[Senate Hearing 109-638]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 109-638
 
   MANAGING RETIREMENT ASSETS: ENSURING SENIORS DON'T OUTLIVE THEIR 
                                SAVINGS

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

                                HEARING

                               before the

                       SPECIAL COMMITTEE ON AGING
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             WASHINGTON, DC

                               __________

                             JUNE 21, 2006

                               __________

                           Serial No. 109-25

         Printed for the use of the Special Committee on Aging


                    U.S. GOVERNMENT PRINTING OFFICE
30-042                      WASHINGTON : 2006
_____________________________________________________________________________
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                       SPECIAL COMMITTEE ON AGING

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

                                  (ii)

  
?

                            C O N T E N T S

                              ----------                              
                                                                   Page
Opening Statement of Senator Gordon Smith........................     1
Opening Statement of Senator Herb Kohl...........................     2
Opening Statement of Senator Ken Salazar.........................     3
Opening Statement of Senator Robert Martinez.....................     3

                                Panel I

Ben Stein, speaker and writer on Finance Matters, actor, and 
  honorary spokesperson for the National Retirement Planning 
  Coalition, Los Angeles, CA.....................................     5
C. Robert Henrikson, chairman of the Board of Directors, 
  president and chief executive officer, MetLife, Inc., Long 
  Island City, NY................................................    10
Stephen P. Utkus, director, Vanguard Center for Retirement 
  Research, Valley Forge, PA.....................................    41
LeRoy Gilbertson, member, National Policy Council, American 
  Association of Retired Persons, Dallas, OR.....................    62

                                APPENDIX

Prepared Statement of Senator Rick Santorum......................    95
Statement submitted by Walter Welsh, chairman of Americans for 
  Secure Retirement..............................................    97
Statement from Pamela Schutz, president and CEO, Retirement 
  Income and Investments, Genworth Financial.....................   100
Statement submitted by American Council of Life Insurers (ACLI)..   122

                                 (iii)

  


   MANAGING RETIREMENT ASSETS: ENSURING SENIORS DON'T OUTLIVE THEIR 
                                SAVINGS

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



                        WEDNESDAY, JUNE 21, 2006

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 10:07 a.m., in 
room SD-106, Dirksen Senate Office Building, Hon. Gordon H. 
Smith (chairman of the committee) presiding.
    Present: Senators Smith, Martinez, Kohl, Carper, and 
Salazar.

     OPENING STATEMENT OF SENATOR GORDON H. SMITH, CHAIRMAN

    The Chairman. Good morning, ladies and gentlemen. We thank 
you all for coming to this important hearing. We thank our 
witnesses who have joined us. I will introduce them after our 
brief opening statements.
    A lot of attention has been focused lately on the need for 
Americans to increase their retirement savings. This attention 
is very important and extremely warranted in light of our 
Nation's low savings rate. However, today's hearing will 
address the equally important next step of managing assets and 
preserving your savings throughout retirement.
    With a huge wave of baby-boomers about to enter retirement, 
it is more important than ever that we educate Americans about 
the financial risks in retirement. Individuals face a variety 
of challenges in managing their assets during retirement. 
Americans are living longer than ever. Therefore, we need to 
stretch our retirement dollars over a longer period of time 
than in the past.
    Retirees also should be concerned that inflation could 
erode their purchasing power, and their investments may yield 
less returns than expected or decline in value. Large, 
unplanned expenses such as those to cover health care or long-
term care also may occur at some point during retirement.
    Furthermore, unless the tide turns, more and more 
individuals will enter retirement with an inadequate nest egg. 
The personal savings rate in the U.S. has declined dramatically 
over the last two decades, reaching minus 1.6 percent in April. 
This is the 11th consecutive month that the savings rate has 
been negative. Clearly, it will be very difficult to be 
financially secure if you begin retirement with insufficient 
savings.
    I am currently developing legislation with Senators Conrad 
and Kerry that addresses many of these issues. Although the 
bill will help all Americans, its focus is on the retirement 
security specifically of women. This is because women face 
greater financial risks than men in retirement. Women tend to 
live longer and women receive significantly less income during 
retirement than men.
    My bill will increase American's retirement savings. That 
is its point and its purpose. It also will provide tax 
incentives for lifetime payments to help seniors protect 
against the risk of exhausting their retirement income. Since 
one of the keys to effective management of retirement assets is 
knowledge, this bill also will improve America's financial 
literacy.
    I would like to thank our witnesses for joining us this 
morning. I am eagerly anticipating the testimony that each of 
you will share and look forward to a productive dialog on how 
to best manage assets during retirement.
    With that, I turn to my ranking member, my friend and 
colleague, Senator Kohl of Wisconsin, for his opening remarks.

             OPENING STATEMENT OF SENATOR HERB KOHL

    Senator Kohl. We thank you, Mr. Chairman, and good morning 
to all who are here today. We thank our witnesses for appearing 
today to discuss how we can ensure that seniors do not outlive 
their savings.
    Of course, managing savings after retirement is an issue 
only if seniors have been able to save for retirement. Most 
workers don't save enough to have the sorts of choices that we 
will discuss today. So we must also focus on helping workers 
save for retirement, as well as helping them manage the savings 
that they have managed to put together.
    For retirees with nest eggs, we must encourage them to 
strike a balance between annuities, which protect them from 
running out of money in retirement, and assets that preserve 
flexibility for unexpected expenses like costly long-term care. 
We need also to guard against scam artists who con retirees 
into buying unsuitable annuities.
    The largest source of annuities in the United States, of 
course, is Social Security, which pays monthly benefits for 
life. Unlike most defined benefit plans and private annuities, 
Social Security payments also automatically increase with 
inflation, which protects the purchasing power of retirees. So 
as we discuss private sector annuities today, we must remember 
that the most powerful action we can take to help most seniors 
post-retirement is to make sure that Social Security remains 
healthy and whole.
    For those who are able to supplement Social Security with a 
private sector annuity, employer plans offer a product at a 
lower cost than is available to an individual. Unfortunately, 
only 30 percent of defined contribution plans offer an annuity 
as a pay-out option. To boost this number, I am examining the 
merits of requiring defined contribution plans to offer an 
annuity as a pay-out option, just like defined benefit plans 
are required to do. Another possible approach is to offer 
incentives for plans to voluntarily offer an annuity.
    We need to help people understand how annuities work and 
what their benefits are. One way to educate the public on 
annuities is through hearings just like this one, and so I look 
forward to the testimony of our witnesses. We appreciate your 
attendance here today.
    Again, I thank you, Mr. Chairman, for holding this hearing.
    The Chairman. Thank you, Senator Kohl.
    We will next turn to Senator Salazar, of Colorado, and then 
Senator Martinez, of Florida.

            OPENING STATEMENT OF SENATOR KEN SALAZAR

    Senator Salazar. Thank you very much, Chairman Smith and 
Ranking Member Kohl, for assembling this important panel of 
experts to deal with this important issue. I hope to learn a 
lot from all of you today because this is an important issue 
for all of our country. It is important as an issue for me in 
Colorado, with nearly half a million individuals who are now 
over the age of 65.
    As our country continues to grapple with the graying, and 
may I say balding of America--that is for me and Herb, Senator 
Kohl--I believe must continually examine this issue, taking 
proactive and thoughtful steps to encourage American workers to 
plan for their retirement. Education is a critical component in 
that planning, and unfortunately we don't have enough education 
in this country on financial planning for retirement.
    Research has shown that when individuals are provided 
financial education, they are better able to make smart choices 
on how much money to save and how to wisely invest their money. 
With advances in medicine, people are living longer than they 
ever have before. So good and wise planning is even more 
important.
    I am pleased that we will be hearing from companies like 
MetLife and Vanguard who are in the business of asset 
management and can share their ideas on how to help seniors 
plan for their future. In addition, I am interested in hearing 
from the AARP, who I worked with over the years on many issues 
impacting Colorado seniors. Whether it is choosing a Medicare 
Part B plan or deciding whether to take a lump-sum payment or 
to establish an annuity, seniors in my State most often turn to 
AARP for guidance. Finally, I am very interested to hear from 
Ben Stein, who uses his intelligence and his wit to call 
attention to many issues, including financial management and 
retirement security.
    Again, Mr. Chairman and Ranking Member, I thank you for 
holding this important hearing.
    The Chairman. Thank you, Senator Salazar.
    Senator Martinez.

          OPENING STATEMENT OF SENATOR ROBERT MARTINEZ

    Senator Martinez. Good morning, Mr. Chairman, and thank you 
for holding this hearing. You and Senator Kohl are to be 
commended for pointing out this very important issue.
    I would like to have my full statement in the record, if 
that would be all right, and just highlight a couple of issues 
that strike me as being particularly important for us to 
consider as part of your call.
    The Chairman. Without objection.
    Senator Martinez. Obviously, when more than 52 percent of 
Americans say that they are worried about their retirement, it 
is obvious that some things are of concern which are rooted in 
the fact that nearly a third of Americans have saved nothing 
for retirement last year and that one out of four Americans in 
their peak earning years saved nothing for retirement in the 
last year. So educating people about the need for planning and 
that sort of thing is very important.
    In addition to that, last year was the first full year 
since the Depression that Americans spent more than they 
earned, and that obviously adds to a negative savings rate for 
Americans. We need to ask ourselves would we save more if the 
Federal Government streamlined the current abundance of tax 
breaks for saving. A report by the President's Advisory Panel 
on Federal Tax Reform suggests boiling all the current 
retirement plans into three simpler ones, all of which would be 
allowed to grow tax-free.
    It is also important that regardless of what planning may 
go on for retirement, the cost of health care is also a 
tremendous burden on seniors. The cost of health care can be a 
jolt for early retirees whose employers' coverage ends and all 
of a sudden they find themselves having to self-provide for 
their insurance, either self-employed or not employed, prior to 
the kicking-in of their Medicare benefits. So for young 
retirees, that is also a problem.
    We need to focus on streamlining the numerous tools 
currently available for retirement planning so that they are 
clear and easier for citizens to utilize. Americans also need 
to make the effort to educate themselves on what options are 
available to them.
    I look forward to hearing from the panel of experts we have 
today. I appreciate all of you being here and I look forward to 
the testimony on an issue that I know is tremendously important 
to many citizens in my State of Florida.
    Thank you, Mr. Chairman.
    The Chairman. Thank you, Senator Martinez.
    Our first witness will be Mr. Ben Stein. He really doesn't 
need an introduction. We have all seen him on TV, and we so 
appreciate his lending his celebrity, but more his financial 
acumen, to highlights this important issue for seniors.
    I would be remiss if I didn't note ``Ferris Bueller's Day 
Off.'' We have all seen that as an ad for DirecTV, but also 
``Win Ben Stein's Money.'' We are all interested in that, Ben, 
but we thank you for being here and helping us to understand 
how to develop a retirement portfolio that has some staying 
power.
    He will be followed by Mr. Rob Henrikson, who is the 
chairman, president and CEO of MetLife. We all know Snoopy, as 
well, and appreciate the coverage you give to all the great 
American sporting events. But far more important than that is 
your discussion of long-term longevity risk and solutions to 
prevent individuals from outliving their savings.
    He will be followed by Mr. Steve Utkus, who is a principal 
at the Vanguard Center for Retirement Research. Mr. Utkus will 
talk about how households should strike a balance between 
annuity income streams and asset income streams.
    Then we will hear, as the clean-up hitter here, from AARP, 
Mr. LeRoy Gilbertson. He is a member of the National 
Legislative Council of AARP. He also is a part-time resident of 
my home State of Oregon. We especially want to note that and 
thank you for the money you spend in Oregon. Mr. Gilbertson 
will discuss the world of retirement like it is and why we need 
to do a better job of helping people manage their assets in 
retirement.
    Mr. Stein, take it away.

STATEMENT OF BEN STEIN, SPEAKER AND WRITER ON FINANCE MATTERS, 
 ACTOR, AND HONORARY SPOKESPERSON FOR THE NATIONAL RETIREMENT 
              PLANNING COALITION, LOS ANGELES, CA

    Mr. Stein. Thank you very much, Mr. Chairman and Honorable 
Senators. Thank you very much for allowing me to appear before 
you this morning. It is a great pleasure and a privilege.
    I am here as honorary spokesperson for the National 
Retirement Planning Coalition, which is a group of 13 leading 
financial and health care industry organizations concerned 
about retirement readiness. This coalition was formed, or at 
least it was begun to be formed by NAVA, a trade group for the 
annuity industry, and we are very concerned, as you are.
    In the waning months of World War II, Franklin Delano 
Roosevelt was asked what we were looking for after victory. He 
said we wanted for mankind to have four freedoms. One of them 
was freedom from fear. There are many kinds of fear and it is 
good to have freedom from all of them, but one of the most 
gnawing kinds of fear we would like to be free of is fear of 
financial insecurity. Franklin D. Roosevelt also hoped for 
freedom from want, a glorious freedom which enriches the lives 
of all who enjoy it.
    These are great goals, but unfortunately for tens of 
millions of Americans, especially baby-boomers, there is 
nothing but fear of financial insecurity, nothing like freedom 
from fear or freedom from want where retirement is concerned.
    The facts are not in serious dispute. There are about 77 
million baby-boomers. Their average savings are far below what 
is needed for a comfortable or even decent retirement. I will 
just go off my statement for a second to say that in a very 
rough way, the average baby-boomer household has about $50,000 
in liquid assets and about $115,000 if you add in the equity in 
their houses. That is not even remotely close to enough.
    While millions are adequately prepared, tens of millions 
are not. They lack sufficient savings to provide enough income 
to get them even close to what they had as a lifestyle before 
they retired. Employers' defined plans are disappearing before 
our eyes day by day. Many of them rely on growing home values 
to tide them over, but real estate markets, as we are seeing 
right now, can shift dramatically, and what seemed like a 
castle suddenly becomes an ordinary cottage once again.
    This problem hits women, minorities and farmers 
particularly hard, for a variety of reasons mostly having to do 
with various problems they have accumulating large savings. 
There is a lot of controversy about why this is particularly 
about women, but suffice to say whatever the reason is, women 
do not accumulate as much savings as men by a substantial 
margin.
    On a relative basis, women, minorities and farmers are 
worst prepared for retirement than other groups, and the other 
groups are not doing terribly well either. The basic nub of the 
problem is we have a large chunk of the population who are 
likely to run out of money when they are old and unable to work 
any longer; that is, they will be broke or in serious privation 
when they are at their most vulnerable and enfeebled.
    To be sure, as the Chairman and ranking member said, there 
is one form of old age insurance that is guaranteed will 
probably not run out of money, and that is Social Security. But 
its payments are for most people fairly modest and all other 
forms of old age insurance can run out or are subject to market 
fluctuations.
    It is great to have a lot of stocks, bonds, mutual funds 
and exchange-traded funds, and cash and real estate, but most 
people don't have those lucky charms in large quantities. 
People need about 15 to 20 times what they expect to live on 
when they retire. Very few people have 15 to 20 times what they 
need to live on, and even if they do have it, they can run out 
of it or it can lose value in market fluctuations.
    The annuity issued by large, reputable insurance companies 
and other financial entities provides income until death, and 
often to the heirs for some time after death. The annuity, 
whether fixed or variable, provides income that by definition 
will last until the holder of the annuity has entered a place 
where money is presumably no longer needed. If it turns out to 
be needed, we are all in for a big shock.
    Anyway, the variable annuity has the added benefit that 
because its benefits are based on the movement of stocks or 
bonds, or both, its payments can, and almost always do rise as 
inflation rises in retirement. That is the variable annuity. 
This is a major consideration because the recent retiree is by 
definition a long-term investor--something a lot of people 
forget.
    The day you retire at age 65, you can expect to live a good 
20 more years of life, and prices, if they rise even at the 
current modest rates, will come close to doubling in that 
period of time. They won't double, but they will come close to 
doubling. An annuity whose payments rise can be a godsend.
    The problem is that at present the tax treatment of 
annuities discourages holding them. While the investments in 
them compound tax-free, the contingent gains from interest, 
dividends and capital gains are taxed at ordinary income rates 
as withdrawn. This is in stark contrast to other investments in 
non-tax-favored investments which actually can have lower tax 
rates than annuities, which are supposedly tax-favored.
    This creates the unfortunate situation we have today in 
which the best vehicle for retirement--the annuity with 
guaranteed payments until death--is discouraged by the tax 
code. The Congress has before it a proposal to allow a modest 
amount of the contingent payments from annuity income to escape 
taxation. This is the Retirement Security for Life Act and this 
Act would result in a tax saving of, say, roughly $5,000 per 
year for the typical American with a fixed annuity paying 
$20,000 a year of taxable income who is in the 25-percent tax 
bracket.
    It doesn't mean a thing to very rich people, but to very 
ordinary citizens trying to cope with retirement it could make 
a huge difference. Fairer tax treatment of annuities could 
encourage an extremely responsible form of retirement planning, 
annuitization, along with other forms of investment. The more 
people who take that path, the better off we are as a society.
    To be sure, it is still better to have a lot of savings in 
many different forms--stocks, bonds, real estate, mutual funds, 
ETFs. But annuities, with their unique guarantee of lifetime 
income, are a vital part of any sensible portfolio for 
retirement and it makes sense to encourage their use. Annuities 
can play a powerful role in achieving freedom from fear and 
freedom from want, and this is an incredibly significant 
achievement.
    I appreciate your letting me come in to talk to you. I know 
you have a schedule that is busy on a scale most of us can't 
even contemplate and I thank you for your kind attention.
    The Chairman. Thank you, Mr. Stein, and also we thank you 
for the public service you have given over the years as well.
    Mr. Stein. My pleasure.
    [The prepared statement of Mr. Stein follows:]

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    The Chairman. Mr. Henrikson.

  STATEMENT OF C. ROBERT HENRIKSON, CHAIRMAN OF THE BOARD OF 
  DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE OFFICER, METLIFE, 
                   INC., LONG ISLAND CITY, NY

    Mr. Henrikson. Good morning, Mr. Chairman and members of 
the Special Committee on Aging. My name is Rob Henrikson. I am 
chairman, president and CEO of MetLife, a company with a 
heritage, expertise and commitment around helping millions of 
Americans manage assets and take risks throughout all phases of 
a lifetime.
    Today's hearing is focused on the very public policy crisis 
that MetLife has taken on as a priority--helping Americans take 
the uncertainty out of retirement. I applaud the Committee's 
foresight and appreciate the opportunity you have given me to 
offer a few insights and potential solutions.
    A fundamental transition occurs at the point of retirement, 
the transition from saving to living off one's savings. In that 
process of transition, individuals are increasingly on their 
own in managing multiple risks. My written testimony details 
the multiple risks one faces in retirement, but in the few 
minutes that I have now, I want to focus on what I believe is 
the most difficult task for an individual to manage in 
retirement, and that is longevity risk.
    The good news is that Americans are living longer than 
ever. The bad news is that many will not both live long and 
prosper. The culprit is the unprecedented financial burden 
brought about by the shift away from traditional safety nets 
that once guaranteed income for life.
    Today, most Americans realize their employer will not be 
providing them with a guaranteed monthly paycheck for life. 
Forced by competitive realities, many employers are 
discontinuing defined benefit pensions, sometimes exchanging 
them for 401(k)s. The reality is that the defined contribution 
plans such as 401(k)s have become the primary retirement 
vehicle, and that is just for people who have employment-based 
retirement plans.
    But 401(k)s, while popular, have not yet proved to be 
successful if success is measured by their ability to generate 
adequate income for a generation of retirees. As the burden of 
retirement has increasingly shifted to the individual, we now 
are asking individuals to do something that they have never 
done before--fund and finance the rest of their lives.
    To accomplish this, one's bag of cash must last through the 
20, 30 or even 40 years that he or she will live in retirement. 
For past generations that were supported by pension plans, that 
job was handled by teams of actuaries and investment and 
administrative professionals performing services for pension 
plans who could leverage the law of large numbers and eliminate 
longevity risk for the individual.
    The individual attempting to manage that risk for himself 
attempts the near-impossible. A 65-year-old man, for example, 
has a life expectancy of 20 years, until 85. By definition, 
therefore, his chances are 50-50 that he will live beyond age 
85. So a 65-year-old man who is quite disciplined, has 
investment expertise and saves enough to make it to age 85 has 
a 50-percent chance of outliving his assets. For the typical 
couple who reaches age 65, there is a 25-percent chance that 
one of them will live to 97.
    If employee benefit trends, demographics and human nature 
are working against us, what is the answer? What steps can 
individuals take to ensure that their retirement savings will 
last as long as they do? Two steps can be taken that will 
encourage individuals to take action to secure their retirement 
income, no matter how short or long their future may be.
    The first step I have alluded to is to encourage 
individuals to take action and join a risk pool. This is a 
solution for retirees who have diligently saved during their 
working years and want income for life. Individuals, no matter 
how smart and savvy, cannot go it alone and efficiently draw 
down their savings to last the rest of their lives. The risk 
they encounter is too great, since no one knows how long he or 
she will live.
    In order to ensure that individuals do not run out of money 
in retirement, we must encourage Americans to harness the power 
of pooling that risk. The pooling concept is a powerful one. It 
is at the heart of all insurance, as well as defined benefit 
pension plans, and for that matter, as has been pointed out, 
Social Security.
    In the case of Social Security, longevity risk is 
transferred to the social system. In traditional pension plans, 
longevity risk is transferred to the plan. On his or her own, 
an individual can pool the risk by turning to an insurance 
company. For insurers, pooling mortality risk is a core 
competency. A retiree would need to save about one-third more 
money to even attempt to replicate the economic power of an 
annuity pool. Even then, there would be no guarantee of income 
for life.
    The second step I recommend is that government provide 
education and incentives. Tax incentives are really a form of 
education. People are quite simply more likely to consider an 
action if the government speaks for it as desirable public 
policy through positive tax consequence. A core proof of this 
is the employer-based retirement system.
    In addition, however, individuals need better retirement 
education and advice. The most effective venue is the 
workplace. Fortunately, Congress is considering taking that 
important action right now in the pension conference. We must 
begin with the employer-based pension system and build on it 
because that is the major source of existing retirement 
savings. We must educate employees to make sure that they 
consider taking a portion of their savings at retirement and 
turn it into guaranteed income for life they cannot outlive, in 
effect creating a personal pension plan.
    For the more than half of Americans whose only secure 
source of savings is outside the employer-based system, the 
same opportunity exists to join a risk pool through an annuity. 
The role of tax incentives added to education and advice can 
particularly help these Americans who can only rely on personal 
savings to fund the rest of their lives.
    In closing, we must evolve from a way of thinking in which 
an investment implies optimism and insurance implies pessimism. 
The shift from organizational to individual responsibility 
requires this transformation. This is especially true at 
retirement age. Consumers get that the core of a smart 
financial plan isn't just about a bag of cash at retirement 
age. It is about ensuring they are protected from the 
unexpected. Americans need help identifying and addressing 
these risks.
    Recent legislation that Chairman Smith has introduced is 
heading exactly in the right direction. The Retirement Security 
for Life Act, S. 381, provides a good starting point to help 
individuals manage the risks of retirement by encouraging an 
income stream that cannot be outlived. I am pleased to point 
out that Senators Collins and Clinton on the Committee are 
cosponsors. I applaud these efforts and look forward to helping 
Congress work toward enactment, if not in this Congress, then 
in the 110th.
    I would go one step further and suggest that the retirement 
income crisis justifies its own package of reform proposals 
that address the array of risks associated with the new set of 
challenges facing the next generation of retirees.
    I want to thank the Committee again for holding this 
hearing today and for inviting me to testify. The goal of 
helping Americans achieve personal retirement income security 
is without question MetLife's No. 1 public policy priority.
    I am happy to answer any questions you may have.
    [The prepared statement of Mr. Henrikson follows:]

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    The Chairman. Thank you so very much, Mr. Henrikson, for 
your testimony and, frankly, the importance of the products 
that you are offering to the American people as a way to secure 
their retirement.
    Stephen, take it away.

 STATEMENT OF STEPHEN P. UTKUS, DIRECTOR, VANGUARD CENTER FOR 
             RETIREMENT RESEARCH, VALLEY FORGE, PA

    Mr. Utkus. Thank you, Chairman Smith and Ranking Member 
Kohl, for this opportunity to discuss the income and retirement 
phase with you and members of the Committee.
    I am reminded by my colleagues at Vanguard that millions of 
retired Americans already face these issues today of generating 
income and managing their savings in retirement. So this is not 
a new issue for individuals in America, but the issue obviously 
is going to take on greater urgency with the prospective 
retirement of the baby boom and the shift of the private 
pension system to defined contribution plans.
    At Vanguard, we have developed somewhat of an expertise in 
thinking about how people make these choices throughout their 
lives and I thought I would devote my remarks today to that 
perspective, thinking of a household approaching retirement and 
making important choices about their life savings.
    So the first decision interestingly enough has nothing to 
do with managing your life savings, but it has to do with the 
question of when to stop working. For many Americans, the real 
risk of the retirement phase is the risk of retiring too early. 
You can see this in our own research, at the Vanguard Center 
for Retirement Research. You can see it in the most recently 
issued Retirement Risk Index from the Boston College Center for 
Retirement Research.
    Delaying retirement by 2 or 3 years can dramatically reduce 
risks in retirement. A longer period of work means higher 
Social Security, more in savings, additional investment 
returns, and for those covered by pensions often a higher 
benefit. It also means fewer years of spending.
    In recent years, there have been many encouraging 
developments in Washington on this question of the timing of 
retirement. Social Security's normal retirement age is rising 
to 67, a reflection of longer life expectancies. In the private 
sector, employers with defined benefit programs have been 
phasing out incentives for early retirement.
    The shift to defined contribution plans is also very 
encouraging in this regard. Individuals in defined contribution 
plans typically work several years later because those plans 
lack the sort of service-related incentives of a DB plan. 
Hybrid plans like cash balance plans probably have a similar 
effect to encourage people to remain in the workforce, although 
there is little research on this particular topic.
    So what else can you do to help in this area? One important 
direction is to continue support for phased retirement, which 
would enable individuals to simultaneously contribute to and 
withdraw from qualified retirement programs as they approach 
and enter retirement. It's particularly important I think, to 
go beyond the regulations that have been recently issued by the 
IRS.
    Working for several more years is one way that the baby-
boom generation will be able to finance its retirement--if I 
can counteract a bit of the gloom around the table concerning 
the prospective retirement of the baby boom. We have all heard 
of the traditional three-legged stool: Social Security, an 
employer pension, personal savings. For the baby-boom 
generation, there is a new three-legged stool. It will be 
Social Security, workplace and personal savings, and work--
especially in the early years, throughout the 60's and early 
70's, for those who haven't saved for retirement.
    The second question for households facing retirement is how 
to manage your accumulated resources. We could spend many hours 
debating this issue of annuity versus asset income. Most 
experts agree that households need both. The only point is one 
of degree. What portion of your retirement should be annuitized 
and what portion should be in the form of a pool of assets?
    In recent years, if you look at the data, it appears that 
many households have voted with their feet, finding that the 
cost of longevity insurance is simply too high. Many private DB 
plans have introduced lump-sum payments. Few DC plan 
participants take up annuities when they are offered. In the 
private market for income annuities purchase rates are low.
    So why might households prefer asset income over annuity 
income in retirement? One reason simply is Social Security. 
Today, Social Security is the principal source of income and 
the main annuity provider for six out of ten American 
retirees--and a group which includes the most economically 
vulnerable retirees. Social Security has the benefit of being 
Government-guaranteed, inflation-indexed and exceptionally low 
cost. Longevity risk is not pooled over a group of customers, 
but over the entire Nation.
    Now, a second reason that households focus on asset income 
is flexibility. A household with a pool of liquid assets is 
better able to address its unanticipated needs in retirement. 
These include major capital or consumer expenses, but they also 
may include out-of-pocket medical costs and the costs of 
nursing home care. A pool of assets can also be invested and 
grow over time, offering protection against inflation.
    There is a third reason that many households are choosing 
asset income. Retirement wealth and financial literacy have 
been rising, especially over the prior generations, and 
households are willing to shoulder more responsibility for 
managing their assets.
    For middle-income households, the dominant asset holdings 
are bank CDs and mutual funds. Affluent households also own 
individual stocks, bonds, ETFs, investment real estate, and so 
forth. Households who own these assets rely on regular interest 
and dividend payments from these assets. As long as they do not 
spend capital, it is possible to maintain these sources of 
income indefinitely. In addition, the financial planning 
community has devised strategies, such as the so-called 4-
percent spending rule, to help people draw down their savings 
in an orderly way.
    Just to go off my official record for a moment, last night 
I calculated, if you had $100,000 in life savings, what you 
would get from a variety of income-producing vehicles today in 
America. If you went to your local bank and bought 5-year CDs, 
you would get roughly $400 per month in income. A little bit of 
self-promotion here: with the Vanguard GNMA fund, our long-term 
corporate bond fund, you would take capital market risk, but 
you would have incomes ranging from our $400 to $500 a month. 
If in our partnership with AIG, you bought a 100-percent joint 
and survivor annuity, you would get $600.
    For many households evaluating those choices, they say they 
can receive two-thirds to 80 percent of the income of an 
annuity and retain control of their assets, versus giving up 
their entire life savings to a third party. This flexibility, 
and the choice between income levels versus flexibility, is why 
you see households pursuing asset-based income.
    So how can you help in this regard? At Vanguard, we 
anticipate a lot of innovation in this area from insurers like 
MetLife, banks, asset management firms like Vanguard, and so 
on. On the annuity side, one of the most intriguing ideas, we 
think, is longevity insurance, an annuity that pays a benefit 
only if you reach a certain age like age 85. Some reform could 
particularly help this new type of annuity.
    Another issue we haven't really talked about today is the 
issue of translating home equity into a reasonable income 
through the reverse mortgage market. Eighty percent of retirees 
own their own homes and policymakers should do much more to 
encourage this market.
    Finally, on the asset income side, a topic worth 
considering, as Senator Martinez pointed out, is tax 
simplification broadly. The tax rules governing different types 
of accounts and plans and the rules governing the taxation of 
Social Security are simply too complex.
    One positive step would be eliminating the required minimum 
distribution rules, as the Joint Committee on Taxation has 
recommended. These rules were designed with the Treasury's 
revenue stream in mind. They were not designed as a long-term 
pay-down strategy for individuals. So eliminating those rules 
would help retirees and they would help us as financial 
services firms to design income programs for retirees. Finally, 
I agree with everyone that efforts to encourage financial 
planning and investment advice make more sense.
    So as I mentioned at the outset, retiree households have 
been making an investment in savings choices already for many 
years. But now with the upcoming retirement of the baby boom, 
many more Americans will be called upon to make these critical 
choices. By retiring just a few years later and by using a mix 
of annuity and asset-based income programs, it is likely that 
many will be able to meet this challenge in the decades ahead.
    Thank you.
    [The prepared statement of Mr. Utkus follows:]

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    The Chairman. Thank you very much, Stephen.
    Gil, take it away.

STATEMENT OF LEROY GILBERTSON, MEMBER, NATIONAL POLICY COUNCIL, 
      AMERICAN ASSOCIATION OF RETIRED PERSONS, DALLAS, OR

    Mr. Gilbertson. Mr. Chairman, members of the Committee, I 
am Gil Gilbertson. I am a member of the AARP National Policy 
Council. I also do some private consulting work for businesses 
as it relates to their 401(k) plans.
    We commend you for convening this hearing on ensuring that 
retirees manage their assets over an increased life span. 
Planning for retirement should begin when an individual enters 
the labor force and it requires a savings discipline and 
financial astuteness that most people have never encountered 
before. Many workers retire ill-prepared for the challenge of 
preserving their assets in the face of a longer than 
anticipated life span. Even those who have planned well can 
face unforeseen obstacles.
    As a personal note, my parents and grandparents lived to be 
in their 90's and my wife's grandparents lived into their 90's. 
So we are an actuarial nightmare for actuaries to try to figure 
out how long we are going to be living, plus the fact of just 
moving to Oregon for 6 months out of the year has probably 
increased our longevity with the clean air and the lifestyle in 
Oregon.
    AARP believes retirement security consists of four pillars: 
Social Security, pensions and savings, continued earnings, and 
health care coverage. For the vast majority, Social Security is 
the solid foundation of a secure retirement that provides a 
defined benefit which is guaranteed for life and adjusted 
annually for inflation.
    For many of today's retirees, and even more tomorrow, 
Social Security will be their only defined benefit pension and 
the only income source that will not require their oversight 
and management. While Social Security faces a long-term 
challenge, we can make adjustments that will maintain Social 
Security's lifetime income for future generations.
    In contrast to Social Security, the pensions and savings 
pillar is much shakier. Over half of private sector workers 
have no regular payroll mechanism to save for the future and 
there are challenges for those with a pension.
    Defined benefit pensions are declining as the number of 
firms freezing, terminating or otherwise abandoning their 
pension obligation rises. Many companies are converting to 
defined contribution plans that require workers to absorb more 
risk and responsibility. Defined contribution plans are subject 
to early withdrawals, poor investment decisions and a failure 
to annuitize account balances. So even if a worker has 
contributed to a retirement savings plan, it is likely to 
provide a much less adequate income in retirement than defined 
benefit pensions provide.
    We need to take steps to strengthen the pension pillar. 
This can include providing the necessary financial education 
and quality investment advice, congressional approval of 
automatic 401(k) features, establishing a regular payroll 
deduction mechanism for workers to save for retirement, 
adopting pension reforms that strengthen the defined benefit 
system and protect older workers, and extending the Saver's 
Credit and making it permanent.
    The picture for personal savings and investment is even 
grimmer than for pensions. Despite being among the wealthiest 
groups, the over-age-50 cohort is not saving adequately for a 
retirement that could span three decades. Moreover, many in 
this group are going deeper into personal debt.
    In order to encourage responsible savings and investment 
behavior among those age 50 and over, AARP has established five 
principles. They are: using indexed funds, keeping the fees low 
in those funds, diversifying investments, rebalancing to stay 
on track, and finally just keep it simple. AARP is working to 
empower those aged 50 and over to attain a secure financial 
future and to safeguard their assets. AARP has conducted 
educational programs in financial literacy and prudent 
investment strategies.
    The third pillar of secure retirement, earnings, is a 
growing source of income. For many, the decision to continue 
working is an economic one. Additional income and health care 
coverage are becoming more and more important as years go by. 
While many may want to work, the job market is difficult for 
those without recent training and current skills, and age 
discrimination is still prevalent in the workplace.
    While policymakers are encouraging later retirement through 
changes such as raising the age for collecting full Social 
Security benefits, many employers are not providing workplace 
accommodations, such as phased retirement or flexible work 
schedules, that would help recruit and retain older employees.
    The final pillar, health care coverage, is vital. Closely 
associated with overall health care coverage is protection 
against long-term care costs. We must do a better job of making 
long-term care more accessible, affordable and understandable.
    Mr. Chairman and members of the Committee, we have painted 
a detailed landscape of retirement so that we can better deal 
with the challenges that boomers and future retirees will face. 
There is much that can and should be done to make management of 
retirement assets easier. Although times have changed, Social 
Security remains the No. 1 pillar of retirement that provides a 
lifetime, inflation-adjusted income stream.
    I thank you for the opportunity to present AARP's views, 
and I would be willing to answer any questions. Thank you, Mr. 
Chairman.
    [The prepared statement of Mr. Gilbertson follows:]

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    The Chairman. Thank you, Gil. Oregon once had a Governor, 
Tom McCall, who famously said, ``Please visit, but do not 
stay.'' It seems you have accepted half of his advice. You stay 
6 months a year. You indicate that you think your longevity is 
on the increase because of that.
    I wonder, have you calculated how long you might live if 
you stayed 12 months a year?
    Mr. Gilbertson. Well, I haven't, but I probably would be 
close to 100 years old.
    The Chairman. I want to ask you about one of the pillars 
you talked about and that is seniors working longer. It is the 
policy of the AARP to encourage seniors to work longer. Is that 
correct?
    Mr. Gilbertson. That is correct, yes.
    The Chairman. If they choose to?
    Mr. Gilbertson. If they choose to.
    The Chairman. There are significant impediments to 
employing seniors, I think you have pointed out in your 
testimony. Are there pieces of legislation that you would have 
us pursue to encourage employers to provide longevity of 
employment to seniors on a more flextime basis?
    Mr. Gilbertson. Yes. AARP is constantly studying the 
issues. As a matter of fact, a committee that I sit on within 
AARP's National Policy Council this summer will be studying 
exactly that issue as it relates to employment of those who are 
50 and older.
    We are probably going to end up making recommendations to 
the board as it relates to strengthening those kinds of issues, 
plus I would suspect coming out of that would be ideas and 
suggestions for legislation that would also strengthen that.
    The Chairman. Well, we would very much like to have your 
recommendations on that because I think one of the answers, 
frankly, to the American economy is encouraging people to work 
longer and giving them the flexibility. Obviously, it is one of 
the keys that you have identified as helping seniors to have 
the money they need to continue to live.
    Mr. Gilbertson. Yes.
    The Chairman. Ben, you mentioned that the average senior in 
America has $50,000 of liquidity. Is that correct? Did I hear 
that correctly?
    Mr. Stein. That is what I am told by people in a position 
to know. That is a rough number; it is a very rough number.
    The Chairman. Obviously, the answer to how much do you need 
in retirement varies with every individual, but have you heard 
of any number that seniors ought to be working for?
    Mr. Stein. Well, the number that I always use in my 
calculations is to take what you were earning the last year 
before you retired, subtract from that the amount that you are 
saving, and then multiply that by roughly 15 and that is the 
approximate amount you should have. That would be a minimum 
amount. If you are going to use my colleague's suggestion that 
you only withdraw 4 percent of your savings a year, you would 
need more like 20-plus times that amount. I think 4 percent a 
year might be a tiny bit conservative, but you need a heck of a 
lot is the short answer, and very few people have it.
    When you tell a person who earns $100,000 or $200,000 a 
year that he or she needs 15 or 20 times that amount to retire, 
that person gets pretty worried. Then when you say you are 
better if you have 22 or 23 times that amount to allow for 
inflation and to allow for some of the money to keep 
compounding and growing to offset inflation instead of paying 
it all out to yourself as you live out your life, people get 
really scared. You need an awful lot of money.
    We have many, many deficits in this country. We have 
enormous Medicare deficit, an enormous budget deficit, an 
enormous trade deficit. We also unfortunately have a very, very 
large deficit of what the baby-boomer generation should have 
saved compared to what it has saved, and that number is in the 
trillions of dollars. I once calculated that as being on the 
order of $15 trillion that we are short in savings. That is, to 
me, a lot of money.
    The Chairman. The multiple of 15 is the number of years 
that one could be expected to----
    Mr. Stein. No, no. That is to account for the amount of 
income you would be likely to earn, counting dividends plus 
capital gains on the amount of money you have saved. It is an 
awful lot of money and very few people are doing it, and if 
they did more of it, we would be a happier group of people.
    The Chairman. With your economist hat on, if there is one 
piece of advice you would give to every baby-boomer, what would 
it be?
    Mr. Stein. Save until it hurts, and if it is not hurting, 
you are not saving enough. You know, if you are partner at 
Goldman Sachs----
    The Chairman. You are going to be OK.
    Mr. Stein [continuing]. You will probably be OK. But for 
most people, they have to save a painfully large amount. I 
mean, the vicissitudes of retirement are scary and if you are 
retiring on enough to live on when you are 65 and prices double 
by the time you are 88, you are going to be a very sad puppy if 
you haven't saved enough.
    Mr. Utkus. Senator, if I could make a comment on that?
    The Chairman. Yes, please.
    Mr. Utkus. I do think that the examples that Ben cites are 
perhaps not the appropriate ones, just given that the median 
household income is somewhere in the $40,000-a-year range 
rather than at $100,000 or $200,000.
    I am least concerned about the ability of six-figure 
families to save for retirement, and if they tell me that they 
are not saving enough and they are going to have to live on 
$50,000 a year, I am going to tell them they are going to be 
richer than 80 percent of retirees in America today.
    So I think if you look at the reality of retirement today--
let's forget about the baby boom--30 percent of households rely 
virtually exclusively on Social Security or supplemental 
security income and other sort of public benefits. So three out 
of ten households today have never saved in the past, and we 
see similar results today of workers. Three out of ten have 
less than $10,000 a year as they approach retirement.
    So I think it is important not to be too catastrophic about 
this because today millions of Americans are retired and three 
out of ten of them have no money but Social Security and very 
little in work earnings. That is the state of the world today. 
Then in the middle, there are 30 percent who rely on Social 
Security for over half of their income. So that is a pretty 
strong backstop for retirement security.
    Then there is the 40 percent who don't rely on Social 
Security as their dominant income source, but I don't know that 
they should be the appropriate focus of policymakers because 
they are the people with 90 percent of the assets.
    The Chairman. Mr. Henrikson, the same question to you as to 
Ben Stein. If there was one piece of advice, I assume you would 
say take advantage of the pooling of risk and buy an annuity. 
Would that be your advice?
    Mr. Henrikson. Well, that could be an answer, but I think 
as you yourself, Senator Smith, said, if I recall, in your 
opening comments, one of the No. 1 priorities is knowledge, 
knowledge about this issue, and then within that what the power 
of a mortality pool is.
    So I am not suggesting that everybody rush out and buy an 
annuity, but what I am saying is that, as pointed out in terms 
of the conversation, we know that individuals may be more 
educated than they have been in the past, but they are not 
facile in terms of making asset allocation decisions with a pot 
of money to generate an income for the rest of their life.
    As was pointed out, you can make income last for the rest 
of your life if you don't touch the principle. The people we 
are talking about don't have that luxury. Maybe the Goldman 
Sachs partner can live off of clipping coupons and then leave 
as a legacy to their family or whomever the principle that they 
didn't spend. But most people are going to have a different 
kind of a legacy to deal with, and I think the legacy that 
parents can leave to their children that they are more 
independent because they have an income will be extremely 
important.
    I think the issue is what kind of an income do they need. 
Beyond that income, they can do other things with their assets 
that may turn out to be disastrous or may turn out to be 
homeruns.
    I just would say one other thing. Most people in the United 
States--I believe this is true--99.44 percent, including high-
income people, tend to make decisions about their life, about 
where they live, where their kids go to school, what kinds of 
vacations they take, when they go out to eat, and so forth and 
so on, based on their income. They don't base it on a bag of 
cash, nor do they base it on the present value of their future 
income.
    So if you ask somebody what is your job worth, they are 
liable to say something like, well, what does that mean? If 
they think about it long enough, they will say, well, I am paid 
$50,000 a year, $40,000 a year or $100,000 a year, whatever the 
number might be. They don't say the present value of my future 
income is ``X,'' and that is what we are asking them to do with 
this bag of cash. That is the present value of something and 
they don't know what that something is. So that is really what 
the education has to be about.
    The Chairman. With the indulgence of my colleagues, I 
wonder if I can ask Ben to put your economist hat on and speak 
to the larger question that Robert just hit on, what is there 
in the American psychology that unlike many European countries, 
unlike China and Japan, we don't save. Is it just a consumer 
mentality that has driven us all these years?
    Mr. Stein. Well, if you think of it from a psychologist's 
perspective, it is a very interesting thing. If you slap down a 
little plastic card, you can get a big-screen TV or a trip to 
the Bahamas or a trip to Oregon. If you take the same amount of 
money and put it in an account at Fidelity, the next thing you 
know it is gone. It is not really gone, but it seems like it is 
gone. It is not available. You can't watch ``The Ladies of 
Wisteria Lane'' on it. You can't get a suntan in it, so it 
seems to be gone. That is the way a child would approach it, 
and unfortunately we have a kind of childish mentality among a 
great many--by no means all--U.S. citizens.
    There is also another problem. Interestingly enough, 
savings rates tend to be higher during bad economic times than 
during good economic times because people get scared and 
concerned about their futures and they save more. In China, the 
ordinary citizen with an income of something like one-fifteenth 
that of the U.S., maybe less than that, saves roughly 40 
percent of his or her income. In this country, which has a 
very, very large average income, we save on the average of a 
negative amount.
    So uncertainty, fear, civil war, privation, dictatorship, 
depression make people want to save in this country. Where 
happy times are here again and have been for a very long time, 
not for everyone, but for a great many people, people don't 
tend to save. This is a happy country, and this is a happy 
country with a very, among all too many people, kind of 
juvenile mind set. That is not obviously true of everyone, but 
it is not a mature mind set to not save.
    The Chairman. But you wouldn't be pushing us to adopt 
policies that brought about plagues and pestilence and 
depressions?
    Mr. Stein. Well, no, I wouldn't be pushing you to do it all 
this summer.
    The Chairman. Thank you.
    Senator Kohl.
    Senator Kohl. Thank you very much. Two things, to me, stand 
out as we listen to what you have said and, of course, think 
about all the accumulated knowledge that we have in this area. 
One thing is to be certain beyond question that Social Security 
remains really, strong and a foundation and a pillar of 
people's ability to live out their retirement years. I would 
like your comment on that, particularly in light of some of the 
efforts that have gone on here to change the nature of Social 
Security.
    The second thing is, isn't it true that if we were 
successful in having a society that offered the kinds of 
incentives and inducements to keep people working longer which 
you have alluded to--if we could accomplish those two things, 
it would change the nature and the dilemma and the difficulty 
that we are looking at with respect to our emerging retirement 
population and how they are going to manage to survive into the 
future?
    If Social Security becomes bedrock and people do manage to 
work into their 70's, given the fact that they are healthier 
than they have ever been before and have a longer life 
expectancy, don't we need to look at all this from a different 
point of view, Mr. Gilbertson?
    Mr. Gilbertson. Yes. Of course, AARP strongly believes in 
Social Security as the very foundation of retirement plan and 
keeping Social Security in a healthy situation, because as many 
on the panel have pointed out, Social Security in the future is 
still going to be an important part of anyone's retirement 
plan.
    Now, regarding people working when they get older, we feel, 
that people should be able to work if they choose to. There is 
a differentiation between having to work and choosing to work. 
If we can reach a happy medium where we can get people to save 
so that they will understand and have a good retirement system 
and then choose to work beyond it, it may be an idealistic 
situation, but I think it is a worthy goal to be working 
toward.
    I managed a very large pension system before I retired and 
people would come in and get an estimate of what their pensions 
were going to be, and then our benefit counselors would say, 
``Have you thought about health insurance.'' Those that were 
under 65, of course, and were not eligible for Medicare? 
Calculated what the health insurance would cost them, they 
would say, ``Well, I guess I had better go home and tear up 
that resignation letter because this is just not going to 
work.'' The health insurance part could eat up a big portion of 
what their pension is. So I think we have to have a discussion 
as it relates to a lot of different issues as to people working 
beyond their normal retirement age or when they want to retire.
    Mr. Utkus. Senator Kohl, I do think that if you think 
carefully about encouraging Americans to work more, a lot of 
the doom and gloom lifts. In other words, there is the sense in 
which everyone thinks it was pre-ordained sometime by Bismark, 
but maybe by the post-World War II generation that retirement 
somewhere between 62 and 65 was written in stone. But, of 
course, we all know that when Bismark created that rule, most 
people were dead by 65 and only a few annuitants lived beyond 
that age.
    So I think this whole notion of getting people to work 
later is to be applauded and I think there are many things that 
can be done on the benefits side to encourage that. It solves 
much of the retirement insecurity problem that we are worried 
about, not in individual cases. Obviously, in individual cases 
people have health problems and they have financial problems. 
But as a macro level, as you look at the whole economy, as you 
do as Senators, it solves a major portion of the concern that 
we may have.
    Then on the question of Social Security, I just think as 
you think about issues of retirement income support and the 
split between annuities and asset income, you must think about 
Social Security as a huge public benefit that, if you will 
think about it, in effect drives out the need for private 
annuities for many households.
    As I said, 30 percent have 90 percent of their income 
coming from Social Security. They need more assets, not more 
income. Another 30 percent have between 50 and 90 percent of 
their income from Social Security. You might debate some of 
them need perhaps a little bit more annuitization; maybe some 
don't. Then the upper 40 percent--well, they have all the 
money, so I am not really worried as much about them from an 
annuitization point of view. To me, the decision for them 
should be neutral. So I think that can help inform this 
decision about how you set policy in other areas.
    Senator Kohl. Mr. Henrikson.
    Mr. Henrikson. Yes. Well, starting off with Social 
Security, one of the things Stephen said in his remarks early 
on was that he mentioned that Social Security was extremely 
efficient. One of the things that makes it efficient is the 
fact that it has a mortality pool that it is part of, and 
without the mortality pool it would not be efficient. So the 
only comment I would make in terms of a discussion about Social 
Security going forward is I think it is very, very important to 
keep Social Security strong in discussions about private 
accounts, which in and of itself is not necessarily a bad 
thing.
    You cannot remove the mortality pool issues in Social 
Security and have it be an efficient system. So, for example, 
if you have a private account, as opposed to income, and you 
know what that account is and that account is something that 
you believe when you pass away you bequeath to your heirs, you 
have taken what we in the industry would call mortality gains 
out of the Social Security system. Believe me, it would not be 
efficient. There is no way there is enough money to replicate 
what mortality gains to the system provide.
    So that is the basis of what Social Security is about. We 
can as a society talk about what the liability will look like 
going forward in terms of how much it escalates in the future, 
what age people retire, and so forth. But that is the key 
principle that we would always, always remind people. There is 
a mortality pool there. If you break that mortality pool, it 
will not be an efficient system.
    Despite the fact that it sounds good for people to say 
wouldn't you like to have your account, wouldn't you like to 
manage it, wouldn't you like to leave it to your children, that 
is a different paradigm. That is called a 401(k) plan, and I 
would not suggest turning Social Security into a 401(k) plan, 
for many, many reasons.
    About working longer--and I realize this is not what anyone 
is suggesting, but I would say the first thing that comes to 
mind is I think Social Security was put in in the first place 
because before that people had to work until they dropped dead 
because they didn't have any source of income.
    So the idea about people working longer and encouraging 
them is absolutely the right thing to do, but there is a limit, 
and the need in terms of the people who actually need to work 
longer versus want to work longer is strangely skewed toward 
the very high-income people that we say that we are not really 
focused on. So the people who must work in that instance are 
the people who are lower-income who cannot afford to retire, 
and the people that want to work, many of them, do all kinds of 
things.
    They may decide to go into the government after they 
retire. They may decide to go from government into private 
industry once they retire. They have got a lot of things on 
their plate. I don't think we are worried about them, but I 
would worry about suggesting that the person who lives on a 
$40,000-a-year income need not do anything else. The question 
to ask them is, if $40,000 is OK, is $50,000 better, would 
$60,000 be better, and plan around the needs of what those 
incomes are. So that would be my comment there.
    Senator Kohl. Mr. Stein.
    Mr. Stein. Well, as to the merits of working longer, I 
think the clear answer is it is better to work longer both in 
terms of your physical and mental alertness, unless you are 
working in a particularly strenuous job like coal mining. There 
is an acute labor shortage in this country for clerical jobs, 
and I think older people are ideally suited to work at those 
jobs and it is ideal for the employers and it is ideal for 
them. They feel better about themselves. Their days are 
organized. They have higher self-esteem. It is a very great 
benefit to work longer, and I must say people are, in a word, 
happier if they are working longer.
    I am a little puzzled about one of my colleague's comments 
because the data I have seen indicates that Social Security 
only replaces about 40 percent of the average retiree's income. 
As I revolve in my mind data I have recently seen from the 
American Enterprise Institute about how much Social Security is 
paid, that seems to be approximately correct.
    Where is the rest going to come from? At least some of it 
has got to come from a guaranteed source if you are going to be 
prudent. Prudence, it seems to me, dictates that if your 
employer is kicking you out of the defined benefit plan, you 
rejoin the pool, and you can rejoin the pool by buying 
annuities.
    I don't in any sense recommend that people do it 
carelessly. I recommend they shop very, very carefully and only 
buy the services they need, but it is a good idea to be in a 
big, giant mortality pool such as can be provided by a gigantic 
insurance company. Again, shop carefully, ask all the right 
questions. But Social Security is not going to do it, except 
for the lowest-income Americans, and another guaranteed source 
of lifetime income is desirable.
    Senator Kohl. Thank you, gentlemen.
    Mr. Utkus. Ben, those statistics are from Social Security, 
just by the way. So the fact is today 30 percent of Americans 
get 90 percent of their income--it might not be enough, but it 
is all coming from Social Security. So this is what people 
actually have versus what they might replace. That is where 
those numbers are.
    Mr. Henrikson. Mr. Chairman, if I might, one other point 
that was brought up earlier. I would be remiss in terms of the 
plan sponsor community and their interests in their employees 
going forward--the question was asked about people being 
encouraged to work longer. It would be helpful if the pension 
laws were such that it doesn't put an employee in a position to 
say, ``Well, if I retire, I can get my pension benefit at this 
employer; if I continue to work, I can't, so what I will do is 
retire and go to work for my competitor.''
    So the plan sponsor community--certainly, in the years that 
I have worked with them, employers are working very, very hard 
to solve this problem. They want to do the best thing for their 
employees and this would be helpful in terms of having people 
be able to work where they are perhaps part-time and not 
sacrifice the pension benefit to do so.
    The Chairman. We are working on that. We need to fix that.
    Senator Carper, of Delaware.
    Senator Carper. Thanks, Mr. Chairman, Senator Kohl, and to 
our guests, our witnesses, thanks for being here. It is good to 
see you and we appreciate very much your testimony and you 
willingness to respond to our questions.
    I used to be State treasurer in one of my earlier 
incarnations and I was responsible for administering our 
State's retirement program for State employees. We wanted to 
encourage our employees to put money into a deferred 
compensation plan, and we had a variety of investment options 
there and we found discouragingly low participation among 
lower-compensated State employees. Those people who were 
generally in the top quartile of income in the State employee 
ranks found out about the program and they found ways in many 
cases to defer a portion of their income for their retirement.
    A smarter State treasurer than me came along and came up 
with an idea to incentivize folks to participate in these plans 
by giving them all a little bit of money to seed their 
accounts. If you happened to be a higher-compensated State 
employee, it didn't really amount to much, but if you happened 
to be someone who could only put maybe $20 or $30 a month into 
an account--you know, you give them a couple of bucks and it is 
an immediate, real return on their investment.
    The other thing we figured out is if people have the option 
of opting in to participate in a plan like that, a lot of times 
they don't. Even people that ought to who could don't. But if 
we had a sort of an opt-out requirement--and you may have 
already gotten into this--if there is an opt-out requirement, 
people a lot of times will get in and there is sort of a 
reluctance to get out. It is a very positive thing.
    Let me just ask your comments sort of with respect to opt-
in and opt-out and how do we incentivize, and maybe some ideas 
that you are familiar with incentivizing particularly lower-
compensated workers to participate in plans like this. Mr. 
Gilbertson, first, and we will just----
    Mr. Gilbertson. Yes, I can speak a little bit to it. As I 
indicated earlier, I do some consulting for firms with a 401(k) 
program and one of the firms is very progressive because they 
put in automatic enrollment and you can then opt out of it. But 
they are finding that once they do the automatic enrollment, 
the employees have a tendency to stay in it.
    I think that is a tremendous step forward, whether you go 
into a 401(k) or a 457 plan, which I am assuming that is what 
you are talking about as far as deferred compensation on a 
State level.
    Senator Carper. Yes.
    Mr. Gilbertson. It is something to get them started, and 
once they see that that money is earning something for them and 
is growing, then they are a little bit more incentivized to do 
it. I think it is an excellent idea, and like I say, I think 
more and more businesses should look at that aspect of it.
    Senator Carper. Thank you, thanks.
    Mr. Utkus.
    Mr. Utkus. Senator Carper, the----
    Senator Carper. Let me ask, Steve--I asked the folks 
sitting behind me, I said, ``Does he pronounce his name Utkus 
or Utkus,'' and they were equally divided.
    Mr. Utkus. Oh, OK. I say Dick Butkus, no ``B.''
    Senator Carper. Well, that is good. Thank you.
    Mr. Utkus. You know, there is a great deal of innovation in 
the 401(k) world and there is a lot of interest in promoting 
these automatic enrollment plans. In the current conference 
committee, there are some provisions which we hope will survive 
to the final bill that encourage this within the defined 
contribution system.
    I should say there are two parts of this. One is among 
plans that are offered, you want to encourage this trend toward 
automatic enrollment. I think Congress is taking some important 
steps there. But the second part is those particularly lower-
wage workers at firms that offer no plan at all, and so there 
are some interesting ideas floating around.
    For example, Brookings and Heritage just had an interesting 
proposal on automatic payroll deduction IRAs in the workplace. 
The Pension Rights Center is working on a conversation on 
coverage with financial institutions, organizations like AARP 
and others, to develop ideas around pension coverage among 
small businesses. So it is really a two-part problem, but I 
certainly think anything we can do to encourage more automatic 
decisionmaking is something we should certainly promote.
    Senator Carper. Thank you.
    Mr. Henrikson.
    Mr. Henrikson. A couple of comments there, Senator. One of 
the things in terms of basically giving some money to people to 
encourage them to be part of a plan--in the 401(k) world 
forever it seems that has been part of the package; in other 
words, matching contributions. We all know that one of the real 
tragedies in the 401(k) world in the employer space is that 
there are so many low-paid people who do not enter the plan, 
despite the fact it is matched, which, of course, if I do my 
math right, tells me you get 100 percent return right out of 
the box.
    So the issue here is that the plans in that instance are 
well-designed, but we get back to knowledge and education and 
again. So the emphasis has to be to really put the focus on 
that issue so employees understand really economically what 
they are walking away from. So that is one thing.
    In terms of opt-in versus opt-out, and so forth, inertia is 
an amazing, amazing power. If you are in----
    Senator Carper. I like that, I like that.
    Mr. Henrikson. Yes.
    Senator Carper. Inertia is an amazing power. I am going to 
use that.
    Mr. Henrikson. Well, it is because----
    Senator Carper. I will never say that you said it first. 
[Laughter.]
    Mr. Henrikson. Well, we see it in the employee benefits 
field and in other areas continuously. It is not just on the 
401(k) side; it is also in the group insurance side, and so 
forth, that whatever people initially sign up on, they tend to 
let that ride for the longest term, and I would say sometimes 
unfortunately even if it is not appropriate, because it is 
difficult to figure out share; what is more valuable to my 
family, and so forth.
    So automatic opt-in, I think, is fantastic. It ought to be 
made simple to do from the employer's point of view, from a 
legislative point of view. But what we must also realize is 
that the indication is, for example, on asset allocation that 
it is not unusual at all for an employee to set an asset 
allocation between fixed and equities, for example, in his 
401(k) and then literally never change it. That is because 
there is a lack of continuing education at that particular plan 
or that particular employer. So that must be addressed.
    I would say that kind of behavior is one of the reasons why 
we think people managing a bag of cash after they retire is 
particularly difficult because the facts tell us that 
employees--many of them are becoming comfortable with income 
averaging into the marketplace, comfortable because it is 
automatic, not because they think about it everyday.
    When they retire, income averaging-out is not going to work 
very well if they are worried about invading principle. So the 
economists may say, ``Well, then value-average out and you will 
be OK;'' then you won't invade that principle. So if the market 
goes down, just simply eat less this week, and I don't think 
that works.
    So we put all of this together when we think consumer 
behavior within the context of employee benefit plans is 
extremely important. That behavior is what is going to really 
determine what the success or failure of these plans are.
    Senator Carper. Mr. Chairman, my time is expired. Can I 
make one more point?
    The Chairman. Yes.
    Senator Carper. My mom passed away last year after about a 
5- or 6-year battle with Alzheimer's disease, and I remember 
visiting her in a nursing home where she lived then those last 
few years in Ashland, KY. I was in a nursing home down in 
southern Delaware this past week and it just kind of reminded 
me of the years of people's lives where they are unable to care 
for themselves, unable to work, in some cases not all that old. 
We spend a lot of money to sort of maintain them, to make sure 
that they are cared for either in our homes or in many cases in 
a facility like the one my mom stayed in.
    As we think of ways to make sure that people don't deplete 
whatever savings they have in the long run, part of it is 
actually curing a disease like that and to better ensure that 
when a person is like 80, 82, 85 or whatever, they can still 
fend for themselves, and in some cases maybe even, if they want 
to do something part-time, they actually do that. We actually 
have, believe it or not, people in the U.S. Senate at that age 
who actually come to work and get a paycheck.
    My other point I wanted to raise is reverse mortgages. I 
don't know that anybody has done that, but in my State we have 
always put a high emphasis on home ownership. Delaware has 
about a 75-percent home ownership rate, which is among the 
highest in the country, and we continue to push for that.
    As you know, folks are able to, when they reach the latter 
stages of their lives and their homes are paid for, sort of 
live off of the equity of their home, which is an idea that has 
a great deal of attraction to me. I just would ask if you are 
aware of anything that we need to do with respect to home 
mortgages to make them more accessible. They are really not 
used that much. I am surprised how infrequently they actually 
are utilized.
    But any thoughts that you have on how we might encourage 
people to make better use of the equity of their home--I think, 
as you know, for most people the biggest source of their 
savings in their lives is the equity in the home that they own.
    Anybody at all? Yes, sir, Mr. Gilbertson, and then Mr. 
Stein.
    Mr. Gilbertson. I think one of the things that is happening 
as it relates to the very question you have is that we are 
talking about a reverse mortgage type of a situation where you 
can take some money out as you retire, and so on. But the 
waters haven't really been tested with those philosophies, and 
they can be very harmful if you are not very careful about the 
contract that you are entering into. So I think a lot of work 
needs to be done as it relates to that very issue.
    You are correct that a majority of people are going to have 
their home paid for and they will have a tremendous asset there 
to draw upon that they will need. But, you know, we have to be 
very careful about how we put people into those types of 
situations because it can be very detrimental and harmful for 
them. So it is going to take a lot of study and a lot of work 
before we get comfortable with that concept, I think, but it is 
a goal that I think needs to be worked on.
    Senator Carper. Thank you.
    Mr. Stein, and then Mr. Henrikson.
    Mr. Stein. Thank you, Senator. First of all, you do not 
need to give credit to my colleague to your left. Mr. Newton 
thought of the law of inertia, the body at rest----
    Senator Carper. I knew it was one of the two.
    Mr. Stein. Yes, he is a great genius of physics, but Newton 
did it a few centuries ago. A body at rest tends to remain at 
rest; in motion, tends to remain in motion.
    Second, if I may respond to something else that you just 
said which I thought was a brilliant point that really we 
should have talked----
    Senator Carper. I said it?
    Mr. Stein. Yes. We should have talked about it before, 
which is if we imagine people----
    Senator Carper. That is a first. We should bring this man 
back more often.
    Mr. Stein. If we imagine people thinking about their own 
pool of assets, their bag of money, as the Chairman said, what 
if they do have Alzheimer's? What if they are mentally 
incapacitated? It is an awfully nice thing to have that regular 
check coming in in the form of the annuity to maintain their 
quality of life without them having to worry about having to 
make those decisions or be horn-swaggled or tricked by a number 
of unscrupulous people out there who will do that with people 
with Alzheimer's. It is a terrible thing, but it is true. So a 
steady source of annuity income is a lovely thing for people 
who are incapacitated in their brains or any other part of 
their body.
    A third thing about reverse mortgages: as my colleague on 
my left said, the fees can be overwhelming; they can be 
startling. Also there is a tricky provision in there that if 
you leave your house for a certain amount of time, even if you 
go into a nursing home or for extended medical care, the person 
who had sold you the reverse mortgage can sometimes seize your 
house. So there is a lot of strengthening of that particular 
kind of instrument that is needed.
    Senator Carper. Thanks. A quick true story. My mom used to 
live down in Florida, down in Clearwater, for a number of years 
after my dad died, and her mind was starting to slip a little 
bit. We kept her at home as long as we could and surrounded her 
with help around the clock, but she would get phone calls from 
these unscrupulous telemarketers to try to sell her this or 
that. I remember she put a roof on her house and the roof that 
she had was perfectly fine. I remember she spent more money 
buying a vacuum cleaner once than some people spend on a car.
    But when we were packing her up to move her up to this 
nursing home in Kentucky, my sister found--as we were going 
through all this memorabilia, she found a long-term care 
insurance policy that somebody had sold to my mother for 
little, if any, money, and it was good for 2 years. For the 
first 2 years that my mom stayed in that wonderful facility in 
Ashland, it was largely paid for, and I thought my mom was 
smarter than all of us put together.
    I think, Mr. Henrikson, you were going to say something. I 
am well over my time.
    Mr. Henrikson. Yes, Senator Carper, a couple of things just 
to let you know how important MetLife feels about this topic of 
Alzheimer's. I don't know if you knew this, but the MetLife 
Alzheimer's award for research is the equivalent of the Academy 
Awards in that area. We have been focused on Alzheimer's as a 
societal problem for well over 20 years now.
    I say also from a personal point of view my father was an 
Alzheimer's victim and I quickly would tell anyone so was my 
mother, because she actually passed away before he did and I am 
sure that had a lot to do with the stress and strain.
    The other point you make in terms of as people age--and I 
think this is a very good one--we can all talk about being 
facile in terms of managing our portfolios while we are young, 
want to take the time to do it, educate ourselves, read the 
Wall Street Journal everyday, and so forth and so on. But as 
people age--and we find this not only in terms of our research 
with older people, and so forth--people even read print 
differently at a certain age based on the change in their eyes, 
and so forth. It is very important to be able to communicate 
with these people.
    The checks we send via annuitization--someone mentioned 
spending, as you did, part of the time in one part of the 
country and part in the other. That is what we do. We track 
people down and we pay them their annuity payments, and we have 
schedules. Some of them stay in Florida these many months, in 
New York so many months, or whatever. It is very important to 
understand the dynamic of aging, the decisionmaking process 
and, quite frankly, the fear because one of the things that 
people really are burdened by is fear.
    I know my parents became more and more fearful, and if they 
watched their bag of cash before they became more fearful, they 
watched it continuously. They didn't do anything with it. They 
didn't turn it into any income. They simply became fearful of 
the unknown because they didn't know how long it could last.
    I think we are not here talking about wealthy people, but 
there are plenty of Americans who I think will be just 
imprisoned in their own homes through fear if they don't have 
an income to live on. It makes a huge difference in people's 
lives.
    Senator Carper. Thank you all.
    Mr. Chairman, thanks for being so generous with this time. 
Thank you.
    The Chairman. Gentlemen, we invited you all here 
recognizing your competence and the contribution you could make 
to this hearing. You have more than met our expectations and we 
are grateful to you. We want you to know that because of C-
SPAN's good work, a lot of people will see you. It is amazing 
how many seniors in the country watch and care about what this 
Committee does. We care about their concerns and that is why we 
have had this hearing.
    So in addition to Mr. Stein, you are all now TV celebrities 
and we congratulate you on that. But more, we thank you for 
your time. You have added immeasurably to the meaning of this 
day and to the Senate record.
    With that, there are two roll call votes and we are 
adjourned.
    [Whereupon, at 11:29 a.m., the Committee was adjourned.]


                            A P P E N D I X

                              ----------                              


              Prepared Statement of Senator Rick Santorum

    Over the past year, the U.S. economy has created almost 1.9 
million jobs; our unemployment rate fell to a remarkable 4.6 
percent. Our productivity, real hourly compensation and 
personal income have all increased. Our nation's real GDP grew 
at an annual rate of 5.3 percent for the first quarter of this 
year, following a growth of 3.5 percent in 2005, the fastest 
rate of any major industrialized nation.
    This incredible growth reflects the success of tax-relief 
legislation, Welfare Reform, and the elimination of the 
marriage penalty. Our recent doubling of the child tax credit 
and continued legislation that supports families and small 
businesses will continue to sustain these positive economic 
trends. It is clear that these programs from Congress have 
capitalized on the incredible resilience and creativity of the 
American people.
    Yet, as more Americans gain jobs, as income increases, and 
as overall economic success indicators continue to stay strong, 
more and more Americans are feeling anxious about their 
financial futures. Leading economic indicators demonstrate that 
American households are not saving enough.
    Over the past decade, the percentage of after-tax, 
disposable income saved has declined precipitously; the latest 
recorded personal-savings rate in the U.S. fell to an 
embarrassingly low negative 0.5%. This low savings rate lags 
far behind that of other industrial nations, constraining 
national economic growth and keeping many Americans from 
entering the economic mainstream.
    In the face of uncertainty from outside retirement sources, 
financial security in retirement increasingly relies on the 
individual. Success and security today depend not just on a job 
and growing income, but increasingly on the ability to 
accumulate a wide range of assets. In the past, corporations 
and the government offered defined-benefit pension plans; 
Social Security was ``more secure'', and retiring seniors were 
certain that they wouldn't run out of money. The quickly 
shrinking number of defined benefit pension plans and the 
pending bankruptcy of the Social Security program all 
contribute to this increased financial uncertainty.
    As other retirement programs become less reliable, owning a 
home, obtaining an education and building diverse financial 
investments are becoming key components to retirement for a 
growing number of Americans. These opportunities, however, are 
especially daunting for low- and moderate-income families. 
Asset-building strategies for these low- and moderate-income 
families, therefore, can no longer rest on government- and 
employer-provided programs; instead, financial security must 
include strengthening incentives to save and invest and also 
increasing financial education tools to enable individuals to 
make informed and appropriate decisions.
    As a first-step to address the Social Security crisis, I 
introduced the Social Security Guarantee Act, which would 
ensure Americans born before 1950 that they would receive their 
Social Security check. This was my way to cut through the 
misleading rumors that reforming our Social Security program 
would leave America's seniors out in the cold. While I know 
that many of my colleagues want to have an open and honest 
debate over viable solutions for retirement security, fear and 
lies continued to shape the debate. It is my hope than in the 
near future we can acknowledge and address the unfair and 
financially unsound structure of our current Social Security 
system, and that the Social Security Guarantee Act will 
facilitate a more open and honest debate.
    Reforming the structure of our current retirement program, 
however, is not enough to ensure financial security. In this 
difficult political environment, we must create asset-building 
programs and policies poised to boost savings in both the short 
term and the long term. One of the most promising strategies 
for achieving this, particularly among the low- and moderate-
income working families who most need increased retirement 
security--is to facilitate the direct deposit of federal income 
tax deferrals into IRAs and other similar accounts. I commend 
the IRS's newly announced split-refund program, which will 
allow taxpayers to designate and deposit their refunds into a 
savings and retirement account with any U.S. financial 
institution.
    Another important asset-building tool is the Individual 
Development Account. The Individual Development Account (IDA) 
program is an element in my Savings for Working Families Act 
that I introduced with Senator Lieberman. It encourages 
ownership among low-income individuals by offering them matches 
for their savings and by rewarding monthly savings of working-
poor families who are trying to buy their first home, pay for 
post-secondary education, or start a small business. These 
matched savings accounts are similar to 401(k) plans, but 
better serve low-income families by providing them with 
financial literacy training and consultation. The Savings for 
Working Families Act will provide the infrastructure for 
sustained investment through combining IDAs with the 
educational tools that can ensure financial security.
    My Savings for Personal Investment, Retirement, and 
Education Act includes another savings-promoting tool called a 
KIDS Account. KIDS Accounts will create an opportunity for 
every child and their family to begin investing in their future 
by providing a sound financial start for children born into 
poverty and creating opportunities for children and families to 
become more financially literate. The accounts will be 
supported by incentives designed to encourage savings, promote 
financial literacy, and expand asset-building opportunities 
like homeownership, education and retirement.
    The final program that I'd like to mention is the 401(k) 
Enhancement Act, which provides incentives to employers to 
automatically enroll employers in 401(k) plans by removing the 
barriers that have deterred employers from offering automatic 
enrollment in the past. It is clear that automatic enrollment 
dramatically increases participation in 401(k) plans and boosts 
the savings rate. The Employee Benefits Research Institute 
reports that less than 40 percent of U.S. workers have 
calculated how much they will need to retire; 30 percent have 
not saved anything for retirement at all; and only 20 percent 
of Americans feel confident about having enough money to live 
comfortable in retirement. 401(k) plans are critical for 
financial security because they shift risk and decision-making 
from the growingly reluctant employers to the individual; the 
incentives included spur savings and employer-confidence within 
the programs.
    It is my hope that Congress will support incentive-based 
savings programs to reflect the changing economic realities 
within America and then turn to seriously addressing the Social 
Security crisis. It is my belief that proactive public-private 
partnerships can expand opportunity for American families who 
fear their financial future. I believe that these incentives, 
coupled with educational programs and a fair and thorough look 
at our current pensions and Social Security policy will prevent 
the United States from encountering a savings and retired 
crisis.

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