------------------------------------------------
    In the United States, we have made promises to senior citizens that 
far exceed what we can pay for at current tax rates. As a result, 
future retirees will have to rely more on private savings than previous 
generations. For this reason, we need programs that encourage private 
sector saving. The ideal would be to encourage private saving and 
reduce future government entitlement obligations at the same time. This 
could be accomplished with personal retirement accounts.
    The Cash Flow Problem. In a pay-as-you-go system, what matters most 
is cash flow. And the cash flow drain that elderly entitlement programs 
portend is not a problem of the distant future, as some argue. The 
problem has already begun.
    Social Security and Medicare have been receiving more in payroll 
taxes than they have been paying out in benefits for several decades. 
Last year, the two programs combined spent more than they took in, 
requiring a general revenue subsidy of about $45 billion. The magnitude 
of the deficits in these two programs will soar in the years to come.
    For those who believe that Social Security and Medicare are in 
sound financial shape for decades to come, Figure I presents a sobering 
picture. In fact, the latest numbers from the Trustees of Social 
Security and Medicare are staggering. In 2010, the federal government 
will need $127 billion in additional funds to pay promised benefits. 
Five years later, the size of the annual deficit will double. Five 
years beyond that, it will double again. In just 15 years, the federal 
government will have to raise taxes, reduce other spending or borrow 
$761 billion to keep its promises to America's senior citizens. As the 
years pass, the size of the deficits will continue to grow. Without 
changes in worker payroll tax rates or senior citizen benefits, the 
shortfall in Social Security and Medicare revenues compared to promised 
benefits will top more than $2 trillion in 2030, $4 trillion in 2040 
and $7 trillion in 2050! \2\
---------------------------------------------------------------------------
    \2\ The 2004 Annual Report of the Board of Trustees of the Federal 
Old-Age and Survivors Insurance and Disability Insurance Trust Funds 
and the 2004 Annual Report of the Boards of Trustees of the Federal 
Hospital Insurance and Federal Supplementary Medical Insurance Trust 
Funds.
---------------------------------------------------------------------------
    These deficit numbers include projected inflation. Yet even in 2004 
dollars, the numbers are still staggering. Valued in today's dollars, 
the annual Social Security deficit will top $50 billion in 2020, $250 
billion in 2030 and $400 billion in 2050. Adding Medicare's deficits, 
the federal government will need more than $500 billion in 2020, $1 
trillion in 2030 and $2 trillion in 2050 to fund elderly entitlement 
programs alone.\3\
---------------------------------------------------------------------------
    \3\ Ibid.
---------------------------------------------------------------------------
    Note that these estimates, which come from the latest Social 
Security Trustees report, do not include the growing burden of senior 
health care costs under Medicaid.
    Deficits as a Percentage of Other Federal Revenues. The combined 
budget shortfalls for Social Security and Medicare are so large that it 
is difficult to comprehend what the numbers mean. Figure II presents 
the projected deficits as a percentage of federal income tax revenues. 
It shows that combined Social Security and Medicare deficits will equal 
almost 10 percent of federal income taxes in just five years. Roughly 
this means that, if the federal government is to keep its promises to 
seniors, it will have to stop doing one in every ten things it does 
today. Alternatively, we will have to raise income taxes by 10 percent 
or borrow an equivalent sum.
    Ten years later, in 2020, combined Social Security and Medicare 
deficits will equal almost 29 percent of federal income taxes. At that 
point the federal government will have to stop doing almost a third of 
what it does today. By 2030, about the midpoint of the baby boomer 
retirement years, federal guarantees to Social Security and Medicare 
will require one in every two income tax dollars. By 2050, they will 
require three in every four.\4\
---------------------------------------------------------------------------
    \4\ The Trustees reports express these deficits as a percent of 
GDP. Here they are converted to a percent of federal income tax 
revenues, assuming federal revenues are 10.8% of GDP, which is the 50 
year average.
---------------------------------------------------------------------------
    What about the Trust Funds? The Social Security and Medicare Trust 
Funds serve an accounting function, not an economic one. They work like 
this: When payroll tax revenues exceed expenses, special bonds are 
created to keep track of the surplus. These bonds are not purchased in 
the marketplace, however. For Social Security, they are created on 
paper and placed in filing cabinets in Parkersburg, West Virginia, (for 
Medicare, they are computer entries only) while the actual surplus 
payroll tax dollars are spent on other things. When tax revenues fall 
short of expenses, the process is reversed: the bonds are taken out of 
the filing cabinets and retired.
    The Social Security Trust Fund currently holds about $1.6 trillion 
of these bonds. But the bonds cannot pay benefits. They cannot be sold 
on Wall Street or to foreign investors. Although they are treated as 
assets of the Trust Fund, they are also liabilities of the Treasury. 
Summing over both agencies of government, assets plus liabilities net 
out to zero. If the federal government had purchased assets with the 
Social Security surpluses, the trust funds would today represent real 
economic value. Instead, Social Security revenues were spent in other 
ways and the government essentially wrote IOUs to itself.
    If a fire were to destroy the filing cabinets in Parkersburg, it 
would in no way diminish the capacity of the federal government to pay 
benefits. Alternatively, if a stroke of the President's pen were to 
double or triple the number of bonds in those filing cabinets, that 
would in no way increase our ability to pay benefits. If we could 
create value by writing IOUs to ourselves, Social Security would have 
no financial problems. Unfortunately, there is no free lunch.
    Present Value of Unfunded Liability. Last year, for the first time 
since the inception of these programs, the Social Security Trustees did 
something private entities do routinely--they calculated the present 
value of the difference between the promises we have made and the 
expected revenues dedicated to keeping those promises. These 
calculations were made for the traditional 75-year horizon and (what 
economists consider the more accurate procedure) looking indefinitely 
into the future. These implied, unfunded liabilities are enormous: \5\
---------------------------------------------------------------------------
    \5\ Social Security Trustees Report Table IV.B7, and 2005 Medicare 
Trustees Report Tables II.B12, III.C17 and III.C23.

      Social Security's long-run cash flow deficit is $11.1 
trillion--almost equal to the current size of the entire U.S. economy.
      The total shortfall of Medicare Part A (hospital 
insurance) and Part B (doctors' services) is $47.7 trillion; and the 
new prescription drug benefit will require $17.7 trillion.
      The unfunded liability of Medicare and Social Security 
combined totals more than $76.5 trillion--more than seven times the 
size of our economy.

    This means that without ever raising taxes or cutting benefits, we 
need $76.5 trillion invested right now at the government's borrowing 
rate. And because we have not made that investment, our unfunded 
liability under Social Security is growing at the rate of $667 billion 
per year. The unfunded liability under Medicare is growing at a rate of 
$4 trillion per year.
    Moving to a Funded System. The underlying problem in the United 
States and throughout the developed world is reliance on pay-as-you-go 
finance. Every dollar that is collected in payroll taxes is spent. It 
is spent the very day, the very hour, the very minute it is received. 
No money is being stashed away in bank vaults. No investments are being 
made in real assets.
    In a pay-as-you-go system, promises made today can be kept only if 
future taxpayers (many of whom are not yet born) pay a much higher tax 
rate than workers pay today. And even if they do shoulder a much 
greater burden, they would have no assurance that their benefits would 
be paid as the necessary tax burden grows through time. In any event, 
this chain letter approach to paying for retirement benefits must 
eventually come to an end. The question is: can we find an orderly way 
to transform the system that minimizes the pain.
    The alternative to a pay-as-you-go system is a funded system, where 
worker contributions are saved and invested. Instead of depending on 
future generations of taxpayers to pay ever-escalating tax rates, in a 
funded system each generation pays its own way.
    Thirty countries have already gone through the process of 
transforming their pay-as-you-go systems into partially or fully funded 
systems. These countries have acted responsibly to deal with a problem 
that the United States so far has refused to face.\6\
---------------------------------------------------------------------------
    \6\ Estelle James, ``Reforming Social Security: Lessons from Thirty 
Countries,'' National Center for Policy Analysis, Policy Report No. 
277, May 2005.
---------------------------------------------------------------------------
    Personal Retirement Accounts. It is possible to fund a retirement 
system without creating individually owned and controlled accounts. 
After World War II, almost two dozen former British colonies set up 
forced savings plans (called provident schemes) as an alternative to 
the pay-as-you-go approach so popular elsewhere around the world. The 
most successful of these was established by Singapore.\7\
---------------------------------------------------------------------------
    \7\ Peter J. Ferrara, John C. Goodman and Merrill Matthews, Jr., 
``Private Alternatives to Social Security in Other Countries,'' 
National Center for Policy Analysis, Policy Report No. 200, October 
1995.
---------------------------------------------------------------------------
    Despite the evolution and success of Singapore's system, in most 
cases provident funds have had a spotty and disappointing record. The 
reason: when funds were managed and controlled by governments, all too 
often politicians succumbed to the temptation to spend the funds rather 
than invest them.
    Personal retirement accounts create a check on government power. By 
creating ownership rights and reinforcing the principle of ownership by 
allowing individual worker investment choices, the odds greatly 
increase that funds invested today will be able to pay retirement 
benefits tomorrow.

                                 

    Chairman THOMAS. Thank you very much. To try to maximize 
the opportunity for all Members to inquire, the Chair will 
place himself on the clock, and would urge Members to heed the 
clock so that all could participate in the discussion. We can 
go in a lot of different directions, but one of the focuses I 
would like to try to get from as broad a number of Members of 
the panel as I can is the idea that what seems to be fairly 
self-evident is that for every dollar you can get voluntarily 
diverted from current consumption to future consumption, it 
relieves the taxpayer government cost; or at least it augments 
it in a way that the future doesn't look quite as difficult. 
The problem, of course, is to get that voluntarily diverted 
dollar. You have to look at the ease of decision. And what has 
been discussed today and has been discussed previously, and I 
would just like a very quick reaction--``Yes'' or ``No,'' 
hopefully--over whether or not someone is, I don't know the 
proper term, offended, opposed for policy reasons--I don't 
know, un-American--to the idea of an automatic enrollment with 
an opt-out in whatever the program is. Is anyone fundamentally 
disturbed by that concept?
    [All Members of the panel shake their heads in the 
negative.]
    Chairman THOMAS. The recorder can't register. The Chair 
would indicate all of the Members moved, almost simultaneously, 
with a motion to the left and right of the heads; which denotes 
they would not be upset by that.
    Mr. DAUB. You said ``disturbed,'' Mr. Chairman.
    Chairman THOMAS. I'm sorry, disturbed. You are not 
disturbed. Okay. Thank you.
    Mr. DAUB. It's a good idea.
    Chairman THOMAS. Welcome back, Hal. Then, of course, the 
question is--and we will leave it for a future debate, because 
obviously that gets into some of the more contentions areas--
how do we deal with a multiplier to benefit the savings which 
we have been able to put aside? And there are options, and I 
don't think we can look at it right now. What Mr. Salisbury 
pointed out--and this is where the Chair would love to have 
whatever research you have, or your knowledge and guidance--is 
the fact that we have seen a significant shift from defined 
benefit to defined contribution in the pension area. And 
obviously, to a very great extent, the savings turn into a kind 
of a defined contribution, unless you then make a subsequent 
decision to change what would otherwise be a defined 
contribution structure. And if the payout structure is going to 
be more and more critical for seniors who make an estimate and, 
pleasantly, fall short in terms of when they are going to die, 
clearly an annuity is a concept that is attractive. It was 
attractive under the old defined benefit program. think one of 
the reasons corporations are moving away from it is they don't 
want the responsibility.
    And Dr. Orszag, to say that what we ought to do is just 
simply use the 401(k)--not to criticize what you are saying, 
and I know there is a lot of money in 401(k)s and we can deal 
with it in rollover or other ways--but it seems to me maybe we 
should be thinking about an instrument that allows a decision 
to be made that doesn't put a company that has voluntarily 
desired to continue to help its employees but doesn't want to 
be saddled with an annuity as concept under the defined 
benefit, and they shifted to a 401(k) and, lo and behold, we 
are going to impose on them a requirement that they provide an 
annuity out of a 401(k); which is looping us right back into 
the defined benefit problem.
    However, if it is desirous to have an annuity at the end of 
whatever the saving structure is, either on an opt-out basis or 
encouragement of the insurance industry to be creative about 
coupling long-term care, life insurance, or other combinations 
that folks haven't focused on to create vehicles for choice by 
seniors, it moves us from the front-end choice, if we are 
successful, to get them to put the dollar away, to the back-end 
choice of how do we maximize their opportunities of using the 
dollars they have put away. I would prefer having the problem 
on the back end, because we have then solved the front end. The 
issue has been presented to us, what might we do in terms of 
being prescient and trying to deal with both ends of the 
problem at the same time.
    I don't need extensive response now. Maybe a Member of the 
panel might want to respond, because my time is going to run 
out. I do want written analysis or your approach to how we 
might deal with it. If we can induce savings--which you have 
provided great options--how can we then at the same time be 
smart and maximize the chances of those people having their 
savings last throughout their life, which is going to be longer 
and longer than people thought it was going to be? Very 
briefly, Dr. Goodman.
    Mr. GOODMAN. I would just like to add something that was 
not mentioned by the panelists. And that is in the movement 
from the defined benefit private pension to the defined 
contribution 401(k) pension. What we are finding is that 
employees do not make good choices. They tend to make two 
mistakes. They tend to invest in what is safe; which is their 
own company stock. And that greatly increases risk. Or they 
tend to what they know or what is safe; which is the money 
market fund, where the return is too low. So, money going into 
these plans is not getting the return, is not building up the 
way it needs to buildup to replace the old defined benefit 
pension. And as part of Peter's set of suggestions, we would 
like to encourage employers, as the default option, to 
encourage people to go into diversified portfolios. That would 
reduce the risk and greatly increase the return. And then, on 
the annuity end, we do not have a well-developed annuity market 
in this country. Chile, by the way, does. Chile has a huge 
market, and has shown that you can have annuity markets that 
work. So, I think we ought to look carefully at what they have 
done, and see how we can encourage a similar market here.
    Chairman THOMAS. Dr. Goodman, we have got unanimity in 
terms of the opt-out on the front end of a savings program. I 
think you will find that there will be much less unanimity on 
opting into a choice of programs. I agree that the more choice 
you have, it isn't empowering or freedom; it is enfeebling, and 
people then don't make a choice. To go so far as to put them in 
a particular program needs to be carefully examined. know Dr. 
Orszag, you have got that ongoing study, which would be 
helpful, not just in inducing people to save; but what is the 
reaction of a default program which maximizes their chances, as 
Dr. Goodman says, to get a decent return on what they have 
saved, but also, to create a decent pattern of disbursement? 
Very briefly, Dr. Orszag.
    Mr. ORSZAG. Very briefly, on the payout stage. agree 
completely that this is one of the critical things we need to 
be looking at as we move forward in time and more people are in 
that stage. The first thing is, it is important to realize that 
for many middle- to lower-income families, where a lot of the 
concern is, current annuities, naturally or understandably, do 
not provide an overwhelmingly good deal. And the reason is that 
insurance companies have to price the annuities to the people 
buying them, who are higher-income, who tend to live longer. 
That means that for middle- to lower-income families, they are 
not a good deal; the estimate suggesting that you lose in 
present value something like 15 percent of the lump sum that 
you would transform into the annuity. So, there is a 
significant market issue that needs to be overcome. will in 
writing try to give some ideas for how to overcome that. The 
second point, though, is there have been proposals to provide 
tax preferences for annuitized income. just want to emphasize 
again that if you provide a tax deduction for the vast majority 
of families you are not doing very much to incentivize that, 
because they are in the 15 or 10 percent marginal bracket. The 
benefits are going to go to people who are at the upper end, 
where there is less concern.
    Chairman THOMAS. And just let me conclude very briefly that 
with anything we deal with, like retirement annuities and the 
rest, you have in essence a bell-shaped curve. think one of the 
responsibilities of government, at least from my perspective, 
is that if the market can't handle the bell-shaped curve, then 
the government can deal with the tails on the bell-shaped curve 
and let the market handle what it can. And that would be 
focused on the assistance to folk in the low income. I think 
that would be preferential to going to any kind of age relating 
or other problems which get us into problems that magnify the 
partisan differences and don't focus on the real problem. I 
want to thank the panel very much, and recognize the gentleman 
from New York.
    Mr. RANGEL. Thank you, Mr. Chairman. Let me thank the panel 
for the quality of your testimony, as well as the 
recommendations that you have made. I certainly think we are 
all in accord that if you are looking at Social Security you 
have to take in consideration pensions and savings, and even 
the Tax Code to the extent that you are going to try to 
persuade people to save by providing incentives. From a 
realistic point of view, however, we are faced politically with 
the solvency of the Social Security system. And while I do 
believe, and everyone believes, that it is going to be 
important to see how we can make the system solvent and at the 
same time give the maximum protection to people who are living 
longer, our former colleague suggested some of the difficult 
things we have to do in terms of reducing costs, reducing 
benefits. We are dealing politically with a program that 
provides some degree of guarantee. We may have to tinker with 
it and do other things with it, in order to make certain that 
it begins to work. Are any of you suggesting that we cannot 
move forward to try to fix in a bipartisan way the Social 
Security system, without at the same time dealing with the 
pensions and the pension benefits and the savings, or what we 
now politically call the private accounts? Because that is the 
major political problem we are facing. Now, do any of you 
believe that we have to put the private accounts on the table 
at the same time, in order to deal with the Social Security 
problem?
    Mr. GOODMAN. Well, Mr. Rangel, I believe that we cannot 
solve the problem of elderly entitlements without moving from a 
pay-as-you-go system to a funded system. That means we need to 
be saving and investing. Now, it is possible to do that saving 
and investing collectively, and in fact, a number of people 
have proposed doing exactly that. I prefer the individual 
accounts because I think when you have individual accounts, 
even if people don't have much choice about where the money is 
invested, they have a property right in the outcome. And there 
are about 30 countries now that have reformed their systems in 
this way. And when individuals have property rights, it is very 
hard for the government to take the money and do something else 
with it.
    Mr. RANGEL. Okay. What we are dealing with here--and I 
don't think it can be challenged--is that the beneficiary goes 
into this system now with some degree of a guaranteed benefit. 
For those that follow, they go in with a guaranteed benefit. 
Are you suggesting, Dr. Goodman, that at the end of the day you 
would be willing to accept a program that includes the pensions 
and the savings, and loses the entire guarantee?
    Mr. GOODMAN. No, there is no country that doesn't have some 
kind of guarantee.
    Mr. RANGEL. I am not talking about the other countries now. 
We are dealing with an election that is coming up in this 
country, and we have to deal with the politics of this country. 
And the issue before us is whether or not we cannot deal with 
Social Security unless we deal with the private accounts. am 
asking you, as economists and people who study this issue, 
because before we get to all of the things that I agree with 
the Chairman that we have to deal with, we may never get there 
if at the same time you have got to remove the guarantee and 
give us the privatization--Chile notwithstanding. I am talking 
about the United States of America.
    Mr. GOODMAN. The quick answer is, of course you can have 
the guarantee. And Representative Shaw has a plan that has a 
100-percent guarantee. So, yes, you can have a guarantee.
    Mr. DAUB. Mr. Rangel?
    Mr. RANGEL. I didn't say you could. My question is, I am 
going to ask, is there anyone here that believes that this 
Congress cannot in a bipartisan way deal with the solvency of 
Social Security without having on the table the private savings 
accounts?
    Mr. DAUB. Mr. Rangel?
    Mr. RANGEL. Yes, Mr. Daub?
    Mr. DAUB. I, in my testimony, gave you two benefit changes 
and two revenue raisers that without the private account 
achieve the 75-year actuarial balance; the baby born today, 
likely to live 75 years. If you think about annuitizing a 
mandatory personal account of only 2 percent, you add to the 
potential income capability, because the FICA is already 
mandatory. That, we pay. So, it is just the concept of trying 
to tie together what you said. You could do it without the 
personal account, in a general way that perhaps I outlined. And 
there are other ways of looking at it.
    Mr. RANGEL. I agree, and you should point that out.
    Mr. DAUB. You could think of one other thing about 
Medicaid. Remember that about half the people in America today 
depend upon the Social Security check after age 65 for almost 
100 percent of their income; and it is an offset against 
Medicaid. So, it is a very important piece of retirement 
security to figure out how on the front end you might use the 
mandatory FICA to advantage for those less well off, less 
financially well off.
    Mr. RANGEL. Does anyone challenge what he has said, that we 
can handle Social Security in a bipartisan way without having 
the private accounts on the table?
    Mr. DAUB. It is just better off, if you think of it.
    Mr. RANGEL. I understand what you are saying. When they 
call it the third rail, they know exactly what they are talking 
about. And you can't dismiss it just because you are experts in 
terms of retirement income. We have to get to the point that we 
are talking; and we are not. just want to find out, from a 
professional point of view, that if, for reasons which you have 
no control of, private accounts are not on the table, can we 
deal with Social Security, with the understanding that we have 
to get back to savings, we have to get back to health care, and 
we have to get back to a lot of other issues? Is there anyone 
here that can say that we can't do it unless we put the private 
accounts on the table?
    Mr. JACKSON. Mr. Rangel?
    Mr. RANGEL. You are back to Chile; aren't you?
    Mr. GOODMAN. No. I do not believe you can ultimately solve 
the problem of elderly entitlements without moving to a funded 
system; which means investment and saving. And you could do it 
without a private account. You could have the government do the 
saving and the investment.
    Mr. RANGEL. That is all I am asking.
    Mr. GOODMAN. I would prefer that----
    Mr. RANGEL. I know you prefer. And it could very well be, 
if the political climate wasn't what it is, a lot of people 
would prefer. All I am asking, and all of you agree, is that we 
have no excuse to move away from dealing with Social Security 
merely because of the private accounts. thank you.
    Chairman THOMAS. The Chair didn't understand that to be the 
conclusion of the panel, but if the gentleman is comfortable 
with that conclusion----
    Mr. JACKSON. May I add to that point?
    Chairman THOMAS. Briefly. exceeded my time, and he exceeded 
his. We are both going to impose the time limit on everybody 
else.
    [Laughter.]
    Mr. JACKSON. I just wanted to say, yes, you can address the 
solvency problem, but solvency isn't the only problem. If all 
you do is raise taxes or cut benefits, you cheapen the deal--
which is already a poor deal--for younger Americans. Addressing 
the solvency issue does not address the adequacy issues. Social 
Security isn't a terribly generous program. We need to ensure 
adequate income for future retirees.
    Chairman THOMAS. Thank the gentleman. Does the gentleman 
from Florida wish to inquire?
    Mr. SHAW. Thank you, Mr. Chairman. I am very impressed by 
the last statement that was made by the gentleman from New 
York. I think it bears repeating. If it were not for the 
political climate, many people would choose private accounts. I 
think that we would get a lot of support from the other side of 
the aisle, if it were not for the political climate. think that 
is probably the tragedy of this Congress, if indeed we walk 
away from Social Security reform without a solution.
    Mr. Salisbury, I am reading from page 6 of your testimony, 
in which you define some of the things that can happen. One of 
the things that you say is that you could have current benefits 
with a cliff imposed. And you go on further in your remarks and 
you say, ``Under the benefit cut, where the cut begins in 2042, 
this individual's benefit would still be $11,200, since he or 
she would reach the normal retirement age before the steep cut 
goes in effect.'' Now, I know you are not advocating that 
position, but you are simply putting it forward. I would like 
to explore that date. We are going to find that we will have a 
decreasing surplus in Social Security for a number of years. 
And 2042, I am sure you chose that as that is one of the 
estimates that is made as a date that we are going to be 
running out of Treasury bills.
    In 2041 and in 2043--and you can go up and down from 
there--the effect is going to be the same. In 2045, '46, '47, 
we are not only going to find that the surplus has dried up--
which the government today, the General Fund, has become 
addicted to--but we will also find that we are going to, 
beginning in 2017, have to find the money in order to pay 
benefits. Now, true, we will go through the mechanics of 
trading in the Treasury bills for cash, but the effect in 2040 
and 2045 is going to be exactly the same. We are going to have 
to find the cash to pay benefits. Is that not a true statement?
    Mr. SALISBURY. That is a true statement, Congressman. And 
one of the other alternatives mentioned in the testimony that 
we did look at was the issue of essentially phasing the benefit 
reduction down beginning almost immediately, in order to smooth 
it out, as opposed to the cliff. We also analyzed what the 
effects would be if you simply raised taxes to close the gap. 
And then we also in the same analysis noted in the testimony 
compared that to the Model 2 individual account with indexation 
proposal of the President's commission, in order to give 
Members an ability to look at what the long-term income and 
expense effects would be of four different alternative 
approaches to reaching financial solvency.
    Mr. SHAW. I appreciate your analysis, but that is not the 
only choice that is out there. And Dr. Goodman, I want to get 
to you for a moment. I think you have very clearly pointed out 
that going to personal or individual accounts in no way is 
inconsistent with a guarantee plan. And you pointed that out 
very well in your testimony. Pursuing this problem of cash 
flow, on page 2 of your testimony you include a table showing 
the cash flow deficit of Social Security and Medicare. The 
numbers, of course, as you pointed out in your testimony very 
adequately, are staggering, and you don't even include the cost 
of Medicaid in that. Clearly, all the entitlement programs have 
to be addressed, and we must do that. We can't tackle all of 
these issues at once. And President Bush, like President 
Clinton before him, has made strengthening Social Security a 
top priority. Would you tell us more about why we need to focus 
on cash flow, and how that focus on cash flow informs us about 
the immediacy of the problem we face? And the immediacy, of 
course, is going to be in 2017, not 2042.
    Mr. GOODMAN. Sure. In a pay-as-you-go system, the only 
thing that matters is cash flow. And what a lot of people 
forget is that ours is a pay-as-you-go system. We have not 
saved. We have not invested. What we call ``trust funds,'' the 
Social Security and Medicare trust funds, are not real trust 
funds. They do not hold real assets. The funds were spent on 
something else. These are basically IOUs they have written to 
themselves. And every asset held by the trust fund is a 
liability of the Treasury. You sum over both parts of 
government, and the assets and liabilities sum to zero. So, all 
that matters is cash flow. And the cash flow numbers are really 
striking. The reason I have added Social Security and Medicare 
together is because I believe that if we didn't have Medicare 
and we didn't have Medicaid, we could probably muddle through 
with Social Security. We can't muddle through with all these 
programs. So, if you like, the strongest argument for the 
reform of Social Security is the existence of Medicare. And the 
second-strongest argument for the reform of Social Security is 
the existence of Medicaid. Sum them all up and it is a burden 
we simply can't live with. So, if you reform one, you help the 
other two.
    Mr. SHAW. Thank you, sir.
    Chairman THOMAS. The gentleman's time has expired.
    Mr. DAUB. Mr. Shaw, could I just add that disability tracks 
age. So, his point is a good one with respect to the FICA also 
covering six million Americans who are disabled.
    Chairman THOMAS. Does the gentlewoman from Connecticut wish 
to be recognized?
    Mrs. JOHNSON. Thank you very much, Mr. Chairman. I 
certainly believe that reforming Social Security is absolutely 
essential; but the world that we live in is increasingly a 
defined contribution world, in the rest of our pension system. 
And a couple of you particularly have focused on the need for 
incentives for annuities, for a paycheck for life. We have to 
find a way to recreate the private sector stability and 
security that defined benefit contributions did offer us. have 
been very interested myself in the annuities issue. How do we 
help lower-income people have annuities? I appreciate the 
importance of encouraging participation in 401(k)s and things 
like that; but nonetheless, at the point of retirement you 
still have to do something far more aggressive than we are 
doing to help people convert those into some kind of life-long 
benefit. So, there are new products coming on the market that 
combine annuities with long-term care, with other benefits. 
What can we do to focus on this issue of not only the security 
of Social Security, but the adequacy of our retirement benefits 
system?
    Mr. SALISBURY. Congresswoman Johnson, if I might?
    Mrs. JOHNSON. Yes.
    Mr. SALISBURY. The one factor in the world of defined 
contribution plans today: Fewer than 20 percent of them even 
offer an annuity type option. So, one major change that would 
affect millions of individuals is to at least give them the 
choice out of these programs; which employers are beginning to 
do as they think about this issue, but it is moving relatively 
slowly. So, simply individuals having the alternative within a 
structure where the employer, by giving that option, also 
negotiates in essence a group annuity price so that the 
disadvantages that the other witnesses have mentioned are not 
there. There is a coalition of 46 large companies right now 
that have come together and are amending their plans and going 
into the private market to, as a group, contract so that their 
employees have the efficiencies of the market that they have 
not generally been able to get. So, I think there are 
movements, to take the issue a step further, of defaults. It is 
having it be something that must be an option out of a plan and 
the potential if you default to an annuity and must opt for a 
lump-sum distribution. Even that alone, from research that has 
been available, would make a substantial difference. 
Individuals tend to go with what is the automatic option, 
frankly, frequently, whatever that happens to be.
    Chairman THOMAS. Will the gentlewoman yield briefly?
    Mrs. JOHNSON. Yes, sir.
    Chairman THOMAS. It would be ironic to create the ideal 
model on the opt-out on the front end and the opt-out on the 
back end and do annuities, and have employers withdraw 
significantly from contributions on 401(k)s. So, I just think 
we have to be very careful about where and how we put the 
incentive.
    Mr. SALISBURY. Mr. Chairman, I don't disagree. Mr. 
Chairman, the difference--and I think this is not talking about 
the employer having a liability for the annuity--is many 
insurance companies, to be blunt, would happily take on that 
liability. One of the differences is that, frankly, most of 
them will do a laddered bond portfolio that immunizes 
themselves, as opposed to the traditional defined benefit plan 
that has invested 60 to 70 percent in the equity market. So, it 
is a matching issue.
    Chairman THOMAS. And on the margin we want to make sure 
that low-income individuals who may not have that support have 
some kind of a group structure to gain the benefits of the 
marketplace as well. Thank the gentlewoman.
    Mrs. JOHNSON. To go back to that point that you were 
making, if an employer is negotiating and essentially all of 
his employees would agree to take at least a portion of their 
lump sum into an annuity, you could get a far lower rate; 
because then you get a true group insurance risk.
    Mr. SALISBURY. That's right.
    Mrs. JOHNSON. Whereas now most annuities are individual 
risk.
    Mr. SALISBURY. That's right.
    Mrs. JOHNSON. And so, as you say, you are selecting out 
those who have the resources, have the best health care, and so 
on, and are going to live the longest. So, this is very 
important in driving down the cost.
    Mr. ORSZAG. Representative Johnson, I would just add very 
briefly, this is precisely one of the reasons why I think we 
need to be very careful, even for middle earners, in 
significant reductions in the Social Security benefit level. 
Because that is something that already provides an inflation-
protected lifetime annuity. The second point I would make is 
that a lot of individual account plans, at least on paper, 
stipulate some annuitization requirement. I would be very 
careful about relying on that requirement, because it is not 
clear at all to me that it will be sustained over time. We have 
examples in other countries, including the United Kingdom, of 
something that was put in place in law, and then over time 
comes under pressure because you have, grandma at age 75, 
saying she has got a $100,000 account, being forced to 
annuitize, and it comes under a lot of pressure. And once you 
start allowing exceptions, the whole thing falls apart.
    Mrs. JOHNSON. Thank you. I do think it has been just 
generally overlooked that the President said no one should have 
at least a Social Security benefit below the poverty income. 
And there are plenty of seniors out there now having a Social 
Security benefit below the poverty income. And we do have to be 
very sensitive to the really minimal nature of our Social 
Security benefit for the majority of participants. Thanks.
    Chairman THOMAS. I thank the gentlewoman. Does the 
gentleman from California wish to inquire?
    Mr. STARK. Thank you, Mr. Chairman. It is difficult, again, 
to inquire of a stacked jury here, in the face of the messages 
that come forth. Medicare was mentioned earlier. And my 
Republican colleagues lack complete credibility on the issue of 
Medicare. They are not to be trusted with entitlement programs. 
When they act, they make things worse. They appeal to the 
public with false claims of crisis, and then work in a partisan 
fashion to offer a so-called solution that basically is 
privatization. Then they cook the books, or hide the numbers, 
or lie to us about the numbers, to obfuscate the true effects 
of their policy. So, I would ask if there is anybody--and Mr. 
Rangel was asking before--who really thinks that you can save 
Social Security without privatization. Is there anybody here 
who thinks that it wasn't a cynical and diabolical plan to 
demolish all of our entitlements, and thereby hurt 60 percent 
of the lowest-income people in this country, by giving away $3 
trillion dollars in unneeded tax cuts? And now to come back and 
say, ``Oh, goodness, gracious me. We don't have any money for 
the poor folks. We have taken care of about the 1 percent of 
the richest folks.''
    And most of my Republican colleagues--most of whom have 
never earned a nickel outside of the public trough--sit here 
and yap about free enterprise. And their acquaintance with it 
is minimal, at least--unless they inherited their money; in 
which case, they were probably all for the inheritance tax. 
just think it is disgusting to hear them talk, and to hear all 
of the witnesses, except Dr. Orszag, yap on, about how they are 
going to help the average person's retirement in this country, 
when it is quite obvious that they really don't give a damn 
about them. would yield the balance of my time to Mr. Levin.
    Mr. LEVIN. I wanted to ask some questions. Then my time 
will come after, I guess, the next two on the Republican side.
    Chairman THOMAS. I would tell the gentleman, the Chair is 
more than happy to allow him then to have his time. So, that 
you can take the two and a half minutes now, and the five that 
you have. So, you will get your full time.
    Mr. LEVIN. I will wait. I will wait.
    Chairman THOMAS. Well, but we don't have saving time. 
Either you get it--it is two-twenty now--or it is gone. So, you 
might as well take the two-twenty, and then you will get your 
five. And it will be split. Yes, you can.
    Mr. LEVIN. I will take the rest of his time, and then wait 
my turn. So, let me just say a word about the whole 
environment, the discussion that is presented here today. It is 
useful to have this discussion about the entire retirement 
picture. And it would be a very different environment, I think, 
if the private accounts had not been the thrust of the approach 
by the President to Social Security. It stands in the way of a 
bipartisan approach to these issues. And really, the reason it 
is such a political issue is because of the policy choices that 
were made by the President; the policy choice being, coming 
before the Congress and the people of this country and saying, 
``What I want to do with Social Security is to turn it into--'' 
what he called ``individual or personal accounts,'' and we call 
them ``private accounts or privatization.''
    So, it is the policy choices that affected the political 
atmosphere. And my time is almost up, but I want to drive that 
point home, because it stands in the way of our having the kind 
of discussion that is needed about these long-term retirement 
issues. will come back to it. And to prepare you, Dr. Holtz-
Eakin, I want to talk to you about your testimony. And there 
isn't much talk in your testimony about the whole issue of the 
deficits; the whole issue of the interest that results from 
paying interest, this huge amount of interest, on these debts. 
And so the pay-as-you-go system has been dramatically 
undermined by fiscal irresponsibility. And we talk about pre-
funding. What we are doing is eating up the resources of the 
future through fiscal policies of today.
    Chairman THOMAS. The gentleman's time has expired, the 
gentleman from California's time. The Chair intends to 
recognize the other gentleman from California, Mr. Herger, for 
his time, and then recess the Committee until 12:15. The Chair 
understands that we have a single vote, and we are currently in 
that roll call vote. Which means Members have a generous seven 
or 8 minutes to wolf down lunch, and anticipate your return at 
12:15. The gentleman from California.
    Mr. HERGER. Thank you very much, Mr. Chairman.
    Dr. Orszag, your written testimony discusses some details 
of your 401(k) proposal, including automatic investment. You 
state, ``Funds would be automatically invested in balanced, 
prudently diversified, low-cost vehicles, such as broad index 
funds, life-cycle funds, or professionally managed funds, 
unless the employee makes other choices. Such a strategy would 
improve asset allocation and investment choices.''
    Dr. Orszag, who would decide exactly what type of funds and 
what portfolio allocation would be appropriate? And how would 
you define ``legitimate, professionally managed funds''?
    Mr. ORSZAG. The firm would be able to choose which fund 
would be the default fund. Regulations would be required, 
presumably from the Department of Treasury or the Department of 
Labor, on broad guidelines for exactly what qualified. So, for 
example, we could have a reasonable definition of what 
``broadly diversified'' means, that, clearly, any index fund 
would qualify. We can have a reasonable definition of what 
``low cost'' means. You could even define a basis point charge 
that could not be exceeded in order to qualify for this safe 
harbor. Basically, regulations would have to define the 
contours of what was permissible. And then the firm would be 
able to choose within those contours.
    Mr. HERGER. Which is actually something similar to what 
Federal employees have at this time, what they have an 
opportunity to invest in.
    Mr. ORSZAG. The types of funds would be similar to the 
Thrift Savings Plan Fund, yes.
    Mr. HERGER. Very good. What benchmark or rule of thumb 
would determine how much risk would be appropriate for a young 
worker, versus a near retiree? And also, should employer stock 
be allowed to be a portion of the default investment?
    Mr. ORSZAG. To answer the second question first, I think 
one of the major problems that we face in terms of lack of 
diversification in 401(k) plans is over-investment in employer 
stock. Investing in a single stock is a mistake, because you 
are not diversified. Investing in your own employer's stock is 
doubly problematic, because that is where your wages are coming 
from, also. So, we need to be aggressively moving away from a 
system in which there is such over-investment in employer 
stock. I see a big advantage of this default investment 
approach, that gradually we would be moving away from that. Any 
kind of professionally managed fund, any kind of life-cycle 
fund, any kind of diversified index fund, will move workers 
away from an over-concentration in employer stocks. Surely, 
they should be included, for example, in the index; but not 
disproportionately so. I would----
    Mr. HERGER. Thank you----
    Mr. ORSZAG. Okay. Thank you.
    Mr. HERGER. No, go ahead.
    Mr. ORSZAG. Oh, on the first question, many of the 
professionally managed accounts automatically take into account 
not only age, but other risks that the workers face. A life-
cycle fund, obviously, is geared to the worker's age. The only 
option that I think would still make sense as a default, that 
doesn't explicitly take age into account, is a simple index 
fund. And that would be one of the reasons, perhaps, that firms 
would not be as likely to choose that as the default.
    Mr. HERGER. Thank you. I appreciate that, Mr. Chairman.
    Chairman THOMAS. Thank the gentleman. Our Committee will 
stand in recess until 12:15.
    [Recess.]
    Chairman THOMAS. The Committee will reconvene. Guests will 
please find their seats. The Chair is aware that there are some 
Members of the panel who have been kind enough to give us a 
major portion of the day. Since they have to be somewhere else 
by this evening, there is going to be a need to leave us prior 
to the last Member having exhausted themselves on the last 
possible question. So, the gentleman from Michigan is 
recognized.
    Mr. LEVIN. Thank you very much, Mr. Chairman.
    Dr. Holtz-Eakin, I mentioned I wanted to talk just a minute 
or two about your testimony and about the whole issue of 
deficits. And there has been a lot of talk about pre-funding, 
and one of the problems is that we are, I think, creating this 
huge debt with the interest, and really impinging on future 
generations. So, if you would, just comment briefly on how you 
think this fits into this whole picture.
    Mr. HOLTZ-EAKIN. Well, I think that the intent was to 
convey the notion that you need to pre-fund in an economic 
sense. You have to save as a nation, build economic resources 
to finance consumption in the future. At this point, the 
Federal Government is running a deficit that is largely driven 
by the structural policies. There is very little left that 
would eliminate that from better economic performance. And to 
the extent that we leave a continuous mismatch between outlays 
and receipts, that will act in opposition to saving. It will 
lower national saving, on average. And it will ultimately have 
some detrimental impact on our economic performance. And the 
debt that you would see accumulating would be a legacy of that 
inability to save as a nation and pre-fund for the future.
    Mr. LEVIN. Thank you very much for your candid answers, as 
always.
    Mr. Salisbury, I just hope that everybody on this Committee 
will read all of your testimony, and re-read it, and also will 
perhaps pay special attention to your discussion about Social 
Security and the example within your family, and what a 
guaranteed benefit has meant and what its reduction or 
elimination would mean in terms of the independence of seniors. 
A lot of us hope to live a long time. And one of the strengths 
of Social Security is that it is there as long as you live. So, 
again, we very much appreciate your testimony, as we do 
everybody else's.
    I would like to ask Dr. Orszag, you said a few words about 
some of the proposals on savings and pensions. The proposal 
that has been embraced by the President in terms of Social 
Security has some major cuts for middle-income families, people 
whose annual wage average income, average earnings, would be 
20,000 bucks and above in today's dollars. So, if you would--
you said just a brief word--talk to us about the proposals that 
have come forth. Well, just talk to them about it, because I 
don't, from what you said in your study, see how the main 
advantages would be for these same middle-income wage earners 
who would under the change in indexing see a major, major 
reduction in their Social Security plus the offset. So, talk a 
bit, very candidly, about your assessment of what has been 
proposed so far in savings accounts legislation.
    Mr. ORSZAG. Mr. Levin, you mean by the Administration?
    Mr. LEVIN. Yes.
    Mr. ORSZAG. Yes. Two points are worth making. First, 
additional retirement saving on top of Social Security can't 
replace the existing benefit structure, precisely because 
Social Security benefits last as long as you are alive; are 
protected against inflation, protected against financial market 
fluctuations; and are preserved for retirement in other times 
of need. So, even thinking about this sort of trade-off is 
somewhat misguided, because the two are not perfect 
substitutes.
    Furthermore, the Administration's approach--which involves 
basically, for example, with the retirement savings accounts, 
eliminating the income limit on Roth IRAs--provides direct 
benefits only to those households with, for example, joint 
filers with incomes above $150,000. Three-quarters of the 
benefits go above $200,000. A quarter of the benefits go above 
$500,000. So, basically, very substantially, almost entirely 
all of the benefits are going to the very top of the income 
distribution. As you noted, there are in the Social Security 
piece benefit changes that are affecting a much wider part of 
the population. So, there is a very significant mismatch, even 
if you accepted the logic--which I don't--of these being sort 
of inherently tradable. There is a very significant mismatch 
between where the benefits are going under the RSA proposal, 
and where many of the reductions are targeted within the 
traditional Social Security program.
    Mr. LEVIN. Thank you. My 5 minutes are up. Thank you.
    Chairman THOMAS. Thank the gentleman very much. Does the 
gentleman from Louisiana, Chairman of the Social Security 
Subcommittee, wish to inquire?
    Mr. MCCRERY. Yes, Mr. Chairman. Thank you. Mr. Chairman, I 
will not respond to the bulk of Mr. Stark's comments that he 
made earlier. One point that he made I will respond to, and 
that is by calling this panel a jury-rigged panel. The minority 
was given every request they made for this panel. Had they 
wanted more witnesses, we certainly would have acknowledged 
that. In my Subcommittee hearing 2 days ago, the minority asked 
for two witnesses out of five on a panel. That wish was 
granted. We are trying very hard to have a dialog, a discussion 
about the issues. wish that the minority would spend as much 
time talking about the substance of the issues as they do 
complaining about things like Mr. Stark did.
    Dr. Holtz-Eakin, in your answer to Mr. Levin about pre-
funding, could we structure personal accounts and Social 
Security in a way that would represent pre-funding under your 
definition?
    Mr. HOLTZ-EAKIN. It is certainly the case that individual 
accounts are one example of a pre-funded approach to a 
retirement benefit. And that is an important policy choice, to 
think about the degree to which there is pre-funding in the 
system as a whole.
    Mr. MCCRERY. Thank you. Dr. Jackson, on page 3 of your 
testimony you state that pay-as-you-go made sense in decades 
past, when the number of workers significantly outnumbered the 
number of retirees. And then you say, with the end of the Baby 
Boom, the demographic underpinnings of that paradigm collapsed. 
Would you tell us more about what you believe the benefits of 
pre-funding are and, based on your global research, how have 
other countries moved to pre-funding their retirement systems?
    Mr. JACKSON. The funded approach has both macro and micro 
benefits. At the macro level, a funded system can help shield 
government budgets from demographic pressure. It can also help 
maintain adequate rates of savings and investment, which is one 
of the greatest challenges an aging society faces. In a pay-as-
you-go system, you are taxing the current wages of workers. In 
a genuinely funded system--by ``genuinely funded,'' a system 
that has raised national savings, and hence the growth path of 
the economy--you are ultimately paying benefits out of new 
wealth that wouldn't otherwise have existed. So, there are 
important macro benefits to funding. There are also important 
micro benefits. At the micro level, a funded system can pay a 
higher benefit at any given contribution rate than a pay-as-
you-go system can, because the return to capital is generally 
higher than the return on a pay-as-you-go system; particularly 
in an aging society where the ratio of contributors to 
beneficiaries is rapidly declining. There is a transition 
during which that may not be true; but ultimately, once one has 
paid that transition, that will be true. There is a bigger bang 
for the buck.
    Mr. ORSZAG. Mr. McCrery?
    Mr. MCCRERY. Just a moment. Let me just follow up, then 
I'll give you a chance, Dr. Orszag. Is piling up Treasury notes 
in the Social Security trust fund pre-funding the system?
    Mr. JACKSON. Well, I believe that it is not. It is a 
transaction, as has been said, that is internal to government. 
What is an asset to the trust fund is a liability to Treasury. 
The trust fund is not without meaning; it has a political 
meaning. It constitutes formal budget authority. It is a 
promise that Congress will raise taxes on my children. It does 
not have any fiscal or economic significance.
    Mr. MCCRERY. Thank you. Dr. Orszag?
    Mr. ORSZAG. I would just emphasize a very important 
distinction between a ``funded pension system'' and increasing 
national saving. The latter is the key. We can do all sorts of 
things to make it look like we are ``funding,'' that don't 
actually translate into higher national saving in particular.
    Mr. MCCRERY. That is why I asked the question the way I did 
to Dr. Holtz-Eakin.
    Mr. ORSZAG. Right. I agree.
    Mr. MCCRERY. I said, can we structure personal accounts in 
a way that would be pre-funding under his definition. And his 
answer was ``Yes.'' I am well aware of that, Dr. Orszag.
    Mr. ORSZAG. Okay.
    Mr. MCCRERY. Thank you.
    Chairman THOMAS. Thank the gentleman. Does the gentleman 
from Maryland wish to inquire?
    Mr. CARDIN. Thank you, Mr. Chairman. want to thank all of 
our witnesses for their testimony. I found it very helpful. I 
particularly appreciate Mr. Salisbury giving us a real, live 
example of the problems. We see these numbers and statistics, 
and it is hard to visualize real-life people. And it is 
interesting; I hadn't focused on the fact that when we look at 
that pie chart that shows that one-third of our retirees rely 
exclusively on Social Security, and for two-thirds it is their 
primary source of income, I never realized that that is a 
changing number by age. It is not a person who comes into the 
system relying upon Social Security for two-thirds, and then 
stays that way the rest of their lives; it changes over time. 
And we have seen a dramatic change, as our Chairman has pointed 
out, in retirement security during these last 10 years. And 
certainly, over the last 75 years there have been very dramatic 
changes in saving and opportunities.
    One of the disturbing trends, of course, is that there are 
fewer and fewer opportunities for guaranteed benefits. The 
defined benefit world is becoming smaller. And even within the 
defined benefit world, the risk factors have gotten much 
higher. The pension guarantee fund is under funded; companies 
are going into bankruptcy; companies are freezing plans and 
converting plans. So, for all those reasons, many of us--and I 
am sorry that my former colleague, Mr. Portman, is no longer 
with us, at least in Congress--but there have been many of us 
on this Committee that have worked together to try to increase 
the other two legs of that retirement stool: private savings 
and private retirement. But as much as we want to increase 
opportunities there, it is going to be virtually impossible for 
us in the private side to have what Social Security provides.
    Guess my comment, or question, to you is that, under 
today's mechanism, the Social Security represents about one-
third of an individual's final income when they retire, on 
average. I know it changes by income level. guess my concern 
is, looking at what is happening in the real world, we are 
trying to preserve that one-third. Some are saying perhaps we 
could change that, based upon income, and let people rely on it 
less. I disagree with that. But maybe we are taking the wrong 
tack. Maybe we should be trying to increase the amount of 
guaranteed benefits, through some mechanism; rather than just 
saying the status quo is adequate. I would appreciate any 
comments here.
    Mr. GOODMAN. I think it is important to realize that, 
although we say Social Security is a guaranteed benefit, it is 
really not. It is guaranteed on paper, but it is a political 
promise. And since it is not backed up by funding, as the 
financial pressure----
    Mr. CARDIN. Dr. Goodman, let me agree with you that 
Congress can always change the law any year. There is no way 
you can change that. I would suggest that Social Security is 
the safest form of retirement security available today, and it 
is funded, many of us believe, for at least 36 years, and many 
of us think maybe beyond that. I guess my point is, obviously, 
anything can change, but if I were to go to Las Vegas and take 
odds as to what is going to be there tomorrow for me, whether 
it would be my employer retirement plans or my 401(k)s or my 
Social Security, I think Social Security would get the best 
odds. Dr. Orszag?
    Mr. ORSZAG. I think we need to be thinking about this 
system in terms of two tiers: a foundation provided by Social 
Security, and then other required savings; which, as Chairman 
Thomas noted, is increasingly becoming just 401(k)s and IRAs, 
as the DB world becomes smaller and smaller. In that context, I 
don't think it makes sense to take that first tier, Social 
Security, and dramatically reduce it, both to restore solvency 
and then also to pay back the funds required to offset the cost 
of individual accounts. That is precisely why I don't think 
that significant reductions in Social Security benefits make 
any sense.
    Mr. DAUB. If I could just----
    Mr. CARDIN. Mr. Daub?
    Mr. DAUB. You could argue in a vacuum about 36 years ahead, 
but I just think we should also remember that the Social 
Security benefit, guaranteed or secure, risk-free as any 
comparatively, is a benefit that is accumulated over a long 
period of one's working lifetime.
    Mr. CARDIN. Right.
    Mr. DAUB. And so it is just not there when we get to be, if 
we are lucky enough to live so long, 62 or 66 years old.
    Mr. CARDIN. Right.
    Mr. DAUB. So, to get that security in income in retirement 
is a long-range proposition. And we don't want to wait so long 
that the choices are fewer and the risk are greater.
    Mr. CARDIN. Right. agree with that. I think we should take 
steps now. I guess my point was that this does represent a 
guaranteed income source that is inflation adjusted, that is 
there. The formula will keep giving you one-third of your 
replacement income. And there is nothing else out there on the 
horizon that comes even close to it.
    Mr. DAUB. It is about 42 percent average, yes.
    Mr. CARDIN. Thank you, Mr. Chairman.
    Chairman THOMAS. I would suggest to the gentleman, although 
I don't think we have talked about it here, one of the things 
that you can do on the margin that kind of splits the 
difference on the problem is to begin to look at the question 
of longevity, and how fair it might be to deal with utilizing 
an index of longevity; notwithstanding the fact that you can't, 
at least in Social Security, raise ethnicity, gender.
    Mr. CARDIN. Right.
    Chairman THOMAS. But perhaps a base structure which allows 
a stretching out to assist in the problem of not knowing for 
sure how long.
    Mr. CARDIN. I agree, but remember Mr. Salisbury's parents. 
They were well-off when they retired. They bet that they would 
live a certain number of years, and they have outlived what 
they thought they would live. And now there would be a problem 
if they didn't have Social Security at its current level.
    Chairman THOMAS. And the percentage of Social Security is 
greater vis-a-vis those other products that ran out of gas, by 
virtue of not being an annuity.
    Mr. CARDIN. Right.
    Chairman THOMAS. think focusing on those other products 
becoming annuitized is an area where I think we would make 
great headway.
    Mr. CARDIN. I agree.
    Chairman THOMAS. I thank the gentleman. Would the gentleman 
from Michigan wish to inquire?
    Mr. CAMP. Thank you, Mr. Chairman.
    Mr. Salisbury, I notice in your written testimony that in 
1986, 16 percent of taxpayers made contributions to IRAs. And 
more recent data, as you say, show that that is less than 3 
percent, and that much of the new money in IRAs is rollovers 
from other pension plans. You also go on to say that of those 
invested in IRAs or 401(k)s, only 6 to 8 percent have reached 
the max. My question is, how do we get more people to 
contribute to IRAs? What recommendations do you have there? And 
how do we have more people contribute the maximum? How do we 
increase that maximum amount? And is that by increasing the 
maximum deduction, or allowing a 100-percent deduction of a 
contribution, or any other ideas you may have?
    Mr. SALISBURY. The change in 1986 that dropped the 
reduction down dramatically was the combination of lower 
marginal tax rates and a limitation on the availability. And it 
goes to some of the comments Dr. Orszag made about the maximum 
effect of these incentives being at the highest income levels. 
The other points other witnesses made: the research that is out 
there. And there is some research that we just completed that 
is referenced in my testimony. Default enrollment makes a 
substantial difference, default contribution rates. And 
basically, starting somebody at a high rate, many of them will 
tend to stay there. Our most recent retirement confidence 
survey, which is mentioned in the testimony, tested public 
opinion on these issues. And overwhelmingly, the public said, 
``I would find default into the plan acceptable. I would find 
default in a diversified portfolio acceptable. I would find 
default into a high contribution rate acceptable.''
    There is a proportion that doesn't find it acceptable, that 
would not participate. But in the most recent numbers we ran 
for the lowest-income 25 percent by income, you would increase 
the ultimate benefit out of the plan by 61 percent at median, 
the replacement rate, by going with these default arrangements. 
And when we then added an analytic. Assume that between 1996, 
when our database starts, to 2003--and this is 15 million 
401(k) participants--that all of those individuals had been 
defaulted into a so-called ``lifestyle fund,'' meaning a mixed-
asset allocation, as compared to what they had actually made as 
choices. And that replacement rate increase, instead of 61 
percent, would be 81 percent.
    And in the highest-income 25 percent, interestingly, the 
defaults would have decreased their replacement by 6 percent; 
unless you move them into the lifestyle funds and counteracted 
their investment choices, in which case they would have had 10 
percent more at the end of the train as well. So, defaults can 
make a difference. A majority of the public finds them 
acceptable. And they do lead to better outcomes. I would add 
the final point that Congressman Cardin and the Chairman made. 
Defaulting individuals into a partial annuity would likely also 
be acceptable to a substantial number; maybe not to all. But it 
would deal with some of the longevity issues as well. So, you 
would get accumulation, you would get better returns, and you 
would get better longevity income.
    Mr. CAMP. Okay. Thank you very much. Thank you, Mr. 
Chairman.
    Chairman THOMAS. Would the gentleman yield briefly on his 
time?
    Mr. CAMP. Yes, I will.
    Chairman THOMAS. I do caution, and I think I am correct in 
cautioning us, in doing comparisons between periods and 
savings. Because to me all it proved was that in 1986 people 
were willing to say ``Yes,'' if you incentivized them to the 
point that it didn't cost them anything and they got something. 
And when we changed the law, fewer people were willing to put 
savings away, when they actually didn't get it totally free 
with no strings attached plus a bonus. When you peg these 
various years, yes, we proved a point, but I don't think it is 
helpful; and then measuring subsequent savings from a point 
when people actually said, ``Yes, if you are going to give it 
to me.'' That is the only point I want to make. That has to be 
made in terms of comparisons between periods.
    Mr. SALISBURY. I totally agree with your point.
    Mr. ORSZAG. And at the same time, there was the growing 
spread of 401(k) plans, which was seen as a substitute in the 
eyes of some people for an IRA.
    Chairman THOMAS. Yes.
    Mr. ORSZAG. And so that also would have diminished IRA 
participation, even apart from this.
    Chairman THOMAS. Yes. You had other cars on the track. I do 
think that we established the fact that people will say ``Yes'' 
if you give them something for nothing. And that is always nice 
to know. The gentleman from Washington.
    Mr. MCDERMOTT. Thank you, Mr. Chairman. I appreciate your 
letting America see and hear the President's plan to pulverize 
Social Security. I want to talk about the middle class. Just a 
week ago, our witnesses testified that the President's plan 
guts the benefits, and here we go again. It is the latest trend 
in the American experience with the Republicans in charge.

[GRAPHIC] [TIFF OMITTED] T6385A.013


    Mr. MCDERMOTT. First, let's go to the first chart here. If 
the Members and the audience could turn to your right, you are 
looking here at the percentage of workers receiving health 
insurance in 1982: almost 70 percent. Then you go to 2002, and 
you see what has happened to the middle class. They are in 
trouble. Twenty-5 percent less workers get their benefits. 
Twenty-5 percent more workers are out there in the individual 
market looking for health insurance, the most expensive place 
to be; and it is the number one cause of bankruptcy. Next 
chart.

[GRAPHIC] [TIFF OMITTED] T6385A.014


    Mr. MCDERMOTT. This chart shows where their children are 
going to school, and what tuition is for a year in 1982. The 
next chart will show you what has happened to tuition. After 
adjusting for inflation, it is nearly twice what it was 20 
years ago. Now, the next chart.

[GRAPHIC] [TIFF OMITTED] T6385A.015


    Mr. MCDERMOTT. In 1988, the percent of workers receiving a 
defined benefit pension program, like the one like United 
Airlines employees just lost, those flight attendants who have 
been flying for 38 years--it is all gone; it is over in that 
pension guarantee program, if that has any money--it was nearly 
60 percent added in that era. Today, employers are largely 
giving up these plans, and they have gone to defined 
contributions, which transfer retirements to the workers away 
from the employers. And you can see where we are today.
    So, we now have an ownership society. You are on your own 
to educate your kids; you are on your own to get your health 
care benefits; you are on your own to get your pension 
benefits. We don't want to do anything in the government level. 
The personal retirement security today is more tied to the 
stock market than ever, if you look at that chart. And defined 
benefit plans are now available to a fraction of the workers 
that enjoyed them just a couple of decades ago. As we learned 
last week, the President and his supporters are proposing 
massive cuts to Social Security, the one guarantee they had. 
They come in here, and they want to take away that benefit and 
say, ``Go to the stock market. Maybe you could do better.'' 
Now, I find these trends rather disturbing. And it seems to me, 
instead of pooling the risk and diversifying among individuals, 
it seems we are concentrating on family units and individuals. 
Mr. Orszag, as an economist, isn't it typically better to 
spread the risk and be diversified, than to be all in your own 
hands?
    Mr. ORSZAG. As a general principle, yes. would actually 
make one quick point; which is that I think the government's 
role as the sort of risk manager for individuals, so that 
individuals or individual households don't face undue risk 
themselves, is absolutely critical. And if we unwind it too 
much--and in fact, I think we should be moving in the other 
direction--if we unwind it too much, there will be a backlash 
in which families facing too much risk themselves will be 
unwilling to take the steps that lead to strong economic 
growth: making the investments, moving for new jobs, and doing 
the other things that lead to a dynamic economy.

[GRAPHIC] [TIFF OMITTED] T6385A.016


      
    [GRAPHIC] [TIFF OMITTED] T6385A.017
    

    Mr. MCDERMOTT. I think that my last slide sort of says it 
all. The Democrats do not just oppose the privatization of 
Social Security; we oppose the entire Republican agenda that 
takes us away from a country of ``we'' and toward a country of 
``me.'' Now, whether it is health care, or education, or 
retirement security, Democrats are opposed to the Republican 
plan to shift all the important risks of life onto the back of 
the individual and away from our society. Our country will only 
thrive if we work together, if we take risks together, and if 
we find the common good. And given what is happening to the 
middle class, I would like to hear you explain to me how the 
middle class is going to have more money to put into whatever 
program we come up with here. How, when they now have to pay 
twice as much to educate their kids at community college, and 
they have to buy their own insurance out in the private market, 
and they don't have a guaranteed program at work? Where are 
they going to get the money to put into these programs?
    Mr. DAUB. Mr. McDermott, I think that you have an 
interesting point that does need to be explored. And it may be 
helpful to think about the fact that we not only have the 
tsunami of the age wave coming at the system, but we have fewer 
workers that will shoulder whatever load this is next year, or 
20 or 30 years from now, in terms of the FICA tax, or in terms 
of paying general revenue income taxes to support the variety 
of programs. So, that ratio of fewer workers, and putting 
higher taxes on fewer workers, is an important issue I think, 
and why, at least from the Social Security Board's point of 
view, we have asked you all to take a broader look, one the 
Chairman suggests, that interrelated with Social Security are 
health security in retirement, as well as cash income in 
retirement.
    Mr. MCDERMOTT. You are talking about higher taxes. I don't 
remember my mentioning that. It seems to me that what we are 
doing here is eroding the base of Social Security and then 
saying we are going to ask people to save more. That is like me 
asking my 95-year-old mother, ``Why don't you have any 
retirement left?''
    Mr. DAUB. Well, you may be right, if we look at the idea 
that we can sustain the same statutory benefit levels, called a 
guarantee, in 2017 or 2042, on a ratio of fewer workers, 
without cutting benefits and without raising taxes. It doesn't 
seem to me--or with a combination of both--that there are 
anything but three choices: either cut benefits, and/or raise 
taxes, or do both; with fewer people producing the dollars that 
have to be paid out to a growing number of people that are not 
in the workforce.
    Mr. MCDERMOTT. I am sorry I can't go on with this 
discussion.
    Chairman THOMAS. The gentleman's time has expired. And Mr. 
Salisbury, and shortly Mr. Daub, beg the indulgence of the 
Committee, but they are going to have to leave. The Chair 
thanks them for the time they were able to provide. The Chair 
would recognize the gentleman from Illinois. Would he be 
willing to yield to the Chair briefly?
    Mr. WELLER. I would be happy to yield to the Chair briefly.
    Chairman THOMAS. Thank the gentleman. If we would put up 
the first slide that Congressman McDermott had, quickly. That 
is the last one. Right there.
    [Slide.]
    Chairman THOMAS. The timeframe for this slide was 1982 to 
2002. Of those 20 years, seven of them were Republican majority 
control of the House. Obviously, with a little math, the 
remainder of those years were Democratic. Next slide.
    [Slide.]
    Chairman THOMAS. 1982 to 2002, seven of those years were 
the Republican majority. The remainder of the 20 were the 
Democrats. Next slide.
    [Slide.]
    Chairman THOMAS. 1988 to 1998, that is a ten-year period. 
Three of those 10 years were under the Republican majority. I 
have no problem pointing out the true problems facing 
Americans, but represented in the way it was, I do believe we 
needed to have that pointed out on the slide.
    Mr. MCDERMOTT. Well, if you would let me talk, Mr. 
Chairman----
    Chairman THOMAS. Thank the gentleman. Gentleman from 
Illinois?
    Mr. MCDERMOTT. Could I get a minute, Mr. Chairman?
    Chairman THOMAS. No.
    Mr. WELLER. Thank you, Mr. Chairman, and I am reclaiming my 
time.
    Mr. MCDERMOTT. Not a single----
    Mr. WELLER. Reclaiming my time, Mr. Chairman.
    Chairman THOMAS. Your staff didn't tell you what you were 
doing. That's a problem you have got to work out with your 
staff. But showing 3 years of Republican control causing all 
that problem, when you have all the rest--I am more than 
willing to share the burden of the problem. That is why we are 
here. I hope you will share the burden of addressing the 
problems in a bipartisan way. The gentleman from Illinois.
    Mr. WELLER. Thank you, Mr. Chairman. And thank the panel 
for being with us today. And thank you for the opportunity to 
participate in this. particularly want to note that the focus 
of this hearing is, of course, to look at the broad challenges 
facing retirement security. It is a given we need to fix Social 
Security. We have some financial problems long-term with Social 
Security under the current trends, and we need to fix it. But 
as we move forward on that solution--and like the Chairman, I 
hope we can find a bipartisan solution--it is important to look 
at some of the other options. And one option I would like to 
put forward, which I would like to hear the thoughts of the 
panel on, beginning with Mr. Holtz-Eakin, is an idea which I 
have revived in this Congress, which was an idea that was put 
forward in a bipartisan way back in the nineties. And that is 
something called a ``Kid Save Account.'' It had bipartisan 
support. Then-Senators Kerrey, Moynihan, and Breaux were 
Democrat lead sponsors on the legislation. Rick Santorum and 
Chuck Grassley, of course, current Members of the Senate, were 
the Republican lead sponsors on that. We have introduced the 
bill, H.R. 1041, and I think it offers an opportunity 
particularly for every child born in America, regardless of 
their income, to have an opportunity for a savings vehicle.
    The way the idea works is, at birth every child gets a 
$2,000 loan from the Social Security Administration. That would 
be linked to inflation, so over time it would be adjusted. The 
money would be deposited in a personal account that could not 
be touched until retirement. It would be managed by the Thrift 
Savings Plan, the same program every Member of Congress and 
every U.S. Senator--and of course, my local mailman--all have 
available and trust. And their parents would initially decide 
how that would be invested; whether in a bond or equity fund. 
And it would grow untapped over a lifetime. And according to an 
outside analyst, the opportunity for growth is there. And that 
$2,000, even though that initial loan would be repaid at age 
30, would have the potential to grow to at least $50,000, 
estimated, over that young American's lifetime. would just like 
to hear if each of the panelists would give me their thoughts. 
Number one, are you familiar with the idea, the Kid Save? And 
what are your thoughts on the feasibility of this particular 
add-on account which I am offering in this debate? Mr. Holtz-
Eakin?
    Mr. HOLTZ-EAKIN. Well, I will not pretend to be intimately 
familiar with it. That is the first description I have heard. I 
think the key point of view from the aggregate performance of 
the economy is what else goes on when that loan is made by 
Social Security to the individual, because that in and of 
itself is a wash. There is no net new national saving. It may 
have policy merits at the level of individuals in terms of the 
accumulation, the ownership, the risk bearing that is there. 
But in the absence of some additional national saving on a 
year-by-year basis, the economy will not grow and would not in 
and of itself enhance our capacity to meet all the needs, 
public and private.
    Mr. WELLER. Mr. Daub?
    Mr. DAUB. It has merit in the same framework of creating a 
combination of a Social Security benefit over time that has a 
limited rate of return over time and featuring a way, if 
mandatory--I assume--I don't know the details of it, but this 
is going to be a mandatory contribution to the account, right? 
And if that is the case, over time at the margin that takes the 
market at a higher yield on average every 10 years. When you 
add the two together at the end of the day, you should end up 
with a greater benefit than the current table will pay over the 
next 75 years to a retiree.
    Mr. WELLER. I would note, Mr. Daub, before I ask the next 
witness just to comment, that the Thrift Savings Plan over the 
last 11 years that I have been in the Congress has grown about 
4 percent a year if the money was in a bond fund and about 8 
percent a year in the equity, the S&P 500 index fund. Social 
Security, it is estimated you get about 0.8 of 1 percent return 
on your initial investment.
    Mr. DAUB. And my salary when I was here before, today has 
over doubled as a Member of Congress relative to the income 
ration and then the contribution made to the private pension 
plan called the FERS account, which you referred to.
    Mr. WELLER. Mr. Jackson?
    Mr. JACKSON. Let me just echo, I think, Doug Holtz-Eakin's 
comments. I think the proposal has merit. I think there is 
certainly a significant benefit, the familiarizing of lower-
income households or middle-middle-income households of the 
benefits of savings and doing that at as young an age as 
possible. However, if all we are doing is taking a dollar of 
Federal revenue and moving it into a private account, then this 
child has a compounding asset in the private account and a 
compounding liability in terms of additional Federal debt. So, 
in terms of the overall economy, that would be a wash. So, it 
is important that accounts of this kind be genuinely funded, in 
which case I think they have significant benefit.
    Mr. WELLER. Of course, it would be a loan which they would 
repay at age 30, and looking at very conservative compounding, 
it would grow to about 50,000 over a lifetime.
    Mr. ORSZAG. Mr. Weller, I have two reactions. I think there 
are proposals in this area that are worth exploring, but 
actually the way you phrased this specific proposal I think 
shows some of the limitations. In particular, what we would be 
encouraging people to do at that point is effectively invest on 
margin. You are borrowing from the government at the bond rate 
and then investing in the stock market in the hope that your 
return on the stock market will exceed that on bonds. In 
general, I don't think that encouraging even middle- to low-
income people to invest on margin is the right way to expose 
them to the stock market and to asset accumulation. Instead, I 
think a lot of ideas that we were talking about earlier in 
trying to get IRA participation up and 401(k) participation is 
more promising, both from a microeconomic perspective and from 
a macro one.
    Mr. GOODMAN. I think that you need to substitute this 
private saving for taxpayer promises on down the line. So, if 
you accumulate $50,000 over a work life, that ought to 
substitute for $50,000 of taxpayer promises. And if you make 
that addition to your proposal, then you are solving the long-
term problem of unfunded political promises.
    Mr. WELLER. Okay. Well, you have been very generous, Mr. 
Chairman. Thank you.
    Chairman THOMAS. The Chair thanks the gentleman for 
yielding.
    Does the gentleman from Missouri wish to inquire?
    Mr. HULSHOF. I do, Mr. Chairman. Thank you. I want to 
commend the gentleman from Maryland, who spoke earlier. He has 
certainly earned the respect and the credibility of Members 
because of his work in the pension area. agree with, Mr. 
Chairman, your comments as well as the Chairman of the Social 
Security Subcommittee. I think it is much better to have a 
dialog than to be subjected to a diatribe. know Mr. Salisbury 
had to leave, and I know how blessed he feels to have parents 
in their longevity. Having a social insurance program, however, 
there are others as far as a financial perspective--I use my 
own case as a case in point. My father did not take early 
retirement and died at the age of 69. My mother had survivor's 
benefits for 17 months, and then she died at the age of 69. And 
if you take a look at what they paid into the Social Security 
system, they did not get out of the system what they paid in. 
And so that is the very essence, of course, of having a social 
insurance system as we have. Now, I have heard a lot of 
discussion about a guaranteed benefit and protection against 
inflation. My daughter, who is 5, the only thing that--right 
now, at least under current law, the only thing that is 
guaranteed is--and I will adopt the gentleman from Washington's 
rhetoric. My daughter will have massive cuts. Social Security 
will be pulverized--again, to use a word from the gentleman 
from Washington--under the current system. And so, again, that 
is my opening salvo, if you will, and I want to also commend 
Dr. Orszag. You, sir, you and Peter Diamond are to be commended 
for laying out tough choices. In fact, Mr. McDermott inquired 
of you, as he was showing us his slides--and, again, I think 
that was when we heard the massive cuts from the President's 
plan. But you provided him a general response, and I want to be 
a little more specific about the plan that you and--I assume it 
is Dr. Diamond, is it not?
    Mr. ORSZAG. It is.
    Mr. HULSHOF. --have put together as far as tough choices. I 
appreciate that you described your plan as a balanced approach, 
but let me inquire. The Social Security actuary's numbers 
indicate that your plan achieves solvency partially through 
payroll tax increases. Is that true?
    Mr. ORSZAG. Yes, it is.
    Mr. HULSHOF. Your plan also reduces benefits for some 
individuals and raises them for others. Is that also a correct 
assessment?
    Mr. ORSZAG. It reduces benefits, and for some small groups 
of particularly vulnerable beneficiaries, there are benefit 
increases.
    Mr. HULSHOF. Are there any workers under your plan--and I 
am not being critical. Are there any workers under your plan 
held harmless from benefit reductions relative to what is 
promised under current law? Are any workers held harmless?
    Mr. ORSZAG. As a group, the disabled beneficiaries and 
young surviving children are held harmless over the next 75 
years.
    Mr. HULSHOF. And let me echo that point as Mr. McCrery--we 
had a hearing 2 days ago with vulnerable populations in the 
Subcommittee. And, again, putting aside the rhetoric that we 
heard from some Members on the Subcommittee, I think the 
consensus is that there is a special category, the disability, 
for instance, category that we too look to to hold harmless. 
But other than those category of beneficiaries, as far as the 
retirement aspect is concerned, no category is held harmless 
under your plan. Is that right?
    Mr. ORSZAG. That is correct.
    Mr. HULSHOF. And does your plan gradually reduce benefits 
for both low- and middle-wage workers relative to what is 
promised under current law?
    Mr. ORSZAG. Yes, it does.
    Mr. HULSHOF. And, again, I am not going to throw in an 
adjective such as ``massive,'' but I think, again, the point is 
simply this: that as we--first of all, for those that recognize 
that there is, in fact, a challenge--President Clinton used the 
word ``crisis'' in my home State in 1998. But, nonetheless, as 
we move forward and for those who wish to engage in a dialog 
rather than a diatribe, I am not sure what constructive benefit 
comes from the rhetorical flourishes. And, again, I think I 
would much prefer working with those Members who recognize that 
this needs to be a bipartisan solution. Again, I salute you for 
putting--do you have a follow-up? In the few minutes that I 
have, yes, I will let you expand.
    Mr. ORSZAG. If the Chairman will indulge me, two things are 
worth noting. Obviously you all are the politicians and I am 
just a policy analyst, so I will defer to you. But it seems 
pretty clear to me what needs to happen in order for us to move 
forward in a bipartisan way on Social Security reform. And at 
least from the Administration, I don't see the necessary step 
being taken. I am just making a factual statement as opposed to 
a normative one. The second point that I would make is the 
benefit changes that are in our plan--and I would emphasize our 
plan is basically the only plan that achieves sustainable 
solvency, that is, long-term solvency, with no general revenue 
transfers at all. So, it is the only really completely honest 
plan out there, and, therefore, it is completely politically 
unviable. But even in that context--even in that context--
because we are willing to dedicate some additional revenue to 
Social Security, the benefit changes are much less severe than 
in the absence of additional revenue. That is a critical 
question. I think that having a strong foundation is worth the 
price of dedicating additional revenue to Social Security, and 
that is the debate we should be having.
    Mr. HULSHOF. Thank you, Mr. Chairman.
    Chairman THOMAS. Dr. Orszag, which of those ideas of yours 
would you be willing to leave at the doorway?
    Mr. ORSZAG. I am sorry?
    Chairman THOMAS. Which of those ideas of yours would you be 
willing to leave at the doorway before we have a useful dialog?
    Mr. ORSZAG. I think----
    Chairman THOMAS. Just pick one. I don't care which one. I 
am forcing you to leave one of your ideas at the doorway before 
we have a meaningful dialog.
    Mr. ORSZAG. I am happy to leave any single idea of mine at 
the doorway before we have a useful dialog, but I think we all 
know that----
    Chairman THOMAS. And that justifies the fact that you said 
you were not a politician.
    [Laughter.]
    Chairman THOMAS. The gentleman from Massachusetts.
    Mr. NEAL. Thank you, Mr. Chairman.
    Dr. Goodman, I arrived in Congress during the middle of the 
S&L crisis, and indeed it was a crisis. And as part of your 
testimony earlier, you suggested that you were concerned that 
some people might not fully understand sophisticated investment 
policy, and as a result, they might make some wrong choices. 
And part of the S&L issue, at least in some measure, part of 
the S&L issue, as they were deregulated, meant that a lot of 
people never understood something as simple as the $100,000 
limit that was guaranteed by FDIC at the time. Would you care 
to talk a little bit more about your concerns or suspicions 
about those, particular lower-income Americans, as it might 
relate to making those individual choices?
    Mr. GOODMAN. Sure. Just briefly on the S&L crisis, what 
caused the crisis was that you had a Federal guarantee for 
entities that were virtually bankrupt, and so they went out and 
gambled.
    Mr. NEAL. I acknowledge that, but that is part of the 
concern that you might have with those that--I know that the 
New York Times on Sunday ran an interesting piece about some 
unsavory annuity salespersons and what they had done to some 
people who were exceedingly vulnerable, even though they had 
been very successful in life. But part of the S&L issue from 
people that sat across my desk was that they had no 
understanding that their deposits were only insured up to 
$100,000. So, if they had been saving it for retirement, only 
to discover that if they had $180,000 of $200,000 or $220,000, 
FDIC only took care of $100,000, that was sort of, a pretty 
cold reality for them.
    Mr. GOODMAN. Right. Well, directly to your question, I am 
concerned about the choices people make, and I think there is 
lots of evidence that investing their own money, people in 
401(k) plans are not always making the wisest choices. They 
tend to make two mistakes: they invest too much in what they 
know, which is their employer's stock, and what is safe, which 
are money market funds. And that means too much risk and too 
little return. And all the evidence points to the fact that if 
we could just encourage people to be in balanced portfolios, 
they would have less risk and higher returns. So, we think--and 
I think Peter and I both agree on this--that we need reforms 
that encourage the private sector to do those things. Now, if 
we have personal accounts under Social Security, we also need 
to restrict the options available to people there, for the same 
reason.
    Mr. NEAL. Great point. Now, I can say this: that based upon 
what I have witnessed in Washington for the last few years, you 
can be sure that during the run-up of the dotcoms, the same 
people who would be arguing for restraint during that period of 
time 4 or 5 years ago would be arguing for more risk. And that 
is the concern that I have. can tell you about those very 
voices in this town that would have been saying open up those 
opportunities for people to more risk because look what has 
happened, it is guaranteed that it is going to take place.
    Mr. GOODMAN. Well, I can just tell you that among the 
economists who have looked at this, it is virtually unanimous. 
We all feel like that if people are going to invest Social 
Security money in the market, it needs to be a balanced 
portfolio. We may disagree about whether to do it, but 
everybody seems to agree on that.
    Mr. NEAL. Thank you, Dr. Goodman. Dr. Orszag?
    Mr. ORSZAG. I would just add on this point, if the 
investment choices are to be restricted to index funds through, 
as the Administration calls it, a central administrative 
authority, a government agency, many of the issues that have 
been raise with regard to political interference of having the 
trust fund directly invest in the stock market arise almost in 
exact parallel with regard to choosing the index funds. There 
would be people, government administrators, who would be 
choosing the index funds. So, you would be forcing people to go 
into an index fund that was partially in tobacco stocks and 
partially in firms that sponsor abortions and all sorts of 
other things. And then if you start exempting those firms out 
of the index fund, you quickly drive up the administrative 
costs. So, there are a lot of practical questions that come 
with the simple we will just put them into index funds as part 
of Social Security that I do not think have been fully 
explored.
    Mr. NEAL. Thank you. Just a quick follow-up. Chairman 
Rostenkowski at the time was in constant conflict with me as a 
Member of this Committee over individual retirement accounts. 
It was interesting that Chairman Thomas raised the same 
concerns today that I used to raise and that Chairman 
Rostenkowski used to object to, simply that by expanding 
individual retirement account opportunities and other pension 
benefits, that it was the wealthy that took advantage of it. 
And it seemed as though Chairman Thomas and I were in agreement 
on that today. Would you talk a little bit more about how to 
get to those who really need to begin saving?
    Mr. ORSZAG. And, again, it is not just that the high-income 
people take up the opportunity to contribute funds, but that 
those contributions are not actually typically a net addition 
to saving. They are simply transferring saving that would have 
occurred anyway or that already had occurred in other forms 
into the tax-deferred accounts. Therefore, focusing on raising 
income limits or increasing the contribution limits is a very 
misguided way of trying to maximize our bang for the buck in 
terms of providing incentives for new saving. Instead, a lot of 
the things that are in my testimony focused on middle and lower 
earners is the right way to go, making it easier and increasing 
the incentives for middle and lower earners to contribute.
    Mr. NEAL. Thank you. Thank you, Mr. Chairman.
    Chairman THOMAS. Thank you. Does the gentleman from 
Kentucky wish to inquire? And would the gentleman yield very 
briefly?
    Mr. LEWIS OF KENTUCKY. Yes, I will be happy to, Mr. 
Chairman.
    Chairman THOMAS. Dr. Orszag, I appreciate your effort to 
push the argument that the structure of collective funds, for 
example, under Clinton, would produce a result exactly the same 
as a government agency----
    Mr. ORSZAG. I said similar.
    Chairman THOMAS. Similar, used for disbursal. It is amazing 
to me then that under Medicare with government moneys, people 
are able to choose their own doctors. Carrying your argument to 
the end of the analogy, you should not be able to choose your 
own doctors. We should be able to choose the doctors for you.
    Mr. ORSZAG. Mr. Chairman, what I was saying is that in 
order to keep administrative costs low, the point----
    Chairman THOMAS. I understand that, but we have very low 
administrative costs in Medicare, and people still get to 
choose their doctors.
    Mr. ORSZAG. The evidence is clear. Sweden actually does 
what I think you may be talking about, which is it is a 
government--a centralized authority that lets you choose----
    Chairman THOMAS. The gentleman from Kentucky is worried 
about how long we are going to continue the dialog, but I do 
believe----
    Mr. ORSZAG. Your administrative costs go up.
    Chairman THOMAS. The point you have made is one you need to 
be aware of. It does not necessarily drive you to the 
conclusion that you arrived at as something you need to worry 
about. Is that a fair agreement that we can continue to talk on 
that point?
    Mr. ORSZAG. I would be happy to respond in more length in 
writing, but the key point is the administrative costs go up as 
you open up more and more options, and the possibility for----
    Chairman THOMAS. We started talking about options and how 
too many options is not freedom, but chaos. The gentleman from 
Kentucky, thank you very much.
    Mr. LEWIS OF KENTUCKY. Thank you, Mr. Chairman. Earlier, my 
colleague Mr. Stark said that he felt like that Republicans had 
a diabolical plan to destroy entitlements. And let me suggest 
that if we do nothing, in fact, if we just forget this and do 
nothing to address the entitlement problem, entitlements will 
be destroyed. It is just a matter of time. And, Mr. Goodman, 
you talked about that in your testimony, that by the year 2020, 
just 15 years from now, all the revenue going into the Federal 
Treasury will be consumed by entitlements and there will be 
nothing left over for discretionary spending. Mr. McDermott was 
worried about education. Well, there goes the education 
funding; not only education funding but defense funding; not 
only defense funding but--well, we can just go on and on. 
Everything was within the discretionary pie. And by the year 
2040, 2041, the only funding that will go into the Federal 
Treasury will be just on interest on the debt, nothing left 
over for entitlements period. So, there go the entitlements, 
there goes discretionary spending, there goes the economy, 
there goes our kids' future. So, we have to address this 
problem, and that is my question. How soon do we need to start 
addressing this? It seems to me like 15 years is not very far 
out.
    Mr. GOODMAN. I want to draw your attention, everyone's 
attention to Figure 7 of Douglas Holtz-Eakin's testimony. It is 
on page 13, Figure 7. I hate to admit this, but I think it is a 
better graph than my graphs. What he shows is what is happening 
to spending and what is happening to revenues, and you can see 
there the spending line is going off the chart and revenues 
projected to the future, it looks like they remain constant, 
about 18 percent of GDP, but spending goes up by mid-century 
and is above 50 percent of GDP. So, all this talk about how 
Social Security benefits are guaranteed and all these other 
entitlements being----
    Mr. LEWIS OF KENTUCKY. It is ridiculous.
    Mr. GOODMAN. --guaranteed, this line going up the page is 
mainly entitlement spending. That is what that is. It is not 
guaranteed. The funding is not there. But if you found a way to 
fund these programs, then you could have a real guarantee, a 
guarantee that actually meant something.
    Mr. LEWIS OF KENTUCKY. That is right. Eventually there will 
be no way you can tax your way out of it. You cannot grow the 
economy out of it.
    Mr. GOODMAN. That is right.
    Mr. LEWIS OF KENTUCKY. The only way you can do it is 
address it through trying to get people investing in ways that 
will provide compound interest to take care of the future for 
our kids and grandkids.
    Mr. DAUB. If you would go to the Social Security Advisor 
Board, www.ssab.gov, have your staff do that, we are a 
bipartisan board created by this Congress in 1994, and we have 
done an immense amount of work on the issue of sooner rather 
than later and what the consequences are for each year that has 
gone by. We started talking about it in 1998, said we had a 14-
year window; 7 of those years have gone by. And your choices 
become fewer, your options become fewer, and the cost of the 
transfers required for guarantees and every other sort of Rube 
Goldberg kind of idea become very extreme. So, your point is 
well taken, and there is a lot of information that has been 
done by economists. Everybody may have a different point of 
view about how to cobble together a solution, but your point is 
the best one that can be made.
    Mr. LEWIS OF KENTUCKY. Well, let me just say, this is not a 
Democrat or Republican problem. This is an American problem, 
and it is a threat to our country as much as any external 
enemy. Thank you.
    Mr. MCCRERY. [Presiding.] Does the gentleman from Texas, 
Mr. Johnson, wish to inquire?
    Mr. JOHNSON OF TEXAS. Thank you, Mr. Chairman. Thank you 
all for being here. I appreciate it. Earlier, just so the 
charts that were introduced by Representative McDermott are not 
taken as facts, I want to point out that there are no sources 
listed for his information other than his personal staff. I 
think I could probably ask all of you the same question and you 
would come up with correct answers, and I appreciate that. But 
defined benefit pension plans are going down, but I don't think 
that, they started at 60 percent, nor do I think that they are 
above 30 percent today. And the President's plan, he talks 
about destroying retirement security for the middle class. I 
cannot use the Texas word, but it is not true. So, Mr. Goodman, 
or Dr. Goodman, you talk about two ways to pre-fund the 
retirement system: investments managed and controlled by the 
government or by individuals. would like to know what you think 
about the down side of government-invested versus personal 
accounts as a preferred way to pre-fund investment.
    Mr. GOODMAN. Well, after World War II, there were about two 
dozen former British colonies that established provident funds. 
These were four savings plans, and they were different from the 
pay-as-you-go system that we have in this country and that most 
other countries established. So, workers put money into the 
funds. In most of these countries, the governments controlled 
the money and made the investments. Now, the country that did 
the best of this sort of technique was Singapore. Singapore did 
very well. They have used the capital to grow, and it is one of 
the real growth stories around the world. But the other two 
dozen or so did not do well, and part of the reason is it was 
tempting to politicians to take the money and do something else 
with it.
    So, I think if you want to make sure that the capital is 
there, that it is invested, and that you have really secured 
the benefits, you need to give people property rights. And that 
is why I like the individual accounts. In most of the proposals 
that are out there, we are not giving the worker much choice of 
investment. Most of these proposals are for some form of forced 
savings. But the key thing about it is it establishes a 
property right. People can leave it to their heirs. They 
understand it is part of their estate. This is, I think, an 
important part of the reform--not necessary, but I think there 
are huge advantages of individualizing this.
    Mr. JOHNSON OF TEXAS. Well, and personal accounts, in my 
view, kind of force people to provide for their retirement. And 
where there is no exact definition of how the government is 
going to pay for the obligations in the future, as a matter of 
fact the bonds in the file cabinet in West Virginia represent 
only a call on future American taxpayers. And so far in all our 
history, American taxpayers have never defaulted, but we have 
never been asked to make good on such a large obligation before 
either. So, it is imperative, I think, that we find another way 
to do it, and other than personal accounts, I wonder, Mr. 
Holtz-Eakin, if you could tell me what you think the other way 
to do it is to guarantee those funds are paid to the people 
when they retire.
    Mr. HOLTZ-EAKIN. The current system is one that relies on 
the sovereign power to tax to make good on the commitments in 
Social Security and all other programs.
    Mr. JOHNSON OF TEXAS. The good faith of the American 
Government.
    Mr. HOLTZ-EAKIN. A future system would depend crucially on 
the nature of the property right that Mr. Goodman has 
described, whether that sovereign power to tax would stand 
behind any commitment or not.
    Mr. JOHNSON OF TEXAS. And you think the government will, 
and so do I, but we feel and I think everyone feels the way to 
get people savings that belong to them, that is theirs, that is 
inheritable for their future is with personal retirement 
accounts. Mr. Goodman, Dr. Goodman, do you care to comment?
    Mr. GOODMAN. No. I totally agree with you. About 30 
countries now have done this in a better way. They have created 
the individual accounts where there is a property right, and 
investment choices are made by individual workers. Some are 
better than others, and we have put out a whole study, 
examining these 30 countries and giving our opinion on what are 
the best options. But, yes, these 30 countries have all 
recognized that we need to go to a funded system, and the best 
way to go to a funded system is with personal retirement 
accounts.
    Mr. JOHNSON OF TEXAS. Thank you. Thank you, Mr. Chairman.
    Mr. MCCRERY. Thank you, Mr. Johnson. Mr. Becerra, do you 
wish to inquire?
    Mr. BECERRA. Mr. Chairman, I would be willing to yield to 
Mr. Tanner because--I was inquiring of staff, but I would be 
willing to yield to Mr. Tanner, who is prepared to go next.
    Mr. MCCRERY. If you want to, you would then take Mr. 
Tanner's place in line, which is at the end.
    Mr. BECERRA. Oh, then I think I will go next.
    Mr. MCCRERY. That is your choice.
    [Laughter.]
    Mr. BECERRA. Thank you, Mr. Chairman, and my apologies, Mr. 
Tanner. Gentlemen, thank you very much for your testimony and 
your patience. I know it has been a long hearing with votes 
intervening. Let me ask a couple of questions with regard to 
just the numbers that are out there, because I think it is so 
important that we get a sense of where we are.
    My understanding is that today we have through the FICA tax 
workers contributing to the Social Security system quite a bit 
of money, in the several hundreds of billions of dollars, and 
we are paying out quite a bit of money to those who are 
currently retired and receiving survivors' benefits and 
receiving disability benefits, again, quite a bit of money. At 
the end of the year, we are netting more in receipts, in 
revenues from those who are working and paying into the system 
than we are having to pay out. My understand is that the amount 
of surplus for this year, for example, is somewhere around $160 
to $170 billion when you include the interest that is being 
earned on the money that is in the surplus.
    My understanding is as well that we take that money that is 
in surplus, that Social Security has that it is not needing to 
spend today because it has enough to pay beneficiaries, and we 
are seeing the operating side of the Federal budget exchange 
that money, take that cash, and give the Social Security 
Administration Treasury certificates, Treasury bonds in its 
place. That becomes part of the Social Security trust fund. 
That money that has been taken by the operating side of the 
Federal Government is used for any number of purposes--spending 
on our various programs, to make up for the loss of revenues as 
a result of the tax cuts that were passed, to pay for the 
supplemental appropriations for the war in Iraq, and so forth.
    At some point Social Security will redeem those Treasury 
bonds to help pay for the cost of benefits to those who are 
retired, and if all estimates are fairly accurate, that will 
begin to occur sometime around 2017, 2018. If we were to not 
have a Federal Government spending those Social Security 
surplus dollars on non-Social Security activities and instead 
use them to reduce the size of the national debt, the amount 
that we pay interest on, or perhaps to set up a separate 
account, as we have seen it called in the past, the lockbox, to 
reserve that money specifically for Social Security, would we 
be in better shape for Social Security in the long run to be 
able to pay benefits to those who are entitled to receive those 
benefits? ask that of anyone who wishes to respond.
    Mr. GOODMAN. Absolutely, because what we are doing now is 
we are taking the surplus and spending it. We are either 
spending it on tax cuts or other spending programs. And now 
what you are suggesting is instead to use those same dollars 
and invest them. You used the example of buying Government 
securities, but we could do better than that. We could buy a 
portfolio that reflected the market as a whole.
    Mr. BECERRA. But we would take a little bit of risk hoping 
for a better return. But as a collective investment, you are 
saying we might be able to get a better return than just 
putting----
    Mr. GOODMAN. Absolutely, invest in the economy as a whole. 
Absolutely that would help the future because that is savings 
and investment.
    Mr. BECERRA. Thank you.
    Mr. JACKSON. I concur, but the problem is there is no 
procedural way to enforce that lockbox. Respectfully, if the 
government owns the money, the government will find some way to 
spend the money, to borrow against it or otherwise neutralize 
the savings.
    Mr. BECERRA. That gets me to another question I wanted to 
ask, and that is, when we talk about guarantees, am I correct 
to say that today or in 50 years, if the laws of this country 
remain the same, people who were paying into the Social 
Security system are guaranteed benefits by law?
    Mr. JACKSON. Absolutely. Social Security is a legislated 
entitlement, so long as the underlying statute remains in 
force.
    Mr. BECERRA. Now, let me ask you this: In terms of someone 
who has a 401(k), the folks at Enron who were investing their 
retirement moneys in Enron who today have found their company 
go bankrupt and now are unemployed and had their pension moneys 
invested in 401(k) stock in Enron, they are not guaranteed 
repayment of their money, are they?
    Mr. JACKSON. Social Security beneficiaries face the 
political----
    Mr. BECERRA. The question I am asking now has to deal with 
Enron employees, or former employees, I guess we can call them, 
since they are no longer employed by Enron, who had much of 
their 401(k) retirement money invested in Enron stock, and now 
Enron having declared bankruptcy, now paying pennies on the 
dollar, those employees do not have a guarantee that they will 
ever receive what they were expecting to receive in terms of 
retirement benefits through their 401(k) plan invested in Enron 
stock.
    Mr. JACKSON. They have no more guarantee than my children 
have that they will receive their Social Security benefits.
    Mr. BECERRA. I thought you just told me that there was a 
guarantee--unless you are saying that someone in Congress is 
going to change the law----
    Mr. JACKSON. Congress has changed the guarantee repeatedly 
since 1983 and always making the system less generous.
    Mr. BECERRA. It would take an act of Congress. So, until 
the politicians change it, there is a guarantee in Social 
Security.
    Mr. GOODMAN. May I answer your question?
    Mr. BECERRA. I yield back.
    Mr. GOODMAN. May I answer your question?
    Mr. BECERRA. Actually, I have run out of time.
    Mr. MCCRERY. The gentleman's time has expired.
    Mr. BECERRA. I thank the Chairman for yielding me 
additional time.
    Mr. MCCRERY. You are quite welcome. I do want to clear up 
one thing, though, Dr. Holtz-Eakin, because Mr. Becerra last 
week 2 days ago in our Subcommittee hearing raised this same 
question about the surplus being spent for other things. And, 
again, he used the figure $160 billion. That includes interest 
that is credited on paper to the trust fund. It is not cash, is 
it?
    Mr. HOLTZ-EAKIN. That is correct.
    Mr. MCCRERY. And so what it the actual cash surplus that we 
are spending on other things from the Social Security trust 
fund?
    Mr. ORSZAG. It is about $90 billion.
    Mr. HOLTZ-EAKIN. I think it is 80 or 90----
    Mr. ORSZAG. The interest in 2005 is supposed to be $91 
billion.
    Mr. MCCRERY. I believe the cash amount is $69 billion.
    Mr. BECERRA. Mr. Chairman, may I inquire something of the--
--
    Mr. HOLTZ-EAKIN. This year.
    Mr. MCCRERY. This year.
    Mr. HOLTZ-EAKIN. 2004 or 2005.
    Mr. MCCRERY. 2005 is projected to be $69 billion cash that 
will come from----
    Mr. HOLTZ-EAKIN. It is clearly in the right ball park. We 
can get the exact number for the record.
    Mr. MCCRERY. That is the Social Security actuary's 
estimate. CBO's may be slightly different.
    Mr. HOLTZ-EAKIN. It happens.
    [Laughter.]
    Mr. MCCRERY. But, in any event, you cannot count the 
interest that is credited to the trust fund when you are 
talking about cash transfer from the trust fund to general 
revenues.
    Mr. BECERRA. But, Mr. Chairman, if I can clarify, if I 
understand what you are saying, I think I recognize what you 
are saying in terms of the actual transaction that occurs. The 
cash that is being received in excess of what is needed to pay 
out is about--I think we just said about $69 billion or so.
    Mr. MCCRERY. Right.
    Mr. BECERRA. But there is interest that on a daily basis is 
accruing to the trust fund from all the other surpluses that 
have been deposited through Treasury bonds.
    Mr. MCCRERY. That is correct.
    Mr. BECERRA. think most people would say, wait a minute, if 
I put money in a bank and I am told I am going to earn 
interest, it may not see it as money that I put in, but it is 
still money I am earning. So, I hope we are still saying that 
it is still money that Americans have earned on their Social 
Security moneys that they----
    Mr. MCCRERY. The trust fund is credited on paper with that 
amount in interest, but it is not cash that the general fund 
can spend.
    Mr. BECERRA. Right, but it is backed by the same full faith 
and credit that the principal balance----
    Mr. MCCRERY. Yes. No question about it.
    Mr. BECERRA. Okay. Thank you, Mr. Chairman.
    Mr. MCCRERY. Yes, sir. Thank you. Mr. Beauprez?
    Mr. BEAUPREZ. Thank you, Mr. Chairman. Gentlemen, thank you 
very much for being with us today. This has been a great panel 
and a good exercise. I feel compelled to respond to the 
gentleman, Mr. Stark, from California earlier who, I think, if 
I heard him correctly, implied that everybody on this side of 
the dais somehow was here by the good favor of some generation 
that came before us, the luck of birth or some inheritance. I 
assure you that whatever I have in my balance sheet, I earned 
it, sitting under cows and taking risks as a businessman, and I 
am rather proud of that. So, I think I have some sense from 
personal experience of what I am about to address and probably 
take a little different direction than we have been going.
    I learned a lot from personal experience, but I also 
learned a lot from watching my father, who had but an eighth-
grade education, but I submit to you was a fairly wise man. he 
thought that there was quite an advantage in owning what you 
wanted to call your own and taking considerable personal 
responsibility for your own outcome and your own food, shelter, 
and clothing, as well as those who you brought in the world, 
the four children that he brought in, including myself, 
obviously.
    I learned a lot from him. He did work very, very hard and 
very, very long to own something, first a house, and then a 
little piece of dirt that he called a farm, and some cattle and 
some equipment, and he provided for himself. It seems to me, 
the point I would make, that as the Chairman has done, the 
Chairman of this Committee has attempted to do, I think, in 
this dialog we are having about Social Security reform, to 
expand that to retirement security reform, I think it is very 
analogous to the lesson my Dad tried to teach me all my life, 
that you save for, frankly, the unknown. It is the ultimate 
uncertainty how long we are going to be here and how much it is 
going to cost us to maintain ourselves here.
    Quite naturally, I think here on Capitol Hill within this 
Committee we look for government solutions, but I think part of 
those Government solutions are sound, broad, expansive economic 
policy that address the possibilities for ownership, because 
given the opportunity, I think the masses of people out there 
right now--I used to run a bank. I was always perplexed how 
difficult it was to get deposits. Why don't people want to come 
in and open a savings account that pays them 1.2 percent 
interest, or a CD that might pay all of 2 or 2.5 percent 
interest? Why do they seem compelled to do other things with 
it, like buy a house? Homeownership is at an all-time high in 
this country. I think that is a good thing. Over the history of 
our country, that would, I think, prove to be one of the wisest 
investments anyone could make for their own security.
    My question to you all, and I will just invite whomever to 
respond: I think what you have said over and over again here 
today collectively is that, as you are planning for retirement, 
a funded as opposed to an unfunded liability--and I will say 
the liability here is the expectation that you are going to 
need some kind of resources out there to sustain your needs and 
your lifestyle. So, that a funded liability is preferred to an 
unfunded liability. What are we missing in the macro here? Some 
have suggested that the tax cuts that I think were an attempt 
to get the economy going again were a bad idea. Some have 
insisted that we, in fact, take a possibility of funding some 
of the Social Security liability off the table before we even 
discuss it. I find that a bit preposterous. But tell me what 
are we missing in the macro sense that might stimulate and 
address this possibility of funding that future liability?
    Mr. DAUB. Let me quickly here, because I do have to go, as 
the Chairman said a minute ago. I have to catch a plane. I am 
sorry that I cannot stay longer. I will take the lead from your 
comment about how we incented home ownership in this country. I 
said in my prepared remarks just briefly, with detail in my 
extended remarks that, for example, we should incent the 
ownership of a long-term health care insurance policy in the 
same way that we revere and have incented home ownership. And 
if we did that, you would take the pressure off of the need for 
an increasing percentage of public funds to be moved around in 
Social Security, Medicare, and Medicaid. And it could be done, 
for example, just in 30 seconds, with an idea that says that 
whether it is a 401(k) or a 403(b) or TIAA-CREF or whether it 
is a mutual fund or an IRA, Roth or regular IRA, whether it is 
an MSA or an HSA, the gain of dividends or income that is 
either tax-deferred or tax-free, Roth IRA, could be used to buy 
a long-term care insurance policy, health insurance policy, 
with content restrictions, 36 months, home health, and you have 
to start it by the time you are age 50 to get your tax break. 
And those particular funds have already been calculated as 
revenue foregone in the Tax Code. We already have those savings 
instruments in place. The revenue has already been foregone, so 
if you just take the gain and use it for that purpose, you 
would move a huge amount of pressure in the next 20 years off 
of the need. And it would take 20 years to do it, but it would 
be a way to start.
    Mr. ORSZAG. If I could just have the Chair's indulgence for 
30 seconds, I think the thing that has been overlooked is 
precisely what Mr. McCrery and I discussed earlier, which is 
simply issuing debt to finance individual accounts does not 
raise national saving. It should not be referred to as 
``funding'' in any way. And so, therefore, what we are really 
talking about is are we willing to raise revenue to have 
additional revenue going into individual accounts or have some 
offsetting other changes to raise national saving, because in 
the absence of that it is a mirage and we are playing--it is 
like a cruel hoax on the American public.
    Mr. MCCRERY. Well, we didn't exactly agree on the specifics 
of what you just said. I agree that it is not net national 
savings if you don't come up with a new revenue source to fund 
them. But it is technically funding in isolation of the Social 
Security system.
    Mr. ORSZAG. Yes, but I think----
    Mr. MCCRERY. Which is it not now.
    Mr. ORSZAG. I agree, but the distinction is that type of 
funding is not particularly important.
    Mr. MCCRERY. I agree--well, I cannot say that yet. Mr. 
Doggett?
    Mr. DOGGETT. Thank you very much, Mr. Chairman. And with 
due respect to the thoughtful testimony of our diverse 
witnesses, I really believe that this hearing should be more 
truthfully entitled the hearing on thin sugar coatings, because 
Chairman Thomas has made it clear that perhaps the next time 
that this Committee convenes, within a matter of a very few 
weeks, less than a month, he will have his proposal out there, 
the centerpiece of which would appear to be individual accounts 
that result in significant cuts to future Social Security 
beneficiaries. It is a plan to replace Social Security as it 
has served generations of Americans over the last many decades, 
and it is based on an ideological commitment that our colleague 
from Washington referred to a few minutes ago that the solution 
to all the problems in our society is me, not we, that we 
cannot come together and find community solutions to problems 
like how we assure the dignity for our seniors in their golden 
years.
    This morning, we had an opportunity to see again that that 
is the central purpose of this gathering, just simply how you 
will find a way to provide enough cover for the dismantling and 
replacement of Social Security by adding on a variety of other 
retirement issues when Chairman Thomas responded to Mr. Neal's 
question--or didn't respond to Mr. Neal's question that if 
there weren't sufficient votes in this Committee or in the 
House to institute and impose these private accounts and the 
privatization of Social Security here, would he guarantee us 
that it will not be done in conference Committee, as is being 
widely discussed here in the halls of Congress. And, of course, 
we got no answer to that, indicating just as with the 
President's continual pursuit of private accounts, that is 
exactly where they are headed. Just this time last week, the 
lead witness for this Republican plan to cut Social Security 
benefits, Mr. Posen was sitting here and he did not discuss it 
at that time, but he came over here to Capitol Hill yesterday 
and indicated that he thought this private individual account 
program that the President is advocating, the House Republicans 
have come behind, is a mistake and that it ought to abandoned 
and that we ought to pursue strengthening Social Security and 
looking at the alternative ways of strengthening and preserving 
Social Security first before getting into the question of 
privatizing Social Security, as the President has insisted we 
must do. Indeed, he has insisted that it be a precondition to 
any negotiations and discussions on Social Security, as our 
Ranking Member indicated last week.
    I believe that if the goal is to encourage the 
participation of more Americans who do not have participation 
now in retirement plans of any kind in having a retirement to 
supplement Social Security, if that is the goal rather than the 
ordinary typical objective of this Committee for years, which 
is to comfort the comfortable, if it really is the goal to help 
people who don't have retirement get a more secure retirement, 
then this Committee and this Congress has done a pretty lousy 
job, because there were reports earlier this year that we now 
have more being expended in tax expenditures drawn out of the 
Treasury as incentives for retirement plans than total 
retirement as a result of those incentives. In other words, it 
costs the Treasury more money to have all these great 
incentives and promotion for individual retirement initiatives 
than gets saved. And the reason for that is because many of the 
comfortable simply find a way to shift, as is a reasonable step 
for anyone who has got the resources to do it, to shift savings 
they otherwise would have into tax-benefited plans. And, 
therefore, we have not targeted our resources toward helping 
those who need retirement the most. Now, Dr. Orszag, you 
referred to another study, and I think, though I don't want to 
cause him any harm by praising them, that H&R Block is to be 
commending for participating in this study. I have just read 
kind of the summary of it, but I want to ask about that 
attempt. It sounds a lot like the kind of incentives that we 
proposed here in this Committee, I think a proposal that Mr. 
Cardin had some years ago. Of course, every Republican Member 
voted against it when we proposed doing something to help those 
who lacked retirement plans to supplement Social Security. But 
you are referring to a plan where incentives were given to the 
working poor and to middle-class families to be able to set up 
individual retirement accounts.
    Mr. ORSZAG. That is right. There is a common hypothesis out 
there that middle- and low-income households will not save 
because they do not have any disposable income. And so this was 
a randomized experiment, sort of the gold standard of these 
kinds of analyses, in which individuals were offered different 
match rates, and what you saw was that a 50-percent match rate 
which was clear, transparent, and well presented generated a 
very substantial and meaningful increase in saving, in 
contributions to IRAs, even among moderate to lower owners.
    Mr. DOGGETT. So, there are ways to try to target relief to 
those who need it the most in terms of retirement security 
without dismantling the Social Security system, as President 
Bush and our leadership here in the House would want to do.
    Mr. ORSZAG. I think we need to make it easier for 
households to save and increase the incentives for middle to 
lower earners to do so, and there will be a significant 
response if we succeed in making those policy changes.
    Mr. DOGGETT. Thank you very much.
    Mr. MCCRERY. Thank you, Mr. Doggett. I would point out to 
the gentleman from Texas that I do not believe the leadership 
in the House, nor anyone on this Committee, has said any such 
thing, that we wish to somehow reduce the benefits of the most 
needy under Social Security. In fact, we are listening 
carefully, as we did in my Subcommittee on Tuesday. The whole 
Subcommittee hearing was dedicated to vulnerable populations 
under Social Security and how they should be protected. So, I 
take the gentleman's point. I appreciate his contribution to 
the discussion, and we will certainly endeavor to heed the 
gentleman's advice.
    Mr. DOGGETT. Well, let me just say, Mr. Chairman, you may 
confuse two points I am making. One of them is that when it 
comes to incentives to encourage people to plan for their 
retirement outside of Social Security, I don't think--and that 
has not, I think, been a focus of your work on Social Security.
    Mr. MCCRERY. Not yet.
    Mr. DOGGETT. --that this Committee has done a very good job 
this year or in any prior year, and the data shows that it is 
costing us more than we----
    Mr. MCCRERY. That is a different point. The gentleman, 
though, made a reference to the leadership of the House in 
wanting to take Social Security benefits away from the most 
needy, and no one has suggested that.
    Mr. LEVIN. Well, let me just say I think some people have.
    Mr. MCCRERY. I am sure some people have.
    Mr. LEVIN. Including people--including Republicans on this 
Committee.
    Mr. MCCRERY. Including Dr. Orszag and his----
    Mr. LEVIN. No, no.
    Mr. MCCRERY. Yes, he--you were not here, unfortunately, for 
the questioning from Mr. Hulshof, and Dr. Orszag said that for 
retirement benefits there was no cohort that would be held 
harmless from reductions in benefits under his plan. So, that 
is true. There are those who have suggested that.
    Mr. LEVIN. And that is across the board----
    Mr. MCCRERY. believe Dr. Orszag is the witness requested by 
the minority. Now, Mr. Pomeroy, would you like to inquire?
    Mr. POMEROY. Yes, Mr. Chairman. Thank you. I think this has 
been an absolutely superb panel, and I commend each of you for 
your participation in its. It seems to me that within this 
panel we have been able to see dimensions of the debate. On the 
one hand, the macroeconomic visions, especially spoken to by 
Dr. Jackson and Dr. Goodman about difficulty in sustaining what 
we have got going forward. On the other hand, we also had 
information, especially from Dr. Orszag and Dallas Salisbury, 
regarding how all this lands on the individual, the 
microeconomic impact of all of this. think obviously that is 
where this Committee has to spend a lot of time thinking about, 
because if we form a response, it is only for the government--
from the Government perspective, we may very well be at odds 
with what the individual needs by way of protection. 
Specifically, Dallas Salisbury said--I want to go across the 
panel and hear your reactions to it--that the risk of living 
too long is increasingly being borne by individuals. Dr. 
Goodman, quickly please, agree?
    Mr. GOODMAN. Sure, but it is not because of a change in 
Government----
    Mr. POMEROY. Okay. Dr. Orszag--I am not asking about that. 
Actually, you and I could have quite a visit about that, but I 
am not going to--that is not my----
    Mr. ORSZAG. Yes.
    Mr. POMEROY. Is the risk of living too long being 
increasingly borne by individuals?
    Mr. ORSZAG. Yes.
    Mr. POMEROY. Dr. Jackson?
    Mr. JACKSON. Yes.
    Mr. POMEROY. Dr. Holtz-Eakin?
    Mr. HOLTZ-EAKIN. I guess yes. Who else would bear it?
    Mr. POMEROY. All right. I believe that this is something we 
really have to worry about. There is a 50/50 chance a couple at 
the age of 65, one of them is going to reach the age of 92; and 
there is a 25-percent chance one of them is going to reach the 
age of 97. And so things that do not really look at how we 
continue to meet the income needs of these people through their 
longevity expectation would fall far short of what the American 
people require. And in the end, if we do not get it right, we 
are going to have to build public service systems to deal with 
those that are very old, very sick, and very broke. And so we 
might as well get it right. But to me this is not a matter that 
ought to be driving an ideological wedge between the sides of 
the aisle here. People are living longer. How do we deal with 
it?
    It is my belief that the way we deal with it is shoring up 
an income stream so they have a cash flow that is dependable 
through their life expectancy. How do you do that? Well, 
essentially, the key is an annuitized payment, a regular 
payment delivered. How do you do that? We have 20 million 
people receiving the benefit of defined benefits plans--
pensions, the old pensions. It is a smaller amount than before, 
but it is still a significant number. I do not believe the 
Department of Labor places a public policy importance on 
continuing pensions. I believe they pay more attention to 
shrinking the exposure of the Pension Benefit Guaranty 
Corporation. I believe that their proposals are wrong-headed 
and would reduce pension coverage, thereby reducing the annuity 
coverage. I think that this Committee needs to help straighten 
that out. Pensions ought to be continued to the extent we can.
    Second, we need to save more. I think that we could maybe 
have bipartisan agreement on this Committee for the automatic 
enrollment proposal Dr. Orszag has talked about and others have 
talked about. I think maybe we could make some headway there. I 
also think we need to look at helping people convert a defined 
contribution plan so it has the defined benefit-like annuity 
stream. We ought to make annuity purchasing more affordable, 
more attractive to people at the time they enter retirement 
years with their nest egg. That certainly lays then the 
longevity risk off of their shoulders and into a pool, a better 
way to manage that risk.
    I also think inevitably we need to understand that Social 
Security plays an incredibly important role here. Social 
Security, as a defined benefit annuity that you cannot outlive, 
inflation adjusted, it is an absolutely key part of the 
longevity puzzle, and that proposals that move toward 
privatizing inevitably--well, may have some--you can certainly 
sketch out some benefit to the Treasury. But for the 
individual, it leaves them even more exposed than they are now. 
And we have panel consensus that people are carrying more and 
more risk now. Any meaningful solution should not take the risk 
people now have and make it worse by in the end reducing the 
security of Social Security for them. And so I think as a 
matter of policy priority going forward, this panel has 
illustrated the task in front of us. Dr. Orszag?
    Mr. ORSZAG. I would just add that especially as the pension 
system has evolved from a defined benefit one toward a defined 
contribution one, I understand concerns that you and many other 
people have about that. It makes ever less sense to engineer 
the same transformation within the core tier of retirement 
income provided by Social Security. In other words, having that 
defined benefit foundation is more valuable as the pension 
system on top of that foundation has evolved toward a 401(k)--
--
    Mr. POMEROY. Exactly. The exchange----
    Mr. MCCRERY. The gentleman's time has expired. The 
gentleman's time has expired.
    Mr. POMEROY. Can somebody comment?
    Mr. MCCRERY. The gentleman used his entire 5 minutes to 
make a speech, which I appreciate, but his time has expired. 
Ms. Hart?
    Mr. POMEROY. I yield back.
    Ms. HART. Thank you, Mr. Chairman. My colleague mentioned 
to me, when did living to an old age become a risk? think one 
of the things that the panel neglected to mention when talking 
about retirement security and the real demographic changes, one 
of them is that, unfortunately, people are not taking 
responsibility for their parents. That is a problem, and maybe 
we ought to think about what Government can do to encourage 
families to be families. But that is an issue that maybe we 
will have to address another time.
    Defined benefit plans, which were very common for a very 
long time, and especially in areas like mind, are falling apart 
in the news every day. We see that. Increasingly, 401(k)-type 
plans are becoming more the rule. I held a forum about 10 days 
ago in my district--actually, I did not hold it. I was a 
speaker, along with a Democrat colleague and an economist. And 
it was before the local organization for Certified Employee 
Benefit Specialists. And the most alarming thing that came out 
of that forum was their number one concern, they said that in 
practical terms people are not taking advantage of the 401(k) 
retirement plans that are being offered to them. To some 
extent, they are, but not nearly as much as they should; that 
they are not putting enough aside or taking enough advantage, 
even, surprisingly, of the kinds of plans where the employers 
are matching their contributions to meet the kind of benefits 
that they should have for retirement. I guess my question to 
the panel is: Specifically in 401(k)s and plans that, we are 
becoming increasingly dependent upon, the people will become 
increasingly dependent upon, what can we do to encourage more 
participation? Anybody from the panel.
    Mr. ORSZAG. I think the answer is very clear. I think we 
know what gets participation up, and it is changing the default 
so that workers are in the plan unless they opt out as opposed 
to having to sign up. It is as simple as that. You see very, 
very substantial increases in participation, and, again, this 
is, I think, something that we can get bipartisan agreement on, 
and we can make the changes that would help encourage more 
firms to have that kind of opt-out system instead of putting 
all of the onus on workers to sign up for the plan.
    Ms. HART. Okay. Anybody else? Dr. Goodman?
    Mr. GOODMAN. Well, Peter and I have made this proposal 
together. There is also another very important component, and 
that is encouraging those who are in those plans to have the 
right kind of portfolio, a balanced portfolio. No one is forced 
to do that, but they should be encouraged to do that. And if 
they do not choose one on their own, that should be the 
default, because how you invest is as important as whether you 
invest.
    Ms. HART. The issue that was discussed earlier about people 
going into what they think is safe company stock, that sort of 
thing.
    Mr. GOODMAN. Exactly.
    Ms. HART. Okay. Thanks.
    Mr. HOLTZ-EAKIN. Congresswoman?
    Ms. HART. Dr. Holtz-Eakin?
    Mr. HOLTZ-EAKIN. If I could make the economist's point, 
which I must, about the fact that, 401(k)s or defined 
contributions are compared to defined benefits. And let me just 
say, since it is the jurisdiction of this Committee, that one 
of the issues with defined benefit plans is that if the 
playingfield is not level, they will wither away inevitably. 
And it may be that some workers want their compensation in that 
form and prefer it to the defined contribution, and others may 
not. But the question is: Does the policy leave the 
playingfield level? At the moment I would say a concern would 
be that many of the DB plans went down because the industries 
they are in have changed dramatically. And if it is the case 
that in the rethinking of the funding rules or the premiums in 
the PBGC you charge new plans that are in good shape the costs 
of what is sunk and over and done, you will overcharge them for 
their insurance, and you inevitably will make DB plans less 
available. And that is a key----
    Ms. HART. I think that is the point that Mr. Pomeroy made. 
It is fair.
    Mr. HOLTZ-EAKIN. I think it merits reflecting.
    Ms. HART. Okay. Dr. Jackson is quiet.
    Mr. JACKSON. I think there is an obvious way to increase 
worker participation in defined contribution savings plans, 
which would be to include a defined contribution savings 
component. would make this on a mandatory basis within the 
Social Security system, just to circle the debate back around. 
I also wanted to make the point that I think it is a non 
sequitur to argue that shifting to a defined contribution or to 
a personal account basis necessarily increases longevity risk. 
It depends on whether you are allowed to cash that out as a 
lump sum and spend it. Certainly account balances could be--
mandatory annuitization of account balances could be required. 
So, I thought that needed clarification.
    Ms. HART. Thank you. also want to refute something that Dr. 
Orszag said earlier, and briefly, Mr. Chairman, if I may.
    Mr. MCCRERY. Briefly.
    Ms. HART. Borrowing to set up accounts, personal accounts 
under Social Security, isn't a hoax of any kind. I think 
borrowing to just throw more money into a pay-as-you-go plan 
which provides people with no security for the future really is 
where you have a hoax. It is really like borrowing money to buy 
a house. You end up with a real asset, whereas under the 
current plan, you just do not get that.
    I yield back, Mr. Chairman.
    Mr. MCCRERY. Mr. Thompson?
    Mr. THOMPSON. Thank you, Mr. Chairman. I would like to 
thank all the panel Members for being here. In Mr. Salisbury's 
written testimony--and I think it was reiterated by the 
Chairman in his opening comment--there was much said about 
people not taking full advantage of all of the retirement 
options that are currently available in the marketplace. And 
given this, I am having a real hard time understanding how 
privatizing Social Security is going to enhance or even protect 
retirement security. They already have options that they are 
not taking advantage of, and to provide more, I do not 
understand how we get to where some think we are going.
    Moreover, while I greatly appreciate some of the things 
that my colleagues and friends on the other side of the aisle 
are talking about, specifically this increase in personal 
ownership, I do not believe it is particularly forthright to 
minimize the corresponding increase in risk. There is a lot of 
talk about increase in personal ownership but very little about 
that corresponding risk that is associated with that. think 
this becomes even more germane now when you have situations 
such as the United action earlier, United Airlines action 
earlier this week, and many folks are saying that this may be 
just the prelude to other old-time industries and what may be 
happening down the line. So, in saying that, I guess I'll ask 
my first question, and I was hoping Mr. Salisbury would be 
here, so, Dr. Orszag, so I guess you get the question because 
he left early. But in his testimony, he said, and I will read 
this: ``Decades of data underlying the compulsion in savings 
and distribution produced better retirement income results than 
open individual choice. If the policy objective is choice, that 
doesn't matter. If the policy objective is lifelong retirement 
income adequacy, it does matter.'' Do you think that the goal 
of Social Security is to provide people with adequate lifelong 
retirement? And given that people are saving very little, do 
you think that fewer people will achieve this lifelong income 
adequacy without some sort of guaranteed annuity such as Social 
Security?
    Mr. ORSZAG. One of the primary goals of Social Security is 
to provide the foundation for an adequate and comfortable 
retirement. Regardless of what we do to the Social Security 
program, more will be required for the vast majority of the 
workforce on top of Social Security, and that is why I think it 
makes sense, in addition to shoring up the system, to encourage 
more retirement saving on top of that foundation rather than 
within it.
    Mr. THOMPSON. And also in some of the written testimony, 
and also in these hearings that we have had in the last couple 
of weeks, a lot has been made of the personal debt that people 
in the workplace have incurred. And the numbers are absolutely 
staggering. The average family has about $10,000 to $12,000 in 
credit card debt, and it just seems to be exacerbating the 
situation on almost a daily basis. How hard is it going to be 
for people to achieve retirement security with this level of 
debt? There has got to be some nexus between the two.
    Mr. ORSZAG. Again, I think it underscores--that is just one 
aspect of the fact that people are not--too many people are not 
saving adequately for their own retirement, and that is one 
manifestation of it. And the flip side, by the way, with regard 
to the Government and coming back to the comments about 
whether--characterizing different kinds of systems, having the 
government issue more debt to create what appears to be a 
funded system, we can call it either a hoax or something else, 
but it is not actually contributing anything to making the 
future economy more productive or providing resources in the 
future for future retirees.
    Mr. THOMPSON. Thank you. Director Holtz-Eakin, I saw one of 
the most interesting charts that I have seen to date. It comes 
from one of Dr. Orszag's colleagues where they show Tom and 
Jane, who basically have the same program in a privatized 
account. They have the same return, the same investment. The 
difference is that each has one bear year. Jane has her bear 
year in the first year, and Tom has his bear year in the year 
before his retirement. And as a result, according to this 
chart, Tom's investments really take a tumble, and he retires 
with a lot less than Jane. Is this accurate? And is this 
something that could actually happen in real life? And if it 
did, what would that mean for the person who has the bear year 
in their last year as opposed to their first year where they 
can recover?
    Mr. HOLTZ-EAKIN. Certainly there are risks that are 
unpredictable in any investment, and the timing of those risks 
will determine the cumulative return. If the cash-out date is 
fixed and you are hit with an adverse shock during a fixed 
cash-out date, then you will suffer the consequences. You will 
have no way to shift that risk in any way. So, the alternatives 
are to find a mechanism to shift it, either within yourself, 
wait later to cash out, or to have a mechanism to shift it 
across people, so shift through time using the government or 
some private entity to borrow and lend.
    Mr. JACKSON. We would be foolish as individuals to have all 
of our money in equities in the year before retirement, and I 
think Congress would be foolish to fashion a personal accounts 
reform that allowed individuals to do that. Personally, I would 
like to see some sort of a life cycle or life balance approach 
be made mandatory. That said, it is entirely possible to 
structure portfolio allocation shifting from equities when you 
are young into bonds when you are older that protects retirees 
and near-retirees against a stock market crash on the magnitude 
of----
    Mr. THOMPSON. So, this would only be a portion of----
    Mr. MCCRERY. The gentleman's time----
    Mr. JACKSON. Sir, I haven't----
    Mr. GOODMAN. May I have 10 seconds?
    Mr. MCCRERY. Yes.
    Mr. GOODMAN. In the Chilean system, you can, up to 10 years 
prior to retirement, lock in an annuity. And even after the 
retirement period, you do not have to lock it in on that day. 
You can just go along with your fund and wait until things get 
better. So, it is not the case that you have to on a single day 
lock in to whatever the market is offering.
    Mr. MCCRERY. I thank the gentleman. Mr. Chocola?
    Mr. CHOCOLA. Thank you, Mr. Chairman.
    Chairman THOMAS. Would the gentleman from Indiana yield 
briefly?
    Mr. CHOCOLA. Certainly.
    Chairman THOMAS. I thank the gentleman. And when we talk 
about a bear year, I immediately think of an Oriental calendar 
in terms of whether you are a bear or an ox or whatever. The 
irony of that, of course, is based upon the changes that have 
been made, for example, the age change in 1983 or any other 
period, especially some of the changes we are talking about 
now, you could be in the Social Security system and, in 
essence, have a ``bear year'' based upon which year you were 
born, because changes go into effect and somebody on the other 
side of that bear year does not get as much in terms of 
benefits as the person on the other side. And to the degree you 
have accounts which move from aggressive when you are younger 
to very conservative when you are older, that bear year, the 
year before you retired, could very well have less of an effect 
in an open market pattern than inside Social Security based 
upon the kind of conditions we would make from year to year. 
So, I think it is useful to talk about bear years, but there is 
no free lunch. I thank the gentleman for yielding.
    Mr. CHOCOLA. Thank you, Mr. Chairman. Just real quick, Dr. 
Holtz-Eakin, you pointed out the defined benefit plans have 
changed in large part because of the industries that sponsored 
them have changed. So, long as you had a prudently designed 
defined contribution plan that did not have too much of one 
company's stock in it, it is not tied to the fate of the 
employer, is it?
    Mr. HOLTZ-EAKIN. That is correct. They are portable across 
firms, and so it would not be tied to the firms' fortunes. In 
the interest of balance, had those plans been fully funded, the 
same would be true. They would not be tied to the fortunes of 
the firm or the industry per se.
    Mr. CHOCOLA. Thanks. In my relatively short time--I 
appreciate all your patience for sticking around. Those of us 
sitting here in the middle of the front row really appreciate 
patience a lot.
    [Laughter.]
    Mr. CHOCOLA. I have not been in government that long, and 
what I have learned in my short term in government is the enemy 
of good Government is 30 seconds. And this is much more than a 
30-second problem to discuss. And so we kind of become 
subjected to sound bites when it comes to discussing solutions, 
and one of the sound bites we hear--and we have talked about 
this already today--is that there are rock solid guaranteed 
benefits under the current system. Do any of you want to argue 
that that is, in fact, true?
    Mr. ORSZAG. I think that there is a very solid guarantee 
that is provided in the defined benefit form from the current 
system, precisely because I don't think--coming back to Mr. 
Thomas' comments, you do not see very drastic changes. Any 
changes that are made are always very, very gradual and, 
therefore, anticipated well ahead of time. And so for anyone 
who is nearing age 60 or 61 or 62, at that point it is 
guaranteed. You do not get that kind of guarantee under any 
kind of account system.
    Mr. CHOCOLA. I think the Supreme Court said there is no 
legal right and that we can change the benefits. But let me----
    Mr. ORSZAG. You could also change the tax law on accounts. 
So, it is easy to----
    Mr. CHOCOLA. Let me--one of the other sound bites is that 
we tend to hear criticism of a single element in a vacuum, of 
personal accounts or progressive indexing. You pick whatever 
the suggested solution might be. When, in fact, I think a broad 
retirement fix is needed, it is going to take a package of good 
ideas to address this issue responsibly. Then if you want to 
talk about the wisdom of a broad retirement fix or a package of 
good ideas and probably the lack of wisdom of focusing on one 
element in a vacuum.
    Mr. GOODMAN. I would, starting with this issue of what is 
really guaranteed, and I want to point everybody's attention 
again to Figure 7 on page 13 of Doug Holtz-Eakin's testimony. 
And whatever we have done in the past, it did not matter very 
much because spending was pretty close to revenue so we could 
handle it. But we are about to hit the tsunami, and the 
spending line is going off the page, and it is almost all 
entitlement spending. Well, there is no way you can say that is 
a guarantee because you do not have the revenue, and that is 
the future we are looking at. So, yes, you need a broad 
approach and it needs funding and it needs funding of the 
public programs, but it needs additional funding in the private 
sector.
    Mr. ORSZAG. would just add, if we are not going to get 
Social Security reform done this year because of disagreements 
over accounts within Social Security, we could at least make 
the 401(k) and IRA system work a lot better. Why don't we just 
come together and do the stuff we agree on?
    Mr. CHOCOLA. Well, Dr. Goodman, we are running out of time, 
but you have talked about 30 other countries have created 
property rights, which is more of a guarantee, a property 
right, I would say. Do you have any quick kind of comments on 
lessons we should keep in mind and have learned from what other 
countries have or haven't done?
    Mr. GOODMAN. Yes. The guarantee from the private accounts 
comes from the fact that funds are in the accounts. So, defined 
contribution funds are always funded, by definition, and they 
are replacing promises, the unfunded promises of governments. 
And the reason 30 countries have done this is because they 
realized they could not keep their promises, and they did not 
want to reach a point where people were without any retirement 
funds.
    Mr. JACKSON. Two points, two lessons. One, make the system 
mandatory. It is difficult to see what the purpose of being 
able to opt in or opt out or what the purpose of choice is in a 
system that is fundamentally designed to protect people against 
bad choices. Mandatory I think is important. And, second, wise 
regulation, the kind of portfolio allocation rules that we were 
talking about, the kinds of annuitization rules that we were 
talking about. Countries that have enacted these have had a 
better experience than countries that have not.
    Mr. HOLTZ-EAKIN. If I could just remind the Committee as 
they head into what may be thinking about legislation, you can 
only think of a plan in its completeness, and the details 
matter, and you cannot evaluate any tiny aspect of it in 
isolation. It is really important to look at the whole, 
evaluate the whole and see how all the pieces interact.
    Mr. CHOCOLA. Thank you all. I yield back, Mr. Chairman.
    Mr. MCCRERY. Mr. Emanuel?
    Mr. EMANUEL. Thank you, Mr. Chairman. To pick up on what a 
number have said in the sense have we looked at both the Social 
Security side of retirement and the non-Social Security side of 
retirement, and then also expanding the debate on the whole 
notion of retirement security, as we all know, more and more 
people in retirement days are spending more and more of their 
Social Security checks and retirement checks on their health 
care. So, looking at the health care portion as well as how to 
save for retirement should be part of this. Now, in the art of 
politics and the art of compromise and trying to get something 
done rather than not, I want to pick up on what Mr. Orszag and 
others have said about the kind of non-Social Security 
retirement. Because if you look at the political landscape--and 
you cannot remove politics from a political process, and that 
is, we should take what we can get done, get that done, and 
then come back or form a debate that is not politicized.
    Now, having been the sponsor of both, I think, the direct 
deposit of tax refunds into savings accounts, because there is 
one time that you can get a great deal of money put into 
savings. The automatic enrollment in 401(k), we all talk about 
that. R.R. Donnelly in Chicago went from about a 53-percent 
participation, when they installed the automatic enrollment 
went up to 94-percent participation, and the greater increase 
was among support staff and those making in the moderate-income 
level. That is where they got the dramatic increase. And not 
only that, the automatic enrollment includes, as you get, 
obviously, pay increases, and so forth, you go from a 3-percent 
contribution, 4-percent, it automatically steps up. also 
believe the life cycle-type funds is a proper way to structure 
an investment through people's lives. Then also, I believe--
these are ideas that I have sponsored and introduced, but also 
working with Congressman Cardin on this last one, what is 
called the saver's credit, the Federal Government matching 
based on H&R Block's kind of program that they did.
    There are going to be Republican ideas on RSAs, LSAs, et 
cetera. We have enough room there and enough bipartisan to deal 
with that. It would make a major contribution to retirement 
security. Now, someone had talked about long-term care. You and 
I, Mr. Chairman, both of you, we have talked about the Business 
Week story of 3 weeks ago where they talked about a product out 
in the private market where people are buying life insurance 
with a long-term component. It already exists out there without 
messing with the Tax Code. It is something we can talk about 
doing here and making that easier.
    I would argue that besides long-term care, if we are going 
to look at retirement security, one of the things we need to 
look at is allowing direct negotiations for prescription drug 
prices by Medicare. Prescription drug prices are going up 3 
times, 4.5 times, on average, higher than inflation. And if we 
are going to deal with retirement security because of the 
health care cost as part of retirement, we have to deal with 
the price of prescription drugs. And so Republicans want to 
bring long-term care, open to that. We are going to bring or 
want to discuss also how we deal with the price of prescription 
drugs, which is a bigger bite out of the retirement security. 
Now, in 1983--I always like to remind people of this--one of 
the things that was taken off the table was privatization, and 
then that Commission came together, and you got an agreement 
that saved Social Security and strengthened Social Security for 
over 75 years.
    Now, some say you should not take anything off the table. I 
don't know. A lot of people have taken revenue off the table. I 
don't know why we have to include privatization. Some people 
took revenue off the table, so other people do not like 
privatization because it changes the basic nature. would say as 
a person who represents well over 28,000 employees from United 
Airlines in his district, you go talk to those folks, they like 
the retirement security of Social Security today because they 
saw everything they had wiped away in one signing of the pen.
    And so we can get agreement on the non-Social Security 
retirement security things. I welcome the Chairman's challenge 
to all of us. That is doable; it is within reach. We should not 
politicize this. I will accept that as the Chair of a political 
apparatus. But we should not include Social Security where 
there has been too much disagreement because of the insistence 
of an idea that the former head of GAO, who sat here, who was 
also a member of the Social Security panel, said would weaken 
Social Security and accelerate the funding crisis of Social 
Security. He said it here in this room. So, I welcome the 
challenge to deal with retirement security in its comprehensive 
nature, putting also the pricing of prescription drugs and how 
we pay for them on the table alongside long-term care. I leave 
time for the Chairman, who usually does comment at the end of 
my time.
    [Laughter.]
    Mr. MCCRERY. That is very kind of the gentleman, and I 
would love to, except Mrs. Tubbs Jones has been waiting 
patiently. So, I am going to call on Mrs. Tubbs Jones, and then 
I will comment on what the gentleman said.
    Chairman THOMAS. Oh, shoot, I was going to lay dental on 
the table as well.
    [Laughter.]
    Mrs. TUBBS JONES. Thank you, Mr. Chairman. I want to echo 
the comments of my colleague Mr. Emanuel. I have four--and I 
have said this in every hearing and I know you are tired of 
hearing this, but my father is a United Airlines employee, my 
sister works for United, my brother-in-law worked for United, 
my niece works for United. So, I am real concerned about what 
happens with United Airlines. But, as important, let me ask 
this question: Have any of you in the process of your long-term 
thinking about pensions factored in how much in debt the 
Pension Guaranty board is and the likelihood of greater debt 
that it is going to be in based on companies who probably want 
to follow the line of United with regard to their pensions. 
Have you speculated at all?
    Mr. JACKSON. I think the PBGC calculates its exposure under 
different scenarios, and it is significant.
    Mrs. TUBBS JONES. But my question was: Have you factored in 
that exposure in all the discussions you are having about how 
we handle pensions and retirements? Mr. Holtz-Eakin?
    Mr. HOLTZ-EAKIN. Well, the statutory obligation of the PBGC 
stops when they run out of assets. The question is whether in 
the event of greater pension bankruptcies than that the 
Congress would have to pick up some of the funding of those 
pensions. If so----
    Mrs. TUBBS JONES. So, speculate for me, since you are--that 
is what your job is.
    Mr. HOLTZ-EAKIN. The economic value of the guarantee now is 
something that looks like on the order of over $100 billion. It 
is a big number.
    Mrs. TUBBS JONES. A hundred billion?
    Mr. HOLTZ-EAKIN. Yes.
    Mrs. TUBBS JONES. How much is the Social Security 
shortfall? Over 75 years, $3.75 trillion, right? Yes? No?
    Mr. HOLTZ-EAKIN. In the ball park.
    Mrs. TUBBS JONES. Yes, so, let's roll that--give me that 
billion again?
    Mr. HOLTZ-EAKIN. A hundred billion, roughly.
    Mrs. TUBBS JONES. A hundred billion as of right now?
    Mr. HOLTZ-EAKIN. At the table right now.
    Mrs. TUBBS JONES. As of right now, so speculate that it is 
going to be greater than Social Security if the companies line 
up like United.
    Mr. HOLTZ-EAKIN. No. No, it will not. It will not exceed 
Social Security.
    Mrs. TUBBS JONES. Because?
    Mr. HOLTZ-EAKIN. That is the current--that is the 
comparable number, a hundred billion versus, $3.5 trillion. The 
non-comparable thing----
    Mrs. TUBBS JONES. One is right now--the hundred billion is 
current. The $3.75 trillion is 75 years out, right?
    Mr. HOLTZ-EAKIN. Both of these are let's look forward over 
some horizon, 75 years, what will the costs be, the apples-to-
apples comparison.
    Mrs. TUBBS JONES. That is what you are saying the Pension 
Guaranty board is factoring in, all the steel people who went 
belly up and everybody else.
    Mr. HOLTZ-EAKIN. If I--not they--factored in the likely 
economic costs of those guarantees, that is roughly what it 
would be.
    Mr. GOODMAN. May I say something----
    Mrs. TUBBS JONES. Compare the liability then, if you are 
saying we as Congress have to up the ante on the Pension 
Guaranty board if it goes any further, is Social Security a 
greater guarantee than the Pension Guaranty board or a lesser 
guarantee, using the term ``guarantee'' as we are using it in 
this discussion.
    Mr. HOLTZ-EAKIN. In the government context, the guarantee 
is----
    Mrs. TUBBS JONES. It is comparable----
    Mr. HOLTZ-EAKIN. --the ability to go get the money from the 
taxpayers and the Social Security guarantee is much, much 
larger. It is an order of magnitude larger.
    Mrs. TUBBS JONES. Not magnitude. I am asking you what is 
the greater guarantee----
    Mr. HOLTZ-EAKIN. Billions versus trillions.
    Mrs. TUBBS JONES. Okay. I am going to bet on Social 
Security paying me, or I am going to be on the Pension Guaranty 
board paying me. Which is--what is the better bet?
    Mr. HOLTZ-EAKIN. If we do the exercise you said, which is 
we speculate that we would go past the statutory authority of 
the PBGC, then they are comparable in their----
    Mrs. TUBBS JONES. But right now----
    Mr. HOLTZ-EAKIN. An order of magnitude----
    Mrs. TUBBS JONES. We cannot go----
    Mr. HOLTZ-EAKIN. --bigger.
    Mrs. TUBBS JONES. If we do not go past the statutory 
guarantee, Social Security is a better bet.
    Mr. HOLTZ-EAKIN. The PBGC is capped. They have a limited 
liability.
    Mrs. TUBBS JONES. All right. Thanks. Let me change the 
subject for a moment. I have pending a piece of legislation 
that has not been scored for me yet that would give people who 
purchase annuities with their lump sum payment a tax credit or 
a tax benefit. What is your position with regard to that, Mr. 
Salisbury?
    Mr. ORSZAG. I am Mr. Orszag. But do you give a tax----
    Mrs. TUBBS JONES. Orszag, I am sorry. I am sorry, Mr. 
Orszag.
    Mr. ORSZAG. That is all right. Do you give a tax deduction 
or a tax credit?
    Mrs. TUBBS JONES. A tax deduction.
    Mr. ORSZAG. Okay. Well, the problem with that is that it 
provides a very small benefit to the vast majority of the 
population and a very significant benefit to the upper tier of 
the income distribution.
    Mrs. TUBBS JONES. So, you think it does not do any good to 
provide that to people?
    Mr. ORSZAG. Basically, no.
    Mrs. TUBBS JONES. Okay. You don't think it will encourage 
people to purchase an annuity?
    Mr. ORSZAG. I think it will encourage high-income people to 
purchase annuities, and that is not exactly where I am most 
concerned.
    Mrs. TUBBS JONES. My legislation is focused more on mid-
income than higher-income, and I am going to have to have a 
conversation with you at a later time because I am about to run 
out of time.
    Mr. ORSZAG. Okay.
    Mrs. TUBBS JONES. My last question is--where is my last 
question? I guess I am going to yield back my time because in 
my discussion with you, I forgot what my last question was 
going to be.
    [Laughter.]
    Mrs. TUBBS JONES. Oh, no, I remember what it was. Mr. 
Chairman, can I do this? I personally am opposed to joining 
State retirement pensions with Social Security, but have any of 
you talked about that or thought about that in the process of 
trying to shore up Social Security? If so, why?
    Mr. ORSZAG. I have not, and I think many economists who 
have looked at the Social Security actuarial deficit have 
explored whether including newly hired State and local workers 
in the system would be beneficial. I think the argument in 
favor of it is that the system is supposed to be a collective 
one, a collective social insurance program, and State and local 
workers are the most significant remaining gap in that 
coverage. Obviously, there are counterarguments against doing 
that also.
    Mrs. TUBBS JONES. Could I ask Mr. Jackson to respond real 
quickly?
    Mr. JACKSON. Yes, well, there would certainly be a near-
term benefit to Social Security's finances because you would be 
bringing in the workers who were paying the contributions, but 
the workers would eventually become beneficiaries. So, in the 
long run, the positive impact of Social Security's finance is 
not that significant. I certainly concur with Peter that the 
rationale for doing that would be that Social Security is a 
collective challenge and that perhaps we should all bear some 
part of the cost of fixing it. That will not make me very 
popular in many----
    Chairman THOMAS. Would the gentlewoman yield briefly on her 
question?
    Mrs. TUBBS JONES. Mr. Chairman, I do not have any more 
time, but I would love to yield to you, yes.
    Chairman THOMAS. Oh, I think we have time.
    Mrs. TUBBS JONES. Okay.
    [Laughter.]
    Chairman THOMAS. I am puzzling with her statement that she 
would prefer that those risky schemes that invest in the stock 
market and other risky securities at the State level not be put 
into the absolute guarantee structure of Social Security, but 
she is willing to leave those State and local people out there 
in those risky investment scheme structures.
    Mrs. TUBBS JONES. Do I get a chance to respond?
    Chairman THOMAS. Sure.
    Mrs. TUBBS JONES. Mr. Chairman, I don't think that the 
State and local programming, as compared to the Social Security 
programming, is the same thing. I think that the people who are 
enrolled in State and local programs recognize what their risks 
are, recognize what they are involved in or getting involved 
in, and that was a commitment that they made at the time. 
First, there are the people who are working in Social Security 
programming--excuse me, who are Social Security retirements 
don't make that. Understand that the people who are in State 
and local retirement programs took a big hit around the Enron, 
WorldCom, and a lot of them are questioning whether they would 
want to remain in----
    Chairman THOMAS. Would the gentlewoman want to run a pilot 
program or perhaps create the opportunity of an option and that 
the State and local can choose their risky schemes with Enron 
or they can choose to go into Social Security and we will let 
those people vote with their feet?
    Mr. MCCRERY. They already have that option, Mr. Chairman, 
as you----
    Chairman THOMAS. I think they voted with their feet. I 
thank the----
    Mrs. TUBBS JONES. But, Mr. Chairman, I am not interested in 
that pilot program, but I have other pilot programs I am 
interested in, and I would love to discuss them with you.
    Mr. ORSZAG. If I could be so foolish as to intervene in 
this discussion, there is a significant difference, which is 
that the State and local programs are defined benefit programs. 
The risks that are entailed in those equity investments are, 
therefore, not necessarily borne entirely by the workers 
themselves.
    Mr. MCCRERY. United was a defined benefit plan, too, Dr. 
Orszag.
    Mr. ORSZAG. I think that illustrates why defined benefit 
programs, perhaps, sponsored by governments are better in 
some----
    Chairman THOMAS. I thought that was why you--you referenced 
it. I thought that was why you prefaced it that you should not 
be so bold to go into the area, because the response was 
exactly right on.
    [Laughter.]
    Mr. MCCRERY. I would welcome you to wade into this.
    Mrs. TUBBS JONES. Thank you, Mr. Orszag, for the help.
    Mr. MCCRERY. The more, I think, compelling illustration is 
what the Chairman pointed out. Those people who have a choice 
choose those risky schemes, not the guaranteed benefit of 
Social Security. I have already been visited by scores of 
public employees from my State begging me not to include them 
in this guaranteed benefit program. So, I think that is the 
more compelling point. Mr. Chairman, you may want to do this, 
also, but I want to thank every Member of this panel. I thought 
today's hearing was excellent. You all brought to the table 
some very interesting and some compelling thoughts and ideas, 
and the Members of the Committee I thought did a good job in 
bringing those out and in some cases actually discussing them, 
and that is very positive. So, I want to thank you for your 
patience in staying with us all day and for the quality of your 
presentations.
    Chairman THOMAS. The Chair wishes to echo the comments of 
the Subcommittee Chair.
    Mr. MCCRERY. Without objection, the hearing is concluded. 
The hearing is adjourned.
    [Whereupon, at 2:30 p.m., the hearing was adjourned.]
    [Submissions for the record follow:]

       Statement of Walter Welsh, Americans for Secure Retirement

    Mr. Chairman and distinguished members of the committee, on behalf 
of Americans for Secure Retirement, I welcome the opportunity to submit 
for the record our statement on policy recommendations to help 
Americans plan and save for their golden years. Americans for Secure 
Retirement is a broad-based coalition of life insurance companies, 
industry groups, and organizations--including women, farmers, Hispanic-
Americans and small businesses--committed to promoting policies that 
provide Americans with a more secure and stable retirement. We are 
pleased that this committee recognizes the scope of the challenges 
facing Americans as they plan for retirement, and the importance of 
examining the full range of potential approaches that can be tapped to 
improve retirement security for millions of Americans.
    I am sure that every member of this committee is well aware of the 
shift in demographics our country is experiencing. These shifting 
demographics define the challenges families and policymakers alike must 
tackle. Today, the life expectancy of a 65-year-old is close to age 83, 
more than four years longer than in 1960. In fact, half of all retirees 
will live beyond average life expectancy. And unprecedented numbers 
will be living into their 90s and past 100. The likelihood of living 
longer compounds both the savings and financial management challenge 
for individuals and families: retirees not only need to save more, they 
also need to manage these resources effectively so they provide a 
sufficient income to sustain a steady standard of living for 20 to 30 
or more years.
    For many retirees, Social Security will be the main source of 
income in retirement. Unfortunately, while there is no denying the 
value of this program, the fact is that on average, Social Security 
currently replaces only about 42 percent of pre-retirement income. 
Moreover, Social Security is subject to a maximum level, and today that 
level is approximately $22,000 per year. Financial planners have 
traditionally recommended at least 70-80 percent to maintain a 
retiree's standard of living.
    Thus, while the future of Social Security is a very important 
retirement security issue, it is certainly not the only one. A key 
question for the Congress is how to ensure that all Americans--
including those that don't have workplace retirement options--have 
sufficient tools available to help them both accumulate savings and 
generate guaranteed, sustained income for as long as they live. In 
short, to achieve retirement security, Americans need a steady paycheck 
for life that supplements their Social Security benefits.
    Historically, many retirees have depended on pension plans to 
supplement their Social Security benefits. Most recent statistics 
indicate that today only about 42 percent of the 151.1 million workers 
in the U.S. are enrolled in an employer-based retirement plan. 
Participation in traditional defined benefit plans, which were a staple 
of retirement benefits in the past, has decreased sharply. The 
percentage of full-time employees in medium and large private 
establishments who are covered by defined benefit plans has fallen from 
80 percent in 1985 to just 36 percent in 2000 as the trend shifts from 
offering defined benefit plans to defined contribution plans (e.g. 
401(k) plans). Moreover, it is increasingly difficult for those who 
participate in defined contribution plans to convert their account 
balances to a steady stream of income that will last throughout 
retirement.
    According to Jeffrey Brown, a former senior economist for the White 
House Council of Economic Advisers and current assistant professor of 
finance at the University of Illinois at Urbana-Champaign's College of 
Business and author of The New Retirement Challenge, ``these [pension 
plan] changes represent an historic shift in our retirement landscape, 
and together place more responsibility on individuals to manage their 
savings so that they last for a lifetime. It is important for us, as a 
nation, to find ways to encourage retirees to secure additional and 
reliable sources of lifelong income so that they can achieve lifelong 
financial security.''
    For women, minorities, small business owners, and farmers, the 
retirement challenges will be increasingly more troubling for a number 
of reasons, but particularly because, compared with other segments of 
the population, they have less access to and lower participation rates 
in employer-based retirement plans.
    Women live longer than men, spend more time in retirement and are 
widowed more frequently. A typical 65-year-old woman has a 31 percent 
chance of living to age 90 or older, as compared to only 18 percent for 
a typical 65-year-old male. Today, nearly 60 percent of older American 
women are single, with more than 45 percent widowed. In contrast, only 
25 percent of elderly men are single. Social Security payments to women 
are on average lower than for men because women on average spend less 
time in the workforce, and their lifetime earnings are lower. A working 
woman still earns, on average, only 76 cents for every dollar earned by 
a man. Over the long term, this income disparity translates into lower 
retirement savings and Social Security payments. Furthermore, many 
women work part time for all or part of their working years and 
therefore accrue less Social Security benefits, and fewer still 
participate in employer-provided retirement plans. In fact, less than a 
third of part-time workers, who are disproportionately women, 
participate in employer-sponsored pension plans. Forty-four percent of 
female workers lack a pension from any employer, compared to 36 percent 
for male workers. This small sampling of data illustrates the concerns 
for women retirees in America and, we believe, obligates us to 
implement policies to better assist the majority of this country's 
population.
    Minority groups, such as Hispanics, also face significant 
challenges. Hispanic-Americans have less workplace pension coverage 
than workers overall. Only 22 percent have retirement savings plans to 
which their employers contribute money or stock, compared to half of 
workers overall.
    Farmers are in the same situation. As compared with non-farm 
workers, farmers are less likely to participate in employer-sponsored 
retirement plans, further limiting their sources of retirement income. 
Just 30 percent of agricultural workers in America work for an employer 
with some form of retirement plan. Even more startling is that less 
than one quarter of agriculture workers participate in any retirement 
plan. That means the vast majority of farm workers have no other 
guaranteed sources of retirement income beyond Social Security. Further 
illustrating the challenges many women will face in retirement, farm 
wives are particularly vulnerable to declining standards of living in 
their golden years. According to the USDA, two-thirds of rural persons 
age 60 or above earning less than $10,000 were women and by age 85 the 
statistic jumps to four-fifths. These troubling statistics underscore 
the need for a comprehensive national policy to help all Americans, 
because while some groups are better off than others, everyone will 
need to plan wisely to live comfortably post-retirement.
    Thus, in our view, a central challenge for policymakers is not only 
the need to make retirement options that complement Social Security in 
providing steady, lifetime benefits more accessible to Americans. It is 
also important to ensure these opportunities reach the populations that 
have the least access to employer based retirement programs, or get the 
least from these and Social Security. For these reasons, we encourage 
consideration of an economic incentive for Americans to provide 
themselves with a steady stream of income for life. Beyond Social 
Security and defined benefit plans, this can only be achieved through 
ownership of a lifetime annuity. Lifetime annuities are the only 
retirement vehicle that can successfully address the dual risks of 
longevity and investment risk.
    An annuity is a financial product that can provide lifetime payment 
at regular intervals, such as monthly. These lifetime payments begin 
when the retiree determines that the payments are needed and continue 
for the lifetime of the retiree and, if selected, his or her spouse. 
These lifetime payments are personal insurance that eliminates the risk 
of outliving one's assets. Americans for Secure Retirement encourages 
increased use of lifetime annuities as part of a sound retirement plan 
and urges this committee to provide tax incentives to encourage 
Americans to include them in their retirement savings portfolio.
    Americans for Secure Retirement supports legislation introduced and 
pursued by members of this committee called The Retirement Security for 
Life Act, H.R. 819, which provides a strong impetus for people to use 
non-qualified (individual) annuities that provide regular payments for 
as long as the retiree lives. Broadly, we support the annuitization of 
retirement savings, and welcome the growing attention and support of 
this concept among policymakers and the public.
    The Retirement Security for Life Act takes a sensible approach to 
encouraging Americans, especially those whose employers don't offer 
traditional pensions, to use non-qualified annuities. The bill provides 
a meaningful incentive by allowing Americans to exclude 50 percent of 
the taxable income portion of the annuity payout. We believe this will 
be a significant enough incentive to spur the use of annuities and give 
annuitants a steady stream of income throughout their time in 
retirement.
    We are encouraged by this committee's demonstrated interest in 
fixing America's retirement system and look forward to helping you in 
these efforts. Thank you.

                                 

   Statement of George Avak, California Retired Teachers Association
    Chairman Thomas and members of the Committee, my name is George 
Avak 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.

                                 

    Statement of Bruce E. Thompson, Jr., Merrill Lynch and Co., Inc.
    Merrill Lynch commends the members of the Committee for undertaking 
a comprehensive review of the critical retirement savings challenges 
facing our aging society. For some time now, we at Merrill Lynch have 
been urging Congress to take steps to encourage Americans to save more.
    In just three short years, the first of the 77 million Baby Boomers 
will become eligible to receive retirement benefits, and numerous 
studies have shown that far too many of them are not saving enough for 
a secure retirement. Only one-third of Baby Boomers believe they are 
prepared financially for a secure retirement, and millions of Americans 
have no savings at all. With the U.S. personal saving rate at a near-
historic low of less than 1 percent, we need to take action to 
strengthen our nation's retirement system.
    In a new Merrill Lynch White Paper, ``Retirement Solutions for the 
21st Century: Bridging America's Savings Gap,'' we recommend ten steps 
that Congress should take to help increase the future retirement 
security of all Americans. The White Paper contains more than 50 
specific proposals for increasing savings and retirement security in 10 
distinct areas, including:

      Expand and Simplify IRAs
      Expand and Simplify 401(k) Plans
      Encourage and Protect Defined Benefit Plans
      Eliminate Barriers to Investment Advice
      Facilitate New Models for Retirement
      Increase Savings for All Workers
      Encourage Saving for Retiree Health Expenses
      Promote Lifetime Saving
      Improve and Expand Financial Education
      Remove Complex and Arbitrary Rules

    Each of the White Paper's broad proposals addresses problems that 
prevent Americans from taking full advantage of the saving 
opportunities available to them. Each section also recommends specific 
actions that Merrill Lynch believes the federal government should take 
to make it easier for people at all income levels to save more.
    We recognize that policymakers are debating the difficult issues 
surrounding proposals to overhaul the Social Security System. At the 
same time, as the Baby Boom generation nears retirement age, we urge 
Congress to act to strengthen the other elements of our nation's 
retirement system
Retirement Solutions for the 21st Century
Bridging America's Savings Gap
April 2005
    For some time now, we at Merrill Lynch have been urging Congress to 
take steps to encourage Americans to save more.
    Americans today are saving less than at almost any time since World 
War II, and we are saving far less than other industrialized nations. 
The U.S. personal saving rate, which exceeded 10 percent in the 1970s 
and 1980s, has plummeted to a near historic low level, dropping to less 
than one percent today.
    In just three short years, the first of the 77 million Baby Boomers 
will become eligible to receive retirement benefits, and numerous 
studies have shown that far too many of them are not saving enough for 
a secure retirement. Only one-third of Baby Boomers believe they are 
prepared financially for a secure retirement, and Baby Boomers, on 
average, have only about the equivalent of one year's household income 
saved.
    The nation's defined benefit system is in distress, providing 
traditional pension plan coverage to only 20 percent of working 
Americans. The defined contribution system has expanded over the last 
20 years, with trillions of dollars being saved in IRAs and 401(k)s. 
But millions of Americans have no savings at all and millions more are 
not saving enough to achieve a secure retirement.
    We believe that policymakers should act to address the shortfall in 
retirement savings. We recommend ten steps that Congress should 
consider to help increase the future retirement security of all 
Americans:

      Expand and Simplify IRAs
      Expand and Simplify 401(k) Plans
      Encourage and Protect Defined Benefit Plans
      Eliminate Barriers to Investment Advice
      Facilitate New Models for Retirement
      Increase Savings for Lower- and Moderate-Income Workers
      Encourage Saving for Retiree Health Expenses
      Promote Lifetime Saving
      Improve and Expand Financial Education
      Remove Comples and Arbitrary Rules

    We recognize that policymakers are debating the difficult and 
controversial issues surrounding proposals to overhaul the Social 
Security system. These are critical issues that affect all generations. 
Social Security is the foundation of our retirement system, and 
Congress needs to act to ensure its financial solvency.
    At the same time, as the Baby Boom generation nears retirement age, 
we urge Congress to act promptly to strengthen the other elements of 
our nation's retirement system. For many people, the gap in savings 
will be bridged by new versions of retirement, as many boomers continue 
working in retirement. But it is undeniable that more retirement saving 
is needed.
    With the Baby Boomers moving toward their senior years, the 
employment-based retirement system has become less of an ``employer-
paid'' program and more reliant on individual savings. The average 
tenure of employment continues to decline and is now less than five 
years on average. Many employers faced with this situation are not 
likely to promote and fund ``career'' retirement programs, such as 
traditional defined benefit plans, which are designed to benefit long 
service employees.
    Small businesses now provide the majority of new employment 
opportunities in the U.S. Yet approximately 80 percent of these small 
businesses are not starting retirement savings programs, primarily 
because retirement is not among the most pressing needs they face. 
Making payroll, managing labor, and providing health insurance all take 
a higher priority.
    The shift away from traditional defined benefit plans and the rise 
of small business employment means that the employment-based system 
provides adequate retirement savings to a diminishing percentage of the 
workforce. This trend is troublesome because payroll deduction programs 
and employer contributions clearly have a positive impact on individual 
saving. Similarly, it seems evident that the purchasing power of 
employer plans reduces investment costs and offers better saving 
opportunities. As a result, the current employment-based system must be 
strengthened and expanded if we are to encourage broader and adequate 
retirement saving in the new labor market.
    In the end, however, retirement success for the Baby Boom 
generation will require rethinking--in addition to retirement 
legislation--other public policies that historically may not have been 
closely linked to retirement security. After all, Baby Boomers are 
faced with caring for their aging parents while they face college 
expenses for their children. For this reason, all options to increase 
savings must be explored.
    The implementation of the ten steps we recommend would begin 
building a culture of saving that America needs in order to achieve 
retirement security in the demographic and global economic climate of 
tomorrow.

Expand and Simplify IRAs
The Problems:
    Complex Rules. Since they were created in 1974, Individual 
Retirement Accounts (IRAs) have proven to be very successful. By the 
end of 2003, individuals had accumulated $3 trillion in IRAs, and IRAs 
have become the single largest component of the nearly $12 trillion 
U.S. retirement market. More than 45 million U.S. households, or 40.4 
percent of all U.S. households, owned IRAs in 2004. However, the 
elimination of the universal IRA in 1986 along with the increased 
complexity caused by constantly changing eligibility and contribution 
rules have discouraged the use of IRAs as a retirement savings vehicle.
    Uncertain Future. The Economic Growth and Tax Relief Reconciliation 
Act of 2001 (EGTRRA) greatly expanded individual retirement savings 
opportunities, but these improvements will sunset at the end of 2010 
unless extended or made permanent.
    Disparate Treatment. IRAs are treated less favorably than 
employment-based retirement arrangements in a number of significant 
respects. This disparate treatment penalizes workers who are not 
covered by an employer plan.

The Solutions:
    Provide a Universally Available IRA. The Internal Revenue Code 
imposes a number of limits and phase-outs on IRAs based on income, 
retirement plan participation, and marital status. Proposals that 
simplify accessibility to retirement savings, such as the Retirement 
Savings Accounts (RSAs), encourage retirement saving and should be 
considered. In addition, employees who are not covered by employment-
based plans should be able to contribute more to IRAs.
    Make the 2001 IRA Improvements Permanent. The 2001 IRA improvements 
have greatly increased savings opportunities, including increases in 
permitted IRA contributions and catch-up contributions for those over 
age 50. They should be made permanent as soon as possible.
    Fully Protect IRA Savings in Bankruptcy. Most employment-based 
retirement plan assets are exempt from the claims of creditors in 
bankruptcy. Although the Supreme Court recently provided bankruptcy 
protection for certain retirement assets, the protection of some 
retirement savings in bankruptcy remains uncertain. Congress should 
extend the treatment of qualified plan assets in bankruptcy to all IRA 
assets.
    Allow Disabled Persons to Make IRA Contributions. The Internal 
Revenue Code limits the amount that an individual may contribute to an 
IRA in any tax year to the lesser of the maximum contribution limit or 
an individual's compensation. Disabled individuals who are unable to 
work generally cannot make IRA contributions because they do not have 
compensation. To facilitate saving, the compensation limit for disabled 
individuals should be eliminated.
    Create a Correction Program for IRAs. The Internal Revenue Service 
maintains a correction program that allows employment-based retirement 
plans to correct defects and therefore preserve the tax-advantaged 
status of the plan. There is no comparable program for IRAs. Congress 
should direct the Secretary of the Treasury to establish an IRA 
correction program that would allow IRA owners and beneficiaries to 
rescind IRA distributions made in error.

Expand and Simplify 401(k) Plans
The Problems:
    Further Promotion of 401(k) Plans Is Needed. For nearly 25 years, 
the 401(k) plan has enabled millions of working Americans to save 
trillions of dollars for their retirement future. Today, thousands of 
companies sponsor 401(k) plans for more than 37 million working 
Americans. As of the end of 2003, 401(k)s held nearly $2 trillion in 
assets, making it one of the most effective wealth-building tools ever 
conceived. But a number of reforms are needed to improve the 
effectiveness of 401(k) plans.
    Lack of Permanence. The Economic Growth and Tax Relief 
Reconciliation Act of 2001 (EGTRRA) greatly expanded retirement savings 
opportunities, but these improvements will sunset at the end of 2010 
unless extended or made permanent.
    Too Few Small Business Plans. Small employers are often focused on 
covering their payroll, managing labor, and providing health insurance 
access. Retirement plans for the small employer can be perceived as an 
additional administrative burden. This leaves countless individuals 
without access to a retirement plan.
    Low Participation Rates. Where an employer does offer a plan, 
participation in voluntary retirement plans remains too low. Average 
plan participation rates have fallen from an estimated all-time high of 
80 percent in 1999 to 70 percent in 2003. The lowest participation 
rates are found among lower- and moderate-income workers who can least 
afford to forego preparing for retirement. One of the greatest barriers 
to participation is inertia--failing to take steps to sign-up for 
participation.

The Solutions:
    Make the 2001 401(k) Improvements Permanent. Make the 2001 401(k) 
Improvements Permanent. The EGTRRA improvements have greatly increased 
savings opportunities, including increases in 401(k) contribution 
limits and catch-up contributions for those over age 50, and should be 
made permanent.
    Provide Incentives for Automatic Enrollment. Employers that have 
adopted automatic enrollment arrangements have been able to use inertia 
to expand saving. Automatic enrollment--whereby an employee 
automatically contributes a certain amount unless the employee 
specifically elects otherwise--has a powerful effect on participation, 
particularly among lower- and moderate-income workers. To date, 
however, few employers have implemented automatic enrollment programs 
because there are few incentives to establishing these programs and 
because of uncertainty surrounding the application of ERISA and State 
law. Congress should provide incentives to establish automatic 
enrollment programs, including arrangements that provide for automatic 
increases, and should clarify the application of state law and ERISA to 
these programs. The employer should also have the option of applying 
the automatic enrollment and automatic increase options to existing 
participants as well as to newly hired employees.
    Provide Small Employers with a Starter Plan. A plan in which the 
employees of many small businesses could be covered by financial 
institutions that agree to assume fiduciary and administrative 
responsibility would greatly expand small business retirement plans. 
These arrangements would function like payroll deduction individual 
accounts and would be universally available to all employees and 
employers. Coupled with an automatic enrollment feature, these plans 
have the potential to dramatically increase retirement coverage. From 
the employer's perspective, all that would be necessary would be 
remitting payroll deductions to the fiduciary financial institution. 
From the employee's perspective, they would receive the benefit of 
economic scale and large group pricing.
    Apply Simple and Consistent Vesting Rules. The American workforce 
is increasingly mobile and the average term of employment is less than 
five years. However, present law allows employers to require five years 
of service before employees have a vested interest in employer non-
elective contributions. Vesting of employer contributions should be 
continually adjusted to mirror the realities of the labor market. 
Consistent vesting of all employer contributions will simplify plans 
and help ensure that our retirement plans keep pace with an 
increasingly mobile workforce.
    Encourage Additional Saving. Employer purchasing power in terms of 
asset management and administration should benefit those wishing to 
deposit more after-tax funds to their retirement savings. These 
programs, especially when used in an automatic deposit program, can 
greatly expand opportunities to save for Baby Boomers reaching their 
peak savings years and for dual income couples. Congress should enact 
legislation encouraging the expansion of 401(k) programs to allow 
additional after-tax employee contributions.

Encourage and Protect Defined Benefit Plans
The Problems:
    Lack of Permanent Rules. Congress has twice enacted temporary rules 
for measuring pension liabilities and the most recent measure expires 
at the end of 2005. Until a permanent funding regime is enacted, 
employers cannot make long-term business plans. This instability and 
uncertainty has caused many employers to either freeze their plans or 
close them to new employees.
    Volatile and Unpredictable Funding Requirements. Under the current 
funding rules, pension contribution obligations can fluctuate wildly 
from year to year. Volatile and unpredictable obligations make planning 
very difficult and employers often cite volatility as the single 
biggest impediment to maintaining a defined benefit plan.
    Restrictive Limits on Contributions. Current tax rules discourage 
employers from building a reasonable funding cushion during good 
economic times. Without a funding cushion, employers cannot insulate 
themselves from the risk that contributions will have to be severely 
increased in poor economic times.
    Legal Uncertainty. Hybrid defined benefit plans, such as cash 
balance and pension equity plans, cover more than seven million 
Americans and deliver valuable retirement benefits. Yet the uncertain 
legal status of hybrid plans, along with other pressures in the defined 
benefit system, has prompted many employers to freeze or terminate 
their plans, and others are considering these actions.

The Solutions
    Create a Stable Defined Benefit System. Employers need permanent 
funding rules in order to make informed business decisions. Congress 
needs to create a stable defined benefit system and enact a permanent 
measure of liability as soon as possible.
    Advance Rules that Encourage Plan Funding. Barriers to adequate 
funding must be eliminated so that employers can fund their plans when 
they have the capacity to do so. Congress should revise the tax law to 
allow employers to make greater tax-deductible contributions in order 
to build a reasonable funding cushion.
    Eliminate Barriers to Fully Considered Investment Decisions. 
Pension funding and related investment decisions have significant 
implications for employers. These decisions affect cash flow through 
future contribution obligations and directly impact financial 
statements. Yet there is uncertainty about whether plan fiduciaries can 
take into account the impact investment decisions have on the plan 
sponsor. ERISA needs to be modernized to reflect that funding and 
investment decisions need not be made in a vacuum.
    Protect Employer Flexibility in Plan Design. The flexibility to 
utilize varied pension plan designs, including cash balance and other 
hybrid plan designs, is imperative if we are to maintain a vital 
defined benefit plan system. Hybrid plan designs have been one of the 
few bright spots in the declining defined benefit system. Congress must 
provide companies with the legal certainty that hybrid plans do not 
violate age discrimination laws.

Eliminate Bariers to Investment Advice
The Problems:
    Lack of Expertise and Engagement. Workers and retirees are 
increasingly responsible for investing their own retirement assets. Yet 
many lack the knowledge necessary to make prudent investment decisions. 
Even participants who are relatively knowledgeable may lack the time to 
make and update investment decisions in a consistent and well-informed 
manner.
    Barriers to Offering Investment Advice. Many participants are 
uncomfortable making investment decisions without assistance and there 
is an enormous demand for investment advice. Few plans, however, offer 
the type of personal advice that participants want because ERISA rules 
place unnecessary burdens on providing investment advice.
    Absence of Incentives for Investment Advice. Tax rules make it 
difficult for employers to offer retirement planning advice, including 
investment advice, to employees who want advice. These tax rules have 
created a significant disincentive to offering investment advice.
    Obstacles to Diversification. Some plans force employees to hold 
large portions of their retirement assets in company stock. This policy 
flies in the face of standard diversification principles.

The Solutions:
    Eliminate Barriers to Providing Investment Advice to Retirement 
Plan Participants. ERISA generally prohibits investment advisors who 
are otherwise plan service providers from providing advice to 
participants regarding their plan assets. Often, advisors provide 
advice on other assets but are forced to ignore plan assets because of 
technical issues under the ERISA-prohibited transaction rules. Other 
participant protections, including fiduciary standards and meaningful 
disclosure, can ensure that employees receive unbiased advice. The lack 
of investment advice in retirement plans is a significant barrier to 
retirement security and Congress should enact legislation allowing 
participants to obtain investment advice from regulated financial 
entities.
    Provide Incentives That Will Encourage Employers to Offer 
Retirement Plan Participants Access to Investment Advice. Retirement 
planning advice (including investment advice) provided to employees on 
a nondiscriminatory basis is excluded from taxable income. However, 
employees who are offered a choice between cash compensation and 
investment advice are taxed as if they elected the cash even if they 
elect investment advice. The inability to offer employees a choice is a 
significant barrier to offering investment advice. Employees who choose 
investment advice should not be taxed and Congress should enact 
legislation exempting these elections from taxation.
    Provide Incentives for Automatic Investment Management. Another 
barrier to retirement plan participation is fear of making the wrong 
investment decisions. Participants are often uncomfortable managing 
their retirement assets. Yet many defined contribution plans default 
the assets of participants into less than optimal funds which earn a 
low rate of return, but are chosen because many fiduciaries are 
uncomfortable making long-range decisions as a default investment. 
Congress should make it clear that a fiduciary can facilitate 
professional management of retirement assets in these situations and 
can take into account the known characteristics of the participant in 
establishing default investments.
    Expand Diversification Rights. Current law allows plans to require 
employees to hold company stock contributed by the employer until age 
55 or after five years of service. Diversification rights should be 
more aligned with the principles of investment diversification for all 
employees, not just those reaching a certain age, or certain tenure 
with the employer. Congress should ensure that employees have the right 
to direct all investments in the plan consistent with generally 
accepted diversification standards.

Facilitate New Models for Retirement
The Problems:
    Outdated Rules. As the average life expectancy of Americans grows 
longer, retirees increasingly risk outliving their assets. Retirement 
plan rules that have not kept pace with changing circumstances force 
individuals to begin receiving distributions from retirement plans and 
IRAs at a time and in an amount that may be unwise. With Americans 
living longer than ever in retirement, such rules threaten to deplete 
retirement assets too quickly.
    Barriers to Lifetime Payouts. IRA and retirement plan rules 
discourage individuals who may need earlier access to retirement 
savings from choosing a lifetime payment stream rather than a lump sum 
distribution. Again, with Americans living longer than ever in 
retirement, such rules threaten to deplete retirement assets too 
quickly.
    Obstacles to Portability. Significant improvements have been made 
in facilitating retirement asset portability but rules restricting 
retirement asset portability remain. These rules create arbitrary and 
significant barriers to consolidating retirement assets.
    Inappropriate Incentives to Retire. As the Baby Boomers approach 
retirement, many may continue working during a phased retirement. 
Today, continuing to work in a part-time capacity may negatively impact 
accrued retirement benefits with an employer. In addition, some 
employers view older workers as consuming greater amounts of employee 
benefits and consider them more expensive than younger workers to 
employ.

The Solutions:
    Recast Distribution and Life Expectancy Rules. Current guidelines 
should be reviewed to incorporate the impact of increased longevity. 
Rules that discourage premature spending of retirement benefits should 
be strengthened. Moreover, as individuals live longer in retirement, 
distribution of their retirement income should reflect the increased 
longevity, and avoid forced distributions that exceed a sustainable 
withdrawal rate. For example, current law requires that individuals 
begin receiving distributions from retirement plans and IRAs generally 
no later than the year in which they attain age 70-1/2. The age at 
which minimum distributions are required has been unchanged for decades 
and there is an increasing risk that the minimum distribution rules 
deplete retirement assets too quickly. Congress should evaluate whether 
the complexity engendered by the minimum distribution rules is 
justified and consider repealing the rules that require lifetime 
minimum distributions. At a minimum, Congress should update the minimum 
distribution rules to reflect the increased life expectancy of today's 
workers.
    Accommodate the Needs of Older Workers. In addition, retirement 
distributions from IRAs and other retirement plans must start at age 
70-1/2 even if the individual continues to work. Those rules should be 
changed to conform to the minimum distribution in employer plans which 
delay the application of the minimum distribution rules until 
retirement for those who are still actively employed with the employer 
maintaining the plan.
    Allow Non-Spouse Beneficiary Rollovers. When a retirement plan 
participant dies, employment-based retirement plans typically provide 
that remaining plan benefits must be distributed promptly in a lump 
sum. Non-spouse beneficiaries who are not permitted to roll over 
distributions can be forced to receive plan benefits immediately and 
incur an immediate tax liability. This problem does not exist if 
retirement assets are held in an IRA at the time of death, because IRA 
beneficiaries may maintain the inherited IRA and receive distributions 
in accordance with the minimum distribution rules. There is no good 
rationale underlying this disparate treatment; non-spouse beneficiaries 
of retirement plans should be allowed to roll over retirement benefits 
to an heir.
    Expand Portability. The portability provisions between various 
types of defined contribution programs should encourage employees to 
roll over their prior employer balances to their new employer, if they 
prefer not to roll them into an IRA. This will allow them to take 
advantage of employer purchasing power and to prevent ``leaving the 
assets behind'' with their old employer. This practice can be 
accomplished by providing incentives to employers to encourage 
acceptance of rollover balances from newly hired employees.
    Tap the Resource of Older Workers. Rules that limit flexibility for 
older workers need to be reconsidered. In certain circumstances, 
current rules make it more expensive for employers to hire an older 
worker, and discourage older workers from continuing employment. For 
example, older workers working past certain ``normal'' retirement age 
might be allowed to choose to receive more cash compensation at the 
price of a lower benefit accrual under a defined benefit arrangement. 
Allowing for older employees to lock in their accrued benefit and 
switch to a part-time or reduced-time work schedule would make the 
option to remain in the workforce more attractive. Tax incentives 
should be considered for employers that retain older workers with 
flexible work arrangements and flexible benefits packages.

Increase Savings for Lower- and Moderate-Income workers
The Problems:
    Low Saving Rate. Americans in general and lower- and moderate-
income workers in particular are not saving enough to achieve a secure 
retirement. In fact, the national saving rate has been approaching 
historic lows and is one of the lowest among industrialized nations.
    Lack of Permanence. The Economic Growth and Tax Relief 
Reconciliation Act of 2001 (EGTRRA) greatly expanded retirement savings 
for lower- and moderate-income workers, but these improvements will 
sunset at the end of 2006 unless extended or made permanent.
    Regulatory Barriers. Burdensome and unnecessary regulations act as 
a disincentive for employers to voluntarily sponsor retirement plans 
for their employees. Such regulations present an even greater hurdle 
for small employers that must generally incur greater than average 
costs to sponsor a plan and can least afford the risk of fiduciary 
liability.

The Solutions:
    Make the Savers' Credit Permanent. EGTRRA created a new non-
refundable tax credit for certain individuals who make elective 
contributions to workplace retirement plans and IRAs. This ``Savers' 
Credit'' has appreciably increased savings among moderate- and lower-
income workers and should be made permanent.
    Expand the Savers' Credit. The maximum contribution eligible for 
the Savers' Credit is $2,000 and the credit rate depends upon the 
taxpayer's income. In addition, many of those otherwise eligible for 
the original Savers' Credit do not owe federal tax and so cannot 
benefit from a non-refundable tax credit. Expanding the credit and 
making it refundable will ensure that this important saving incentive 
will remain a prominent part of our nation's package of retirement 
saving incentives.
    Reduce Administrative Burdens. Small employers are often deterred 
from offering a retirement plan by the administrative burdens and 
fiduciary liability that typically accompany plan sponsorship. Congress 
should enact a simplified retirement plan to expand coverage among the 
class of employers with the lowest coverage rates. One option would be 
a plan administered by financial institutions that agree to assume 
fiduciary responsibility. Such a plan would have the potential to 
significantly increase saving if it is coupled with an automatic 
enrollment program that uses inertia to incentive-ize saving.

Encourage Saving for Retiree Health Expenses
The Problems:
    Lack of Incentives to Save for Retiree Health Costs. There are few 
incentives to encourage Americans to save for their health care 
expenses in retirement. The absence of a tax-preferred individual 
savings vehicle dedicated to retiree health expenses makes it difficult 
for Americans to focus and plan for health care costs in retirement. In 
addition, a pervasive lack of understanding regarding the benefits 
offered by Medicare combined with retirement policies that do not 
emphasize the need to plan for retirement health care needs leads many 
to believe that saving for health care expenses in retirement is 
unnecessary.
    Obstacles to Flexible Pay Arrangements. There is a labor shortage 
in today's economy; a large demand for skilled workers is coinciding 
with an aging workforce and a diminishing number of new entrants into 
the workforce. Moreover, demographic trends indicate that this shortage 
will become more acute as our population ages. A clear way for an 
employer to address this need for workers is by retaining its own older 
employees. There are, however, significant challenges to overcome in 
retaining older employees. One challenge is that older workers tend to 
value certain benefits more than others. The tax rules governing 
retirement plans and health plans, however, prevent employers from 
offering employees the opportunity to choose the mix of benefits that 
is best suited to their circumstances. Cafeteria plans begin to move 
compensation in this direction, but limits on the scope of these plans 
hinder their value. The result of the current system is a failure to 
deliver the maximum value.
    Lack of Adequate Incentives for Employers to Maintain Retiree 
Medical Plans. Under current law, there are limited incentives for 
employers to maintain retiree medical plans. Additionally, 
opportunities to pre-fund retiree health costs are limited. As a 
result, employers are increasingly unwilling to offer retiree medical 
benefits.

The Solutions:
    Create a Health IRA. There is no individual savings vehicle for 
retiree medical expenses and each year fewer employers offer retiree 
medical benefits. As retiree medical expenses continue to grow, more 
and more retirees are finding themselves spending an escalating portion 
of their retirement savings on health expenses. Individuals should be 
able to contribute to individual health IRAs to be used to pay medical 
expenses on a tax-exempt basis after a stated age. In addition, 
individuals should be able to use retirement plan distributions on a 
pre-tax basis to pay for their share of the cost of retiree health plan 
coverage.
    Permit Additional Retiree Health Contributions to HSAs. Current law 
generally provides that an individual who is covered by a high 
deductible health plan may contribute to a health saving account (an 
``HSA''), which is a tax-exempt individual account maintained by a 
custodian or trustee for the benefit of the individual. The maximum 
amount that may be contributed is an amount equal to the amount of the 
high deductible. Because HSA contributions are ordinarily used to pay 
current medical expenses, HSAs work poorly as a vehicle for saving for 
retiree medical expenses. Employees should be able to contribute an 
additional amount to an HSA that cannot be used before retirement in 
order to pre-fund future medical expenses.
    Eliminate Rules that Deter Individuals from Continuing to Work 
After Retirement. Rules that limit flexibility for older workers should 
be changed. For example, the defined benefit system allows for payments 
to an employee who is working only in limited circumstances. These 
barriers to phased retirement should be eliminated. In addition, 
barriers to hiring older workers should be eliminated and employers 
should be allowed to offer fair and flexible compensation packages that 
better meet the needs of those older workers.
    Encourage Employers to Maintain Retiree Health Plans. Today, an 
employer wanting to prefund retiree health benefits has two inadequate 
options--401(h) accounts and voluntary employee beneficiary 
associations (VEBAs). A section 401(h) account is generally an account 
maintained within a defined benefit plan for retiree medical benefits 
that cannot exceed 25 percent of the total employer contributions. 
Section 401(h) accounts, however, are not available to the vast 
majority of defined contribution plans, including 401(k) plans. 
Similarly, retiree health prefunding through VEBAs is subject to a 
series of draconian restrictions. The lack of effective pre-funding 
arrangements has contributed to the decline in employer's willingness 
to maintain retiree health plans. Section 401(h) accounts should be 
allowed in section 401(k) plans and the limits on contributions to 
VEBAs should be eased.

Promote Lifetime Saving
The Problems:
    Low Saving Rate. The U.S. personal saving rate has dropped to a 
near historic low level. The low level of saving means there is less 
money available to expand long-term economic growth and there are high 
levels of financial insecurity for millions of Americans.
    Obstacles to Accumulation. Mutual funds are the primary savings 
vehicle for millions of American households. Over the past two decades, 
millions of small, middle-income investors have participated in our 
capital markets through mutual funds. However, the tax treatment of 
mutual funds significantly reduces the investment return for millions 
of mutual fund shareholders.
    Uncertain Future. The lower tax rates on dividends and long-term 
capital gains are scheduled to expire at the end of 2008. The 
increasing uncertainty created by the possibility of rising tax rates 
on dividends and capital gains in future years may reduce the 
beneficial effects of the lower rates.

The Solutions:
    Reduce the Anti-Saving Bias. The tax code currently affords 
preferential tax treatment that encourages many forms of consumption, 
rather than optimizing savings incentives.
    Eliminate Barriers to Saving. Mutual fund investors are required to 
pay capital gains taxes on the shares of stock sold by their mutual 
funds even if investors sold none of their mutual fund shares. Allowing 
mutual fund investors to defer payment of capital gains taxes until 
they sell their shares would increase the ability of millions of 
middle-income Americans to save for their retirement.
    Make the Capital Gains and Dividend Tax Rates Permanent. Congress 
should not wait until 2008 to address the capital gains and dividend 
tax rates. The lower tax rates on dividends and capital gains have been 
tremendously successful in boosting dividends and investments in our 
economy. Congress should act now to make these changes permanent and 
keep the maximum tax rate for both dividends and long-term capital 
gains at 15 percent.
    Promote Education Savings. Encourage employer sponsorship of 529 
payroll deduction programs to assist not only in traditional college 
funding but also to encourage adults to continue lifelong learning 
before and after retirement. These programs, if employer contributions 
were allowed, could take the place of tuition reimbursement programs 
for adult workers over time.

Improve and Expand Financial Education
The Problems:
    Financial literacy is deficient across all generations and socio-
economic levels. The National Council for Economic Education Studies 
(NCEE) reports nearly two-thirds of American adults and students do not 
understand basic economic principles such as ``inflation'' and 
``national debt.''
    Financial literacy curriculums are not being taught in schools. 
NCEE says only four states require students to complete a course that 
includes personal finance before graduating high school. In a 
nationwide survey of 4,000 high school students, sponsored by the 
Jump$tart Coalition for Personal Financial Literacy, that asked 
questions on income, spending, money management and saving, more than 
65 percent of the students failed the exam.
    Decisions made early in life can threaten an individul's financial 
security later in life. A Nellie Mae analysis indicates the average 
college student has more than four credit cards, with forty-five 
percent of them carrying debt of more than $3,000. The report also 
found that almost half of college students have paid late fees and 
almost ten percent have had cards cancelled because of late payments. 
Bankruptcies for those 18-to-25 years old numbered 150,000 in 2000.

The Solutions:
    Encourage participation in private sector programs. There are many 
financial literacy programs and curricula designed for all age groups 
by the private sector, but there needs to be a concerted effort to 
encourage school districts and teachers to incorporate them into their 
class plans.
    Support states' efforts to improve financial literacy requirements 
in schools. In 2003, six states adopted legislation requiring 
integration of personal finance into K-12 instruction. This was done 
with little accompanying financial burden because of the large amount 
of no--or low-cost education materials and free teacher training. More 
states need to be encouraged to adopt financial literacy requirements 
in schools.
    Support the efforts of the Congressional Financial and Economic 
Literacy and Education Commission, the U.S. Treasury Department's 
Office of Financial Education, and the Congressional Financial Literacy 
Caucus. The Commission was created by Title V of the Fair and Accurate 
Credit Transactions Act and the Office of Financial Education in May of 
2002. It works to promote access to the financial education tools that 
can help all Americans make wiser choices in all areas of personal 
financial management, with a special emphasis on saving, credit 
management, home ownership and retirement planning. The Congressional 
Financial and Economic Literacy Caucus, formed in February 2005, will 
work to increase public awareness of poor financial literacy rates 
across the country and work toward improving those rates.
    Promote Innovative Education Solutions. Many companies are 
committed to innovatively helping our next generation reach their full 
potential. As an illustration, Merrill Lynch's Investing Pays Off ( 
IPO) curriculum has been specially developed as a tool for volunteers, 
parents and educators to teach young people the foundations for 
business and financial success. The IPO curriculum is available, free 
of charge, at http://www.ml.com/philanthropy/ipo/.

Remove Complex and Arbitrary Rules
The Problem;
    Complex and Arbitrary Rules. Retirement plan rules are complex and 
arbitrary. As a result, employers--especially small employers--are 
unwilling to voluntarily sponsor retirement plans for their employees. 
Such rules not only make compliance difficult and errors likely, but 
they also greatly increase costs.

The Solutions:
    Simplify Corrective Distributions of Excess Contributions. 
Employers who voluntarily sponsor retirement plans for their employees 
should not be penalized unfairly when excess contributions are made and 
corrected within a reasonable period of time. Compliance with the 
myriad of rules, limitations, and nondiscrimination requirements is 
extremely difficult. In many cases, it may not be realistically 
possible to complete all corrective distributions within 2-1/2 months 
of the plan year in spite of best efforts. By allowing plan sponsors to 
have six months after the plan year to make corrective contributions, 
the rules will provide needed flexibility. In addition, by providing 
that corrective distributions of excess contributions will be taxable 
in the year of receipt, the proposal would significantly decrease 
complexity.
    Eliminate Barriers to Charitable IRA Contributions. Individuals who 
wish to donate IRA assets to charity must first include taxable amounts 
in income and then claim a deduction. Limits on deductible charitable 
contributions create barriers to charitable giving that should be 
eliminated. These barriers actually discourage retirement saving for 
those without heirs. Retirement age individuals should be able to 
exclude direct transfers from IRAs to charities before or after death 
without regard to the limits on deductible charitable contributions.
    Repeal the Top-Heavy Rules. Under current law, plans must satisfy 
stringent nondiscrimination requirements ensuring that the plan covers 
and provides meaningful benefits to rank-and-file workers. In addition 
to the nondiscrimination requirements, plans must also satisfy an 
entirely separate set of requirements that serve the same purpose as 
the nondiscrimination requirements. The additional set of requirements, 
the ``top-heavy rules,'' are complicated and superfluous. The 
nondiscrimination requirements are more than adequate to ensure that 
rank-and-file workers are receiving sufficient benefits.
    Elimiate the ``Half-Year'' Rules. A number of IRA and retirement 
plan rules turn on half-years, e.g., 59-1/2, and Congress should round 
these years to whole numbers, e.g., 60, to make it easier for 
individuals to understand the rules.

                                 

 Statement Yung-Ping Chen, University of Massachusetts-Boston, Boston, 
                             Massachusetts

    Mr. Chairman and Members of the Committee: I appreciate the 
opportunity to present for your consideration a statement on ``How to 
Create a Social Insurance Program for Basic Long-Term Care Coverage.'' 
For the record, my name is Yung-Ping Chen. I am a professor of 
gerontology and the Frank J. Manning Eminent Scholar's Chair in 
Gerontology at the University of Massachusetts Boston. My academic and 
professional background in the field of Social Security and economics 
of aging includes the following: member of the technical panel of 
actuaries and economists of the 1979 Advisory Council on Social 
Security; delegate or consultant or both to the 1971, 1981, 1995 White 
House Conferences on Aging and the 1998 White House Conference on 
Social Security; and faculty appointments at several colleges and 
research organizations. I am a founding member of the National Academy 
of Social Insurance and a fellow in the Gerontological Society of 
America. The statement I am presenting today, I should indicate, is 
based on my research that was supported by the Home Care Research 
Initiative of the Robert Wood Johnson Foundation. However, the views I 
express are my own and do not necessarily represent the positions of 
any organization with which I am affiliated.
    Mr. Chairman, you are right to highlight long-term care as a 
national policy issue, as you broaden the discussion of reforming 
Social Security to include other retirement policy challenges and 
opportunities for our aging society. I applaud you for the vision you 
are introducing to the Congress and the nation.
    Long-term care--health, social, and personal services performed at 
home, in the community, or in a nursing home or assisted-living 
facility--embodies many personal, family, and societal issues in an 
aging society. The need for long-term care will grow with the ``aging 
of the elderly.'' In 40 years, those 85 or older are estimated to more 
than triple, outpacing the growth rate of those 65 to 84, which will 
double.
    A key policy question for long-term care is whether the current 
system of paying for it can be expected to meet future needs, a system 
that relies heavily on personal payment and public welfare (Medicaid) 
and only lightly on social insurance and private insurance.
    Long-term care may carry with it substantial, even catastrophic, 
costs to an individual or a family. But only a small proportion of 
people need an extensive amount of this care during their lifetimes.
    Therefore, this contingency is best protected by insurance. But 
insurance is in limited use, as just noted. A system relying on 
Medicaid and personal payments to cover the bulk of the costs is 
problematic. Medicaid has been subject to cuts and partial restoration 
of cuts over the years, and personal payments may impoverish people and 
they have.
    As a possible remedy, some analysts propose expanding Medicare to 
include long-term care. Others advocate a new social insurance program 
for it. Given current and projected federal budget deficits, new tax 
dollars are even harder to come by
    Others have promoted private long-term care insurance as a 
solution. Limited income tax deductibility already exists for insurance 
premiums, but few people buy private long-term care insurance policies.
    Personal savings can certainly help, but not many individuals can 
amass sufficient financial resources over a lifetime to pay for the 
care of a long duration. For others who may experience unemployment, 
illness, or disability during working years, chances for accumulating 
substantial wherewithal are especially slim.
    Mr. Chairman and Members of the Committee, I believe a better way 
could be found by (1) more widespread use of insurance in both public 
and private sectors, and (2) linking several sources of funds that 
already exist in each sector to generate the needed dollars to pay for 
social insurance and private insurance.
    The new method I propose is one in which social insurance and 
private insurance will pay for the bulk of the costs, supplemented by 
personal payments. I call it a ``three-legged-stool'' funding model.
    How then do we find public and private dollars for a new social 
insurance program and for the purchase of private insurance? Since many 
people seem unable or unwilling to devote new resources for long-term 
care, I suggest using our existing resources more efficiently by 
trading resources dedicated for one purpose for another purpose. I call 
it the ``trade-off principle.''
    Applying the trade-off principle in the public sector, we could 
divert, say, 5 percent of a retiree's Social Security cash benefits 
(not payroll taxes) to fund a social insurance program that provides 
basic long-term care. I call this a ``Social Security/Long-Term Care 
(SS/LTC) Plan.'' With this plan, retirees themselves are trading some 
income protection for some long-term care protection. This would 
enhance a retiree's total economic security. Low-income beneficiaries, 
though covered by the program, will be exempt from the trade-off. This 
program could pay for one year of nursing home care or two years of 
home care.
    Participation in the SS/LTC plan could be mandatory with an opting-
out provision. So, people would be automatically enrolled in this plan 
upon receipt of Social Security retirement benefits, but they may opt-
out of it within a reasonable timeframe. Or people may be given a one-
time opportunity to join SS/LTC plan at age 62 or 65.
    To pay for longer periods of care, people would buy private long-
term care insurance, much like those Medigap policies that supplement 
Medicare. Since the social insurance program would provide the basic 
coverage indicated above, private long-term care insurance would cost 
less than it does now and thus become more affordable to more people. 
The visibility of the SS/LTC plan could, in addition, serve as a 
catalyst to increase awareness of the need to prepare for long-term 
care. And people would finance additional care out of pocket.
    The trade-off principle is already being used in the private 
sector. For example, a person could buy an insurance policy that 
combines life insurance and long-term care, which pays for long-term 
care expenses, if needed, by commensurately reducing life insurance 
benefits. Although available, this type of combination policy is not 
wildly popular. Perhaps there is a role for the government to encourage 
it.
    To summarize, because the current system of relying primarily on 
personal payments and public welfare is inherently unsustainable or 
problematic and because the uncertain need for long-term care is a risk 
best protected by insurance, I have proposed a ``three-legged-stool'' 
funding model, under which social insurance would provide a basic 
protection that would be supplemented by private insurance and personal 
payment, with public welfare as a safety net. These four sources of 
funds are the same as those used at present, but they would be deployed 
vastly differently under the proposed model. Moreover, to implement the 
new funding model, I have also suggested a ``trade-off principle'' to 
generate money to pay for social insurance and private insurance 
because the prospect for new public and private dollars for long-term 
care appears dim.
    The preceding is a summary of my proposed ideas. The balance of 
this statement, in the form of an attachment, explains my ideas in 
greater detail. I would be pleased to provide additional materials to 
the Committee and its staff. Thank you for your attention.
                                 ______
                                 
ATTACHMENT: A Fuller Explanation of ``How to Create a Social Insurance 
        Program for Basic Long-Term Care Coverage''

Insurance for long-term care in theory and in practice
    The uncertain need for long-term care services is a recognized risk 
that may carry with it substantial--even catastrophic--financial 
consequences to an individual or his or her family, but it actually 
occurs only to a relatively small and predictable proportion of persons 
in a population at any one time. This type of contingency is best 
protected by insurance mechanisms.
    In practice, however, insurance is used only in a limited way to 
fund long-term care, either in the public sector or in the private 
sector. Current funding for these services relies heavily on personal 
payment and public welfare (Medicaid) but only lightly on social 
insurance and private insurance.\1\ This method is akin to sitting on a 
two-legged stool, which is unlikely to be stable at best and 
unsustainable at worst, because it tends to impoverish many people and 
thereby severely strains Medicaid budgets nationwide. One may regard it 
as a catastrophe waiting to happen.
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    \1\ Combined, out-of-pocket payment and Medicaid defrayed 70 
percent of the total expenditures. Out-of-pocket payment--sometimes 
called self-insurance--fails to use the insurance principle of pooling 
risks. Self-insurance, by definition, is assuming the risk by oneself, 
rather than with others in a large group of persons exposed to the same 
type of risk. Medicaid has been regarded by some analysts as a public 
insurance program, but it is not insurance because it lacks risk 
pooling. Labeling Medicaid--a welfare program--as insurance appears to 
use the term in a vernacular sense (``something to fall back on''), 
rather than in its actuarial sense, in terms of risk pooling among a 
large number of persons exposed to the same type of risk.
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    Heavy reliance on out-of-pocket payment and public welfare has 
spawned many calls for reform over the years. But all proposals face 
the same question: How to obtain additional funding? Many have come to 
realize that neither the public sector nor the private sector alone has 
the financial wherewithal to meet the high and growing long-term care 
costs. A significant challenge for policymakers is how to secure 
funding from both public and private sectors. New approaches are 
needed.

A ``three-legged-stool'' funding model
    In my view, a better funding method could be found by (1) more 
widespread use of the insurance principle for both private- and public-
sector programs, and (2) linking several sources of funds in each 
sector that already exist to generate resources to pay for both social 
insurance and private insurance. Therefore, I propose a new funding 
model, one in which social insurance and private insurance will pay for 
the bulk of the costs, supplemented by personal payment. I call this a 
three-legged-stool funding model.\2\ When these three sources fail to 
provide for some individuals, public welfare (Medicaid) will serve as a 
safety net. These are the same sources of funds presently in use, but 
will be deployed vastly differently in the proposed model.
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    \2\ The idea of a three-legged-stool is patterned after the way, as 
a model or as an ideal, we provide retirement income and acute health 
care for the older population. Retirement income is provided using 
Social Security for a floor of protection, with employment-based 
(occupational) pensions and personal savings supplying supplemental 
income. When these three sources fail to provide for some individuals, 
public welfare (Supplemental Security Income) serves as a safety net. 
Similarly, acute health care for the elderly is provided by Medicare, 
supplemented by employer-provided health benefits for retirees and by 
individual payments for non-covered expenses in some cases through 
Medicare Supplemental (Medigap) policies. When a person's health care 
needs cannot be met by these sources, public welfare (Medicaid) acts as 
a safety net. The three-legged-stool funding model may be regarded as a 
policy approach that would simultaneously foster self-reliance (by 
means of private insurance and personal payment) and collective 
assistance (in the form of social insurance). In the same vein, 
building a three-legged-stool funding model for long-term care would 
begin with creating a social insurance program for a basic amount of 
long-term care coverage.This social insurance program would then be 
supplemented by private long-term care insurance and by personal 
payment.
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A trade-off principle for merging resources: A new approach
    Assuming acceptance of this model, where might the funds for a new 
social insurance program and for the purchase of private insurance be 
found? Many people seem unable or unwilling to devote new resources for 
meeting long-term care costs. At least part of this may stem from the 
fact that people, in general, tend to compartmentalize or categorize 
their total resources (financial and non-financial assets as well as 
income) into different expenditure items such as food, housing, and the 
like. Once compartmentalized or categorized, resources will only be 
available for designated purposes or accounts.
    Merging resources could then increase the total utility of existing 
resources for meeting various costs. In order to merge or combine 
resources together, it is necessary to create linkages in both public 
and private sectors. Therefore, I suggest the use of the trade-off 
principle.

Trade-off is ideologically and politically neutral
    The trade-off principle can be applied in both the public and 
private sectors, as will be illustrated below. While the trade-off is 
suggested to generate new funding for long-term care when government 
resources are not available and when individuals are either unable or 
unwilling to devote new dollars for it, the suggestion does not imply 
that this method will cover all long-term care needs. Far from it--
implementation of the trade-off principle in the public sector would 
still leave much room for private-sector initiatives such as personal 
insurance and personal savings. Therefore, the concept of trade-off is 
ideologically and politically neutral in that it favors neither social 
insurance nor private insurance; it can apply to either or both.

A Social Security / Long-Term Care Plan
    Applying the trade-off principle in the public sector, one could 
fund a social insurance program for providing basic coverage for long-
term care by diverting a small portion, such as 5%, of a retiree's 
Social Security cash benefits for this purpose. I call this a ``Social 
Security/Long-term Care (SS/LTC) Plan.'' This plan would cover low-
income Social Security beneficiaries but exempt them from the trade-
off.\3\
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    \3\ Broad outlines of this plan are available in Chen, Yung-Ping 
(1993). A `three-legged stool:' A new way to fund long-term care?, Care 
in the Long Term: In Search of Community and Security (pp.54-70). 
Washington, D.C.: National Academy Press.
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    Participation in the SS/LTC plan could be mandatory with an opting-
out provision. That is, upon receipt of Social Security retirement 
benefits, people would be enrolled into SS/LTC automatically, but they 
may opt out of it within a specified timeframe. Or people may be given 
a one-time opportunity to join SS/LTC plan at age 62 or 65.
Private long-term care insurance
    The trade-off principle can and could be applied in the private 
sector as well.\4\
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    \4\  A fuller discussion may be found in Chen, Yung-Ping (2001). 
Funding long-term care in the United States: The role of private 
insurance. Geneva Papers on Risk and Insurance, 26 (4), 656-666.
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    With respect to private long-term care insurance policy, there are 
many reasons for the unwillingness of people to buy it. One of the most 
important reasons on the demand side may be that some people resist 
buying because it provides no benefit if they do not need services; 
they dread the so-called ``use it or lose it'' syndrome. Another reason 
is the high costs of private long-term care insurance policies for 
older people.
    On the supply side, insurance companies are concerned about moral 
hazard (greater use of services induced by insurance) and adverse 
selection (buyers are those who suspect they will need long-term care 
services).
    To substantially reduce the degree of these reservations, the 
trade-off principle may be used to enhance the willingness of 
individuals to purchase long-term care insurance, by linking it to life 
insurance or annuity products.\5\
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    \5\ Also, it may be possible to increase the ability of individuals 
to purchase long-term care insurance by linking it to occupational 
pensions from employers. This includes Teachers Insurance and Annuity 
Association--College Retirement Equities Fund and government employee 
retirement programs at federal, state and local levels; or by linking 
it to individual retirement accounts (IRAs), Keogh plans, or other 
employment-based saving vehicles, such as 401(k) plans; or linking it 
to homeownership through home equity conversion plans (e.g., reverse 
mortgages).
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A combination policy: Example of the trade-off principle
    Linking long-term care benefit to life insurance or annuity 
products already exists in the market; it combines long-term care 
protection with income protection through life insurance or annuity. 
For example, for a single premium of $100,000, a 65-year-old woman 
could buy a life insurance policy that provides an initial death 
benefit of $190,000. The death benefit, by definition, is payable on 
the death of the insured. The death benefit can also be used by the 
insured prior to death to pay for long-term care expenses, such as 
nursing home or home health care for at least 50 months--at lesser of 
actual cost or at a monthly rate of 2 percent of the death benefit or 
$3,800 per month.
    In short, with a rider for long-term care, a life insurance policy 
pre-pays the death benefit for long-term care expenses. If the insured 
does not need long-term care, then the funds in the insurance policy 
(such as universal life or variable universal life) continue to grow. 
Stated differently, unused long-term care benefits will pass to the 
beneficiaries of the policy. Under this arrangement, in essence, the 
policyholder trades off some or all of the death benefit for long-term 
care.
    Providing a long-term care rider to a life insurance policy could 
also reduce, if not eliminate, the moral hazard problem: there would be 
a built-in resistance to over-using long-term care benefits because 
that would reduce the eventual insurance proceeds. The adverse 
selection problem could be limited, too, because such a combination 
product would appeal to both healthy and not-so-healthy people. The 
high cost issue could also be moderated, in addition, because people 
could buy long-term care insurance coverage at younger ages.
Conclusion
    In summary, we need fundamental reform of the ways in which we pay 
for long-term care and I have suggested some potentially viable ideas.

                                  
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