[Senate Hearing 109-24]
[From the U.S. Government Publishing Office]



                                                         S. Hrg. 109-24

                SOCIAL SECURITY: DO WE HAVE TO ACT NOW?

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                            FEBRUARY 3, 2005

                               __________

                            Serial No. 109-2

         Printed for the use of the Special Committee on Aging


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                       SPECIAL COMMITTEE ON AGING

                     GORDON SMITH, Oregon, Chairman
RICHARD SHELBY, Alabama              HERB KOHL, Wisconsin
SUSAN COLLINS, Maine                 JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri            RUSSELL D. FEINGOLD, Wisconsin
ELIZABETH DOLE, North Carolina       RON WYDEN, Oregon
MEL MARTINEZ, Florida                BLANCHE L. LINCOLN, Arkansas
LARRY E. CRAIG, Idaho                EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania          THOMAS R. CARPER, Delaware
CONRAD BURNS, Montana                BILL NELSON, Florida
LAMAR ALEXANDER, Tennessee           HILLARY RODHAM CLINTON, New York
JIM DEMINT, South Carolina
                    Catherine Finley, Staff Director
               Julie Cohen, Ranking Member Staff Director

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Gordon Smith........................     1
Opening Statement of Senator Herb Kohl...........................     2
Opening Statement of Senator Thomas Carper.......................     3
Opening Statement of Senator Bill Nelson.........................     5
Opening Statement of Senator Jim DeMint..........................     5
Opening Statement of Senator Mel Martinez........................     6

                                Panel I

Douglas Holtz-Eakin, director, Congressional Budget Office, 
  Washington, DC.................................................     7
David Walker, comptroller general, Government Accountability 
  Office, Washington, DC.........................................    22

                                Panel II

David C. John, research fellow, Thomas A. Roe Institute for 
  Economic Policy Studies, The Heritage Foundation, Washington, 
  DC.............................................................    61
Robert L. Bixby, executive director, The Concord Coalition, 
  Arlington, VA..................................................    73
John Rother, director of Policy and Strategy, American 
  Association of Retired Persons, Washington, DC.................   112

                                APPENDIX

Prepared Statement of Senator Larry Craig........................   131
Prepared Statement of Senator Hillary Rodham Clinton.............   132
Prepared Statement of Senator Susan Collins......................   132
Statement submitted by National Association of Chain Drug Stores.   134

                                 (iii)



 
                 SOCIAL SECURITY: DO WE HAVE TO ACT NOW?

                              ----------                              --



                       THURSDAY, FEBRUARY 3, 2005

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The committee convened, pursuant to notice, at 2:06 p.m., 
in room 628, Dirksen Senate Office Building, Hon. Gordon H. 
Smith (chairman of the committee) presiding.
    Present: Senators Smith, Martinez, DeMint, Kohl, Lincoln, 
Carper, Nelson, and Clinton.

      OPENING STATEMENT OF SENATOR GORDON SMITH, CHAIRMAN

    The Chairman. I will call to order this hearing of the 
Senate Special Committee on Aging.
    Today's hearing is its first on Social Security in the 
109th Congress. This is the beginning of a series of hearings 
this committee will hold on Social Security in the coming 
months. Anyone who listened to the State of the Union Address 
knows that this is Topic A on the Hill right now.
    It is with great hope that we convene as colleagues to 
examine this program, for we are truly at a unique crossroads 
as a nation. Social Security has been the most successful 
endeavor by government in attempting to assure income security 
for the elderly and the disabled and no other program has 
served the nation's seniors so effectively for so long.
    Now itself at age 65, Social Security is a mature program, 
and as with anything that has evolved over so many years and 
touched the lives of so many Americans, the complexity of 
determining how to assure its continuance as an effective base 
of retirement and disability income for future generations 
cannot be understated.
    Social Security is the cornerstone of the nation's multi-
faceted retirement system, and as we will hear from the 
exchange among our witnesses today, how best to proceed 
involves more than examining how two trust funds can be brought 
into balance over the next 75 years. The first of the baby 
boomers are only a few years from entering the ranks of senior 
citizens and the challenges that their swelling numbers will 
place on this and other vital programs of government are 
enormous.
    The President's willingness to confront these issues, to 
take the lead, gives us a rare and perhaps small window of 
opportunity to set partisan differences aside, wherever 
possible, and attempt to achieve what many in recent years have 
felt was unreachable, greater retirement security not just for 
today's seniors, but for our children and our grandchildren.
    I am pleased that we are starting off this series of 
hearings with the heads of Congress' own support agencies. CBO 
and GAO have been reviewing and studying the problems of Social 
Security in a nonpartisan fashion for many years and their work 
has been and remains a vital tool in assisting the Congress in 
its consideration of these issues.
    Before we proceed, I am pleased to turn to my colleague, 
the ranking member of this committee, Senator Herbert Kohl of 
Wisconsin, and I know he has some remarks of his own. Senator 
Kohl.

             OPENING STATEMENT OF SENATOR HERB KOHL

    Senator Kohl. I thank you, Mr. Chairman, and we welcome our 
distinguished witnesses here today.
    Today, this committee will address the issue of Social 
Security, which the President pushed to the very top of the 
national agenda last night in his State of the Union address. I 
want to make very clear that while Social Security faces 
financial challenges in the future, it is clearly and 
indisputably not broke. Even using the most conservative 
estimates on economic growth for the next 40 years, Social 
Security will continue to be able to pay full benefits to 
seniors that have earned and deserve those benefits.
    It is important to remember that Social Security has been 
one of the most successful programs, as Senator Smith said, in 
our nation's history. This program has reduced poverty among 
the elderly from what it was in the 1930's, almost 50 percent, 
to 10 percent today. It has helped seniors live out their 
retirement years in more comfort and security than otherwise 
would have been possible or even dreamt of. So as we work to 
strengthen Social Security, we need to be careful to mend it 
and not to break it.
    We have all heard the arguments that Social Security will 
be broke, bankrupt, and not able to pay benefits to future 
retirees, but factually, that is not so, for even if we did 
nothing to fortify the program, which, of course, is not an 
option that we intend, but even if we did nothing, Social 
Security would be able to pay 78 percent of benefits in the 
year 2052. I believe that CBO will confirm that very important 
fact today.
    We need to take steps to strengthen and mend Social 
Security so that its promise of a secure retirement is just as 
real for seniors in the future as it has been for seniors up 
until today. But those who want to radically change Social 
Security need to clearly explain why we should so demonstrably 
alter a program that has been so successful and has kept so 
many seniors out of poverty over the years.
    It is also important to point out that under the 
President's proposal, as has been explained so far, people are 
not given a choice between keeping what they have today or 
starting new private accounts. But whether you choose a private 
account or not, the President's plan apparently requires 
significant cuts in the guaranteed benefit that seniors have 
come to rely on in their retirement.
    There are a variety of options to choose from to make 
Social Security solvent far into the future. We need to start 
considering those options so we can protect Social Security for 
the seniors of today and tomorrow. We need to have an honest 
dialog that gives us the real picture of Social Security's 
finances and challenges. We look forward to this hearing with 
the hopes that we can begin to accomplish exactly that.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Kohl.
    Senator Carper, do you have an opening statement?

           OPENING STATEMENT OF SENATOR THOMAS CARPER

    Senator Carper. I do, Mr. Chairman. Thank you very much. It 
is good to be here with you and Senator Kohl and see our 
witnesses here. We look forward to your testimony. I am going 
to be called out to another meeting here in just a few minutes, 
but I want to hear at least the beginning of your remarks, so I 
will be brief.
    I was elected to the U.S. House of Representatives in 1982 
and was sworn in on January 3, 1983. One of the first things I 
learned as I was looking for the men's room was that we had a 
crisis with regard to Social Security, not a long-time 
challenge, which is what I think we face today with respect to 
Social Security, but a real crisis. The system was going to run 
out of money soon if we did not act.
    Ronald Reagan was President then, and a year or so before I 
was elected, he and Tip O'Neill got together on an idea. They 
created a true bipartisan commission and their Commission, I 
think, with a number of members appointed by the President and 
at least as many members, maybe even more members appointed by 
the Democratic leaders of the House and the Senate. You may 
recall that those members included Alan Greenspan, who I think 
was the Co-Chairman of the Commission. They included Senator 
Bob Dole, my colleague Claude Pepper from Florida, and a number 
of other wise men and women.
    They came back to us in 1983 with a whole laundry list of 
recommended steps to take to shore up Social Security well into 
the 21st century, and very much in a political environment, a 
highly charged political issue, we adopted those 
recommendations almost lock, stock, and barrel.
    The outcome of those actions with Social Security was it 
was strengthened, as Senator Kohl says, well into this century, 
to probably the middle part of this century.
    We have had an experience with another bipartisan 
commission more recently that was created on the heels of 9/11 
and chaired by Governor Tom Keane and by my former colleague in 
the House, Congressman Lee Hamilton, a highly regarded 
Republican and Democrat, surrounded by folks who were Democrat 
and Republican, selected by the President and some by our 
Democrat leaders, but they did great work, I think, for this 
country, and led us through last year, literally an election 
year, certainly a highly charged election year, to a consensus 
around the steps that we needed to take, 40-some 
recommendations. In the end, we adopted almost all of them.
    I don't know if maybe we couldn't take a play out of the 
playbook of a couple of really good politicians, Ronald Reagan 
and Tip O'Neill, in this decade and apply it, again, not to a 
crisis but to a challenge that we face, a long-term challenge 
that we face in Social Security, and take a page out of our 
playbook from last year where we created the 9/11 Commission.
    I don't know that Democrats or Republicans or any others 
should be knee-jerk opponents of creating private accounts, but 
if we are going to do that, or examine that or support that, I 
think we need to agree on a couple of basic principles and one 
of those is we are not going to do so in a way that increases 
our nation's debt. It is all well and good we talk about giving 
young workers the opportunity to set aside monies to save for 
their retirement, but at the same time, increasing the debt, 
the burden of debt that they are going to inherit, is not what 
we should be about.
    Further, I don't believe we should be doing this at a time 
and in a way that would reduce the benefits for those senior 
citizens who are going to be looking for them, either now or a 
few years down the road.
    Let me close with this, Mr. Chairman, if I could. I have 
just come from a meeting where folks were discussing options if 
we are ever to further explore not only how to shore up Social 
Security well beyond the middle of this century, but also to 
allow people to either establish accounts that are add-ons, 
which is what I, frankly, favor, or some would suggest a carve-
out.
    Among the approaches that have been suggested, I think 
Senator Lindsey Graham has suggested that we help put Social 
Security on a sounder footing and enable a new benefit by 
raising the cap that now exists. We pay the payroll tax on 
income up to about, I want to say $90,000, but it has been 
suggested that we increase that. I think I have heard Chairman 
Greenspan talk about whether or not we should apply the CPI, 
Consumer Price Index, to the annual benefit and use that as the 
annual benefit increase each year instead of the wage index.
    I think President Bush said last night in his address, ``I 
don't know if it was Congressman Tim Penny, my former 
colleague, good friend, or former Senator Moynihan about 
indexing the full retirement age with life expectancy.'' As we 
live longer, live healthier lives, maybe we could do that.
    Someone suggested at a lunch meeting where I was that maybe 
we should consider allowing Social Security to invest certainly 
not all or not the lion's share of the trust fund monies in 
equities, not just in U.S. Treasury obligations, but some 
portion could be in equities, as well, which is what we do with 
our pension funds in the State of Delaware and, frankly, in a 
lot of other places.
    So those are all things that are on the table. I wanted to 
put them on this table, Mr. Chairman and my colleagues, and I 
thank you for the chance to do that and we welcome you today. 
Thank you.
    The Chairman. Thank you, Senator Carper. I don't think you 
put anything on the table that the President didn't put on the 
table last night.
    Senator Nelson, you arrived next. Do you have an opening 
statement?

            OPENING STATEMENT OF SENATOR BILL NELSON

    Senator Nelson. Speaking of that, I wish that our 
distinguished panel, who I have had the pleasure of hearing 
both of you in these past couple of days, might clarify for us 
on what was changed in what the President said and what the 
White House put out with regard to what had been put out by the 
White House previously in the press. We don't know the details 
of the President's plan, but some additional information was 
released yesterday and I would like that to be filtered through 
the eyes of both of you and give us your interpretation and how 
that would affect the ultimate final product.
    It is no secret, Mr. Chairman. I have made a couple of 
fairly definitive statements this week, both in Florida and 
here on the Senate floor, that I am not going to support 
anything that is going to be a huge transfer of new debt out of 
the Social Security Trust Fund, nor am I going to support 
something that will have a diminution of the benefits. Now, I 
agree that everything ought to be on the table and if 
everything is on the table, then we can start realistically 
picking and choosing.
    I will just close by saying that I, too, was a Member of 
Congress when one of the finest examples of bipartisanship has 
ever been rendered in American history, and that was when 
Ronald Reagan and Tip O'Neill decided that they were going to 
save Social Security in the early 1980's. They appointed this 
Commission, and it was bipartisan, and as a result of that, 
they came to an agreement and then they came to another very 
significant agreement, that nobody was going to play ``gotcha'' 
politics and that there was not going to be used the final 
result, which was a give and take in the process of compromise, 
otherwise known as consensus building, that they were not going 
to use that to someone's disadvantage in the coming election. 
They honored that agreement and that is why we had the saving 
of Social Security back in the 1980's.
    Thank you, Mr. Chairman.
    The Chairman. Thank you.
    Senator DeMint.

            OPENING STATEMENT OF SENATOR JIM DEMINT

    Senator DeMint. Mr. Chairman, I really appreciate you 
holding this hearing. Obviously, the timing is perfect, as the 
President threw out a challenge to us and to the Nation last 
night to fix Social Security. The difficulty has been that 
there are so many different understandings of Social Security, 
how it works, the condition it is in. In groups that I speak 
to, it continues to amaze me, even people in Congress who have 
a completely different view of things like the trust fund and 
how the trust fund is going to pay for the program.
    I appreciate the folks who turn the numbers here to talk to 
us and I would hope you would speak to us in as clear of terms 
as you possibly can and correct me if I am wrong.
    My understanding is that within about three years, and 
maybe CBO has a little different numbers, but within three 
years, this Senate and its 10-year budget forecast will have to 
begin to include billions of dollars that go from the general 
fund to supplement Social Security benefits, and I think you 
need to tell us if that is true. There are so many people here 
who seem to think we can still put this off for decades when, 
if in 2018 or maybe it is 2020, I think the first year it is 
$16 billion, the next year it is $30-something billion, and 
within a relatively short period of time, we are talking 
hundreds of billions of dollars a year that we have to take 
from the general fund to supplement payroll taxes in order to 
pay benefits. I hope I am wrong, but if you gentlemen are here 
to tell us what the numbers are really like, I hope you will 
straighten that out.
    I hope you will also explain, again, if I understand it 
correctly, that the Social Security Trust Fund is merely a 
bookkeeping of how much money that has been borrowed from the 
Social Security and spent on other things, that there are no 
real assets in the Social Security Trust Fund, that there are 
no assets that can actually pay a benefit, that we have to make 
up every dollar in the trust fund with an exact replica from 
the general fund. It is one pocket to another.
    So I think if you can help us clarify the problem, and I 
agree with my colleague, Senator Carper, that all ideas should 
be on the table for a solution. But Social Security is a 
promise we should keep. It is not like another government 
program that we make up and start spending something on. This 
is money that we have taken from people over the years in 
return for the promise of some security in their retirement.
    I don't think the problem with Social Security is that the 
benefits are too high now. I don't think that the problem is 
that the taxes are too low. From the math that I have seen on 
this, if we could even save half of what people have been 
putting into Social Security, that even the lowest-income 
American worker would be a millionaire, if not close to it, if 
it was actually saved and invested in a government bond. That 
may not be exactly correct, but I know there would be a lot 
more money than there is now.
    But the first step in solving a problem is realizing we 
have one, and if you could help us clarify that today, I think 
you would do a great service to us and to the country so that 
we then, as colleagues, could sit down and say, we do have a 
problem, and when that problem begins is actually in three or 
four years. Then, I think we can put our best ideas together 
and come up with something that works for the future of this 
country.
    Thank you, Mr. Chairman. I yield back.
    The Chairman. Thank you, Senator DeMint.
    Senator Martinez.

           OPENING STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Thank you, Mr. Chairman. I wanted to 
thank you and Senator Kohl for holding this hearing and I also 
wanted to just thank you for allowing me to be a part of this 
committee. I am looking forward to serving here with you and to 
dealing with the important issues of aging in America, many of 
which I have been interested in for some time, particularly 
housing as people age.
    I also want to say it has been a pleasure in the past to 
work with Mr. Walker and I look forward to hearing from you 
today, as well.
    Mr. Chairman, I believe that the solvency of Social 
Security affects all Americans in every walk of life. I do 
believe that there is uncertainty regarding the funding for 
Social Security and I look forward to hearing the testimony 
here today on the issues before us and working with the 
committee in a bipartisan fashion to take steps that will 
perhaps help guide Social Security toward a solid financial 
footing and ensure it be there for the future.
    I think it is also vitally important that no matter what 
steps we take, as Senator DeMint was just saying, that we keep 
the promises made to seniors, those that are currently 
collecting Social Security benefits.
    I was so pleased last night for President Bush to speak so 
clearly to the fact that those that are 55 years of age and 
older will see no change and that our sacred trust and sacred 
bond to them will be kept, and whatever we do to secure and 
ensure the system there for a future generation, that it 
doesn't impact them.
    Tomorrow, I am going to be in Florida visiting in Sun City 
Center, one of our large retirement communities, with my foster 
parents, dear people to me who took good care of me at a time 
in my life when I was in desperate need of help. For them in 
their years of now vulnerability to illness and what not, they 
and people like them don't need to worry. It isn't fair to say 
that they are threatened or that they are under some sort of a 
threat to lose their benefits or have a change that is going to 
dramatically impact their lives. That is just not what we are 
about to do or we are talking about doing or what the 
President's plan, I think, clearly in any way will imply.
    I think another thing that I would like to stress as we 
delve into this debate is that it doesn't appear to me, as I 
have studied the issue, that doing nothing is responsible. 
Simply saying there is not a problem, we will deal with it, or 
someone else will deal with it another day at another time, 
that is not an acceptable or really a responsible track to 
follow.
    So I would look forward to hearing from the witnesses today 
and then with my colleagues on both sides of the aisle, working 
toward crafting, as I think Senator Nelson has stressed so 
appropriately, in a bipartisan way a solution to this problem 
so that we can ensure a safe and strong retirement for the next 
generation, as well.
    The Chairman. Thank you, Senator Martinez, and we will have 
some housing hearings, as well, so we look forward to those.
    Ladies and gentlemen, our first panel consists of Douglas 
Holtz-Eakin. He is the director of the Congressional Budget 
Office here in Washington, DC. He will be followed by David 
Walker, comptroller general of the Government Accountability 
Office, also here in Washington, DC.
    Doug, you are up first.

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

    Mr. Holtz-Eakin. Mr. Chairman, Senator Kohl, members of the 
committee, thank you for having the Congressional Budget Office 
here today to discuss this important issue.
    In my opening remarks, I thought I would focus on three 
things. I will spend a few minutes discussing the outlook for 
Social Security under current law so that in the interests of 
helping Senator DeMint, we can have the same sets of facts at 
our disposal, and then set the problem in the larger context of 
budgetary pressures facing the United States and economic 
policy issues going forward. Finally, I thought I would close 
with a few illustrative examples of the relative impacts of 
moving sooner versus later in addressing the Social Security 
financing problem.
    The outlook for Social Security under current law is in the 
diagram before you. The dotted line are dedicated receipts into 
Social Security. At the moment, those receipts lie above the 
outlays for benefits to retirees. Beginning in 2008, the 
leading edge of the baby boom generation will be eligible to 
retire. Shortly thereafter, the surplus of receipts in excess 
of outlays which are currently available to the remainder of 
the Federal budget will begin to diminish, and at that point, 
the cushion provided by the Social Security program will 
diminish thereafter until roughly 2020, at which point the 
system will take in approximately as much as it sends out. 
Dedicated taxes in will match benefit payments going out.
    In the decades to follow, under law, the accounting 
mechanism called the trust fund will indicate that benefits may 
be paid. The benefits paid will exceed receipts coming in. That 
gap will be made up by funds provided from elsewhere in the 
overall Federal budget, whether they be lower spending, higher 
taxes, or borrowing from the public, until in 2052, under our 
estimates, the trust fund will exhaust. There will no longer be 
the authority to pay full benefits. There will be an across-
the-board cut of roughly 20, 22 percent in our estimates.
    At that point, at least some form of the program is 
sustainable indefinitely, where benefits are paid out equal to 
dedicated taxes coming in for the remainder of the current law 
scenario. That, of course, does not match expectations for 
benefits as scheduled under law, if we go to the next chart.
    You can see that under current law, outlays for benefits, 
benefits scheduled under current law, those that would be 
calculated given individuals' working histories and payable 
under the program, exceed dedicated revenues for the 
foreseeable future. In terms of the magnitude of the problem, 
that is in the eye of the beholder. It is inevitably the case 
that with the outlays above the revenues, one must somehow add 
up that gap, year by year, over longer horizons, and most of 
the computations of the size of the Social Security problem are 
some variant of that calculation.
    In terms of when it hits, that, of course, depends on when 
one views the pressures as becoming most pertinent, whether it 
was when the surplus begins to diminish, whether it is the case 
when cash-flow deficits begin, or whether it is the case when 
automatic benefit reductions might come into play.
    Finally, there are at least two different notions of 
``fixed'' that float around in this discussion. From the broad 
budgetary point of view, one notion of fixed would be when 
those two lines coincide, so that Social Security as a stand-
alone program for the indefinite future would be able to 
finance itself and would require no help from the remainder of 
the budget. Alternative measures of fixed look at measures of 
trust fund balance, which may or may not also necessitate some 
transfers from the remainder of the general fund.
    Now, clearly, Social Security is an important policy issue 
in its own right. The program has a long and important history 
as a part of economic and social policy. But it fits in a 
larger budgetary picture which is quite pressing. Indeed, the 
rising payments for Social Security, those which coincide with 
the retirement of the baby boom generation, pale in magnitude 
when compared to the likely outlays for the health programs, 
Medicare and Medicaid.
    Over this same period, Medicare and Medicaid start at 
roughly the same place as Social Security, about four cents on 
the national dollar. While Social Security rises to about 6\1/
2\ cents on the national dollar, Medicare and Medicaid under 
extrapolations of history could rise to as high as 20 percent 
the size of the current Federal budget. No one believes that 
anything like that is even plausible, so it is typically the 
case that one assumes a more moderate growth rate going 
forward. In those scenarios, Medicare and Medicaid typically 
rise to 12 percent of GDP, or over half the size of the current 
Federal budget.
    Needless to say, the Social Security issues evolve in the 
context of rising budgetary pressures. To the extent that funds 
are necessary from the rest of the budget to sustain Social 
Security, they will compete with those funds, for those funds, 
with ever-larger demands in other areas.
    That suggests that from the point of view of solving this 
problem, it may be desirable to move sooner versus later, and 
indeed, one way to think about this is that current law is a de 
facto wait and reform strategy. Putting the program on 
autopilot means that you go until 2052, at which point, by law, 
the program is brought into balance through an across-the-board 
benefit cut.
    Alternatively, one could move proactively and sooner. That 
could have effects at the level of both the individual and in 
the aggregate. The next chart.
    To get a flavor of this, we included in the testimony, and 
I would be happy to discuss at greater length, a comparison of 
benefits as scheduled under current law with those benefits 
that would be payable if one were to take a very mechanistic 
approach to the existing Social Security program. I emphasize 
that this is for illustrative purposes only. It is a 10-percent 
reduction in retirement benefits at the point of retirement and 
is done in that mechanistic and simple fashion just to give you 
a sense of magnitude, not as a suggestion of a solution.
    But one can see that if you move that 10 percent cut up to 
2012 and thus affect those individuals who are--instead of 
waiting for a sudden benefit cut in 2053 affect those who were 
born in the 1950's, it will be possible to pay higher benefits 
compared to what would have happened with the cut for those in 
the later generations and that is the tradeoff for having lower 
benefits for those workers who are older at the moment.
    So there is a clear tradeoff at the level of the individual 
that has budgetary consequences, but it is also very important 
for economy policy. Social Security affects incentives to work. 
It affects incentives to save. Both the program and its reform 
will have large economic consequences. Those consequences will 
be felt in the aggregate, as well.
    To the extent that such a mechanistic move earlier approach 
were instituted and nothing else changed in the Federal budget, 
the advantages of moving in 2012 would manifest themselves as 
less pressure to borrow from the public and less cumulative 
debt outstanding. The light blue line shows the benefits of 
moving in 2012. The darker line, waiting a decade and moving 
with the same size cut.
    In any event, moving sooner reduces overall borrowing, 
leaves less debt in the hands of the public. For the broad 
performance of our economy, less Federal borrowing transforms 
itself into higher national saving, a greater capacity to 
produce goods and services, and a higher standard of living 
going forward.
    So the tradeoffs involve benefits higher for those later if 
lower for those in the present and an economy that can perform 
better in the near term than would be otherwise. These are 
important issues in thinking about the issue of Social 
Security, not only in its totality but when it is best to move 
and to put it into long-term sustainability.
    I thank you for the chance to be here today.
    The Chairman. Thank you very much.
    [The prepared statement of Mr. Holtz-Eakin follows:]

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    The Chairman. David Walker.

  STATEMENT OF DAVID WALKER, COMPTROLLER GENERAL, GOVERNMENT 
             ACCOUNTABILITY OFFICE, WASHINGTON, DC

    Mr. Walker. Thank you, Mr. Chairman. Senators, it is a 
pleasure to be here with you to talk about Social Security 
again.
    In the interest of full and fair disclosure, in addition to 
being comptroller general of the United States and head of the 
Government Accountability Office and working on this issue 
there, I was a public trustee for Social Security and Medicare 
from 1990 to 1995. I was appointed to that position by 
President George Herbert Walker Bush. I have been on two Social 
Security Reform Commissions and I was involved with former 
President Clinton and former Vice President Gore in the effort 
in 1997 and 1998 to go around the country and help educate the 
public as to the nature, extent and magnitude of our challenge 
in this area. So I have been involved in this subject for a 
number of years and am pretty deep on the subject.
    I would respectfully suggest the following. First, I have a 
full statement I would like to have entered into the record, 
Mr. Chairman, if that is OK with you. There are lots of neat 
charts and graphs in there. But I will hit the highlights and 
get to the bottom line.
    While the Social Security program does not face an 
immediate crisis, it does have a serious financing problem that 
needs to be fixed and that is growing every day. For example, 
Social Security currently has a $3.7 trillion--that is 
trillion, not billion--gap between promised and funded benefits 
in current dollar terms. Given this gap and the large and 
growing fiscal challenges elsewhere in the Federal budget, not 
the least of which involve Medicare, which is roughly $27 
trillion-plus, up over $10 trillion last year alone, it would 
be prudent for the Congress to act sooner rather than later to 
address Social Security. Failure to take steps to address our 
large growing and structural long-range fiscal imbalance will 
have serious adverse consequences over time to our economy, our 
quality of life, and ultimately our national security.
    There are a number of key points that I highlight in my 
testimony. First, solving Social Security's long-range 
financing problem is more than making the numbers add up. 
Social Security is more than a retirement income program. It is 
also a disability program and a survivors income program. It is 
critically important to millions of Americans and always will 
be.
    Second, focusing on trust fund solvency alone is not only 
insufficient, it can be very misleading with regard to the 
state of the Social Security system. We need to put the program 
on a path of sustainable solvency. Candidly, the Social 
Security Trust Funds are nothing more and nothing less than a 
sub-account in the government's financial records and badger 
accounts. They are not real trust funds. If you looked in 
Webster's Dictionary, or if you have been a fiduciary for 
private pension plans and other arrangements, it is not a trust 
fund in the sense that any of us normally would refer to as a 
trust fund. It is a sub-account of the general ledger.
    The Chairman. David, for the benefit of everyone 
listening----
    Mr. Walker. Yes?
    The Chairman [continuing]. Can you clarify a point? Has the 
trust fund, the Social Security Trust Fund that so many seniors 
think is there or should be there, has it ever existed as 
anything more than just an accounting device?
    Mr. Walker. It has always been an accounting device.
    The Chairman. Is that true from the days of Franklin 
Roosevelt?
    Mr. Walker. It has always been an accounting device, to my 
knowledge, but that is not important. Let me explain what 
happens. Let's take last year, for example.
    Last year, the Federal Government took in $151 billion more 
in payroll taxes attributable to Social Security than it paid 
out in benefits. The Federal Government ended up spending all 
of that money on other operating expenses. It replaced it with 
an IOU that is a non-readily marketable security. You can't 
sell it to anybody. You can't get any money for it. It is 
backed by the full faith and credit of the U.S. Government. It 
is guaranteed as to principal and interest. It has legal, 
political, and moral significance. It has no economic 
significance whatsoever.
    Ultimately, when you have to start drawing down on those 
IOUs, and that is what they are, then you are either going to 
have to increase revenues, cut spending, or increase debt held 
by the public. The surplus will start to decline in 2008. 
Social Security (ie, OASDI) it will go negative cash-flow in 
2018. In 2042, all of the IOUs will have been redeemed and it 
is at that point when, if Congress does nothing, benefits will 
go from everybody being paid a dollar of benefits for every 
dollar of promised benefits to 73 cents in benefits for every 
dollar and it will get progressively worse over time.
    Yes, Congress could wait until 2042, as it did in 1983. 
That is where you were in 1983. The trust fund was going to be 
exhausted. There was still money coming in. Given where Social 
Security stands as compared to our broader fiscal challenges, 
it would be imprudent to wait why, because Social Security 
should be easy lifting as compared to Medicare, Medicaid, and 
some of our other challenges which are likely to take many 
years to address and are likely to require a lot tougher 
choices.
    So Social Security is part of our broader fiscal and 
economic challenge. Acting sooner rather than later can help in 
many ways, including the fact that by acting sooner, you don't 
have to make as dramatic of changes and there is more time for 
transition. Furthermore, it is my earnest belief, having been 
involved in this issue for many years, that Congress has an 
opportunity to exceed the expectations of every generation of 
Americans in connection with Social Security reform. By that I 
mean every generation can get more money than they think they 
are going to get, and I will give you a personal example.
    My parents who are retired, they are going to get every 
dime of what has been promised to them. My son is 28. My 
daughter is 31. They are discounting Social Security to a much 
greater extent than they should, because even when the trust 
fund goes dry in 2042, there is 73 cents in revenue for every 
dollar of promised benefits. But they are discounting it much 
more than that.
    You have an opportunity to leave current retirees and near-
term retirees alone, give them everything that is promised, 
make progressively greater changes the younger a person is, but 
you have to do more than just individual accounts and you may 
or may not want to do individual accounts. If you do that, 
every generation can get more than they think they are going to 
get. That is what I would call a win.
    What is important about that is right now. Because last 
year may have been the worst year, in my opinion, in our fiscal 
history. We had huge current year deficits and, we increased 
our unfunded obligations by $13 trillion in one year, $8.1 
trillion of which was the Medicare prescription drug benefit. 
We face serious financial and fiscal challenges. We need to 
send a signal to the markets that we are serious about dealing 
with these large and growing challenges and we need to send a 
signal to the American people that we are willing to deal with 
some of these large and growing challenges before we are about 
ready to hit the wall.
    By hitting the wall, I mean cutting benefits dramatically 
and suddenly to a bunch of people when the trust fund runs dry 
rather than trying to deal with it more prudently and more 
pragmatically over time.
    In summary, I note that GAO has been involved in this issue 
for a number of years. We have recommended three basic criteria 
for evaluating all Social Security reform proposals. First, how 
do they stack up against financing, sustainable solvency, not 
just solvency over 75 years, solvency in perpetuity, because 
even when the changes were made in 1983, it was known from day 
one that they were going to be out of balance within a year 
because of known demographic trends.
    Second, we need to balance adequacy and equity with regard 
to all the different stakeholders that rely upon Social 
Security in its many forms.
    Third, it is important to look at how it will be 
implemented, including administrative feasibility, which is 
particularly relevant if the Congress decides it is going to 
have individual accounts. But if you do have individual 
accounts, they are not going to solve the problem. There are 
pros and cons to individual accounts. You have to have other 
reforms, as well, in order to achieve these objectives.
    We stand ready, Mr. Chairman and Senators, to continue to 
assist this committee and the Congress in analyzing various 
Social Security reform proposals. But let me just say, it is 
not an immediate crisis. That is true. It is a large and 
growing problem and it would be prudent to act sooner rather 
than later because this is easy compared to the real heavy 
lifting that is going to have to be done to reconcile our large 
and growing fiscal gap, which now is estimated to be $43 
trillion in current dollar terms, $350,000 for every full-time 
worker, $145,000 for every American.
    Thank you, Mr. Chairman.
    [The prepared statement of Mr. Walker follows:]

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    The Chairman. Gentlemen, a bipartisan group, including 
myself, recently were in Europe at a conference. I was in one 
meeting in which European demographics and economics were 
shared with us. I think to your point, David, if we don't begin 
to do something, we will do serious damage to our economy, and 
my question is, are some of those European models examples of 
the damage that can occur, because what I saw is that their 
demographics are worse than ours. Their promises are greater 
than ours. They, frankly, make our problem look like a fairly 
good time.
    I don't know whether you believe that to be true, but I 
would be interested in your opinion. But as I look at what you 
have just shared with us about the share of the nation's 
payrolls that will be required to finance what is current law, 
I am wondering what you see for the American economy if we 
don't figure this out, because you have used a static economic 
projection model, I assume, in what you have shared with us, 
and I am wondering what that will do to American 
competitiveness if we don't fix this as against China and other 
emerging nations that have very different demographics, much 
younger workforces, and burgeoning economies. Do you have a 
comment?
    Mr. Walker. Mr. Chairman, first, it is true that there are 
other nations, including in Europe, that have more difficult 
demographics to deal with than we do. It is true that there are 
certain nations that have larger relative unfunded commitments 
to deal with than we do, and in some cases, they are not as 
transparent with regard to the nature and magnitude of those 
commitments.
    But it is also true that some of them have started to deal 
with their problems before we have, the U.K. and Norway, just 
to name a couple off the top. It is also true that I don't take 
a whole lot of comfort in the fact that if we have serious 
problems, just because somebody else has more serious problems 
than we do, that we should be comforted by that. I don't think 
we should be comforted by that.
    As I said, ``One can't look at Social Security standing 
alone.'' Yes, it is $3.7 trillion, but we face a $43 trillion 
problem and it would be nice if we could make a good 
downpayment by doing something with this $3.7 trillion, because 
ultimately, we are going to have to end up starting to deal 
with the balance.
    The Chairman. Do you have a comment, Doug?
    Mr. Holtz-Eakin. The CBO does examine Social Security 
proposals in the context of a model that captures both the 
direct and the indirect effects on long-term economic growth. 
We have not done formal analyses of payroll tax increases that 
look to be on the order of 5.5 percentage points to close the 
long-term gap between the benefits promised and the receipts 
dedicated to the program.
    We have, however, looked in the context of the larger 
budgetary pressures, at the run-up in Social Security along 
with Medicare, Medicaid, projections for defense. These 
estimates were done at the end of December 2003. Qualitatively, 
it is the case that the United States' success rests on three 
pillars, the reliance on private markets, a relatively small, 
contained government as a result, on low and relatively 
efficient taxes by international standards, and on flexibility.
    A large run-up in Federal spending of the magnitudes in 
that report would require much higher taxes and the taxes 
imposed, in our estimates, would have lowered capital 
accumulation, lowered labor supply, and reduced GDP over the 
long term, and that is a numerical result that we can go 
through with you. But qualitatively, that kind of spending has 
to financed somehow and it will have economic ramifications.
    The Chairman. How much of the future growth of Social 
Security can be attributed to tying its initial benefits to 
wages as opposed to inflation and how much can be attributed to 
the aging of the population?
    Mr. Holtz-Eakin. In some work we did about two years ago, 
it broke about 50-50. Half of the rise in real outlays come 
from aging of the population, half from higher real benefits 
per recipient.
    The Chairman. Senator Kohl.
    Senator Kohl. Thank you, Mr. Chairman.
    Gentlemen, just to cover some of the ground that you have 
talked about in your statements, is Social Security going to be 
broke in 2052, as we hear it said so often, or is it true that 
after the trust fund is exhausted, then retirees will, in fact, 
continue to receive benefits as a result of contributions that 
will continue to be made?
    Mr. Holtz-Eakin. As I said in my opening remarks, some form 
of the program is sustainable indefinitely.
    Senator Kohl. Right.
    Mr. Holtz-Eakin. I think that the date, whether it is 2052 
or 2042, is somewhat uncertain. But any group that has looked 
at this, whether it be the GAO, the Social Security actuaries, 
the CBO, agrees on the basic trajectory of the program.
    Senator Kohl. Your estimate was, I think, something like 78 
percent?
    Mr. Holtz-Eakin. We see a 22 percent across-the-board cut 
necessary. The SSA actuaries have a bigger cut and earlier.
    Senator Kohl. Right. Depending on who looks at it, maybe 
somewhere between the mid 70's up until the upper 70's of what 
people expect will continue to be paid.
    Mr. Holtz-Eakin. Yes.
    Senator Kohl. So it is not fair, or is it fair to say that 
Social Security at some point will be broke or bankrupt or 
anything else of that sort in the common vernacular as people 
think about it?
    Mr. Walker. The program will never go broke.
    Senator Kohl. Right.
    Mr. Walker. The trust fund will go dry.
    Senator Kohl. Right.
    Mr. Walker. The program will never go broke.
    Senator Kohl. Right.
    Mr. Walker. But Senator Kohl, you probably recall the real 
controversy about the ``notch baby'' issue back a few years 
ago. Imagine a notch baby issue of the magnitude of tens of 
millions of persons where on one day, you are receiving a 
dollar of benefits for every dollar promised, and the next day, 
you are receiving 73 cents in benefits for every dollar 
promised. I mean, that is what would happen if Congress does 
nothing and waits until the trust fund goes dry.
    Senator Kohl. That is true. There is no argument about 
that. But I just wanted to get those----
    Mr. Walker. You are right.
    Senator Kohl [continuing]. Again, very clear, that we are 
not talking about a program that at some point is going to be 
broke in the sense that people will not get any money out of 
it. That is not true.
    Mr. Walker. It will never go broke.
    Senator Kohl. Right. Is it true that with relatively small 
changes, that decisions would have to be made, we could get 
Social Security solvent for another 75 years? Maybe not into 
perpetuity, if you want to put that as the goal, but in terms 
of making relatively small changes in terms of our economy, its 
size, we can get this program solvent through the 21st century 
into the 22nd century, is that true?
    Mr. Holtz-Eakin. Small is in the eye of the beholder. I 
would caution you that any fix that involves making the trust 
fund last 75 years involves a period where the trust fund is 
declining----
    Senator Kohl. Sure.
    Mr. Holtz-Eakin [continuing]. Each year in which that is 
true, those funds are coming from the remainder of the Federal 
budget. So it is far from the case that the overall problem is 
easy to fix. You could make the Social Security problem and 
hold it essentially harmless, but you will have a bigger 
problem elsewhere in the budget.
    Senator Kohl. Of course, but what we are talking about in 
the context, for example, of the President's speech last night 
is Social Security. We are not talking about the entirety of 
our economy, the entirety of our--we are talking about Social 
Security and whether or not there are ways and means to make 
that program whole. The question I asked is whether it is true 
that we can make that program whole for many more years beyond 
2040 or 2050 with relatively small changes in terms of our 
national economy. David.
    Mr. Walker. Three comments, Senator. Relatively small is in 
the eyes of the beholder. Second, clearly, relatively small as 
compared to Medicare.
    Senator Kohl. Yes.
    Mr. Walker. No doubt about that. You are going to have to 
take much more dramatic actions there.
    Second, I think there are a lot of positive things you can 
say about the changes that were made in 1983, but one of the 
things I would respectfully recommend to the Congress is that 
if you are going to go after Social Security again, you need to 
look for sustainable solvency, not just look for 75 years, why, 
because in 1983, they knew that the problem was going to 
reemerge because of known demographic trends.
    Right now, you have a situation that every year, we take a 
surplus year that gets lower each year and we add an 
increasingly large deficit year. That is due to known 
demographics. So if you are going to take it on again, I would 
strongly suggest you try to solve it for the long-term.
    Last, you could look at Social Security in isolation and 
say it is not that difficult, we can solve that for 75 years or 
in perpetuity. But I would respectfully suggest that one of the 
problems that we have is that we are looking at everything in 
isolation and we shouldn't be doing that. We have to recognize 
that Social Security is a subset of a much bigger challenge. 
Not only do we have to deal with Social Security, we have to 
deal with Medicare, we have to deal with Medicaid, we have to 
deal with many other issues, and whatever you do with Social 
Security is going to have an impact on private pensions, 
personal savings, et cetera.
    Senator Kohl. But it is true that the President raised the 
issue last night and so he is making it front and center, and 
so we have to discuss it because he has directed our attention 
to a single, what he describes as a catastrophic problem, 
Social Security, and that is why we are talking about it and 
that is why we are addressing it.
    In that context and last, if it is true that we look to 
Washington to keep our eye on the ball, to see problems as they 
are and as they emerge and to look for ways in which we can 
solve those problems, and if it is true, as you have said, 
``That Medicare is by far a more serious problem'', then why 
are we focusing on Social Security today, other than the fact 
that the President has decided that we are going to talk about 
Social Security? If Medicare is a much more serious and urgent 
problem that needs to be----
    Mr. Walker. I think you would have to ask the President. I 
would say that one of the reasons that it may be the case is 
because Social Security is a problem that is actually solvable. 
It is solvable in a way that you can exceed the expectations of 
every generation of Americans, and if you can do that, it would 
send a positive signal to the markets that we are willing to 
get serious about dealing with some of our large and growing 
long-term deficits, and second, that it could serve as a 
confidence builder among the public and potentially a momentum 
builder within the Congress to take on some of the more 
difficult challenges.
    You do have to deal with Medicare. I would respectfully 
suggest, Senator, that may take many years and many 
installments----
    Senator Kohl. My time is up, but didn't we just, at the 
President's urging and request, just add on an enormous 
liability to Medicare? Didn't we just do that with our eyes 
wide open, understanding then the same facts that we understand 
today? I mean, there was just a vote a few months ago.
    Mr. Walker. Senator, you are correct in saying that when 
the Medicare prescription drug bill was passed, it added $8.1 
trillion to our unfunded obligations. It dug the hole much 
deeper. Part of the problem is because at the time that that 
bill was discussed and debated, Congress did not have access to 
its long-term cost. That has got to change. Congress needs----
    Senator Kohl. Well, the administration had access to it. We 
didn't.
    Mr. Walker. I don't know that they had the 75-year costs. 
There was a difference----
    Senator Kohl. It was very clear that people within the 
administration knew that the cost of that was far more than 
what we were told what it was. But, and finally, I end, because 
I know my time is up, it is ironic and perplexing that now the 
President is talking about these unfunded, probably, Social 
Security, and we have got to deal with it, got to understand 
what it means into the future, and if it is not dealt with, 
there are dire things that can occur. But just a few months ago 
when we were dealing with the Medicare situation and he and 
others were urging that we pass this tremendous unfunded 
liability, there was no discussion of it in that context at 
all. So if we are mixed up and confused and trying to 
understand what is really happening, I hope you, at least, Mr. 
Walker, can understand.
    Mr. Walker. I have for several years, Senator, said that 
the Congress should have at its disposal before it passes 
legislation, whether it be tax legislation or spending 
legislation, the estimated long-term cost and implications of 
that legislation because we have been digging the hole deeper 
rather than filling the hole lately.
    The Chairman. Thank you, Senator Kohl.
    We have been joined by Senator Clinton and Senator Lincoln. 
We have each made opening statements, if you would like to make 
one, please feel free to do so or we will get to you shortly on 
questions.
    Senator Nelson, you are next.
    Senator Nelson. Could you all address the question that I 
had raised in my opening comments? What was changed last night?
    Mr. Walker. Do you want to go first?
    Mr. Holtz-Eakin. With the stipulation that we are far, far, 
far from a lot of detail on what we know was proposed, we have 
looked at the transcript of the speech, at the policy book that 
has been released, and at the transcript of a briefing which 
provided some background, and I think three things stand out in 
contrast to Commission Plan 2, which was widely discussed prior 
to the State of the Union.
    First is in the contributions to the plan itself, as we 
understand it, there is a $1,000 cap which is now indexed to 
general wage growth and which then also goes up by $100 each 
year in addition to whatever wage growth there might be. So 
there is a rising cap on the contributions.
    Second, there is a series of phase-ins in both when the 
program starts and then who is eligible to contribute to 
individual accounts.
    Then third, in terms of the computations at the end of the 
working career, there are accumulations in the individual 
accounts that come from contributions. In Commission Plan 2, 
each contribution was, for purposes of calculating total 
benefits, that contribution was assumed to have a 2-percent 
real return. At the end of the working career, all these 
fictitious 2 percent earnings were used to calculate offsets to 
the traditional benefit. That 2 percent return has now been 
changed to 3 percent.
    So there have been some, essentially, details on money 
going in, timing of eligibility, and calculation of total 
benefits at the end that look a little different from 
Commission Plan 2, but an enormous amount remains to be 
specified in terms of annuitization and many details.
    Mr. Walker. Senator, I would say there are still a lot of 
issues that have to be addressed to figure out how you are 
going to pay for the individual accounts. Commission Plan 2 
provides some insights, potentially, as to what the 
administration has in mind, but it is not clear that they 
intend to necessarily go with Commission Plan 2.
    There are several things that I took out of last night's 
State of the Union, and I was there as you were and others. 
First, I heard the President say that if you are 55 years old 
or older, you will not be affected in any way, shape, or form. 
Presumably, that means that whatever the benefits people 55 and 
older have been promised and in whatever form they will get it.
    Second, the language that I heard appeared to say that 
individual accounts would be optional. He didn't actually use 
the word optional, but that is what I inferred, at least, that 
it would be optional for people under 55.
    Senator Nelson. He said voluntary.
    Mr. Walker. Voluntary. Well, then that is optional. That 
tells me it is optional. The question is----
    Senator Nelson. What does that mean to you?
    Mr. Walker. Well, what it means to me is that you wouldn't 
automatically have to take part of your payroll tax and use it 
to fund an individual account. You might be able to stick with 
the current system, and part of the question would be is if you 
did take part of the payroll tax and use it for an individual 
account, what would the tradeoff be? How would your defined 
benefit promise otherwise be affected? That hasn't been defined 
yet, and that is something that obviously would have to be 
defined.
    There are a number of important details that would have to 
be defined before, A, you can really understand it, and second, 
before you can cost it and think about what the potential 
implications would be for individuals.
    Senator Nelson. So we are really reacting to something that 
we don't know what the specifics are. We are having an academic 
discussion about various things that we might put on the table, 
but at this point, we don't know what is on the table by the 
President.
    Mr. Walker. Senator, I would suggest there is one thing 
that is important in addition to getting the details filled 
out. As was mentioned by one of the members earlier, you can't 
solve a problem until you admit that you have a problem and I 
think there is work still to be done in trying to help convince 
people, not only here within Washington but outside the 
beltway, what is the nature, extent, magnitude, and timing of 
the problem and what are the relative pros and cons of acting 
sooner rather than later? But you are right, a lot more details 
have to come out as to what the potential solution might be and 
what the pros and cons of that potential solution might be.
    I might mention one more thing, Senator. It is very 
important in analyzing reform proposals that, as we have said 
at GAO, you have to look at a package. There are pros and cons 
of every reform element.
    The other thing is to benchmark the reform package against 
both promised benefits and funded benefits, because not all 
promised benefits are funded. Therefore, if somebody is to say, 
``Well, this represents a cut of X percent from promised 
benefits.'' Well, if you are under 40, all your promised 
benefits aren't funded and if you're under 30 none of your 
benefits are fully funded. As a result, you are really 
comparing apples and oranges unless you consider both the 
funded benefits as well as the promised benefits.
    Senator Nelson. You know, you talk about you don't have a 
problem unless you recognize there is a problem, and we had a 
problem back in the Great Depression and it was addressed. I 
know that just on a basic set of values that we have a problem 
if we don't, and are not admonished and follow the necessities 
put out in the Good Book about honor your father and your 
mother and take care of the widows and orphans. I know that 
elderly poverty is now 10 percent, and it is down from 35 
percent in 1959, and I sure don't want it to go back the other 
way where it is increasing. So I am going to look at this with 
a very, very careful eye, Mr. Chairman.
    The Chairman. Thanks, Senator.
    Senator DeMint.
    Senator DeMint. Thank you. I believe I heard you say that 
it confirmed what I thought that in 2018, or thereabouts--I 
know there may be some difference between CBO--the real strain 
is going to begin from Social Security on our general fund, 
that it is going to require billions of dollars of infusion 
from the general fund to supplement the current Social Security 
system to meet promised benefits, that the trust fund is an 
accounting mechanism that just tells us how much the general 
fund owes Social Security.
    So there is no money there to pay and we have to come up 
with new money to make good on our promises to seniors in 2018, 
which I believe, as I said before, that this Congress, this 
Senate, and our budget cycle three or four years from now is 
going to have to begin to budget for huge amounts of transfers 
to Social Security. To me, that is an urgent crisis that we 
need to address, particularly if we are going to address it 
differently than we have before.
    Mr. Walker, you talked about the fix in 1983. What did we 
do to fix the program in 1983?
    Mr. Walker. Well, there were a number of reforms. I mean, 
there was an increase in revenues----
    Senator DeMint. How was that----
    Mr. Walker [continuing]. In payroll taxes----
    Senator DeMint. An increase in payroll taxes.
    Mr. Walker. There was an increase in payroll taxes. There 
was a gradual increase in the normal retirement age from 65 to 
67, phased in over a number of years.
    Senator DeMint. So a reduction of benefits.
    Mr. Walker. You could look at it that way----
    Senator DeMint. Yes, you could.
    Mr. Walker [continuing]. As many people probably did, a 
modification, at least. Others. Those are two that I recall 
right off the top of my head. The taxation of the Social 
Security benefits----
    Senator DeMint. Right.
    Mr. Holtz-Eakin. Expanded coverage for seniors.
    Mr. Walker. That is right. There was an expansion of 
coverage, as well, as to who would be covered by the Social 
Security system.
    Senator DeMint. Well, it is my understanding that this 
program has been fixed many times that same way, is to increase 
the taxes and to somehow, through raising the age or indexing, 
as we are talking, as cutting the benefits. My contention is 
people are putting enough in the system not to have their 
benefits cut. I think what we are struggling for, is there a 
way to fix this system, which I think we have established by 
any rational basis today that we are in a crisis if we consider 
hundreds of billions of dollars, even trillions, of debt that 
faces an unfunded liability, is there a better way to fix the 
program than cutting benefits again and raising taxes again.
    I think we are at the point now where we are taxing labor 
at such a high rate, and these payroll taxes are part of it, 
that corporations are beginning to wonder, should they locate 
their headquarters in America anymore. It is an additional tax 
on labor.
    We are providing a poverty-level, or just barely above it, 
a poverty-level benefit for folks who have paid into this, and 
I think the program should be focused on low- and middle-income 
workers.
    The idea of raising retirement to people who need it the 
most are the ones that are most likely to have done manual 
labor their whole life and are the least likely to want to 
continue to work well into their old age, my hope is that we 
won't look at cutting benefits again and we won't look at 
raising taxes again.
    For my colleagues, I think that is what we have struggled 
to look at. The only solution to me appears to be, unless you 
are willing for these little adjustments, which these little 
adjustments are always cutting benefits and raising taxes, is 
to make the money that we are collecting work harder, and I 
think that is all the President is talking about.
    The average American family now is putting in over $5,000 a 
year of taxes into Social Security, if you count the employer 
and the employee side. If we can just begin to save and let 
compound interest work with a part of that to supplement Social 
Security, it is not going to fix the whole problem, but it 
could lower the financial strain, and as you said, and I think 
the best thing said today is exceed the expectations of every 
generation.
    We have got to meet our promises to seniors, and I think we 
have the opportunity now to make every American a saver and 
investor, to begin to actually save Social Security taxes for 
the first time, which I think it is interesting when I talk to 
groups back home and I explain to them all this money that has 
been going into it and I say, ``You know, we haven't saved one 
penny of that'', and they smile like I am teasing them because 
they think we are doing that.
    But I appreciate the presentation today, just the clarity 
of the financial strain that we have. I recognize that we have 
even a bigger unfunded liability with Medicare, but the 
solutions there will be much more abstract. The demand on the 
system is much less predictable. I think, as you said, again, 
Mr. Walker, this is solvable, but only solvable if we take it 
on now before we get right in the middle of these huge 
deficits.
    So thank you for putting the numbers to an issue we have 
been talking about and I think that will help us solve the 
problem.
    Mr. Chairman, I yield back.
    The Chairman. Thank you.
    Senator Clinton.
    Senator Clinton. Thank you, Mr. Chairman, for holding this 
very timely hearing, and I thank our witnesses.
    This is an issue that generates as much heat as light, and 
there is so much emotion, ideology, that it would be very 
welcome to have this debate basically run by the two of you. 
Let us look at the facts, let us look at the evidence, and then 
let us try to reach the appropriate conclusions.
    I must confess that I am disappointed in the President's 
decision to pursue this issue in the way that he has chosen to 
do so. I do not agree there is a crisis. I agree there are some 
long-term challenges, as there are with every aspect of 
government. Addressing those challenges requires people to work 
in good faith and to arrive at solutions that will hopefully 
solve the problems we confront.
    I have been asking myself for quite some time, what is the 
reason for the President's approach, which does emphasize a lot 
of crisis language, a lot of very dramatic rhetoric, and I 
conclude, in large measure, because of ideological drivers as 
opposed to policy or values that are at stake.
    When I look at the unfunded liabilities that we have, we 
compare Social Security to $3.7 trillion, Medicare to $8.1 
trillion, the tax cuts, if extended, to $11.1 trillion. When I 
think about the situation that we were in in 2001, where we had 
balanced our budget on a current account basis, where we were 
building up a surplus, where we had our financial destiny much 
more in our control than we had had previously or that we have 
today, when I realize that we are at the beck and call of 
foreign lenders to pump in approximately $50 billion, give or 
take a month, to buy our debt, it is very discouraging to me 
that we would take this issue, put it in isolation, whip up a 
lot of scare tactics for ideological reasons, and I hope that 
the American people are smarter than that.
    There are steps that we could take, depending on our 
choices and values, right now to deal with Social Security. We 
could do some things that some in this body would call tax 
increases, such as rolling back income tax cuts for those above 
a certain level of income or retaining the estate tax at some 
level, that would make a big contribution.
    But what really concerns me is that the average working 
American, who has been paying in with a payroll tax into Social 
Security, whether you call it a trust fund or you call it an 
accounting device, it is an obligation of the U.S. Government. 
Those payroll dollars have largely funded the upper-end income 
tax cuts and it is, you know, a transfer of wealth. We talk 
about building wealth and building ownership for middle-income 
and working-class people. This is one of the biggest transfers 
of wealth that we have seen in our country, and now we are 
sitting here talking about ripping the rug out from under the 
existing social insurance system and it is just astonishing to 
me that we would be having a conversation on these terms.
    What is also troubling to me is that the third of the 
people who are in Social Security who receive survivor benefits 
and disability payments are basically left out of this 
conversation. These are people, especially on disability, for 
whom this is, in most instances, their sole income. For 
survivors, it is often the difference between being able to 
afford some luxuries for a child growing up and going to school 
than not. So there is a whole third of our people on Social 
Security that are being left out of this conversation.
    So I think there is room to have an honest, evidence-based 
conversation about what to be done with Social Security, to 
raise the issues, to have a mature conversation in the American 
public, and to make some tough decisions. You know, it is a 
social insurance program. There are other ways we could 
incentivize wealth creation and savings.
    We could, for example, as some have recommended, make 
401(k)s automatic unless you opt out. That would dramatically 
increase the participation rate in 401(k)s. We could come up 
with different ways of funding add-on accounts that would not 
go to the point of carving out payroll tax. There are ways we 
could address both the long-term solvency of Social Security 
and we could address wealth creation and ownership.
    But we are just whistling in the dark if we don't think our 
long-term fiscal situation is heading us right off a cliff, and 
it just is beyond me how people who call themselves 
conservative could have the gall to support economic policies 
that are sending the younger generation into the biggest 
deficit and debt hole that any generation has ever inherited.
    So I respect greatly the purpose of this hearing and am 
glad we are having it and particularly these witnesses, but if 
we have ever needed an honest debate where people look really 
at what is happening and put it into the context of the 
Medicare debt and the fiscal debt, our trade account deficit, 
and then try to say to ourselves, what are the responsible 
positions to take, it is now and I fear that we are going off 
on this tangent on Social Security in the wrong direction. It 
will make the situation worse and it will break faith with the 
social insurance program that Social Security is supposed to 
be.
    Mr. Chairman, thank you for giving me the opportunity to 
vent. [Laughter.]
    The Chairman. Senator Lincoln?
    Senator Lincoln. Thank you, Mr. Chairman, and I would like 
to add my thanks to you and to Senator Kohl for your leadership 
and bringing us to a timely hearing on such a very important 
issue, allowing us to vent, but also to discuss some of our 
options of what we want to do in terms of these long-term 
solutions.
    I was with both of these gentlemen yesterday. I am 
delighted to be with you today. I am not sure if I am going to 
see you tomorrow, but---- [Laughter.]
    I am hoping that you both will be a very real part of 
helping us find the solutions in the long term of how we can 
create solvency in a program that truly has meant a tremendous 
amount to a lot of the elderly people. Again, I want to 
reiterate Senator Clinton, not forgetting the disabled 
community as well as the survivors of many recipients.
    I have got a couple of questions and I think I will go 
straight to those. Mr. Holtz-Eakin, according to an analysis by 
your own CBO, future retirees would fare worse under the 
Commission's plan than if no action were taken at all in Social 
Security. I think the chart under there says the current 
benefit which a median wage earner born in the 1990's and 
retiring at 65 would receive $23,300 annually. If no action is 
taken the trust fund runs out but does not go broke, the system 
does not go broke, the worker would receive $18,000. Then under 
the Commission's plan, the worker would receive only $14,500.
    So it appears from this that retirees would be worse off 
under the Commission's plan than even if no action were taken. 
Is that accurate?
    Mr. Holtz-Eakin. Yes. Those are our estimates for the 
middle quintile of the earnings distribution.
    Senator Lincoln. So, in essence, we know we have something 
to do, but we also know that there is great potential to go in 
the wrong direction in terms of making decisions and taking 
action that could, in turn, really do more harm than good.
    I guess especially concerning our younger workers, because 
if the graph is correct, our younger workers would be hit 
twice, it appears. First, they will have a reduced benefit, and 
then, second, they will be responsible for repaying additional 
borrowing, as Senator Clinton mentioned, this enormous pitfall 
of debt that we are going to be establishing--that would be 
required to set up these private accounts. Is that fair to say?
    Mr. Holtz-Eakin. In our estimates in the aggregate, it is 
the case that the introduction of the individual accounts early 
on have a negative impact on the balance in the program between 
receipts and outlays, but past 2065, it switches as the 
accounts begin to accumulate.
    Senator Lincoln. Sixty-five?
    Mr. Holtz-Eakin. Two-thousand-sixty-five, in the aggregate.
    Senator Lincoln. Right. So it takes us a little while to 
get there, before that turnaround happens.
    Mr. Walker, I appreciate your input. I understand that the 
Federal spending for Medicare, something we talked about 
yesterday, is rising at a much faster rate than the Federal 
funding for Social Security, and you have mentioned that here 
today. I know as a matter of fact that the Medicare costs we 
see will exceed Social Security costs by 2024, twice as much as 
Social Security by 2078. In addition, the Medicare Health 
Insurance Trust Fund, which alarms me enormously, will be 
insolvent by 2019, the year after the general treasury is 
supposed to pay back that IOU to the Social Security Trust Fund 
that we borrowed in 1983 that Senator DeMint brought up.
    So I guess I am not trying to negate the fact that Social 
Security is facing a very long-term, real financial challenge 
and we need to address that, but if we were to prioritize these 
in terms of economics, in terms of crises that we are talking 
about, I don't know, but what has been presented almost seems 
to me that Medicare and health care costs are a bigger issue. 
How do you see it?
    Mr. Walker. The Medicare unfunded obligations are over $27 
trillion of which $8.1 trillion relates to the new prescription 
drug benefit alone, as compared with $3.7 trillion for Social 
Security. Arguably, Medicare and Medicaid are a subset of a 
much larger challenge, and that is the overall health care 
system. There are many who believe that our health care system 
is in crisis and that it represents our No. 1 domestic policy 
challenge. I would say that other than our large and growing 
fiscal imbalance, they're right. So there is absolutely no 
question.
    But I would also respectfully suggest, Senator, that the 
nature, extent, magnitude and emotion associated with health 
care is also multiple times greater than Social Security and 
that, ultimately, there is going to have to be a comprehensive 
reform of the entire system in installments which will require 
many years and many tough decisions. While I would encourage 
the Congress to get on with it sooner rather than later----
    Senator Lincoln. On Social Security?
    Mr. Walker. On both.
    Senator Lincoln. Both.
    Mr. Walker [continuing]. I would encourage Congress to 
recognize the totality of the challenge and the need to start 
getting on with it sooner rather than later. I do honestly 
believe, as I said before, that while the Social Security 
challenge in dollar terms is much less, that it is something 
where you can exceed the expectation of all generations. You 
can gather some momentum. You can gain some credibility. You 
can enhance your confidence. There is something to be said for 
that.
    Senator Lincoln. So if we are looking for legislation, 
don't look for a work of art. Let us consider it a work in 
progress as we do things incrementally to improve both of these 
programs.
    Mr. Walker. My personal opinion, Senator, is to deal with 
our large and growing fiscal gap, it is going to take a 
generation or more to deal with it, and I am just being 
straight with you.
    Senator Lincoln. All right. Mr. Chairman, just briefly, if 
I may, I am also especially concerned about the effects of 
privatization on women. We know that women do live longer. They 
become more dependent on these programs, both Medicare as well 
as Social Security because of various demographic factors, some 
of which I have mentioned. But they also have a greater chance 
of exhausting sources of income. Social Security's progressive 
benefits provide women with some sense of economic security, 
and without these benefits, I know from the statistics in 
Arkansas that 66 percent of the women in Arkansas would be 
poor.
    Do you all agree that privatization will put more women at 
risk? Is that an agreeable thing to say, that women are at a 
far greater risk if we don't do this correctly than if we do--
instead of doing no harm, we do great damage?
    Mr. Holtz-Eakin. I think the question is, what is ``this,'' 
and I would echo what David said earlier about looking 
comprehensively at any reform plan. The major risk comes in two 
pieces. The first is longevity and the degree to which the plan 
includes an annuity that is similar in type to the one that 
Social Security offers now, indexed for inflation and lasting 
the lifetime of the recipient.
    The second is the degree to which those who have adverse 
labor market careers are reliant exclusively on the individual 
contributions to the account to fund such an annuity.
    So to the extent that there are provisions somewhere else 
in the plan that make sure the annuity is present and make sure 
that it is of sufficient magnitude, that can be addressed.
    Senator Lincoln. Definitely, it is a part of the principles 
we are espousing. I just would like to echo Senator Clinton, 
because in Arkansas, nearly 40 percent--we are way above the 
national average of Social Security beneficiaries that are 
receiving those benefits as disabled or survivors and we have 
not addressed that at all and I hope that we will. I know with 
the leadership of these two gentlemen and this committee, we 
will.
    Thank you, Mr. Chairman. Thank you, gentlemen, for joining 
us.
    The Chairman. Thank you very much.
    Are there Senators with any further questions? If not, 
thank you, gentlemen. We appreciate your contribution to this 
hearing. We no doubt will be calling on you in this and other 
committees in the future, as you certainly described well the 
problem we have to resolve.
    We will call next our second panel. Our first witness will 
be David John, research fellow, Thomas A. Roe Institute for 
Economic Policy Studies of the Heritage Foundation, Washington, 
DC; Robert L. Bixby, executive director of the Concord 
Coalition, Arlington, VA; and John Rother, director of Policy 
and Strategy, American Association of Retired Persons, here in 
Washington, DC.
    Gentlemen, thank you. David John, we will start with you. 
Welcome.

  STATEMENT OF DAVID C. JOHN, RESEARCH FELLOW, THOMAS A. ROE 
INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION, 
                         WASHINGTON, DC

    Mr. John. Thanks for having me. Chairman Smith and Senator 
Kohl, thank you very much for having me. As mentioned, I am 
David John. I am a research fellow at the Heritage Foundation 
specializing in Social Security, other retirement, corporate 
governance, and other such fun topics.
    Social Security has a major place, but it is only one of a 
number of significant aging discussions that we need to have as 
a people over the next few years. We can't ignore the whole 
question of weaknesses in both our defined benefit and defined 
contribution pension plans. We can't ignore the whole question 
of what is retirement. Currently, it seems to be a bright line. 
One minute, you are employed; the next minute, you are retired. 
I don't know that as a people we can afford that in the future. 
I don't even know that it is desirable for those of us who are 
going to be approaching that. Last but not least, of course, we 
have medical questions. But for the moment, let us concentrate 
on what is doable, which is to save Social Security first.
    Social Security, as Senator Kohl mentioned, has been an 
incredibly successful program. My grandmother, who actually 
lived in Milwaukee, financed all of her retirement based on 
Social Security. However, times change and companies and 
programs need to change over time, also. In 1935, U.S. Steel 
was one of the biggest companies in the United States. It no 
longer exists, at least not under that name. AT&T was the 
controller of telephones, and now AT&T is changing. In 1935, 
the Chicago Cubs were in the World Series. They lost. But times 
have shifted over the last 70 years. My grandfather, for 
instance, was a master mechanic at Harley-Davidson at that 
point.
    This is a debate that gets lost, unfortunately. We talk 
about billions and trillions and bend points and trust funds 
and things and that is really not what this is all about. This 
is about people. This is about not necessarily my 85-year-old 
father, who lives in retirement. This is about my 18-year-old 
daughter, who is a freshman at Villanova studying nursing.
    If the current activities continue, if we do nothing, 
Meredith faces a future where she will pay 100 percent of her 
Social Security taxes throughout her working life. She will pay 
100 percent of her share of a total of $5.6 trillion to repay 
the bonds in the Social Security Trust Fund. Ten years before 
she retires, if you use the Social Security estimate, the same 
year she retires if you use the CBO estimate, the Social 
Security Trust Fund runs out and essentially she gets 73 cents 
on the dollar. That is not exactly the kind of future I want to 
leave for my daughter.
    This is a real problem. The trust fund is a real problem. 
My daughter is thoroughly convinced that her credit card is not 
a real problem because she doesn't pay it. However, it is a 
major part of the family finances, or at least it can be if she 
gets carried away. [Laughter.]
    If we do nothing for Social Security at this point, we will 
start to run $100 billion annual deficits in 2022. Those will 
go up to $200 billion annually in today's dollars 5 years after 
that.
    According to the Social Security Administration, doing 
nothing adds $600 billion a year to the cost of reforming 
Social Security. That is about $50 billion a month.
    What to do? I happen to be very strongly in favor of a 
personal retirement account. The simple fact is that Social 
Security, because of an index change that was done during the 
Jimmy Carter administration, has offered my daughter 
significantly higher benefits than it can afford to pay. We 
need a simple structure that is easy to understand with a 
default fund which is something similar to a lifestyle fund.
    A lifestyle fund has most of your investments in index 
funds when you are young and it gradually shifts to bonds when 
you are old. What that means is that the difference between 
retiring in 1999 and 2000 is taken care of, essentially, 
because virtually all of your money is in bonds at that point.
    The future Social Security benefits will be paid from a 
Social Security Part A, which is the government-paid benefit, 
and Social Security Part B, which is a personal retirement 
account. There is a fairly simple formula that would determine 
how much would be paid from what.
    What is key about this is that the sad fact is that only 
about 50 percent of the American workers have some sort of a 
retirement savings plan outside of Social Security. A personal 
retirement account would allow these workers the opportunity to 
build assets.
    The sad fact is that no matter what, Social Security can't 
afford to pay my daughter what it has promised her, but at 
least with a personal retirement account, she has the 
opportunity to make up all or most of the difference between 
what it promises and what it will be able to pay.
    There are a lot of other proposals out there. Let me just 
address one very quickly. One of them suggests that all we have 
to do is raise the payroll tax cap from $90,000 to $150,000 or 
$200,000 and we have solved most of the problem. The Social 
Security Administration addressed that in an October 2003 
scoring memo which found that if you completely got rid of 
that, which means that Donald Trump gets to pay payroll taxes 
on 100 percent of his earnings, what that does is to move the 
date where Social Security starts to spend more than it takes 
in from 2018 to 2024. If Donald Trump is allowed, as under the 
current system, to receive benefits on all of that money, then 
basically the $100 billion deficits in today's dollars begin in 
2029, not 2022. That is scarcely saving the system.
    If, on the other hand, we make a major shift in the way 
Social Security is operated and we start to make Social 
Security into some form of a welfare program, meaning that we 
are only going to pay Donald Trump benefits on the first 
$90,000 of his income, and basically we are going to take all 
the taxes on the amount above that and say, ``Thank you,'' then 
the $100 billion deficits start in 2031 instead of 2029 or 
2022.
    Essentially, small thoughts and small solutions aren't 
going to work. This is too big a problem. We need to think very 
seriously outside of traditional boundaries and come up with a 
solution that guarantees people like my daughter a decent 
retirement income. Thank you.
    The Chairman. Thank you.
    [The prepared statement of Mr. John follows:]

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    The Chairman. Robert Bixby, welcome.

 STATEMENT OF ROBERT L. BIXBY, EXECUTIVE DIRECTOR, THE CONCORD 
                    COALITION, ARLINGTON, VA

    Mr. Bixby. Thank you, Mr. Chairman, Senator Kohl. This is 
an incredibly well-timed hearing. I congratulate you on your 
foresight. Thank you for inviting me to testify.
    I am here representing the Concord Coalition, which is a 
bipartisan organization that argues for fiscal responsibility. 
It is co-chaired by former colleagues of yours, Bob Kerry and 
Warren Rudman.
    Sitting here, it occurred to me that you get some 
interesting experiences working with the Concord Coalition. 
Last night, when I was listening to the State of the Union 
Address, I agreed with many of the comments that President Bush 
made about the future of Social Security and the nature of the 
problem. Then this afternoon, hearing some of Senator Clinton's 
remarks, I agreed with those, too. If you think about why, it 
defines how the Concord Coalition thinks about this problem and 
how we suggest you might want to look at it.
    If you look at the cost of the system in the out years, 
just look at it as it builds over time and ask yourself, how 
are we going to pay for it? You see that the cost gradually 
increases and that the taxes flowing into the system don't keep 
up with that and so a gap opens up in 2018 or 2020. We know it 
is coming sometime around that time. It gets bigger and bigger 
and wider and wider from that point on.
    That is the essential problem with Social Security. 
Promised benefits can't be paid under the stream of revenue 
that we have dedicated for them, and the trust fund really 
doesn't have too much to do with that. It does have legal 
significance, but it doesn't have an economic significance. It 
doesn't change the equation.
    But Social Security is part of a larger picture. It is part 
of the retirement security challenge. It is part of the budget. 
It is the largest program in the budget. It is part of the 
economy. What we do with Social Security has a big effect on 
those things.
    When I heard Senator Clinton talking about the larger 
fiscal challenge, I think she is absolutely right to raise that 
issue, as well. You can't really separate them. These things 
are intertwined.
    I have been looking at some numbers that the Government 
Accountability Office did last year. Every year, they do long-
term scenarios and they look at the consequences of current law 
over 50 years, 75 years, whatever. If you look at 2042, which 
is only significant because it is the year we talk about as the 
year of trust fund exhaustion, and people say, ``Well, the 
trust fund is solvent until 2042'', so there is no problem.
    In 2042, under the so-called baseline extended scenario, 
which assumes that all of the tax cuts are allowed to expire on 
schedule and that discretionary spending grows no faster than 
inflation, Federal spending at that point would be up to 34 
percent of GDP and the debt as a percentage of the economy 
would be at 164 percent of GDP. It is at 38 percent of GDP 
today. Net interest would cost us more than Social Security, 
Medicare or Medicaid.
    In other words, we are headed toward a fiscal cliff and we 
are going to go over that fiscal cliff long before 2042. So--
and by the way, this is not the worst scenario by any means. I 
mean, we could run much bigger budget deficits if we don't get 
them under control.
    So my point here is that we are--our overall fiscal policy 
is unsustainable and it is going to be unsustainable sometime 
in the 2030's. So if what you are saying is, ``Well, we don't 
need to worry because the trust fund is going to be solvent 
until 2042'', or if in the case of private accounts you are 
saying, ``Well, we can do the borrowing now because we are 
going to get big savings in the 2050's or 2060's, my point is 
we are going to go over the cliff before that.'' The government 
is going to be bankrupt before the trust fund is, and that is 
the larger problem that Senator Clinton talked about.
    So I will wrap up by saying that as we address Social 
Security reform, and I think it is essential that we do so and 
it is essential that we do so sooner rather than later, we 
can't duck the hard choices here. We can't fund all future 
benefits and not raise taxes. You are going to have to make 
some hard choices, and this is true regardless of private 
accounts. Private accounts don't solve the gap. They may have 
some good effects for younger workers. They may be very sound. 
The Concord Coalition is perfectly in favor of private 
accounts. But we think they should be funded with new 
contributions, new savings into the system, and not with 
borrowed funds.
    But whether you do private accounts or don't do private 
accounts, you are going to have to face some hard choices about 
can we afford all the future benefits that are promised, and if 
we are going to, then you are going to have to raise taxes to 
pay for them because the deficits that occur in the rest of the 
budget just become unsustainable.
    Thank you.
    The Chairman. Thank you.
    [The prepared statement of Mr. Bixby follows:]

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    The Chairman. John Rother, welcome.

  STATEMENT OF JOHN ROTHER, DIRECTOR OF POLICY AND STRATEGY, 
    AMERICAN ASSOCIATION OF RETIRED PERSONS, WASHINGTON, DC

    Mr. Rother. Mr. Chairman, thank you, Senator Kohl, Senator 
DeMint. It is a privilege to be back in front of the Aging 
Committee. I was the staff director here for four years. Today, 
I am the policy director for AARP.
    I will leave my full testimony with you and just summarize 
briefly, given the time.
    The Chairman. We will include it in the record.
    Mr. Rother. I agree that this debate needs to be about 
people just as much as it is about dollars. AARP believes that 
Social Security does need to be strengthened for our children 
and our grandchildren, but that the solution should not be 
worse than the problem. In our view, private accounts that 
drain money out of Social Security will only cut its guaranteed 
benefits, increase the federal debt, and pass the bill on to 
future generations. Private accounts are risky, expensive, and 
unnecessary as replacements for Social Security's guaranteed 
insurance protections. AARP is working to strengthen Social 
Security, not dismantle it.
    We believe that all Americans, young and old, have a stake 
in this debate. We do not find the generations divided. When it 
comes to Social Security, America, we believe, is a house 
united. We have done a series of recent surveys, the latest one 
we release today, of Americans 18 and older that shows that 
people of all incomes and all generations would prefer to 
strengthen the existing system with as few changes as possible. 
They would not favor radical changes that would undermine its 
purposes.
    There are sensible and workable solvency options to explore 
that could make a real and lasting difference and restore the 
program to fiscal stability. My full testimony includes several 
of those that we have been using in an educational way around 
the country to help people understand the tradeoffs that will 
need to be made in order to strengthen this program.
    We do believe that we should avoid Social Security changes 
that add huge new sums to our nation's debt. I certainly agree 
with Bob and the Concord Coalition on this point. Doing so 
would burden all taxpayers with additional interest costs and 
further increase deficits, which in turn threaten our ability 
to finance essential health and service programs for Americans 
young and old.
    So we think that all generations have a stake in this 
debate and we do not believe that seniors are somehow exempt 
from it.
    Social Security was never intended to be the sole source of 
retirement income but a foundation and this foundation must be 
strengthened. Social Security replaces, on average, only about 
40 percent of pre-retirement income. We support savings and 
investment options that are in addition to, not in place of, 
Social Security.
    Last night, the President mentioned the Federal Thrift 
Savings Plan. That is a very good model, but I want to point 
out that it is on top of a Social Security benefit and a 
defined benefit pension for Federal retirees. So it serves a 
very important savings function on top of a guaranteed base of 
Social Security and pension benefits. It should not be used as 
a model to replace that guaranteed base.
    In fact, if there is a crisis in retirement income today, 
it is the fact that only half of private sector jobs even offer 
a pension and only 70 percent of employees in those firms 
participate in one. So we are at eminent risk of the largest 
generation in our history, the boomers, being completely 
unprepared to finance their own futures beyond Social Security.
    AARP is working to ensure retirement security for all 
generations. Any agenda to strengthen our nation for the future 
in addition to Social Security must also include strong 
Medicare benefits, a viable Medicaid program, and opportunities 
for meaningful employment for older workers. These are family 
issues that demand Americans of all ages be engaged. We 
certainly are going to work with the public across the country 
and will work with members and Congress on both sides of the 
aisle to make sure that Americans can continue to age with 
security and dignity and that we can restore confidence in the 
single most important domestic social program we have, our 
Social Security program.
    Thank you.
    [The prepared statement of Mr. Rother follows:]

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    The Chairman. John, as I have read the AARP literature, it 
seems, as you have stated here, that not a lot needs to be done 
because there isn't really a problem until 2042, but that is 
not really what you are saying.
    Mr. Rother. No, not at all.
    The Chairman. You are admitting that there is a problem. 
Are you saying the sooner we get to it, the better?
    Mr. Rother. Yes. It is certainly true, as a defender of the 
system, that more modest changes are possible now than if we 
wait, and the longer we wait, the more difficult the choices 
will be. So I think it makes good sense to act sooner rather 
than later.
    The Chairman. Your proposals are to raise the wage cap, is 
that correct?
    Mr. Rother. We have done extensive polling work and 
community forums around the country. Consistently, we have 
found the single most popular option of all the ones out there 
would be to ask those who have benefited the most in recent 
years to contribute more, and the way to do that is to raise 
the wage base up from its current $90,000 a year to something 
more in line with the historical standard, which would probably 
take it up to around $140,000.
    The Chairman. Some have suggested that we means test Social 
Security. I am not, but some have suggested that, so Bill Gates 
doesn't get it or Donald Trump--they always pull those names 
out of the air. Do you favor such a thing?
    Mr. Rother. No, Senator. The current Social Security 
benefit formula returns less of a benefit as a percentage of 
pre-retirement income to people who have more of an opportunity 
to save for themselves. It provides a more generous benefit for 
people at the low end who generally have not had an opportunity 
to save or be part of a pension plan. We think that is the 
appropriate way to structure it, and that is the way the system 
works today.
    The Chairman. David, as you listened to the President last 
night, and we all listened, clearly, there is a funding 
obligation here if we are going to be fiscally responsible on 
this. Whether it is $800 million or $2 trillion, do you have 
any recommendations as to how we would do that if we were to go 
to personal accounts?
    Mr. John. Essentially, there are going to be four 
mechanisms that can be used, whether this is used to repay the 
trust fund or to pay general revenue costs of establishing 
personal retirement accounts. Those four are fairly simple.
    We can borrow the money, which means we are going to pay it 
back.
    We can raise taxes in some form or another, but we have to 
be very careful with that. For one, it is a slippery slope, and 
for another thing, it can have a very serious impact on the 
economy.
    Third we can cut other government spending, which has 
always been one of my favorite choices, but as I learned the 
hard way, it is a lot easier to talk about than it is to do.
    Or last but not least, we can change Social Security 
benefits, and any of those four would work.
    What I personally would love to see done would be to see 
something like a BRAC, Base Realignment and Closure Commission, 
type structure that looked over government programs, identified 
duplicate programs, programs that might have outlived their 
usefulness, and basically close them down or merge them or do 
something along that line.
    But this is going to be a long-term problem. At some point 
or another over the 30 or 40 years that we deal with these, all 
four of these methods are going to come into play here.
    The Chairman. As to Social Security or all entitlements?
    Mr. John. All entitlements, when it comes down to it.
    The Chairman. Robert, as I listened to my colleague, 
Senator Clinton, I certainly admire her passion. I was only a 
Senator for half of the Clinton years. On the surface, a lot of 
what she said, I agreed with, except I do remember that when I 
came to the U.S. Senate in 1997, the budget--and I was on the 
Budget Committee--that President Clinton presented to us showed 
deficits for as far as the eye could see. What closed that and 
produced the surplus was a stock market bubble and we began to 
get tremendous revenues from what eventually exploded in the 
last year of his Presidency.
    Whether you like the tax cuts or not, the recession was 
short and it was shallow and we are seeing increases to 
revenues now. I guess as against China, we are certainly not 
growing at 11 percent, but we are growing at a rate that is the 
envy of the Western world, of the industrialized world. That is 
the part that wasn't said.
    But clearly, we have got to do something. It does seem to 
me that we have got a problem on the spending side and 
obviously the revenue side. My hope is that the revenues will 
grow with a growing economy.
    What does the Concord Coalition, bottom line, what do you 
want to see us do with this?
    Mr. Bixby. Well, I think there are only two ways to address 
the problems here. One is to control the long-term cost growth 
and the other is to try to grow the economy, to make the 
remaining costs more sustainable. Those are hard choices. 
Neither one of them is a free lunch.
    One could conceive of a plan that could try to trim the 
promised benefits more to a level that would be sustainable 
without raising the payroll tax. You would have to do that 
gradually and over time and you would have to look at the 
adequacy of the benefits. But at the same time, you could 
perhaps help the system and increase national savings to help 
build the economy with a system of mandatory private savings 
accounts that would be part of the Social Security system. But 
if you were to do that, in order to result in real savings, 
they would have to be funded with new money, so there is no 
free lunch in any of this.
    Overall, I would strongly urge you to look at whatever 
reform you adopt by looking at the year-by-year results for the 
budget and for the economy and not to get hung up on 
abstractions about the trust fund or the perceived benefits of 
private accounts. I think both are important and I think they 
have a role, but ultimately from the Concord Coalition's, ``eat 
your peas'' point of view on fiscal policy, when we add all of 
these things up, you have to ask, ``Is the path that we have 
set for ourselves sustainable? '' Right now, it isn't, and so 
whether we are talking about Social Security reform or 
Medicare, Medicaid, taxes, whatever, we need to get back on--a 
sustainable path.
    I should say, Mr. Chairman, I am not one that says, repeal 
the tax cuts and the problem is solved. I want to be clear 
about that. Whatever one thinks of the tax cuts, and at 
Concord, we didn't think they were a particularly good idea, 
but they didn't cause this problem and repealing them is not 
going to be the solution to this problem.
    The Chairman. Do you attribute any of the growth we are 
seeing now, a short and shallow recession and the growth we now 
enjoy, do you attribute any of that to the tax cuts?
    Mr. Bixby. Yes. I think short-term tax cuts were a good 
idea. Our problem with the tax cuts is more the long-term 
effect and whether more was done than needed to be done for 
short-term fiscal stimulus, although that is probably the 
subject for a different hearing. [Laughter.]
    The Chairman. My recollection, and I don't mean to be 
partisan, Herb, and you can counter me here in a second, but my 
recollection is that when we passed a $1.3 trillion tax cut to 
get the economy going, we were also turning back additional 
spending of over $2 trillion from our friends on the other 
side. So I think there is blame to go around, I suppose, but it 
does seem to me that the tax cuts at least have helped to get 
us back to growth and reemploying people.
    Mr. Bixby. I would just say that I agree with what 
Comptroller General Walker said in that I think last year was a 
bad year and that cutting taxes while adding a major new 
entitlement program, is an inconsistent mix and I would hope 
that we go in the opposite direction, anyway, in our future 
fiscal policies.
    The Chairman. Thank you.
    Herb.
    Senator Kohl. Thank you, Mr. Chairman.
    Mr. John, back in 1935, if you were engaging in that debate 
to create Social Security, would you have supported Social 
Security back then or would you have opposed it? What I am 
asking you is whether you generally support the idea of any 
kind of social insurance programs.
    Mr. John. I 100 percent support it.
    Senator Kohl. You support it?
    Mr. John. I do support--if I were living in 1935, I would 
have supported Social Security at that point. If I lived today 
and the question comes up, social insurance, yes or no, the 
answer is yes. This is not a society that is going to let 
senior citizens starve in the street, and thank goodness for 
it.
    Senator Kohl. Good. Mr. Bixby, some argue that borrowing 
money to create private accounts would not hurt the economy 
since we are taking the borrowed money and investing it. 
Therefore, it would have no effect. What is your view on that?
    Mr. Bixby. Well, I don't agree with it. I think that there 
is a huge amount of borrowing involved although, you would have 
to see the details of any plan, obviously. But one of the goals 
of Social Security reform should be to improve national savings 
and help grow the economy. Private accounts presumably would do 
that, but if you are going to borrow the money to do it, you 
are just taking money from one pocket, putting it into another, 
and national savings wouldn't be improved that way. They would 
probably actually decline because people would tend to save 
less if they were saving through Social Security and the 
government would be stuck with the debt.
    But the problem I have with a lot of these so-called carve-
out accounts that require a lot of borrowing is that even if 
they promise to pay the money back sometime in the future, the 
savings are so distant, that they come after we have already 
gone over the cliff that I talked about. If we are already 
headed over a cliff by 2040 and we borrow a lot in the interim, 
presuming that we are going to get savings back in 2060 and 
beyond.
    Well, we are never going to get to 2060 on the current 
path. That is what we need to worry about. So I would urge not 
looking at 75-year summaries of these things, whether we are 
looking at private accounts or the trust funds. Again, just 
follow the money on a year-by-year path and see if we are on a 
sustainable course.
    Senator Kohl. I believe you have advocated mandatory 
private accounts. Why shouldn't working people have a choice?
    Mr. Bixby. Social Security is a social insurance program, 
first and foremost, and frankly, I think everybody should have 
the same rules. I mean, choice doesn't seem important in a 
system that is designed to protect people from bad choices. So 
if we are going to do private accounts, I think that they 
should be a mandatory part of the system.
    The other thing is that if you do voluntary accounts, I 
just can't imagine the complexities of that sort of thing. 
There would probably be notches and what not and difficulties 
with people opting in and then wanting to opt out again. I 
don't know how you could control that.
    The other thing with voluntary accounts is I think there 
would be a tendency, and John probably knows more about this 
than I do, having studied savings behavior, but--lower-income 
people tend to be more risk averse and they might well opt not 
to take the personal accounts. But they are the ones that would 
benefit most from it in the sense of building up savings, 
because if you also at the same time were doing something to 
reduce the defined benefit, the guaranteed benefit, the cut can 
get quite substantial over the long term. If they opted not to 
take the private account that would help make up for they could 
find themselves in much worse conditions. Upper-income people 
probably would take the account, but they would probably save 
less in some other area, so we wouldn't be increasing savings 
that way.
    So I really think there are a lot of, while it sounds like 
a good idea, I think in practice, voluntary accounts would be 
very problematic.
    Senator Kohl. Mr. Rother, what role will Social Security 
play in the retirement of future retirees and will it be more 
or less important than it has been for the prior generation?
    Mr. Rother. Today, as you know, about two-thirds of 
retirees receive most of their retirement income through Social 
Security, and we would like to think as a result of a rising 
economy and higher living standards that this would change for 
the boomers. However, the studies that we have commissioned 
from leading universities show that, in fact, that is not going 
to be the case. Part of it is the result of the decline in 
offering of defined benefit pension plans from employers. The 
rise in defined contribution plans, the 401(k) that replaces 
the old plans have not succeeded in offsetting the losses in 
plan value that people are not contributing enough, they are 
not investing very wisely, and they are pulling their money out 
before retirement.
    The other part of the problem is that we have a wage 
structure in our country that is getting more bifurcated where 
we have exaggerated winners and losers. People with lower 
educations are not keeping up with rising standards. This is 
true for many people in the boomer generation their wages 
aren't keeping up.
    They no longer have a defined-benefit pension. Their health 
costs are going through the roof, and they are responsible for 
more of those health care costs. These are the people, and it 
is going to be a very substantial number of boomers, who are 
going to be in real trouble when they no longer can work. That 
is exactly the crisis that I think we should be paying more 
attention to rather than just the dollar numbers in the trust 
fund.
    Senator Kohl. I thank you. Mr. Chairman, thank you very 
much. I think it has been a great hearing.
    The Chairman. Thank you, Senator Kohl.
    One question, Robert. Is the Concord Coalition opposed to 
private accounts?
    Mr. Bixby. No.
    The Chairman. You are not?
    Mr. Bixby. No. We have said a lot of very favorable things 
about private accounts. Our concern is whether they are funded 
or unfunded. Unfunded private accounts don't seem like much of 
an advantage over unfunded trust funds.
    The Chairman. I thought it was interesting, your comment 
that the people at the low end who probably are in jobs with 
companies that don't provide them with a pension and therefore 
they only have Social Security those individuals are the ones 
that would gain the most from the compounding interest of a 
personal account.
    Mr. Bixby. Yes. I think they have a real advantage, and 
particularly for younger workers, the people that don't save 
enough now and people that would have a long time to buildup 
assets.
    My essential point about private accounts is that they are 
not a free lunch. They have to----
    The Chairman. They have to be paid for.
    Mr. Bixby. Right. Exactly.
    The Chairman. Do you have any recommendation for that?
    Mr. Bixby. The Concord Coalition has not taken a specific 
position on reform items, but I would say the funding for 
accounts should come from some sort of new mandatory 
contribution, which, of course, some people would say is a tax 
increase. My argument back on that would be at least it is 
going into directly funding a worker's account and it is not 
going into the government, which a tax increase would, and so a 
Republican should say, ``It may be a higher tax in that sense, 
but it is going to fund a private account and it is not going 
into creating a bigger government.''
    The Chairman. John, would it be fair to say that AARP is 
ideologically opposed to personal accounts on any basis?
    Mr. Rother. We actually favor private accounts, just so 
long as they are on top of the----
    The Chairman. So you would favor Social Security Plus?
    Mr. Rother. Yes, and as I have emphasized the real problem 
today is that half of our workforce doesn't have access to a 
payroll deduction mechanism for funding their own savings, so 
that is where the solution lies. We favor--and we think you 
could do it on a voluntary basis or mandatory basis, but we do 
favor a system open to every American worker that would allow 
them to save for retirement in addition to their Social 
Security.
    The Chairman. So hypothetically, if we were in gridlock 
here until 2042, but we were able to do Social Security Plus, 
you would see the benefit to your members--you and I won't be 
here, but--well, maybe not---- [Laughter.]
    You look pretty vigorous.
    Mr. Rother. Thank you. [Laughter.]
    The Chairman. But our children who would have a Social 
Security Plus, the quarter-percent cut that they would take, 
and they are going to lose roughly 27 percent under current 
law, that you think Social Security Plus would more than make 
that up?
    Mr. Rother. Well, I want to be clear. We favor 
strengthening the Social Security system first and foremost.
    The Chairman. But say we weren't able to.
    Mr. Rother. Well, I----
    The Chairman. This system won't allow us to deal with it. 
One side wants to increase benefits, the other won't raise 
taxes, and you just get to gridlock, hypothetically. In that 
instance, the Social Security Plus account would really help 
your members, I assume.
    Mr. Rother. Well, I don't know if it would help our 
members, but it would help our future members, our children, 
quite a bit----
    The Chairman. Exactly.
    Mr. Rother [continuing]. Particularly since the current 
defined benefit pension structure is eroding in the private 
sector. We need something that is available to all----
    The Chairman. Do you think it would make up at least the 27 
percent cut they are scheduled to take?
    Mr. Rother. Well, only----
    The Chairman. Or would it even be more than that?
    Mr. Rother. Well, that would depend on how much people put 
in. The amounts that are being talked about today, two, three 
percent of payroll, are not going to be sufficient to replace 
Social Security's guaranteed benefit. I think the amounts serve 
well as a savings supplement. They do not serve well as a 
replacement.
    The Chairman. David, do you think with program cuts or 
ending programs, do you think we could find $2 trillion?
    Mr. John. Oh, I am pretty sure of it, especially spaced 
over a certain period of time, yes.
    The Chairman. Do you have any programs you want to 
recommend?
    Mr. John. I think we actually have a fairly long list that 
we could send over, if you would like.
    The Chairman. We would be pleased to receive those.
    Gentlemen, you have been great. Thank you. We respect your 
views and we are charged with weighing them and coming up with 
what we hope will not be gridlock, but something that our 
country can live with and retire on.
    We are adjourned.
    [Whereupon, at 4:07 p.m., the committee was adjourned.]


                            A P P E N D I X

                              ----------                              


               Prepared Statement of Senator Larry Craig

    I want to thank and commend the Chairman for holding this 
hearing--and this series of hearings--on the future of Social 
Security.
    These hearings are very much in line with those held by 
your predecessor. There are many arguments and 
misunderstandings out there, and much information to be 
digested and discussed, on the future of Social Security. I 
don't think it would be possible to hold too many hearings on 
this topic, to help make Members of Congress, the media, and 
the public better informed.
    The first, critical point to make of course, is this: For 
everyone now in, or nearing, retirement, Social Security will 
not change. The President said it again last night, our 
colleagues have confirmed it, and it bears repeating. We are 
looking at the future of the system, because we also want the 
best for our children, our grandchildren, and all of today's 
younger workers.
    The President highlighted the future of Social Security in 
his State of the Union address last night. He has been 
discussing it and doing good work on it for four years, 
including his establishment of the distinguished, bipartisan 
Commission to Strengthen Social Security in 2001.
    I hope and believe we all share the commitment articulated 
by the President last night: ``Social Security was a great 
moral success of the 20th Century, and we must honor its great 
purposes in this new century.''
    Idahoans, of course, have been even farther ahead of this 
curve. All the way back in 1996, I held a series of town hall 
meetings across Idaho--the ``Seniors to Seniors Meetings''--in 
which we tried to bring together everyone from seniors in high 
school to senior citizens for this kind of informed discussion. 
We've had numerous Idaho events in the following years.
    In those gatherings, I have been consistently reassured 
that, once all the information is on the table, most folks from 
grandparents to grandchildren are ready to take a constructive 
part in saving and strengthening Social Security for the 21st 
Century.
    In choosing the topic for this hearing, Mr. Chairman, you 
have asked: ``Do We Have to Act Now?''
    Some have said that we do not have to act now. They say, 
``There is no Social Security crisis.'' They say Social 
Security only has a ``problem'' or faces a ``challenge''. They 
say, essentially, ``Let's wait until the long term to fix the 
long term,'' or maybe, ``Let's just tinker, for now''.
    Waiting for a crisis to happen is never a good strategy. 
That's why, Mr. Chairman, I appreciate your holding these 
hearings. And I look forward to us asking, ``How should we act?
    I also want to join my Chairman in welcoming today's 
witnesses. We've all worked together before. These witnesses 
and their organizations are facing the issues squarely and are 
deeply responsibly involved in the national discussion of 
Social Security's future.
    In fact, David John (Heritage) even joined us a few years 
ago for one of those town meeting tours around the State of 
Idaho.
    Thank you again, Mr. Chairman. I look forward to continuing 
to work with you and the Committee.

          Prepared Statement of Senator Hillary Rodham Clinton

    Thank you Chairman Smith and Ranking Member Kohl for 
holding this hearing today. The debate over the future of 
Social Security has significant implications for every American 
and it is critical that we bring the facts to light and have a 
debate that allows the American public to make an informed 
decision about what they think the future of Social Security 
should be.
    And as we consider this issue, it is important that we 
recognize the financial challenges facing Social Security and 
commit ourselves to fixing them. But tactics designed to scare 
the public into thinking that Social Security is ``in crisis'' 
or ``about to go broke'' are inaccurate and do a disservice to 
the debate.
    In fact, Social Security will continue to run annual 
surpluses for decades to come. In 2018, Social Security will 
have $5.3 trillion in reserves, growing to $6.6 trillion in 
2027. In fact, Social Security will not be ``bankrupt'' even in 
2042 or 2052 when the Trust Funds are exhausted. This is 
because payroll taxes coming in to the Trust Funds will be 
enough to finance 70-80 percent of benefits.
    Now, there is obviously a problem, and I do think that we 
need to act sooner rather than later, but this is not the 
crisis that some would have us believe. And it certainly 
doesn't mean we should ``throw the baby out with the 
bathwater.''
    Social Security is the bedrock of our senior's retirement 
security and must remain so. Carving private accounts out of 
the Social Security system undermines the fundamental nature of 
the program, requires substantial benefit cuts, and drives up 
the national debt with trillions in new borrowing. The costs 
and the risk to the retirement security of millions of 
Americans from privatization are too great.
    I look forward to hearing from our witnesses today, and I 
am hopeful, Mr. Chairman and Mr. Kohl, that your leadership on 
this issue and the hearings we will hold over the next weeks 
and months will help inform this debate and bring us to a 
broadly bipartisan consensus on the future of Social Security.
                                ------                                


              Prepared Statement of Senator Susan Collins

    Mr. Chairman, thank you for calling this afternoon's 
hearing to examine the long-range financing problems facing 
Social Security. I understand that this is the first in a 
series of hearings that the Committee will be holding to 
discuss the challenges facing this tremendously important 
program, and I commend you for giving us the opportunity to 
explore these issues thoroughly.
    Social Security has been a huge success. It is our nation's 
largest and most popular government program. More than forty-
seven million Americans depend on Social Security, and, for 
two-thirds of them, it is their major source of income. For 
many older Americans, Social Security is the safety net that 
makes the difference between poverty and an adequate standard 
of living.
    And Social Security is not just a retirement program. It is 
also a disability insurance program and a life insurance 
program that provides families of active workers with 
protection worth more than $12 trillion--more than all of the 
private life insurance currently in force.
    Unfortunately, as successful as Social Security has been, 
the system faces serious long-term financing problems and is 
not sustainable in its current form. While the system is sound 
today, it will not be able to meet its obligations to future 
retirees unless it is modernized.
    Social Security is currently running a surplus because the 
program is taking in more in payroll taxes than it is paying 
out in benefits. But before too long, this will no longer be 
the case. Our Social Security cash surplus begins to decline in 
2008--the first year in which the baby boomers can begin to 
collect Social Security. By 2018, payroll taxes will not be 
sufficient to pay benefits and we will either have to raise 
taxes, cut spending, go further into debt, or use more general 
fund money if we are to continue to meet our full obligation to 
Social Security beneficiaries. By the year 2042, the trust fund 
will be completely exhausted if steps aren't taken to save the 
program.
    At the root of Social Security's problems is the simple 
fact that America is growing older. Today, more than 30 million 
Americans are 65 and older. These numbers will rise 
dramatically as the ``tidal wave'' of baby boomers--all 76 
million of us--sweeps into retirement. Moreover, it is not just 
that there will be more older Americans in the next century. It 
is that older Americans will be living longer and longer.
    And the rapidly increasing number of older persons is only 
part of the equation. The ``baby boom'' was followed by a 
``baby bust,'' and the inevitable result is that there will be 
fewer workers to support each retiree in the future. In 1960, 
there were five workers for each beneficiary. Today there are 
scarcely three, and by 2030, there will be only two.
    Last night, the President laid out his plan to overhaul 
Social Security. Other Social Security reform plans have been 
proposed by both Republican and Democratic members of Congress, 
as well as by a variety of public policy groups. While there is 
a consensus that action needs to be taken, there is less 
certainly about what should be done, how soon it should be 
done, and how quickly a consensus plan can be forged.
    Clearly, action must be taken to preserve Social Security 
for not just current, but future generations. And the sooner we 
begin to deal with Social Security's financing problems, the 
less disruptive the solution will be.
    Given the universal importance of this program, however, it 
is crucial that any changes be carefully thought out, 
thoroughly understood, and have a solid basis of bipartisan 
support that cuts across all age and income groups.
    Mr. Chairman, that is why hearings like this are so 
important. They give us the opportunity to discuss the scope 
and nature of the problems facing Social Security as well as to 
explore the ramifications of the various proposals to modernize 
the program.
    Again, I thank you for convening this important hearing, 
and I look forward to hearing the testimony from our witnesses.

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