[Senate Hearing 109-244]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-244
 
                     FISCAL YEAR 2006 FIELD HEARING

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

                                HEARINGS

                               before the

                        COMMITTEE ON THE BUDGET

                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

             March 23, 2005--THE FUTURE OF SOCIAL SECURITY












                                     

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                        COMMITTEE ON THE BUDGET

                  JUDD GREGG, New Hampshire, Chairman

PETE V. DOMENICI, New Mexico         KENT CONRAD, North Dakota
CHARLES E. GRASSLEY, Iowa            PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               PATTY MURRAY, Washington
MICHAEL ENZI, Wyoming                RON WYDEN, Oregon
JEFF SESSIONS, Alabama               RUSSELL D. FEINGOLD, Wisconsin
JIM BUNNING, Kentucky                TIM JOHNSON, South Dakota
MIKE CRAPO, Idaho                    ROBERT C. BYRD, West Virginia
JOHN ENSIGN, Nevada                  BILL NELSON, Florida
JOHN CORNYN, Texas                   DEBBIE STABENOW, Michigan
LAMAR ALEXANDER, Tennessee           JON S. CORIZINE, New Jersey
LINDSEY O. GRAHAM, South Carolina

                  Scott Gudes, Majority Staff Director
                      Mary Naylor, Staff Director


























                            C O N T E N T S

                               __________

                                HEARINGS

                                                                   Page
March 23, 2005--THE FUTURE OF SOCIAL SECURITY....................     1

                    STATEMENTS BY COMMITTEE MEMBERS

Senator Conrad...................................................     1

                               WITNESSES

Bixby, Robert, Executive Director of the Concord Coalition.......    23
Blake, Venus, Retiree From Fargo.................................    28
Cheney, Janis, State Director of the North Dakota AARP...........    21
Savelkoul, Stuart, Housing Coordinator at Dickinson State 
  University.....................................................    30









                     THE FUTURE OF SOCIAL SECURITY

                              ----------                              


                       WEDNESDAY, MARCH 23, 2005

                                       U.S. Senate,
                                   Committee on the Budget,
                                                          Fargo, ND
    The committee met, pursuant to notice, at 10:35 a.m., in 
the Prairie Rose Room, 1401 Administration Avenue, North Dakota 
State University, Fargo, North Dakota, Hon. Kent Conrad 
presiding.
    Present: Senator Conrad.
    Staff present: Sarah Kuehl and Catherine Peterson.

              OPENING STATEMENT OF SENATOR CONRAD

    Senator Conrad. I want to welcome everyone to the North 
Dakota State University campus for an important Senate Budget 
Committee hearing about the future of Social Security, and I 
want to extend a special thanks to the witnesses for their 
testimony here today.
    We have on the witness panel Janis Cheney from the North 
Dakota Chapter of the AARP.
    We have Bob Bixby, who is here from The Concord Coalition, 
the national organization that advocates fiscal responsibility 
while ensuring that Social Security and Medicare are secure for 
all generations.
    We have Mrs. Venus Blake, a retiree from Fargo, who's here 
to tell us a little bit about what Social Security has meant to 
her and Stuart Savelkoul from Dickinson, North Dakota, who 
recently graduated from Dickinson State University. I 
understand that you were president of the student body there; 
is that correct?
    Mr. Savelkoul. Once upon a time.
    Senator Conrad. Once upon a time. Well, it is good to have 
you here as well to give your views on Social Security.
    Each of the witnesses will be asked to testify for five to 
7 minutes. Then I will ask the witnesses some questions to 
further draw out their views on Social Security and the 
challenges that we face.
    Before we get to the witnesses' testimony, I would just 
like to make some brief opening remarks about where we are with 
respect to Social Security and the funding challenge that we 
face. I believe the President has rightfully indicated that 
there is a long-term funding challenge that we need to address 
and the sooner that we do it the better.
    I think we all recognize the extraordinary importance of 
protecting and strengthening Social Security. This has been one 
of the most successful enterprises that the Federal Government 
has ever embarked on to provide retirement security for 
Americans and it has played an absolutely critical role in the 
lives of many people.
    I think many of you know my life story. My parents were 
killed when I was young and I was raised by my grandparents and 
during all of my growing up I received a survivor's benefit. My 
family was of moderate means and that survivor's benefit was 
very important to me and to my brothers.
    In part, it enabled us to go on to college and get advanced 
degrees and played a critical role in our ability to succeed, 
so I think I have a first-hand understanding of how important 
Social Security can be for North Dakotans and Americans.
    The fundamental reality is that we face a funding challenge 
not only in Social Security but in Medicare. Of course, we have 
a larger funding challenge as well, don't we, because we are 
running these massive Federal budget deficits, and all of these 
things will put enormous pressure on the fiscal condition of 
the Federal Government.
    We are running record budget deficits now and we see no end 
in sight. With the budget that has just passed Congress, 
according to the calculations of those who favored the budget, 
it will increase the debt by over $600 billion a year each and 
every year of the 5-years of that budget. That is an enormous 
accumulation of additional debt on top of an already surging 
Federal debt that we experience today.
    Now, with respect to Social Security, and this affects 
Medicare as well, here is the fundamental problem that we 
confront. We have got a demographic change that is occurring 
with the retirement of the baby-boom generation that's going to 
take us from around 40 million people eligible for Social 
Security and Medicare to 81 million by 2050, and it is a very 
dramatic rise in the people eligible for Social Security and 
Medicare.

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    While we clearly have a shortfall in Social Security, we 
have an even bigger shortfall in Medicare. In fact, the 
Medicare shortfall is eight times as large as the shortfall in 
Social Security. My own strong belief is we need to work on 
both of these things as well as the budget deficits. Why? 
Because this extraordinary level of borrowing is making us 
increasingly indebted, not only to those who buy government 
bonds in this country but to people who are buying government 
bonds all around the world.
    In fact, foreign holdings of our debt have gone up almost 
100 percent in the first 3 years of this administration. I 
don't believe that strengthens the country. I believe that 
weakens us and makes us more vulnerable.
    And if we look at this chart, the green bar here shows the 
Social Security surpluses, the blue bar shows the Medicare 
surpluses and deficits, the red bar shows the President's tax 
cuts, both those already passed and those that he advocates 
extending.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    What you see here is that at the same time the trust funds 
of Social Security and Medicare go cash negative out in the 
range of 2020, the cost of the President's tax cut proposals 
explode as well. The combination drives us, as you can see 
visually here, right over the fiscal cliff.
    We think we have big deficits now. But we have not seen 
anything yet unless we take action. That is why it is 
critically important that we understand the challenge facing 
the country and the need to respond.
    Unfortunately, the President's budget proposals make this 
situation worse. Why? Because the budget he has sent us assumes 
that the Social Security money that is available over the next 
10 years will all be used for other purposes. The Social 
Security surplus, every dime of it under the President's plan, 
will be used to pay for other things, some two and a half 
trillion dollars.

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    Some may be wondering, well, how can there be surpluses in 
Social Security when we are talking about all these shortfalls? 
As you know, for the near future, Social Security is taking in 
more money than it is spending for current Social Security 
retirees. It is that difference, the flow of income coming in 
over and above current expenditures, that constitute a current 
surplus. But that surplus won't last very long.
    According to the Congressional Budget Office, and they have 
just revised these numbers, by 2020, more money will be going 
out than is coming in. And by 2052, the Congressional Budget 
Office is telling us Social Security would only be able to meet 
78 percent of its obligations. So clearly there is a gap to be 
closed here, and I think it is important that we all know the 
information.
    The President's budget makes the problem worse because he 
is taking for the next 10 years all the Social Security money 
that is available and using it for other purposes. That is what 
he is doing. He is taking money that is raised through excess 
payroll taxes over and above what is needed to pay benefits now 
and he is taking that money, $2.5 trillion, and using it to pay 
for other things.
    When Social Security was last reformed, I believe it is 
very clear that Members of Congress and the President at the 
time thought that these surpluses now would be used for one of 
two purposes, either to pay down debt or to prepay the 
liability that everybody knows is coming.
    Unfortunately, that is not how the money is being used. The 
money is being used to pay benefits, but that money that is 
over and above what is needed to pay current benefits is not 
being used to pay down debt, not being used to prepay the 
liability, instead it is being used to pay for other things.
    Many of you know I was the sponsor of lockbox legislation 
to prevent this, to prevent Social Security money being used 
for other purposes. I actually got that passed in the U.S. 
Senate, but it never became law. So now we are in a 
circumstance in which it is possible to use the Social Security 
surpluses for other purposes. I think that is a mistake, but 
that is, in fact, what is occurring.
    The President makes the situation worse again by proposing 
to divert additional money out of Social Security to begin 
private accounts or individual accounts.
    Let me be clear. I've always thought there was a kernel of 
a good idea in individual accounts, but I do not think that it 
is a good idea if it is financed by massive debt, by massive 
additional deficits, and I do not think that it is a good idea 
if it is financed by steep benefit reductions.
    I proposed to my colleagues in 2001 actually setting aside, 
at that time, $900 billion in surpluses to either pay down the 
debt or to prepay the liability in Social Security. One way of 
doing that would have been to establish individual accounts. So 
I proposed to my colleagues a budget that would have provided 
$900 billion for that purpose. Unfortunately, that budget was 
not adopted.
    Under the President's plan, over the next 10 years he will 
take $750 billion out of Social Security to fund the beginning 
of private accounts. That is just the tip of the iceberg, 
because over the next 20 years, the cost of the President's 
proposal is over $4 trillion. And the President proposes 
borrowing all of that money.

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    Adding to the already record deficit and debt, I do not 
believe that is wise. I do not believe that is sustainable. I 
think that hurts the younger generation, who will be expected 
to pay this bill. I think it hurts the current generation and 
the current economy by requiring additional borrowing at a time 
when we are already reaching our limits on borrowing.
    What difference does it make? Well, very simply we are 
reading in the paper every day the difference it makes. As we 
borrow more and more money, part of it is being borrowed from 
abroad. Here are the countries that we are currently indebted 
to.
    We now owe Japan over $700 billion. We owe China almost 
$200 billion. We owe the United Kingdom over $160 billion. We 
owe the Caribbean Banking Centers over $90 billions. We owe 
South Korea over $68 billion.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    I don't believe this borrowing from abroad makes us 
stronger. Some people say, well, this is an indication of how 
attractive we are as a place to invest money. That is one way 
to look at it. I don't believe any country has ever 
strengthened itself by becoming more and more indebted to 
foreign nations and that is precisely the shape we are in.
    What difference does it make? Well, we have seen the 
difference that it makes, haven't we? Just a few weeks ago, 
South Korea announced that they were going to begin to 
diversify out of dollar denominated securities because the 
dollar has been going down so sharply in value. Over the last 
two and a half years, the dollar has lost 33 percent of its 
value compared to the euro.
    You saw a headline in Newsweek about the amazing shrinking 
dollar. That is what they are talking about, and it is the 
combined effect of budget deficits and trade deficits and the 
fact that we are borrowing more and more money from abroad. The 
result is people are putting less value in our currency.
    They are concerned about our ability to pay all of these 
debts and they are concerned about what it means to the 
economic strength of America and what it means to the economic 
health of the world.
    Let us go to the next chart. Social Security, I think we 
all understand, is critically important in our society. We have 
in North Dakota over 114,000 people that are receiving Social 
Security benefits, 62 percent of them are retirees, 14 percent 
are widows or widowers, 9 percent are wives and husbands of 
Social Security eligible beneficiaries, 9 percent are disabled, 
6 percent are children. So we have a very large part of North 
Dakota's population that receives Social Security benefits.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    The average monthly Social Security benefit in North Dakota 
is $859 for retired workers. For widows and widowers, their 
average benefit is $845. For disabled workers, their average 
benefit is $814.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    I have had many people come to me over the years and tell 
me how critically important these benefits are to them. I 
remember so well an elderly woman, frail and sickly, coming to 
one of my town hall meetings and telling me that the only 
income she had was from Social Security. She had no other 
income from any other source. She had prepared on a little 
piece of notebook paper her budget, and she had approximately 
$800 a month of Social Security income. She paid over $200 a 
month for rent. She paid over $200 a month for prescription 
drug benefits. She had $150 a month of utility costs, water, 
sewer, heat and light, telephone, and you add it up. She had 
very little money left over.
    When she calculated how much a month she spent on food, she 
had very little money left. Social Security was all that was 
standing between her and not being able to meet her most basic 
needs.
    We know nationally that two-thirds of retirees rely on 
Social Security for more than half of their income. Two-thirds 
rely on Social Security for more than half of their income. 
Thirty-six percent get less than 50 percent of their income 
from Social Security, but 31 percent get at least 90 percent of 
their income from Social Security and 33 percent get 50 to 89 
percent of their income from Social Security.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    So clearly Social Security is playing a very important role 
in the economic lives of tens of thousands of North Dakotans. 
Without Social Security, we know that nearly 50 percent of 
beneficiaries would be in poverty. With Social Security, only 9 
percent of seniors are in poverty. Without it, 48 percent of 
seniors would be in poverty.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    I think it is important to understand the elements of the 
President's plan, because the first part of the President's 
plan is to sharply cut benefits over time by changing from what 
is called the wage index to a price index. The effect of that 
change grows very sharply over time.
    In 2022, benefits on average would be cut 10 percent. By 
2042, they would be cut 26 percent, and by 2075 they would be 
cut by 46 percent.

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    Now, those are steep cuts in benefits and it is important 
to understand that they apply to everyone. Whether you choose 
to have an individual account or not, those benefit cuts apply.
    The President's private accounts work somewhat differently 
than has been described or at least the descriptions that I 
have heard. I have heard the President say that the private 
accounts belong to you and nobody can take it away from you. 
That is true as far as it goes, but that description leaves out 
a very important feature of his plan.
    The way these private accounts work, as I've come to 
understand it from talking to the President's people and I have 
talked to them repeatedly, is somewhat different than the way 
it's been described. Let me give you an example.
    If you set aside in a private account $1,000 a year for 40 
years and you earned six and a half percent rate of return on 
that investment every year, at the end of 40 years you would 
have $92,000 in your accountin today's dollars. But that is not 
yours free and clear. Under the President's plan, they assume 
that money was loaned to you by the Social Security Trust Fund 
and they expect it to be paid back with interest.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    What am I talking about? That thousand dollars a year that 
you put in your private account they assume was loaned to you 
by the Social Security Trust Fund, and they expect to be paid 
back that $1,000 a year that you put aside, that $40,000, plus 
they expect to be paid back with interest. They expect to be 
paid back a 3-percent real rate of return. That is 3 percent 
plus inflation.
    So in this example, you owe back $78,000, but you don't owe 
it back out of your individual account. You owe it back by 
taking a further reduction in your already cut traditional 
Social Security benefit. Now, I know this is somewhat 
complicated and somewhat difficult to follow. I know it seems 
odd that you would have to pay back some of this money, but 
that is the way it works. That is the way it works.
    Yes, you have an account. Yes, you have an investment. Yes, 
your name is on it, but it is also true that under the 
President's plan they assume much of that money was loaned to 
you and that you must pay it back.
    Now, what happens if you don't get a six and a half percent 
rate of return on the money that you invest? What happens if 
you only get a 5-percent rate of return on the money that you 
invest in the private account? Well, here is what happens under 
that example.
    If you set aside $1,000 a year for 40 years and you only 
earn a 5 percent rate of return, you would have in your private 
account $64,000. But wait a minute. You owe back the $78,000. 
Because remember, under the President's plan, the assumption is 
that your account contributions were loaned to you and you have 
to pay them back. The President's plan says the amount that you 
would be required to pay back is the $1,000 a year plus 5.8 
percent compounded.

[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]


    So you still owe back the $78,000, even though you only 
have $64,000 in your private account. Again, you don't pay it 
back out of your private account. That is the little wrinkle in 
all this.
    Even though they assume it has been loaned to your private 
account, you do not pay it back out of your private account. 
You pay it back by taking an additional reduction out of your 
traditional Social Security benefit, which has already been 
cut.
    Now, I know this sounds hard to believe, but that is the 
way it works. I have spent many hours with the President's 
representatives so that I could understand, how it works. They 
have confirmed to me that that is how it works.
    I think we will just end on that point and we will go into 
other explanations as we go forward.
    Just to recap, No. 1, I agree with the President that we 
have got shortfalls in Social Security. In 2020, Congressional 
Budget Office says the trust fund will have more expenditures 
than revenue.
    By 2052, they say Social Security will only be able to meet 
78 percent of its obligations, so clearly we have got a 
shortfall. It is also true we have an even bigger shortfall in 
Medicare.
    According to the General Accounting Office, a shortfall in 
Medicare is eight times the shortfall in Social Security, and 
on top of it all we are already running record budget deficits.
    My strong belief is we must tackle all of these things. We 
need to put it all in front of the American people so they can 
see the challenges, the financial challenges, that we face.
    The result of all this is we are borrowing more and more 
money. We are borrowing more and more money from ourselves, we 
are borrowing more and more money from abroad and that puts us 
at risk. If these central banks that are buying American debt 
decide they are going to buy less of it, we would then have to 
substantially raise interest rates in order to attract the 
capital to finance our growing dependence on foreign borrowing. 
That is the economic reality.
    Yesterday you saw the Federal Reserve again raise interest 
rates and you saw the stock market go down. That is what is at 
risk here, an ever increasing pressure to raise interest rates, 
an ever increasing pressure to borrow more and more money and 
to go deeper and deeper into debt.
    That is why I believe there is a kernel of a good idea in 
individual accounts, but I do not think it is a good idea if it 
is financed by massive borrowing. I do not believe it is a good 
idea if it is financed by steep benefit cuts.
    Senator Conrad. With that, I want to turn to our witnesses, 
and again I just conclude by saying the other concern I have 
with the President's proposal is the way these individual 
accounts would function. This idea that the money is loaned to 
you and you are required to pay it back makes it very likely 
that many people would owe back more than what they have in 
their private accounts. Again under the President's plan you 
don't pay it back out of your private account. You pay it back 
by reducing your already cut traditional Social Security 
benefit. That to me makes it a much less attractive plan.
    With that we are going to turn to the excellent witnesses 
that we have with us today, and I am going to first call on Jan 
Cheney, the North Dakota State Director for the American 
Associated of Retired People. Welcome and please proceed.

    STATEMENT OF JANIS S. CHENEY, STATE DIRECTOR, AMERICAN 
              ASSOCIATION OF RETIRED PERSONS AARP

    Ms. Cheney. Thank you very much. Good morning, Senator 
Conrad. I'm honored to have this opportunity to testify on 
behalf of AARP North Dakota about Social Security and its 
importance for America's families.
    We at AARP view Social Security as an obligation to current 
and future generations of Americans. We believe it is our 
responsibility to make sure their Social Security benefits will 
be there when they are needed.
    And, we believe that we must advocate today to strengthen 
Social Security for our children and our grandchildren. Social 
Security faces challenges in the years ahead, but the solution 
should not be worse than the problem!
    Social Security is the only guaranteed, inflation proof, 
lifelong benefit that millions of workers, present and future, 
can count on.
    I believe that Social Security's promise embodies our 
deepest values as Americans. It reflects the obligations 
between generations, between parents and children, between 
grandparents and grandchildren. It also represents our 
commitment to those in retirement, those at work, and those 
workers who are disabled and their families.
    The promise of Social Security has endured for 70 years and 
AARP believes we should not be putting an expiration date on 
it.
    One of every five Americans faces retirement with no income 
except from Social Security. Social Security is all that stands 
between those beneficiaries and living in poverty. And for 
nearly two-thirds of the people age 65 or over, Social Security 
provides at least half of their income. That alone is reason 
enough to protect and strengthen Social Security's guaranteed 
benefits.
    But Social Security wasn't designed just for retirement. It 
also provides valuable disability and survivors' benefits.
    Here in North Dakota, Social Security is crucial to the 
economic security of many people. In December 2003, 114,220 
people were getting Social Security benefits, including 71,190 
retired workers, 15,860 widows and widowers, 10,410 disabled 
workers, and 6,990 children.
    At AARP, we recognize the challenges that Social Security 
faces in the coming years, and we believe that the sooner we 
take action to meet those challenges, the smaller the 
adjustments that have to be made.
    But we also recognize that there is a right way and a wrong 
way to renew the promise of Social Security for future 
generations.
    Some are proposing to create private accounts in Social 
Security with money that would otherwise be used to pay 
benefits and go into the Social Security Trust Fund. That, in 
our view, is the wrong way to deal with the challenges facing 
Social Security. AARP is firmly opposed to private accounts 
that divert money from Social Security.
    Private accounts that drain money out of Social Security 
clearly are a solution that is far worse than the problem. They 
would cut guaranteed Social Security benefits substantially 
while passing a huge burden of debt on to future generations. 
Even worse, they offer a false promise that people can build 
wealth that they might be able to pass on to their children and 
grandchildren.
    These plans could leave our children and grandchildren with 
more debt, less security and, quite probably, less income. We 
should not leave such a legacy to our future generations.
    AARP strongly supports private savings and investment 
accounts when they are funded by the individual or, hopefully, 
his or her employer.
    Such private accounts are excellent savings tools, but in 
addition to Social Security, not in place of Social Security. 
Workers should not have to relinquish any portion of their 
Social Security benefits to invest for their retirement.
    It is extremely important that our children and 
grandchildren begin setting aside money now to invest and save 
for their retirement. But, under no circumstances should we 
weaken Social Security by taking money from it to create 
private accounts.
    Another fundamental fact we need to know, despite 
everything we may have heard, is that Social Security is not in 
crisis. It's not going broke. The trust fund will be able to 
pay 100 percent of promised benefits through 2042, or perhaps 
longer, when the youngest of the baby boomers will be 78 years 
of age.
    After that, fully 70 percent of promised benefits could 
still be paid, even if no changes are made. Now is the time to 
take steps to strengthen Social Security's long-term solvency 
to ensure that full benefits can be paid for decades beyond.
    We believe there are sensible ways to ensure Social 
Security's long-term solvency, and we will fight to ensure that 
the only guaranteed source of retirement security and long-term 
disability insurance for America's families is not put at risk 
needlessly.
    Once we put aside the misguided idea of taking money out of 
Social Security to fund private accounts, we need to have an 
honest debate about the serious options available to us.
    First, we must ask two important questions.
    As a nation that claims to value the well-being, dignity, 
and security of every citizen, do we really want to abandon 
those principles and leave millions of older Americans to fend 
for themselves?
    And, as a nation who has always recognized the bonds 
between parents and children, do we really want to use Social 
Security as a generational dividing line, pitting old against 
young?
    The Reverend Martin Luther King once said, ``Our lives 
begin to end the day we become silent about things that 
matter.''
    Social Security matters to us. We cannot afford to be 
silent about it. By speaking out and working together, we can 
preserve and strengthen Social Security for generations to 
come. Thank you.
    Senator Conrad. Thank you for that testimony.
    And next we will hear from Bob Bixby, who is here 
representing The Concord Coalition. Let me just say this is an 
organization that I have great respect for because they have 
been many times a voice in the wilderness about the importance 
of being fiscally responsible, about paying your bills, and for 
the Federal Government to balance its books. Welcome, Mr. 
Bixby.

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

    Mr. Bixby. Thank you, Senator Conrad. I'm very happy to be 
here today to discuss the future of Social Security, which is, 
of course, an important issue for all Americans. The Concord 
Coalition is a bipartisan organization. We are chaired by 
former Senators Bob Kerrey from Nebraska, a Democrat, and 
Warren Rudman, a Republican from New Hampshire.
    Our organization was started in 1992 in response to the 
huge budget deficits that we had at that time. In the late 
1990's when things turned into surpluses, people said, well, I 
guess you can disband and we said, well, no. There's still that 
long-term challenge out there that needs to be addressed and, 
unfortunately, in the last few years big budget deficits have 
come back again, so we're back to our original problem.
    Short-term deficits and long-term deficits are even worse 
so, unfortunately, we are still around being the pain in the 
neck to both political parties and asking them to make the hard 
choices and do the right thing on fiscal responsibility.
    It's often said in that regard the political system only 
responds to a crisis. If that's true, we're in big trouble, 
because there is no immediate crisis, but there is a very 
serious long-term problem, and that problem can be made so much 
easier if we start taking modest steps now phased in slowly 
over time to address it.
    This isn't a problem--this isn't something that's going to 
sneak up on us. We know the problem is coming. The baby boomers 
are here. Senator Conrad and I used to be cute little kids some 
time ago with coonskin caps and, you know, the first of the 
baby boomers is going to qualify for Social Security in just 3 
years. Kind of a frightening thought.
    And that signals the beginning of a great demographic shift 
in this country, which will see a much older population. People 
are living longer, which is a good thing obviously. As 
President Clinton used to say, ``This is a high-class 
problem,'' but it does make the future of Social Security and 
Medicare and the long-term care portion of Medicaid much, much 
more expensive and that's our problem, but we can see it coming 
if we can take some modest steps now to deal with it.
    Basically with Social Security the problem is, and Senator 
Conrad's charts show this very well, that the system promises 
more in future benefits than it can deliver under current law. 
There's a set tax rate. There are benefit formulas. You plug in 
the demographics and the system is running an ample surplus at 
the moment, which is the reason we have no immediate crisis, 
and sometime in about 15 years the system will begin paying out 
more than it is taking in, and then it will look at that trust 
fund and say you got to cash in some of these bonds that have 
been accumulating.
    And as a budget person, I look at the fiscal consequences 
of cashing in the bonds in the trust fund, which means the 
Social Security Administration will have to go to the treasury 
and say pay up, and so the treasury at that point will have to 
find the cash to make good on the bonds in the trust fund.
    So it's important to keep in mind from a budgetary and an 
economic standpoint that once the system begins paying out more 
than it takes in the rest of us are going to have to make good 
on those promises and we have to look at the consequences of 
that as well.
    Sometimes, you know, when we say there's no crisis or say 
that the trust fund is solvent for, you know, 40 or 50 years, 
when I say that that in itself is sort of a problem because it 
creates a false sense of security that we don't have a problem 
for 40 years. You have to keep in mind that, say, in 2041 or 
sometime in the late 2040's even as the trust fund is fully 
solvent it will be running a deficit.
    In other words, the treasury will have to make good on 
bonds that are worth about $300 to $400 billion a year. That's 
the cash, operating cash, deficit in Social Security at the 
time, so that's about the size of our entire Federal budget 
deficit at the moment.
    So it's not an inconsequential thing. It's not as if we can 
say, well, the trust fund is solvent for 40 years so we don't 
have to worry about it. There are real world economic and 
budgetary consequences that hit far sooner than that. It's also 
important to keep in mind that Social Security is only one part 
of this major fiscal challenge that we have coming up.
    The demographics are the same for Medicare and quite 
frankly the problem there, as Senator Conrad said, are much, 
much worse. If you sit around worrying, as I do sometimes--
maybe I'm a little bit unusual. Most people don't sit around 
thinking about the budget deficit in 2030 I suppose, but if you 
do, you worry much more about Medicare than you do Social 
Security. The problems are much, much greater.
    If you look at overall fiscal policy, it's truly 
unsustainable on its current course. Even as we have no 
immediate crisis but the--where we're headed right now and it's 
a combination of factors, but you look at the cost growth of 
Social Security, Medicare, and Medicaid, and by 2030 they could 
cost about 18 percent of the economy.
    Now, this is the way that economists speak about these 
programs. It is a shorthand way but sort of bear with me. If 
the three programs now cost about 8 percent of GDP, let's just 
say they cost 8. By 2030, they could cost 18.
    Now, that's more than we pay in taxes now. We pay about 17 
percent in GDP in taxes. So what I'm saying is the cost of 
these three programs is going to put enormous pressure on the 
Federal budget. You know, we have to borrow for everything 
else, defense, education, health care, whatever in the 
discretionary side of the budget, homeland security.
    I mean we're talking about a truly unsustainable situation, 
and the cost of borrowing is reflected in interest in the 
Federal budget. The Federal Government, like every other 
creditor, has to pay interest. The GAO that Senator Conrad 
referred to, the General Accounting Office, that now changed 
their name and they call themselves the Government 
Accountability Office, did some long-term scenarios and they 
found on our current course by 2040 net interest, just 
interest, costs on the debt could consume all Federal revenues.
    Now, obviously that's not going to happen. I mean it is 
just ridiculous, but it shows what an unsustainable fiscal path 
we're on. We are on track where spending could reach like about 
30, overall Federal spending about 30 percent of GDP by 2050 or 
so. That's about where it was--it is levels not seen since 
World War II.
    Now, Federal tax rates hover usually around 18 percent of 
GDP. As I said, they are lower now. That's really the essence 
of our overall fiscal problem. You can argue about whether we 
should both spend and tax at 25 or 30 percent of GDP or you can 
argue about whether we should both spend and tax at about 18 
percent of GDP, but nobody in their right mind would argue that 
we can spend at 30 percent of GDP and tax at 18 percent of GDP. 
It doesn't work, and that's the course that we're on.
    It's important to recognize this because it has 
implications for what we do with Social Security and Medicare 
what sort of reform options we pick.
    You know, I mentioned before that the trust fund is solvent 
until the 2040's, but it will be running big budget deficits. 
Keep in mind that if our overall fiscal policy is going over a 
cliff by 2040, you know, it doesn't matter if the trust fund is 
solvent or not if the Federal Government is bankrupt because 
that's where the trust fund gets its money from, so you have to 
look at the overall fiscal policy.
    Conversely, let me talk now about personal accounts, 
because that's gotten a lot of attention. If you're looking at 
this situation and you say I've got an idea. Let's borrow 
trillions of dollars more. That doesn't make any sense. We're 
already going over a cliff by 2040 or sooner. Borrowing 
trillions of dollars more in the interim only means that you're 
going to go off the cliff somewhat sooner.
    Now, in fairness to the President's plan, what they have 
tried to show is that if you implement some of these plans, 
there's some models that show very large savings in future 
years, enough to balance the system. It's not the private 
accounts that get the savings by the way. It's the price 
indexing that Senator Conrad showed in one of those charts, 
which reduces the guaranteed benefit.
    But again if fiscal policy is going over a cliff by the 
2040's or sooner, a program that says we're going to get big 
savings in the 2050's and 2060's is irrelevant because the 
government is going to go off the fiscal cliff before then, so 
what we need to do is sort of step back for a minute and look 
at overall fiscal policy, look at Social Security's role in 
that.
    When we look at Social Security reform, we can address 
first the basic problem, which is the imbalance between what 
the system is going to pay out and what the dedicated revenues 
are. Personal accounts don't address that. The President 
acknowledges that they don't address that. That's the essence 
of the problem with Social Security. It's going to require some 
hard choices. Somebody is going to have to give up something in 
the form of higher contributions, in the form of lower promised 
benefits.
    If you phase them in now, it is not as bad of a problem. If 
you wait, you're going to have to have drastic tax increases, 
sudden benefit cuts, things that are very politically painful 
and the default option is that you just keep running up the 
national debt.
    I should say that I error on the side of making benefit 
cuts. That's why The Concord Coalition is always so unpopular, 
but the reason why is that long-term spending growth is a real 
problem here. In order to pay full benefits that are promised 
under Social Security and Medicare and avoid massive deficits, 
you would have to raise taxes to levels that are unprecedented 
in this country.
    Now, maybe future workers will want to pay those higher 
taxes, but if they do they would be a lot different than us 
because we won't pay them. So we're sort of assuming if we rely 
on tax increases alone or if that's our primary role of reform, 
the future taxpayers won't mind paying much higher rates than 
we're willing to pay for ourself. We're a lot richer as a 
nation than we were about 40 years ago, but we pay about the 
same in taxes as a percentage of the economy.
    Also, I think that the cost of Medicare is such that the 
cuts there are a lot more difficult. I think that the reason 
that I would favor some sort of benefit reductions in Social 
Security is that I think that people can adjust their behavior 
over time to make up for the savings and it's a lot more 
difficult to adjust for health care prices because you never 
know when one is going to hit. So if we're going to pay more 
money, I would rather do it for Medicare. That's what I'm 
saying.
    Private accounts. Let me close by just saying about private 
accounts. I'm not an opponent of private accounts. I just don't 
like borrowing to pay for them. I think it makes a lot of sense 
to bring new money into the system and put the money into 
private accounts. I mean if you're going to--that could be the 
ultimate lockbox. If we bring new money into the system without 
some way of turning it into genuine savings, then it might just 
result in higher taxes today. The money is going to get spent 
on something else.
    One way or the other, we need to increase savings. We need 
to increase individual savings. We need to get the government 
to stop running big budget deficits because that detracts from 
the national savings. So if we had a system of accounts that 
were funded with new money, that would increase savings.
    That's not an easy choice either, because you're asking 
people to pay more money, but the more money wouldn't function 
like a tax. It wouldn't go to the government. It would be in 
your private account. It wouldn't have the deficit affect that 
the President's plan would have and it would increase savings.
    So whatever we do here there are hard choices. None of us 
should be diluted into thinking there's a free lunch out there. 
We got an unsustainable situation, but it is not unsolvable. It 
is very important that we get to it soon. All options should be 
on the table, but whatever we do it should seek to increase 
savings both for the good of the economy and the good of the 
long-term retirement security of our population.
    And we're not doing a very good job of being savers right 
now and it should be fiscally responsible, because in the long-
term running up the debt is just--that's a tax increase on 
future generations. Somebody is going to have to pay for it.
    So with that, The Concord Coalition never cheers people up. 
That's not our role, but I think that the good news from me is 
that I think that the American people are willing to make hard 
choices if things are explained to them.
    I've always found in field events that we do at The Concord 
Coalition that the American people are actually quite rational 
and quite willing to sit down and go through and set priorities 
and make hard choices. That's what we've already done as a 
nation, that's what we need to do now.
    Senator Conrad. Thank you, Bob.
    Next we will hear Venus Blake. Venus is a retiree, and she 
will tell us her experiences with Social Security and what it 
means to her.

          STATEMENT OF VENUS BLAKE, RETIREE FROM FARGO

    Ms. Blake. Well, good morning and thank you for calling 
this meeting together so we can discuss Social Security, and I 
guess after listening to Bob, I'm glad he made that 
presentation because I think it is a very, very serious problem 
that we need to be aware of and that we're not that aware of. 
It's too easy to go on living from day-to-day on our Social 
Security check without thinking of where it is really coming 
from.
    My name is Venus Blake. My husband and I have lived in 
Fargo for 35 years. We were both raised in rural North Dakota. 
I was born in Hannah up in Cavalier County. He grew up in 
Underwood, North Dakota. We lived in small towns. We've lived 
in Fargo for 35 years and raised our family here. I'm 80 and he 
is 87, so we have been quite aware of the Social Security 
problem.
    When I was growing up at a young age, there wasn't a Social 
Security problem or there wasn't Social Security. I can 
remember my parents, you know, were farmers. That was their 
heritage, and I can remember after the crops were sold--and 
this wasn't discussed around the dinner table but in the 
corners you'd hear well, you know, grandma has to have some 
money now and, you know, there's got to be money that's going 
to go to grandpa.
    This is what we would be hearing, you know, in the 
background. This is where the retired generation got their 
income, from their homesteads, from the businesses that they 
had established and the next generation that was running them. 
It was a responsibility of this mature generation to support 
that older generation because there wasn't any Social Security 
and that's what we grew up knowing.
    Now, my mother lived until she was 94, and so she had been 
receiving Social Security for quite a while, and her check was 
certainly not very large because the earnings were really quite 
small after the depression and but she was living with us. We 
were fortunate enough to have a large enough home that she had 
a room, but everybody else was busy. The mail that came nothing 
was usually for grandma there, you know, and grandma's main 
purpose in life seemed to be letting the dog in and out, you 
know.
    Everybody else was going on with their life, but she knew 
the day that Social Security check was coming in the mail and 
she knew there was going to be something in the mailbox for 
her. It might not have been that large, but she would endorse 
that check and give it to me and I would cash it and take the 
money back to her and then so she would have her money.
    And then every so often she would come down the stairs with 
this little note, you know, and say now when you're going to 
the store, Venus, you know the Cream of Wheat is almost gone 
and look for those good cookies. You know the ones I like.
    She would be able to do that because she had this money 
from Social Security and it gave her some dignity that she 
wasn't just living off her relatives, you know, because she had 
been an independent person all her life, and I'm sure that this 
is true of any of your parents. This is the way they survived.
    Now, I met my husband at Minot college. We were both 
teachers. I guess my first teaching experience was during World 
War II and we had to grow up pretty fast back there in the 
1940's, and the people that were in charge knew that any person 
that was interested in teaching were going to be herded into 
the educational system, so I found myself in a consolidated 
school with one room with 23 children and eight grades, and I 
have said to this day that I know that I learned more than they 
did in those 2 years.
    But after that I went back to school and my husband also 
and he taught until his dad became ill with cancer and we 
decided we had to live in close proximity to them, so he took a 
job out at Garrison dam where people were going to work in 
those days and he never went back to teaching. I never went 
back to teaching because I had four children and I was busy 
raising these four kids.
    If we had gone back to teaching, we would have had a 
retirement system. We would have to have paid in and 
contributed but the school board would have also matched that. 
If we worked for the railroad, we would have had a retirement, 
but we worked for small businesses and a lot of times I was 
self-employed so we paid into the Social Security system on our 
own.
    We realized we were not having a retirement from anybody 
else. We knew that anything that we had would come from our own 
earnings and from our own property, so we knew that we had that 
responsibility; although, it certainly wasn't easy to put aside 
retirement and set up retirement like we're saying to our 
children now should be setting up retirement, but when the kids 
were going to school the most important thing was that they get 
their education. Our retirement was going to be coming after 
these kids were educated and it did.
    When we were ready to retire, we had lived quite frugally. 
We hadn't gone on vacations and blown it so we owned our house, 
we owned our car, and we had Social Security. We're very, very 
glad that we have that Social Security that we get now.
    My husband gets a small veteran's pension and we had a 
little inheritance, but without the Social Security we would be 
in very, very tight straits, and I think about so many other 
people in North Dakota that don't have retirement through their 
work because there weren't the kind of businesses.
    We had so many rural--our farmers didn't have a chance to 
set up. The time came when there were systems set up and now we 
have the 401 plans but then there weren't plans. People just 
had to save for themselves for retirement and this is what we 
had to do.
    Like I said if it weren't for that Social Security that we 
get now, life would really be very, very tough, and I guess as 
I said I'm glad to hear what Bob had said, you know, how 
important a system it is and that it is a system that has to be 
maintained and especially for us around here who have not been 
in positions to be working for companies that are going to have 
a retirement system set up.
    I don't know how many of you out here in the group are 
receiving retirement from their work other than what they had 
paid in. I know those of us that are old enough are certainly 
on the Social Security system, but how much other money is 
coming in to your pockets I don't know but I do know, you know, 
that those of us that lived here in North Dakota it isn't as 
great amount as if this meeting were being held out in the Twin 
Cities where most of you would have worked for another company 
and would be receiving a retirement, but here in our rural 
state we really do depend a lot on Social Security.
    And as I said, again thank you for bringing up and giving 
us this occasion to talk about it and discuss it because it is 
very important to us.
    Senator Conrad. Thank you very much, Venus. An excellent 
testimony. I think it kind of brings us all back to the reality 
of real life and what real people's economic and financial 
lives are like.
    Stuart Savelkoul, why don't you proceed.

STATEMENT OF STUART SAVELKOUL, HOUSING COORDINATOR AT DICKINSON 
                        STATE UNIVERSITY

    Mr. Savelkoul. My name is Stuart Savelkoul. I grew up in 
Beulah, North Dakota, and graduated from Beulah High School. In 
2004, last May, I graduated from Dickinson State University 
with a bachelor of arts degree in history and political 
science. Currently, I'm the Housing Coordinator at DSU and I'm 
in the process of applying for law school.
    Senator Conrad, it's an honor to be here. It's certainly an 
honor to be up here at this table with such distinguished 
witnesses. I'm not sure I fit in the puzzle but I'm not here 
because, you know, I was the student body president at DSU. I'm 
not here because you know I'm a college graduate looking to go 
to law school.
    I'm here solely because I'm 22 years old, and if you recall 
the charts that Senator Conrad showed earlier, those years, 
2042 and beyond, those are talking about me and my friends and, 
you know, siblings. That's us.
    And what's more, I'm a 22-year-old who's planning on 
retiring and staying in North Dakota for the rest of his life, 
which, as you know, I understand with the recent out-migration 
problem makes me one of six. But like many of my peers, I've 
heard so much about the funding challenges facing Social 
Security that I wonder whether I'll ever see a benefit check 
from the system that I'm going to pay into for my entire 
working career.
    I'm particularly worried that, in the future, Social 
Security will not be there for the people who need it most. 
Clearly, as Senator Conrad and Mr. Bixby pointed out, doing 
nothing is not an option. However, I also have serious concerns 
about the riskiness of some of the changes that have been 
proposed.
    In my testimony, I plan to outline why I think Social 
Security is facing a funding challenge, why I do not support 
privatization as a solution to this funding challenge, and what 
reforms I think Congress should consider because I have so much 
experience and I'm in a great position to advise Congress on 
what to do.
    Under the current system of Social Security, there are a 
number of obstacles facing future retirees.
    Unless changes are made, when people who are 25 years old 
now reach the age of 65, benefits for all retirees to be cut by 
27 percent and could continue to be reduced over every year 
thereafter. According to the Social Security Trustees' Report, 
the average life expectancy is going to be higher then, between 
85 and 89 years old, depending on socio-economic class levels.
    So our scheduled benefits could be reduced by 33 percent 
from today's scheduled levels. For example, the average North 
Dakotan who is drawing an $859 a month benefit check, it could 
mean a cut of 33 percent down to $567 a month, an almost $300 
reduction in benefits. Looking at the rising cost of living, 
could mean the difference between someone's life and death.
    If an individual is counting on Social Security benefits as 
a retirement plan, which a vast majority of people are as Venus 
so eloquently pointed out earlier, this will severally damage 
their cost of living and create a potential exodus into poverty 
status for a large percentage of the population.
    Social security is supposed to be one leg of a sort of 
three-legged stool that also includes a private pension plan 
and other savings for people my age. For many retirees, the 
drastic reduction in one of those legs of the stool could have 
a catastrophic effect on the other portions as well.
    For example, if the stock market takes a turn for the 
worse, than an individual could lose some or all of their 
invested moneys for retirement. An individual might be forced 
to drain their retirement savings much earlier than anticipated 
or perhaps a family emergency arises, possibly a serious 
medical issue, which would cause a person to drain their other 
resources with only Social Security to rely on for a period of 
time.
    If Social Security benefits are reduced drastically, many 
families could face financial ruin. Clearly, we have to do 
something to make sure the safety net of Social Security is 
there for future workers.
    You know, another problem with the current system is how 
Social Security is paid out. As of 2004, the Social Security 
fund was resting at approximately $1.7 trillion, accumulating 
over $150 billion annually. This essentially creates a pay as 
you go system, which worked without taxing the system 
extraneously.
    However, the worker to beneficiary ratio, as most of us are 
aware, has fallen from 16 to 1 in 1950, to 3 to 1 at the end of 
2004, and it's not going to take very long before that ratio 
drops from 2 to 1, leaving a financial vacuum.
    This dropping ratio, coupled with the impending baby boomer 
retirement scheduled to begin in 2011, is going to leave many 
working-class citizens paying higher taxes or taking cuts in 
their benefits.
    In the 2000 U.S. census, only Alaska, Georgia, and Utah had 
populations where less than 10 percent of the population was 65 
and older. This rate will only rise as life expectancies grow 
and family size increases.
    So now that we've established that the status quo is 
unacceptable, I would like to examine a couple of the more 
publicized solutions to fixing the Social Security problem. A 
recent proposal from President Bush calls for allowing workers 
to invest a portion of their Social Security dollars in the 
market; however, this proposal is not without risk.
    In a March 2005 report, the General Accounting Office 
observed that retirees have four main methods of financing 
their retirement years. These four categories were Social 
Security, pension funds, personal savings, and residual income 
from continued employment. Essentially they're banking on 
everybody working until they die.
    Part of the beauty of this system is that each of these 
four categories operates independently from the others. Market 
impacts might impact a person's pension fund, but don't affect 
our Social Security dollars or personal savings.
    In short, the Social Security system provides just that, 
security.
    Calls to privatize Social Security, or portions of Social 
Security, remove this vital protection. It removes the wall of 
safety and leaves a greater percentage of a person's retirement 
funds at the mercy of the stock market. A downturn in the 
nation's economy for whatever reason, terrorism, natural 
disaster, economic stagnation or some other unforeseen force, 
would impact a greater percentage of every retiree's retirement 
funds.
    We would like to believe that the economy will always grow 
and improve and that the stock market will only go up, but any 
financial planner would be the first to tell you that that's 
not always the case. Under privatization, the security that 
many have come to expect from Social Security is reduced, 
rather than increased, because a greater percentage of those 
funds are now subject to the fickle whims of a macroeconomic 
system that the vast majority in this nation, myself included, 
cannot fully understand.
    Now you're in for some, you know, youthful ignorance so 
keep up if you can.
    Perhaps the easiest, fairest, and most sensible solution to 
the Social Security problem is to do nothing more than lift the 
cap on wages that are taxed for Social Security purposes. You 
see that's what's crazy. A person who makes $90,000 a year and 
a person who makes $2 million per year both pay the same into 
Social Security. Any income you make after $90,000 isn't 
subject to the 12.4 percent payroll tax that funds Social 
Security benefits.
    Last month there was an article at The American Prospect 
Online and this fellow named Lawrence Mishel of the Economic 
Policy Institute argues that the elimination of the cap alone 
would virtually eliminate the projected Social Security 
shortfall over the next 75 years. What's more is that this plan 
is incredibly popular.
    A recent poll in The Washington Post said that 81 percent 
of the respondents support eliminating the cap. Well, that's 
probably because 93 percent of the Nation isn't making $90,000 
a year.
    Audience member. Right.
    Mr. Savelkoul. To put that in perspective, other possible 
solutions, including raising the retirement age, cutting 
benefits, or increasing the percentage that workers are 
actually paying into Social Security, couldn't even muster a 
majority of support amongst those surveyed.
    You know, it's been more than 20 years since major 
adjustments have been made to Social Security to compensate for 
wage and population growth, and since that time a 
disproportionate gap has evolved between the wealthiest wage 
earners and that of typical, working-class, Americans.
    As Mishel said, the top 5 percent of households earned 25.4 
percent of all the wages in 2000. That's up from 17.6 percent 
in 1980. That's impressive, but even more impressive is that 
the upward redistribution of household wages accrued almost 
entirely to the top 1 percent, whose share of wages roughly 
doubled, rising from 6.4 percent in 1980 to 12.6 percent in 
2000.
    The increased earnings for the typical worker have been 
relatively flat. It only seems fair to make this adjustment to 
correct the potential deficiencies of the Social Security 
system since middle-income families are bearing the brunt of 
all these cuts. As if that were not enough, one must remember 
that the wealthiest are not taxed at all for Social Security on 
the majority of their investment earnings.
    The wealthiest 1 percent receives most of their income from 
investments and yet they can still claim the maximum Social 
Security benefits when they retire.
    Now, as I said, this whole debate centers on those dates 
that Senator Conrad posted earlier and that everyone of these 
panelists have mentioned before me, but the difference between 
the previous witnesses and myself is that that's when I'm going 
to be entering into retirement and that's when everybody else 
my age is going to be entering into retirement.
    Now, there's those out there that say somebody is going to 
have to bite the bullet and why not make it us? Well, I'm not 
willing to give up that easily. You know, if simple changes and 
small changes can be made to fix the problem, then maybe we 
should take a look at examining those before asking any 
generation, mine, yours, or any of those after us, to bite the 
potential bullet. Thank you.
    Senator Conrad. Thank you very much. Good testimony by all 
of this panel. Let me, if I can, now turn to questions for our 
panelists.
    Bob, your organization recently ran a full-page ad in The 
New York Times saying that more debt is not the answer, and I 
saw that the ad was signed by Warren Rudman, former Republican 
Senator from New Hampshire, somebody who is very well regarded 
on both sides of the aisle; Senator Bob Kerrey, Democratic 
Senator from Nebraska; the former Secretary of the Treasury, 
Bob Rubin; members of your board.
    What is the thinking of your organization as to why more 
debt is not the answer?
    Mr. Bixby. A sure answer is that we have enough debt 
already and that we shouldn't pile it on, but we highlighted in 
that statement, which is attached to my testimony. three 
reasons and there are probably five, but because for time 
purposes we only put three in the statement but, first, it 
wouldn't add to national savings.
    If you're doing borrowing, the government is detracting 
from national savings, and we feel very strongly whatever you 
do on Social Security reform one of the benefits should be to 
improve national savings because we need it to help grow the 
economy.
    Now and second, it would make the already precarious fiscal 
situation even worse as your charts pointed out. We have 
deficits back as far as the eye can see, and so if the solution 
is just to borrow more, obviously the deficits would get that 
much bigger.
    And, third, we thought that that would send a very bad 
signal to the financial markets that are already concerned 
about the growing deficit and the amount of borrowing that we 
do from abroad, and that if we adopt a solution that says we're 
going to borrow substantially for, you know, several decades, 
that would send a very bad signal that the government had no 
present intention of getting its fiscal house in order, and 
those were really the three big reasons that we oppose that 
approach and went to the unusual extent of taking out a full-
page statement in The New York Times to say so.
    Senator Conrad. OK. Janis, on behalf of AARP, you testified 
that private accounts are not the answer, at least private 
accounts financed out of Social Security funds. Has AARP taken 
a position on private accounts outside of Social Security?
    Ms. Cheney. AARP, Senator, has already supported people 
taking a balanced look at retirement and including a number of 
activities in their retirement planning, Social Security being 
the base and the guaranteed portion of that, other elements 
being pensions and savings, earnings, continued earnings, from 
work, and health insurance.
    We see that as an ever more critical element of security in 
retirement and so absolutely the association is supportive of 
mechanisms or vehicles that would allow us to further enhance 
or support private savings options for individuals outside of 
the guarantee of Social Security.
    Senator Conrad. You know, clearly we have a problem. The 
problem we have is really a demographic problem. Just over 
three working people are now supporting each retiree. We know 
that is going to go down to two to one. So we have a problem. 
On top of that, we have a problem because in 2020 more money is 
going to be going out than is coming in through Social Security 
revenue. That presents a budget problem.
    I am using CBO numbers here because in Congress we 
typically use Congressional Budget Office figures. By 2052, 
they say Social Security can only meet 78 percent of its 
benefits. So young people are saying, ``Gee, I don't think 
Social Security is going to be there for me because there is 
this shortfall, there is this gap.''
    What would AARP say to those young people is the solution?
    Ms. Cheney. I think that this activity today is a 
significant part of the solution. There are, as I think we've 
all acknowledged and as you have mentioned as well, a variety 
of options that we can look at to strengthen and secure the 
Social Security program for many, many years into the future. 
What it will take is a balanced and reasonable national dialog 
about those options and some acknowledgement, also, that there 
might be a number of different groups that have to give a 
little in order to sustain the program in the long-term.
    Senator Conrad. I would like to ask the audience here, a 
show of hands, on some of these reform options that are going 
around about Social Security. After we have had a chance to ask 
the panel some more questions, I will open it up for 
suggestions, questions from the audience, statements from the 
audience.
    I would just like to see how many here think Social 
Security is in crisis? How many would describe it that way?
    [Some audience members raised their hands.]
    Senator Conrad. OK. How many would say, no, it's not in 
crisis?
    [Some audience members raised their hands.]
    Senator Conrad. OK. How many would say that there is a 
long-term funding challenge in Social Security?
    [Some audience members raised their hands.]
    Senator Conrad. OK. How many here think that borrowing to 
address the President's proposal of establishing private 
accounts is something that you would support? How many would 
say borrowing money to fund those accounts is something you 
could support?
    [No audience members raised their hands.]
    Senator Conrad. How many would oppose borrowing to do it?
    [Some audience members raised their hands.]
    Senator Conrad. You know, there are a whole series of 
options that the Social Security actuaries have come up with. 
Let me just run through a couple of them and get your 
reactions.
    One idea is reducing the COLA, the cost of living 
adjustment, that's applied every year to Social Security 
benefits. So this year I think it is being adjusted by what? 
Three percent?
    Ms. Kuehl. A little under.
    Senator Conrad. A little bit under 3 percent. If that COLA 
adjustment every year, instead of being 3 percent, was two and 
a half percent, that would solve, according to the Social 
Security actuaries, 40 percent of the problem, 40 percent of 
the shortfall. How many would support a proposal to reduce the 
COLA by one-half of 1 percent a year?
    [Some audience members raised their hands.]
    Senator Conrad. OK. How many would oppose that?
    [Some audience members raised their hands.]
    Senator Conrad. OK. Reducing the COLA by 1 percent a year, 
would solve 80 percent of the problem. How many would support 
reducing the COLA by 1 percent a year now?
    [Some audience members raised their hands.]
    Senator Conrad. How many would oppose that?
    [Some audience members raised their hands.]
    Senator Conrad. OK. Reducing benefits across the board by 3 
percent for those newly eligible for benefits in 2005 and later 
would solve about 20 percent of the problem. Who would favor 
reducing benefits? How many would support reducing benefits by 
3 percent across the board for newly eligible?
    [Some audience members raised their hands.]
    Senator Conrad. OK. How many would oppose that?
    [Some audience members raised their hands.]
    Senator Conrad. Increasing the retirement age, eliminating 
the hiatus in the normal retirement age. As you know, the 
retirement age is being increased to 67 but there's a period in 
which that's not done. Eliminating that and then indexing the 
normal retirement age by 1 month for every 2 years would solve 
about 30 percent of the problem. How many would favor extending 
the retirement age?
    [Some audience members raised their hands.]
    Senator Conrad. OK. Now, how many would oppose that.
    [Some audience members raised their hands.]
    Senator Conrad. Raising payroll taxes for employees and 
employers by a combined 2 percent. Let us say 1 percent for 
each. Right now each person, the employer and the employee, 
each pay 6.2 percent. If each of them paid 7.2 percent, that 
would solve 100 percent of the problem. How many would favor 
that?
    [Some audience members raised their hands.]
    Senator Conrad. How many would oppose that?
    [Some audience members raised their hands.]
    Senator Conrad. OK. Making all earnings subject to the 
payroll tax. As you know, currently there's a $90,000 cap. So 
you only pay Social Security on the first $90,000 of earnings. 
If you eliminated the cap, that would solve about 120 percent 
of the problem. In fact, you would not only solve the problem, 
you would raise more money. How many would support removing the 
cap?
    [Some audience members raised their hands.]
    Senator Conrad. How many would be opposed to that?
    [Some audience members raised their hands.]
    Senator Conrad. Of course, that would go all the way up, 
right?
    Audience member. Sure.
    Senator Conrad. If you removed the cap, all wages would be 
taxed.
    Audience member. No cap.
    Senator Conrad. Yes, that's a good way to say it, no cap. 
If instead you raised the cap to $200,000, so you would still 
have a cap but it would be at $200,000, that would solve some 
of the problem. How many would favor that?
    [Some audience members raised their hands.]
    Senator Conrad. OK. How many would oppose that?
    [Some audience members raised their hands.]
    Senator Conrad. OK. Investing 40 percent of the trust funds 
themselves in equities would solve about half of the problem. 
How many would support investing 40 percent of the Social 
Security Trust Fund in equities, that is stocks, rather than in 
government bonds? How many would support that?
    [Some audience members raised their hands.]
    Senator Conrad. OK. How many like the idea of the 
President's private accounts?
    [Some audience members raised their hands.]
    Senator Conrad. And how many would oppose that?
    [Some audience members raised their hands.]
    Senator Conrad. How many like the idea of the President's 
private accounts if they are funded by borrowing? How many 
would still like it if it's funded by borrowing?
    [No hands were raised.]
    Senator Conrad. OK. Again let me say this to you. I've 
always liked the idea of additional incentives for savings and 
investment. Why? Because we need investment in this country in 
order to grow, don't we? You have to invest in order to grow. 
In order to invest, you have to save because you need money to 
invest, so you have to save. I like the idea of more incentives 
for savings and investments for everybody.
    I asked my staff go out and find out for me how much money 
we spend a year on incentives for savings. You know what they 
found out? We spend about $125 billion a year on incentives for 
savings. I said OK. Now, go find out for me how much money are 
we actually saving a year. How much money are individuals 
saving?
    You know what they found out? About $80 billion. We are 
spending more money on tax incentives for saving than we're 
actually saving. How can that be? Well, the reason it happens 
is because people shift their investments and savings from 
those that are not tax favored to those that are. So we're not, 
unfortunately, getting an increase in savings, but we're 
spending a lot of money to shift around where people are saving 
and investing their money.
    So part of this puzzle, I have concluded, is to find a more 
efficient way of encouraging people to save and invest. I like 
the idea very much of encouraging people to save and invest to 
prepare for the future and that will also strengthen our 
economy because we need investment to grow. We need savings to 
invest. The more we save and invest, especially if it is 
positive investment, the better we will do.
    And I don't know who mentioned it. I think Bob mentioned it 
perhaps. Correct me if I am wrong. The idea of incentives for 
individual accounts outside of Social Security, how many would 
like that idea?
    [Some audience members raised their hands.]
    Senator Conrad. And how many would oppose that idea?
    [No hands were raised.]
    Senator Conrad. Well, that's one of the first thing that we 
got unanimous support for.
    OK. I want to go back, if I could, to the panel and then 
I'm going to open it up for people in the audience, and if you 
want to make a statement feel free to come up to the head of 
the room so that our stenographer can hear and we would ask you 
to identify yourselves and then make your statement or ask your 
question. Before that, I'm going to have a show of hands on a 
couple of other things that I've thought of too.
    I wanted to go back, Venus, to your testimony. You are in 
the same spot as many people are in North Dakota, especially 
because for the years that you were working very few companies 
had separate retirement plans, did they?
    Ms. Blake. Right.
    Senator Conrad. I mean really only the biggest companies 
did. Maybe you were fortunate enough to work for the Federal 
Government that did or maybe you were fortunate to work for a 
bank or as a teacher.
    Ms. Blake. A railroad.
    Senator Conrad. A railroad. The railroad had a good 
retirement plan. Some of the insurance companies in North 
Dakota had good retirement systems. But an awful lot of people 
worked for small businesses and those businesses typically did 
not have a retirement plan separate and apart from Social 
Security, did they?
    Ms. Blake. That's correct.
    Senator Conrad. Let me ask you this. You know, Social 
Security certainly has challenges, but there are some strengths 
too. One of the big strengths is it is a defined benefit. That 
is, you're assured of getting the amount of money promised 
under Social Security. It doesn't vary with how well you 
invest.
    I don't know if you've seen today's USA Today. They have a 
big story about how many Americans are not very good at 
investing money. One woman who has a background in finance said 
she has not been a successful investor. Certainly many of us 
have lost money in the last several years.
    I know I certainly did and I have a master's in business 
administration, I am a member of the U.S. Senate, and I am on 
the finance committee in the U.S. Senate. So if anybody has a 
flood of information upon which to make good investment 
decisions, I should certainly be one, and I think with an awful 
lot of Americans I lost a lot of money.
    Would you want to trade a defined benefit, that is a 
certainty of a check and a certain amount monthly from Social 
Security, for the opportunity to potentially make more by 
investing that money separately and on your own?
    Ms. Blake. I personally would, but as I said there are 
other people that are much more interested in other--they have 
other interests, you know.
    Senator Conrad. So----
    Ms. Blake. So I think maybe a part of the population would 
and a part would do better than others would do investing it.
    Senator Conrad. Yes.
    Ms. Blake. And I guess the thing of it is don't sell when 
it's down.
    Senator Conrad. That's very important, don't sell when it 
is down. Well, you are exactly right. I think we all know some 
people would do better, some people would not do as well, and 
it raises the question what is the purpose of Social Security? 
Is Social Security to be a place where we invest in stocks on 
the hope of greater return and, of course, when you have the 
hope of greater return you also have greater risk. Is that the 
role of Social Security or is the role of Social Security to 
provide kind of that beginning guaranteed amount to try to keep 
people from falling into poverty?
    Ms. Blake. I think that's it right there.
    Senator Conrad. You think that's what it should be?
    Ms. Blake. Yes, I really do. Uh-huh.
    Senator Conrad. Let me just see a show of hands on that if 
I could from the crowd. How many would think the right role of 
Social Security is to be that part of your retirement that you 
can be assured you're going to get and is not at risk and it is 
not an investment risk? How many think that is the role of 
Social Security?
    [Some audience members raised their hands.]
    Senator Conrad. How many think the role of Social Security 
should be to provide another investment vehicle with greater 
risk but the hope the possibility of greater return?
    [Nobody raised their hands.]
    Senator Conrad. OK. Sarah, and I have not introduced Sarah 
Kuehl. Excuse me for that. Sarah is my Social Security expert, 
and she was once on the staff of Senator Kerrey, and Senator 
Kerrey was on the finance committee and very active on these 
issues. Sarah is somebody very, very respected by the way by 
both sides I think. My Republican colleagues tell me all the 
time she is extremely smart and very knowledgeable and I know 
that is the case as well.
    I would like to put up the chart about how the President's 
individual accounts work, if we could put that up. I would just 
like to ask the witnesses if they knew from the descriptions 
they have heard or the descriptions they have read about did 
each of you know that you owed back money to the Social 
Security Trust Fund under the President's plan? And I start 
with you Janis.
    Ms. Cheney. I was aware that there was some sort of offset. 
I had not heard it explained as very clearly and specifically 
as you explained it. I appreciate that very much.
    Senator Conrad. Bob, were you aware of this provision?
    Mr. Bixby. I was aware of it because I follow this stuff 
obsessively, but I don't think it's widely understood how this 
works and what little personal control there would be over the 
personal accounts. So I think you have to dig very deeply to 
get that sort of understanding and it's sort of at odds with 
how the accounts have been portrayed generally.
    Senator Conrad. I'll tell you I've spent many hours with 
the President's representatives and, you know, the Secretary of 
Treasury, somebody I admire. I have had a long respect for his 
career. I have talked to Mr. Hubbard, who is the President's 
chief advisor on this matter, and I have spent, both on the 
plane coming out here and in my office, a number of hours 
talking to him, and I have gone over with him in great detail 
how this works and other representatives of the President as 
well, and I must say it took me a long time to understand how 
this really works.
    Venus, had you had any understanding that you owe some of 
this money back under the President's plan?
    Ms. Blake. Not really. I guess I had--from what I read, a 
lot of times I would get to the end of an article and it 
appeared that the writer was a little confused, but as I said I 
mean after this presentation, I have certainly reversed myself 
that I do not approve of the account so by being completely 
informed, it has certainly changed my mind in my thinking.
    Senator Conrad. OK. Stuart, were you aware that under this 
you would have an opportunity just in this example if you put 
aside $1,000 a year for 40 years, you earn six and a half 
percent each year, you would have 92,000 in your account, but 
it is not yours free and clear in the sense that they assume 
that money was loaned to you by the Social Security Trust Fund 
and they expect to be paid back with interest and you do not 
pay it back out of your private account.
    That is the little wrinkle here. You do not pay it back out 
of your private account. You pay it back by taking a further 
reduction in your traditional Social Security benefit. Were you 
aware that that works that way?
    Mr. Savelkoul. Not until, you know, a few days ago and, you 
know, believe it or not I don't spend, you know, nearly as much 
time on Social Security as some I guess but when you start 
doing your research you find those things out. I think honestly 
the way the President is attempting to sell his plan it comes 
off as though you're just transferring.
    Senator Conrad. Yes.
    Mr. Savelkoul. That instead of paying into the Social 
Security Fund, you're paying into your separate account and 
that I mean that's the way you sell it, right?
    Senator Conrad. Yes. That would be pretty appealing to 
young people, especially I would think if they didn't know that 
that money was in effect loaned to them.
    Mr. Savelkoul. Because especially when you consider the 
fact that so many people my age are so sure that they are not 
going to see Social Security that the idea of being able to pay 
into an account with their name on it----
    Senator Conrad. Yes.
    Mr. Savelkoul [continuing]. Is exactly like you said, very 
appealing. The reality of the situation is, no, you are still 
paying into the same fund and that you're essentially going to 
be loaned money to you. And if that's the case, you know, why 
does the government need to be involved at all? Why can't you 
take out a loan, invest it in the stock market and try to get 
it back at a higher rate than, you know, whatever your best 
interest rate is?
    Senator Conrad. There is one other thing I wanted to ask 
you, Stuart. How did you do your research for this?
    Mr. Savelkoul. That's funny. I got called on Friday and it 
was we need somebody from North Dakota to come do this and I 
said, ``All right. I'm there.'' So then I thought--so then I 
called up my friends and one of them is sitting out there--one 
of my friends sleeps up against the left wall on the political 
spectrum. I mean he's not comfy if he has to leave it for 2 
seconds.
    Another one of my friends is super Libertarian. He's 
conservative all the way and then I have another guy whose 
views are a little more centralized and it was essentially 
Stuart school. Teach me. Well, where do I fall and so they----
    Senator Conrad. And where did they do their research? I'm 
just kind of intrigued. Did they do it on the Internet?
    Mr. Savelkoul. Oh, yes, the vast majority I mean.
    Senator Conrad. I was just interested because you had a lot 
of information.
    Mr. Savelkoul. The same statistics.
    Senator Conrad. A lot of information and it has been a long 
time since I was in school. I wonder if you do it on the 
Internet?
    Mr. Savelkoul. Oh, yes, and I mean a lot of the charts you 
used and a lot of the sources you cite are all right there on 
the Internet so it takes all of 5 minutes to get the 
information.
    Senator Conrad. Boy, has the world changed, hasn't it?
    Audience member. Yes.
    Mr. Savelkoul. What's hard is processing the information. 
You know, what's hard is taking a graph like that and 
understanding what it means.
    Senator Conrad. Right.
    Mr. Savelkoul. That's where the tricky part comes in.
    Senator Conrad. OK. Are there other----
    Mr. Bixby. I just want to make one observation about that 
and building off of what Stuart said what it means. What that 
chart is showing in a different way is why the particular 
proposal doesn't address the problem that Social Security is 
facing, because what it does is it takes some money in and 
takes some money out. It rearranges the financing, but it's a 
wash. I mean you're still leaving the same hole that we've got 
now.
    The offset prevents the diversion of accounts from digging 
a bigger hole for the long-term, but it doesn't address the 
main problems that we confront with Social Security.
    Senator Conrad. I must say it took me a long time to 
understand how this thing works. It is so totally different. 
Well, frankly, in listening to the President, it is so totally 
different than the way he describes it. He never gets to this 
point, ever. He never describes this offset. He never describes 
that this money has been loaned to you and you got to pay it 
back with interest and I was here in Fargo with him.
    I have listened to his State of the Union. I have listened 
to many of his speeches around the country. Not a single time 
have I heard him describe how this all works, and it was only 
in talking to his people that I came to understand how it 
works, and again I go back to the notion there are things that 
the President said that I agree with.
    I think we do have a long-term funding challenge. I don't 
want to raise payroll taxes. He said he doesn't want to raise 
payroll taxes. I think payroll taxes are already too high and I 
think they are discouraging American companies from hiring 
American workers. I think we have actually built the payroll 
taxes up so high in this country that they are discouraging the 
hiring of American workers and I not only think that--I know 
it.
    And anybody that's gone to any vacation place in the 
country, any place that has a lot of tourism, you will find an 
awful lot of foreign young people working, and I started asking 
the question why are there all these foreign young people 
working? Why aren't they North Dakotans? Why aren't they young 
Americans working at these tourist places, and you know what I 
found out? They don't have to take out Social Security on these 
foreign young workers and so there's a big financial incentive 
to hire foreign young people to work in these service jobs.
    You have to wonder when you add up all the payroll taxes we 
have in this country. Social Security amounts 12.4 percent 
employer and employee share. Then you stack Medicare on top of 
it. You are up--Bob, what----
    Mr. Bixby. 5.3.
    Senator Conrad. 5.3.
    Mr. Bixby. 15.3.
    Senator Conrad. 15.3 for all of it. I mean that is a pretty 
big disincentive to hire American workers if you got to be 
paying payroll taxes on them. So I agree with the President. I 
don't think that adding payroll taxes is the answers.
    I have always kind of liked the idea of these individual 
accounts, first off, if you don't borrow the money to finance 
it. I think that is a terrible idea, borrowing the money to 
finance them, but I do like the idea of establishing more 
incentives for savings and investment.
    My own sense is it is probably best done outside of Social 
Security and we have got to go back to the drawing boards. The 
fact that we are spending more on incentives than we are 
getting on savings tells us that the design of our various 
retirement plans is not efficient, right? Isn't that what you 
would conclude? It is just not very efficient if we are 
spending more money than we are getting in savings.
    So we have all these different plans. We got 401(k)'s. We 
have Roth IRAs. We have regular IRAs. Frankly, I think we have 
managed to confuse people. I think we have managed to confuse 
people and simplicity is very important in getting people 
attracted to the various opportunities.
    I am going to open it up to people in the audience. If you 
would step up and identify yourself. That is very important 
because this is a formal Senate hearing. I know we are in an 
NDSU hall, but make believe for a moment you are in the U.S. 
Senate. If you would give your name and where you live so the 
stenographer can have that and then tell us what you think.
    Mr. Aabye. My name is Carl Aabye. I live in Fargo. I've 
lived in Fargo most of my life. I barely made it through high 
school so maybe you fellows can help me out with this or I 
guess your lady right here can maybe.
    Senator Conrad. Yes. She is way smarter than I am.
    Mr. Aabye. Maybe you can comment on this. As our national 
debt in a few years will become, say, ten trillion, can you see 
any possibility of the debt being monetized? If the money 
becomes only half as much, then the Government only owes five 
trillion. You know what I'm trying to say?
    Senator Conrad. I sure do.
    Mr. Aabye. Do you see that coming down the road? I think it 
is already happening right now I believe.
    Senator Conrad. Did you say you didn't graduate from high 
school?
    Mr. Aabye. Barely.
    Senator Conrad. You got a first-class college education 
somewhere because that is the great risk, isn't it? That is the 
great risk, that we run up this massive debt, and that one 
solution to it is to make the currency much less valuable and 
it is sort of already happening, isn't it.
    The dollar has gone down 33 percent against the euro in the 
last two and a half years so that is how governments have done 
it in the past, isn't it? They ran up a big debt and then they 
just inflate their way out of it by, as you so aptly described, 
monetizing the debt, making their currency worth less.
    So I am amazed when people say deficits don't matter. Of 
course deficits matter. You know, you think about Germany after 
World War I. What happened there? They had massive debts, 
didn't they, after World War I, and they did exactly what the 
gentleman describes and the currency became virtually 
worthless.
    Yes, sir.
    Mr. Fox. I have a related question.
    Senator Conrad. If you would----
    Mr. Fox. Greg Fox, Fargo, North Dakota. I have a related 
question. I was watching C-SPAN today when I think he was 
testifying before Congress when Chairman Greenspan was 
describing how having surpluses or not having a deficit could 
be a problem. He said the economy needs that to operate, and 
very soon after that you started hearing this deficits don't 
matter stuff, and I mean now we're seeing the problems.
    I've heard your great talk four times, Senator, but I know 
in Minot I heard you months and months ago and you were showing 
all these red numbers and people still had that deficits don't 
matter and they had nothing to relate it to.
    My question is this. No. 1, what did Chairman Greenspan 
mean by that and, No. 2, if we have to run deficits, in other 
words to maintain the economy, banking, whatever, can somebody 
tell us what that number is as a percentages of GNP or is there 
any--you see, we just throw these big numbers. Some of these 
people in the audience are still thinking deficits don't 
matter. Chairman Greenspan said so. I don't know.
    Senator Conrad. Yes. No, let us go back. Let us go back to 
the point. This is in 2001. Chairman Greenspan said he was 
concerned about the surpluses because he was concerned that we 
would pay down too much debt; that we would eliminate all the 
debt outstanding and that that would have some negative 
consequences. He came and met with me before he made that 
public statement, and I begged him not to make it.
    Mr. Fox. Disastrous.
    Senator Conrad. I said, Mr. Chairman, if you say that, you 
will unleash the deficit dogs in this town and that's all 
captured in the book about the former Secretary of the 
Treasury, Paul O'Neill, this conversation that I had with 
Chairman Greenspan.
    I said for goodness' sake let us wait and see and let us 
not bet on a 10-year projection. Let us see if we actually are 
paying off too much debt. Let us actually make certain that 
there is a risk and there is a danger of paying off too much 
debt.
    Now, he has changed quite dramatically. He went to Europe 
and gave a speech in which he said we are taking on too much 
debt as a country and that is unsustainable.
    The head of the General Accounting Office, David Walker, 
has just released a report and he says it is absolutely 
unsustainable. In fact, when Chairman Greenspan gave that 
speech, Robert Novak wrote a column and said that speech of 
Greenspan could have been written by Senator Conrad because 
Senator Conrad is obsessed with debt.
    I am not obsessed. I am Scandinavian. I am not obsessed 
with much of anything, but I am concerned about debt and I just 
say this to you. Perhaps one reason I have always been 
concerned about too much debt and what do I mean by too much 
debt? I mean when the debt is growing much faster than the size 
of the economy. That means in relationship to the economy your 
debt is growing, right? Because, obviously, we can handle a 
certain level of deficit. We can handle a certain level of debt 
just like a family can, just like a company can. The danger is 
when your level of debt is growing much more rapidly than the 
size of your economy and that is what is happening to us now.
    And the reason it matters is because you got to get the 
money from someplace. Where are we getting it from? 
Increasingly we are getting it from foreign investments and 
foreign central banks. The debt, the foreign debt, holdings of 
the U.S. Treasury has gone up almost 100 percent in the first 3 
years of this administration. Now, that is an unsustainable 
course clearly.
    Foreign central banks are warning us it is unsustainable. 
It is not just them warning us. We have got one of the foremost 
investors in America that's warning us it is unsustainable, 
Warren Buffett. Hard to find a guy that's been more successful. 
What is he saying? He is saying, America, you are taking on too 
much debt, too much trade deficit and, in fact, what is he 
doing? He is betting against the dollar.
    He just issued his report on March 5th, you know, his very 
famous annual report, and he says in there, America, wake up. 
Do not keep doing this. You are going to have very adverse 
consequences if you keep spending more than you can afford as a 
country.
    So that's my own strong belief.
    Mr. Fox. Can you give me a number? I guess I'm thinking in 
my mind is there a number? I'm looking at Bob over there too. 
Is there a number of percent of GNP so we know how much is too 
much? I've never heard.
    Senator Conrad. You know, I have asked this question 
repeatedly of the top economists in the country and here is 
what they say to me. Senator, nobody can tell you and here is 
why they cannot tell you. We know that our debt as a share of 
our gross domestic product was over 120 percent after World War 
II. We are close to that now. Our debt as a share of GDP went 
down into the 25s. You know, we were working down our debt. Now 
it has gone back up the other way. The difference is our 
position in the world has also changed.
    After World War II, we were dominant, weren't we? There was 
nothing close to us and at that time we were paying down debt. 
Paying down debt. What they say to me is nobody can tell you. 
It is a calculus of confidence because as you are running up 
this debt, as you are borrowing more and more money from your 
own people through issuing treasury bonds and you are borrowing 
from foreign investors and foreign central banks, the danger is 
they decide you have borrowed too much and they cut back what 
they are loaning to you and then the only way to float this 
boat is to raise your interest rates to attract more money. Of 
course, what does that do?
    That slows down the economy because an interest rate 
increase affects all debt, all government debt, all Federal, 
all state, all local, all corporate debt, all individual debt, 
and that is a much bigger anchor on the economy than anything 
else.
    Yes, sir.
    Mr. Jones. My name is Jeff Jones and I'm from the wrong 
side of the tracks in Minnesota.
    Senator Conrad. We even allow Minnesotans in here. Let me 
just interrupt for one moment if I could.
    Mr. Jones. Sure.
    Senator Conrad. Mr. Bixby has a plane at 1:20.
    Mr. Jones. Oh, sure.
    Senator Conrad. And for him to make that plane, we need to 
excuse him and we will do that but our thanks for coming, also 
our thanks for being a persistent----
    Mr. Bixby. Pain in the neck?
    Senator Conrad. No. I think you are more like the canary in 
the mine that is warning the rest of us when we are going off 
beam, and you take a lot of guff and I know you do from people 
in my party, from people in the other party. I have always felt 
that you do a great public service and I want to thank you for 
coming.
    Mr. Bixby. Thank you, Senator. Thank you for inviting me.
    Mr. Jones. Anyhow, you're talking about privatizing--or 
private retirement. I have a lot of friends that live up on the 
Iron Range and they've bankrupted their pension. Thirty-five 
years they worked for the mines, 40 years for the mines, and 
they were able to bankrupt out of those pension plans so Social 
Security is the only thing they have and I'm not totally 
familiar with it, but there's a trust account that covers 
bankrupt pension plans.
    Senator Conrad. Yes. There's a Pension Benefit Guarantee 
Corporation.
    Mr. Jones. And as I understood, that was in the black and 
it's been raided so much now it's way in the red----
    Senator Conrad. It's true.
    Mr. Jones [continuing]. Because they had to take over that.
    Senator Conrad. They have had to take over these pension 
plans that have been bankrupted, right?
    Mr. Jones. Right.
    Senator Conrad. And so they get turned over to the Pension 
Benefit Guarantee Corporation.
    Mr. Jones. All I want to finally say was that in my 
opinion, too, Social Security was, you know, seen as a social 
safety net and it wasn't perceived as an investment scheme or 
an insurance policy. It hasn't been--and not to be factious but 
instead of Mr. Roosevelt conceiving it, it was Charles Schwab. 
It was created to cover people like retired and their other 
retirement failed or had no retirement or for no fault of their 
own were injured in an accident or developed multiple sclerosis 
or some unforeseen problem was that safety net was there, and 
it's very important we keep it and I thought all of your people 
on there did an excellent job of testifying why we need it.
    Senator Conrad. Thank you very much. Let me just say I do 
remember very well having a man come to me who went to work for 
Enron right before it failed, and just weeks before Enron 
failed he had transferred all of his retirement funds to 
Enron's retirement funds, and he had a half million dollars 
built up over a lifetime. He was in his late 50's, and when 
Enron went down, all of that money that he had just put in was 
lost to him.
    Now, you know, here is a man as I recall was 58 years old. 
I might not be quite right on that, but I think, as I recall, 
he was 58 years old. I will tell you that man was so distraught 
about, you know, seeing all his lifetime and his family wiped 
out.
    Now, this has happened closer to home, hasn't it?
    Mr. Jones. Oh, yes.
    Senator Conrad. We have got people that worked in the mines 
and their companies went down, some of them. When they went 
down, they lost their pensions. Some of them went to PBGC. 
PBGC, as you have described, is under very severe pressure 
because of what is happening. We have Enron going down. We have 
mining companies down. We have airlines going down and so more 
and more pressure gets put on the Pension Benefit Guarantee 
Corporation to pick up those failed plans.
    Mr. Jones. The Chinese came in and bought the mines too.
    Senator Conrad. And we are increasingly dependent on 
borrowing from Japan and China. Does that strengthen then 
America? I don't think so.
    We have run out of time. We had indicated to the University 
that we would end this hearing at 12:30 and we will be good to 
our word.
    I want to thank the witnesses. Thank you for your excellent 
testimony and thank all of you for participating. The hearing 
is adjourned.
    [Whereupon, at 12:33 p.m., the committee was adjourned.]

                                 
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