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






                    BANKING ON RETIREMENT SECURITY:

                      A GUARANTEED RATE OF RETURN

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

                                HEARING

                               BEFORE THE

                            SUBCOMMITTEE ON
               FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             JUNE 23, 2005

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 109-41



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                           WASHINGTON : 2006 
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    MICHAEL G. OXLEY, Ohio, Chairman

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

                 Robert U. Foster, III, Staff Director
       Subcommittee on Financial Institutions and Consumer Credit

                   SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
    Carolina, Vice Chairman          CAROLYN B. MALONEY, New York
RICHARD H. BAKER, Louisiana          MELVIN L. WATT, North Carolina
MICHAEL N. CASTLE, Delaware          GARY L. ACKERMAN, New York
EDWARD R. ROYCE, California          BRAD SHERMAN, California
FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      DENNIS MOORE, Kansas
PAUL E. GILLMOR, Ohio                PAUL E. KANJORSKI, Pennsylvania
JIM RYUN, Kansas                     MAXINE WATERS, California
STEVEN C. LaTOURETTE, Ohio           DARLENE HOOLEY, Oregon
JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
VITO FOSSELLA, New York              HAROLD E. FORD, Jr., Tennessee
GARY G. MILLER, California           RUBEN HINOJOSA, Texas
PATRICK J. TIBERI, Ohio              JOSEPH CROWLEY, New York
TOM FEENEY, Florida                  STEVE ISRAEL, New York
JEB HENSARLING, Texas                CAROLYN McCARTHY, New York
SCOTT GARRETT, New Jersey            JOE BACA, California
GINNY BROWN-WAITE, Florida           AL GREEN, Texas
J. GRESHAM BARRETT, South Carolina   GWEN MOORE, Wisconsin
RICK RENZI, Arizona                  WM. LACY CLAY, Missouri
STEVAN PEARCE, New Mexico            JIM MATHESON, Utah
RANDY NEUGEBAUER, Texas              BARNEY FRANK, Massachusetts
TOM PRICE, Georgia
PATRICK T. McHENRY, North Carolina
MICHAEL G. OXLEY, Ohio


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 23, 2005................................................     1
Appendix:
    June 23, 2005................................................    41

                               WITNESSES
                        Thursday, June 23, 2005

Brock, David O., President and CEO, Community Educators Credit 
  Union (FL), on behalf of Credit Union National Association.....    17
Brown, Michael J., President and CEO, Harbor Federal Savings Bank 
  (FL), on behalf of America's Community Bankers.................    14
Furman, Dr. Jason, Non-Resident Senior Fellow, Center of Budget 
  and Policy Priorities, Wagner Graduate School of Public 
  Service, New York University...................................    20
Gornto, Rick, President, First Financial Benefits, Inc. (TX).....    19
Roberts, J. Lamar, President and CEO, First National Bank of 
  Pasco (FL), on behalf of Independent Community Bankers of 
  America........................................................    15

                                APPENDIX

Prepared statements:
    Bachus, Hon. Spencer.........................................    42
    Clay, Hon. Wm. Lacy..........................................    46
    Sessions, Hon. Pete..........................................    47
    Brock, David O...............................................    51
    Brown, Michael J.............................................    56
    Furman, Jason................................................    60
    Gornto, Rick.................................................    64
    Roberts, J. Lamar............................................    66

 
                    BANKING ON RETIREMENT SECURITY:
                      A GUARANTEED RATE OF RETURN

                              ----------                              


                        Thursday, June 23, 2005

                  House of Representatives,
             Subcommittee on Financial Institutions
                               and Consumer Credit,
                           Committee on Financial Services,
                                                   Washington, D.C.

    The subcommittee met, pursuant to notice, at 10:08 a.m., in 
Room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the subcommittee] presiding.
    Present: Representatives Bachus, Biggert, Tiberi, Feeney, 
Hensarling, Pearce, Neugebauer, Pryce, McHenry, Sanders, 
Maloney, Moore of Kansas, Frank, Crowley, Baca, Green, Moore of 
Wisconsin and Clay.
    Also present: Representative Sessions.
    Chairman Bachus. Good morning. The Subcommittee on 
Financial Institutions and Consumer Credit will come to order. 
Today's hearing is on banking on retirement security, a 
guaranteed rate of return. And at this time I am going to 
recognize Mr. Feeney, a Member from Florida, for an opening 
statement.
    Mr. Feeney. Thank you very much, Mr. Chairman, and thank 
you for having these hearings that will provide important 
discussions about some options for long-term retirement savings 
for Americans.
    Mr. Chairman, we have got a number of distinguished guests 
here today. I have read all of the testimony and appreciate all 
of our witnesses. We have got a number of Floridians here 
today. I will be introducing one of those when he speaks in a 
moment or two.
    I did want to recognize a longtime friend going back 12 
years now, Mike Brown, from the American Community Bankers. It 
has been great to work with him in my capacity in Tallahassee. 
It is great to see him visiting Washington. And when I get a 
chance, I will be introducing Mr. Roberts for his testimony.
    Mr. Chairman, one of the goals of the House Financial 
Services Committee is to bring to light the importance of 
retirement savings. This has become more important than ever 
because we have all heard about the situation that Social 
Security is in and the long-term challenges or crises, 
depending on the way you prefer to describe it.
    Today Social Security is collecting more money than it 
needs to pay benefits, but by the year 2017 or so, it will 
start running a deficit, collecting less in taxes than it pays 
in benefits, and that deficit will get worse every year. 
Already 78 percent of families pay more in payroll taxes than 
in income taxes. There are fewer workers per retiree today than 
ever before, and that ratio gets worse as we go along. When 
Social Security started, we had some 42 workers paying into the 
system for every beneficiary. By the year 2030, the ratio will 
be two people paying for the benefits of every retiree.
    Americans need to know they have no legal right to any part 
of the money they have paid into Social Security. In the 1960 
Supreme Court case Fleming v. Nestor, the Supreme Court decided 
that Americans have absolutely no ownership rights to the money 
that they have paid into Social Security. The Government has 
absolutely no contractual obligation to pay any set level of 
Social Security benefits.
    Yesterday, certain members of the Republican Conference 
introduced a proposal which would move us toward some real 
reform by allowing Social Security surplus, instead of being 
spent every year by Congress, to be put into personal 
retirement accounts. I think that both as a practical matter 
and politically, hopefully we will lose some of the 
obstructionism and allow the Social Security surplus to be used 
for what it was always intended to be used for; that is, 
individual retirement savings for future seniors.
    Personal accounts would provide ownership of one's 
retirement savings. Some argue that personal accounts are very 
risky. They point to things like Enron, which there is no 
proposal by any Member of Congress to suggest that people ought 
to be able to put all of their retirement savings in any stock, 
let alone their own company's stock.
    Having said that, completely avoiding all risk is difficult 
and actually has the guaranteed problem of underperforming 
inflation. So one thing we know is that if you avoid all 
investment risk, you will be worse off as inflation eats into 
your long-term retirement savings. Most investors are aware 
that you must take some risk to achieve higher returns, and 
that, over the long term, riskier investments have provided 
much higher rates of return.
    But individual investors also need to know that there are 
some very conservative choices that they can make as part of 
any retirement portfolio. As has been mentioned, some 15 
Members have joined me in proposing, in a letter to Chairman 
Thomas, that we have what has been referred to as a community 
bank option that would be included in any personal savings 
account, and that is what we are here to discuss today.
    Mr. Chairman, I again thank you. I look forward to hearing 
from our witnesses not just in terms of what opportunities that 
they provide to their current investors, but how maybe they can 
solve the long-term retirement challenges that face Americans.
    Chairman Bachus. Thank you, Mr. Feeney.
    Mr. Frank.
    Mr. Frank. Thank you, Mr. Chairman. And I am glad to be 
with our friends in the independent bankers, community bankers, 
and credit union communities, who do a great deal. And let me 
say at the outset there was a statement in the credit union 
testimony which had noted that CUNA has taken no position on 
whether or not there should be private accounts, but that if 
there are, there would be equity among financial institutions. 
And I very much agree with that.
    Let me give you an analogy. I think this latest proposal 
that we should spend countless tens of billions of dollars to 
send people to Mars is the height of foolishness. But if we 
were to send people to Mars, I would certainly want no 
discrimination against those who could be sent. So I have a 
similar approach here. I don't think much of the idea, but I 
certainly agree that if we were to do this, I would be for full 
equity for the smaller institutions, and I will--in the 
questioning, I think this does get to a point where I have 
agreed which is that we should be raising deposit insurance. I 
think we would agree that doing this without raising the 
deposit insurance limit would be a problem there, and this 
shows what I think is the inequity of current law, which 
reinforces the economic problems that smaller banks face by the 
inadequate level, it seems to me, of deposit insurance.
    But I then do want to talk--the gentleman from Florida 
mentioned this newest proposal, and I am struck. There was a 
recent proposal that said individuals should now be given 
ownership in their share of the surplus, and they can put that 
in a private account.
    First, up until recently, I had understood the President to 
be pooh-poohing the notion that there was a real surplus. I 
mean, the President had said when he went to, I think, West 
Virginia, well, this is just paper in here. So first--and here 
is what has happened. First people really denigrated the notion 
that there was a tangible Social Security surplus as a way to 
argue that we need to reduce benefits. In fact, if Social 
Security, as we know, is credited with its current surplus, and 
with the surplus that will build up until 2018, and with the 
interest that should be accruing on that, then Social Security 
is fully funded until sometime in the 2040's.
    We have been told by people, well, wait a minute, that the 
surplus isn't really there. It has been spent, the President 
said, in a variety of ways. So now what we see is a kind of a 
reversal of position. We have apparently gone on the part of 
some from a denial that there was this surplus that we could 
use to an assertion that there is a surplus. But it is 
apparently now not to be used to pay the benefits, and that is 
what puzzles me. If we fully credit the surplus that is there 
and that will grow for 13 years, and the interest on it, we do 
not have a problem fully funding existing Social Security 
benefits until sometime in 2041. That doesn't mean we shouldn't 
consider what we should be doing. It doesn't seem to me to be a 
short-term crisis.
    But, in fact, what we are now told is, oh, no, there is 
this surplus, but instead of using it to fully fund the 
benefits, let us put it into private accounts, and then that 
coerces you into reducing the benefits.
    So I have a great deal of difficulty understanding how that 
pivot came about, and as I said, if there is a surplus, then we 
should use it for funding the benefits.
    Now, it is true that there is, according to the courts, no 
legal ownership in that surplus, but it is a matter of public 
policy. We can, in fact, take action to make sure that that 
surplus is used to fully fund benefits. And again, I want to 
stress what we have here is a kind of a double game going on, 
on the one hand a denigration of the reality of surplus, to 
argue, I think inaccurately, that there is a crisis and that we 
don't have enough money to pay the benefits. But having made 
that argument, people then turn to say, yeah, there is a 
surplus, but we are not going to use it, and this is the issue. 
Instead of using the surplus as it was intended to be used, to 
pay the legally mandated level of benefits, people say, no, let 
us take that and put it into private accounts, thereby creating 
precisely the problem that would exist if did you that with 
fully funding the benefits.
    So it just does seem to me--people have said, well, what is 
your proposal for Social Security? And let me just say, this 
recognition that there is a surplus is part of it. The problem, 
of course, is that this surplus has been used to pay for tax 
cuts, it has been used to pay for the war in Iraq, and it has 
been used to pay for a lot of other things. And this reinforces 
to me what is the short-term answer, even the intermediate-term 
answer to Social Security to the President and to the Majority. 
This surplus in Social Security that has been used for tax 
cuts, that has been used for the war in Iraq, that has been 
used for other programs, put the money back. If we put the 
money back, Social Security benefits can be fully paid until 
sometime in 2041 or 2042. That gives us years to decide what 
other adjustments we should make, and that would be the answer.
    But I do want to close by agreeing that if we are, in fact, 
going to go private accounts, which I think would be a very 
grave error, that I certainly do not want to see discrimination 
against small financial institutions. I have been worried, let 
me just say in closing. When I came on this committee, it was 
called the Banking Committee. In Massachusetts, in our 
legislature, the equivalent committee is called the committee 
on banks and banking. And somebody said, do you ever think they 
will change the name back here like to the committee on banks? 
And I said, well, I am afraid by the time we get to that, it 
will be called the committee on ``the'' bank, because there may 
only be one in America. Maybe there will be one in Germany, 
maybe there will be one in Japan. I don't think anybody wants 
to see that.
    I think the smaller institutions, the credit unions, and 
the community banks play a very important function. They are 
often preferred by consumers, not just individual consumers, 
but smaller business people, and so I certainly would not want 
to see anything done that would further the already unfortunate 
set of disadvantages they face.
    Chairman Bachus. I thank Mr. Frank and assure him that if 
we make a list for folks going to Mars, that we will actually 
give preference to the Democratic side.
    Mr. Frank. I thank you. But, Mr. Chairman, let me just say, 
only if we have reinstated proxy voting by that time.
    Chairman Bachus. Without objection, the gentleman from 
Texas, Mr. Sessions, will be permitted to participate in 
today's hearing. And I had already--Mr. Franks graciously 
consented. So, Mr. Sessions, I would like to recognize you. And 
I would like to also recognize the work that you and 
Congressman Feeney did in requesting this hearing and also in 
introducing H.R. 209 expressing the sense of the House of 
Representatives that any plan to reform Social Security and, I 
guess, include personal accounts would include the Social 
Security option. So at this time I am going to recognize you 
for an opening statement.
    Mr. Sessions. Thank you, Mr. Chairman. I have missed my 
years of--when I originally was here some 10 years ago, the 
service over here was a lot of fun, and I see that the humor 
has not stopped. And I appreciate and respect that, as well as 
the way it was accepted by the gentleman from Massachusetts in 
the spirit of fun.
    Mr. Chairman, I appreciate the opportunity to address the 
House Committee on Financial Services on the important issue of 
retirement security. I would also like to take this opportunity 
to thank you for your leadership vision that you have 
demonstrated on this issue for the American people.
    As Congress examines its options for providing long-term 
solvency of Social Security, I believe that there is one 
essential element that must be a part of comprehensive reform, 
and it is what we call the banking option. The banking option 
would allow workers to put part of their Social Security 
benefits in a product similar to a federally insured 
certificate of deposit, a CD, and to receive what is known as a 
guaranteed rate of return.
    I must say that much of what this hearing is about today, 
about safety and soundness that exists in the marketplace 
today, avenues by which people who need to make sure that they 
have regular rate of return, as well as the security involved, 
is important.
    I would also note to this committee, to this subcommittee, 
that today railroad, coal, fire, police, and teachers include 
those other workers across the United States that have their 
own private accounts that include many of these same options.
    Perhaps more importantly, the banking option would give 
risk-averse workers the opportunity to own a safe personal 
account that would guarantee a set rate of return greater than 
what is offered by Social Security, and one that is just as 
safe as any money in the bank.
    While studying measures that can serve as components of the 
comprehensive Social Security reform, I believe that Congress 
should pay particular attention to measures that have already 
been created and implemented in what we call field laboratories 
at the local level throughout America. Fortunately, one such 
laboratory for studying the real-world effects of the banking 
option already exists in Galveston County, Texas. It really is 
the birthplace of the banking model.
    Over 20 years ago, county employees in Galveston voted 
overwhelmingly to create an alternative to the Social Security 
system that gives retirees control of their own money at 
virtually no risk to the beneficiary. The results have been 
extraordinary, and Galveston County employees have average 
annual returns of 6.5 percent. Even today with our historically 
low interest rates, workers in Galveston still receive returns 
of 3.75 percent on their investment, which is far better than 
the Social Security rate of 1.8 to 2 percent.
    Giving workers this expanded choice is an important option 
for reforming Social Security because it provides workers with 
the same or better benefits as our Social Security system does.
    The other important aspect of this plan is that as workers 
get closer to retirement age and more vulnerable to potential 
swings in investments rates of return, the banking option 
allows them to move their assets into a conservative investment 
vehicle that protects their principal from a potential market 
downturn.
    There is nothing new about giving Americans the ability to 
put their money into an account with guaranteed returns. There 
is no more risk than what is already inherent in the current 
Social Security system, and that is why I have introduced, 
along with my dear friend Congressman Tom Feeney and 
Congressman Paul Gillmor, H.Con.Res. 209, which the Chairman 
spoke about. This legislation simply expresses the sense of 
Congress that any Social Security reform legislation should 
include this banking option. And I believe that, listening to 
our witnesses here today, we can begin to further explore how 
this option can be implemented and successful for so many 
Americans.
    Mr. Chairman, thank you for the opportunity to be with you 
today, and I yield back my time.
    Chairman Bachus. Thank you, Mr. Sessions.
    I now recognize the Ranking Member, Mr. Sanders.
    Mr. Sanders. Thank you very much, Mr. Chairman. I look 
forward to hearing from our panelists.
    Let me just be very brief. There is a saying in Vermont, 
and, I suspect, all over the country, that if it ain't broke, 
don't fix it. The truth of the matter is that despite all that 
we hear from the White House, Social Security is not broke in 
either a literal or a figurative sense.
    Depending on the study that you look at, Social Security 
could pay out every benefit owed to every eligible American 
from between 36 and 47 years. That ain't broke. And that is 
under conservative projections of economic growth. And with 
modest reforms, modest reforms, not overhauling the whole 
system, not destroying the whole system, Social Security will 
be there for our kids and our great-grandchildren.
    I think it would be very foolish to dismantle what might 
likely be the most successful antipoverty program in the 
history of the world, one that has helped not only retirees, 
but has also helped millions of disabled people, millions of 
women and orphans who have lost breadwinners live with dignity.
    So I think we have a good system which needs modest 
changes, and what I object most to in this debate, it is not 
people who have different ideas than me. I think it is good to 
debate the ideas. I object to the fear-mongering that is coming 
from the White House, telling young people that Social Security 
is not going to be there when, in fact, that is simply not the 
case.
    Mr. Chairman let us take a look at the Galveston plan. 
First, Mr. Chairman, let us ask the question does the Galveston 
plan earn a higher rate of return than Social Security? The 
answer is no, it does not. According to the Wharton School of 
Business, in 14 out of 16 years since the creation of the 
Galveston plan, Social Security actually earned the same or 
higher rates of return than Galveston's.
    Second, will privatizing Social Security lead to higher 
taxes? Yes, if the Galveston plan is our model. Payroll taxes 
for the Galveston plan total 13.9 percent compared to 12.4 
percent under Social Security.
    Third, what would happen to the 45 million current 
recipients of Social Security if we adopted the Galveston plan? 
That is a question we must answer, Mr. Chairman, because you 
see the 5,000 municipal employees covered by the Galveston 
plan, unlike the Social Security System, do not make any 
contributions to support current retirees. That means that if 
we adopted a Galveston-like plan, no one would be paying the 
$500 billion annual cost of benefits for the Nation's 45 
million current Social Security beneficiaries. That would be a 
disaster.
    Fourth, do people receive higher benefits under the 
Galveston plan than under Social Security? No. According to a 
study done by the Social Security Administration, the 
Galveston's plan ``offers a lower initial ongoing benefit than 
Social Security for single workers with low earnings and for 
married workers at the low, middle and high earning level. 
After 20 years, all of Galveston's benefits are lower relative 
to Social Security's.''
    And according to the GAO, ``Low wage earners retiring today 
generally would have qualified for higher retirement incomes 
had they been under Social Security. Many median wage earners, 
while initially receiving higher benefits under the Galveston 
plan, would have eventually received larger benefits under 
Social Security because Social Security's benefits are indexed 
for inflation.''
    Mr. Chairman, if you are still not convinced that replacing 
Social Security with the Galveston plan would be a disaster, 
listen to Galveston's own municipal employees. Here is what 
Evelyn Robinson, who was the Galveston district court clerk for 
13 years before retirement in 2004, had to say about this plan: 
``I didn't come out ahead. My chief deputy did not come out 
ahead. My bookkeeper did not come out ahead. I personally don't 
know anyone who has retired who came out ahead.''
    So, Mr. Chairman, I look forward to hearing the testimony, 
and thank you for calling this hearing.
    Chairman Bachus. Thank you, Mr. Sanders.
    Mr. Hensarling.
    Mr. Hensarling. Thank you, Mr. Chairman, and thank you for 
holding this hearing. And I especially want to thank and 
congratulate my colleagues, Mr. Sessions and Mr. Feeney, for 
their leadership on this issue and helping us explore yet 
another option of what we can do to save Social Security for 
future generations.
    I would respectfully disagree with my colleague from 
Vermont. I recently became a father 3 years ago, so I have a 3-
year-old daughter and a 21-month-old son, and if we don't do 
something about Social Security now, they are going to receive 
a negative rate of return. I do not believe that is fair. That 
is inherently unfair to future generations, and I think 
something needs to be done.
    As my colleague from Florida pointed out, you can't escape 
demographics. We have increased number of retirees who are 
living longer. We have fewer workers supporting them. And 
something is going to have to happen in our system. And if we 
decide to do absolutely nothing, I can tell you what is going 
to happen. We all know what is written in the current law, and 
that is in 2042--and maybe I am not going to be here, but I 
expect my children will be. And in 2042 there is going to be a 
massive benefit cut of almost one-third. And I don't know how 
people feel in other parts of the Nation, but when I talk to 
people in my congressional district back in Texas, I have yet 
to find anybody who wants to embrace a benefit cut in Social 
Security of almost one-third, nor do they think that is fair 
for future generations.
    Additionally, if we don't do that, we have the option of 
raising taxes. We can raise payroll taxes 42 percent. I have 
yet to find anybody again in my congressional district who 
wants to see payroll taxes raised 42 percent.
    Well, indeed there is another option, and that is trying to 
help Social Security become an asset-based system with real 
assets that workers own, can manage, that the government can 
still guarantee, not unlike what our Federal deposit insurance 
is all about. And that is the option that we need to explore as 
a Nation, and so that is why I have embraced personal accounts.
    Now, we are going to hear a lot of talk today about how 
risky it is to allow individual Americans the freedom to manage 
their own personal accounts. Well, I would like to point out 
how risky the current system is. Congress, over the history of 
Social Security, has raided that system to surplus 57 different 
times. And as the Ranking Minority Member has pointed out, they 
have spent it on all kinds of things that are not related to 
retirement security. To me that sounds pretty risky.
    There have been at least 20 tax increases, and every time 
taxes increase, your rate of return goes down. And that is why 
my grandparents, who were born in roughly 1900, when they were 
alive received about a 12 percent rate of return on their 
Social Security, and my children will receive a negative rate 
of return. Part of it has to do with the tax increases.
    There have been benefit cuts. I believe, Mr. Chairman, that 
there is plenty of risk of leaving our money in the hands of 
Washington, and so that is why we need to explore personal 
accounts and particularly the guaranteed rate of return that is 
federally insured that could be offered by our community banks 
and our credit unions.
    Mr. Sanders. Will the gentleman yield briefly for just 1 
second, just for a minute. Just for the record. I respect his 
point of view. I would categorically disagree with many of the 
assertions made by my friend from Texas, not the least of which 
the suggestion that the alternative is privatizing or doing 
nothing. There is lot that we can do without destroying Social 
Security. It is not doing nothing, it is making modest changes 
to keep a very successful program going. Thank you.
    Mr. Hensarling. Well, we look forward to the Democrat plan 
then, Mr. Sanders.
    Chairman Bachus. Thank you, Mr. Hensarling.
    Mrs. Maloney.
    Mr. Frank. If the gentlewoman would yield. We do have a 
plan: Put the money back. Put the money back in Social Security 
that it was credited with, and then we have until 2041 to work 
on it. So if Social Security gets the money it is legally 
entitled to, that surplus that is being discussed, that is our 
plan is to put the money back.
    Chairman Bachus. Okay. I think all time has expired on 
that. And when this--yes, we will recognize Mrs. Maloney. Now, 
are there members on either side--Mr. Green, do you wish to 
make an opening statement?
    Mr. Green. If the Chair will deem it appropriate, I will 
waive it.
    Chairman Bachus. If you want to, we will have somebody on 
this side. Otherwise when Ms. Maloney is through--well, 
actually we do. Mr. McHenry and Mr. Green after that.
    Mrs. Maloney. Thank you very much, Chairman Bachus. And I 
welcome my friends from the community bankers and the credit 
unions, and Dr. Furman from New York University, which is in 
the district that I represent, and is an economist who has 
written extensively and published on this topic.
    But I must say I am puzzled today by the timing of this 
hearing. By all accounts I truly believe this privatization 
movement is not going to go anywhere because the more the 
American people learn about it, the less they like it. And once 
the American people understand four simple points about the 
President's proposal, then they understand that it makes no 
difference whether the private accounts are in a bank or with a 
broker. It is absolutely a losing proposition for them. And 
these four points I would like to briefly explain.
    Number one, the plan is not voluntary and will result in 
large benefit cuts because the President's plan will change the 
calculation of benefits from wage indexing to price indexing, 
and that will have a result of cutting guaranteed benefits 
possibly by more than 25 percent, even for the middle-class 
workers, even for those who choose not to invest in private 
accounts. And nothing about the bank option that we are 
considering today changes that fact. And the President has 
endorsed a substantial benefit cut for the middle class called 
progressive indexing because the benefit cuts are less for 
lower-income workers than for middle-class and higher-income 
workers.
    Under this sliding-scale benefit formula, benefits would 
fall behind the standard of living for almost all workers. For 
example, once fully phased in, a worker who has earned $37,000 
per year would have a 28 percent benefit cut. A worker who has 
earned $58,000 a year would have a 42 percent benefit cut. A 
worker who has earned $90,000 a year would have a 49 percent 
benefit cut. Benefits would be cut for all workers whose annual 
earnings are more than $20,000 a year.
    Number two, in addition to being a substantial benefit cut 
for almost all workers, including the middle class, the 
Administration's proposal would, over time, lead to a flat 
benefit amount, the so-called ``clawback'' provision. Some call 
it a tax; some call it a clawback. Whatever you want to call 
it. If you take money away from someone, I call it a tax. And 
at retirement, retirees who choose a private account would have 
to pay back the amount that they would have had, both principal 
and interest, had the money stayed in a trust fund. And under 
the bank option, by all predictions, the amount they have to 
pay back will be possibly up to 100 percent or more of the 
amount in their private account. They could possibly lose 
money.
    Number three, the vast majority of retirees would not be 
able to pass funds from their private accounts on to their 
children. An essential feature of the President's plan which is 
not affected by the bank option is that, at retirement you will 
be required to turn over the amount in your private account 
that is left after the privatization account in an insurance 
company to purchase an annuity which will give you a monthly 
income. Reliable, nonpartisan estimates indicate that this 
would leave little or nothing to be passed on to someone's 
children. So only those who died before they retired and had 
money left after the clawback would have assets to pass on.
    And number four, the money is not yours to invest as you 
see fit. In response to criticisms that the main beneficiaries 
of the private accounts would be money managers, the 
Administration made clear that the investment would be limited 
to a few large funds. Most recently the Administration has 
indicated that to prevent very risky investing that could dump 
unlucky retirees in the taxpayers' lap, it would require 
retirees to invest in life cycle accounts, an option in which 
the accountholder has no control at all over the funds in their 
account. And these problems of benefiting the money managers 
and moral hazard are equally pressing with the bank option and 
compel the same result. And these four points have persuaded 
many Americans that privatization is a bad idea, whether the 
private accounts are in the hands of a broker or a bank.
    Thank you, and I look forward to your testimony.
    Chairman Bachus. Thank you.
    Mr. McHenry.
    Mr. McHenry. Thank you, Mr. Chairman. I will make this 
brief.
    We are the Financial Services Committee. We have oversight 
over the markets. We have oversight over banks and insurance. 
We have oversight over Wall Street. This is a wonderful 
opportunity to discuss the investment opportunities that 
Americans can have when we have personal retirement accounts, 
and we are trying to get the full range of options on the 
table. Those on the other side of the aisle, I think, are 
arguing that we shouldn't do anything, that the marketplace is 
bad and dangerous and a horrible place for Americans to even 
look to. So their arguments, I think, are that we shouldn't 
even have this hearing today because markets are innately 
dangerous and bad.
    And I think our perspective on this side of the aisle, and 
what Congressman Feeney--his proposal is that we should 
actually have a full range of financial opportunities and 
options for all Americans for their personal retirement 
accounts, if and when we do proceed to personal retirement 
accounts; that markets could actually produce benefits for 
every American of all walks of life--rich, poor, black, white--
all walks of life. And so I think it is a healthy thing that we 
discuss some options in that regard.
    And I think we need to look at experiences of those that 
have had personal retirement accounts, much like Galveston, 
Texas, and under all press reports that I have read about 
Galveston, Texas, that all beneficiaries receive twice as much 
as they would, with their personal retirement accounts, twice 
as much as they would have under the current Social Security 
plan.
    So I think we need to look at all options. I think a 
wonderful federally insured manner of investing is with 
actually FDIC-insured banks. I think it is a wonderful 
opportunity for us to discuss this, and I think it is very 
appropriate that this is the week we are doing it, after the 
Ways and Means Committee leaders put forward their proposal to 
actually have personal retirement accounts that use the Social 
Security surplus that we have for the next 12 years, the Social 
Security surplus to actually start funding these personal 
retirement accounts and actually inject this capital into the 
marketplace, rather than having Washington, D.C., politicians 
spend it on pork barrel projects. So I think it is a very 
positive thing.
    I am looking forward to the testimony that the gentlemen 
here have to present to us, and thank you, Mr. Chairman, for 
hosting this meeting.
    Chairman Bachus. I thank you.
    Mr. Green.
    Mr. Green. Thank you, Mr. Chairman, and thank you, Mr. 
Ranking Member. I, too, look forward to hearing from the 
outstanding panelists that we have assembled today.
    Mr. Chairman and friends, when I left my district to come 
to Congress, one of the promises that I made was that I would 
do all that I could as a Member of Congress to protect Social 
Security. And my constituents made it conspicuously clear to me 
that for many of them, Social Security is not supplemental 
income; for many of them it is the only income they have, they 
have absolutely nothing but Social Security. And for too many 
of them, that is not enough. They don't want me to use my one 
precious vote to gamble with Social Security.
    Why are we discussing at great length Social Security as 
opposed to Medicare? Medicare as projected will face its 
depletion around 2020, whereas Social Security is looking at 
2041, and with some tweaking we can go a lot longer. My 
suspicion is this, friends: There is a surplus in Social 
Security. We are talking about trillions of dollars in Social 
Security that, when invested, will benefit somebody, bankers, 
credit unions, stock market, stock brokers. We are talking 
about Social Security because we have got a surplus. The house 
is on fire; that is Medicaid. We need to adjust the flame on 
the stove; that is Social Security.
    Rather than fight the house fire, we are finding ourselves 
trying adjust the flame on the stove. I contend that is because 
there is money to be invested. And I am just going to appeal to 
you to understand that I can't go back and tell my people that 
I voted to gamble with their future.
    I thank you. I yield back the remainder of my time, Mr. 
Chairman.
    Chairman Bachus. I thank the gentleman from Texas.
    That concludes our opening statements. All members are 
welcome to submit their written opening statements, and I will 
do so, submit mine for the record, and also associate myself 
with the remarks of Mr. Hensarling, Mr. Feeney, Mr. Sessions 
and Mr. McHenry.
    At this time we will recognize our panel of witnesses. Mr. 
Mike Brown is the president and CEO of Harbor Federal Savings 
Bank and is representing the America's Community Bankers. Mr. 
Brown is a native of Missouri, moved to Florida in 1972; is 
that right? He has held several positions with thrifts and 
community banks, and now is president and CEO of Harbor 
Federal. He is active in his community with the regional 
hospital--I am just summarizing--the theater, the Sunrise 
Theater, and he has just completed a 2-year appointment on the 
Thrift Institutions Advisory Council to the Federal Reserve 
Board of Governors, and was a co-chair of Governor Bush's 
campaign in your home county. We welcome you.
    At this time I am going to recognize Mr. Feeney to 
introduce Mr. Roberts.
    Mr. Feeney. Thank you, Mr. Chairman.
    I think it is appropriate that Florida has three witnesses 
today, Mr. Brock, Mr. Brown, and Mr. Roberts. Among other 
things, Florida, while I was a State legislator, took a defined 
benefit plan that was running deficits, some years as much as 
$14 billion, for our State workers and State retirees. We have 
moved it into an optional defined contribution plan. Nobody is 
forced to move, but we will never again, for those people that 
have their own defined contribution accounts, have an unfunded 
liability. These people will be guaranteed that they have a 
healthy retirement.
    So it is great to have three Floridians here today. Mr. 
Roberts is an at-large director of the Independent Community 
Bankers of America, which is the Nation's largest banking trade 
association and the only national association that exclusively 
serves community banks. The president of First National Bank of 
Pasco County, Mr. Roberts is a respected leader throughout the 
banking industry. In addition to serving on ICBA's executive 
committee, he represents Florida on ICBA's board of directors 
and serves as a member of the association's Federal legislation 
committee. He has previously served as president of the Florida 
Bankers Association. Mr. Roberts has been a director and 
instructor for the Florida School of Banking, chairman of the 
Independent Bankers Bank of Florida, and chairman of the 
Florida Banker Insurance Trust.
    Active in civic affairs, Mr. Roberts has served in 
volunteer leadership positions for the housing authority, two 
chambers of commerce, a Habitat for Humanity affiliate, and a 
Rotary Club. He has been named citizen of the year for Zephyr 
Hills, Florida, and business leader of the year for Dade City, 
Florida.
    My office has had the pleasure of working closely with Mr. 
Roberts on many matters important to the banking community and 
to Florida itself. Considering his vast knowledge of community 
banking, I believe that he will be able to offer us much today 
in his testimony, and I am grateful for the opportunity to 
introduce him.
    Chairman Bachus. I thank you, Mr. Feeney, and that was a 
very good introduction.
    So at this time I am going to introduce Mr. David Brock, 
president and CEO of Community Educators Credit Union in 
Florida. Representing CUNA, the Credit Union National 
Association. The fascinating thing about your institution is 
that it was started in 1953 by a group of 10 teachers, and now 
has 6 traditional branches and 9 branches in elementary and 
secondary schools. And from that modest start to the end of 
2004 it has $220 million in deposits, $186 million in loans. 
That is quite impressive.
    Mr. Brock is very active in his community. He serves on the 
Brevard County Foundation, which is the public schools in 
Brevard County; the Rolling Readers Space Coast, which is a 
program for disadvantaged children; and the United Way, as well 
as other organizations. He and Mr. Brown are both active in 
several other community organizations. So we welcome you to our 
committee.
    And at this time I would like to introduce Mr. Sessions to 
introduce Mr. Gornto.
    Mr. Sessions. Yes, Mr. Chairman. Thank you so very much. 
Mr. Chairman, it is a great pleasure for me to introduce a 
person who will be providing testimony today, Richard Gornto, 
who is president of the First Financial Benefits, Incorporated 
of Houston, Texas. It is important to note that Mr. Gornto is 
the plan designer of the so-called Galveston Plan, and has 
continued to successfully manage this plan and several other 
county plans for the past 25 years. It would be my hope and 
expectation that Mr. Gornto would be able to debunk any myths 
that may have been presented today in the opening phase of this 
hearing as Mr. Gornto would be considered an expert on all 
aspects of return, rate of return, as well as feedback about 
that plan.
    It is important to note that during this period of time he 
is past president, board chairman of Houston Society of 
Certified Financial Planners, trustee of Alvin Community 
College, board member of Child Advocates of Houston, board 
member of Alvin National Bank, past president and current board 
member of the Nolan Ryan Foundation and past board chairman of 
HCA Clear Lake Regional Hospital.
    Mr. Gornto came to Washington as a result of this important 
hearing, and I appreciate him taking time out of his schedule.
    Thank you, Chairman.
    Chairman Bachus. I appreciate that.
    And at this time it is my pleasure to recognize the 
gentlelady from New York.
    Mrs. Maloney. I thank the Chairman for allowing me this 
opportunity to introduce Dr. Jason Furman, and he is a 
nonresident senior fellow, Center on Budget and Policy 
Priorities, and visiting scholar from the New York University 
Wagner Graduate School of Public Service, which happens to be 
in the district that I am honored to represent this outstanding 
university. Previously Dr. Furman served as Special Assistant 
to the President for Economic Policy in the Clinton 
Administration.
    Dr. Furman has been a visiting lecturer at both Colombia 
and Yale Universities. In addition, Dr. Furman served as a 
staff economist at the Council of Economic Advisers and senior 
economic advisor to the chief economist of the World Bank.
    Dr. Furman received his Ph.D. In economics from Harvard 
University, and he is widely quoted in newspapers and other 
written documents on the subject that is before us today. We 
thank you for joining us today, Dr. Furman.
    Thank you.
    Chairman Bachus. Thank you, Mrs. Maloney, and we welcome 
you, Dr. Furman.
    At this time we will recognize our panel of witnesses, and 
we will start with Mr. Brown and go to his left and conclude 
with Dr. Furman. So at this time, Mr. Brown, you are 
recognized.

 STATEMENT OF MICHAEL J. BROWN, SR., PRESIDENT AND CEO, HARBOR 
  FEDERAL SAVINGS BANK (FL), REPRESENTING AMERICA'S COMMUNITY 
                            BANKERS

    Mr. Brown. Thank you.
    Chairman Bachus, Ranking Member Sanders and members of the 
subcommittee, I am Michael Brown, Sr., president and CEO of 
Harbor Federal Savings Bank. Harbor Federal is a $2.9 billion 
publicly traded community financial institution serving the 
eastern coast of Florida in Fort Pierce. I am testifying on 
behalf of the American Community Bankers, where I have served 
as a member of the board of directors and continue to serve on 
several committees.
    Thank you for this opportunity to testify on the role of 
community banks in retirement security and the importance of 
bank deposits and other investment options in creating a 
solvent retirement system for America's working men and women.
    Let me commend the hard work that Congressman Tom Feeney 
and Congressman Pete Sessions have done on this issue. They and 
their staffs have been working tirelessly to ensure that 
working families have a full range of options as part of any 
Social Security reform.
    ACB believes that allowing workers the choice of investing 
at least part of their Social Security taxes in personal 
accounts would create a more solvent system. We have been 
working for some time on this with Members of Congress and the 
Administration to make certain that workers have a full range 
of options for investing in Social Security personal accounts.
    Any Social Security reform should give workers the choice 
of relying on the products their community banks offer for 
their personal retirement accounts in addition to those 
investment options available on Wall Street. We call it the 
community bank option. Workers should have the option of 
seeking advice on their personal accounts from knowledgeable 
people they already know and trust, their hometown community 
banker. Community banks already offer a variety of federally 
insured retirement investments, including FDIC-insured 
individual retirement accounts and certificates of deposits.
    Workers of all ages would benefit from the community bank 
option. For example, some who seek greater return than the 
Social Security program currently provides may be wary of 
investing all of the retirement funds in equities and other 
retirement products that carry a higher risk. For these 
workers, a long-term federally insured deposit account from a 
community bank would be the most appropriate investment for all 
or part of the funds made available by Social Security reform.
    In addition, workers nearing retirement are traditionally 
advised to reduce their allocation in equity investments to 
reduce the risk. ACB believes that FDIC-insured accounts would 
benefit those older workers not only as a place to invest new 
funds, but also as a safe place in which to roll over funds 
from riskier personal account products.
    For more than 70 years, FDIC insurance has given millions 
of American families the confidence that the money they save in 
federally insured banks will be where they need it when they 
need it. Allowing FDIC-insured accounts for community banks as 
an option under Social Security reform would encourage workers 
to choose the personal account option, and it would increase 
support for reform.
    Today the shift from defined benefit plans into IRA and 
401(k)-type savings has made individuals responsible for 
managing their own assets. Retirement accounts often exceed the 
current $100,000 coverage limit provided by Federal deposit 
insurance. A substantial increase in FDIC coverage for 
retirement accounts would strengthen the viability of the 
insured deposit account option. Past assessments on federally 
insured banks cover the cost of today's deposit insurance. 
Deposits in FDIC insurance accounts return money to the local 
communities where workers live. Community banks invest these 
funds in their communities through loans to local businesses, 
mortgage loans to families, education loans to students and in 
many other ways. If the community bank option is adopted, it 
could result in reduced rates to borrowers and greater economic 
growth.
    ACB strongly believes that the community bank option should 
be available for workers choosing personal Social Security 
accounts. It will increase their choices, reduce their risk and 
help grow their communities. Thank you for giving us this 
opportunity to present our views.
    Chairman Bachus. Thank you.
    [The prepared statement of Mr. Brown can be found on page 
56 of the appendix.]
    Chairman Bachus. Mr. Roberts.

    STATEMENT OF J. LAMAR ROBERTS, PRESIDENT AND CEO, FIRST 
NATIONAL BANK OF PASCO (FL), REPRESENTING INDEPENDENT COMMUNITY 
                       BANKERS OF AMERICA

    Mr. Roberts. Mr. Chairman, Ranking Minority Member Frank 
and members of the committee, my name is Lamar Roberts, and I 
am president and CEO of the First National Bank of Pasco, a 
$105 million community bank in Dade City, Florida. I am also a 
member of the ICBA's executive committee and board of 
directors. I am pleased to appear today on behalf of the ICBA 
and its nearly 5,000 members to testify on ways the community 
banking industry can contribute to the retirement savings and 
Social Security reform debate.
    Today too many Americans are simply not saving enough for 
retirement. There is a genuine recognition that the low U.S. 
savings rate combined with the swell of baby-boomer retirees 
and the associated stress on the current Social Security system 
simply cannot be ignored. The ICBA supports bipartisan efforts 
to strengthen Social Security and retirement savings and the 
opportunity for new individual savings account contributions 
for community bank customers. Community banks have always 
served an essential role in the U.S. economy as a steady and 
trusted place for consumers to save for life's events, such as 
retirement.
    Notably, ICBA would like to thank Representatives Feeney 
and Sessions for introducing House Resolution 209. This 
resolution conveys an important message by the House of 
Representatives that any plan to reform Social Security should 
also include what we call a community bank option. Bank CD's 
are an attractive and safe product for the retirement savings 
needs of Americans, especially as savers look to reduce risk as 
they get closer to retirement. Bank CD's can provide both a 
reasonable rate of return and preserve the saver's principal.
    Involving the Nation's community banks in the retirement 
savings debate is critical. That is because the savings in 
local community banks support community investment and job 
creation throughout main street America. We are greatly 
encouraged that lawmakers are generally considering the full 
range of personal investment options in the Social Security 
reform debate rather than just a limited selection of stock and 
bond investments.
    The bottom line is that savings reform must make sense, 
both on Wall Street and main street. Should enhanced personal 
savings accounts emerge as a bipartisan remedy to improve 
retirement savings, the structure of such accounts does demand 
close attention so that all segments of our Nation can 
participate in both the savings and associated investment 
opportunities.
    Allowing a community bank savings option is also very 
important to support local economic vitality. Ample personal 
savings is vital not only to meet the retirement needs, but 
also to provide the economic lifeblood for our communities as 
banks leverage private savings to meet the borrowing needs of 
individuals, small businesses and farms.
    Individuals always need to diversify their savings to help 
mitigate unwanted risk. As the timeless saying goes, don't put 
all your eggs in one basket. When it comes to nest eggs, this 
lesson is paramount. It only stands to reason that a broad 
array of savings options and financial service providers should 
be considered in the Social Security reform debate so assets 
are not unevenly concentrated. The dispersion of our Nation's 
assets and wealth helps preserve the safety, soundness and 
stability of our entire financial and economic system. Without 
solid savings flowing into our local communities, economic 
prospects are diminished.
    Other important retirement savings issues also deserve 
attention, and I would like to highlight just a couple. First, 
ICBA supports the initiative for new retirement savings 
accounts proposed by the Administration and in Congress.
    Second, the ICBA-backed Communities First Act introduced by 
Representative Jim Ryun contains a provision that would allow 
consumers to defer recognition of interest income on long-term 
CDs and reduce the top tax rate.
    In conclusion, ICBA appreciates the opportunity to testify 
on this important issue. Community banks are a safe and 
effective place for Americans to save for retirement. Should 
new or expanded personal accounts be part of any bipartisan 
retirement security reform, ICBA urges that community banks 
have the ability to serve their customers' saving needs with a 
CD, RSA or similar safe bank product option. We believe having 
diversity of savings products and risk options can only better 
serve America's retirement needs. Thank you.
    Chairman Bachus. Thank you.
    [The prepared statement of Mr. Roberts can be found on page 
66 of the appendix.]
    Chairman Bachus. Mr. Brock.

STATEMENT OF DAVID O. BROCK, PRESIDENT/CEO, COMMUNITY EDUCATORS 
     CREDIT UNION (FL), REPRESENTING CREDIT UNION NATIONAL 
                          ASSOCIATION

    Mr. Brock. Chairman Bachus, Congressman Feeney and members 
of the subcommittee, I am David Brock. I am the president and 
chief executive officer of Community Educators Credit Union in 
Rockledge, Florida. I am here today on behalf of the Credit 
Union National Association, and I appreciate this opportunity 
to provide CUNA's views this morning on the topic of Banking on 
Retirement Security: A Guaranteed Rate of Return.
    CUNA is the largest credit union trade association, 
representing approximately 90 percent of our Nation's nearly 
9,300 credit unions and their 86 million members. You have 
asked us to comment on Representatives Feeney and Sessions' 
proposal to give workers the option to invest part of their 
Social Security into a federally insured certificate of deposit 
offered by a credit union, community bank or savings 
association.
    First, I should clarify that CUNA has taken no formal 
position on whether any plan to fix Social Security should 
include private accounts.
    However, if legislative changes allow workers to direct 
part of their payroll taxes into individual accounts, we 
believe it makes sense to include all financial institutions as 
one option for participants.
    Sound personal financial planning dictates that retirement 
funds for those nearing retirement be distributed in part in 
lower-risk safe liquid investments. Financial institutions 
offer such accounts. In fact, at year end 2004, financial 
institutions controlled a total of $270 billion in individual 
retirement account deposits. It is difficult to project the 
potential effect of allowing consumers to invest Social 
Security funds in financial institutions savings accounts such 
as certificate accounts, and because such accounts would 
provide a relatively low, albeit safe return on the investment, 
it is likely that it would be used more by those approaching 
retirement than by younger workers.
    This certainly would be consistent with the savings trends 
and IRA's at my credit union, where IRA savings are 
significantly concentrated in those in higher age categories. 
In either case, however, an increase on the order of 10 percent 
of current IRA balances might serve as a conservative estimate 
of the increase in savings through a CD option.
    In this case, financial institutions would experience a $27 
billion increase in savings, and credit unions would garner an 
estimated total of roughly $5 billion based on their current 18 
percent share of the depository institution IRA market. An 
increase of this magnitude could have an obvious impact on the 
economy and the communities in which workers live. They would 
become more financially independent and be more likely to have 
sufficient funds to spend on goods in their retirement, thus 
stimulating the economy and providing or maintaining 
employment.
    Social Security plays a critical role in the lives of 48 
million beneficiaries and 159 million covered workers and their 
families. The widely-acknowledged challenges facing the Social 
Security system are compounded by the fact that U.S. consumers 
generally save very little and specifically put very little 
aside in private retirement accounts.
    The U.S. personal savings rate has been on a declining path 
for roughly 2 decades. In the 1975 to 1984 period, personal 
savings as a percent of personal disposable income averaged 
nearly 10 percent, but fell to an average of 7 percent over the 
1985 to 1994 period and to an average of less than 3 percent in 
the 1995 to 2004 period. The personal savings rate at the end 
of April 2005 was just over .4 of 1 percent, near its historic 
low.
    Moreover, a recent Brookings Institution policy brief found 
that only about half of workers participate in an employer-
based pension plan in any given year, and participation rates 
in individual retirement accounts are substantially lower.
    Further, many households approach retirement with meager 
defined contribution balances. Financial institutions can help 
close this gap, and credit unions in particular are uniquely 
positioned to assist consumers in doing so. Credit unions, 
which pay very favorable interest rates on savings accounts 
provide a wide variety of savings product alternatives to their 
members.
    At year end 2004, credit unions had $575 billion in savings 
accounts. Of this total, 22 percent was held in share 
certificate accounts; 18 percent was held in money market 
deposit accounts; and 8 percent was an individual retirement 
accounts and the remainder in other short-term liquid accounts.
    As not-for-profit, member-owned financial cooperatives, 
credit unions have a long history of serving as trusted 
financial advisors and in providing their 86 million members 
with financial education materials, including those that stress 
the need for savings and retirement planning. These 
characteristics are reflected in the fact that, while credit 
unions have a 12 percent share of household savings held in 
depository institutions, they account for an approximate 18 
percent share of IRA balances held in depository institutions.
    In summary, we believe that any legislative change allowing 
workers to direct part of their payroll taxes into individual 
accounts should include financial institution savings accounts 
as one option for participants. Financial institutions have 
extensive experience in providing retirement-related accounts, 
and financial institution accounts provide a level of liquidity 
and safety that is not available through other sources.
    Thank you.
    [The prepared statement of Mr. Brock can be found on page 
51 of the appendix.]

STATEMENT OF RICK GORNTO, PRESIDENT, FIRST FINANCIAL BENEFITS, 
                           INC. (TX)

    Mr. Gornto. Good morning, Mr. Chairman and members of the 
committee, in particular Mr. Sessions' office, I would like to 
thank you for inviting me to this hearing and allowing me to 
speak to you today about this very important topic of Social 
Security reform.
    My name is Rick Gornto, and I am president of First 
Financial Benefits, Inc., a retirement planning design and 
administrative firm in Houston, Texas. The reason I am here 
today is to talk to you about the Galveston plan, which, by the 
way, is alive and well after 25 years, which could be used as a 
model, and to review with you how this plan was designed and 
how it has performed during the last 25 years in several 
counties and cities in south Texas.
    In 1980, I was asked by Don Kebodeaux, my business partner, 
County Judge Ray Holbrook, and County Attorney Bill Decker of 
Galveston County to see if I could design a privatized 
substitute for Social Security.
    During the ensuing 9 months, the plan was developed and 
presented to the Galveston employees and county commissioners 
who voted overwhelmingly to adopt the plan, which by the way 
was after a 2-month debate with the Social Security 
Administration in 11 various meetings where we debated in front 
of hundreds, in effect thousands, of employees.
    At the end of the day, 72 percent voted to opt out of 
Social Security. The primary design features of the plan are as 
follows: Design a plan that mirrors Social Security benefits, 
retirement, survivorship and disability benefit, design the 
plan to have equal or greater benefits with equal or less cost 
than Social Security. Design the plan to have fixed costs over 
a long period of time. Design the plan with more flexibility 
than both Social Security and their current State retirement 
plan, which is the Texas county and district retirement system. 
Design the plan to have guaranteed returns on investments. That 
is, take no risks; don't want to lose the money. Allow for 
hardship withdrawals in the event of medical emergencies during 
the term of the lifetime. They wanted this because they wanted 
that flexibility. Allow for lump sum withdrawals at retirement. 
Do not include a cost-of-living adjustment and design the plan 
that has private accounts and private ownership of these plan 
assets. Design the plan that the employees can leave to their 
estate and design the plan that has built in tax efficiencies.
    These plan features were drafted, and all but the hardship 
withdrawal option exist today, primarily because of Evelyn 
Robinson, who borrowed out most of her funds to pay for a 
medical illness for her husband prior to her retirement. That 
is why she got lower benefits. She forgot to talk about that up 
there.
    This plan has been very successful in meeting its intended 
goals, and there have been hundreds of people who have used 
these benefits for their personal retirement income replacement 
and their estates. The plan has discovered a diverse range of 
people at different levels as well as both union and nonunion 
employees. The plan investment performance has been excellent 
as well.
    During the past 25 years, the plan has provided returns 
from 15 percent to 3.75 percent during the term of the 25 
years. The guaranteed rates that have been paid have always 
been higher than the general prevailing interest rates in the 
economy, so the plan has always been very competitive when 
compared with other fixed return investments including Social 
Security.
    It is my intention that this plan, with a few 
modifications, could be used as a national plan. It is a plan 
that is based on asset-building rather than pay-as-you-go; 
personal ownership rather than no ownership; and guaranteed 
returns on your investment rather than no assurance that you 
will get the return that was promised.
    Today, there are 7 million government workers in America. 
There are 30 countries throughout the world that adopted Social 
Security pay-as-you-go-type plans and opted for asset-building 
plans. My view of several of these types of plans that I have 
reviewed show me that they will all outperform their various 
Social Security systems on an investment-return basis.
    They have all recognized the same thing that we are seeing 
today: It is better out there than it is in here. They 
understand that a pay-as-you-go system cannot survive when the 
next 25 years in America--and listen to this statistic--there 
is a 200 percent increase in plan beneficiaries and a 10 
percent increase in workers.
    That is a 20-to-1 ratio of people taking out than people 
putting in. Unless the government can change the current 
demographic trend than no short-term salvos can fix--like 
increasing payroll taxes, extending target traffic retirement 
age or cutting the benefits to any reasonable level--it can't 
be fixed. That vote won't float.
    If we try to throw millions at a system over the next 25 to 
35 to 40 years, our children will eventually look up and 
realize that their fathers and mothers have left them holding 
the proverbial bag. If we are going to throw money anywhere, 
then let us throw it at a system that will survive and thrive 
like Galveston, Brazoria, and Matagorda Counties and so many 
others have done throughout the country and throughout the 
world.
    Thank you for having me here today, and let us please get 
together to make something happen for all of us.
    [The prepared statement of Mr. Gornto can be found on page 
64 of the appendix.]
    Chairman Bachus. Thank you, Mr. Gornto.
    Now, Mr. Furman.

STATEMENT OF JASON FURMAN, NONRESIDENT SENIOR FELLOW, CENTER OF 
BUDGET AND POLICY PRIORITIES, WAGNER GRADUATE SCHOOL OF PUBLIC 
                  SERVICE, NEW YORK UNIVERSITY

    Mr. Furman. Thank you, Mr. Chairman, Mrs. Maloney, for the 
kind introduction to the committee and the opportunity to 
address you today.
    The question of whether to establish individual accounts in 
Social Security is a contentious one.
    I want to begin my testimony by making a few points that 
virtually all policy analysts and economists, whether they 
support accounts or oppose them, would agree with. I then want 
to go on why I believe that replacing a portion of Social 
Security with private accounts would be a bad idea, and that, 
instead, we should be focused on strengthening Social Security 
while at the same time helping moderate-income families save, 
invest, and accumulate wealth through IRA's, 401(k)'s and other 
vehicles outside of Social Security.
    My first point is that if accounts are established, they 
should not include a bank option. No individual account 
proposal scored by the Social Security Act raised in the last 
several years includes a bank option. Account proposals all 
include a Treasury bond option. This is the safest security 
there is, although guaranteed to lose money under individual 
accounts proposals like the President's, as I will explain 
later.
    There is no financial reason to supplement this with an 
additional bank option. Bank accounts, including CD's, provide 
a higher agree of liquidity in exchange for a lower rate of 
return. This liquidity is largely valueless in the context of a 
retirement account.
    More importantly, the additional monitoring and enforcement 
costs associated with a bank option would be prohibitively 
expensive compared to the current design of Social Security 
proposals. Every plan I am aware of, including the President's, 
is organized through a central administrative authority that 
collects contributions, manages investments, and maintains 
records.
    This administrative structure limits choices and services 
and provides lower costs, although even these costs are 10 
times higher than the costs of administering the current Social 
Security system.
    Establishing a bank option would entail setting up 
decentralized accounts like existing IRA's. The losses in terms 
of economies of scale and higher administrative costs could 
easily eat up 30 or 40 percent of the final account balances.
    Second, Galveston does not provide a model that is relevant 
for nationwide Social Security reform. The Galveston plan bears 
little resemblance to individual accounts. The county invests 
pension funds in the market. Workers do not have accounts. They 
do not have any control over investment decisions. 
Participation in the Galveston plan is mandatory, and the 
contributions are set at 13.9 percent of payroll.
    So if your idea is to raise payroll taxes, require people 
to be part of the system, and then have the government invest 
the money, Galveston is your model.
    According to the Social Security Administration and GAO, 
Galveston generally provides lower benefits for its 
beneficiaries. It doesn't provide protections for spouses, 
inflation and many of the important features of Social 
Security. But regardless of whether Galveston provides higher 
benefits or lower benefits, it is still irrelevant for thinking 
about the problem that we have as a Nation.
    The several thousand municipal employees in the Galveston 
plan do not make any contributions to support current Social 
Security beneficiaries. If the United States as a whole adopted 
a Galveston-like plan, there would be no one left to pay the 
$500 billion annual cost of benefits for the Nation's 45 
million current Social Security beneficiaries. The United 
States as a whole cannot free ride in the same way that 
government employees in one relatively small county can.
    Third, there is no such thing as a higher guaranteed rate 
of return. The basic principle of financial markets is that you 
only get higher returns as compensation for taking greater 
risks. As Nobel Prize winner Gary Becker explained, ``There are 
no freebies from such investments''--he is talking about 
individual accounts--``since the higher return on stocks is 
related to the greater risks and other trade-offs between 
stocks and different assets.''
    Social Security benefits are not subject to any market 
risk. In fact, Social Security provides critical insurance 
against becoming disabled, dying, or outliving one's savings. 
No financial instruments provide this range of benefits, and if 
they did, they would be extremely expensive.
    Even more fundamentally, as Greg Mankiw, former chairman of 
President Bush's Council of Economic Advisors, explained--this 
is a quote from President Bush's former top economic advisor--
``Admittedly, some of Bush's arguments are off the mark. When 
he compares the 2 percent real return a worker now gets from 
Social Security with a 6 percent real return offered by 
portfolio of stocks and bonds, he neglects to mention that the 
Social Security fund still owes a huge amount to those now or 
soon to be retired. This liability--the overhang from giving 
earlier generations more than they put into the system--doesn't 
disappear with privatization.''
    Virtually every policy analyst and economist, whether they 
support or oppose accounts, would agree with my statements 
about the bank option, Galveston, and rate of return. I would, 
however, like to make one additional point. In my judgment, the 
risks associated with a proposal like the President's or the 
House Republican proposal yesterday are unjustifiable. The 
President's proposal would not increase the return to Social 
Security. For many beneficiaries, it would lower it. Under the 
President's accounts, you need to get a real rate of return of 
3 percent above inflation--that is 5.8 percent of the total 
annual return--just to break even from one of the two benefit 
cuts he is proposing. By way of comparison, CD's currently have 
a 3.5 percent rate of return. That is a sure-fire way to lose 
money under the President's proposal.
    As Robert Shiller noted, financial economists found, even 
with a sounder investment strategy, you lose money the majority 
of the time. In conclusion, investing in risk plays an 
important role in wealth creation and retirement security, but 
they should play that role in a separate part of the retirement 
system, not replace the retirement security provided by Social 
Security.
    Thank you and I look forward to the committee's questions.
    [The prepared statement of Mr. Furman can be found on page 
60 of the appendix.]
    Chairman Bachus. Thank you.
    I am going to ask for the committee's indulgence. We are 
going to have a vote in about 30 minutes, if not sooner. What 
we will try to do is we will recognize each member for 5 
minutes. If they are in the process of asking a question or 
answering a question, we will conclude that with the answer. 
But there won't be any additional questions past the 5 minutes. 
If I can ask unanimous consent for that.
    At this time, the lady from Illinois is recognized.
    Mrs. Biggert. Thank you, Mr. Chairman.
    And thank you to the panel for all of your expertise that 
you bring today and talking about this issue.
    It is nice to have, I think, a debate that is not, let us 
say, spirited one way--that we are able to discuss this issue 
calmly. And I think that we need a lot more of this, because 
certainly the Social Security plan that we are going to have 
really needs to be a bipartisan plan. And we are going to have 
to reach some accommodation at some point, and it is a critical 
time that we really need to be looking at this.
    So I have just a couple of questions, first, for Mr. Brown. 
Many of the community banks are offering some type of limited 
retirement savings products such as the IRA's. What type of 
outreach in financial education do you provide to help 
encourage your customers to invest in these products and save?
    Mr. Brown. Well, it is something we have been doing for 
years. Quite frankly, it is a product that often sells itself 
because we do find that people clearly want to invest in their 
retirement. The IRA has been a wonderful vehicle.
    We do a lot of mailings, particularly at tax time or the 
time people are thinking about that year end. We do, in many 
cases, community outreach where we go to communities where we 
would also try to promote housing for people who are not 
necessarily sophisticated investors and try to talk about those 
things also.
    But it is an ongoing year-after-year type of thing to get 
people thinking about their retirement benefits. One of the 
things that I think would be--there is a similarity between 
what we are proposing today or discussing today and the IRA. 
That is, the beauties of compounding are amazing.
    When you continue to put money in on a regular basis, it 
compounds and builds. It is amazing how much some people have 
put aside in their IRA account, and we would encourage that the 
public has a choice of both of those.
    Mrs. Biggert. I think you mentioned that savings, and 
almost all of the panel did, that savings is down, that we are 
finding that people are not putting aside the money, but they 
are also, particularly the young people, are not putting moneys 
into accounts. Is there any way to reach the younger people?
    Mr. Brown. Well, my own judgment is, and I am sure this is 
controversial, but I don't think, quite frankly, the general 
public understands Social Security, and, quite frankly, I don't 
think there is a broad confidence in it, particularly the 
younger people, and they are not counting on it.
    My sense of it is that younger workers would be glad to 
reach out to something of this nature, because they really 
don't think that there is going to be anything there for them, 
and that is sad.
    Mrs. Biggert. I think it has been said many times that they 
think they will see a UFO before they see their Social 
Security.
    Mr. Brown. Well, it is--I think there are issues with it, 
there are problems with it, and we need to deal with it.
    People, and actually having something with community banks, 
I think, would be very valuable, because it is interesting, as 
getting close to Social Security age myself, I get a mailing 
once a year now to tell me what I will have. But quite frankly, 
it is--it just doesn't seem very real. It is very remote.
    But I think if someone can go into their bank, and they 
could check what they have in that account, it would really 
give them a sense of finishing something. Quite frankly, it 
probably would increase savings in general.
    Mrs. Biggert. Thank you.
    Mr. Gornto, I think the proponents of personal accounts are 
really concerned about the risk. Certainly, the plan that has 
been talked most about is, it starts for those under age 55 and 
below, and the other people would be still in the traditional 
plan. Has anyone, besides the one woman that you mentioned who 
used her money for the hospitalization or whatever, lost money 
in this?
    Mr. Gornto. No, ma'am. Nobody has ever lost a penny in the 
account. In fact, we have had, it seems, a great deal of press 
in the last couple of years, and the reporters have tried to 
ferret out unhappy people, people who have had problems. They, 
as you know, they have a way of being able to do this very 
well. Evelyn was the only one that they could find.
     Evelyn, from--I mean, she just simply took out 35 percent 
of her money 5 years prior to retirement under the hardship 
option to provide for a heart bypass surgery for her husband, 
and when she retired, she wanted to know where her money was. 
She had used it for current dollars rather than future dollars.
    Hardship withdrawal was something that was supposed to be a 
benefit of this plan. Because we got so much bad press on it, 
and she made such a problem with it, we finally terminated that 
option. They no longer can have hardship options.
    Mrs. Biggert. Thank you, I see my time has expired. I yield 
back.
    Chairman Bachus. Thank you.
    Mrs. Maloney.
    Mrs. Maloney. Thank you. I thank all the gentlemen for 
their testimony.
    Dr. Furman, is there anything in the bank option that 
solves or lessons the clawback problem? Mr. Greenspan testified 
before this committee that the private accounts do absolutely 
nothing for solvency. Could you comment more on that?
    I have read the Shiller study that you referenced, and it 
seems to prove private accounts are a bad idea. And can you 
comment further and elaborate further?
    Mr. Furman. Sure, I would be happy to comment on all three 
of those issues. I think it is generally acknowledged now--and 
the President himself has acknowledged--that individual 
accounts do nothing to help restore solvency to Social 
Security. That is especially the case if you did something like 
the bank option. You are taking moneys that right now are 
invested, in effect, in Treasury and just investing them with 
higher administrative costs through another system that would 
require thousands or tens of thousands of government employees 
to oversee the circulation of money that isn't doing anything 
for the system. In terms of the risks you face, the President's 
plan is what I call offset. Others have called it a 
privatization tax or a clawback.
    What it says is, if your benefit, if your account does not 
grow more than 3 percent above inflation, that is about 5.8 
percent per year, you will lose money. A CD right now, you get 
a 3.5 percent return. If you put your money in the CD under the 
President's plan, it is like borrowing at 5.8 percent and 
investing at 3.5 percent. That is just one of the dumbest 
things you could imagine someone doing with their money. Giving 
someone the option to do something that stupid with their money 
to me does not seem to be good public policy.
    Finally, there are smarter things you can do with your 
money. Professor Shiller looked at them. If you do invest your 
money wisely, you don't lose money. One hundred percent of the 
time, you only lose it somewhere between 32 and 71 percent of 
the time, depending on the particular assumptions that you use.
    Mrs. Maloney. Could you comment on the fact that the plan 
is not voluntary and will result--some economists have 
written--- in large benefit costs because it will change the 
calculation of benefits from wage indexes to price indexing? 
Could you elaborate and explain more?
    Mr. Furman. Sure, the President's proposal has two benefit 
reductions. One is a sliding scale benefit reduction. Some have 
called it progressive price indexing. That would apply to 
everyone, mandatory, across the board, and would result in 
benefit reductions for middle-class families of between 28 and 
40 percent reduction in their replacement rates by 75 years.
    In addition, there are private accounts, and people who do 
those, get a second benefit reduction on top of the first one 
that applies to everyone.
    Mrs. Maloney. Could you explain how that benefit works in 
the private--how they cut it back?
    Mr. Furman. The first benefit reduction or the second one?
    Mrs. Maloney. Both of them.
    Mr. Furman. For the first one, right now, Social Security 
benefits are done according to a formula that grows with wages. 
That ensures that your benefit replaces a constant fraction of 
your income. You need about 70 percent of your pre-retirement 
income in retirement to have a dignified retirement.
    Social Security provides about half of that, 35 percent of 
your preretirement income, provided that 20 years ago. It is 
going to provide that about 20 years from now. That formula 
would change, and that benefit would be eroded over time, just 
grow with prices. You would have basically a 1950 standard of 
living going forward if we had had it in place before.
    The second benefit reduction says that, for every dollar 
you put in your account, your Social Security benefits are 
reduced by $1 plus inflation plus 3 percent interest. That 
accumulates to be about $150,000 worth of benefit reductions at 
retirement.
    Mrs. Maloney. The vast majority of retirees would not be 
able to pass funds from their private accounts on to their 
children, according to many economists, yet the President 
continues to say this is a benefit of that plan.
    Could you elaborate further on that aspect of it?
    Mr. Furman. Right. For example, if your husband dies and 
has an account, you inherit his account, but you also inherit 
the entire benefit reduction that he agreed to of the account. 
So when he set up his account, he agreed to something like a 
$150,000 benefit reduction. You get his account, you better 
hope that it has more than $150,000, because you are going to 
get his benefit reduction regardless of how much is in your 
account.
    Mrs. Maloney. Could you comment on the inability of 
individuals to invest their money as they see fit in these 
private accounts and estimates about how much these private 
accounts will cost to set up? I have seen everything from $5 
trillion to $10 trillion. Could you elaborate on the cost to 
the Federal deficit and the growth of the deficit in that 
respect?
    Chairman Bachus. Dr. Furman, if you could be sort of short 
on that?
    Mr. Furman. Okay. The most optimistic estimate of that is 
30 basis points as a cost which is about 10 times higher than 
Social Security's administrative costs now. There are a range 
of other estimates that are much higher than that, and the 
range is on government employees required are at the low end of 
the Social Security Administration, 7,700 to 50,000 or more new 
government employees required.
    Chairman Bachus. Thank you.
    Mr. Feeney.
    Mrs. Maloney. Thank you very much.
    Mr. Feeney. Thank you, Mr. Chairman.
    Mr. Gornto, I want to turn first to your plan. We have 
consensus among actuaries that, give or take a couple hundred 
billion, over the next 75 years, there is a $2 trillion 
unfunded liability in what we have promised out in Social 
Security. Any American who thinks that there is money sitting 
in Ft. Knox for his or her retirement has been fooled. Whether 
it was Congress or the trustees, they have been fooled and 
misled.
    I want to know, under the Galveston plan, what your 
unfunded liability is? To what extent have you lied to people 
about what assets they will have when they retire up until now?
    Mr. Gornto. Well, there is no lying, and there is no 
unfunded liability.
    Mr. Feeney. Mr. Roberts, one of the concerns that I think 
is a legitimate one about personal ownership accounts is that, 
to the extent any proposal would start with very small 
ownership accounts, say $500 or $1,000 or even $1,500, a lot of 
large Wall Street investors have suggested that there is not a 
lot of incentive for big investors to take those sort of 
smaller startup accounts and that there is not enough money to 
make it worth their while to manage those accounts. That is one 
of the problems, if you don't get a significant size account to 
start with.
    But with respect to community bankers, is it a huge problem 
for you? Is there a huge transactional cost? Is there a large 
fee associated with coming in and buying a $500 or $1,000 CD-
type instrument?
    Mr. Roberts. There is a cost, but it is not unreasonable. 
With computers, with technology the way it is now, it can 
easily be handled. It can be made profitable. We accumulate 
funds from a lot of different people, all the way up from 
children with smaller accounts where we are trying to teach to 
save to those who can only put a small amount away. When you 
accumulate all this, you get the millions that we have to 
invest back in our community in the loans. It is an ongoing 
expense that we can easily handle and pay them a reasonable 
market rate and make a reasonable return for the bank.
    Mr. Feeney. One of the suggestions that Dr. Furman had is 
that T-bills provide a traditionally better return than CD-type 
instruments because they tend to be more liquid and more 
flexible. But to the extent that I know to a moral certainty 
that my--I am not eligible to withdraw money from a personal 
savings account till I am ready to retire, it seems to me that 
the banks may be able to offer enhanced rates of return because 
there would be no liquidity or flexibility that you have in the 
traditional CD offerings; is that right?
    Mr. Roberts. Yes, to some extent. I think I take exception, 
if I understand your question correctly, I think if you look at 
the CD rates and you look at the Treasury bill, the Treasury 
bill rates, you will find, they are very similar. So I don't 
think you will find one more so than the other, and I don't 
think that you will find one safer than the other. The U.S. 
Treasury, of course, has the full faith and credit of the 
government behind it. So does the FDIC insurance.
    Mr. Feeney. As we talk about that insurance and the safety 
and solvency of the banking community since Glass-Steigel, 
many, many decades ago, as I stated earlier, all actuaries tell 
us we have about a $2 trillion unfunded liability in Social 
Security.
    By the way, it gets worse after 75 years, the situation 
goes on to an infinite obligation that we cannot pay for. When 
was the last time there was a significant failure within a 
401(k) or an IRA in CD-type instruments that are held by 
investors to pay those investors money that they were owed in a 
401(k), CD or an IRA-CD, or have there have been significant 
bank failures to meet their obligation, like we are going to be 
unable to meet our obligations?
    Mr. Roberts. Not to my knowledge.
    Mr. Feeney. Mr. Brown, you did a wonderful job talking 
about, not just the benefits to the investors, but--and banks, 
but to communities themselves, there are a lot of things that 
community banks do.
    Do you want to elaborate just briefly--because we do have 
votes coming up--on the kinds of services you provide in the 
community with the money that you will hold in a CD?
    Mr. Brown. Well, with--we are a bank that serves 7 counties 
in Florida, and we have 37 offices. One of the things that we 
think sets ourselves apart and, quite frankly, seems to be in 
common between the four presenters, is that we do reach out and 
deal with individuals. We certainly make loans to businesses. 
But the prime business that we do is we make home loans. We 
make home improvement loans, things of that nature.
    We find that we deal with all ranges of financial ranges of 
people's wealth. But, primarily, we are focusing on home loans. 
Candidly, I think it is readily accepted, as the more money we 
have to lend, quite frankly, the better rates we are able to 
give for home loans and home improvement loans.
    Even if it doesn't change the rate, it would change the 
availability. I mean, it is a function of where we are doing 
our best to lend as much as we can in the community, and we do 
reach out. And we do try to touch everyone in the markets. Just 
the other day, we had a function where we were helping with a 
number of our Latin immigrants as far as helping them, as far 
as opening accounts.
    In many cases, community banks are actually teaching people 
how to bank who are coming to this country, who are new to this 
country. That is something, certainly, that money--if we did 
have personal accounts--some could go to Wall Street. But 
community banks do something a little different than is done in 
Wall Street, and the customers that come in our door cover 
every spectrum of the wage scale.
    But, quite frankly, a lot of our growth is coming from the 
low- to moderate-income people who are learning how to save and 
who have goals to save for a home. Quite frankly, most of them 
haven't yet started saving for retirement, so I think that is 
something that should be done.
    Mr. Hensarling. [presiding] The time of the gentleman has 
expired.
    The gentleman from Texas, Mr. Green, is recognized for 5 
minutes.
    Mr. Green. Thank you, Mr. Chairman, and thank you, members 
of the panel. I appreciate greatly your comments. I support 
banks, community banks, credit unions. I am a member of a 
credit union, have several bank accounts, probably more than I 
need.
    Mr. Brown. No.
    Mr. Green. But I do have them. I do have a concern that I 
would like to sort of back into, if I may. Some incident 
occurred that caused Social Security to come into being. 
Something happened. Some folks tend to believe that it may have 
had something to do with 1929 and something that occurred then.
    Is it a fair statement, Mr. Brown, that something that 
happened in 1929 had something to do with the establishment of 
Social Security?
    Mr. Brown. Well, obviously, we all know what happened in 
1929. I do think that we--you know, I am not a historian, but I 
gather it was determined that we needed to set a safety net for 
peoples of all ages.
    Mr. Green. Exactly, a safety net.
    Mr. Brown. If I may--
    Mr. Green. If I may, you have given me the magic words, 
safety net. Let me ask you this, do you think that the people 
who established Social Security were persons who understood 
that they had the bank option, the credit union option, the 
option of the stock market? My suspicion is that they were 
reasonably intelligent, and they knew that they had these 
options. But for some reason, they did not buy into these 
options at that time.
    Mr. Brown, if you could make it brief, because I would 
like--I want to respect you.
    Mr. Brown. I suspect that they didn't choose that at the 
time, but those were different times. We had different 
demographics at the time. We weren't living as long. The whole 
world has changed since then. I think we need to change with 
it. But Social Security is right--
    Mr. Green. If I may now, because I was yielding to you, but 
the concept of a safety net, which is what you used, is still 
one that we are grappling with today. That is the one we are 
still grappling with.
    Now, prior to 1929, good times were here. Folk were having 
a big time in the country. We didn't plan for the stock market 
to crash. We don't plan for these types of events. But, 
unfortunately, with the best of intentions, they sometimes 
occur. When they happen, we want Social Security.
    The question comes, for Mr. Furman, if we should have 
another event, maybe--let us hope that it is not comparable to 
what happened in 1929--we are all invested in banks and credit 
unions, as I am, I have money in banks and credit unions, how 
is that going to impact us, as opposed to what we have right 
now with the Treasury?
    Mr. Furman. The Social Security benefit at least doesn't 
change with the stock market. It is based on your income and 
replaces a constant fraction of your income. It is the only 
investment that most people, in effect, have that has that 
feature. Everything else is subject to market risk in one form 
or another.
    Mr. Green. If the market performs poorly, and we have what 
is the equivalent of a crash, what do we have?
    Mr. Furman. Well, bank deposits are insured, so you are not 
going to lose your bank deposit. But they are not guaranteed to 
keep up with inflation. They are not guaranteed to replace a 
certain fraction of your income. They don't provide insurance 
against living a longer life than you expect to. They don't 
have any of the features that make Social Security so 
attractive as one part of a person's retirement planning.
    Mr. Green. I will just conclude with this, because I would 
like others to have their time. It does cause me great 
consternation. I am willing to listen to what everybody has to 
say and hope to visit with some of you individually.
    But it does cause me great consternation to know that we 
are about to make what I consider a very significant change, if 
we do this, and that that change is going to put a lot of what 
we consider our safety net at risk.
    I yield back the remainder of my time, Mr. Chairman.
    Mr. Hensarling. The gentleman yields back.
    The gentleman from Texas, Mr. Sessions, is recognized for 5 
minutes.
    Mr. Sessions. Thank you, Mr. Chairman.
    Mr. Gornto, I would like to go directly to you. We are on 
votes, and I will leave here in just a moment. There was some 
discussion about costs associated with running these funds that 
you--and I would like for you to confine your comments to the 
Galveston model. Can you talk to us about the cost, the 
management cost, the cost to run these models?
    Mr. Gornto. Yes. Our costs have been less than 1 percent 
for the past 25 years. Simply that.
    Mr. Sessions. 1 percent.
    Mr. Gornto. Less than 1 percent, 90 basis points.
    Mr. Sessions. There was just a discussion about length of 
time that Mr. Green talked about, you know, when you retire and 
how long you can keep these in. Is there any requirement or 
rules related to when a person can take their money out, must 
take their money out? Or could a person leave them in as long 
as they wanted?
    Mr. Gornto. In the Galveston plan, you have several 
options. You have separation of service options, if you will. 
In other words, when somebody separates from service, they can 
take the funds with them at that time. They can roll them to 
another plan that they would go to. They can leave them in the 
plan until retirement.
    Our retirement--our normal retirement age is in 
correspondence or coincides with the county and district 
retirement plan so that they get full benefits, so that certain 
of the plans, like the paid-up insurance after their 
retirement, you know, after their retirement age occurs if they 
go to full retirement. But with respect to the retirement 
dollars themselves, they have separation of service 
availability at any time.
    That was designed that way, on a local level with that 
flexibility, because they did have a Texas county and district 
retirement plan. Had that not been there, we would have limited 
those options to receipt at retirement age only. They can 
retire under a variety of different mechanisms, if they are age 
60, with 8 years, or if they are 30 years of service or if they 
have a, you know, years of service and age, work together, they 
can retire under any one of those three options.
    Mr. Sessions. Generally speaking, from a person who was on 
or went into the system, when it was formed, and they get out. 
In other words, they retire, generally, how much money, 
assuming they had not taken money out, just as an average, how 
much money does a person, quote, cash out with?
    Mr. Furman. We have had a variety of people who, right now, 
are currently being--been in the system for 25 years. Now, 
granted, a career, a working career is 35 to 40 years. If a 
person goes to work at age 20 or 22 and works till age 65 under 
Social Security, that is a 40-plus year life span. So we don't 
have 40 years in our plan yet.
    We have 25 years. But in the 25 years that we have been in 
place, we have people with $300,000 and $400,000 in their 
account who will receive $300,000 and $400,000 in their 
accounts either in weigh payouts or in lump sum distributions 
at this time.
    Those using that same trending that we are going, even at 
the lower rate of interest rate, they will end up with 
substantially more than that in another 15 years when we have a 
full 4-year, you know, look see at the timeframes.
    Mr. Sessions. Mr. Gornto, thank you so much for taking your 
time to be with us today. I will tell you that you have had an 
opportunity to hear from the members on this side some 
agreement, some disagreement about what we are attempting to 
do.
    I think what you have done by presenting this Galveston 
model plan, the banking option, will allow members of this 
committee, the subcommittee and this committee, as well as our 
general body, to make wiser decisions about the inclusion of 
this with whatever we do.
    I want to thank you so much for taking your time to be with 
us today.
    Mr. Chairman, I am going to go vote. I yield back my time.
    Mr. Hensarling. The gentleman yields back.
    The gentlelady from Wisconsin, Ms. Moore, is recognized for 
5 minutes. Ms. Moore.
    Ms. Moore of Wisconsin. Thank you, Mr. Chairman.
    And I want to thank this panel for coming. I can see that 
there is broad agreement among all the speakers, that, indeed, 
one of the sort of hidden problems with these proposals, 
wherever you stand on private accounts, is that we don't have 
enough savings, and those savings aren't available, quite 
frankly, to invest, and I think that is a breakthrough, at 
least for me, in terms of trying to understand where the major 
disagreements lie.
    I can--I guess the question that I would have, first of 
all, is for Mr. Brock. In your written testimony, you talked 
about, if the bank option were available, this would 
immediately bring $27 million into financial institutions, and 
ultimately into the economy for lending.
    I want you to talk about that, and then also I would like 
you to mention the fees and the servicing fees and so forth 
that banks would garner as well.
    Mr. Brock. Well, the assumption is, you know, that if this 
option were available, that we would increase our rate balances 
by 10 percent. That would create the $27 billion. The credit 
unions, you know, our structure--you know, the costs are 
distributed across all the products, and it is really hard to 
determine exactly what kind of fees would have to be charged on 
that kind of an account, because it would be built into the 
rate. I would assume that these kinds of accounts would be no 
more expensive to operate than any other kind of deposit or 
certificate account that we have.
    Ms. Moore of Wisconsin. Okay. Well, I guess the next 
question would be for Dr. Furman. I was very interested in your 
testimony, because you have really talked about the security of 
Social Security, and the only way--very informative testimony--
about the only way to get a higher rate of return is to take 
that risk. You have made a great argument for having accounts 
outside of Social Security and maintaining Social Security.
    So I guess I wanted to give you an opportunity to elaborate 
on that, because we are constantly bombarded with information 
about the ownership society and how people ought to take charge 
and so on. I guess I just want you to close the loop that some 
of us may have in our minds about the difference in ownership 
society or the example of Galveston, Texas, where the claim is 
that no one has been harmed and that everyone has been doing 
great.
    Mr. Furman. I am all in favor of an ownership society, I 
think it is a great concept but what we really need to do is 
follow through on it. So let me give you one example. The 
saver's credit. It is the only tax incentive we have right now 
for low- and moderate-income families to help encourage them to 
save. It is not perfect. It needs to be improved in a number of 
ways, for lowest-income families, but it expires in 2006.
    It is the only part of the tax cuts that are expiring in 
the next decade that the President has not proposed to renew. 
The only tax incentive we have for moderate-income families, he 
would like to end after the year 2006. That is a good way to 
encourage wealth, along with helping families opt into--you 
know, automatically enroll in 401(k)'s. Low-income families get 
very low rate of return from their savings, because if they 
save a lot, they lose their Medicaid. They lose a lot of other 
benefits. We should raise those asset limits so those families 
aren't penalized for saving.
    Finally, if you carve out a portion of Social Security, you 
have to give up your Social Security to get an account, you are 
not any wealthier because of that. What is genuine wealth 
creation is real savings and new savings.
    Ms. Moore of Wisconsin. In addition to the progressive 
indexing proposal, which was not part of the proposal 
yesterday--but it is still on the table, according to the 
President--where low-income people would not have to, would not 
lose any benefits, but your testimony seems to be that 
everybody is going to lose with some kind of carve-out. So 
could you explain to us how that would not be the case with low 
income?
    Mr. Furman. Under progressive price indexing, people who 
make under $20,000 a year, retirees, get their benefits 
reduced. People who make less than $20,000 a year, according to 
a White House study, a substantial number of them get their 
benefits reduced if they are getting survivors benefits, 
disability benefits, or benefits through a spouse. Low-income 
families can also see their benefits reduced. It doesn't 
protect anyone.
    Ms. Moore of Wisconsin. My time has expired--because I 
wanted to ask Mr. Gornto something about Galveston, Texas.
    Chairman Bachus. I will indulge you, because it doesn't 
look like a long line behind you.
    Ms. Moore of Wisconsin. Indulge me.
    Chairman Bachus. Ms. Moore, you may miss your vote on the 
floor, I am not sure.
    Ms. Moore of Wisconsin. Oh, I can't do that. All right. 
Just very quickly. I am very impressed with what is being done 
in Galveston, Texas, but I see that the contributors have to 
make more than the 12.4 percent payroll tax to participate in 
this program, and then there is no portability. Do you have any 
examples of people who decided that they don't want to work for 
these three counties? They wanted to walk--you know, they have 
to move to Milwaukee, Wisconsin? What happens to their 
benefits?
    Mr. Furman. On the contrary, it is fully portable to 401(k) 
rollovers or IRA rollovers. In addition to that, the extra 
amount that Galveston is putting in is not arequirement. The 
12.26 percent of 6.13 percent, which is the 1981 Social 
Security level, is still in place. The additional amount they 
are putting in was a voluntary amount they would put in because 
they had extra budget. It wasn't a requirement for cost.
    That has been a real misunderstanding. They keep, you know, 
talking about the comparison. But the only requirement has 
been--and the employees are still paying in 6.13 percent, which 
was the 1981 level. The employer is just putting in a little 
extra, and it is fully portable.
    Ms. Moore of Wisconsin. Well, thank you very much. I don't 
want to miss my vote. I absolutely am going to read all of your 
testimony. Thank you for coming.
    Chairman Bachus. Thank you, Ms. Moore.
    Dr. Furman, do you believe that we do have a crisis in 
Social Security?
    Mr. Furman. I don't think the terminology matters a lot. We 
certainly have a problem or a challenge. You can call it a 
crisis if you want.
    Chairman Bachus. We should move as quickly as possible to 
address the problems with Social Security?
    Mr. Furman. The most important thing is to not do any harm. 
But if we are doing a proposal that is constructive in moving 
forward, doing that sooner rather than later would certainly be 
better.
    Chairman Bachus. What would be your proposal for a 
constructive plan to reform and strengthen Social Security? I 
mean, specifically?
    Mr. Furman. We have--the benefits we have promised are $4 
trillion larger than the taxes we are scheduled to collect over 
the next 75 years. Whether you have accounts or don't have 
accounts, you need to reduce benefits by $4 trillion or raise 
revenues in some form by $4 trillion. I would like to do some 
balance combination of both of those. I think that progressive 
revenue sources have a very important role to play like raising 
the cap on taxable earnings from the level of today.
    Chairman Bachus. So you would lower benefits and raise 
taxes?
    Mr. Furman. Or some combination of the two of those. There 
is no other way to solve the problem. I don't know of any.
    Chairman Bachus. Now, you were Senator Kerry's advisor 
during the campaign?
    Mr. Furman. Correct.
    Chairman Bachus. Was that your advice to him?
    Mr. Furman. I don't think that political campaigns are the 
right place to undertake Social Security reform.
    Chairman Bachus. Okay. What did you advise him, I mean, 
publicly?
    Mr. Furman. I advised him on a number of issues, but one 
thing that was very important, I think Social Security is a 
very small part of our long-term fiscal challenges.
    If you look at the tax cuts that were passed over the past 
couple of years, they cost about 3 times more than the Social 
Security deficit. The Social Security deficit is $4 trillion. 
That is pretty large. Tax cuts are about $12 trillion. The 
prescription drug benefit is about $9 trillion. So if you think 
about our overall fiscal problems and how we could address 
them, I recommended to him and I would recommend to you, is the 
most important thing that any of us can do.
    Chairman Bachus. You know, the Wharton School of Business 
and others have said that those tax cuts created 3 million 
jobs. Would you concur with that conclusion?
    Mr. Furman. Job growth since the recovery began in, I 
believe, November 2001 has been among the slowest of any job 
growth recoveries. In fact, we have only just now had more 
private-sector jobs than we had in January 2001 when President 
Bush became President. So in my view, the tax cut is 
successful. Tax cuts should have been done, but there should 
have been more up-front stimulus and less long-term cost.
    Chairman Bachus. So you don't disagree with the tax cuts. 
You think it should have been more sooner?
    Mr. Furman. I think it should have been more bang for your 
buck, not tax cuts with long-term costs that didn't encourage 
consumption economic stimulus.
    Chairman Bachus. Well, more sooner would have actually made 
the tax cuts more expensive than they are, would they not?
    Mr. Furman. I actually think we could have done about the 
same magnitude. We did about $200 billion sooner. So I 
shouldn't have said more sooner.
    Chairman Bachus. If we create personal accounts, would the 
proposal that we are discussing today be a viable vehicle?
    Mr. Furman. As you may have noticed from the hearing, I 
don't think that personal accounts are the greatest idea. That 
being said, as I look at the proposals by a range of people, 
the President, Senator Hagel, Congressman Shaw, Bob Posen, 
every single one of those proposals doesn't have anything like 
a bank option. The problems of the bank option are not the 
costs of the bank managing the money. I think, sure, it can do 
that reasonably well.
    It is that needed to take 100 million different accounts 
and keep track of each one of them separately. In something 
like the President's proposal, all the money goes into the 
Government, and then the Government looks, how many people 
wanted to invest in the stock market, adds up to 50 billion. 
They hand Barclays $50 billion, and they invest it in the stock 
market. Here you hand this group $5,000, that group $15,000, 
and then you need a monitoring and enforcement structure to 
make sure people didn't withdraw it earlier and break the other 
rules.
    That is why every one of those have rejected it. In fact, I 
testified to Senator Hagel's committee last week, and he was 
very strenuous that, no, no, this is government centralized 
management of the money to keep down costs. Every time I said, 
you know, it might have a higher cost, he said it is not going 
to have a higher cost because we are not going to do it that 
way.
    Chairman Bachus. Well, you are talking about 20,000, 30,000 
different accounts, some investing 20, some investing 30 in 
different funds. Isn't that what the Federal workers do today 
through the Thrift Savings Account?
    Mr. Furman. No, it is not. First of all, there is one 
employer, the TSP. And the country as a whole, there are 
millions of employers. There are a lot of administrative 
complications that you have that you don't have with the TSP. 
But the TSP, assuming that you have a TSP, the TSP 
administrator doesn't have your own personal account with your 
name on it keeping track of the moneys.
    They just take all the money. They figure out how many 
people wanted to invest in the stock market, including 
potentially you. They take all of that together, and they hand 
it to Barclays, and they invest it collectively.
    Chairman Bachus. Actually, they don't hand it--there are 
different funds, T-bills.
    Mr. Furman. No, no, most of them are invested by Barclays, 
one by the Treasury, the G Fund. But the administrative 
complications of a decentralized system is something we see in 
Chile and the U.K. Studies have found it eats up about 40 
percent of your retirement balance. I have been on a lot of 
panels.
    Chairman Bachus. I am not--generally, it doesn't really. 
Understand, I am more interested, you know, in the Federal 
employees. As a Federal employee, whether you are a Congressman 
or a postman or an air traffic controller, the yield has been, 
the return on investment has been--the worst you could have 
done if you had made all the worst decisions on which funds 
would have been 3.9 percent. The best would have been 11 
percent. In my case, it is about 8 percent. I thought I was 
doing fairly conservatively. But how does that compare with the 
rate of return on Social Security?
    Mr. Furman. There are, you know, as I tried to explain in 
my testimony, there are three problems with comparing the rate 
of return in Social Security and the rate of return in the 
private market. One, Social Security--the private market has 
risks associated with it, market risks. Number two, the private 
market doesn't provide insurance services. Then, the most 
important thing is, if we could--
    Chairman Bachus. I think what we have done there is we have 
broken out the disability insurance. I think every proposal has 
taken the pension or the retirement component, and they have 
broken out the disability insurance and preserved that.
    Mr. Furman. Almost all of them, you are correct, take out 
the disability. Some of them don't take out the survivors'.
    Chairman Bachus. Let us just say, and I think we would 
agree, that one that did not break out the disability and the 
President proposes breaking out the disability--
    Mr. Furman. He did. But, unfortunately, not the survivors', 
but we don't need to get hung up on that. The most important 
economic issue is one that I tried to explain through the words 
of Greg Mankiw when quoting him.
    If we could all take our money out, we are getting about a 
1.5 percent rate of return above inflation and Social Security 
right now. If we could all take our payroll tax out, our 12.4 
percent out, and put it in bonds, we could do a little bit 
better than that. The problem is, we are still spending $500 
billion a year on the current senior citizens. Where is their 
money going to come from?
    Chairman Bachus. What about a phase in?
    Mr. Furman. Well, what would happen, during the course of 
that phase in, you would have to--I would have my money getting 
a higher return on the account, but then I would be paying 
higher income taxes to support the current retirees.
    Chairman Bachus. I think the people who get a greater 
return wouldn't mind paying income tax on that return. It would 
actually be when they paid it--
    Mr. Furman. There is a mathematical theorem, and it is 
associated with a number of economists. Olivia Mitchell, who is 
a member of the President's Social Security Commission, 
supports reform and supports private accounts.
    They have proven that how you did that transition, no 
matter how you phased it in, the cost of that transition was 
exactly equal to the difference in the rate of return between 
Social Security on the market right now, so that once you 
factored that transition cost in, no matter how you phased it 
in or out--if--and this is a member of the President's 
Commission that explained it--you can't get a higher rate of 
return.
    Chairman Bachus. Thank you, Dr. Furman, I do appreciate 
your candor.
     Mr. Gornto, they teach you in law school, never ask a 
question you don't know the answer to. But this Evelyn that we 
talked about earlier--
    Mr. Gornto. This what?
    Chairman Bachus. Evelyn, the lady.
    Mr. Gornto. Oh, yes, Evelyn.
    Chairman Bachus. Did she express regret that the money was 
spent on her husband's open heart surgery?
    Mr. Gornto. I don't think so.
    Chairman Bachus. Okay. So she actually doesn't--she agrees 
that was pretty good?
    Mr. Gornto. She agrees that that was--
    Chairman Bachus. I would agree with her. Particularly, if 
they are still married.
    Mr. Pearce.
    Mr. Pearce. I can't follow that. I may have to go to the 
House.
    Mr. Gornto, you are described in, I think, Mr. Furman's 
testimony as free riders in your Galveston system. Free rider 
indicates, it hints at someone who gets on the train and goes 
to their destination and then gets off without paying.
    Do you all draw--in terms of Social Security, that would 
indicate you all are drawing Social Security benefits without 
paying into the system. Do you all do that?
    Mr. Gornto. I am sorry. I am not quite sure I understand 
your question.
    Mr. Pearce. Do you all, are you free riders on the Social 
Security system? The accusation has been made by the gentleman 
sitting to your left.
    Mr. Gornto. Are we free riders?
    Mr. Pearce. In Social Security. Do you draw benefits 
without paying into the system?
    Mr. Gornto. The--
    Mr. Pearce. Do you draw Social Security benefits?
    Mr. Gornto. Yeah, the Galveston County employees when they 
terminated the contract in 1980 accrued a benefit up to that 
point. Whatever they paid in they accrued, and that benefit has 
stayed with the benefit they have gotten from us.
    Mr. Pearce. So you get Social Security benefits.
    Mr. Gornto. Whatever had accrued to 1980 or any other type 
of job they would have, yes, sir.
    Mr. Pearce. Okay. It is also stated that Social Security is 
paying greater benefits than in your plan. You are saying that 
you had hoped to draw equal or greater benefits to Social 
Security. Are you succeeding in that?
    MR. Gornto. Yes. I have a chart that shows--
    Mr. Pearce. Mr. Chairman, with a unanimous consent I would 
like to get that chart as a part of the record.
    MR. Gornto. I think I gave it to you.
    Mr. Pearce. Okay. Fine. Mr. Furman, you alleged exactly the 
opposite. Did you bring your chart showing where the benefits 
are not as great?
    Mr. Furman. I have my chart and it is from the Social 
Security Administration.
    Mr. Pearce. Okay. But it shows that actually the benefits 
are less than in the Galveston plan.
    Mr. Furman. Correct.
    Mr. Pearce. Mr. Chairman, if we could get that put into the 
record.
     Mr. Furman, you indicate that the cost on the 
administration can be 30 to 40 percent of the final account 
balance. When I look at my costs for the TSP, and that is what 
the President has said he visualizes, a TSP type program. I 
look at my costs and they are .001. Now that is 1/300th of your 
estimate. You range--actually I round off, it is .0006 of my 
actual cost, and that makes your estimate 500 percent 
overinflated.
    Can you submit the documentation by which you say that our 
costs are going to be 500 percent greater under TSP under 
Social Security of the President's plan?
    Mr. Furman. Sir, would you let me explain briefly?
    Mr. Pearce. No, I just want you to submit your 
documentation. I think it bears the scrutiny. You have made a 
pretty strong claim and I would like to see that documentation.
    Mr. Furman. Okay. It is not the TSP that would. It is the 
bank option. But I will submit it to you.
    Mr. Pearce. I understand. Mr. Gornto, you said that you 
provide survivor benefits. Can you provide documentation that 
you actually do that?
    Mr. Gornto. Yes.
    Mr. Pearce. You said the Galveston plan has survivor 
benefits. And again Mr. Furman claims that it doesn't.
    Mr. Gornto. We can prove that.
    Mr. Pearce. Mr. Furman is shaking his head.
    Mr. Furman. I said it doesn't have spousal benefits for 
dependent spouses while you are alive. That is different from 
survivor's benefits.
    Mr. Gornto. I disagree. It has them.
    Mr. Pearce. All right. I see that. Okay. Would any of you 
tell me what we do with our Social Security surpluses right 
now? We have surpluses at the current point. What do we do with 
those surpluses? How do we invest them? Anyone?
    Mr. Furman. Special issue treasury bond.
    Mr. Pearce. Special issue treasury bonds. And what are the 
rates of return on those special interest treasury bonds?
    Mr. Furman. Long term projection is for 3 percent rate of 
return, above inflation about 5.8 percent.
    Mr. Pearce. If I go down and buy a long-term bond today I 
can get--
    Mr. Furman. I think it is less than that today.
    Mr. Pearce. It is somewhere down on the floor at 4 percent. 
Are we buying long-term bonds for Social Security or are we 
buying short-term bonds? I have the information that we are 
actually buying short-term bonds because we are not allowed to 
buy the longer term bonds.
    Mr. Furman. We buy bonds that are a special issue. They 
have the same rate of return as a maturity of 4 years and up 
average--from 4 to 30-year bonds to average return.
    Mr. Pearce. So on the--let me switch over and I will ask 
the question. Mr. Furman, I walked in on the discussion about 
the tax cuts and what should have been on tax cuts. Does the 
size of our government spending as a percent of our overall 
economy rise to the level of concern for you?
    Mr. Furman. I am concerned that we have seen one of the 
largest expansions in government.
    Mr. Pearce. Not size, that is relative. In other words, 
when we cut taxes the idea is we depress down the size of 
government?
    Mr. Furman. I see that that theory works. We have actually 
seen a huge expansion in government spending.
    Mr. Pearce. I mean we went from 25 percent to 23 percent. 
Now, the relationship is that as you move beyond 25 percent 
your economy stagnates and becomes very immobile. As you lower 
the percent it has greater vitality and growth. And if you 
want, the way that that has played out, you could look at the 
Irish miracle, where they have a tax rate of 10 percent, the 
government spending lowered and their economy jumped 
significantly. You could also scoot over to New Zealand where 
they cut the size of government significantly, and they 
graduated it up, the scale of industrialized economies and then 
if you come to current day Germany, at 52 percent, we are again 
at 23 percent. They haven't created a new job in 10 years.
    Now, your basic assumption that we should have left the tax 
rates up would encourage us to be higher--in the higher 
percentage of government projects. And if we look at the other 
side of the aisle's recommendation on spending, we could easily 
find ourselves way up in the 30 to 40 percent range if we delay 
the solution of Social Security right now, solution, use the 
high estimates, $3 trillion averaged out over 10 years, $300 
billion. The low end is a trillion dollars. Average that out 
over 10 years you get 100 billion.
    If we do like you are recommending and do nothing, the 
estimates are $11 trillion to solve the problem 75 years from 
now. And divide that by 10 and you get one trillion per year 
solution cost with a $2.5 trillion budget.
    I don't see how we can keep our economy vital; that is, the 
percent of government spending as a total percent of the 
economy. I don't see how we can get where we need to be as far 
as a vital economy. If you have any comments on that.
    Mr. Chairman, I see my time has elapsed and I will let him 
close.
    Chairman Bachus. I would appreciate that, Mr. Pearce. We 
are going to conclude our testimony at this time. Before I do, 
I want to thank the panelists for their testimony and I also 
want to thank Mr. Sessions and Mr. Feeney's staff who were very 
effective in putting this hearing together as well as Marisol 
Garibay, who is here on Mr. Oxley's staff, who coordinated this 
entire hearing and did an excellent job. I would like to 
commend you, Ms. Garibay.
    We do appreciate your testimony. I think the thing that we 
all agree with on both sides of the aisle is that we do have, 
whether we call it a crisis or a critical juncture in Social 
Security, there needs to be reform, overhaul, whatever we want 
to call it. And every year that goes by we don't do it, it 
costs almost a trillion dollars a year, which is a staggering 
amount. And we have our baby boomers facing us 3 years down the 
road. And so we appreciate your testimony.
    Without objection, all written statements will be made a 
part of the record, and the Chair notes that some members may 
have additional questions for this panel which they may wish to 
submit in writing.
    Without objection, the hearing record will remain open for 
30 days for members to submit written questions to the 
witnesses and to place their responses in the record. This 
hearing is adjourned.
    [Whereupon, at 12:14 p.m., the subcommittee was adjourned.]

                            A P P E N D I X


                             June 23, 2005

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