[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]





                     HEARING ON ECONOMIC CHALLENGES
                      FACING MIDDLE CLASS FAMILIES

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

                                HEARING

                               before the

                      COMMITTEE ON WAYS AND MEANS
                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                            January 31, 2007

                               __________

                            Serial No. 110-4

                               __________

         Printed for the use of the Committee on Ways and Means





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                      COMMITTEE ON WAYS AND MEANS

                 CHARLES B. RANGEL, New York, Chairman

FORTNEY PETE STARK, California        JIM MCCRERY, Louisiana
SANDER M. LEVIN, Michigan            WALLY HERGER, California
JIM MCDERMOTT, Washington            DAVE CAMP, Michigan
JOHN LEWIS, Georgia                  JIM RAMSTAD, Minnesota
RICHARD E. NEAL, Massachusetts       SAM JOHNSON, Texas
MICHAEL R. MCNULTY, New York         PHIL ENGLISH, Pennsylvania
JOHN S. TANNER, Tennessee            JERRY WELLER, Illinois
XAVIER BECERRA, California           KENNY HULSHOF, Missouri
LLOYD DOGGETT, Texas                 RON LEWIS, Kentucky
EARL POMEROY, North Dakota           KEVIN BRADY, Texas
STEPHANIE TUBBS JONES, Ohio          THOMAS M. REYNOLDS, New York
MIKE THOMPSON, California            PAUL RYAN, Wisconsin
JOHN B. LARSON, Connecticut          ERIC CANTOR, Virginia
RAHM EMANUEL, Illinois               JOHN LINDER, Georgia
EARL BLUMENAUER, Oregon              DEVIN NUNES, California
RON KIND, Wisconsin                  PAT TIBERI, Ohio
BILL PASCRELL JR,, New Jersey        JON PORTER, Nevada
SHELLEY BERKLEY, Nevada
JOSEPH CROWLEY, New York
CHRIS VAN HOLLEN, Maryland
KENDRICK MEEK, Florida
ALLYSON Y. SCHWARTZ, Pennsylvania
ARTUR DAVIS, Alabama

             Janice Mays, Chief Counsel and Staff Director

                  Brett Loper, Minority Staff Director

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
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                            C O N T E N T S

                               __________

                            January 31, 2007

                                                                   Page
Advisory of January 24, announcing the hearing...................     2

                               WITNESSES

The Honorable Jim McCrery, A Representative from the State of 
  Louisiana......................................................     4
.................................................................
The Honorable Jerry Weller, A Representative from the State of 
  Illinois.......................................................     5
Peter R. Orszag, Ph.D., Director, Congressional Budget Office....     9

                                 ______

Jacob Hacker, Ph.D., Professor of Political Science, Yale 
  University, New Haven, Connecticut.............................    26
Jason Furman, Ph.D., Senior Fellow and Director of the Hamilton 
  Project, Brookings Institute...................................    36
John C. Goodman, Ph.D., President and Chief Executive Officer, 
  National Center for Policy Analysis, Dallas, Texas.............    40
Diane Rowland, Sc.D., Executive Vice President, Kaiser Family 
  Foundation.....................................................    47
Eugene Steuerle, Ph.D., Senior Fellow, Urban Institute...........    54

                       SUBMISSIONS FOR THE RECORD

Americans For Fair Taxation, Conyers, Georgia....................    88
 Council, John M., Council Tool Co., letter......................    88
 Employee Benefit Research Institute, statement..................    89
 Ivar Rydstrom, statement........................................    95
 Stahl, Lawrence, American Prepaid Legal Services Institute, 
  statement......................................................   103

 
                     HEARING ON ECONOMIC CHALLENGES
                      FACING MIDDLE CLASS FAMILIES

                              ----------                              


                       WEDNESDAY, JANUARY 31, 2007

                     U.S. House of Representatives,
                               Committee on Ways and Means,
                                                    Washington, DC.

    The Committee met, pursuant to notice, at 2:07 p.m., in 
room 1100, Longworth House Office Building, Hon. Charles B. 
Rangel (Chairman of the Committee) presiding.
    [The advisory announcing the hearing follows:]

ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS
                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
January 24, 2007
FC-4

   Chairman Rangel Announces a Hearing on Economic Challenges Facing 
                         Middle Class Families

    House Ways and Means Committee Chairman Charles B. Rangel today 
announced the Committee will hold a hearing on the economic challenges 
facing middle class families. The hearing will take place on Wednesday, 
January 31, in the main Committee hearing room, 1100 Longworth House 
Office Building, beginning at 2:00 p.m. It is the fourth and final in a 
series of hearings the Committee is holding on the state of the 
American economy.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing.
      

FOCUS OF THE HEARING:

      
    In the decades after World War II, standards of living for middle-
class families grew along with the American economy. Millions of 
American families moved into larger and more modern homes. Many 
consumer goods like telephones, televisions, and automobiles became 
commonplace items. Educational opportunities expanded, opening new 
doors to the children of middle-class and working families. Retirement 
became a real option for most workers rather than a luxury enjoyed only 
by the wealthiest Americans or an economic hardship forced upon those 
no longer able to work. Employer-provided health insurance became 
widespread.
      
    In recent years, middle-class families have found their economic 
circumstances increasingly precarious. Many workers face wage 
stagnation, or even prolonged unemployment, and fewer workers have 
guaranteed pension benefit plans, causing many to worry about 
retirement. All of this uncertainty comes at a time when families face 
increasing costs for education, health care, and energy. This hearing 
will examine these challenges and related pressures facing middle-class 
families and their economic future.
      
    In announcing the hearing, Chairman Rangel said, ``Many American 
families are finding it harder and harder to hold on to the American 
dream. Too often, we hear about parents worried that their children 
will not be able to build on their success and create a higher standard 
of living for themselves. We need to take a deeper look at what is 
driving these concerns so we can build and maintain an economy that 
works for all Americans.''
      

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    Chairman RANGEL. The Committee on Ways and Means will come 
to order.
    This is the third broad-based hearing that we have had on 
taxes, poverty and now on the economic challenges that are 
facing the middle class. We are not looking immediately for 
legislation to come out of these hearings, but we want the 
Members to have a broader base as to areas where we do have 
jurisdiction and whether or not they should receive some type 
of priority as we set our legislative calendar up.
    So, I would like to yield at this time to the Ranking 
Member, Mr. McCrery, for any statement he would like to make.
    Mr. MCCRERY. Thank you, Mr. Chairman. I have a written 
statement that I would offer to the Committee.
    Just a few brief remarks. This is an important topic to all 
of us in this country, as we are certainly aware of our 
Nation's proud history of having a strong, vibrant middle 
class; and, indeed, the middle class makes up the vast majority 
of the people in this country. So, we are all concerned about 
learning of anything that might be threatening that history and 
the future of the middle class. So, it is certainly appropriate 
to investigate this matter.
    I would submit just briefly that one of the areas that has 
come up in our other hearings, and I think we ought to devote 
more time to it at some point, is the issue of health care, 
health insurance, health benefits and how the increase in the 
cost of health care and the increase in premiums for health 
insurance plays a role in this feeling among some in the middle 
class that they are being squeezed because, to some extent, 
their wages are not as high as they otherwise would be because 
of the tremendous increases in health care costs.
    So, I would submit that that is one of the things we should 
examine further at some point, and I include in my written 
statement a little further explanation of my concerns with 
respect to health care as part of this question.
    Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you.
    [The prepared statement of Mr. McCrery follows:]
           Opening Statement of The Honorable Jim McCrery, a
         Representative in Congress from the State of Louisiana
    Thank you, Mr. Chairman.
    Today's hearing deals with a broad topic, the economic challenges 
facing the middle class. I would like to focus on one area--the rapidly 
rising cost of health coverage--and what it illustrates about the 
larger reforms we need.
    For several decades, the employer-based system has been the primary 
means of providing health insurance. That model is showing serious 
signs of strain. We must adopt better ways of organizing our health 
insurance system, so that potential increases in middle class wages are 
not siphoned off by ever-higher health costs.
    The employer-sponsored health care system is a historical accident, 
born of wage and prices controls during World War Two. Though it was 
never intended to be permanent, it served us well for a time. But now 
many of the economic assumptions it was based on have changed. For 
example, workers today rarely work for one company their entire lives. 
Instead, it is not uncommon for individuals to change jobs--and even 
occupations--several times during their lives.
    Last Fall, the Bureau of Labor Statistics released a study finding 
that the average person born between 1957 and 1964 held an average of 
more than ten jobs from ages 18 to 40. In an era with this more mobile 
workforce, our goal should be a health insurance system tied to the 
individual, not to the employer.
    In addition, when employees receive their health care for ``free'' 
from their employer, they have no motive to shop for the best price, or 
to seek out cost-effective preventative care. That is one of the many 
factors fueling the increase in health care costs, which rose up 6.9 
percent in 2005 and 7.2 percent in 2004.
    Though American workers often fail to realize it, the ``free'' 
health coverage they receive from employers has real and substantial 
costs--generally in the form of lost wages or other benefits. That 
point bears repeating: wages for working Americans would clearly be 
higher if it were not for the rapid increase in health care costs.
    As the CEO of General Motors has noted, each of his company's 
vehicles produced in North America includes an average embedded cost of 
$1,525 in health care benefits. That makes GM the world's largest 
private provider of health care benefits. Former Chrysler CEO Lee 
Iacocca has observed, ``it is a well-known fact that the U.S. 
automobile industry spends more per car on health care than on steel.''
    It is no surprise that the Employee Benefits Research Institute 
found the percentage of adults getting health insurance through their 
employer declined from a high of 68.7 percent in 2000 to 63.8 percent 
in 2005. The erosion in employer-sponsored coverage was steady each 
year, even as unemployment rates rose and then fell over the past 6 
years.
    The situation is particularly difficult for low-income Americans. 
If they do not receive employer-sponsored health coverage, they are 
likely to find themselves completely priced out of the individual 
insurance market. They will join the 43 million Americans with no 
health insurance at all.
    The current tax code is clearly part of the problem, because it 
provides large subsidies to employer-sponsored plans, but practically 
nothing for those in the individual market.
    President Bush has put forward a creative and bold revision of the 
tax treatment of health care. I do not agree with every detail. For 
example, I would prefer to provide assistance to the low-income 
individuals through a tax credit rather than a deduction, and the 
proposal should be combined with market reforms to address the 
affordability and availability of insurance in the individual market. 
But I believe his proposal should get us thinking about ways the tax 
code could be modernized to better reflect today's market realities.
    We see a similar situation with respect to pensions. Old-fashioned 
defined-benefit plans make sense for workers who are going to stay with 
one employer for many years. But in the modern economy, mobile workers 
are better served by defined-contribution plans.
    Last January, EBRI quantified the dramatic shift from defined-
benefit to defined-contribution plans. The percentage of workers whose 
primary retirement plan was a defined benefit had declined from 56.7 
percent in 1998 to just 40.5 percent in 2003. In that same five-year 
period, the percentage of workers whose primary retirement plan was 
based on defined contributions rose from 35.8 percent to 57.7 percent.
    There are greater risks, as well as greater rewards, in a defined-
contribution system, and we should protect workers from some of those 
risks. By including provisions in the pension bill last year expanding 
the ability of individuals to obtain investment advice from their 
401(k) provider, the Congress took an important step toward helping 
workers make more informed choices about how to save for the future.
    Similarly, I am pleased the Congress last year, as part of the 
pension bill, made permanent the savings and investment tax incentives 
that were developed with the strong input of two former Members of this 
panel, Rob Portman and Ben Cardin. Both have gone on to bigger, if not 
necessarily in our minds, better places.
    Nevertheless, more needs to be done to help promote retirement 
security. And that includes all three legs of the stool, personal 
savings, employment-based plans, and Social Security.
    The challenges we face, as a nation, are particularly acute with 
respect to the future financing of Social Security, and I am hoping 
that we can work, on a bi-partisan basis, to address the long-term 
solvency of the program. The longer we wait, the more difficult the 
solutions become. And if we do nothing, we will soon see double-digit 
cuts in Social Security benefits or massive tax increases. THAT would 
``squeeze'' the middle class.
    Mr. Chairman, there are many challenges facing American families. 
Some, like those I mentioned, are within this Committee's jurisdiction. 
I look forward to the discussion today, and the dialogue to come, as we 
examine ways to ensure the tax code is responsive to our changing 
workforce.
    Thank you, and I yield back the balance of my time.
    [The prepared statement of Mr. Weller follows:]
            Opening Statement of The Honorable Jerry Weller,
        a Representative in Congress from the State of Illinois
    One of the topics being discussed today is income inequality. When 
most people hear ``income'' they think of earnings. But it's more than 
that, and includes for many families other income sources such as 
pensions, government benefits, and so on.
    During testimony today before the Joint Economic Committee, Dr. 
Richard Vedder, a visiting scholar at the American Enterprise 
Institute, noted that ``the conventional measures that are typically 
cited to denote greater inequality are fundamentally flawed and grossly 
overstate inequality in this nation, and the growth in it over time.'' 
(p. 1)
    He goes on to point out that Medicaid benefits, food stamps and 
housing subsidies, among other benefits, are ignored in such 
calculations. He suggests that ``Any comparison of income levels or 
income inequality today with, say what existed in 1960 using published 
income data will tend to overstate any reported rise in inequality, and 
understate any estimate of income gains for lower income Americans.'' 
(p. 2)
    This is the same dynamic we saw in last week's poverty hearing--the 
``official'' poverty rate does not include data on all the anti-poverty 
benefits the government provides, which has the effect of making 
poverty seem deeper and more widespread. The same goes for income 
inequality--by not counting as ``income'' many of the government 
benefits designed to raise the wellbeing of low-income families, 
inequality seems worse than it really is.
    Consumption data suggests more of the same. Dr. Vedder noted that 
instead of looking solely at income inequality, ``what we should truly 
be interested in is the economic well-being of Americans, and a far 
better measure of that economic well-being is consumption spending.'' 
He goes on to note that ``Roughly speaking, conventional measures show 
consumption inequality is at least one-third less than for income 
inequality.''
    I commend Dr. Vedder's testimony to the Committee, as it provides 
much-needed context related to the well-being of all families, 
including middle class families.
                               __________
                  TESTIMONY BEFORE THE JOINT ECONOMIC
                COMMITTEE OF CONGRESS, JANUARY 31, 2007
Economic Growth, Economic Justice, and Public Policy
By Richard Vedder
Visiting Scholar, American Enterprise Institute
Distinguished Professor of Economics, Ohio Univeristy

    Good morning Senator Schumer and Members of the Committee. The JEC 
has just completed 60 years of existence, and during those six decades 
it has assisted importantly in the making of economic policy, and I am 
pleased to be part of today's proceedings. My distinguished colleagues 
on this panel have painted a somewhat pessimistic and perhaps mildly 
alarming picture of the American economy. We learn that many Americans 
have not shared in our nation's rising prosperity. The income and wage 
gap between the rich and the poor is growing. We are told we are 
becoming a more economically divided nation.
    My message is somewhat more optimistic and skeptical of the 
analysis suggesting that vast portions of the American populace are 
languishing economically. Let me very briefly touch on three points. 
First, the conventional measures that are typically cited to denote 
greater inequality are fundamentally flawed and grossly overstate 
inequality in this nation, and the growth in it over time. Second, even 
if one accepts the proposition that America has insufficient equality 
of economic condition, history tells us that public policy efforts to 
deal with the problem often are ineffective. Third, some policies that 
conceivably might lower inequality as conventionally measured would, if 
adopted, have serious adverse consequences to the economy as a whole.
    Turning to the first point, looking at conventional statistics on 
income distribution, three factors lead us to overstate inequality. 
First, and probably least important, those statistics are traditionally 
based on money income, excluding a variety of in-kind, non-cash 
payments that primarily benefit lower income persons--Medicaid 
benefits, food stamps, and housing subsidies are three good examples. 
Any comparison of income levels or income inequality today with, say 
what existed in 1960 using published income data will tend to overstate 
any reported rise in inequality, and understate any estimate of income 
gains for lower income Americans, since non-cash payments have become 
relatively more important in the intervening time period.
    A second factor is that what we should be truly interested in is 
the economic wellbeing of Americans, and a far better measure of that 
economic well-being is consumption spending. Dollar for dollar, people 
derive more joy from what they spend than from what they earn. As many 
elementary economics textbooks point out in the first chapter, the 
ultimate purpose of economic activity is consumption.
    We know that in any given year consumer spending is far more 
equally distributed than income. Comparing the income distribution 
statistics derived from the Current Population Survey with the BLS's 
Consumer Expenditure Survey is revealing.
    For example, the poorest one-fifth last year earned only slightly 
over 7 percent as much income as the richest one-fifth in 2002, but 
they consumed more than 24 percent as much. Using the most recent data 
for 2005, we see the richest one-fifth of the population earned 3.47 
times as much as the middle quintile, but consumed only 2.31 times as 
much. Roughly speaking, conventional measures show consumption 
inequality is at least one third less than for income inequality.
    The third point relating to the overstatement of inequality relates 
to the remarkable income mobility of the American people. For example, 
at the request of this Committee, the Treasury Department in the 1990s 
provided data suggesting that the overwhelming majority of persons in 
the bottom quintile of the income distribution were in another quintile 
a decade later, and a large percent even moved up or down the 
distribution from one year to the next. Researchers at the Urban 
Institute and other organizations have made similar observations. This 
phenomenon helps explain the narrowness of the distribution of 
consumption spending relative to the distribution of income, as 
observed decades ago by the late Milton Friedman and in a different 
context by Albert Ando and Franco Modigliani. Failure to consider the 
income mobility of people contributes to the inadequacies of 
traditional measures of income distribution and also leads us to create 
some inequities and inefficiencies when devising tax policies based on 
single year definitions of income.
    While we are talking about measurement problems, they are 
particularly prevalent in our discussions of changes in earnings over 
time. Go to page 338 of the 2006 Economic Report of the President. We 
learn that average weekly earnings of workers in private 
nonagricultural industries in 2005 were over eight percent less than 
they were in 1964, the year Lyndon Johnson announced his Great Society 
initiatives. Yet turn the page, to page 340. Looking at real 
compensation per hour in the non-farm business sector for the same time 
period, we learn it has risen 75 percent. Page 338 is consistent with a 
Marxian or even Malthusian interpretation of the economy--a tendency 
for wages to fall to near subsistence, and evidence of mass 
exploitation of the working proletariat by exploitive capitalists. Page 
340 is consistent with the view that with economic growth, the earnings 
of workers have risen sharply, and also consistent with national income 
accounts data that shows per capita real consumption has increased 
about two percent annually.
    Yet even the data on page 340 suffer from deficiencies. We learn 
that productivity per hour in the non-farm business sector in 2005 was 
2.28 times as great as in 1964, yet compensation rose only 1.75 times, 
a pretty big difference that is inconsistent with the neoclassical 
economic theory of factor prices and suggestive that owners of capital 
are indeed deriving extraordinary profits as a result of paying workers 
less than what they contribute to output at the margin. This should 
have resulted in a significant decline in compensation of workers as a 
percent of national income. Yet the national income data taken from 
pages 314 and 315 of the same source show a radically different story.
    Compensation of employees actually rose from 60.75 to 61.51 percent 
as a percent of the national income. The share of national income 
accounted for by corporate profits fell slightly in the same time 
period.
    I am making two points here. First, interpretations of economic 
data can be exceedingly misleading. Second, the analysis of broader 
measures of economic performance suggests that workers as a group have 
shared in our national prosperity of the past several generations. The 
original wage data I cited suffer from two enormous deficiencies. 
First, they fail to take into account non-wage forms of compensation, 
particularly health care and retirement benefits. These have soared in 
magnitude over time. Second, the calculation of changing values in 
constant dollars is fraught with peril, and the Consumer Price Index 
used in these calculations very significantly overstates inflation in 
the eyes of virtually every mainstream economist, liberal, 
conservative, vegetarian, Presbyterian, what have you. Similarly, 
analysis of wage changes by wage or income category suffers not only 
from these problems, but from the aforementioned phenomenon of the 
rapidly changing economic status of individual members of our 
opportunity society over time.
    You don't need a Ph.D. in economics to observe that never has a 
society had a middle class more used to what once were considered goods 
and services available only to the upper rich. Middle income Americans 
live in larger homes, buy more gadgets like IPODS and cell phones, live 
longer, are more if not better educated, and take nicer vacations than 
either their parents did or do and their counterparts in any other 
major nation. I returned two days ago from a two week cruise in the 
Caribbean, traveling less with top business executives or even elite 
Ivy League professors than with equipment salesmen, butchers, and 
teachers--ordinary folk. That simply did not happen even 30 years ago.
    My second major point relates to public policy dealing with 
economic inequality. Time does not permit a detailed exegesis of past 
efforts. But a reminder of some historical experiences is sobering. 
Policy can come from the tax, spending or regulatory side. I will 
ignore regulatory matters in the interest of time, although I would 
hasten to commend Senator Schumer for recent statements showing his 
concerns about the abusive use of the tort system as a growth-impeding 
way of redistributing income. Looking at taxes, attempts to make the 
system more progressive often have unintended effects. For example, 
sharp reductions in top marginal tax rates in the 1920s, 1960s, and 
1980s, viewed by some as favoring the rich, actually led to sharp 
increases in the tax burden of the rich relative to the poor. I worked 
for this Committee during the 97th Congress in 1981 and 1982 in a 
political environment much like today with divided government, with the 
Republicans controlling the Executive while Congress was more under 
Democratic control, yet the two branches managed to work together to 
fashion a more growth oriented tax policy with lower marginal tax rates 
that contributed mightily to the boom that has followed. I hope the 
110th Congress is capable of similar accomplishments. Taxes have 
behavioral consequences.
    The CBO greatly underestimated revenues that would arise from the 
reducing in the top capital gains rate to 15 percent, for example. 
Falling rates unlocked billions in unrealized gains that have helped 
fund our rapidly expanding government. Similarly, sharp reductions in 
the number of estates subject to death taxation as a result of reform 
in those laws has not led to a sharp decline in revenues from that 
source, as some had expected. It would be a tragedy to reverse the 
positive effects of the tax reductions of the past few years that, like 
the Kennedy tax reductions of the 1960s, have had a positive impact on 
economic activity.
    On the spending side, history again shows disappointing results of 
many initiatives to help the poor or middle class. As the January 20 
issue of the Economist notes, government job training programs have 
internationally been largely failures. Spending initiatives in the 
areas of education, medical care, and public assistance have usually 
brought about disappointing results. Despite spending far more in real 
terms per student than a generation or two ago, American students do 
not appear to be learning much more, and the education for lower income 
students is particularly deficient. A tripling of federal aid to 
college students since 1994 has been accompanied by a decline, not an 
increase, in the proportion of students from the lowest quartile of the 
income distribution attending and graduating from our finest 
universities, which are increasingly becoming taxpayer subsidized 
country clubs for the children of the affluent. While Medicaid has 
brought some increase in medical care for the poor, it has done so at 
an enormous cost to society, and the cost pressures of a highly 
inefficient system are leading companies to cut back on health care 
benefits for working middle class Americans. As to public assistance, 
it is far greater today in real per capita or per poor person terms 
than in 1973, yet the current poverty rate is higher. The welfare 
reforms of the 1990s were an important achievement, but the overall 
picture is, at the very least, mixed.
    Speaking of public assistance, I have to make one statement that 
may sound a bit callous or insensitive to some, but it is an important 
but often neglected truism. Comparing the rich and the poor, it is 
worth noting that the rich work a lot more. Of those persons in 
poverty, only a tiny minority work full-time. We have relatively few 
working poor in America. And it is worth noting that employment 
creation is greatest in periods when the government allows the 
incredible job machine generated by the competitive private sector 
operating in a market environment to work. The job creation of the 
1980s was stimulated by a halt to the growth in government's share of 
GDP characterizing earlier decades, and by tax reductions that 
stimulated the spirit of enterprise. The job creation of the 1990s was 
stimulated by an unprecedented decline in government expenditures as a 
percent of GDP for eight consecutive years--a reverse crowding out 
phenomenon that propelled an enormous outpouring of American creative 
and entrepreneurial endeavor.
    Turning to my final point today, there is a temptation to do things 
in the interest of protecting middle and lower income Americans that 
might have highly undesirable effects on the economy as a whole. In 
this regard, the rise in protectionist sentiment in Congress is 
appalling, particularly as is largely centered in a party which 
historically has favored free trade, a policy that has brought 
prosperity to almost all Americans while at the same time has 
contributed enormously to eliminating global disparities in the 
distribution of income and wealth. I hope the intelligent wing of the 
Democratic Party, represented by able persons such as those who 
preceded me on this panel, will be able to prevent a return to policies 
reminiscent of that old Democratic bete noire, Herbert Hoover. The 
Smoot-Hawley Tariff and rising taxes were a factor, along with Hoover's 
inane wage policies, for the Great Depression of the 1930s. Let us not 
repeat that today. I hope the Democratic Party will try to emulate 
Franklin D. Roosevelt, John F. Kennedy and Bill Clinton in the area of 
trade policy, not Herbert Hoover.
    At a macro level, I believe the biggest single factor in the modest 
slowdown in growth rates in this decade relative to the 1980s and 1990s 
is the sharp increase in government expenditures. From fiscal year 2001 
to fiscal year 2006, total federal outlays rose by 42.4 percent, or 
$790.1 billion. By the way, the overwhelming majority of that was for 
non-defense or national security purposes. This was nearly double the 
percent growth in GDP. Receipts rose well over 20 percent or roughly 
equal to the growth in GDP, so the burgeoning deficit reflected a 
spending binge that resulted in some crowding out of private economic 
initiatives. Dollar for dollar, the evidence is crystal clear that 
private spending has more productivity-enhancing effects than public 
spending because of the discipline that competitive markets impose on 
market enterprise. The tax cuts largely corrected for the natural 
tendency for taxes to rise relative to national output. Raising taxes 
again would reduce the deficit, but would have direct unfortunate 
disincentive effects on human economic behavior and would also reduce 
the political costs to Congress of incremental spending initiatives, 
which almost certainly would have severe economic effects. I hope some 
early indications of spending constraint are maintained in the months 
and years ahead. While I am not the financial guru that Secretary Rubin 
is, an analysis that I have conducted with Lowell Gallaway for this 
Committee in the past suggests that the two best determinants of the 
growth of wealth as measured in equity prices are the rate of inflation 
and government spending as a percent of GDP. Rising government spending 
is associated with falling market values and wealth, with all the 
adverse consequences that has for pensions. And stable prices are much 
better than inflation. The Fed has done a pretty good job on the 
inflationary front, but the Congress and the Executive are guilty of 
having shown insufficient constraint with respect to federal 
expenditures.
    Again, I praise the JEC for providing a needed forum for the 
analysis of policy possibilities informed by factual evidence. I hope 
the next 60 years are as successful for this Committee as the last 60 
have been.
    Thank you.

                                 

    Chairman RANGEL. Let me say to the gentleman that I agree 
with you, and I think in putting together our hearings that, in 
talking with you, I would hope that this would be an early 
priority for the Committee to at least set the groundwork to 
see how we can move forward in this very serious area.
    Peter Orszag, or Dr. Orszag, who is the Director of the 
Congressional Budget Office (CBO), first, let me congratulate 
you for your appointment as well as the CBO that we rely on so 
much for non-partisan views for serious issues that come before 
this Committee. Once again, I thank your office for your past 
contributions; and I look forward to your testimony.

 STATEMENT OF PETER R. ORSZAG, PH.D., DIRECTOR, CONGRESSIONAL 
                         BUDGET OFFICE

    Dr. ORSZAG. Thank you very much, Mr. Chairman, Mr. McCrery 
and Members of the Committee. I appreciate the invitation to 
participate in today's hearing and very much look forward to 
working with all of you throughout my term to provide you with 
timely and high-quality analysis of economic and budget issues.
    My testimony today examines both macroeconomic volatility 
and household income volatility. Macroeconomic volatility, that 
is the ups and downs of overall economic growth in inflation, 
has declined and is now relatively low. In particular, year-to-
year fluctuations in the economy have become smaller than in 
the past.
    The first chart just shows you the growth rate in Gross 
Domestic Product that is in the size of the economy. That is 
kind of hard to read, but if you look at the size of the change 
from year to year in a standard measure of that variation, it 
is now much lower than it was during the fifties, sixties, 
seventies and early eighties, roughly half as large. The same 
decline has occurred in inflation rates in terms of their 
variability.
    Several potential explanations have been put forward for 
this so-called great stabilization. Among the leading 
explanations are that a more flexible economy, itself 
reflecting developments such as improvements in production 
processes and investments in information technologies, have 
made it possible for the economy to adjust much more smoothly 
to changes in the availability of goods and services. As a 
result, the macroeconomy can adapt more easily to shocks 
without large changes in output or large jumps in inflation.
    A second potential explanation is that financial innovation 
since the seventies have provided alternatives to lending by 
banks, broadened opportunities for various types of financial 
intermediation between borrowers and lenders and enhanced risk 
management. The result has been more stable financing for both 
businesses and households and more resiliency in the financial 
system which has also helped to stabilize the macroeconomy.
    The second main point of the testimony, though, is that, 
despite the relatively modest volatility in the overall 
economy, workers in households still experience substantial 
variability in their earnings and income from year to year. CBO 
undertook new empirical analysis to explore this earnings and 
income volatility. Between 2001 and 2002, for example, and 
after adjusting for inflation, one in four workers saw his or 
her earnings increase by at least 25 percent over that short 
time period, while one in five saw his or her earnings decline 
by at least 25 percent.
    You can see in this chart that you have very significant 
portions of workers--for example, 11 percent of workers saw 
their earnings decline by at least half, which is the far left 
bar. That is a very substantial amount of volatility.
    Workers with less education tend to experience more 
volatility in their earnings than do workers with more 
education, which is illustrated on this chart. For example, 16 
percent of workers without a high school education had their 
earnings decline by 50 percent or more, compared with just 10 
percent with more than a high school education; and we give you 
the figures here for declines or increases of 25 percent or 
more. Such fluctuations can result from many sources, including 
job changes, job losses, job gains and voluntary exits from the 
labor force, such as to care for children or other family 
members.
    It is also worth noting that these figures are for before-
tax earnings and income. The tax system can help to smooth 
fluctuations in income so after-tax income can vary less from 
year to year than before tax income does. That potential role 
of the tax system in smoothing income fluctuations can be quite 
important and I think is worthy of further scrutiny.
    Given the high current levels of volatility at the worker 
and household level, an important question is whether over 
longer periods of time earnings in income volatility has risen. 
According to most studies on the topic, earnings now fluctuate 
more on a percentage basis than they did in the seventies. 
Relative to other topics, though, the trend in earnings and 
income volatility has received relatively little research 
attention. More research is therefore needed before firm 
conclusions about the precise time trend in earnings and income 
volatility can be reached.
    A final section of my testimony involves job transitions 
which can contribute to volatility at the worker and household 
levels. Each year, millions of people become unemployed and 
find a new job; and many others change jobs without any 
intervening unemployment. Recent estimates demonstrate the 
extent to which workers move in and out of jobs. Over the 12 
months ending in November, 2006, for example, an average of 
almost 5 million workers were hired by firms each month, and 
4\1/2\ million workers per month quit, were laid off or for 
other reasons left their jobs. So, almost 5 million or 4\1/2\ 
million workers leaving and entering new jobs each month, which 
is a significant amount of volatility.
    Over the past several decades, the percentage of unemployed 
who remain out of work for long periods of time has increased. 
About one in six workers who were unemployed in late 2006 had 
been unemployed for 27 weeks or longer, which is illustrated on 
this chart, even though the unemployment rate is low, at less 
than 5 percent of the labor force.
    One part of the explanation for the rise in long-term 
unemployment may be an increasing share of job losses that are 
permanent separations rather than temporary layoffs. Moreover, 
research suggests that the adverse consequences of losing a job 
because of slack work, a plant closing or a position being 
abolished have increased, which may be one factor contributing 
to the relatively high level of volatility in earnings in 
income at the household level.
    So, in conclusion, the overall U.S. economy has become less 
volatile. Macroeconomic fluctuations are now less severe than 
they were, say, in the sixties and seventies. At the same time, 
though, households continue to experience very substantial 
variability in their earnings and income, and that variability 
may now be higher than it was in the past, perhaps contributing 
to anxiety among workers and families. This topic seems worthy 
of more attention from both policymakers and analysts.
    Thank you very much.
    Chairman RANGEL. Thank you so much.
    [The prepared statement of Dr. Orszag follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Chairman RANGEL. Maybe we ought to invite all of our 
panelists to sit up here together. Jacob Hacker--Dr. Hacker is 
a Professor of Political Science from Yale University. Welcome. 
Sit up here.
    Dr. HACKER. Thank you very much.
    Chairman RANGEL. We ask to join you Dr. Jason Furman, 
Senior Fellow and Director of the Hamilton Project at 
Brookings; Dr. John Goodman, President and Chief Executive 
Officer of the National Center for Policy Analysis, Dallas; 
Diane Rowland, Doctor, Executive Vice President of Kaiser 
Family Foundation--do we have chairs for everybody? Great--and 
Eugene Steuerle--Dr. Steuerle--Senior Fellow At the Urban 
Institute.
    Let me welcome all of you and your taking time out to share 
your views with us. It is very important to us, and we 
appreciate the time that you have spent.
    Now I will ask Dr. Hacker from Yale, how many books have 
you written, Doctor?
    Dr. HACKER. Four at the moment.
    Chairman RANGEL. Okay. How many articles? Any number, 
right?
    Dr. HACKER. Quite a few, thank you. I just spilled my water 
on me in the excitement of the question.
    Chairman RANGEL. I didn't ask you to name them all now, but 
thank you so much for coming, and we welcome your views.

   STATEMENT OF JACOB HACKER, PH.D., PROFESSOR OF POLITICAL 
        SCIENCE, YALE UNIVERSITY, NEW HAVEN, CONNECTICUT

    Dr. HACKER. Thank you so much for having me. It is a 
pleasure to be here before the Committee, and I am honored to 
speak today about the economic condition of the American middle 
class.
    Now, without mincing words, I think that condition can be 
described as serious and unstable. Over the last generation in 
nearly every facet of American middle-class economic life--
health insurance, pensions, job security, family finances--
economic risk has shifted from the broad shoulders of 
government and corporations onto the fragile finances of 
American families. I call this transformation "the great risk 
shift," and I believe it is at the heart of the economic 
anxieties that many middle-class Americans have expressed in 
recent years.
    As you well know, the United States has a distinctive 
framework of economic security, one that relies heavily on 
employers to provide essential social benefits. Today, however, 
this framework is eroding, and risk is shifting back onto 
workers and their families.
    Employment-based health insurance, for example, has 
contracted substantially, leaving nearly one in three non-
elderly Americans without coverage for some time every 2 years. 
Meanwhile, even as overall pension coverage has stagnated, 
there has been a dramatic movement away from traditional 
guaranteed defined benefit plans toward individual account 
style, defined contribution plans which place much of the 
responsibility and risk of retirement planning on workers 
themselves.
    We hear much today about inequality, the growing gaps 
between the rungs on our economic ladder, but the term that 
really captures the shift that I am describing is insecurity, 
the growing risk of slipping from the ladder itself. Insecurity 
seems to be what more and more Americans are feeling.
    In an election night poll commissioned by the Rockefeller 
Foundation last year, polling 3/4 of voters, Republicans in 
almost as large a portion as Democrats said they were worried 
about their overall economic security.
    Let me clearly emphasize that these are not just concerns 
or problems of the poor or poorly educated. Insecurity today 
reaches across the income spectrum, across the racial divide, 
across lines of geography and gender. Increasingly, all 
Americans appear to be riding the economic roller coaster that 
was once thought to be reserved for the working poor.
    For example, personal bankruptcies and home foreclosures 
are stunningly more common than they were a generation ago, and 
most who experience these dislocations are in the middle class 
when they do. Indeed, the segment of the population that is 
most vulnerable to these trends is families with children, in 
part because they are drowning in debt. In 2004, according to 
the Survey of Consumer Finances, personal debt exceeded 125 
percent of income for the median married couple with children.
    Now we will hear more at this hearing about the squeeze 
between income and expenses that helps account for some of this 
rise in middle-class debt, but another factor to consider, as 
our new CBO Director said, is that family incomes are unstable 
and perhaps have become more so. Indeed, research I have done 
using the Panel Study of Income Dynamics, a survey that has 
tracked thousands of families from year to year since the late 
sixties, suggests that not only have the gaps between the rungs 
on our economic ladder grown but what has also increased is how 
far people slip down the ladder when they lose their financial 
footing. For example, a recent study shows that the chance that 
Americans will spend short periods in poverty has increased 
substantially since the seventies in every age group.
    It is common to say that trends like these either cannot be 
addressed or that addressing them will hurt our economy. Both 
claims I think are false. The great risk shift is not an 
inevitable occurrence. In an economy as rich as ours, there is 
no compelling reason why we should not and could not shore up 
an update that buffers to protect families from economic risk 
so as to help them prosper in our increasingly dynamic, 
uncertain economy.
    Which brings me to the second misleading claim, that 
providing Americans with a basic foundation of security will 
drag our economy down. We cannot--we should not--ensure people 
against every risk they face, but it is a grave mistake to see 
security as opposed to opportunity. We give corporations 
limited liability, after all, precisely to encourage 
entrepreneurs to take risks. If middle-class Americans are to 
make the risky investments necessary to thrive in our new 
economy, they need an improved safety net, not an ever more 
tattered one.
    The American dream, the economic promise of this great 
Nation, is about security and opportunity alike; and ensuring 
the vibrancy of that dream in the coming decades will require 
providing security and opportunity alike.
    Thank you.
    Chairman RANGEL. Thank you so much, Doctor.
    [The prepared statement of Dr. Hacker follows:]
        Statement of Jacob Hacker, Ph.D., Professor of Political
            Science, Yale University, New Haven, Connecticut
    Thank you, Mr. Chairman. My name is Jacob Hacker, and I am a 
professor of political science at Yale University. I thank the 
committee for the honor of speaking today about the economic condition 
of the American middle class.
    Without mincing words, that condition can be described as ``serious 
and unstable.'' Increasingly, middle-class Americans find themselves on 
a shaky financial tightrope, without an adequate safety net if they 
lose their footing.
    A major cause of this precariousness is what I call ``The Great 
Risk Shift.'' \1\ Over the last generation, we have witnessed a massive 
transfer of economic risk from broad structures of insurance, whether 
sponsored by the corporate sector or by government, onto the fragile 
balance sheets of American families. This transformation is arguably 
the defining feature of the contemporary American economy. It has 
reshaped Americans' relationships to their government, their employers, 
and each other. And it has transformed the economic circumstances of 
American families, from the bottom of the economic ladder to its 
highest rungs.
---------------------------------------------------------------------------
    \1\ Jacob S. Hacker, The Great Risk Shift: The Assault on American 
Jobs, Families, Health Care, and Retirement--And How You Can Fight Back 
(New York: Oxford University Press, 2006).
---------------------------------------------------------------------------
    We have heard a great deal about rising inequality--the growing gap 
between the rungs of our economic ladder. And yet, to most Americans, 
inequality is far less tangible and immediate than a trend we have 
heard much less about: rising insecurity, or the growing risk of 
slipping from the ladder itself. Even as the American economy has 
performed fairly strongly overall, economic insecurity has quietly 
crept into American middle-class life. Private employment-based health 
plans and pensions have eroded, or been radically transformed to shift 
more risk onto workers' shoulders. Government programs of economic 
security have been cut, restructured, or simply allowed to grow more 
threadbare. Our jobs and our families are less and less financially 
secure.
    Insecurity strikes at the very heart of the American Dream. It is a 
fixed American belief that people who work hard, make good choices, and 
do right by their families can buy themselves permanent membership in 
the middle class. The rising tide of risk swamps these expectations, 
leaving individuals who have worked hard to reach their present heights 
facing uncertainty about whether they can keep from falling.
    Little surprise, then, that insecurity was a central issue in the 
2006 midterm elections--during which fully three-quarters of voters, 
Republicans in almost as large a proportion as Democrats, said they 
were ``worried about their overall economic security, including 
retirement savings, health insurance, and Social Security.'' \2\ 
Insecurity also appears to be a major reason for the huge divorce in 
recent years between generally positive aggregate economic statistics 
and generally negative public appraisals of the economy.\3\ And it is 
certain to be one of the most pressing domestic challenges faced in the 
coming years.
---------------------------------------------------------------------------
    \2\ McLaughlin and Associates poll of 1,000 midterm election 
voters, conducted for the Rockefeller Foundation. I am grateful to the 
Foundation for making this unpublished data available to me. Sixty-nine 
percent of Republican voters stated that they were worried, compared 
with 78 percent of Democratic voters and 76 percent of independent 
voters.
    \3\ Hacker, The Great Risk Shift, Chapter 1.
---------------------------------------------------------------------------
    In my remarks, I would like to review some of the major evidence 
that Americans are at increased economic risk, drawing on my recent 
book, The Great Risk Shift. After laying out the problem, I want to 
discuss the economic and philosophical grounds for addressing it--
grounds that, I believe, demand bold and immediate action. My central 
claim is that economic security is not opposed to economic opportunity. 
It is a critical cornerstone of opportunity. And restoring a measure of 
security in the United States today is the key to transforming the 
nation's great wealth and productivity into an engine for broad-based 
prosperity and opportunity in a more uncertain economic world.

The Economic Roller Coaster

    American family incomes are now on a frightening roller coaster, 
rising and falling much more sharply from year to year than they did 30 
years ago. Indeed, according to research I have done using the Panel 
Study of Income Dynamics--a nationally representative survey that has 
been tracking thousands of families' finances from year to year since 
the late 1960s--the instability of family incomes has risen faster than 
the inequality of family incomes. In other words, while the gaps 
between the rungs on the ladder of the American economy have increased, 
what has increased even more quickly is how far people slip down the 
ladder when they lose their financial footing.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    Is this just a problem of the less educated, the workers who have 
fallen farthest behind in our economy? The answer is no. Income 
instability is indeed greater for less educated Americans than for more 
educated Americans. (It is also higher for blacks and Hispanics than 
for whites, and for women than for men.) Yet instability has risen by 
roughly the same amount across all these groups over the last 
generation. During the 1980s, people with less formal education 
experienced a large rise in instability, while those with more formal 
education saw a modest rise. During the 1990s, however, the situation 
was reversed, and by the end of the decade, as Figure 1 shows, the 
instability of income had increased in similar proportions from the 
1970s baseline among both groups.\4\
---------------------------------------------------------------------------
    \4\ Further explication of all the analyses discussed in this 
testimony are contained in my book.
---------------------------------------------------------------------------
    Roller coasters go up and down. Yet when most of us contemplate the 
financial risks in our lives, we do not think about the upward trips. 
We worry about the drops, and worry about them intensely. In the 1970s, 
the psychologists Amos Tversky and Daniel Kahneman gave a name to this 
bias: ``loss aversion.'' \5\ Most people, it turns out, aren't just 
highly risk-averse--they prefer a bird in the hand to even a very good 
chance of two in the bush. They are also far more cautious when it 
comes to bad outcomes than when it comes to good outcomes of exactly 
the same magnitude. The search for economic security is, in large part, 
a reflection of a basic human desire for protection against losing what 
one already has.
---------------------------------------------------------------------------
    \5\ Daniel Kahneman and Amos Tversky, ``Prospect Theory: An 
Analysis of Decisions Under Risk'', Econometrica Vol. 47, no. 2 (1979).
---------------------------------------------------------------------------
    This desire is surprisingly strong. Americans are famously 
opportunity-loving, but when asked in 2005 whether they were ``more 
concerned with the opportunity to make money in the future, or the 
stability of knowing that your present sources of income are 
protected,'' 62 percent favored stability and just 29 percent favored 
opportunity.\6\
---------------------------------------------------------------------------
    \6\ George Washington University Battleground 2006 Survey, March 
24, 2005.
---------------------------------------------------------------------------
    Judged on these terms, what the Panel Study of Income Dynamics 
shows is troubling. About half of all families in the study experience 
a drop in real income over a two-year period, and the number has 
remained fairly steady. Yet families that experience an income drop 
fall much farther today than they used to: In the 1970s, the median 
income loss was around 25 percent of prior income; by the late 1990s, 
it was around 40 percent. And, again, this is the median drop: Half of 
families whose incomes dropped experienced larger declines.
    Figure 2 uses somewhat fancier statistics to show the rising 
probability of experiencing a 50 percent or greater family income drop. 
The chance was around 7 percent in the 1970s. It has increased 
dramatically since, and while, like income volatility, it fell in the 
strong economy of the 1990s, it has recently spiked. There is nothing 
extraordinary about ``falling from grace.'' You can be perfectly 
average--with an average income, an average-sized family, an average 
likelihood of losing your job or becoming disabled--and you're still 
two-and-a-half times as likely to see your income plummet as an average 
person was 30 years ago.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    The most dramatic consequence of financial reversals is, of course, 
poverty--subsistence at a level below the federal poverty line. 
According to the sociologist Mark Rank and his colleagues, the chance 
of spending at least a year in poverty has increased substantially 
since the late 1960s, even for workers in their peak earning years. 
People who were in their forties in the 1970s had around a 13 percent 
chance of experiencing at least a year in poverty during their forties. 
By the 1990s, people in their forties had more than a 36 percent chance 
of ending up in poverty. \7\
---------------------------------------------------------------------------
    \7\ Daniel Sandoval, Thomas A. Hirschl, and Mark R. Rank, ``The 
Increase of Poverty Risk and Income Insecurity in the U.S. Since the 
1970's,'' paper presented at the American Sociological Association.
    Annual Meeting, San Francisco, CA, August 14-17, 2004.
---------------------------------------------------------------------------
    These numbers illuminate the hidden side of America's economic 
success story: the growing insecurity faced by ordinary workers and 
their families. Yet as dramatic and troubling as these numbers are, 
they vastly understate the true depth of the problem. Income 
instability powerfully captures the risks faced by Americans today. But 
insecurity is also driven by the rising threat to family finances posed 
by budget-busting expenses like catastrophic medical costs, as well as 
by the massively increased risk that retirement has come to represent, 
as ever more of the responsibility of planning for the post-work years 
shifts onto Americans and their families. When we take in this larger 
picture, we see an economy not merely changed by degrees, but 
transformed--from an all-in-the-same boat world of shared risk toward a 
go-it-alone world of personal responsibility.

America's Unique--and Endangered--Framework of Economic Security

    We often assume that the United States does little to provide 
economic security compared with other rich capitalist democracies. This 
is only partly true. The United States does spend less on government 
benefits as a share of its economy, but it also relies more--far more--
on private workplace benefits, such as health care and retirement 
pensions. Indeed, when these private benefits are factored into the 
mix, the U.S. framework of economic security is not smaller than the 
average system in other rich democracies. It is actually slightly 
larger.\8\ With the help of hundreds of billions in tax breaks, 
American employers serve as the first line of defense for millions of 
workers buffeted by the winds of economic change.
---------------------------------------------------------------------------
    \8\ Jacob S. Hacker, The Divided Welfare State: The Battle over 
Public and Private Social Benefits in the United States (New York: 
Cambridge University Press, 2002); Willem Adema and Maxime Ladaique, 
``Net Social Expenditure, 2005 Edition,'' Paris, Organization for 
Economic Cooperative for Development, 2005, available online at 
www.oecd.org/dataoecd/56/2/35632106.pdf.
---------------------------------------------------------------------------
    The problem is that this unique employment-based system is coming 
undone, and in the process risk is shifting back onto workers and their 
families. Employers want out of the social contract forged in the more 
stable economy of past, and they are largely getting what they want. 
Meanwhile, America's framework of government support is also strained. 
Social Security, for example, is declining in generosity, even as 
guaranteed private pensions evaporate. Medicare, while ever more 
costly, has not kept pace with skyrocketing health expenses and 
changing medical practice. And even as unemployment has shifted from 
cyclical job losses to permanent job displacements, Unemployment 
Insurance has eroded as a source of support and recovery for Americans 
out of work.\9\
---------------------------------------------------------------------------
    \9\ See Lori G. Kletzer and Howard Rosen, ``Reforming Unemployment 
Insurance for the Twenty-First Century Workforce,'' Hamilton Project 
Discussion Paper 2006-06, Washington, D.C., Brookings Institution, 
September 2006, available online at www1.hamiltonproject.org/views/
papers/200609kletzer-rosen.pdf.
---------------------------------------------------------------------------
    The history of American health insurance tells the story in 
miniature. After the passage of Medicare and Medicaid, health coverage 
peaked at roughly 90 percent of the population, with approximately 80 
percent of Americans covered by private insurance. In its heyday, 
private insurance was provided by large nonprofit insurers, which 
pooled risks across many workplaces (and, originally, even charged all 
subscribers essentially the same rate--a practice favorable to higher-
risk groups). The American Hospital Association proudly described the 
Blue Cross insurance plans that once dominated U.S. health insurance as 
``social insurance under nongovernmental auspices.'' \10\
---------------------------------------------------------------------------
    \10\ Hacker, Divided Welfare State, 186, 214, 204.
---------------------------------------------------------------------------
    Since the late 1970s, however, employers and insurers have steadily 
retreated from broad risk pooling. The number of Americans who lack 
health coverage has increased with little interruption as corporations 
have cut back on insurance for workers and their dependents. From 
around 80 percent of Americans, private health coverage now reaches 
less than 70 percent, with nearly 47 million people without any 
coverage at all.\11\ Over a two-year period, more than 80 million 
adults and children--one out of three non-elderly Americans, 85 percent 
of them in working families--spend some time without the protection 
against ruinous health costs that insurance offers.\12\ And the problem 
is rapidly worsening: Between 2001 and 2005, the share of moderate-
income Americans who lack health coverage has risen from just over one 
quarter to more than 40 percent.\13\
---------------------------------------------------------------------------
    \11\ Current private coverage estimates are available through the 
Kaiser Family Foundation's ``Trends and Indicators in a Changing Health 
Care Marketplace,'' available online at www.kff.org/insurance/7031/
print-sec2.cfm. The estimate of nearly 47 million uninsured (the actual 
number is 46.6 million) comes from Carmen DeNavas-Walt, Bernadette D. 
Proctor, and Cheryl Hill Lee, ``Income, Poverty, and Health Insurance 
Coverage in the United States: 2005,'' Current Population Reports 
(Washington D.C.: U.S. Census Bureau, August 2006), 20, available 
online at www.census.gov/prod/2006pubs/p60-231.pdf.
    \12\ Families USA, ``One in Three: Nonelderly Americans Without 
Health Insurance, 2002-2003,'' Washington, D.C., Families USA, 2005, 
available online at www.familiesusa.org/assets/pdfs/
82million_uninsured_report6fdc.pdf.
    \13\ Sara R. Collins, et al., ``Gaps in Health Insurance: An All-
American Problem,'' New York, Commonwealth Fund, 2006, available online 
at www.cmwf.org/usr_doc/Collins_gapshltins_920.pdf.
---------------------------------------------------------------------------
    The uninsured, moreover, are hardly the only ones at risk because 
of rising medical costs. Among insured Americans, 51 million spend more 
than 10 percent of their income on medical care.\14\ One out of six 
working-age adults--27 million Americans--are carrying medical debt, 
and 70 percent had insurance when they incurred it. Of those with 
private insurance and medical debt, fully half have incomes greater 
than $40,000, and of this group a third are college graduates or have 
had postgraduate education.\15\ Perhaps not surprisingly, as many as 
half of personal bankruptcies are due in part to medical costs and 
crises--and most of these medical-related bankruptcies occur among the 
insured.\16\
---------------------------------------------------------------------------
    \14\ Families USA, ``Have Health Insurance? Think You're Well 
Protected? Think Again,'' Washington, D.C., February 2005, available 
online at www.familiesusa.org/assets/pdfs/Health_Care_Think_Again.pdf.
    \15\ Robert W. Seifert and Mark Rukavina, ``Bankruptcy Is The Tip 
Of A Medical-Debt Iceberg,'' Health Affairs 25:2 (2006): w89-w92.
    \16\ David U. Himmelstein, et al., ``MarketWatch: Illness And 
Injury As Contributors To Bankruptcy,'' Health Affairs, Web Exclusive, 
February 2, 2005.
---------------------------------------------------------------------------
    As employment-based health insurance has unraveled, companies have 
also raced away from the promise of guaranteed retirement benefits. 
Twenty-five years ago, 83 percent of medium and large firms offered 
traditional ``defined-benefit'' pensions that provided a fixed benefit 
for life. Today, the share is below a third.\17\ Instead, companies 
that provide pensions--and roughly half the workforce continues to lack 
a pension at their current job--mostly offer ``defined-contribution'' 
plans like the 401(k), in which returns are neither predictable nor 
assured.\18\
---------------------------------------------------------------------------
    \17\ John H. Langbein, ``Understanding the Death of the Private 
Pension Plan in the United States,'' unpublished manuscript, Yale Law 
School, April 2006.
    \18\ Geoffrey Sanzenbacher, ``Estimating Pension Coverage Using 
Different Data Sets,'' Center for Retirement Research Issues in Brief 
Number 51, Boston College, August 2006, available online at www.bc.edu/
centers/crr/issues/ib_51.pdf.
---------------------------------------------------------------------------
    Defined-contribution plans are not properly seen as pensions--at 
least as that term has been traditionally understood. They are 
essentially private investment accounts sponsored by employers that can 
be used for building up a tax-free estate as well as for retirement 
savings. As a result, they greatly increase the degree of risk and 
responsibility placed on individual workers in retirement planning. 
Traditional defined-benefit plans are generally mandatory and paid for 
largely by employers (in lieu of cash wages). They thus represent a 
form of forced savings. Defined-benefit plans are also insured by the 
federal government and heavily regulated to protect participants 
against mismanagement. Perhaps most important, their fixed benefits 
protect workers against the risk of stock market downturns and the 
possibility of living longer than expected.
    None of this is true of defined-contribution plans. Participation 
is voluntary, and due to the lack of generous employer contributions, 
many workers choose not to participate or contribute inadequate 
sums.\19\ Plans are not adequately regulated to protect against poor 
asset allocations or corporate or personal mismanagement. The federal 
government does not insure defined-contribution plans. And defined-
contribution accounts provide no inherent protection against asset or 
longevity risks. Indeed, some features of defined-contribution plans--
namely, the ability to borrow against their assets, and the 
distribution of their accumulated savings as lump-sum payments that 
must be rolled over into new accounts when workers change jobs--
exacerbate the risk that workers will prematurely use retirement 
savings, leaving inadequate income upon retirement. And, perversely, 
this risk falls most heavily on younger and less highly paid workers, 
the very workers most in need of secure retirement protection.
---------------------------------------------------------------------------
    \19\ Alicia H. Munnell and Annika Sunden, ``401(k) Plans Are Still 
Coming Up Short,'' Center for Retirement Research Issues in Brief 
Number 43b, Boston College, March 2006, available online at www.bc.edu/
centers/crr/issues/ib_43b.pdf.
---------------------------------------------------------------------------
    According to the Center for Retirement Research at Boston College, 
the share of working-age households who are at risk of being 
financially unprepared for retirement at age 65 has risen from 31 
percent in 1983 to 43 percent in 2004. Younger Americans are far more 
likely to be at risk than older Americans: Roughly half of those born 
from the mid-1960s through the early 1970s are at risk of being 
financially unprepared, compared with 35 percent of those born in the 
decade after World War II. The least financially prepared are low-
income Americans--in every age group.\20\
---------------------------------------------------------------------------
    \20\ ``Retirement at Risk: A New National Retirement Risk Index,'' 
Center for Retirement Research, Boston College, Boston, MA, June 2006, 
available online at www.bc.edu/centers/crr/
special_pubs/NRRI.pdf.
---------------------------------------------------------------------------
    As private and public support have eroded, in sum, workers and 
their families have been forced to bear a greater burden. This is the 
essence of the Great Risk Shift. Rather than enjoying the protections 
of insurance that pools risk broadly, Americans are increasingly facing 
economic risks on their own--and often at their peril. In the new world 
of work and family, the buffers that once cushioned Americans against 
economic risk are become fewer and harder.

The New World of Work and Family

    The erosion of America's distinctive framework of economic 
protection might be less worrisome if work and family were stable 
sources of security themselves. Unfortunately, they are not. Beneath 
the rosy economic talk, the job market has grown more uncertain and 
risky, especially for those who were once best protected from its 
vagaries. While the proportion of workers formally out of work at any 
point in time has remained low, the share of workers who lose a job 
through no fault of their own every 3 years has actually been rising--
and is now roughly as high as it was during the recession of the early 
1980s, the worst economic downturn since the Great Depression.\21\
---------------------------------------------------------------------------
    \21\ Henry S. Farber, ``What Do We Know About Job Loss in the 
United States?'' Economic Perspectives 2Q (2005): 13, 14, available 
online at www.chicagofed.org/publications/economicperspectives/
ep_2qtr2005_part2_farber.pdf.
---------------------------------------------------------------------------
    No less important, these job losses come with growing risks. 
Workers and their families now invest more in education to earn a 
middle-class living, and yet in today's post-industrial economy, these 
costly investments are no guarantee of a high, stable, or upward-
sloping path. For displaced workers, the prospect of gaining new jobs 
with relatively similar pay and benefits has fallen, and the ranks of 
the long-term unemployed and ``shadow unemployed'' (workers who have 
given up looking for jobs altogether) have grown. These are not just 
problems faced by workers at the bottom. In the most recent downturn, 
the most educated workers actually experienced the worst effects when 
losing a full-time job, and older and professional workers were hit 
hardest by long-term unemployment.\22\
---------------------------------------------------------------------------
    \22\ Ibid.; Katharine Bradbury, ``Additional Slack in the Economy: 
The Poor Recovery in Labor Force Participation During this Business 
Cycle, Federal Reserve Bank of Boston Public Policy Brief No. 05-2, 
Boston, 2005, available online at www.bos.frb.org/economic/ppb/2005/
ppb052.pdf; Andrew Stettner and Sylvia A. Allegretto, ``The Rising 
Stakes of Job Loss: Stubborn Long-Term Joblessness amid Falling 
Unemployment Rates,'' Economic Policy Institute and National Employment 
Law Project Briefing Paper No. 162, 2005, available online at 
www.epi.org/briefingpapers/162/bp162.pdf.
---------------------------------------------------------------------------
    Meanwhile, the family--once a refuge from economic risk--is 
creating new risks of its own. At first, this seems counterintuitive. 
Families are much more likely to have two earners than in the past, the 
ultimate form of private risk sharing. To most families, however, a 
second income is not a luxury, but a necessity in a context in which 
wages are relatively flat and the main costs of raising a family 
(health care, education, housing) are high and rising.\23\ According to 
calculations by Jared Bernstein and Karen Kornbluh, more than three-
quarters of the modest 24 percent rise in real income experienced by 
families in the middle of the income spectrum between 1979 and 2000 was 
due to increasing work hours, rather than rising wages.\24\ (Some of 
this overall gain has been reduced by recent family income declines.) 
In time-use surveys, both men and women who work long hours indicate 
they would like to work fewer hours and spend more time with their 
families--which strongly suggests they are not able to choose the exact 
mix of work and family they would prefer.\25\
---------------------------------------------------------------------------
    \23\ Elizabeth Warren and Amelia Warren Tyagi, The Two-Income Trap: 
Why Middle-Class Mothers and Fathers Are Going Broke (New York: Basic 
Books, 2003).
    \24\ Jared Bernstein and Karen Kornbluh, ``Running Faster to Stay 
in Place: The Growth of Family Work Hours and Incomes,'' New America 
Foundation, Washington, D.C., June 29, 2005, available online at 
www.newamerica.net/publications/policy/
running_faster_to_stay_in_place.
    \25\ Jerry A. Jacobs and Kathleen Gerson, The Time Divide: Work, 
Family, and Gender Inequality (Cambridge, MA: Harvard University Press, 
2004).
---------------------------------------------------------------------------
    With families needing two earners to maintain a middle-class 
standard of living, their economic calculus has changed in ways that 
accentuate many of the risks they face. Precisely because it takes more 
work and more income to maintain a middle-class standard of living, the 
questions that face families when financially threatening events occur 
are suddenly more stark. What happens when women leave the workforce to 
have children, when a child is chronically ill, when one spouse loses 
his job, when an older parent needs assistance? In short, events within 
two-earner families that require the care and time of family members 
produce special demands and strains that traditional one-earner 
families generally did not face.
    The new world of work and family has ushered in a new crop of 
highly leveraged investors--middle-class families. Consider just a few 
of the alarming facts:

          Personal bankruptcy has gone from a rare occurrence 
        to a routine one, with the number of households filing for 
        bankruptcy rising from less than 300,000 in 1980 to more than 2 
        million in 2005.\26\ Over that period, the financial 
        characteristics of the bankrupt have grown worse and worse, 
        contrary to the claim that bankruptcy is increasingly being 
        used by people with only mild financial difficulties. 
        Strikingly, married couples with children are much more likely 
        to file for bankruptcy than are couples without children or 
        single individuals.\27\ Otherwise, the bankrupt are pretty much 
        like other Americans before they file: slightly better 
        educated, roughly as likely to have had a good job, and 
        modestly less likely to own a home.\28\ They are not the 
        persistently poor, the downtrodden looking for relief; they are 
        refugees of the middle class, frequently wondering how they 
        fell so far so fast.
---------------------------------------------------------------------------
    \26\ Data courtesy of Elizabeth Warren, Harvard Law School. 2005 
was, of course, an unusual year because of the rush of filings before 
the 2005 bankruptcy bill took effect. The number in 2004, however, 
still exceeded 1.56 million.
    \27\ Warren and Tyagi, Two-Income Trap.
    \28\ Elizabeth Warren, ``Financial Collapse and Class Status: Who 
Goes Bankrupt?'' Osgoode Hall Law Journal, 41.1 (2003).
---------------------------------------------------------------------------
          Americans are also losing their homes at record 
        rates. Since the early 1970s, there has been a fivefold 
        increase in the share of households that fall into 
        foreclosure--a process that begins when homeowners default on 
        their mortgages and can end with homes being auctioned to the 
        highest bidder in local courthouses.\29\ For scores of ordinary 
        homeowners--one in sixty mortgage-owning households in recent 
        years--the American Dream has mutated into what former U.S. 
        Comptroller of the Currency Julie L. Williams calls ``the 
        American nightmare.'' \30\
---------------------------------------------------------------------------
    \29\ Calculated from Peter J. Elmer and Steven A. Seelig, ``The 
Rising Long-Term Trend of Single-Family Mortgage Foreclosure Rates,'' 
Federal Deposit Insurance Corporation Working Paper 98-2, n.d., 
available online at www.fdic.gov/bank/analytical/working/98-2.pdf.
    \30\ Christian Weller, ``Middle Class in Turmoil: High Risks 
Reflect Middle Class Anxieties,'' Center for American Progress, 
Washington, D.C., December 2005, 7, available online at 
www.americanprogress.org/kf/middle_class_turmoil.pdf; Joe Baker, 
``Foreclosures Chilling Many US Housing Markets,'' Rock River Times, 
March 22-28, 2006, available online at www.rockrivertimes.com/
index.pl?cmd=viewstory&id=12746&cat=2.
---------------------------------------------------------------------------
          American families are drowning in debt. Since the 
        early 1970s, the personal savings rate has plummeted from 
        around a tenth of disposable income to essentially zero. In 
        2005, the personal savings rate was -0.5 percent--the first 
        time since 1993, in the midst of the Great Depression, that 
        savings has been negative for an entire year.\31\ Meanwhile, 
        the total debt held by Americans has ballooned, especially for 
        families with children. As a share of income in 2004, total 
        debt--including mortgages, credit cards, car loans, and other 
        liabilities--was more than 125 percent of income for the median 
        married couple with children, or more than three times the 
        level of debt held by married families without children, and 
        more than nine times the level of debt held by childless 
        adults.\32\
---------------------------------------------------------------------------
    \31\ ``U.S. Savings Rate Hits Lowest Level Since 1933,'' MSNBC.com, 
January 30, 2006, available online at www.msnbc.msn.com/id/11098797.
    \32\ Calculated from Federal Reserve Board, Survey of Consumer 
Finance 2004, available online at www.federalreserve.gov/PUBS/oss/oss2/
2004/scf2004home.html; all results are appropriately weighted.

    As these examples suggest, economic insecurity is not just a 
problem of the poor and uneducated, as is frequently assumed. It 
affects even educated, middle-class Americans--men and women who 
thought that by staying in school, by buying a home, by investing in 
their 401(k)s, they had bought the ticket to upward mobility and 
economic stability. Insecurity today reaches across the income 
spectrum, across the racial divide, across lines of geography and 
gender. Increasingly, all Americans are riding the economic roller 
coaster once reserved for the working poor, and this means that, 
increasingly, all Americans are at risk of losing the secure financial 
---------------------------------------------------------------------------
foundation they need to reach for and achieve the American Dream.

A Security and Opportunity Society

    Most of us think of our nation's safety net as a way of helping 
those who have had bad fortune or fallen on hard times. Yet providing 
economic security has far broader benefits for our economy and our 
society. Corporate law has long recognized the need to limit the 
downside of economic risk-taking as a way of encouraging entrepreneurs 
and investors to make the risky investments necessary to advance in a 
capitalist economy. The law of bankruptcy and principle of limited 
liability--the notion that those who run a firm are not personally 
liable if the firm fails--allow entrepreneurs to innovate with the 
security of knowing they will not be financially destroyed if their 
risky bets fail.\33\
---------------------------------------------------------------------------
    \33\ David Moss, When All Else Fails: Government as the Ultimate 
Risk Manager (Cambridge, MA: Harvard University Press, 2002).
---------------------------------------------------------------------------
    By the same token, families need a basic foundation of financial 
security if they are to feel confident in making the investments needed 
to advance in a dynamic economy. All of the major wellsprings of 
economic opportunity in the United States--from assets to workplace 
skills to education to investments in children--are costly and risky 
for families to cultivate. Providing security can encourage families to 
make these investments, aiding not just their own advancement but the 
economy as a whole.
    Providing economic security appears even more beneficial when 
considered against some of the leading alternatives that insecure 
citizens may otherwise back. Heavy-handed regulation of the economy, 
strict limits on cross-border trade and financial flows, and other 
intrusive measures may gain widespread support from workers buffeted by 
economic turbulence, and yet these measures are likely to reduce 
growth. The challenge, then, is to construct a twenty-first century 
social contract that protects families against the most severe risks 
they face, without clamping down on the potentially beneficial 
processes of change and adjustment that produce some of these risks.
    In achieving this vision, there can be no turning back the clock on 
many of the major changes that have swept through the American economy 
and American society. Yet accepting these changes does not mean 
accepting the new economic insecurity that middle-class families face. 
Americans will need to do much to secure themselves in the new world of 
work and family. But they should be able to do it in a context in which 
government and employers act as effective advocates on working 
families' behalf. And they should be protected by an improved safety 
net that fills the most glaring gaps in present protections, providing 
all Americans with the basic security they need to reach for the 
future--as workers, as parents, and as citizens.
    First and foremost, this means health coverage that moves with 
workers from job to job. In a policy brief released earlier this month, 
I have outlined a proposal that would extend good insurance to all non-
elderly Americans through a new Medicare-like program and guaranteed 
workplace health insurance, while creating an effective framework for 
controlling medical costs and improving health outcomes to guarantee 
affordable, quality care to all.\34\
---------------------------------------------------------------------------
    \34\ Jacob S. Hacker, ``Health Care for America: A Proposal for 
Guaranteed, Affordable Health Care for all Americans Building on 
Medicare and Employment-Based Insurance,'' EPI Briefing Paper #180, 
Economic Policy Institute, Washington, D.C., January 11, 2007, 
available online at www.sharedprosperity.org/bp180.html.
---------------------------------------------------------------------------
    A new social contract should also include enhanced protections 
against employment loss (and the wage and benefit cuts that come with 
it), and an improved framework for retirement savings. And I believe it 
should include a new flexible program of social insurance that I call 
``Universal Insurance''--a stop-loss income-protection program that 
insures workers against very large drops in their income due to 
unemployment, disability, ill health, and the death of a breadwinner, 
as well as against catastrophic medical costs. For a surprisingly 
modest cost, Universal Insurance could help keep more than 3 million 
Americans from falling into poverty a year and cut in half the chance 
that Americans experience a drop in their income of 50 percent or 
greater.\35\
---------------------------------------------------------------------------
    \35\ Jacob S. Hacker, ``Universal Insurance: Enhancing Economic 
Security to Promote Opportunity,'' Discussion Paper 2006-07, The 
Hamilton Project, Brookings Institution, Washington, DC, September 
2006, available online at www.brook.edu/views/papers/
200609hacker_wp.htm.
---------------------------------------------------------------------------
    Such a ``security and opportunity society'' will not be 
uncontroversial or easy to achieve. But it will restore a simple 
promise to the heart of the American experience: If you work hard and 
do right by your families, you shouldn't live in constant fear of 
economic loss. You shouldn't feel that a single bad step means slipping 
from the ladder of advancement for good. The American Dream is about 
security and opportunity alike, and rebuilding it for the millions of 
middle-class families whose anxieties and struggles are reflected in 
the statistics and trends I have discussed will require providing 
security and opportunity alike.

                                 

    Chairman RANGEL. Next will be Dr. Furman, who has taught at 
Yale, Columbia and is now at New York University in the great 
city of New York, the Wagner School, and has made an 
outstanding contribution in so many issues including Social 
Security. We not only thank you for coming today, but I have an 
impression that we will be calling upon you again for some help 
in this subject matter I mentioned. Welcome.

STATEMENT OF JASON FURMAN, PH.D., SENIOR FELLOW AND DIRECTOR OF 
           THE HAMILTON PROJECT, BROOKINGS INSTITUTE

    Dr. FURMAN. Well, I would be happy to help in any way I 
can; and thank you for the invitation to come here again today 
to this Committee.
    I currently serve as the Director of The Hamilton Project 
at the Brookings Institution, an initiative dedicated to 
developing policies that promote broad-based growth and 
opportunity. Today, I want to focus on one particular issue of 
tremendous importance to middle-class families and the anxiety 
they face, which is their retirement security.
    Preparing for retirement is substantially more complicated 
for today's work force than it was for yesterday's workers. Old 
mechanisms to secure retirement income, such as defined benefit 
pension plans, are being displaced by new savings vehicles, 
such as defined contribution plans. This change offers major 
opportunities but leaves many families at risk of being behind.
    When I submitted my prepared testimony, I wrote the 
personal savings rate has been negative for six straight 
quarters. This morning, the Bureau's economic analysis reported 
that it has now been negative for a seventh straight quarter 
for the first time since the thirties. This not only threatens 
the well-being of working families, it also endangers our 
entire economy.
    There is wide variation in retirement savings. Many 
families are accumulating enough assets to ensure a comfortable 
retirement, but at least one-third of families are not 
adequately prepared, according to a number of studies by 
economists. This latter group needs more supportive public 
policy initiatives.
    Financial planners generally recommend that retirement 
income replace about 70 percent of pre-retirement income. 
Social Security gets the typical family about halfway to this 
goal. For a typical worker retiring at age 65, Social Security 
replaces 40 percent of pre-retirement income. As the normal 
retirement age rises, the replacement rate for workers retiring 
at age 65 will fall to 36 percent.
    While Social Security remains the core tier of retirement 
security, the rest of the system has shifted beneath the feet 
of today's work force. The percentage of workers participating 
in the pension plan has been roughly constant at 50 percent for 
at least the last 25 years, but the types of pension plans 
workers are participating in has changed dramatically. In 1983, 
88 percent of workers with pension coverage were offered a 
defined benefit plan. By 2004, that percentage had fallen to 37 
percent. For defined contribution plans, the trend is the exact 
opposite.
    The shift to defined contribution plans creates two types 
of risks for workers. The first type of risk is easy to 
understand, the risk that a worker's chosen investments will 
perform poorly. This risk is mostly unavoidable in a defined 
contribution context, and policymakers would not want to 
eliminate this risk since its flip side is the high average 
returns in the stock market. The fact that the percentage of 
families holding stocks directly and indirectly has risen from 
40 percent in 1995 to 48 percent in 2004 is a good thing. The 
challenge we face is helping the remainder of Americans enjoy 
the benefits of investing in stocks without weakening the core 
tier of retirement security.
    The second risk associated with defined contribution plans 
is more troubling but also completely fixable. Traditional 
defined benefit plans do not require workers to make many 
choices. In contrast, defined contribution plans shift the 
burden of frequently complex decisionmaking to workers. As 
Brookings economist Bill Gale says, you don't have to be a 
mechanic to drive a car, and you shouldn't need a Ph.D. in 
financial economics to navigate the pension system.
    I can add that I have been a Brookings employee for a 
month, and I have a Ph.D. in economics. It was only in the 
course of preparing this testimony I realized I have yet to 
sign up for the pension plan.
    The Pension Protection Act of 2006 will improve matters for 
many employees by making it easier for companies to set up 
automatic 401(k)s, but it is only the first step of many that 
can be taken to help families prepare for retirement, and we 
should not forget that a substantial fraction of Americans must 
save for retirement without any help from their employers and 
without the administrative tax and financial advantages 
afforded by a company retirement plan.
    Finally, I urge this Committee to consider the unique 
retirement security challenges facing low- and moderate-income 
families. While Social Security benefits are progressive, one 
feature of particular importance to low-income workers has 
shrunk in recent years. Enacted in 1972, the special minimum 
benefit was designed to provide a robust floor to people who 
had worked hard and contributed all their lives. Since it is 
not indexed to wage growth, the benefit has eroded over time. 
Today, few workers receive it. Within a few years, none will.
    Furthermore, low- and moderate-income workers who manage to 
set aside modest retirement savings may be forced to deplete 
their nest eggs before getting help during times of hardship. 
Assets tests for food stamps, Medicaid, Temporary Assistance 
for Needy Families (TANF) and Supplemental Security Income 
(SSI) all mean low-income families can face a higher effective 
tax rate on their savings than high-income families. To make 
matters worse, many of the assets tests are not indexed for 
inflation, and balances in some defined contribution plans 
count toward some of the asset tests, even though the defined 
asset replacement tests did not.
    Working Americans need new policies for a modern era of 
retirement planning. The Hamilton Project as well as the 
Retirement Security Project are working to develop such 
policies. I look forward to discussing some of them in response 
to your questions.
    Chairman RANGEL. Thank you so much, Doctor.
    [The prepared statement of Dr. Furman follows:]
            Statement of Jason Furman, Ph.D., Senior Fellow
       and Director of the Hamilton Project, Brookings Institute
    Mr. Chairman and other Members of the Committee, thank you for the 
invitation to testify to you today regarding retirement security. I 
currently serve as Director of The Hamilton Project at The Brookings 
Institution, an initiative dedicated to developing policies that 
promote broad-based growth and opportunity. Enhancing retirement 
security is an important part of our efforts.
    Preparing for retirement is substantially more complicated for 
today's workforce than it was for yesterday's workers. Old mechanisms 
to secure retirement income, such as defined benefit pension plans, are 
being displaced by new savings vehicles such as defined contribution 
plans. This change offers major opportunities but leaves many families 
at risk of falling behind. As this change continues many families risk 
being left behind. Social Security benefits, meanwhile, provide an 
increasingly important bedrock for retirement security.
    The challenge could not be more stark. The personal saving rate has 
been negative for six straight quarters, the first time it has gone 
negative since the 1930s. A negative personal saving rate not only 
threatens the economic wellbeing of working families, it also endangers 
our entire economy. Low national saving leads the United States to 
borrow nearly 7 percent of GDP annually from foreign countries. This 
high current account deficit increases the chances of an economic 
crisis that could adversely affect the economic security of all 
Americans. And it requires that a fraction of our future national 
output be devoted to repaying foreign lenders, rather than raising the 
living standards of future generations of workers and retirees.
    At the individual level, many families are approaching retirement 
with very little in the way of savings. According to Survey of Consumer 
Finances data, two-thirds of families headed by a worker between the 
ages of 55 and 64 had under $88,000 in their retirement savings 
accounts in 2004. To put this in perspective, $88,000 would be enough 
to purchase an annuity paying just $653 per month.
    There is wide variation in retirement savings and many families are 
accumulating substantial assets that will be enough to ensure a 
comfortable retirement. But it is safe to say that at least one-third 
of families are not adequately preparing for retirement, according to a 
number of studies by economists. And it is this latter group which most 
needs--and can most benefit from--supportive public policy initiatives.
    Financial planners generally recommend that retirement income 
replace about 70 percent of pre-retirement income. Social Security gets 
the typical family about halfway to this goal. For a typical worker 
retiring at age 65, Social Security replaces 40 percent of pre-
retirement income. As the normal retirement age rises to 67, the 
replacement rate for workers retiring at 65 will fall to 36 percent. 
For the plurality of families that claim benefits starting at age 62, 
the replacement rates are even lower.
    In practice, Social Security makes up more than half of retirement 
income for 70 percent of people over age 65. It is the only source of 
retirement income for a quarter of the people above age 65. In 
addition, Social Security benefits have several important features that 
make them a uniquely important part of retirement security: in 
particular, benefits are inflation-indexed, last until death, are not 
subject to market risk, and cover virtually the entire workforce.
    But while Social Security has remained the core tier of retirement 
security, the rest of the system has changed rapidly. The percentage of 
workers participating in a pension plan has been roughly constant--at 
50 percent--for at least the last 25 years. But the types of pension 
plans workers are participating in have changed dramatically. In 1983, 
88 percent of workers with pension coverage were offered a defined 
benefit plan that would provide a retirement benefit linked to earnings 
and tenure, not to the individual investment portfolio of the worker. 
By 2004 that percentage had fallen to 37 percent. For defined 
contribution plans, (for example, 401(k)s, in which retirement benefits 
are linked to the performance of an investment account) the trend is 
almost the exact opposite. In 1983, 38 percent of workers offered a 
pension were offered a defined contribution plan while in 2004 it was 
80 percent. And the trend away from defined benefit plans in corporate 
America continues apace. In 2006, IBM, Verizon, and a number of other 
prominent companies stopped offering defined benefit plans to new 
employees.
    The shift to defined contribution plans creates two types of risks 
for workers. The first type of risk is easy to understand--the risk 
that a worker's chosen investments will perform poorly. This risk is 
mostly unavoidable in a defined contribution context (although some 
steps could reduce risks, such as not investing primarily the stock of 
one's employer). And policymakers would not want to eliminate this risk 
since the flip side of stock market risk is the high average returns in 
the stock market. Over the past century, equities have outperformed 
bonds by nearly 5 percentage points annually. Although there is no 
guarantee the equity premium will persist in the next century, and 
stocks are much more volatile than bonds, the fact that the percentage 
of families holding stocks, directly or indirectly, has risen from 40 
percent in 1995 to 48 percent in 2004 is a good thing. The challenge we 
face is helping the other 52 percent of Americans enjoy the benefits of 
investing in stocks--without weakening the core tier of retirement 
security.
    The second risk, associated with defined contribution plans is more 
troubling--but also completely fixable. Traditional defined benefit 
plans do not require workers to make many choices. Participation is 
generally automatic and nearly 100 percent of workers who are eligible 
for a defined benefit plan participate. In contrast, defined 
contribution plans shift the burden of decision-making to workers, 
leaving them in charge of making choices about whether to participate, 
how much to set aside for retirement, how to manage these funds, and 
how to roll them over into another retirement vehicle when they leave 
their job. And the evidence clearly shows that many workers make sub-
optimal choices in all these respects. As Brookings economist William 
Gale says, ``You don't have to be a mechanic to drive a car, and you 
shouldn't need a Ph.D. in financial economics to navigate the pension 
system.''
    In essence, while defined contribution plans present a tremendous 
opportunity for the workers who participate, make smart choices, and 
invest during strong markets, they also present a substantial risk to 
workers who fail to participate, make the wrong choices, or invest 
during weak markets. The Pension Protection Act of 2006 will improve 
matters for many employees by making it easier for companies to set up 
an automatic 401(k), but it is only a first step of many that can be 
taken to help families prepare for retirement.
    By far the biggest challenge today's workers face is not being 
offered any pension plan at all. In 2006, 40 percent of private workers 
were working for a company that did not have any form of pension 
coverage. These workers have to save on their own, without the 
administrative, tax and financial advantages afforded by a company 
pension plan.
    Finally, low- and moderate-income families face unique retirement 
security challenges. While Social Security benefits are progressive and 
provide a larger benefit for every dollar contributed by a low-income 
worker, one feature of particular importance to low-income workers has 
eroded in recent years: the special minimum benefit. Enacted in 1972, 
the special minimum benefit was designed to provide a robust floor for 
people who worked hard and contributed all their lives. Because it is 
not indexed to wage growth, the benefit has eroded over time and today 
few workers benefit and within a few years none will.
    Another challenge faced by low- and moderate-income workers is that 
even if they manage to set aside modest retirement savings, they may be 
forced to deplete these savings before they can get help during times 
of hardship, such as a temporary period of unemployment or a major 
illness. Assets tests for Food Stamps, Medicaid, Temporary Assistance 
for Needy Families (TANF), and Supplemental Security Assistance (SSI) 
mean that low-income families can face a higher effective tax rate on 
their saving than high-income families. To make matters worse, many of 
the assets tests are not indexed for inflation and balances in some 
defined contribution plans count towards some of the asset tests, even 
though the defined benefit plans they replaced did not.
    Working Americans need new policies for the modern era of 
retirement planning--policies that make pensions work better for the 
workers that have them, and policies that ensure more workers, and 
ideally all workers, have a pension.
    The Hamilton Project, as well as the Retirement Security Project, 
are working to develop such policies. I look forward to discussing some 
of them in response to your questions.
    \1\ The views expressed in this testimony are those of the author 
alone and do not necessarily represent those of the staff, officers, or 
trustees of The Brookings Institution or the members of the Advisory 
Council of The Hamilton Project.

                                 

    Chairman RANGEL. Dr. Goodman, who has been an advisor to 
many Members of the Congress is author of many books, 
editorials, is a great speaker. He is commonly seen on 
television shows, and he received his doctorate from Columbia. 
He has taught and worked with Stanford, Dartmouth, Southern 
Methodist, University of Dallas and is a great friend and 
advisor to Members of Congress. We thank you once again for 
agreeing to be with us. I think you are the author of this 
book, Leaving Women Behind, something we really don't want to 
do. Thank you.

   STATEMENT OF JOHN C. GOODMAN, PH.D., PRESIDENT AND CHIEF 
EXECUTIVE OFFICER, NATIONAL CENTER FOR POLICY ANALYSIS, DALLAS, 
                             TEXAS

    Dr. GOODMAN. Thank you, Mr. Chairman, Members of the 
Committee.
    The most important problems faced by middle-income families 
today are not caused by the economic system. Instead, they are 
more likely to be caused by outdated public policies.
    Our health care system, our pension system, tax law, labor 
law, employee benefits law, the basic structure of these 
institutions was formed 50 or 60 years ago by policymakers who 
made three interesting assumptions: First, they assumed that 
workers would have long-term relationships with employers, work 
for the same employer for their whole lives. Second, they 
assumed that the male in the household would be the 
breadwinner, would be a full-time worker, and his wife would be 
a full-time homemaker, and the two would stay married. Number 
three, in devising social insurance programs like unemployment 
insurance and workers compensation, they assumed the individual 
incentives or market forces could largely be ignored.
    These assumptions clearly are not valid for the 21st 
century.
    The traditional defined benefit pension was clearly not 
designed for a mobile labor market. Workers in these pension 
systems--in these pension plans lose thousands of dollars of 
benefits every time they switch jobs. Similarly, the employer-
based health insurance system makes less and less sense. A 
switch of employers today means a switch of health plans. That 
often means a switch of doctors. That means no continuity of 
care. It may also mean no continuity of health benefits.
    Now, Dr. Hacker says the move to IRAs, 401(k)s, health 
savings accounts involves a shifting of risk to employees. I 
think he has it exactly backward. The risk of benefit losses 
from job switches under the old defined benefit pension plans 
is greater than the risk of stock market fluctuation to the 
owner of a 401(k) plan, and the only thing that is portable in 
a modern health insurance plan is the health savings account 
part of it.
    In a highly mobile labor market, benefits should be 
personal and portable. They should be owned by employees, and 
they should travel with those employees as they go from job to 
job through the labor market.
    Portable health accounts and portable savings accounts are 
not the problem, they are part of the solution. What we should 
do is build on the institutions that we have created along 
these lines; and that is what Congress did last summer, by the 
way, when it adopted some recommendations made by my own 
organization and the Brookings Institution for how to reform 
and make better the 401(k) programs. Some of those same ideas 
could also be used to improve and reform the unemployment 
insurance system and the workers compensation system and other 
social insurance programs.
    Now to the subject of women. The most important economic 
and sociological change in the last 50 years has been the 
movement of women into the labor market, and yet our labor law, 
employee benefits law, tax law and so forth assumes that this 
has never happened. So, when a wife leaves the home and enters 
the labor market, she is in her husband's tax bracket, even if 
she is only earning the minimum wage. Even if her husband is 
maxed out on Social Security payments, she starts all over; and 
she will likely get no additional Social Security benefits in 
return for the extra taxes that she pays. For a middle-income 
couple, they are lucky if the wife at the end of the day gets 
to keep 35 cents of each dollar that she earns.
    The employee benefit system is even worse, because it is 
filled with rigidities. If the wife's husband has her covered 
under health insurance under another employer, she does not 
need duplicate coverage. She would probably like to forgo 
joining the health plan and have higher wages instead, but, in 
general, employers cannot do this.
    On the other hand, if she is not covered at her husband's 
place of work and she is working part time, she would probably 
like to take less in wages in order to be able to join the 
employers' health plan, but, again, the employers are not able 
to do this.
    Labor law also is way too rigid. What couples with children 
want more than they want higher wages is they want flexibility, 
they want the ability to have flexibility in their time; and 
yet the law is very rigid in this area as well. In general, 
women are more likely than men to move in and out of the labor 
market, to work part time and to have spells out of the labor 
market; and whenever they do any of these things the tax law 
discriminates against them when they buy health insurance, when 
they save for retirement, when they buy day care and when they 
do many other things.
    So, bottom line, what can we do about all of this? In a 
single sentence, what we need to do is bring 20th century 
institutions into the 21st century. At a minimum, that means 
personal portable benefits, tax fairness and enough flexibility 
in employee benefits law and labor law to allow employers to 
help employees meet their needs.
    Chairman RANGEL. Thank you, doctor. Your remarks are very 
well taken.
    [The prepared statement of Dr. Goodman follows:]
        Statement of John C. Goodman, Ph.D., President and Chief
 Executive Officer, National Center for Policy Analysis, Dallas, Texas
    Mr. Chairman and members of the committee, good afternoon. I am 
John Goodman, President and CEO of the National Center for Policy 
Analysis, a nonprofit, nonpartisan public policy research organization 
dedicated to developing and promoting private alternatives to 
government regulation and control, solving problems by relying on the 
strength of the competitive, entrepreneurial private sector.
    The most important problems faced by middle-income working families 
today are not problems that arise from the nature of our economic 
system. Instead they are problems caused by outdated public policies. 
The basic structure of tax law, labor law, employee benefits law and a 
host of other institutions was formulated 50 or 60 years ago by 
policymakers who made assumptions about how life would be lived. From 
top to bottom, key public policies were based on the assumption that:

        (1)  Workers would work for the same employer throughout their 
        work lives.
        (2)  Men and women would marry and stay married; and throughout 
        their working years the husband would be a full-time worker and 
        the wife would be a full-time homemaker.
        (3)  Workable social insurance (e.g., for unemployment, 
        disability, illness etc.) could be managed by bureaucratic 
        agencies because the consequences of individual choices are 
        largely irrelevant, regardless of how perverse the incentives 
        are.

    Clearly, these assumptions no longer describe the world in which we 
live. Accordingly, institutions designed for the 20th century are 
unworkable and inadequate for the 21st century. Among the reforms that 
are needed: Employee benefits need to be personally owned and 
portable--traveling with the worker from job to job. In this respect, 
IRAs, 401(k) plans and Health Savings Accounts (HSAs) are all steps in 
the right direction.
    More needs to be done.

Adjusting to a Mobile Labor Market

    One of the remarkable changes in the workforce over the past 
several decades is the rise in labor force mobility. Today, workers 
have held an average of 10.5 different jobs by the time they reach age 
40.\1\ Traditional employee pension and health benefits are ill-suited 
for this environment.
---------------------------------------------------------------------------
    \1\ ``Number of Jobs Held, Labor Market Activity, and Earnings 
Growth among the Youngest Baby Boomers: Results from a Longitudinal 
Survey Summary,'' U.S. Department of Labor, Bureau of Labor Statistics, 
Press Release, August 25, 2006.
---------------------------------------------------------------------------
    Mobile Workers, Immobile Retirement Savings. Opportunities to save 
for retirement are very dependent on where people work--and whether 
they work.
    Defined Benefit Pension Plans. Since World War II, the dominant 
form of retirement plan provided by employers has been the defined 
benefit pension. Employees acquire pension benefits based on their 
wages and years of service to the company. These plans work well for 
people who stay with the same employer, but they do not work well for 
employees who switch jobs. The reason: Under typical benefit formulas, 
workers sacrifice substantial benefits if they switch employers 
frequently throughout their career, even though they remain fully 
employed for their entire work lives and fully vested in every plan 
they enroll in.
    Defined Contribution Plans. Unlike defined benefit plans, defined 
contribution plans such as 401(k)s and 403(b)s promise no specific 
benefit at retirement. The employee has ownership rights over the 
assets in a specific account and is entitled to the full accumulation. 
Unlike defined benefit pensions, these accounts are portable: They 
follow the worker from job to job.
    Some complain that employees are ill-prepared to make the type of 
investment decisions made under the old system by professional 
managers. One answer is for workers to copy the investment choices of 
the defined benefit plans. Another criticism is that 401(k) holders are 
subject to stock market risk not encountered by defined benefit plan 
beneficiaries. However, the risk of defined benefit pension losses 
generated by job changes can be greater than the stock market risk 
assumed by 401(k) holders.\2\
---------------------------------------------------------------------------
    \2\ James Poterba, Joshua Rauh, Steven Venti and David Wise, 
``Defined Contribution Plans, Defined Benefit Plans, and the 
Accumulation of Retirement Wealth,'' National Bureau of Economic 
Research, Working Paper No. 12597, October 2006.
---------------------------------------------------------------------------
    There are a number of ways to make 401(k) plans work better. These 
reforms--initially developed and proposed by the National Center for 
Policy Analysis and the Brookings Institution and passed by Congress in 
2006--include automatic enrollment of new employees in 401(k) plans, 
automatic escalation of contributions and diversified portfolios.\3\
---------------------------------------------------------------------------
    \3\ For more information, see John C. Goodman and Peter R. Orszag, 
``Retirement Savings Reforms on which the Left and the Right Can 
Agree,'' National Center for Policy Analysis, Brief Analysis No. 495, 
December 1, 2004.
---------------------------------------------------------------------------
    Individual Retirement Accounts. Workers who do not have access to a 
401(k) plan may make contributions to an Individual Retirement Account 
(IRA). However, the contribution limits are lower and there are also 
income limits. Participants in an employer-sponsored 401(k) plan can 
contribute up to $15,000, while nonparticipants can contribute only 
$4,000 ($5,000 if age 50 or older) to a tax-advantaged IRA (both Roth 
and traditional IRAs).
    Mobile Workers, Immobile Health Plans. Like the tax subsidies for 
retirement saving, tax relief for the purchase of health insurance also 
depends on where we work and whether we work. The federal government 
subsidizes employer-provided health insurance through the tax system. 
The employees avoid federal, state and local income taxes as well as 
payroll taxes. In some places, the government is effectively paying 
half the cost of the insurance.
    The tax law is far less generous to people who must purchase 
insurance on their own, however. For this reason, more than 90 percent 
of people who have private insurance get it though an employer. The 
downside is that the health plan most of us have is not a plan that we 
chose; rather, it was selected by our employer. Even if we like our 
health plan, we could easily lose coverage because of the loss of a 
job, a change in employment or a decision by our employer.
    Problem 1: Lack of Continuity of Insurance. Virtually all employer 
health insurance contracts last only 12 months. At the end of the year, 
the employer--in search of ways to reduce costs--may choose a different 
health plan or cease providing health insurance altogether.
    Problem 2: Lack of Continuity of Care. Employees who switch jobs 
must also switch health plans. All too often that means changing 
doctors as well, since each health plan tends to have its own network.
    Problem 3: Perverse Incentives for Employers and Employees. Some 
individuals have a family member (often a spouse or child) who has very 
high health care costs. When these workers compare job opportunities, 
they are primarily comparing health plans. To protect themselves from 
such potential hires, employers are increasingly altering their health 
plans to attract the healthy and avoid the sick.
    Problem 4: Younger Spouses of Retirees on Medicare. When a husband 
retires and enrolls in Medicare, a younger wife may be left without 
coverage because underage spouses cannot enroll in Medicare. Until the 
wife qualifies for Medicare at age 65, the couple will have to purchase 
her insurance with after-tax dollars.
    Problem 5: Federal Laws Designed to Encourage Portability Have 
Actually Outlawed It. Under the current system, employers cannot buy 
individually-owned insurance for their employees. Specifically, lawyers 
interpret the Health Insurance Portability and Accountability Act of 
1996 (HIPAA) to say that the only employee health insurance employers 
can purchase with pretax dollars is group insurance.
    Exception: Health Savings Accounts (HSAs). An interesting exception 
to these generalizations is the HSA. These accounts represent 
individual self-insurance and they are an alternative to third-party 
insurance. Unlike third-party insurance, HSAs are fully portable, 
traveling with the employee through the labor market. Moreover, they 
are a model of how the rest of the insurance arrangement may also 
become portable.
    Solution: Tax Fairness. Health insurance and retirement savings 
choices have been distorted by a byzantine tax code that has long since 
lost its rational. In an ideal system, people would receive the same 
tax relief whether they save at home or at work, and whether they work 
or do not work.
    Solution: Personal and Protable Benefits.\4\ Just because employers 
pay all or most of the premium does not mean health insurance must 
necessarily be employer-specific. As an alternative, why can't 
employees enroll in health plans that meet their needs, and then be 
allowed to stay in those plans as they travel from job to job? Portable 
health insurance promises a continuing relationship with an insurer 
and, therefore, a continuing relationship with doctors and health 
facilities. It also means that people who are in a health plan they 
like can stay in it, without worrying whether they will be forced out 
of the plan by an employer's decision or by a change in employment.
---------------------------------------------------------------------------
    \4\ See John C. Goodman, ``Employer Sponsored, Personal and 
Portable Health Insurance,'' Health Affairs, Vol. 25, No. 6, November/
December 2006, pages 1,556-66.
---------------------------------------------------------------------------
    Pension benefits should also be personal and portable. While the 
creation of 401(k)s has been a liberating development in this respect, 
vesting periods are still too long. Although Congress has made progress 
on lowering vesting requirements, beyond a nominal period (to 
accommodate administrative costs) there should be no such thing as 
unvested, tax-advantaged 401(k) contributions.\5\ The principle should 
be: If there is a tax advantage, the benefit should belong to the 
worker.
---------------------------------------------------------------------------
    \5\ The Pension Protect Act of 2006 reduced the vesting period to 3 
years for employer contributions to defined contribution plans, down 
from 5 years before the change.

Adjusting to the Entry of Women Into the Workforce \6\
---------------------------------------------------------------------------
    \6\ This section is largely based on Kimberley A. Strassel, Celeste 
Colgan and John C. Goodman, Leaving Women Behind: Modern Families. 
Outdated Laws (Lanham, MD.: Rowman and Littlefield, 2006).

    The most significant economic and social change in the past half-
century has been the movement of women into the labor market. Since the 
1950s, the labor participation rate of women ages 25 to 55 years has 
increased more than 75 percent. Today, more than 60 percent of mothers 
with children under the age of six are working.\7\ Families with both 
spouses in the labor market now constitute almost two-thirds of all 
married couples.\8\ Yet the tax law, pension law, social insurance 
policies and laws governing employee benefits assume women never left 
the home.
---------------------------------------------------------------------------
    \7\ ``Women in the Labor Force: A Databook,'' U.S. Department of 
Labor, Bureau of Labor Statistics, Report 985, May 2005, Table 7.
    \8\ ``Women in the Labor Force: A Databook,'' U.S. Department of 
Labor, Bureau of Labor Statistics, Report 985, May 2005, Table 23.
---------------------------------------------------------------------------
    Income and Payroll Taxes. Income taxes and payroll taxes favor 
families with a homemaker spouse over families with two working 
spouses. Consider what happens when a married woman enters the labor 
market:

          Even if she earns minimum wage, she is taxed at her 
        husband's income tax rate; and even if her husband reaches the 
        cap on Social Security taxes, she must still pay Social 
        Security taxes on every dollar she earns up to the same 
        maximum.
          Since she is entitled to half of her husband's Social 
        Security benefit (and gets 100 percent after his death) whether 
        she works or not, odds are that she will get little if any 
        benefit from the payroll taxes she pays.
          Further, when all taxes and costs are considered 
        (including the cost of child care and other services she was 
        previously providing as a homemaker), a woman in a middle-
        income family can expect to keep only about 35 cents out of 
        each dollar she earns.\9\
---------------------------------------------------------------------------
    \9\ Assumes a 25 percent federal income tax, plus a 7.65 percent 
payroll tax, 7 percent state tax and 25 percent for ``replacement 
services.''

    Pensions and Health Care. In contrast to most other developed 
countries, the United States encourages employers rather than 
government to provide such benefits as health insurance and pensions. 
Federal policies also encourage employers to provide life insurance, 
disability insurance and even day care for children. Not everyone is 
treated the same, however. The employer-sponsored benefit system has 
been structured from top to bottom to accommodate the single-earner 
---------------------------------------------------------------------------
family with a spouse and dependents at home:

          Because they are more likely to work part time, women 
        are less likely to qualify for employer-provided benefits.
          Because they move from job to job and in and out of 
        the labor market more frequently than men, women are more 
        likely to be burdened by employee benefit programs that 
        penalize job switching (such as lack of vesting in a pension 
        plan).
          And when people acquire health insurance or save for 
        retirement outside the workplace, the tax system is far less 
        generous.

    Because of federal policies, this system favors workers over 
nonworkers, full-time workers over part-time workers and long-term 
employment over job-switching and intermittent employment.
    Child Care. Federal policies have resulted in a patchwork system of 
child care credits and exemptions that are arbitrary and unfair:

          While the tax law has a credit for child care 
        expenses, the maximum credit for 2006 was only $1,050--well 
        below most families' actual expenses. Further, there is no tax 
        relief for uncompensated care provided by a relative, friend or 
        family member.
          Parents lucky enough to work for an employer who 
        provides a flexible spending account may set aside up to $5,000 
        of annual pretax wages to purchase child care services.
          Employers can provide an unlimited amount of day care 
        on-site--all tax free; however, if the employer provides 
        additional compensation to the employee to purchase day care 
        services, the benefit is taxable.

    Clearly this is not a system designed to accommodate the needs of a 
21st century workforce.
    Labor Market Rigidities. Our institutions were not only designed 
for the full-time worker with a stay-at-home spouse, employers and 
employees find it difficult to make any other arrangement.

          Because of rigid tax laws and employee benefits laws, 
        if both spouses work full time they will likely receive 
        duplicate, unnecessary sets of benefits. The wife will be 
        unable to acquire higher wages in return for forgoing health 
        and pension benefits she acquires through her husband's 
        employer.
          In a free labor market, one would expect to find a 
        wide variety of work arrangements. Not every two-earner couple 
        will want to work 40 hour weeks. Some might opt for 25 to 30 
        hour weeks so they can spend more time with each other or 
        raising children. But rigid tax and employee benefits laws make 
        such arrangements largely impossible for people who need health 
        insurance, pensions and other benefits.
          Women raising children or caring for an ailing parent 
        have other reasons to want flexibility in working hours. 
        However, rigid labor laws may deny them the opportunity to 
        attend a child's soccer game or take a parent to the doctor one 
        week and make up the hours the following week.

    Antiquated Social Insurance. Among its other shortcomings (see 
below), the unemployment insurance system makes few allowances for 
women who leave work to have a baby, care for a relative or relocate 
because of a change in their husband's job. For example, suppose a 
woman has been working for years, paying taxes into the system, but 
decides to leave her job to have a baby. In most states, she would 
receive no benefits during her time away from the workforce and she 
would also be denied benefits when she searches for a new job. If she 
does find a job, works for a month and then is laid off, she still 
won't qualify for benefits because all but nine states ignore the most 
recent three to six months of work when calculating eligibility for 
unemployment compensation.\10\
---------------------------------------------------------------------------
    \10\ ``Women, Low-Wage Workers and the Unemployment Compensation 
System: State Legislative Models for Change,'' 2003 revised edition, 
National Employment Law Project, October 1997, pages 3-4, 9.

    Soutions. Many changes are needed to bring aging institutions into 
sync with the way people are living their lives in the 21st century. 
---------------------------------------------------------------------------
Here are a few suggestions:

          All employee benefits should be personal and 
        portable; they should be individually owned and travel with the 
        worker as he or she moves from job to job.
          There should be a level playing field under the tax 
        law, so that people who save for retirement or purchase health 
        insurance, long-term care insurance, day care, etc., receive 
        just as much tax relief as people who obtain these benefits at 
        work.
          The tax system should not penalize two-earner 
        couples; at a minimum, both spouses should be able to file 
        completely separate tax returns.
          The employee benefit system should be flexible, 
        making it easier for dual-earner couples to obtain higher wages 
        rather than unneeded, duplicate benefits, and for part-time 
        workers to accept lower wages in return for more valuable 
        health and retirement benefits.
          Labor law should be flexible, making it easier for 
        workers (especially parents with young children and caregivers 
        for elderly parents) to choose alternatives to the traditional 
        40-hour work week.

Making Social Insurance Meet Individual Needs

    Social insurance schemes managed by large, impersonal bureaucracies 
inevitably create perverse incentives for the individual beneficiaries. 
Sixty years ago there were only a limited number of options open to 
individuals, even if the incentives were perverse. For example, there 
were only a limited number of ways to spend health care dollars, even 
if someone else paid all the bills.
    Today we potentially can spend the entire gross domestic product on 
diagnostic tests alone. As a result, individuals left unchecked to 
pursue their own interests can bankrupt a health insurance plan. 
Similar principles apply to the workers' compensation and unemployment 
insurance systems.
    Dysfunctional Workers' Compensation Insurance.\11\ State workers' 
compensation systems do not allow employers and employees to reap the 
rewards or bear the full financial costs of their individual behavior. 
Premiums are not fully adjusted for claims experience, and employers 
are not allowed to integrate employee health plans and workers' 
compensation medical coverage.
---------------------------------------------------------------------------
    \11\ See N. Michael Helvacian, ``Workers' Compensation: RX for 
Policy Reform,'' National Center for Policy Analysis, Policy Report No. 
287, September 13, 2006.
---------------------------------------------------------------------------
    Most employer-sponsored health plans do not have first-dollar 
coverage or allow a completely free choice of physicians and 
facilities. The reason: There are significant savings from other types 
of plans. For companies that offer health benefits, the health plan 
presumably reflects the employees' implicit trade-off between wages and 
health insurance, since employers compete for labor by making their 
overall compensation package as attractive as possible. There should be 
no barrier to using the same health plans for workers' compensation 
claims. The failure to give employers and employees this option forces 
employees to take too much workers' compensation coverage and too 
little in wages and other benefits.
    Employers should also be allowed to integrate wage-replacement 
benefits with their regular disability plans. Having the same waiting 
periods could provide direct financial incentives to workers for safe 
behavior and impose financial penalties for unsafe behavior. With their 
premium savings from selecting more limited conventional coverage, 
employers could establish Workers' Compensation Accounts (WCAs) for 
employees; individually-owned WCAs would be a form of self-insurance.
    As a step in the right direction, employers should also be allowed 
to ``opt out'' of the statutory workers' compensation system. In Texas, 
firms employing almost one-fourth of the state's workers have chosen 
this option. These firms have fewer injuries, lower treatment costs and 
fewer sick days.
    Dysfunctional Unemployment Insurance.\12\ The unemployment 
insurance system encourages employers to lay off employees and 
discourages workers from seeking new jobs until their benefits are 
nearly exhausted. Part-time workers and those who change jobs 
frequently are taxed, but often are ineligible for benefits. Those who 
never make a claim receive no benefit in exchange for the taxes they 
pay.
---------------------------------------------------------------------------
    \12\ See William B. Conerly, ``Unemployment Insurance in a Free 
Society,'' National Center for Policy Analysis, Policy Report No. 274, 
March 29, 2005.
---------------------------------------------------------------------------
    The system encourages layoffs by shielding employers and workers 
from the true cost of such layoffs, since the tax rate paid by the 
employer is not fully adjusted for the cost to the system resulting 
from layoffs. Furthermore, because benefits for low-wage workers 
replace 50 percent or more of their previous pay, the loss of benefits 
upon reemployment acts as a 50 percent tax, acting as a powerful 
disincentive to find a new job.
    The simplest solution is replacing unemployment insurance with 
personal employment accounts that are individually owned, totally 
portable and benefit workers even if they are never involuntarily 
unemployed. A portion of the payroll taxes paid would be put into 
investment accounts that workers own and control. People could withdraw 
funds from their accounts during periods of unemployment, and any 
unused funds would add to their retirement incomes.
    Chile has implemented such a personal account system.\13\ The 
accounts are funded by payroll taxes. Workers own their accounts, but 
prior to retirement they only withdraw funds when they are unemployed. 
Unlike the U.S. unemployment system, Chileans can draw the funds out 
even if they quit or were fired from their last jobs. This allows 
workers more flexibility in changing employment. Any unused funds in 
their accounts are their own money. Also, employers have incentives to 
provide steady, year-round employment since seasonal work is not 
artificially subsidized.
---------------------------------------------------------------------------
    \13\ William B. Conerly, ``Chile Leads the Way with Individual 
Unemployment Accounts,'' National Center for Policy Analysis, Brief 
Analysis No. 424, November 12, 2002.
---------------------------------------------------------------------------
    Antiquated Health Insurance for the Poor, Elderly and Disabled. The 
basic structure of Medicare and Medicaid closely resembles the Blue 
Cross plan it was modeled on more than 40 years ago. In the years 
since, private insurance has changed considerably. Our public insurance 
programs have changed little, or not at all.
    Medicare enrollees are the only citizens in our society who must 
buy a second health plan (medigap) to fill the holes in the first. Many 
go on to buy a third plan (Medicare Part D) to fill the gaps in the 
first two. Paying three premiums to three plans is wasteful and 
inefficient. In fact, Medicare Part D would never have been necessary 
if Medicare and medigap had been combined efficiently into the type of 
comprehensive plans available to other Americans.\14\ Medicaid is also 
replete with inefficiencies.\15\ Although these programs do not 
directly affect the middle class, they serve as safety nets in case of 
loss of earning power, disability or old age.
---------------------------------------------------------------------------
    \14\ Mark E. Litow (Milliman & Robertson, Inc.), ``Defined 
Contributions as an Option in Medicare,'' National Center for Policy 
Analysis, February 4, 2000.
    \15\ John C. Goodman, Michael Bond, Devon M. Herrick and Pamela 
Villarreal, ``Opportunities for State Medicaid Reform,'' NCPA Policy 
Report No. 288, September 2006.
---------------------------------------------------------------------------
    These programs are not only inefficient, they are on an 
unsustainable growth path. If the trend of the past 30 years is 
continued indefinitely into the future, spending on health care will 
crowd out every other government program at the federal, state and 
local level by the time today's college students reach the retirement 
age.\16\
---------------------------------------------------------------------------
    \16\ Laurence Kotlikoff and Christian Hagist, ``Health Care 
Spending: What the Future Will Look Like,'' National Center for Policy 
Analysis, Policy Report No. 286, June 2006.
---------------------------------------------------------------------------
    We cannot get off this unsustainable path unless someone is forced 
to choose between health care and other uses of money. The only 
question is: Who will that someone be? Government? Employers? Insurers? 
Or patients and their families? The system is likely to work better for 
people if they make their own choices rather than relegating the power 
to choose to an impersonal bureaucracy. Moreover, if seniors, the poor 
and the disabled are to have access to the same care as the rest of the 
country, they must be part of the same health care system.

                                 

    Chairman RANGEL. Our next panelist is Dr. Diane Rowland. 
She is the Executive Vice President of the Henry Kaiser Family 
Foundation and the Executive Director of the Kaiser Commission 
on Medicaid and the Uninsured.
    In addition to other things, she has been at Bloomberg 
School of Public Health and John Hopkins University and is a 
noted authority on health policy, Medicare and Medicaid. She 
holds a bachelor's from Wellesley, a masters from the 
University of California, a doctorate at John Hopkins. Most 
importantly, she is a former staffer of the Subcommittee on 
Health and Environment of the Energy and Commerce Committee in 
the House of Representatives.
    So, that is your outstanding background, and we appreciate 
your willingness to share your views with us.

 STATEMENT OF DIANE ROWLAND, SC.D., EXECUTIVE VICE PRESIDENT, 
                    KAISER FAMILY FOUNDATION

    Dr. ROWLAND. Thank you very much for having me, Mr. 
Chairman; and I also appreciate the Committee on Ways and 
Means, not just the Energy and Commerce Committee. I am pleased 
to be here today to discuss the impact of health care costs on 
the financial well-being of America's families.
    We all know that health insurance coverage provides a 
valuable key to gain access to preventive and primary health 
care services as well as peace of mind and financial security 
for those facing serious illness. Today most non-elderly 
Americans depend on employer-sponsored group coverage for their 
health insurance. Yet for working families, employer-based 
coverage depends on where they work, the nature of their job, 
as well as what they earn. You are more likely to have coverage 
in large firms and firms with unionized workers than in small 
and low-wage firms. We also know that, unfortunately, the 
number of firms and the share of workers with employer-
sponsored coverage has been declining in recent years.
    In the absence of employer coverage, workers have few 
choices. Most have earnings putting them above the eligibility 
levels for public programs; and the non-group private market 
has high deductibles, coverage limits and pre-existing 
condition exclusions that make that a less than attractive 
option for many employees without access to employer-based 
coverage. As a result, millions of America's workers and their 
families are among our Nation's 46 million uninsured. Nearly a 
quarter of the uninsured are from middle-class families.
    When insurance is offered, it is increasingly becoming more 
unaffordable for low- and moderate-income families. At a cost 
of $11,500 for a family policy in 2006, the cost of employer-
sponsored coverage now exceeds the full year salary of a 
minimum wage worker. Since 2000, the cumulative increase in 
health insurance premiums of 87 percent has far outstripped the 
20 percent increase in employee wages; and the cost for 
coverage varies widely across the country, reflecting 
differences in the cost of medical care as well as the cost of 
living. Today, in New York City, the typical premium per family 
coverage in the small group market is now over $15,000 for a 
health maintenance organization (HMO) and nearly $20,000 for a 
preferred provider organization (PPO).
    It is both the premiums they pay and the coverage they get 
that determines the financial burdens Americans face for health 
care. Policies with high deductibles and lower premiums may 
help from a premium perspective, but, unfortunately, too often 
shift the dollars saved on premiums to increased out-of-pocket 
costs for health care services. Many learn through an 
unexpected injury or serious illness that they are not well 
protected financially.
    Underinsurance, not overinsurance, is a problem in America 
today, leaving one in six adults with substantial problems 
paying their medical bills. In 2003, one in four middle-class 
families had costs for health insurance and medical care that 
exceeded 10 percent of their disposable aftertax income. Those 
with chronic illness and those with non-group policies were at 
greatest risk for financial burden. These increasing health 
care costs contribute to increased medical debt and are a major 
cause of bankruptcy today.
    To address the growing concern of American families as 
health care costs take an increasing share of their budget, we 
should consider ways to first make health insurance more 
affordable and available by lowering administrative overhead, 
introducing better information technology to the system, 
seeking better prices for services in the health care market, 
and eliminating some of the waste and duplication in our health 
care system.
    We must also consider ways to provide financial assistance 
or broadened access to public coverage to help low- and middle-
class families to obtain affordable coverage; and, finally, we 
need to promote good health practices and early access to 
preventive and primary health care services so that we can 
reduce health care costs by improving the health of American 
families, rather than shifting greater cost burdens onto them.
    Thank you very much.
    Chairman RANGEL. Thank you, Doctor.
    [The prepared statement of Dr. Rowland follows:]
              Statement of Diane Rowland, Sc.D., Executive
                Vice President, Kaiser Family Foundation
Introduction

    Mr. Chairman and Members of the Committee, thank you for the 
opportunity to testify today on the growing problems of rising health 
care costs and increasing gaps in health coverage as they affect middle 
class Americans. I am Diane Rowland, Executive Vice President of the 
Henry J. Kaiser Family Foundation and Executive Director of the Kaiser 
Commission on Medicaid and the Uninsured.
    Health insurance coverage provides a valuable key to gain access to 
preventive and primary health care services, and peace of mind and 
financial security for those facing serious health care problems. Yet, 
a growing number of Americans--46 million in 2005 and increasing each 
year--lack health insurance to help them address their health care 
needs. Our growing uninsured population gets care later, if at all, and 
ends up sicker than those with coverage. The Institute of Medicine 
reports that lack of health insurance causes 18,000 unnecessary deaths 
each year. Leaving 46 million Americans without health coverage not 
only compromises their health but also puts a growing burden on our 
health care system and adds additional strain to our economy.
    And, even for those with health coverage, rising premium costs, the 
increasing out-of-pocket costs from more limited coverage, and 
decreasing availability of employer-based coverage make obtaining and 
paying for health care an increasing financial burden. For many, health 
insurance coverage through the workplace now has higher deductibles and 
more cost-sharing as well as higher premiums. Access to health 
insurance and medical care that is affordable is becoming out of reach 
for more and more middle class families and contributing to our growing 
uninsured population.
    My testimony today will focus on health care coverage, the growing 
burden of health care costs for America's families, and the challenge 
of making affordable coverage a reality for all Americans.

Health Coverage for Working Americans

    While the elderly rely on Medicare for their health insurance 
coverage, most non-elderly Americans receive their health insurance 
protection through the workplace. Of the 257 million non-elderly 
Americans, 156 million (61% of the non-elderly population), are covered 
by employer-sponsored health insurance (Figure 1). Public coverage 
through Medicaid and SCHIP provide an important adjunct to employer-
based coverage for low-income families, especially children, covering 
16 percent of the non-elderly population.
    The availability and affordability of employer based coverage 
varies widely by income, with higher-income families more likely to be 
covered by employer-based coverage than moderate or low-income 
families. Nearly 3 out of 4 (71%) of the 74 million middle-class non-
elderly individuals--who I will define today as having incomes between 
200 and 400 percent of the federal poverty level (about $41,000 to 
$82,000 for a family of 4 in 2007)--have employer sponsored coverage. 
Lower-income families (with incomes 100-199% of poverty, some of whom 
might actually consider themselves part of the middle class) have much 
lower levels of private coverage--only 39 percent have employer-based 
coverage--resulting in higher levels of uninsurance (30%) and greater 
reliance on public coverage (26%).
    Lack of employer-based coverage and limited access to public 
coverage leaves nearly 11 million (14%) middle-income Americans 
uninsured. They account for nearly a quarter (23%) of the nation's 46 
million uninsured although the majority of the uninsured have even 
lower incomes (Figure 2). In addition, like most of the nation's 
uninsured, the middle-class uninsured come from working families. In 
fact, 9 in 10 (91%) come from families with at least one full-time 
worker, but many of these workers are in jobs that do not offer health 
insurance coverage or where such coverage is unaffordable.

Availability and Affordability of Coverage

    Over time, the availability of employer-sponsored coverage has been 
declining. From 2000 to 2006, the percentage of firms offering health 
coverage fell from 69 percent to 61 percent (Figure 3). The size and 
type of firm where an individual works and the nature of the job make a 
difference in whether or not health coverage is offered. Sixty percent 
(60%) of firms with fewer than 200 workers offer health insurance, 
while almost all large firms (98%) offer health coverage (Figure 4). 
Between 2000 and 2006, small firms accounted for a substantial share of 
the decrease in offer rates.
    Firms with a high percentage of low-wage and part-time workers are 
less likely than higher-wage firms to offer health benefits, with only 
4 in 10 such firms offering coverage. In addition, the presence of 
unionized workers increases the likelihood that a business will offer 
health insurance--87 percent of firms where there are at least some 
union workers offer coverage, compared to 60 percent of firms where 
there are no union workers. Certain industries such as agriculture, 
construction, and the service industry have higher than average rates 
of uninsured workers, even among the ``white-collar'' professionals and 
managers in the industry. For example, about 20% of management workers 
in the construction and service industries are uninsured.
    When insurance is offered, it is becoming increasingly unaffordable 
for many. From 2000-2006, the cumulative increase in premiums for 
employer-sponsored insurance was 87 percent compared to a 20 percent 
increase in wages and 18 percent increase in overall inflation (Figure 
5). Since 2000, the cumulative increase in premiums is over 4 times the 
increase in wages for non-supervisory employees. The average annual 
family premium reached $11,480 in 2006, and the average family 
contribution was $2,973 (Figure 6). This means a family earning $40,000 
in 2006 would have to pay 7% of their pre-tax income for their share of 
health insurance premiums. At $11,480 per year, the full cost of family 
coverage now exceeds the full-year income of a minimum wage worker. In 
2006, premiums grew twice as fast as wages and inflation. Even when 
premium increases have moderated over the last decade, the rise in 
health care costs and premiums has outpaced the growth in wage 
earnings, creating a growing gap between worker's income and the cost 
of health insurance (Figure 7).

Stability of Coverage

    The combination of declining employer coverage and rising health 
costs has placed more and more middle-income families at risk of being 
uninsured and additional financial burden for health care on those with 
coverage. In the absence of employer-offered coverage both low- and 
middle-income workers are at risk of being uninsured, but they have few 
coverage options given the high cost and limitations in the non-group 
market and limited access to public coverage.\1\ While Medicaid and 
SCHIP have helped to offset declines in employer-based coverage for 
low-income children, middle-income adults have not been able to avail 
themselves of this safety-net. Medicaid and SCHIP do not cover adults 
without dependent children, and the income levels for eligibility for 
parents in most states are far below the levels for children. In 24 
states, a parent working full-time at minimum wage has an income too 
high to qualify for Medicaid (Figure 8).
---------------------------------------------------------------------------
    \1\ Yu-Chu Shen and Sharon K. Long, ``What's Driving the Downward 
Trend in Employer-Sponsored Insurance?'' Health Services Research 
41(6):2074-2096, December 2006.
---------------------------------------------------------------------------
    Because public coverage offset employer coverage declines for 
children, all of the growth in the uninsured between 2000 and 2004 was 
among adults. Adults under 100 percent of poverty accounted for almost 
half of the growth in uninsured adults between 2000 and 2004, and over 
20 percent of the growth was among near-poor adults (100-199% FPL), who 
some might classify as the lower middle class. However, middle-income 
adults contributed about a quarter (24%) of the growth, raising concern 
that loss of coverage is increasingly becoming a problem for the middle 
class (Figure 9). From 2004 to 2005, there was no significant change in 
the number or percentage of uninsured among those with incomes between 
2-4 times the poverty level, due in part to the improving economy, but 
the lower middle class accounted for over three-quarters of the growth 
in the number of uninsured--comprising 1.0 million of the 1.3 million 
growth in that year. Unfortunately, 2005 also saw an increase in 
uninsured children for the first time in a decade as public coverage 
was unable to offset fully the loss of employer-based dependent 
coverage.
    Employer-based coverage for the middle class is increasingly 
threatened. Between 2001 and 2005, the share of middle-income employees 
in firms with employer-based coverage dropped from 82.4 percent to 78.5 
percent and, in turn, their uninsured rate grew from 13.4 percent to 16 
percent (Figure 10). The decline in employer sponsorship of health 
benefits explained a quarter (26%) of the drop in job-based coverage; 
losses in eligibility accounted for 19 percent, and the loss of 
coverage as a dependent of another worker with job-based insurance 
explained another 25 percent (Figure 11). About a third (30%) of the 
decline in employer-sponsored coverage among middle-income employees 
was attributable to decreased participation by employees in the health 
plans offered to them. Other research indicates that cost is a large 
reason why employees decline health insurance--about half (52%) of 
uninsured employees eligible for their employment-based coverage 
reported they declined to take up the health benefits because it is too 
expensive.
    The factors leading to decreased availability of employer-sponsored 
coverage--sponsorship, eligibility and take-up--noticeably affected the 
lowest-income employees, but are also more common among middle-income 
employees than those with the highest incomes. Lack of coverage in the 
workplace for a worker can be offset by a spouse's coverage. However, 
in 2005 about 13 percent of middle-income employees were not offered 
health benefits through their own or their spouse's employer, which is 
more than three times the rate (4%) among higher-income employees 
(Figure 12). The share of employees declining coverage decreases as 
income increases; a higher percentage of middle-income workers than 
higher-income workers declined health insurance benefits offered to 
them through an employer (8% vs. 4%).
    Those without access to employer-sponsored health insurance or 
public coverage must look to the non-group insurance market for 
coverage, but unfortunately this market has not proven itself to be an 
attractive option for many uninsured people. Among those without an 
offer of coverage through an employer or public coverage, less than a 
quarter of the middle-income purchase non-group coverage (Figure 13). 
Some potential purchasers are excluded or charged higher premiums 
because they have preexisting medical conditions. When available, 
lower-cost products generally have high deductibles and coverage 
limitations, especially for maternity care or mental health services. 
The low percentage of middle-income adults who purchase non-group 
coverage underscores the limitations of the non-group market.

Scope of Coverage

    While the availability of employer-sponsored coverage is declining 
and the premium costs are rising, the scope of medical care costs 
covered by insurance is also contributing to growing stress on family 
budgets. Health insurance policies do not provide complete ``100 
percent'' coverage for health care needs. Depending on their policies, 
individuals with insurance can have to pay deductibles for physician or 
hospital services, copayments or cost-sharing for physician visits and 
other medical services, and pay additional amounts for using providers 
that are outside a plan's network.
    Thus, even people who have insurance can face significant out-of-
pocket costs. For example, data from the Kaiser/HRET 2006 Employer 
Health Benefits Survey shows that 12 percent of workers in PPOs who 
have deductibles are in plans with a deductible for single coverage of 
$1,000 or more and that about half of all covered workers are in plans 
that have cost-sharing in addition to the general deductible for people 
who are hospitalized. A recent study by Dana Goldman and others at the 
Rand Corporation looking at health plan data from 15 large employers 
from 2003 and 2004 found that more than 10 percent of patients with 
cancer had out-of-pocket expenses over $18,500 and 5 percent had out-
of-pocket costs over $35,660, despite having private health coverage 
through their work.\2\
---------------------------------------------------------------------------
    \2\ D.Goldman et al, ``Benefit Design and Specialty Drug Use,'' 
Health Affairs 25(5):1319-1331, Sept/Oct 2006.
---------------------------------------------------------------------------
    People's out-of-pocket liability may increase if new consumer 
directed health care designs gain favor in the market. About 7 percent 
of employers offering health benefits offered a consumer directed 
health plan in 2006, covering about 4 percent of all workers with 
employer-sponsored health insurance (Figure 14). These plans have 
significantly higher deductibles than traditional insurance 
arrangements and are more likely to assess coinsurance rather than 
fixed-dollar copayments for office visits and prescription drugs. In 
some cases this higher out-of-pocket liability is partially or fully 
offset by employer-contributions to employee health care savings 
arrangements, although 37 percent of employers offering HSA-qualified 
plans do not make contributions to HSA accounts established by their 
workers.
    The movement toward ``consumer-driven'' health plans restructures 
insurance toward catastrophic coverage. Consumers face higher 
deductibles, making them more directly responsible for the purchase of 
their care and more sensitive to the price of services. The 
implications of these changes on consumer costs, out-of-pocket spending 
and access to care are just beginning to be assessed as the 
participation in these plans is still relatively low.

Medical Debt and the Financial Burden of Health Care

    As the availability, affordability, stability and scope of health 
insurance decrease, far more of the middle class--both insured and 
uninsured--are now dealing with budget-consuming medical bills and 
debt. Researchers from AHRQ examined the financial burden of health 
care relative to family incomes over time. Financial burden was defined 
as having out-of-pocket expenses for health care services and insurance 
premiums that exceeded 10 percent of a family's disposable (or after-
tax) income. They found that in 2003 almost 20 percent of the total 
nonelderly population had this level of health cost burden and that the 
financial burden for health care was heaviest for those with lower 
incomes (Figure 15). A third (33%) of the poor experienced such 
financial burden, compared to 10 percent of those in the highest income 
group (at or above 400% FPL). Nearly a quarter (23%) of middle-income 
Americans spent more than 10 percent of disposable income on health in 
2003.
    The prevalence of high out-of-pocket costs increased significantly 
from 1996 to 2003, but the increase was particularly steep among the 
poor and those with middle incomes. In 1996, about 16 percent of the 
middle class had out-of-pocket health expenses that consumed at least 
10 percent of their family income. By 2003, however, 23 percent of 
middle-income families experienced a financial burden from health care 
costs that exceeded 10 percent of family income, and about 6 percent 
had health costs that consumed over one-fifth of the family's 
disposable income. Essentially, financial burden for the middle class 
rose, placing them at the same risk for high burden in 2003 as those in 
the lower-middle class with incomes just above poverty.
    The researchers also found that financial burden varied 
considerably depending on the type of health insurance a person has. 
Among those covered either by employer-sponsored insurance or public 
programs, about 19% had out-of-pocket health expenses that consumed at 
least 10% of their family income. In contrast, 53% of those with 
private non-group coverage were dealing with this high level of out-of-
pocket health costs, and over 20% had even higher health care costs 
that consumed more than one-fifth of the family's disposable income 
(Figure 16). The authors note persons with non-group plans are nearly 3 
times as likely to bear high total financial burdens for health care as 
individuals with public insurance or no coverage. Those with non-group 
coverage are at greater risk of financial burdens as a result of the 
combination of high premiums plus high out-of-pocket spending.
    When the researchers assess how adequately the insurance coverage 
protects individuals from high out-of-pocket costs relative to income, 
the difference between employer-sponsored coverage and coverage in the 
non-group market is again striking. When premium costs are excluded to 
measure underinsurance, out-of-pocket expenses for medical services 
consume more than 10 percent of disposable income for 5.5 percent of 
those with employer-sponsored coverage compared to 12.9 percent of 
those with private non-group coverage.
    Those who bear the greatest burden for health care are most likely 
to be those with serious illness or chronic conditions. The AHRQ 
researchers found that forty percent of persons with diabetes had out-
of-pocket expenses that consumed more than 10% of their income in 2003, 
as did 56% of persons who experienced a stroke or other cerebral 
problem. Those with financial burdens incur high expenses largely due 
to hospital and prescription drug costs.
    Likewise, cancer, the second leading cause of death in the United 
States, commonly poses financial burdens for families. A November 2006 
USA Today/Kaiser/Harvard survey of households affected by cancer 
surveyed the financial impacts of cancer on families. Even though most 
(95%) reported being covered by insurance during their cancer 
treatment, the survey found that nearly half (46%) of people affected 
by cancer said the costs of care were a burden on their family, 
including one in six (17%) who said costs were a major burden. A 
quarter (25%) of all respondents--including those with health 
insurance--say they used up all or most of their savings as a result of 
the financial cost of dealing with cancer, and 11 percent were unable 
to pay for basic necessities like food, heat and housing.
    It is clear that for many, health insurance alone is no longer a 
guarantee of financial protection from the costs of health care and 
financial stress when illness strikes. Today's higher premiums, 
deductibles, and copayments can create substantial financial burden for 
families, and many learn only through an unexpected serious injury or 
illness that they are not well-protected financially. Based on analysis 
of the 2003 Kaiser Health Insurance Survey, we found that one in six 
adults who are privately insured--17.6 million adults--report having 
substantial problems paying their medical bills.\3\ Privately insured 
adults with medical debt are largely from middle-class families. Two-
thirds of the privately-insured who have medical debt have family 
incomes between $20,000 and $75,000.
---------------------------------------------------------------------------
    \3\ Meaning that in the past year, they reported having either 
great difficulty paying their health care costs, had problems paying 
their medical bills in the past year, had changed their life 
significantly in order to pay medical bills, or had been contacted by a 
collection agency about medical bills.
---------------------------------------------------------------------------
    An important difference between the privately insured with medical 
bill problems and those without debt is their health status. Those with 
medical debt are almost twice as likely to have an ongoing or serious 
health problem compared to others with private coverage. Unfortunately, 
the privately-insured who have medical debt are also as likely as the 
uninsured to postpone care, skip recommended tests and treatments, and 
not fill drug prescriptions (Figure 17). This can lead to more serious 
illnesses, which are often more costly to treat than earlier 
interventions and contribute to more disability and premature death.
    Some families are turning to their credit cards to pay their 
medical bills and going into debt to pay for health care as a result. 
According to a newly released study by Demos and the Access Project, 29 
percent of low- and middle-income households with credit card debt 
spanning at least three months reported that medical expenses 
contributed to their current level of credit card debt. One-fifth (20%) 
of those surveyed reported having a major medical expense in the past 3 
years that contributed to their credit card debt. Households reporting 
that a recent major medical expense contributed to their debt had an 
average of $11,623 in unpaid credit card bills, which is almost $4,000 
higher than the average amount for other indebted households. These 
mounting levels of personal indebtedness and the growing role of 
medical bills in bankruptcy proceedings point to the financial toll 
rising health care costs and limits on the scope of health insurance 
protection are taking on America's families.

The Public's Concern about Rising Health Care Costs

    The research documents that health costs are becoming increasingly 
difficult for middle-class families to manage and eroding both health 
and financial security. Public opinion also bears out the research. 
Concern over rising health costs has mounted as many watch their health 
care premiums, deductibles, and copays rise. The increasing costs of 
health care--both premiums and out-of-pocket payments for health care--
create financial insecurity for families. In a September 2006 public 
opinion poll, we found that 60 percent of adults with health insurance 
were worried about being able to afford the cost of their health 
insurance over the next few years, and almost a third (27%) was very 
worried.
    In the same poll, 66 percent of adults with health insurance 
reported that their health insurance premiums are going up, and nearly 
a third (31%) felt their premiums were going up a lot. In addition, 
about half (48%) of adults with health insurance saw their copays and 
deductibles increasing, adding to their out-of-pocket costs. These 
findings held true when a subset of middle-income respondents (those 
with income $30,000-$49,999) was analyzed.
    In a recent Kaiser Family Foundation public opinion poll, concerns 
about health care costs dominated the list of 13 possible issues the 
public is worried about (Figure 18). Almost half of the public (47%) 
was very worried about having to pay more for health care or insurance, 
and 39 percent said they were very worried they would not be able to 
afford the health care services they needed.
    The public is worried about the impact of rising health costs on 
their family budgets and their lives, and many are looking to Congress 
for action. Seventy percent (70%) of the public, and a slightly higher 
percentage of middle-income respondents (75%), felt that health 
insurance premiums were unreasonably priced and that Congress should 
try to do something about the unreasonable cost of health care. In 
fact, about two-thirds (64%) of the public believes that health care 
costs are something Congress not only should--but can--do a lot about.

The Challenge Ahead

    Health insurance provides families with an important source of 
financial security when illness strikes and helps to promote access to 
health care services that can often stave off more serious illness. 
Although the majority of non-elderly Americans receive health care 
coverage through their employer today, the availability and 
affordability of employer-based coverage is declining . . . putting 
more and more middle- and low-income working families at risk of being 
uninsured and without coverage for their health needs. For those with 
coverage, the value of that coverage has begun to erode as limits on 
the scope of coverage leave more and more insured Americans to face 
increased out-of-pocket costs when they seek care.
    Rising costs for both health care services and insurance coverage 
are placing a heavy load on family budgets, businesses, and public 
programs. The financial burden resulting from these growing costs is 
already squeezing out good health practices, leading many to defer care 
due to costs and contributing to increases in the uninsured.
    As Congress moves forward to address rising health care costs and 
their impact on America's families, it will be important to address not 
only the cost of health insurance but also the impact of any changes on 
reducing the uninsured population and promoting improved access to 
affordable care for all Americans. Shifting more costs onto consumers 
could further endanger access to care and financial security. The 
quality and scope of coverage and the availability of financial 
assistance to make coverage affordable for low- and middle-income 
families will determine whether the nation can provide affordable 
access to preventive and primary care as well as catastrophic health 
care for all Americans.
    I appreciate the opportunity to testify before the committee today 
and welcome your questions. Thank you.

                                 

    Chairman RANGEL. Our last witness that we look forward to 
hearing is Dr. Eugene Steuerle--is that the correct 
pronunciation?
    Dr. STEUERLE. Steuerle.
    Chairman RANGEL [continuing]. Who is an outstanding and 
nationally known tax expert. He has written several books. He 
has been president of the National Tax Association and, as I 
said, written special books with international interest and is 
well-known to this Congress and this Committee. I welcome you 
once again. I look forward to your testimony.

   STATEMENT OF EUGENE STEUERLE, PH.D., SENIOR FELLOW, URBAN 
                           INSTITUTE

    Dr. STEUERLE. Thank you, Mr. Chairman, Mr. McCrery, and 
Members of the Committee.
    Ever since coming to this town in the mid-70s and appearing 
with the Treasury Department before the Committee on Ways and 
Means, I have stood in awe at the prestige and the history of 
this institution; and I would especially like to thank you, Mr. 
Chairman and Mr. McCrery, for restoring a longstanding 
tradition of trying to gather information before we jump in to 
try to examine policy solutions. I say this especially because 
at this point in time--I believe we are on the eve of a very 
different period in our fiscal history. The issues you are 
raising today are only among those that we face.
    In my testimony, I would like to focus on the risks 
associated with the cost and availability of health insurance. 
I focus on this issue mainly because past Congresses have 
decided already how this Committee will meet many of its future 
economic challenges. In particular, the law now requires that a 
majority of the increases in revenues that you will receive to 
be spent on health programs that were designed yesterday. 
Figure 1 which is up on the monitor, displays this result.
    Unfortunately, this precommitment has two major effects. 
First, it deters Congress and this Committee from doing very 
much about the new risks facing middle-income families; and, 
second, some aspects of the current policy are likely adding to 
risk, including the risk of being uninsured, rather than 
reducing them. To clarify these two effects, let me lay out 
very briefly some basic figures and facts.
    The total amount spent on health care in the United States 
in 2006 was around $2.2 trillion. For households, total health 
spending was around $19,000 per household, with Government 
providing through direct expenditures and tax subsidies about 
$11,000 a year already. By about 2010, Government spending and 
tax subsidies are scheduled to grow by another $2,000 per 
household, to about $13,000 per household.
    These Government benefits are distributed very, very 
unevenly. In many cases, they do not produce the health 
outcomes we want, and workers, particularly middle-income 
families with modest health insurance policies, get very little 
out of this package. Many of these additional expenditures and 
tax subsidies--that is, the scheduled increases--are so badly 
designed that they are likely to lead to an increase in the 
number of uninsured, largely among working families.
    Now most of the data you have and most of the data we 
researchers have on income security tend to ignore this very 
large health insurance component of total income, although, if 
added in--I want to be clear about this--middle-class workers 
would still not have seen the income gains accrued at the very 
top of the income distribution.
    Finally, among the retired, whom we often ignore when 
examining these middle-class issues, the typical middle-class 
couple now receives lifetime retirement and health benefits 
around 3/4 of a million dollars, growing to over a million 
dollars soon, but then they are encouraged to spend down these 
public and private assets long before they reach true old age, 
which adds to their risk in old age.
    Now let me focus very briefly on one Government program, 
the tax subsidy for employer provided health insurance. This 
subsidy favors higher income over lower income employees, and 
it is most valuable to those who buy the most expensive health 
insurance. Even worse, the subsidy is open ended. Every year 
billions more are spent without a vote by Congress, and yet the 
extra subsidies most likely increase--that is right, increase 
rather than decrease--the number of uninsured people.
    The President recently proposed to tackle this issue by 
proposing what is closer to an equal subsidy for everyone. 
There are a number of problems with his proposal, but we should 
agree to try to pursue a more equally distributed subsidy and 
one more likely to expand health insurance. Why not simply 
follow the logic of the reform and grant vouchers or tax 
credits of equal size to every adult and child? In addition, 
health savings accounts should not be favored--as in his 
proposal--over other forms of health insurance, and much 
stronger incentives are needed to deter people from signing up 
for insurance that is cheaper because it excludes sick people.
    In sum, a properly designed voucher is a much better way of 
getting at so many of these issues than the existing tax 
exclusion.
    In conclusion, meeting tomorrow's economic challenges 
requires that this Committee have budget flexibility. A very 
large portion of additional Government spending and tax 
subsidies is currently designed to go to health programs 
designed yesterday, squeezing other parts of the budget such as 
programs for children. In addition, within the health system 
itself, the additional amount spent on these tax subsidies and 
direct expenditures is sometimes adding to risk, including the 
risk of being uninsured, rather than reducing the risk.
    Thank you.
    Chairman RANGEL. Thank you so much, Doctor.
    [The prepared statement of Dr. Steuerle follows:]
  Statement of Eugene Steuerle, Ph.D., Senior Fellow, Urban Institute
    The views expressed are those of the author and should not be 
attributed to the Urban Institute, its trustees, or its funders. 
Portions of this testimony are taken from the author's column, 
``Economic Perspective,'' in Tax Notes Magazine.
    Mr. Chairman and Members of the Committee:
    Thank you for the invitation to testify before you today on 
economic challenges facing middle-class families. I appreciate 
especially your effort to first gather information in a bipartisan way. 
Facts--the base on which we start--shouldn't have a political party. I 
am engaged with the Pew Foundation in a project that includes 
researchers from the Urban Institute, the Heritage Foundation, the 
Brookings Institution, and the American Enterprise Institute on a 
related topic: mapping the status of economic mobility. We will be glad 
to report those results to you as they become available.

Background on Income Distribution

    The subject of this hearing is a difficult one. There are many 
things we do not understand about what is happening in the economy and, 
more specifically, to the middle class. It is fairly clear that, 
beginning in the late 1970s, income distribution has become more 
unequal, and that income at the very, very top--particularly among 
executives, the famous, and some professionals--has been growing 
significantly faster than income at most other income levels. Some 
explanations relate to the extraordinary economies of scale in fields 
such as entertainment, prescription drugs, and information technology.
    But much else is also occurring. The growth in single-parent 
families, long correlated with poverty among the young, is changing 
family structure as we know it; single-adult families are more 
vulnerable to the whims of the labor market than are two-adult 
families. Recently, some aspects of life have become more risky and 
some less. To mention only two, some very recent mortgage-lending 
practices have put more middle-income families in danger of losing 
their housing. Yet, unemployment due to recessions has waned over the 
past three decades relative to most of our history.
    In my testimony, I would like to focus on one of the major risks 
facing American families: the cost and availability of health 
insurance. Current law schedules Congress to spend more on health care 
than in any other area. Under Congressional Budget Office projections 
of current law, moreover, a majority of the increase in federal 
revenues that would accrue to government in the next 5 years would be 
spent on additional health expenditures and health tax subsidies 
(figure 1). Unfortunately, we are likely spending more on health care 
in a way that increases rather than decreases the number of insured. As 
a consequence, the way our health budget is evolving has two major 
effects:

        (1)  By absorbing most future revenue growth, health policy 
        embedded in current law is deterring Congress from doing very 
        much about the risks facing middle-class families;
        (2)  Within the health system itself, current policy is likely 
        adding to risks--including the risks of being uninsured--rather 
        than reducing them.

    To clarify these two effects, let me lay out some basic figures and 
facts:

          Health goods and services now comprise one-sixth of 
        the U.S. economy--perhaps soon one-fifth at current rates of 
        growth. The total amount spent in 2006 was about $2.2 trillion, 
        of which government provided about $1.3 trillion (figure 2).
          Per household, total health spending is about 
        $19,000, while government subsidizes health care and health 
        insurance to the tune of about $11,000 per household (figure 
        3).
          To cover $11,000 of costs per household, government 
        effectively assesses taxes of $11,000 per household, although 
        with deficits, some of those tax liabilities are passed on, 
        with interest, to future generations (figure 3).
          Federal, state, and local governments in the United 
        States spend as large a share of GDP and significantly more in 
        real dollars on health care than most Western European 
        governments with which they are often compared.
          There is little evidence we are getting much better 
        health care for the much larger real dollar expenditures.
          By about 2010, government spending and tax subsidies 
        are scheduled to grow in real terms by another $2,000 per 
        household to about $13,000 or by more than $1/4 trillion when 
        compared to 2006 (figure 4).
          These government benefits are distributed very, very 
        unevenly. Workers, particularly middle-income families with 
        modest health insurance packages, get very little. Benefits 
        tend to go toward the elderly, those in high-cost states, and 
        to higher-income workers with more expensive health plans.
          Many of these additional expenditures and tax 
        subsidies--that is, the scheduled increases--are so badly 
        designed that they likely lead to an increase in the number of 
        uninsured, largely among working families.
          Most of the data reported on income security tend to 
        ignore this large portion of total income. For instance, income 
        of workers or retired individuals is often reported net of the 
        value of health insurance policies.
          Even if added in, this additional income would not 
        dispute the fact that, among the working-age population, the 
        middle class has still not seen the income gains accruing at 
        the very top of the income distribution.
          Among the retired, the issue is more complex. If 
        health care is counted, the average household is now retiring 
        with a Social Security and Medicare package that will pay 
        benefits for more than a quarter of a century. If purchased out 
        of a 401(k) account at age 65, the package would be worth more 
        than $3/4 million, rising for retirees in 2030 to well over $1 
        million in today's dollars (figure 5). Cost-wise, newly 
        retiring middle-class families are getting more and more 
        benefits every year. Because so many benefits are paid to those 
        in late middle age (that is, with significant remaining life 
        expectancy), however, the truly old are often left in much more 
        precarious circumstances.

The Tax Break for Employer-Provided Insurance

    Let me now provide more details on the primary subsidy for middle-
class families--the exclusion from tax of benefits provided through 
employer insurance. This tax break raises a number of concerns. The 
nation spends over $200 billion annually on tax subsidies for health 
and the number is rising fast. Nonetheless, 47 million people lack 
coverage. By any standard, we aren't getting our money's worth.
    These tax subsidies favor higher-income over lower-income 
employees--and many poor people get no help at all. Higher-income 
households sometimes receive as much as $3,000 or more in reduced taxes 
for buying health insurance, while many moderate-income taxpayers get 
very little. The existing tax break is also most valuable to those who 
buy the most expensive insurance: the more one buys, the more subsidy 
one receives.
    Even worse, the subsidy--like many health subsidies--is open-ended. 
Every year billions more are spent, without a vote by Congress or the 
public to spend money this way rather than some other way. According to 
one estimate, from about 2006 to 2010, the cost will grow by an extra 
$58 billion.
    This extra money not only won't buy more insurance coverage, it 
most likely will increase the number of uninsured. The subsidy 
encourages insured people to buy more high-cost insurance, which 
encourages more use of high-cost health care, which helps drive up 
health costs, which, in turn, leads to a decline in insurance coverage. 
Many individuals and employers simply decline to pay those high-
insurance costs.
    Starting from scratch, it seems to me that almost no one would 
propose spending more in this extremely regressive manner to increase 
the number of uninsured and to encourage the excessive use of health 
care and health insurance. Yet that is exactly what the current system 
offers--only it takes place automatically and without a vote by 
Congress.
    None of this suggests that determining how to spend federal dollars 
on health is easy. One can sometimes hide choices in a socialized 
bureaucracy so they aren't so apparent to the public, but that doesn't 
make them any easier. The primary problem is not that choices are hard, 
it's that automatic growth in health care spending programs prevents 
some hard choices from being made at all. As for the open-ended tax 
break for employer-provided health insurance, it is the largest federal 
tax break and it is also the largest health subsidy in the tax or 
expenditure systems for the non-elderly and non-disabled. Those facts 
alone make it worthy of attention.
    The president recently proposed to tackle this issue by providing 
what is closer to an equal subsidy for everyone. At the same time, 
there would be no additional subsidy if we bought more expensive health 
insurance. He does this by suggesting a fairly significant tax break 
simply for buying some minimal policy, but otherwise taking away a tax 
break--as under current law--that is related to the amount of insurance 
we buy. I believe we should accept his call to improve both fairness 
and efficiency of the medical marketplace, but follow the challenge to 
its logical conclusion.
    Once we agree on pursuing a more equally distributed subsidy and 
one more likely to expand insurance coverage, then we need to figure 
out how to amend his proposal to best achieve those goals. Yes, his 
proposal would give everyone the same income tax deduction as long as 
they purchased health insurance--that's fairer than current law. Social 
Security tax breaks would certainly be more evenly distributed. But 
because deductions are worth more the higher one's tax bracket, higher-
income people could still get income and Social Security tax subsidies 
worth over $5,000 while many moderate-income workers could at best get 
about $2,300 in Social Security tax reduction. Some would do even 
worse. Thus, while the president's proposals would reduce the disparity 
in tax subsidies between rich and poor, it would not remove them. Why 
not simply follow the logic of the reform and grant vouchers or tax 
credits of equal size for every adult and child?
    The efficiency of the subsidy must also be improved. As currently 
structured, the proposal would turn existing health subsidies upside 
down by granting an additional tax benefit only to those people who put 
money into something called Health Saving Accounts or HSAs. 
Effectively, individuals would be subsidized more if they did NOT join 
with others in an insurance pool to cover health costs over and above 
catastrophic amounts. Thus, a person enrolled in a health maintenance 
organization (HMO) could only get a tax deduction of $15,000. But 
someone enrolled in an HSA could get $15,000 plus, say, $3,000 put into 
the account--really a double deduction. This would discriminate against 
certain forms of insurance and favor those who could most easily come 
up with the cash or afford the risk associated with high deductibles. 
Whatever one thinks of HSAs, it goes against the original argument of 
HSA proponents for greater neutrality between expenses paid by an 
individual and those paid out of an insurance pool.
    Much stronger incentives are also needed to deter people from 
signing up for insurance that is cheaper because it excludes sick 
people and those with chronic conditions. The Administration is willing 
to provide states some money to deal with these issues, but it wants to 
redistribute money that is already earmarked for health spending. It is 
unclear how much it could buy as a result. We need more work on this 
front.
    A properly designed voucher is a much better vehicle for getting at 
so many of these issues. It can be extended to people who pay little or 
no tax, it can be integrated with state Medicaid and related children's 
insurance for the poor, and, if it were worth the same amount per 
person, it would be much easier to administer by employers and 
insurance companies alike.

Medicare and Medicaid

    It may seem strange that in a hearing on economic challenges to the 
middle class, I would raise concerns with the direction of our direct 
spending programs as well--in particular, Medicare. Analysis of recent 
Congressional Budget Office data reveals that, under current law, 
revenues would increase by about $340 billion absent any increase in 
the cost of health tax subsidies. Because so much built-in growth is 
contained in health expenditures and tax subsidies, however, these 
existing programs by themselves would automatically absorb the majority 
of that growth (figure 1).
    This, of course, leaves the Congress--and, in particular, the Ways 
and Means Committee--little flexibility to determine how to allocate 
additional revenues to meet the most important needs of the nation, 
including new risks to the middle class. Existing health policy 
essentially has put this Committee in a straightjacket. The odds that 
programs designed years ago would efficiently and fairly meet the needs 
of tomorrow--before tomorrow has arrived--is slim indeed.
    It is not just that there is reduced flexibility to meet non-health 
needs or to reduce associated risks. The growth in existing health 
spending programs and tax subsidies consumes resources that might 
otherwise go to expanding coverage for the uninsured, achieving 100 
percent immunization rates, enhancing frail-elderly services, or 
increasing the budget of the Centers for Disease Control and 
Prevention. Two or 3 years' worth of Medicare growth could pay for a 
decent health insurance package for all children, and a few years' 
worth of growth in the tax subsidies for health insurance, which mainly 
benefit higher-earning employees, could pay for a modest credit for 
insurance for households at all income levels.
    In addition, the retirement from the workforce of such a large 
portion of our population significantly reduces revenues to government 
and puts much additional tax pressure on middle-class families to make 
up the difference. Meanwhile, since middle-class couples retiring on 
Social Security and Medicare can now expect benefits for well over two 
decades, they effectively spend down much of their public and private 
assets long before they reach old age, as defined by a short remaining 
life expectancy and larger health needs.

Conclusion

    Middle-class families do face many economic challenges. Some risks 
have been reduced and some increased. An extremely important question 
is whether past government tax and expenditure policy can be taken off 
of autopilot and redirected to help meet the needs of today and 
tomorrow in the fairest and most efficient way possible.
    A very large portion of additional government spending and tax 
subsidies is already destined under current law to go toward the 
provision of health care. By absorbing so much of future revenue 
growth, they deter Congress from doing very much about new risks facing 
middle-class families. In addition, within the health system itself, 
some of the additional amount spent on these tax subsidies and direct 
expenditures are likely adding to risks--including the risks of being 
uninsured--rather than reducing them.


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    Chairman RANGEL. Let me thank this entire panel. The wisdom 
that you bring to this issue cannot be fully appreciated in 5 
minutes, no matter how much time it took for you to prepare 
your remarks; and the Ranking Member and I were hoping that you 
might consider joining with us on these different subject 
matters in a seminar where we are not talking about 5 minutes.
    We are talking about learning, debating, discussing and 
trying to come up, as a result of you knowing the problems so 
well, in assisting us in fulfilling our responsibility in a 
bipartisan way of trying to find solutions to some of these 
very complicated issues.
    To the Executive Director of the CBO, we have had three 
hearings before this, and it was abundantly clear that ignoring 
the problems that the poor have and the middle class have 
ultimately is going to be very costly as it relates to the 
budget. With the restrictions that we have on our budget in 
terms of pay-as-you-go (PAYGO) and priorities and the war, how 
would you suggest that the Congress fulfill its responsibility 
and, at the same time, finds some way within our budget rules 
to pay for these things?
    It has been reported that we have millions of kids that 
drop out of high school every year and that this group of 
people, once they leave the school, they have no alternative, 
there is no door open to them.
    In addition to that, the school system seems destined to be 
preparing kids for college, but if they don't make college, 
they don't make anything.
    It has been reported that--because of gun violence--that 
they are very expensive in terms of health care for those that 
survive, that half of them end up in jail, half of them are 
ineligible to join the military, and then the long and short of 
it, forgetting the compassion, they are very, very expensive 
and costly in terms of economic recovery.
    Clearly, it is not perceived to be a priority, but most 
economists believe that we just cannot ignore that or the 
price, the costly price that the poor pay by not having access 
to health care, education, unemployability. While everyone 
agrees we should do something, what recommendation could you 
make that this Committee could consider, recognizing the budget 
constraints we have to work with?
    Dr. ORSZAG. Well, obviously, we are very careful not to 
make recommendations, but we would be happy to provide options. 
Next month we will be coming out with a budget options volume 
that will provide potential offsets for new investments that 
you may want to make.
    I would note that there is a variety of work--Mr. Steuerle 
mentioned one possibility. There are various options for 
retargeting both the tax incentives and spending programs that 
already exist. So, Dr. Steuerle mentioned one possibility in 
terms of the incentive that we provide for health insurance and 
whether that could be retargeted, in his view, in a more 
auspicious manner. There are many, many options that exist for 
taking the investments or the tax incentives that already exist 
and better targeting them to where you would like, as 
policymakers, to put them.
    Chairman RANGEL. Well, let me thank you. I hope you can get 
the tax jurisdiction recommendations to us so that, without 
violating the restrictions that you work against, that we would 
have a heads-up to how we can organize our hearings to take 
advantage of some of the options that you may recommend.
    I yield to Mr. McCrery.
    Mr. MCCRERY. Thank you, Mr. Chairman.
    I want to add my thanks to the panel, excellent panel again 
today. We appreciate very much your taking time to come share 
with us your knowledge and thoughts on these important 
subjects.
    Dr. Orszag, you mentioned there are ways we could redirect 
or reallocate current tax expenditures to different recipients 
that might be more efficacious in terms of getting health 
insurance in to families that don't have it and so forth. Isn't 
the President's proposal along that line, the one that he 
announced in the State of the Union address?
    Dr. ORSZAG. I think that the President's proposal has 
elements of this kind of idea, and I would note that there are 
parts of it that I think are consistent with what sort of the 
broad analytical community believes is the right way forward. 
As Dr. Steuerle mentioned, there are other ways of tweaking it 
that might make it more effective in terms of the traditional 
objectives of outside analysts promoting health insurance 
coverage and fairness and efficiency.
    Mr. MCCRERY. I appreciate your answer, because I think some 
people have a knee-jerk reaction to whatever the President 
proposes, and I was sorry to hear some say that his idea 
wouldn't even get a hearing or see the light of day in the 
Congress. I think that is shortsighted and not conducive to a 
broad inspection of what we have at our fingertips to deal with 
to solve this problem.
    The President's proposal, I like. I think it is a step in 
the right direction.
    I would go much further along the lines that Dr. Steuerle 
talked about. If we look at the tax expenditures that we do now 
in health care, they are not very equally distributed. They are 
extremely tilted toward people who make very comfortable 
incomes and don't do a whole lot, in my view, to encourage 
people of low or moderate income that don't have insurance to 
purchase insurance. In fact, they do nothing to encourage 
people to purchase health insurance.
    So, in my view, we ought to embrace at least the 
President's willingness to approach this subject of the 
reallocation of the tax expenditures and then see how we might 
all differ in the particulars, but certainly not reject a 
hearing of that approach.
    In terms of the income inequality, income gap that was 
talked about a lot today, I guess, Dr. Goodman and Dr. Hacker, 
I would ask you, is it as valuable a tool in examining what is 
really happening in our population in the United States to look 
at not only income but consumption data? It is quite different. 
The gap is considerably less in consumption than it is in 
income. So, there has got to be some explanation for that, and 
maybe we should explore the consumption data as well as the 
income data when we are talking about this gap that exists. Do 
you have any comments on that, Dr. Hacker?
    Dr. HACKER. I will say very briefly that I think they are 
two very different perspectives on inequality, and I would 
argue that you shouldn't privilege one over the other. It is 
indeed the case that inequality of consumption is less dramatic 
than inequality of income, but it should be noted--and here I 
am referring to a very nice paper that was done by an economist 
named Timothy Smeating called Inequality Through the Prism of 
Consumption and Income in which he looked at the trends in both 
consumption and income inequality.
    What was interesting is, while consumption inequality is 
less than income inequality, the trend is surprisingly similar. 
They both have risen, in other words. The consumption data he 
points out, too, have some gaps in them that raise questions 
about their ability to--particularly for hiring very high-
income people to look at their consumption pattern. So, I only 
note that these are really two different perspectives.
    I do think it is worth noting that, to the extent that 
lower--and middle-income people--particularly lower income 
people--are spending much more than they earn, that does raise 
concerns about whether people are going into debt to maintain 
their standard of living. So, I think that it may push our--if 
we look at the consumption data, it may push our perspective 
toward asking, how can we provide new kinds of savings instead 
of new tools for lower--and middle-income people?
    Mr. MCCRERY. That is certainly a legitimate point of 
inquiry.
    Dr. Goodman.
    Dr. GOODMAN. A very good book by Alan Reynolds I think that 
just came out last month that went into all different kinds of 
ways you can compare standards of living and income amongst the 
different population groups, and worth looking at. One of the 
things Dr. Reynolds points out is that so many of the 
comparisons of income growth over time between different 
population groups ignore transfer payments which means they are 
ignoring Social Security, they are ignoring income support 
programs. So, for many, many people, that is a very important 
source of income.
    You are right. There is far more equality of consumption 
than there is of income, and maybe at the end of the day that 
is what matters more.
    Mr. MCCRERY. Thank you.
    Thank you, Mr. Chairman.
    Chairman RANGEL. Thank you.
    Mr. Stark.
    Mr. STARK. Thank you, Mr. Chairman.
    I thank the panel for joining us in one of these series of 
hearings that the Chairman has called which I think are very, 
very important.
    Several of you in your testimony discussed, in reference to 
the President's proposed tax health care for everybody plan, 
that there was indeed a certain amount of tax fairness, that 
having tax-free income or tax-free benefits in the form of 
health benefits is an advantage that may not be enjoyed by all. 
I would like to ask the panel if there is anyone who would 
suggest to me that having equity in a home by virtue of the 
mortgage interest deduction is more important to the quality of 
life than having medical care. Would any of you want to take 
that side of the question?
    I assume by the silence of the panel that you all think 
that perhaps medical care would be more important to our 
quality of life than building up equity their home. Is that a 
fair assumption? Anybody want to raise their hand or nod? You 
can all put your heads on the table. I won't tell.
    So, I guess I ask that just to suggest that we put away 
this argument about the fact that there is a terrible tax 
inequity that I get my health insurance benefits from the 
Federal Government as a tax-free benefit. I also get to deduct 
the interest that I pay on my mortgage, and if we are going to 
start picking and choosing, I think we can look at the Tax Code 
as hosting a whole lot of inequities, and I hope we wouldn't 
just pick on health care for that.
    Further, I wanted to suggest that, in the question of 
consumption, just to add in that it hardly seems to me that the 
ability through accumulation of assets to fund children's and 
grandchildren's college education to the tune of $40,000 or 
$50,000 a year per child or grandchild isn't a grand 
distinction between people with huge incomes and people with 
modest incomes. So, that when you start comparing consumption 
and income I think you have to be careful going down that road. 
I think there are different ways to----
    I wanted to ask Dr. Hacker, who has come up with a 
brilliant plan for insuring all Americans. I think he calls it 
the Health Care for America Plan. I wonder if you would 
describe why you think that plan is the best way to solve our 
problem for universal health care, aside from the fact that it 
was supported by Congressman Levin back in 1993 and 1994 when 
he was instrumental in helping Mrs. Clinton write the bill. Are 
there other reasons, Dr. Hacker, that you would suggest?
    Dr. HACKER. Besides the fact that your own proposal very 
closely follows the details of this proposal, that would be 
another piece of argument in favor for what I believe. The 
Health Care for America Plan, which was recently introduced by 
me through the Economic Policy Institute's Agenda for Shared 
Prosperity Project, is an attempt to try to propose a 
politically feasible, reasonable way of achieving universal 
coverage and health security in the United States by building 
on the best aspects of the President's system, namely, 
employment-based coverage for higher income workers that pools 
risk broadly and a Medicare Program which has done an admirable 
job in keeping administrative costs down and restraining cost 
increases within the program.
    It does not simply expand Medicare. It creates a new Health 
Care for America Plan modeled after Medicare, but it 
essentially gives employers the choice of either providing 
coverage on their own that is comparable to this new option or 
to paying a reasonable--in my proposal's case--payroll-based 
contribution to enroll their workers in this proposal.
    I want to say why I think this has several virtues. One, it 
really addresses this question and problem of affordability 
that we have been talking about. The fact is, is that the only 
way that we have effectively addressed cost increases in the 
past is through the restraint of price increases within the 
Medicare Program.
    It has--between 1970 and 2002, it grew about 40 percent 
slower over that period for the same services as private 
insurance. It has much lower administrative costs, and it is 
done much better even than that longer track record, which 
suggests since the mid-eighties--there is no question in my 
mind if under this proposal you had a substantial share of 
Americans in the new Medicare-like plan, it would be even more 
effective in controlling cost, thus being able to guarantee a 
defined package of benefits, rather than giving people a 
voucher that might not be able to cover the whole cost of 
insurance.
    Mr. STARK. Did you bring some copies of your book that you 
might offer to the audience and autograph?
    Thank you.
    Dr. HACKER. I did not.
    Thank you very much.
    Chairman RANGEL. The Chair recognizes Mr. Herger.
    Mr. HERGER. Thank you, Mr. Chairman.
    Dr. Goodman, concerning these retirement plans, some have 
criticized the move from defined benefit to defined 
contribution because they fear it shifts risk to the employees 
who are less well suited to bear those risks than the 
employers. Why do you disagree? I know you have made a comment 
earlier in your statement. Would you go into that a little bit?
    Dr. GOODMAN. Yes. A lot of people don't understand how the 
defined benefit pensions work, but, basically, they are back-
end loaded. What that means is that the last year you work for 
the employer is worth a lot more for pension benefits than the 
first year, but if you don't stay with the employer for the 
whole 4 years--let's say you work for 10 years for an employer, 
and then you move to another employer with an identical defined 
benefit pension plan, work another 10 years but get vested in 
that plan and go to a third and fourth, so you divide your 40-
year work life into four employers. You will cut your pension 
benefits in half, even though you are in an identical plan with 
all four workers.
    So, that is what I meant earlier when I said the job 
switching costs thousands of dollars of benefits. That is not a 
good pension plan if you have a mobile labor market.
    So, I think we need retirement savings, pension plans that 
are consistent with a very mobile labor market. That is why I 
said I think the benefits ought to be personal and portable. 
The benefits ought to travel with the worker.
    Mr. HERGER. We are seeing more of that. Our economy today 
is more of a dynamic economy that we live in that unlike maybe 
during the fifties or mid 1900s where people would stay with 
their job their entire lifetime, we are seeing more of a mobile 
force that is moving. Is that not correct?
    Dr. GOODMAN. I think we are, yes.
    Mr. HERGER. Would anyone else like to comment on that?
    Dr. HACKER. I would only just say one quick note, which is 
that these are not either or choices. It is true that defined 
benefit pensions don't often serve a highly mobile work force 
and that they also have risks. As Dr. Goodman said, for 
example, if firms go bankrupt, Congress has of course tried to 
deal with some of these risks and tried to address some more 
recently with the pension protection act.
    I do want to say, though, that there is a fundamental 
feature of defined benefit pensions that is very difficult to 
get in the private market today and it is quite important and 
that is the ability, the ease with which defined benefit 
pensions offer a guaranteed benefit in retirement, an annuity 
if you will. So, one of the fundamental issues with defined 
contribution plans is it is generally the case that people do 
not turn that money into a defined benefit for the remainder of 
their lives. So, one thing to think about is how to make it 
easier for people to annuitize their benefits because that is a 
risk that is often not fully recognized by workers.
    Mr. HERGER. Thank you. Yes, Doctor.
    Dr. STEUERLE. Mr. Herger, if I could respond to you and Mr. 
Stark, as well, with respect to the pension question. 
Currently, the tax subsidies for pensions are estimated to be 
on the order of about $150 billion per year. The personal 
saving rate in the United States is zero. That means we are 
spending $150 billion without necessarily getting very much at 
all in the way of savings. Of course, there are a variety of 
reasons, one of which is the way these subsidies are designed. 
We can get the subsidy without doing any saving at all. Most of 
the people in this room have figured that out because you can 
borrow with one hand and put money in a pension account with 
the other and generate huge tax savings without doing 
additional savings. So, that is among the games that are going 
on.
    There are all sorts of issues like this such as in pensions 
and other areas where you designed programs decades ago. Mr. 
Goodman mentioned what is happening with the changing status of 
the family, but there is also the issue of how to bring older 
workers into the work force.
    The old traditional defined benefit plan had a lot of good 
features to it, such as annuitization, but for instance, it 
discriminated enormously against older workers--not just 
younger workers, but older workers. Why, because you often 
peaked out on these plans and you started accruing literally 
negative benefits if you stayed with the plan.
    If you don't believe this, go to your local government 
officials and ask what has happened to teachers and fire 
persons and other local officials where they accrue negative 
benefits if they stay on the job.
    So, there is a lot of work that we need to do in all these 
areas. We need to bring the best features of what we had in the 
past as well as accommodate the needs of the future.
    Mr. HERGER. I thank you, and again, Mr. Chairman, I thank 
you for having this hearing on a very important issue. Thank 
you.
    Chairman RANGEL. Thank you very much. The Chair would like 
to recognize Mr. Thompson of California.
    Mr. THOMPSON. Thank you, Mr. Chairman. I apologize for 
stepping out. There was a budget meeting I had to attend. I 
would be interested in hearing from the panel Members their 
understanding of the impact that this phenomenon--that sandwich 
generation of folks who are having to care for elderly parents 
as well as children.
    What sort of impact is that going to have both on people's 
daily living pressures as well as their ability to save and 
plan for the future?
    Dr. GOODMAN. Well, I will comment generally on it. It means 
that you move out of this traditional idea that you are going 
to have a full-time place in the work force. People need 
flexibility to care for children and to care for parents. They 
might want to combine the care time with a part-time job.
    We have an employee benefit system and we have a labor law 
system that is very unkind to part-time workers. It is all 
designed around the idea that you will have a full-time 
relationship with an employer.
    So, we need flexibility in employee benefits law and we 
need for employers to be able to give workers choices between 
benefits and taxable wages, and we need to have that, or we are 
not going to be able to accommodate all the many different 
things that families are going to want to do to deal with those 
problems.
    Dr. ROWLAND. Mr. Thompson, we can't just solve that problem 
in the workplace. One of the big issues we have is very limited 
assistance to families who have long-term care needs. We often 
leave people in the community without any ability to get the 
kind of in-home assistance they need. We really need to develop 
a better set of policies that go beyond acute medical care to 
help with the chronic illness, which is facing more and more of 
our elderly population.
    So, the work force issue is not just an issue for women, it 
is an issue for whole families where there is no longer any 
ability to get even the kind of workers in the home that could 
take care of providing the needs of long-term care services.
    Mr. THOMPSON. Is there a way to identify the economic 
impact that is going to have in a more macro sense?
    Dr. ROWLAND. Well, we do surveys of informal care giving 
and the economic impact of the family having to contribute that 
without any assistance and we can certainly get back to you 
with some studies on what the impact is on the overall economy 
of the family.
    Mr. THOMPSON. Anybody else?
    Dr. STEUERLE. I testified yesterday before the Senate 
Budget Committee on a related matter, which was how our 
particular design of old age programs now work against helping 
people in old age. To give you an example, in Social Security 
now, only about 35 percent of benefits are paid to people with 
less than 10 years of life expectancy. That is, this system has 
morphed into a middle-age retirement system where benefits are 
paid to the average couple for 26 years, yet a smaller and 
smaller share of benefits is available to help them in old age.
    So, regardless of the tax rate that this Committee or the 
Congress may decide it wants to compromise on for some eventual 
Social Security system, there is still the issue of the ages at 
which you would want to concentrate the benefits then that this 
tax rate would support, whether it is a higher rate or lower 
rate.
    I would suggest very strongly we want more of those 
benefits in older age so we could provide more of the type of 
protections for the types of risk issues you are talking about 
today.
    I would also mention, by the way, that if we could get 
people to work longer, it would add revenues to our system. We 
are going to a system where we are scheduling close to one-
third of adults to be on Social Security. When you start 
subsidizing that many people for that long a period of time and 
getting them out of the labor force, you lose revenues.
    Again, at any tax rate, if we can work on improving the 
system so that people work longer, we can concentrate not only 
more benefits in old age, but we can have a higher package of 
lifetime benefits because there would be more revenues 
available to the system.
    Mr. THOMPSON. I don't have much time left, but I would like 
to touch on the issue of health care needs quickly, on 
affordability of health care.
    I would like to hear your impression as to how that is 
going to impact middle class families, and at the same time, 
what the President's proposal for the tax deduction how that is 
going to affect or how is it going to impact middle class 
families and their ability to purchase health care.
    Dr. ROWLAND. Well, clearly, we know that the economic 
burden of health care is growing for families, especially for 
middle class families. A study just completed by the Federal 
Agency for Health Research and Quality shows that in 1996, 
about 16 percent of middle income families faced financial 
burdens for health care that exceeded 10 percent of their 
disposable income. By 2003, that had risen to 23 percent of 
middle class families.
    So, we are clearly seeing a growing economic burden not 
just for health insurance premiums, but for the related out of 
pocket expenses that families face when they go to use a doctor 
or when they enter a hospital.
    I think that one of the concerns that one might have in 
looking at the President's proposal is that many of our middle 
class and lower income families are facing becoming uninsured. 
Getting insurance is the most important aspect to their having 
the financial means to obtain health care services and the 
President's proposal does relatively little to expand the 
uninsured population into the insured population.
    By the Administration's estimates, roughly 3 million people 
who are uninsured today might gain insurance.
    It could also lead in some cases with its incentives toward 
going to the nongroup market to individuals losing employer-
based coverage.
    So, for the middle class and the lower income working 
class, I think we really need to look at making insurance 
generally more available and more affordable and I don't think 
we can get as far as we could through tax policy as with other 
methods.
    Mr. THOMPSON. Thank you. My time has expired, but maybe on 
the second round we can continue on the issue of health care.
    Chairman RANGEL. I may have some bad news in terms of the 
second round, because I have just been advised that the 
cloakrooms expect three votes and that should take a total with 
the 15, 5 and 5 of 30 minutes. Then I am also advised that we 
could possibly expect a series of procedural votes.
    Now, we can't ask these witnesses to stay beyond 30 
minutes. I was just consulting with the Ranking Member to see 
whether it would make any sense, since the following--excuse 
me, panel--since the following procedural votes probably would 
take 15 minutes apiece.
    If we did that, I would like to know how many of the 
Members that are here would try to make it back and forth 
within the 15 minutes, and then I would, if there was 
sufficient number, by putting up your hand.
    Now what we would attempt to, with the panel's consent, is 
to adjourn for a half-hour, and then promise you that we would 
be coming back. You won't have the full number of people here, 
but we would do the best we can. I ask your indulgences, but 
more important than what happens today, it is abundantly clear 
to all of us that we are going to need you to come and sit with 
us without the mike, without the 5-minute rule and help us 
think our way through as to what we can do, because it is 
abundantly clear that all of us recognize the problem, but your 
expertise has been clarified, but we need your help as to where 
we end up, Mr. McCrery.
    Okay, Sandy.
    Mr. LEVIN. All right, quickly on health, and again, 
welcome, Dr. Steuerle. In your testimony, you say these tax 
subsidies favor higher income over lower income employees. It 
would be helpful if you and others could provide a profile, 
data, because I do think, it is my guess that the majority of 
the tax subsidy--and this is going for people who are 
employed--go for people who would be called in the range of 
middle income families. I think it is true that those who are 
under contracts with more comprehensive benefits earn more than 
low income families, but still, I think they would consider 
themselves very much middle class families.
    [The information follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    So, I think it would be useful for us to have data and 
maybe Dr. Orszag you can also supply it, in terms of 
consumption, I just urge that we be careful and we not--it is 
true the consumption differential will be less than the income 
differential because people have to eat, they have to buy 
clothes, they have to have a roof over their house.
    I still don't think the fact that the consumption gap is 
less says very much about the income gap.
    Let me just, also, suggest in terms of Dr. Orszag's 
testimony, that you help us, and if there isn't time, and maybe 
somebody else should join in, to talk about, less volatility, 
to ask themselves is there less volatility macrowise because we 
have been so mortgaging the future?
    We have piled up so much debt, so much deficit, et cetera 
that that maybe has somewhat evened out the volatility, but it 
is essentially raising the risk of much greater volatility when 
the time comes.
    Do you want to comment on that?
    Dr. ORSZAG. Sure. I would say the nation's low national 
saving rate and our for example large external deficit poses 
some risk, particularly it means we are accumulating less 
capital and that reduces future income compared to what it 
would be otherwise.
    What I would say about the macro economic volatility is it 
may be the mirror image, the reduced level of macroeconomic 
volatility may be the mirror level of a higher level of 
individual level or household level of volatility, that because 
workers in households are experiencing more volatility in 
response to shocks, the macroeconomy is smoother because those 
households and workers are kind of moving around to respond to 
fluctuations and demand for goods and services more, and that 
means the total moves around less. There may be a connection 
between the two.
    Mr. LEVIN. Mr. Chairman. If a Republican could chime in, we 
have what, 7, 8, minutes? Should we try?
    Mr. STARK [presiding]. Well, I had been asked by the Chair 
to recognize Mr. Camp at the conclusion of your time.
    Mr. LEVIN. No, he can.
    Mr. STARK. Thank you, and I am pleased to recognize Mr. 
Camp.
    Mr. CAMP. Thank you, Mr. Chairman. Dr. Orszag, before we 
find out whether the middle class is squeezed, who is the 
middle class? Could you define them for me?
    Dr. ORSZAG. I don't think I used that term, and obviously, 
different people refer to the middle class to apply to 
different ranges of income. I don't know that--I don't think 
there is an official definition.
    Mr. CAMP. So, there is no definition.
    Dr. Goodman, is there a working definition of middle class, 
or is there at least some way we can define who we are talking 
about here, to find out whether they are squeezed.
    Dr. GOODMAN. Well, it depends on who is making the 
argument. I didn't say they were squeezed.
    Mr. CAMP. That is the title of the hearing, but I am trying 
to understand, we found this with poverty, there were different 
levels of describing who is in poverty, some people counted 
Federal transfer payments when they determined who is in 
poverty. Some folks did not. The Government doesn't, for 
example.
    Who is middle class? By income level or does owning a home, 
does that put you in the middle class? What criteria should we, 
as a Committee, use to define middle class?
    Dr. GOODMAN. That I don't know, because that is not the 
language that I use.
    However, I will say this. I don't think that the income is 
the problem. I think the problem relates to these programs that 
I think of them as safety net institutions, the pension system, 
the health care system, the retirement system, that is where 
the problem is. Those are the institutions that are out-of-
date.
    Mr. CAMP. Okay, but if some economists have used the middle 
20 percent of household income as middle class, and that would 
be between 25 and $45,000 per year, between the 40th and 60th 
percentile, is that fair? Are these economists on track or----
    Dr. ROWLAND. In terms of the work I looked at with regard 
to the health services research literature, we define middle 
class as individuals and families between 200 and 400 percent 
of the Federal poverty level. That is roughly 41 to 82,000 a 
year for a family of four.
    One can argue that people just below that are still part of 
the middle class, but that is what we used in our testimony.
    Mr. CAMP. Has that number grown in the past? I am sorry, 
would you like to comment as well?
    Dr. STEUERLE. I just wanted to make a couple quick comments 
here. One of the difficulties with the data is that they often 
exclude items. For instance, a lot of reporting of what is 
middle class income excludes income from your housing, it 
excludes income from your health insurance, it excludes income 
you might be accruing on your pension plan. So, that is one of 
the issues. What economists will generally do is present to you 
the data by percentiles or deciles or the middle 20 percent, so 
you can decide what you want to define as middle class.
    I need to add one other complication as well, which goes 
back to the consumption-income debate. A lot of households 
combine together in ways we don't measure very well. There are 
2 million people missing even in the Census. That is one of the 
reasons we get some of these consumption-income differences. 
Not marrying is the tax shelter of the poor. So, they often 
combine households in ways that that don't show the data.
    Mr. CAMP. Households are combined but yet we don't know----
    Dr. STEUERLE. So, all we can do is try to present the data 
to you honestly in a nonpartisan way.
    Mr. CAMP. So, there are double income households 
potentially, but we don't know that. How many people are, Dr. 
Rowland, in this category?
    Dr. ROWLAND. There are roughly 74 million non elderly 
people between 200 and 400 percent of poverty, about 92 million 
above that, and obviously another 90 million below that. So, we 
are picking the middle range of both people and income.
    Mr. CAMP. Is that a static group or do people move in and 
out of that?
    Dr. ROWLAND. People clearly move in and out of these income 
bands, because as you have heard, income does not stay stable 
for many people over the course of the year.
    So, this is a snapshot view that was taken using the Census 
current population survey (CPS).
    Mr. CAMP. Has that group--our Tax Code has been fairly 
static for past 50 to 60 years. Has that group grown in the 
past generation, do you know?
    Dr. ROWLAND. Well, during recessionary times, obviously the 
lower income groups grow resulting in growth in the 
underpoverty group, and growth in the near poor just below the 
middle income group. As a result, this group goes back and 
forth, depending on the state of the economy.
    Mr. CAMP. In the last 10 years?
    Dr. ROWLAND. In the last 10 years, there has been growth in 
the middle income group, but there has also been more growth in 
the near poor group just below it.
    Mr. CAMP. Do you count Federal tax benefits when you 
include the poverty group?
    Dr. ROWLAND. This is just using the Census CPS, that does 
not include Federal tax benefits.
    Mr. CAMP. Thank you, Mr. Chairman.
    Mr. STARK. We will recess for 30 minutes. Thank you.
    [Recess.]
    Chairman RANGEL. I you so much for your indulgence, we try 
to avoid this, but thank you for coming back.
    Mr. Blumenauer.
    Mr. BLUMENAUER. Thank you, Mr. Chairman and thank you for 
keeping this going. Not just because I haven't had a chance to 
have my 2-1/2 minutes, but I truly appreciate what is happening 
with you and the Ranking Member, laying the foundation, dealing 
with the issues of poverty, income insecurity, and how to tie 
these pieces together.
    In the course of the hearings that we have been having in a 
broad range of areas, the things that you are talking about 
today tie into trade policy and anxiety, manufacturing, health 
care, we are just seeing across the board you are touching on 
things under the broad sweep of this Committee, and I think 
ultimately the things you are talking about are part of the 
solutions.
    I would say, Dr. Furman, you ought not to feel too bad 
about not having signed up yet for your 401(k) or whatever it 
is. I am going to find, Mr. Chairman, and enter into the 
record, I think it was an article in the New York Times last 
year where they interviewed the winners of Nobel prizes for 
economics about what they had done with their prize money. 
There were people who were embarrassed to say I kicked it, it 
is in a money market, I don't know, it was really telling at a 
time when some people think that all we need to do is just give 
more choices to the American public rather than giving them 
information and guidance, that this study of Nobel Price 
laureates in economics was quite embarrassing. For them. Not 
for you, sir, I am sure.
    In a world where we now have the studies that show that you 
sell less jam if you are offering consumers 26 brands rather 
than 6, the notions of health care, retirement security, how we 
balance the desire for choice and opportunity, with what we 
pile on people in a time of insecurity is something that I am 
deeply concerned with.
    I appreciate what has happened in the hearings before this 
Committee because we started with the 37 million people who 
were poor. Then we expanded the discussion. Today we are 
talking about maybe 100 million Americans who are struggling 
not to be poor, working hard, some of them with two jobs, and 
then you are talking about the instability and the volatility 
that there may be another 100 million who are struggling to 
stay in middle class.
    My question--and it probably isn't a lot of time for each 
of you, I would turn it over to you for observations that you 
have, but I would welcome any written response you may have to 
me or the Committee focusing on that 100 million people who are 
not the poor. They are not the struggling middle class. These 
are people who are, in many cases, in health care, the only 
ones that are paying retail. You know they don't have enough 
for health insurance, but they have to--they have enough that 
people expect them to pay. They have to put down the credit 
card. The people who may be steered to subprime loans.
    People who are really ensnared in the new bankruptcy laws, 
there are a series--and these are people who are probably 
paying more for transportation than for housing. There is a 
series of things that talk about the stress that these people 
face.
    I wondered, if you had some observations in the things that 
we were talking about in terms of their income insecurity, the 
problems they face with health care, probably not having 
defined pensions and maybe the least likely to have 401(k)s, 
are there thoughts, prescriptions that you have for these 100 
million Americans who are not poor, but certainly aren't rich, 
not middle class and are really struggling to make ends meet?
    [The information follows:]

    New York Times
    December 5, 1999
    Nobel Economics: Spending the Check
    By SYLVIA NASAR

    On a late October morning, Robert Alexander Mundell sat Buddha-like 
amid stylish clutter in his Claremont Avenue apartment, two blocks from 
Columbia University in Manhattan. The magic moment when, amid fairy-
tale pomp, he will receive from the King of Sweden the heavy gold medal 
engraved with Alfred Nobel's stern profile was still weeks away. But 
life had already changed profoundly for Mr. Mundell, 67, the flamboyant 
Canadian-born economist whose ideas paved the way for the euro, the 
European currency.
    Since the announcement of the prize 2 weeks earlier, The Wall 
Street Journal had already described him as more important than Keynes, 
a television network had filmed a documentary on his life and 3,000 e-
mail messages had clogged his ``in'' box. Invitations were pouring in 
so fast on this particular morning that his wife, Valerie Natsios, 
desperate for the last hour to take a shower, couldn't leave the phone: 
It wouldn't stop ringing.
    Mr. Mundell, who ``half expected'' the prize for some 15 years, had 
already decided how he would spend the nearly $1 million prize (to 
complete the renovation of his Tuscan palazzo, once featured in 
Architectural Digest, and to buy a pony for his 2-year-old son, 
Nicholas). And he had already decided that he would have the honorarium 
transferred to his bank account in euros, because he thinks the euro, 
though sinking of late, is bound to appreciate against the dollar. But 
one detail appeared to have escaped the man who, during the Reagan 
presidency, became the intellectual guru of the supply side tax 
revolution: ``You mean . . . '' he asked, a tiny frown now evident on 
the capacious brow, ``it's taxed?'' The world's great economic thinkers 
aspire to the Bank of Sweden Prize in Economic Sciences in Memory of 
Alfred Nobel for some of the same reasons that actors hanker after the 
Academy Award and athletes hope to enter the Hall of Fame. ``People 
like crowns,'' said Mr. Mundell, who will receive this year's prize on 
Friday.
    No one has ever refused the economics prize, which was added to the 
five original Nobel prizes in 1968, although one laureate, Gunnar 
Myrdal, said publicly that he would have done so had he not been so 
sleepy when the predawn call came from Stockholm, and another winner 
seriously considered turning it down because a friend's work had been 
ignored. The prize, after all, is the only one that can vault a social 
scientist into the same pantheon as Einstein, Curie and Bohr. William 
Breit, co-editor of ``Lives of the Laureates'' (M.I.T. Press), calls 
the Nobel nothing less than ``the maiden's kiss that turns the toad 
into a daring, dashing fellow.''
    As its cachet has grown--in step with the awareness of economics' 
role in public and private life--the prize has had a bigger impact on 
the laureates. They are tempted with new opportunities--financial, 
professional and personal---as well as new risks. Research can be 
disrupted, and, said Milton Friedman, who won in 1976, ``the temptation 
to shoot off your mouth is nearly irresistible.'' The media hoopla 
accompanying the announcement may even have hastened the death of 
William Vickrey, who won in 1996 for his modern auction theory. Three 
days later, Mr. Vickrey, who was 82, died of cardiac arrest, possibly 
set off by the unusual stress.
    And then there is the money. Woody Allen, that notorious Academy 
Award absentee, once acknowledged that he would, if called, show up in 
Stockholm: ``Apart from everything else,'' he said, the prize ``carries 
an interesting amount of cash.''
    Assar Lindbeck, the Swedish economist who was long the leading 
force on the five-member prize Committee, put it this way: ``People say 
that the money doesn't matter, but they are just being politically 
correct.''
    What makes the money so important isn't the absolute sum. Though it 
varies, it is never enough to let a laureate quit his day job, as 
Alfred Nobel might have hoped. Rather, the prize is like a movie deal 
for a writer or a bundle of stock options for a middle manager: one of 
those rare windfalls in a middle-class life big enough to make the 
question ``What shall I do with it?'' really worth asking.
    Interviews with a sampling of economics laureates show that for all 
their sophistication, they seem no more, nor less, canny about money 
than mere mortals. Surprisingly few have entrusted their winnings to 
Wall Street, apparently agreeing with the sentiment of Wassily 
Leontief, who, upon winning the prize in 1973 for inventing input-
output analysis, said: ``I like to speculate in ideas. I don't like to 
speculate in money.''
    Rather, some laureates have spent their windfalls to take a 
planeload of family and friends to share the festivities in Stockholm, 
others to buy real estate----in Mr. Friedman's case, an apartment in 
San Francisco. A surprising number have given the money to their 
children or used it to become charitable benefactors. Some have bought 
time to pursue favorite public causes or--despite the fact that their 
average age on receiving the prize was 69--have started new research 
careers.
    In part, the variation arises because the laureates haven't all 
received the same sum. More than one-third of the prizes have been 
shared with one or two co-winners. The amount, like that of the science 
prizes, is set each winter and varies with the fortunes of the Nobel 
Foundation's investment portfolio. The prize became much richer at the 
end of the eighties thanks to the bull market in stocks and a hugely 
profitable real estate deal in Stockholm. Mr. Mundell's take will be 
7.9 million kronor, or nearly $1 million at current exchange rates. 
That is about twice the amount, in nominal terms, of awards in the mid-
1980s.
    Mr. Mundell is lucky. When Paul A. Samuelson won in 1970, the prize 
amounted to a mere $77,000, less than 40 percent of the purchasing 
power of the original science prizes in 1901. By 1976, it was $180,000, 
a sum that hardly bothers the winner, Mr. Friedman, one of the earliest 
and most vocal proponents of the free market. He argues that, while his 
prize was delayed for several years by his ideological enemies, they 
actually did him a favor. Allowing for inflation and tax changes, his 
has been the biggest prize, before or since. ``I know. I calculated 
it,'' he said recently.
    As Mr. Mundell discovered, the U.S. government has lately become a 
prime beneficiary of the Nobel Foundation's investment success. Since 
1986, when Congress changed tax laws to equalize the treatment of 
various kinds of income, regardless of source, the prize has been taxed 
as ordinary income, a little-known fact that, when discovered, has led 
to an occasional petition to Congress. Starting with Robert M. Solow, 
who won in 1987, American laureates have had to pay up to 50 percent of 
their winnings to city, state and Federal Governments.
    The timing of the prize introduces its own vagaries, as Robert E. 
Lucas Jr., the creator of the theory of rational expectations, 
discovered in 1995. Like Mr. Mundell, Mr. Lucas knew he was in the 
running. When negotiating their 1989 divorce agreement, his wife, Rita, 
thought the odds good enough to have her lawyer insert a clause in 
their agreement stipulating that ``wife shall receive 50 percent of any 
Nobel prize'' won prior to Oct. 31, 1995. The prize arrived a few days 
before, and Mr. Lucas wound up pocketing roughly $300,000 after taxes, 
instead of the $600,000 or so he would have received if he had won the 
next year.
    ``A deal is a deal,'' Mr. Lucas told reporters afterward, adding 
that he might have resisted the clause more strenuously had he been 
more sure of winning so soon. But Mr. Lucas, who teaches at the 
University of Chicago, is quite philosophical about it now: ``She got 
the whole house,'' he said recently. ``Getting half of the prize was 
better than nothing.''
    Mr. Lucas says that he parked his share of the prize money in his 
retirement account and more or less forgot about it.
    At the opposite end of the spectrum is Franco Modigliani, who won 
in 1985 for his theory of saving and financial markets. Mr. Modigliani, 
now retired and living in Cambridge, Mass., says he owes his 
substantial net worth partly to the fact that his tax-free $225,000 
prize, mostly invested in stock index funds, has been multiplied many 
times over by what he calls ``the stock market bubble.'' He declined to 
say what his bundle is now worth, but said he leaves the day-to-day 
management of his portfolio to a professional.
    Still, he has not relaxed about the future. Before the 1987 market 
crash and again this year, he acted on his suspicion that the bubble 
was about to burst. Using a combination of put and call options that 
allow one to lock in a gain, he bought what is called a ``collar.'' It 
produces the same effect as if he had sold everything, but without 
incurring huge capital gains taxes. ``The cost is that you freeze 
yourself out of the market,'' he said.
    There is no way to tell, of course, if he will turn out to be 
right. But when laureates have followed their own investment instincts, 
the results have sometimes been less than impressive. Douglass C. 
North, who won the prize in 1993 for his contribution to economic 
history and is now teaching at Washington University in St. Louis, 
delights in the fact that entire countries like Venezuela are asking 
him to redesign their economies.
    But in financial terms, he has not fared as well.
    ``We got a bad year,'' recalled Mr. North, who shared the prize 
with Robert W. Fogel. The prize was worth only $880,000; after dividing 
it in two and paying taxes (46 percent in his case), ``it got to be a 
manageable sum of money,'' he said. ''We thought the stock market's too 
high--the Dow was at 2,000--so we put it in tax-exempt municipal bonds, 
which shows you this economist doesn't know a damn thing about 
investing.'' The Dow closed on Friday at 11,286.18.
    Laureates have also been caught by sudden swings in the currency 
markets. In announcing the winners, the news media usually report the 
prize in dollars, but the amount is actually set in kronor. If the 
kronor heads south between mid-October and mid-December, when the 
laureates collect, the dollar value of the prize can be a lot smaller.
    Gary S. Becker of the University of Chicago, the 1992 winner for 
his application of economic theory to a wide range of human behavior, 
including racial discrimination and crime, now says that he had 
intended to hedge against a sudden depreciation of the kronor by buying 
dollars on the forward market. He never got around to it, and 2 weeks 
after he got his call from Stockholm, a currency crisis erupted in 
Sweden. His prize, worth about $1.2 million in mid-October, shrank by 
25 percent, to about $900,000. ``I was too overwhelmed by all the 
hoopla in the first 2 weeks,'' Mr. Becker said ruefully. ``So I 
suffered some.''
    No laureate's life has been as thoroughly transformed by the prize 
as that of John F. Nash, a co-winner in 1994. The award literally 
brought the world back to Mr. Nash, now 71, whose life was shattered at 
30 by paranoid schizophrenia. Mr. Nash's slim doctoral dissertation, 
written in 1949 when he was a 21-year-old graduate student, 
revolutionized the way economists thought about competition, but on the 
day that the prize was announced, Mr. Nash told reporters that he might 
now be able to get a credit card. They thought he was joking, but he 
was not.
    When the long-delayed honor finally came, Mr. Nash had been without 
a job for 35 years, getting by on only a few hundred dollars a month 
from a trust his mother had established before her death, and avoiding 
homelessness only because of his former wife's compassion.
    After years of grinding poverty, Mr. Nash now has some measure of 
financial security. The prize, which he shared with John C. Harsanyi 
and Reinhard Selten, netted him some $200,000, most of which he put 
first in tax-free municipal bonds and later into a global mutual fund. 
He even has the luxury to indulge in what was a passion of his youth, 
dabbling in stocks, mostly making long-shot bets with small amounts of 
money.
    ``Without the money, it wouldn't be the same thing,'' Mr. Nash said 
of the prize, adding that ``the honor is worth more money than the 
money.'' After he won the prize, Princeton University offered him a 
part-time research post that pays about $25,000 a year. And a major 
Hollywood producer has bought the rights to his life story for a high-
six-figure sum.
    These days, Mr. Nash looks like his old elegant self. He has paid 
part of the mortgage on the house he shares with Alicia Nash, his 
former wife, and shared his good fortune with her and his two sons. 
Asked what difference the prize had made in his life, he said: ``I feel 
I can go into a coffee place and spend a few dollars. Lots of other 
academics do that. If I was really poor, I couldn't do that. 
Previously, I was like that.''
    Robert C. Merton, while hardly unlucky, was a less fortunate 
winner. A mere 53 when he won the prize 2 years ago, Mr. Merton had 
been a superstar since his graduate schooldays at M.I.T. His method for 
determining the future value of stock options, developed with Fischer 
Black and Myron S. Scholes, had an impact that few other contributions 
in economics have matched: they helped hatch a $70 billion market in 
financial derivatives.
    He had long been a professor at the Harvard Business School and was 
a Member of the National Academy of Sciences. After years of consulting 
on Wall Street, Mr. Merton had a personal fortune that was sizable even 
before he became a founding partner in Long Term Capital Management, a 
hedge fund started by John W. Meriwether, the renowned former Salomon 
Brothers trader, in 1993.
    Mr. Merton netted some $250,000 after splitting the prize with Mr. 
Scholes and paying taxes; he spent a large chunk of it to take family 
and friends to Stockholm to share his moment of glory.
    It was the fame that proved a bit overwhelming. ``This is very 
different,'' he said, ``no matter how much attention you've gotten 
before.'' In his apartment after receiving the news, he hesitated 
before facing the reporters who had gathered in the lobby. ``I realized 
that if I said something stupid or out of context it would be in every 
newspaper in the world.''
    That was the easy part, though. A year later, Long Term Capital 
imploded and once adulatory headlines like ``The Right Option'' gave 
way to ones like ``Scrambled Eggheads'' and ``Teachings of Nobelists 
Also Proved Their Undoing.''
    ``It was very painful,'' Mr. Merton recalled--``the extraordinary 
destruction of value, mostly of the partners, including myself, the 
effects on reputations.''
    ``For 25 years these ideas were used all over the world--on stock 
exchanges, asset management firms, banks, insurance companies,'' said 
Mr. Merton, his voice still raw from the experience. ``If the media had 
asked, `Do you still use these models?' the answer would have been 
yes.''
    ``I'll never really get over what happened to L.T.C.M.,'' he 
continued.
    Mr. Merton, who never quit his full-time post at Harvard, retired 
from Long-Term Capital last June. He now has an exclusive consulting 
relationship with J. P. Morgan.
    For Amartya Sen, the first Asian to win the economics Nobel, the 
1998 prize had a different significance. Charming and immensely 
cultured, Mr. Sen has spent a lifetime shuttling with apparent ease 
between his native India and England and the United States. Married to 
a Cambridge University economist, Emma Rothschild, he is the first non-
Briton to be master of Trinity College, the richest of Cambridge's 
colleges. He is also a professor emeritus of philosophy and economics 
at Harvard.
    ``I've been writing for 40 years about inequality and the terrible 
neglect of education in India,'' said Mr. Sen, who was cited by the 
Nobel Committee for his contributions to the economics of social 
welfare, including poverty, famines and human rights. ``Now I have more 
of a voice.''
    Mr. Sen's voice is indeed being heard, particularly in Asia, where 
he has been greeted as a demigod. Ten thousand people crowded into a 
Calcutta stadium to celebrate his prize, a generation of babies has 
been named Amartya (which means immortal) and Asian leaders--including 
Singapore's Lee Kwan Yew, of whom Mr. Sen has been particularly 
critical--are eager to meet him. Among other things, his prize prompted 
the finance minister of West Bengal to commit to building 8,000 new 
primary schools.
    In keeping with his lifelong desire to make a difference to the 
world's poor, Mr. Sen, who witnessed the 1949 Bengal famine, used 
$400,000 of his $940,000 prize to set up two trusts--one in India, the 
other in Bangladesh. He said the trusts, named Pratichi after his 
boyhood home, would ``work toward the removal of illiteracy and 
ignorance, the lack of basic health care, and the special disadvantages 
from which women, particularly young girls, suffer.''
    Mr. Sen, who has an American green card although he remains an 
Indian citizen, will be able to keep roughly $250,000 after paying 
United States taxes. ``I don't think I will invest it,'' he said. 
``I'll use it for useful purposes.'' That means, first, paying for his 
three grown children's air fares for regular trips to India so that 
they can maintain their ties to family and culture. ``It's nice to have 
money,'' Mr. Sen said. ``But now I don't see that life would be that 
much better if I had more money. If I were to get another big cash 
prize, I'd give it all to the trusts.''
    Like Mr. Sen, Tjalling C. Koopmans, the quiet Yale professor who 
won in 1975, gave away a large portion of his prize. Mr. Koopmans, who 
won for his contribution to the theory of optimum allocation of 
resources, was upset that George B. Dantzig, the inventor of linear 
programming, was not included, so he called another laureate, Kenneth 
J. Arrow, to ask him whether he should refuse the prize. Mr. Arrow 
recalled: ``I'm sure he was glad when I said, `Go ahead, take it. You 
deserve it.' ''
    Mr. Koopmans took the advice but couldn't quell his conscience 
after splitting the $240,000 prize with his co-winner, Leonid V. 
Kantorovich. So he donated $40,000 to the International Institute for 
Applied Systems Analysis, a research organization in Vienna with which 
he and Mr. Dantzig were affiliated. The donation reduced his personal 
gain to $80,000, the amount he would have received had Mr. Dantzig 
shared the prize. An explicit condition of the gift was that it be kept 
secret, though a friend has since told Mr. Dantzig about it and 
published an account after the death of Mr. Koopmans in 1985.
    Ronald H. Coase, who was 81 when he won the 1991 prize for his work 
on transaction costs and property rights, is intent on parlaying his 
award into more influence. He netted about $700,000 after taxes, partly 
by getting the Nobel Foundation to push part of his payment into the 
following January, by which time the kronor had appreciated. That sum 
has grown to $2.4 million in a Merrill Lynch mutual fund.
    Mr. Coase, who retired from the University of Chicago Law School, 
now regards the economics profession with a jaundiced eye. And he would 
like to use his new fortune to establish a program to encourage more 
empirical research. But finding the time has been difficult. ``I'm 
fully engaged now, engaged and overwhelmed,'' he said from his home in 
Chicago. Besides, as he has learned, he said, ``it's very hard to give 
money away'' to good effect.
    The prize has tugged a different laureate back into economic 
research. By the time William F. Sharpe won the prize in 1990 for his 
theory of capital asset pricing, he had already retired from the 
Stanford Business School and was a principal in a company that advised 
pension funds. He shared the prize, $380,000 before taxes, with two co-
winners so it ``wasn't huge,'' he said. Once, when a fellow laureate, 
Merton H. Miller, was asked how he spent his share, he joked, ``Well, I 
took my family to dinner in Stockholm.''
    Mr. Sharpe did the same, taking ``my full extended family--
stepmother, mother, children, stepchildren'' along.
    The prize inspired him, then 56, to return to his old position at 
Stanford. ``I was in a commercial phase of a my life, but I wanted to 
go back to writing and research,'' he said. A burst of publications has 
followed. ``I've published a lot of what I've done on my Web site, 
including a book I've had under construction since I went back,'' he 
said.
    Mr. Sharpe has since retired a second time and joined an online 
investment advisory firm, but this time strictly in a research 
capacity. ``You really feel increasingly that what you do should really 
add to knowledge or welfare in some important way,'' he said.
    Even when the prize amount is small, the Nobel creates money-making 
opportunities--five-figure speaking fees, fat consulting contracts and 
post-retirement job offers, not to mention glamorous opportunities like 
opening-night tickets to La Scala and first-class travel around the 
world. For those who consult, join financial firms or hire themselves 
out as expert witnesses in court cases, the payoff can be huge.
    But perhaps true to their lifelong devotion to scholarship, some 
laureates do not find such opportunities all that seductive. At first, 
for example, Mr. Lucas reveled in the invitations. But after five or 
six trips, he realized that he wasn't having that much fun. ``I'm still 
excited by mathematical economics,'' he said. ``The other stuff is just 
a diversion. It doesn't advance any ambitions I have.'' Mr. Lucas, 62, 
finds that the higher profile the Nobel has given him in the economics 
profession is ``extremely stimulating.'' His recent work on growth 
theory may make him the first economics laureate to win the prize 
twice, as the award is given for specific, not lifetime, achievements.
    Mr. Mundell, meanwhile, is thinking of calling his Nobel lecture 
``Reconsideration of the 20th century.'' For him, like most other 
laureates, it is the intellectual contribution--and the stamp it leaves 
on the world--that counts far more than the money.
    Harriet Zuckerman, the author of a classic study of the science 
Nobel Prizes and the stepmother of Mr. Merton, said: ``Posterity is the 
ultimate gold ring. The prize has a way, if not of insuring one's place 
in history, of giving one a better chance of being included.''

    Chairman RANGEL. You will have a full minute to respond, 
and I do hope you take advantage of the invitation of Mr. 
Blumenauer, for all of you to prepare something to send to us, 
because we all want answers to that question. Someone wanted to 
volunteer? Dr. Furman.
    Dr. FURMAN. Sure. I think part of that answer is that you 
are not going to change the volatility, and a lot of it is 
people going to better jobs and moving to new and better 
industries. What you can change are the really bad consequence 
that that volatility has for people so that you won't lose your 
health insurance when you lose your job. You won't lose your 
pension plan when you lose your job. You won't lose your income 
when you lose your job.
    So, stopping the unemployment insurance system from eroding 
and making it work better in a work force where people are 
unemployed for longer is something that the Hamilton project 
has proposals on, along with making it easier for families to 
save.
    We are working on, and will be coming back to later in 
year, proposals in the health care area that would, again, take 
away one of the biggest risks you can face in a volatile 
economy.
    Chairman RANGEL. Please share with us, the Hamilton 
proposals as well as all of you because we will use this at our 
reunion when we get together and try to resolve some of these 
issues. Mr. Pascrell.
    Mr. PASCRELL. Thank you, Mr. Chairman, Mr. Ranking Member.
    Mr. Goodman, I read your testimony as well as the other 
testimonies, and thank you all for making yourselves available 
to us and we need to do more of this, this is what the Chairman 
wants. This is what we are going to have. This is so 
refreshing.
    I think this is, we need to air so that we can come to 
resolve and compromise. I think that is what a democracy is 
supposed to be all about.
    You said in your testimony that the most important problems 
faced by middle income working families today are not problems 
that arise from the nature of our economic system. Instead, 
they are problems caused by outdated public policies.
    I like the first part of the statement.
    I like the second part of the statement. I don't agree with 
you on the third part of the statement, because when I look at 
the issues of the cost of debt, trade policies, health 
situations in this country, college tuition, utility costs, 
many of these policies, many of the things that Government has 
involved itself in deals with public policy. Does effect.
    There has been a huge--and I want your opinion of this, 
your thoughts about this, they are important to me. There has 
been a huge redistribution of income in this country, the 
result of changes over the last 30 years, particularly in the 
Tax Code. The Government interceded to effect economic factors.
    If you look at what we tax now in terms of income and 
assets, it is certainly the reverse of what we were doing 30 
years ago, 40 years ago. There is more emphasis on taxing 
income than it is assets. I know many more people own assets 
today in sharing of the economy. You would have to admit that 
in taxing more of an income that I think that has more than 
anything else has lead to a squeeze of these people who are 
working poor, those people that we would consider come to some 
agreement on, what is the middle class, somebody asked before.
    What is your take on that?
    Dr. GOODMAN. Well, first, I agree with what Dr. Furman said 
a minute ago that we are not going to change the economy, and 
we shouldn't want to change the economy, and that a growing 
economy is one in which there is going to be volatility, and so 
the things we should pay most attention to are the safety net 
institutions, health insurance, pensions, unemployment 
insurance, workers' comp insurance. That is where the reforms 
need to go.
    Mr. PASCRELL. You do mention that in your testimony. When 
you talk about 401(k)s and Individual Retirement Arrangements 
(IRAs), but you do mention also health savings account, there 
is where we may have this question and we may have to iron some 
things out and come to some compromise. I interrupted you. I am 
sorry.
    Dr. GOODMAN. I have not spent a lot of time personally with 
the income redistribution statistics. It is my impression, 
however----
    Mr. PASCRELL. Not my interpretation, believe me.
    Dr. GOODMAN. Every tax cut we have had in the last 30 years 
I think has made the Tax Code more progressive. So, on the tax 
side we are not--it is not as though we are letting rich people 
off the hook. They are bearing a larger share of the load than 
they did 30 years ago.
    Mr. PASCRELL. Well, their incomes are increasing 
proportionately, but Dr. Orszag, I am very interested in this 
question about distribution and redistribution of wealth in 
this society. I believe in capitalism. I don't want to sound 
like a socialist, but there has been in terms of what the 
emphasis is on taxing and people are hurting out there, you 
talked about the volatility within individual incomes rather 
than the general economy has calmed down. This is good. We need 
a stable economy, but local--individuals this has not happened. 
Could you address that and try to, not get to a debate but just 
give us your reaction to what I am trying to get at here?
    Dr. ORSZAG. If I could focus in on the tax system for a 
moment, the tax system could play a role in cushioning the 
volatility in after-tax income, in particular, progressive tax 
system can take any given level of variability in before tax 
income and squeeze it down so that it is not as large on an 
after tax basis. I think this is potentially a quite important 
role of a progressive tax system, so changes in the tax system 
that alter the progressivity of the overall tax burden will 
have implications for after-tax income volatility as well.
    Mr. PASCRELL. Dr. Furman, I may be comparing apples and 
oranges, but we know what happened before 1934 when individuals 
certainly didn't save in this country and were put in a 
precarious station where we had 60 to 65 percent of the poor 
living in poverty, and we know what happened after the, not 
only some programs, but particularly Social Security was 
implemented.
    We have a situation, is the debate between whether we 
should go back to that, at least philosophically? Or to 
strengthen, to strengthen some programs that came out of these 
last 70 years? Is that where the debate is going? People--it is 
a question that they had the option to decide where they are 
going to put all their money. They didn't have the money to 
begin with. A lot of older people were hurt, suffered, died, 
because they couldn't make it. It just wasn't there. It wasn't 
simply because of the depression. Those things were happening 
before 1930 as well when older people were living in poverty as 
well.
    Now, how do you address that?
    Dr. FURMAN. As I tried to discuss a little bit, if you look 
at your retirement portfolio, anyone would want a diversified 
retirement portfolio. Some of it invested in the market, some 
of it risk free, market risk free, rock-solid guarantee. That 
part of the portfolio was represented in the past by Social 
Security benefits and defined benefits pension plans.
    With defined benefits going down, that is, if anything, an 
argument for a more robust Social Security system, which, 
again, market risk free, offers a guaranteed benefit, I think 
several of the witnesses have said an annuity, a real annuity 
that lasts as long as your life so that, if anything, it plays 
a more important role than it did before.
    Mr. PASCRELL. Thank you all very much for doing such a 
great job.
    Chairman RANGEL. Mr. Pomeroy.
    Mr. POMEROY. Thank you, Mr. Chairman. I appreciate it very 
much, the testimony right across the panel, and particularly I 
like the work of some of the panel participants.
    I think the issue of economic insecurity, particularly as 
discussed in Dr. Hacker's book, is, right front and center, and 
presents an opportunity for bipartisan action on this Congress.
    For the last several months, we have been having 
exhortations from those that view the economic, macroeconomic 
data as wonderful news, country is doing great, and it just 
hasn't resonated at all.
    In fact, last week we had the curious anomaly of the 
highest stock market ever, and 71 percent polled by ABC polled 
saying the Nation is on the wrong track.
    What I think the disconnect is, is that macroeconomic data 
is different than the aggregate of microeconomic fact, 
household to household, and at the household level, people are 
not feeling this gain, because of the disconnect between 
productivity and wages, but it is also even more, I think, much 
more deeply spread than that through this insecurity business.
    What do you think we ought to focus on as we try to address 
the insecurity issues? Do we revisit the pension bill and try 
and extend the transition period on the stepped up funding 
requirement so that we try to mitigate something that wasn't 
considered by either party last year. I might add, try to 
mitigate the funding shock that is going to hit pensions, they 
are going to cause, I think, an untenable amount of freezing, 
the defined benefit plans that remain. There still are 20 
million people covered by the defined benefit plans. These are 
still big deals out there.
    Do we look at health care? Do we invest in broad-based 
education programs?
    Dr. Hacker, because you have the most recent significant 
published work in this area, I would like you to kick this off.
    What should we do to address this worker insecurity issue?
    Dr. HACKER. I think the first step is exactly the step that 
has been taken by the Committee today, which is to discuss 
among people who are expert in these areas some of the key 
challenges that Americans are facing. I think you are 
absolutely right, as Peter, Dr. Orszag's testimony suggested, 
that part of this disconnect has to do with the fact that the 
broad macroeconomic indicators don't capture some of the 
insecurity and instability that workers are feeling.
    I do think that, as you suggested, that it is not just the 
squeeze that workers are facing in recent years as the cost of 
many valuable items like health care and college tuition have 
gone up, but that wages have not, but they also have concerns 
about their future. Some people who are active in the financial 
service sector who sell products for financial services such as 
MetLife have emphasized this as well with what they see as the 
financial burden shift in the sense that workers, they have to 
have a personal safety net.
    So, I think the focus should be in the core areas that we 
talk about today, that is pensions, health insurance coverage, 
thinking about job security and the work-family balance more 
broadly, and finally some of the key concerns about wealth and 
savings that have been discussed.
    Obviously I can't offer proposals in each of those areas. 
My book has a discussion of them. What I do think is that we 
can keep some principles front and center.
    The first principle is, I think we should try insofar as 
possible is to emphasize broad risk pooling, that social 
insurance in the form of particular programs may have problems 
sometimes dealing with the present era----
    Mr. POMEROY. Is it your sense that as we look at risk 
pooling that the employment relationship can still play a part 
in trying to help people affect risk pooling?
    Dr. HACKER. I do believe it can still play a part, but I 
don't believe it can continue to play the dominant role it has 
played----
    Mr. POMEROY. The Administration is a very different mindset 
they have obviously put tremendous pressure on pensions trying 
to shift them to defined contribution plans capping the risk of 
the employer. They are now trying to do the same thing on 
health insurance. It seems to me that they are very much more 
sensitive to the risk burdens of the corporations than 
ultimately the employees that are getting the risks shoveled 
off on them.
    Dr. HACKER. What we have here is one area where there is a 
fundamental ideological debate. There are lots of areas of 
agreement about the tax treatment of health insurance, for 
example, that there are many people who believe in broad risk 
pooling, who believe the current tax treatment has problems, 
where I think there is a broad ideological debate is about risk 
pooling, whether or not individuals should be purchasing these 
benefits on their own and being within individualized benefit 
options, or whether we could try to encourage new forms of 
broad risk pooled benefits, whether they are provided by 
employers or not.
    I think that the terrain that we have not yet covered in 
terms of broad thinking is how could we construct broad risk 
pools that wouldn't necessarily be tied to an individual 
employer.
    Mr. POMEROY. I would just observe, in closing, no further 
comments from the panel, Mr. Chairman, I believe the ownership 
society is not at all inconsistent with risk management. 
Ownership society doesn't mean you need to own all your own 
risk. Still applied risk management, owner opportunity, share 
the risk and I really am hopeful we might find some bipartisan 
areas of agreement on that one. Thank you, Mr. Chairman and 
Ranking Member.
    Chairman RANGEL. Thank you. Mr. Becerra.
    Mr. BECERRA. Thank you, Mr. Chairman, and to the panel, 
thank you for your patience in staying with us. I would like to 
get into something that my colleague, Mr. Pomeroy, got into a 
little bit because I think it is interesting to note that while 
Wall Street may think that we are going in the right direction, 
Main Street, by an overwhelming number, thinks we are going in 
the wrong direction. People back home think something is wrong, 
and it is palpable that them they feel something is wrong.
    I would like to just explore something, because to me it 
helps explain why so many people are saying to us today even 
though the stock market is hitting all time highs, that we may 
be heading in the wrong direction.
    Mr. Orszag let me check some facts here. What have the Bush 
tax cuts cost us in lost revenue to date?
    Dr. ORSZAG. We could get back to you with the official 
revenue score for the 2001, 2003 tax legislation. For this 
year, that number amounts to a little bit over $200 billion.
    Mr. BECERRA. That is for this year alone?
    Dr. ORSZAG. For 2007.
    Mr. BECERRA. Cumulatively, roughly. Roughly.
    Dr. ORSZAG. Roughly speaking, it would be over a trillion 
dollars.
    Mr. BECERRA. Over a trillion. If we were to extend them out 
say another 5 years because some are set to expire over the 
next 4, 5, years, if we were to extend them out, how much more 
revenue over that 5-year period would we lose?
    Dr. ORSZAG. There would be another significant revenue 
effect of extending the tax provisions past their scheduled 
sunset.
    Mr. BECERRA. So, if we were to key those tax cuts in place 
over the next 5 years, how much would that cost us, roughly? I 
am not going to keep you on this number.
    Dr. ORSZAG. It depends on what happens to the alternative 
minimum tax, but it is the range, it is more than a trillion 
dollars, and depends on what exactly what you assume by the 
alternative minimum.
    Mr. BECERRA. Let's assume roughly a trillion so far that we 
have lost in revenue from the Bush tax cuts, roughly another 
trillion dollars or so over just the next 5 years if these tax 
cuts remain in place.
    Dr. ORSZAG. Let me make clear the extensions would begin, 
the tax provision sunset in 2010, so there is after, so if a 5-
year period that you are discussing----
    Mr. BECERRA. My understanding is that to date, we spent 
something between 350 to upward of $450 billion on the war in 
Iraq, we have lost over 3,000 men and women in Iraq, and I 
suspect that most of the men and women who have perished as a 
result of the war in Iraq or Afghanistan would have qualified 
for very few benefits from those Bush tax cuts.
    Dr. ORSZAG. We haven't done an analysis of the tax 
legislation with regard to particular service Members.
    Mr. BECERRA. Other than perhaps the child tax credit and a 
few things that are focused on family, not on income, I suspect 
most of the men and women who are in uniform today don't make 
enough income to benefit dramatically from the Bush tax cuts. 
Is that a fair statement?
    Dr. ORSZAG. Again, we haven't done an analysis of 
particular service men.
    Mr. BECERRA. Let me ask this: What percentage of the tax 
cuts would you say went to the one-third wealthiest Americans 
in this country?
    Dr. ORSZAG. You are, again, asking me to do a distribution 
analysis that we have not done.
    Mr. BECERRA. Do you have a sense that most of the tax cuts 
go to those who are wealthier than not?
    Dr. ORSZAG. The distributional consequences of the tax 
changes are to make larger percentage changes in after tax 
income in higher income households than lower income 
households.
    Mr. BECERRA. Once we get the data will probably show that 
the wealthiest Americans have benefited most from these tax 
cuts. So, while we have men and women sacrificing their lives 
in Iraq and men and women back home or middle income or modest 
income making sacrifices, because we have these massive 
deficits, we can't figure out ways to resolve our health care 
crisis, we are not educating our kids well because our public 
schools are deteriorating, we have given tax cuts to very 
wealthy individuals.
    Can you think of a time in our history where this the 
Federal Government, the U.S. government has pushed forward tax 
cuts that benefit the wealthiest Americans at a time when we 
are at war?
    Dr. ORSZAG. I had gotten some indication that there would 
be a question about tax changes during times of war and I did 
ask the CBO staff for their historical analysis and got this 
response, which I will just read to you. The United States 
declared war on Mexico on May 13, 1846 although Mexico didn't 
formally return the favor until July 7th. A major tariff, 
effectively the country's only source of taxes, was reduced on 
July 30th, 1846 and became effective on December 1st, 1846. The 
war ended February 2, 1848. So, that is your example.
    Mr. BECERRA. Is that the only time when you can--when your 
staff would find that the U.S. government decreased a tax or 
tariff on the American public?
    Dr. ORSZAG. During a time of war. Apparently so.
    Mr. BECERRA. My understanding, then I will conclude with 
this, because I know my time has expired, the Spanish American 
War, at the end of the 1800s, actually saw us institute what we 
now consider the inheritance tax, which was a tax principally 
on the wealthiest Americans to try to help finance the cost of 
the Spanish American War. Since you didn't mention anything 
during World War I and World War II, Vietnam, Korea, I am 
assuming that at no time during those conflicts did we ever 
decrease the tax burden for the wealthiest Americans while we 
are asking for an increased commitment on the part of America's 
men and women serving in uniform. So, with that, I appreciate 
whatever response you were able to give, and Mr. Chairman, I 
yield back the balance of my time.
    Chairman RANGEL. It is not directly relevant but do you 
have any information as to whether or not the causes given by 
the president of that war were validated?
    Dr. ORSZAG. You don't really expect me to answer that 
question, do you?
    Chairman RANGEL. I didn't really expect you to give the 
answer you gave here. I would like to yield to Mr. Porter and 
thank him for his patience and thank him for coming back. The 
panel has been very kind to us and we appreciate the fact that 
you came back.
    Mr. PORTER. Thank you, Mr. Chairman, and thank you to the 
panel. A couple things, I guess, in comment. Dr. Hacker, I 
wouldn't disagree that there certainly is some financial 
insecurity, certainly, in lots of different parts of the 
country. I would wish that in your next book you had a couple 
more chapters. I think directly related to insecurity isn't 
just finances. There is personal insecurity, there are people 
worried about killer bees, killer birds, hurricanes. They are 
worried about homeland security. They are worried about their 
personal security in traveling. They turn on cable television 
for 24 hours a day, they see what is happening around the 
world.
    So, there is a whole other sense of what is happening in 
the American people community. It is not just financial, and I 
think it is directly related to our direction as a Congress in 
that this insecurity isn't just financial because as was 
mentioned by my colleagues, the financial aspects of the 
country are coming back strong. I just, again, appreciate the 
one piece of the insecurity, but part of it is because of their 
mental attitudes in these other areas. I, again, appreciate 
what you said.
    To Dr. Rowland, I do have a couple of questions. You 
mentioned throughout your report about employer-sponsored 
coverage is declining, premium costs are rising, scope of 
medical care costs covered by insurance contributed to growing 
stress. You also mentioned that employer-based coverage for the 
middle class is increasingly threatened.
    This Congress has had opportunities to provide for small 
businesses the same opportunities that big business has in 
pooling their medical insurance.
    The same advantages that labor unions have, but this 
Congress has chosen time and time again to vote against the 
ability for small businesses to band together.
    Don't you think that small businesses should have the same 
tools as big business to pool together to make sure they get 
proper, adequate, and coverage of choice that large businesses 
have?
    Dr. ROWLAND. I think it is very important for small 
businesses to have adequate entry into the group market. Many 
States have moved to try and open up the group market. New 
York, for example, has a small group market that they allow 
small businesses into with some subsidies from the State 
government. I think one of the issues is across State lines; 
what are the rules and how to deal with the fact that our 
economy often doesn't operate within a single State, and how to 
get through some of the constraints on State offers of 
insurance in terms of the mandates that some States have put on 
to make sure that there is at least a minimum policy.
    I think one of the things one might look at is how the 
State of Massachusetts is now trying to move forward to create 
a purchasing pool where they can pool risks to let small 
businesses and individuals come into that pooled risk.
    So, I think the real goal ought to be to broaden the risk 
pools that people can buy into both for small businesses and 
for individuals who are outside of the employer market.
    Mr. PORTER. Again, Federal Employees Health Plan is 
probably the biggest associated health plan in the country with 
close to 9 million participants, and we have found a way to 
make it work for Federal employees to have benefits that small 
businesses can't have.
    Don't you think there is a way we can work with the States 
to come up with a program--not unlike the large businesses do 
nationwide, not unlike labor unions do nationwide, that small 
businesses could do the same and look at that as an advantage 
for the small businesses?
    Dr. ROWLAND. Certainly I think that is one way to look at 
it, and the Federal Employees Health Benefits system has been 
one that many have proposed as a vehicle that could provide a 
more national across-State-line way of dealing with health 
care.
    So, I think there are lots of models that can be used. I 
think enabling individuals and those in small businesses to be 
able to purchase in a group purchasing pool, really would be 
very important because we know that the nongroup market has a 
lot of limitations and can have a lot of experience rating, 
that really makes it very difficult for people with health 
problems to gain affordable access.
    Mr. PORTER. One last, not difficult question. Is the 
foundation part of the Kaiser health organization nationwide?
    Dr. ROWLAND. No, actually the Kaiser Family Foundation was 
founded by Henry J. Kaiser, and it is his foundation. He also 
started the Kaiser Permanente Health Plan.
    Mr. PORTER. Which, by the way, is a model.
    Dr. ROWLAND. No longer related, although they have a common 
name and a common founder.
    Mr. PORTER. Thank you, we appreciate you all being here.
    Chairman RANGEL. I guess most of you know the worst thing 
about this hearing has been the frustration of the Members of 
not being able to really have the time to ask you questions and 
to get the benefit of your knowledge.
    So, I do hope you can consider seriously--I have talked 
with the Ranking Member and we do want a round table, no 
camera, no mike, type of setting, perhaps with a configuration 
where we are not talking about Members and witnesses, but 
genuine effort. I've never seen this Committee in session where 
nobody was looking for a headline or no one wanted to make a 
point, but was actually seeking an opportunity to learn.
    You have made a great contribution. We have a long way to 
go, and I especially want to thank you for your patience and 
understanding on our voting procedure. Thank you so much.
    The record will be held open for 2 days--5 days--it's great 
being Chairman--for those who want to include items in the 
record. Thank you so much.
    [Whereupon, at 4:34 p.m., the hearing was adjourned.]

    [Submissions for the Record follow:]

       Statement of Americans for Fair Taxation, Conyers, Georgia
    As a member of the tail end of the Baby Boomers, we are 
experiencing exactly the conditions described by this hearing's focus. 
We are still at an income level that we had attained back in the mid 
80's. Moreover, retirement and the uncertainty of Social Security 
benefits being able to sustain our retirement is viewed by many of us 
to be our future reality.
    The main reason we are in the predicament that we are in is due to 
the absence of a steady job market and the mind-set today's employers 
have to keep the workforce dynamic. This single attitude has caused 
downsizing, elimination of positions because some streamliner suggested 
to rethink business processes (only to have those positions reopen a 
year or two later), and the monetary risk an employer tends to avoid by 
laying off older workers.
    Many of these problems have caused the current condition within the 
middle class, but the cure for them is a twofold process. First, there 
must be an incentive for businesses to keep their core business 
processes and staff. The only way this will happen is if there is 
competition for market share within the U.S. boundaries. Secondly, the 
tax system of keeping families from passing on their lifetime's 
accumulated wealth to their children must be done away with. 
Inheritance tax, estate tax, and taxes on retirement income must be 
eliminated if family structures are going to be allowed to pass on 
wealth and value and set the stage for a better life for their 
children.
    I strongly recommend that the Fair Tax, H.R. 25 be seriously 
considered for its life-changing value it can instill in America. Full 
funding of Social Security, increased American manufacturing (and 
hence, more competition for market share), and the ability to pass on 
accumulated wealth to our children without the tax man taking most of 
it. That is why the Fair Tax is endorsed by many Farm Bureau 
organizations, because they believe that this is the only way that the 
family farm can stay within the family.
                                  Donald Williamson

                                 

           Letter from Council, John M., Council Tool Company
                                               Council Tool Company
                                                   February 2, 2007
Committee on Ways and Means
The United States House of Representatives
1102 Longworth H.O.B.
Washington, D.C. 20515

Dear Sir/Madam:

    On behalf of The Council Tool Company, Inc., we hereby respond to 
the January 31, 2007 Advisory from the Committee on Ways and Means 
soliciting comments, by February 7, 2007, on the Commerce Department's 
proposed modification to its calculation of weighted-average dumping 
margins in antidumping investigations. Congress should vigorously 
oppose the Commerce Department's decision to end its long-standing 
practice of ``zeroing,'' which will eviscerate the principal tool 
available to U.S. manufactures and producers to combat unfair trade 
practices.
    The Commerce Department, on December 27, 2006, notified Congress 
that it would implement the World Trade Organization's Appellate Body 
ruling banning Commerce's practice of ``zeroing.'' The Commerce 
Department stated that it would, effective February 22, 2007, begin to 
offset positive dumping margins (sales that were not dumped) against 
sales with negative dumping margins (sales that were dumped), when 
calculating the weighted-average dumping margin in antidumping 
investigations. In other words, Commerce will no longer set positive 
dumping margins to ``zero'' when calculating overall margins of 
dumping. The effect of this change to U.S. law will be to reduce 
generally and/or eliminate margins of dumping in investigations, and to 
mask or eliminate dumped sales by foreign exporters.
    Congress must oppose the Commerce's Department's inappropriate 
concession on this issue. First, Congress has given the Administration 
explicit instructions in the context of the Doha Round of trade 
negotiations to defend the practice of zeroing; those negotiations are 
ongoing. Second, Congress, not Commerce, is the proper body for making 
laws. For many years, the Commerce Department argued before the Courts 
that it was statutorily required to zero in investigations. While the 
Courts have stated that Commerce has some discretion in this matter, 
Commerce changed its view only when it became apparent that the WTO 
intended to ban improperly the practice of zeroing. The Department 
should not alter course because of an adverse WTO ruling that fails to 
address significant evidentiary findings by the lower panel, relies on 
novel findings by reference to evidence not before the Appellate Body, 
and that exceeds the Appellate Body's authority.
    Additionally, in May 9, 2006 comments filed at the WTO, the 
Administration noted ``disturbing'' aspects of the WTO ruling, 
including that (1) it would be ``extraordinary'' for Members to have 
negotiated specific language in the Antidumping Agreement now rendered 
superfluous by the Appellate Body ruling; (2) the Appellate Body's 
finding that dumping should be measured for ``the product as a whole'' 
reverses 47 years of WTO jurisprudence finding that dumping should be 
measured ``in respect of each single importation of the product;'' and 
(3) that the ruling banning the practice of zeroing was never agreed to 
by Member States in the Uruguay Round or previous trade agreement 
negotiations.
    Congress is empowered to make U.S. laws, not the WTO. Commerce's 
reversal of its long-standing practice of zeroing is tantamount to 
yielding that authority to others. As such, Congress should require the 
Commerce Department to continue its zeroing practice when calculating 
antidumping duty margins in investigations.
            Sincerely,

                                               John M. Council, III
                                                          President

                                 

            Statement of Employee Benefit Research Institute
``Research on Economic Security Issues: Retirement, Health Coverage, 
        Employment-Based Benefits, and the Growing Debt of the 
        Elderly''

    The Employee Benefit Research Institute (EBRI) is a nonprofit, 
nonpartisan research organization that has focused on health, 
retirement, and economic security issues since 1978. EBRI does not take 
policy positions and does not lobby. www.ebri.org
    EBRI has conducted very extensive and in-depth research on many of 
the issues related to the Ways and Means Committee's Jan. 31 hearing on 
Economic Challenges Facing Middle Class Families. For this submission 
for the record, EBRI is included short, summary material, with links to 
the more detailed analysis. Specifically, this includes:

RETIREMENT/PENSIONS:

          ``EBRI Benefit FAQ: Pension Trends, EBRI Benefit 
        FAQs, http://ebri.org/publications/benfaq/index.cfm?fa=retfaq14
          ``Traditional Pension Assets Lost Dominance a Decade 
        Ago, IRAs and 401(k)s Have Long Been Dominant,'' Fast Facts 
        from EBRI, Feb. 3, 2006.
HEALTH CARE:
          Key Determinants of Health Care Coverage and the 
        Uninsured, EBRI press release, October 3, 2006 #749.

EMPLOYMENT-BASED BENEFITS:

          ``The $7 Trillion Question: How Do Employers Spend 
        That Amount on Worker Wages, Salaries, and Benefits?'' Fast 
        Facts from EBRI, Jan. 3, 2007.

GROWING DEBT OF THE AMERICAN ELDERLY:

          ``How Debt Has Increased for Older American 
        Families,'' Fast Facts from EBRI, Oct. 17, 2006.
          ``A Breakdown of Debt for Older Families,'' Fast 
        Facts from EBRI, Nov. 14, 2006.

ADDITIONAL LINKS TO ERBI ECONOMIC SECURITY RESEARCH:

          ``Measuring Retirement Income Adequacy: Calculating 
        Realistic Income Replacement Rates,'' EBRI Issue Brief, 
        September 2006, http://ebri.org/publications/ib/
        index.cfm?fa=ibDisp&content_id=3745
          ``Defined Benefit Plan Freezes: Who's Affected, How 
        Much, and Replacing Lost Accruals,'' EBRI Issue Brief, March 
        2006, http://ebri.org/publications/ib/
        index.cfm?fa=ibDisp&content_id=3628
          ``The Influence of Automatic Enrollment, Catch-Up, 
        and IRA Contributions on 401(k) Accumulations at Retirement,'' 
        EBRI Issue Brief, July 2005, http://ebri.org/publications/ib/
        index.cfm?fa=ibDisp&content_id=3565
          ``ERISA at 30: The Decline of Private-Sector Defined 
        Benefit Promises and Annuity Payments? What Will It Mean?'' 
        EBRI Issue Brief, May 2004, http://ebri.org/publications/ib/
        index.cfm?fa=ibDisp&content_id=3500
          ``Can America Afford Tomorrow's Retirees: Results 
        From the EBRI-ERF Retirement Security Projection Model,'' EBRI 
        Issue Brief, November 2003, http://ebri.org/publications/ib/
        index.cfm?fa=ibDisp&content_id=182

EBRI FREQUENTLY ASKED QUESTIONS: PENSION TRENDS

    See http://ebri.org/publications/benfaq/index.cfm?fa=retfaq14
    The number of defined benefit plans in the private sector has been 
shrinking, as small--and mid-sized employers have either dropped their 
pension plans or shifted to defined contribution retirement plans (such 
as the 401(k) plan). In addition, the number of active participants in 
pension plans has been declining since the late 1980s (historically, 
the number of total--including inactive--participants has increased 
slightly, since pension plans typically pay benefits for the life of 
the retiree). In the public sector, defined benefit plans have remained 
the predominant type of retirement plan.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



``Traditional'' Pension Assets Lost Dominance a Decade Ago, IRAs and 
        401(k)s Have Long Been Dominant

    WASHINGTON--Where are bulk of private-sector retirement assets held 
in the United States? By a substantial margin--and for many years--
individual retirement accounts (IRAs) have held more funds than any 
other financial vehicle, followed by defined contribution plans 
(primarily 401(k) plans).
    So-called ``traditional'' defined benefit pension plans were 
displaced a decade ago by defined contribution plans in terms of assets 
held. The most recent data from the nonpartisan Employee Benefit 
Research Institute (EBRI) show that about 58% of private-sector 
retirement assets currently are held in defined contribution (DC) 
plans, compared with 42% in ``traditional'' defined benefit (DB) 
pensions. In fact, as data from EBRI show, assets held in DC plans 
first surpassed DB pension assets in 1997--almost 10 years ago. Data 
from the Federal Reserve and EBRI show that IRAs became dominant in 
1998.
    As research by EBRI and others has documented, the forces behind 
these trends involve a move away from defined benefit pensions by 
employers and a corresponding shift to defined contribution plans 
(principally the 401(k) plan). The sharp growth in IRAs has been driven 
by the rollover of assets by workers and retirees from other tax-
qualified plans (such as pensions and 401(k)s) to IRAs upon job change 
or retirement.


[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



    EBRI first reported in 2001 that private-sector pensions had lost 
their asset dominance to DC plans (EBRI Notes, January 2001, ``IRA 
Assets Continue to Grow,'' http://ebri.org/publications/notes/
index.cfm?fa=notesDisp&content--id=3226) and most recently updated this 
trend in its January 2006 EBRI Notes (``IRA and Keogh Assets and 
Contributions,'' http://ebri.org/publications/notes/index.cfm?fa=notes
Disp&content_id=3614)

FOR IMMEDIATE RELEASE: Oct. 3, 2006

New Research from EBRI: Study Details Key Determinants of Health Care 
        Coverage: Work Status, Income, Age, Gender, Firm Size, and 
        Others

    WASHINGTON--Do you have a job? What is your income? How old are 
you? What is your occupation? How large is the firm where you work?
    The answers to these questions--and a few others--go a long way to 
determining whether U.S. residents are likely to have health insurance, 
according to a study published today by the nonpartisan Employee 
Benefit Research Institute (EBRI). The study appears in the October 
EBRI Issue Brief, ``Sources of Health Insurance and Characteristics of 
the Uninsured: Analysis of the March 2006 Current Population Survey,'' 
available at www.ebri.org
    ``Work status and income play a dominant role in determining an 
individual's likelihood of having health insurance,'' writes Paul 
Fronstin, director of the EBRI health research and education program 
and author of the study. In addition, age, gender, firm size, hours of 
work, industry, and location are all important determinants of an 
individual's likelihood of having coverage--as are race and ethnicity, 
Fronstin says.
    As the study notes, the impact of these indicators varies widely. 
Here is some of what the study says about each of the indicators for 
U.S. residents under age 65 in 2005:

          Work status: Workers are more likely to have 
        insurance than nonworkers. Nearly 71 percent of workers had 
        employment-based health benefits, compared with nearly 37.7 
        percent of nonworkers.
          Income: Workers with low earnings are much less 
        likely to be insured than those with high earnings. One-third 
        of workers with earnings of less than $20,000 were uninsured, 
        compared with 5.4 percent of workers with earnings of $75,000 
        or more.
          Age and gender: Younger adults are more likely than 
        older adults to be uninsured. Nearly 40 percent of men ages 21-
        24 and 30.6 percent of women ages 21-24 were uninsured. This 
        compares with 15.8 percent of men ages 45-54 and 14.8 percent 
        of women ages 45-54 who were uninsured.
          Hours worked: Part-time and seasonal workers are less 
        likely to have employment-based health benefits than full-time, 
        full-year workers. Part-time or part-year workers accounted for 
        30.2 percent of the employed population, but accounted for 41.4 
        percent of uninsured workers.
          Industry: Workers employed in agriculture, forestry, 
        fishing, mining, and construction are disproportionately more 
        likely to be uninsured, with 36.9 percent uninsured. This 
        compares with 14.6 percent uninsured among workers in the 
        manufacturing sector, 18.5 percent in wholesale and retail 
        trade, and 22.1 percent in the service sector.
          Firm size: Nearly 63 percent of all uninsured workers 
        are either self-employed or working in private-sector firms 
        with fewer than 100 employees. Nearly 27 percent of self-
        employed workers are uninsured, compared with 18.8 percent of 
        all workers. More than 35 percent of workers in private-sector 
        firms with fewer than 10 employees are uninsured, compared with 
        13.4 percent of workers in private-sector firms with 1,000 or 
        more employees.
          Location: The proportion of the population with and 
        without health insurance varies by location. In 12 states--
        generally in the south-central United States--the uninsured 
        averaged close to 20 percent of the population during 2003-
        2005. States with a relatively low percentage of uninsured 
        individuals include Minnesota, Hawaii, Wisconsin, Iowa, and New 
        Hampshire.
          Race and ethnic origin: While 64.7 percent of the 
        population under age 65 is white, whites comprise 47.6 percent 
        of the uninsured. Individuals of Hispanic origin are more 
        likely to be uninsured than other groups (34.3 percent).

    The study discusses each or these factors in detail and provides 
more than 25 charts that provide a full statistical picture of those 
who have health insurance (along with the sources of coverage) and 
those who do not.
    As the study notes, the proportion of uninsured working-age 
Americans rose slightly to 17.9 percent in 2005, and the overall 
percentage of the population under age 65 with health insurance 
declined in 2005 to a post-1994 low of 82.1 percent. Declines in health 
insurance coverage have been recorded in all but 3 years since 1994.
    The study also reports that the segment of the U.S. population 
under age 65 with employment-based health insurance dropped from 64.4 
percent in 1994 to 62 percent in 2005, the latest year for which 
statistics are available. The change was small from 2004 to 2005 (0.4 
percentage points), but share of the population under age 65 with 
employment-based health insurance has declined significantly since 
2000, when the number was 66.8 percent. Even after the drop in 
coverage, employment-based health benefits remain by far the most 
common source of coverage in the United States.
    EBRI is a private, nonprofit research institute based in 
Washington, DC, that focuses on health, savings, retirement, and 
economic security issues. EBRI does not lobby and does not take policy 
positions. www.ebri.org
    PR #749

The $7 Trillion Question: How Do Employers Spend That Amount on Worker 
        Wages, Salaries, and Benefits

    WASHINGTON--Employers in the United States are spending at least $7 
trillion a year on total worker compensation, including wages, 
salaries, and benefits. Where does the money go?
    An article in the December 2006 EBRI Notes, published by the 
nonpartisan Employee Benefit Research Institute (EBRI), provides this 
breakdown for all employers, based on 2005 Commerce Department data:

          Wages and salaries: 80.6 percent
          All benefits: 19.4 percent

    The article, available at www.ebri.org, shows these additional 
details:

          Wages and salaries: This sector accounted for about 
        $5.7 trillion of total employer spending for worker 
        compensation in 2005, up from $4.8 trillion in 2000. In 1960, 
        wages and salaries accounted for about 92 percent of employer 
        spending for total compensation, but that share has slipped 
        over time.
          Retirement benefits: Employer spending was $628.4 
        billion for retirement benefits in 2005, up from $458.8 billion 
        in 2000. Retirement benefits have long been the largest single 
        sector for benefits expenditures, but have been declining as a 
        share of the whole. In 1960, retirement benefits accounted for 
        nearly 60 percent of total benefits spending, but by 2005 that 
        number had declined to 46 percent of the total.
          Health benefits: In 2005, employers spent $596.5 
        billion on health benefits, up from $399.6 billion in 2000. 
        Health benefits, which are taking an ever-increasing share of 
        employers' benefits spending, accounted for 44 percent of 
        employer spending on benefits in 2005, up from 42 percent in 
        2000 and just 14 percent in 1960.
          Other benefits: Employer spending on other benefits, 
        such as unemployment insurance, life insurance, and workers' 
        compensation, was $138.3 billion in 2005, up from $94.2 billion 
        in 2000. Other benefits accounted for just over 10 percent of 
        employers' spending for benefits in 2005, compared with just 
        under 10 percent in 2000. Over the long term, other benefits 
        have been a shrinking share of employer spending on benefits, 
        down from nearly 26 percent in 1960.

    The EBRI Notes article provides a detailed breakdown of employer 
spending for total compensation and benefits for selected years from 
1960 to 2005. The article also contains a breakdown of spending for 
total benefits by the federal, state, and local governments.
    EBRI is a private, nonprofit research institute based in 
Washington, DC, that focuses on health, savings, retirement, and 
economic security issues. EBRI does not lobby and does not take policy 
positions. www.ebri.org Fast Facts from EBRI is issued occasionally to 
highlight benefits information that may be of current interest.

How Debt Has Increased for Older American Families

    WASHINGTON--How much debt do older American families have? How has 
it changed over time? What does it mean?
    A study by the nonpartisan Employee Benefit Research Institute 
(EBRI) shows that nearly 61 percent of American families with family 
heads age 55 and older had debt in 2004, almost 5 percentage points 
higher than in 2001 and about 7 percentage points higher than in 1992.
    Further, the debt of families with family heads over age 75 has 
increased over time as well. An article in the September 2006 EBRI 
Notes, which contains these numbers, says that the increasing debt 
levels could have serious implications for the future retirement 
security of older Americans, as their debt levels are rising at a time 
when their earning ability is declining. The EBRI Notes article is 
available at www.ebri.org
    Here is a look at the recent rise of debt among families with a 
family head age 55 or older and age 75 or older:


------------------------------------------------------------------------
                                    1992          2001          2004
------------------------------------------------------------------------
Families With Debt
Family head age 55 or older             54%           56%           61%
Family head age 75 or older             32%           29%           40%
Average Family Debt
Family head age 55 or older         $29,309       $41,294       $51,791
Family head age 75 or older          $7,769        $9,549       $20,234
Median Family Debt (midpoint,
 half above, half below)
Family head age 55 or older        $14,498*      $24,497*      $32,000*
Family dead age 75 or older         $4,218*       $5,326*      $14,800*
------------------------------------------------------------------------
Source: EBRI Notes, September 2006.
* For families with debt.

    Fast Facts from EBRI is issued occasionally by the nonpartisan 
Employee Benefit Research Institute to highlight benefits information 
that may be of current interest. EBRI is a private, nonprofit research 
institute based in Washington, DC, that focuses on health, savings, 
retirement, and economic security issues. EBRI does not lobby and does 
not take policy positions. www.ebri.org
    FFE #35, Nov 14, 2006

A Breakdown of Debt for Older Families

    WASHINGTON--What percentage of older American families' total 
income goes for debt payments? What percentage of older families had 
debt payments of more than 40 percent of family income? How do housing 
and credit card debt fit into the picture?
    A study in the September 2006 EBRI Notes has the answers to these 
questions. Overall, the study found that total debt payments increased 
for families with a family head age 55 or older from 2001 to 2004 and 
that housing debt and credit card debt were both factors in the 
increase. The study is available at www.ebri.org
    Here are some details of the study for families with a family head 
age 55 or older, showing the recent increase in their debt levels:


----------------------------------------------------------------------------------------------------------------
       Families With a Family Head Age 55 or Older            1992          1995          2001          2004
----------------------------------------------------------------------------------------------------------------
Total debt payments as a percentage of family income             9.2%          8.5%          8.8%         10.3%
Percentage of families with debt payments more than 40           5.8%          5.6%          7.2%          7.3%
 percent of income
Percentage of families with housing debt                          24%           27%           32%           36%
  (median amount: half above, half below)                   ($36,904)     ($34,471)     ($53,255)     ($60,000)
Percentage of families with credit card debt                      31%           31%           31%           34%
  (median amount)                                            ($1,147)      ($1,231)       (1,353)      ($2,000)
----------------------------------------------------------------------------------------------------------------
Source: EBRI Notes, September 2006. (All debt values are in 2004 dollars.)

    Fast Facts from EBRI is issued occasionally by the nonpartisan 
Employee Benefit Research Institute to highlight benefits information 
that may be of current interest. EBRI is a private, nonprofit research 
institute based in Washington, DC, that focuses on health, savings, 
retirement, and economic security issues. EBRI does not lobby and does 
not take policy positions. www.ebri.org

                                 

                       Statement of Ivar Rydstrom
Summary of Statement Issues Covered:

    State of the Economy: American Dream of Homeownership, Its 
Solutions & Direct Relationship with the Economy & Retirement/
Homeownership as Key Economic Wealth Builder/80% Homeownership Subprime 
Success Rate/Can We Expand Homeownership?/Should We Expand 
Homeownership?

Problems & Solutions Concerning The 20%--Subprime Homeowner Defaults, 
        Foreclosures

    Immediate Solutions: We can help stop defaults and foreclosures----
Interim Loan Measures (``ILM'')

Long Term Solutions:

        Secret or Silent Risks/Overburdened Borrowers/Naked Lenders and 
        Naked Government Backed Securities ``RAhD'' (randomly activated 
        hidden debt)/``RAhC'' (randomly activated hidden contingencies)
    Failed Disclosures to Government Sponsored Entities (GSEs) or 
Investors
    Failed Disclosures to the Borrowers
    ``Truly Intelligent Disclosures'' (``TID'')--New proposed lender 
disclosures--``Borrower's Consent on Suitability''
    Failed Historic Bargaining Positions of Market Participants--New 
proposed risk-price allocations

RISK MITIGATION TECHNIQUES

    ``Safe Harbor Intelligent Loan Options'' (``SHILO'')--New proposed 
``Contractual'' default type solutions

RISK MITIGATION DEVICES

    Mortgage Insurance (Funds) (``MI'') New MI Products: Cash 
Affordability, Shared Costs-Shared Benefits
    TID, SHILO & MI Integration:
    Foreclosure Mortgage Insurance (``FMI'')--New proposed mortgage 
insurance solutions:
    Default Mortgage Insurance (``DMI'')
    Investors Mortgage Insurance (``IMI'')
    Key Risk Benefit Pricing & Tax Reallocations--New proposed Tax Law 
Changes
    Conclusion--You're As Sick as Your Secrets/Sustainable 
Homeownership

Ultimate Questions Not Yet Answered by Comprehensive Policy:

    1.  The question is simple. Do we want to expand the American Dream 
of Homeownership and grow the Economy at the same time, or not?
    2.  Ultimately our children and grandchildren will sit back and 
ask, why did they punish the weak, and reward the strong--when they 
could have strengthened the weak and strengthened the strong at the 
same time?

    Mr. Chairman, Members of the Committee: I am pleased on behalf of 
Economic Justice & Policy Center to witness and submit this statement 
for the record of the House Ways and Means Committee on the 
``Challenges Facing Middle Class Families'' limited to the problems and 
solutions concerning homeownership and its direct relationship to the 
economy and retirement. We think it is critical to take a market 
neutral approach without allegiance to any group or interest and 
present all sides: Homeowners, Lenders, Bankers, Investors, GSEs, 
Immigrants, Baby Boomers, Retirees, Builders, Brokers, etc.

State of the Economy: American Dream of Homeownership, Solutions & Its 
        Direct Relationship with the Economy & Retirement/Homeownership 
        as Key Economic Wealth Builder/80% Homeownership Subprime 
        Success Rate 

    Can We Expand Homeownership? Yes we can. Look at the statistics. If 
``one in five (20%) subprime loans (``made in the last 2 years'') 
result in foreclosure'' (Ron Nixon, New York Times, Center for 
Responsible Lending), then 80% of that revenue stream was a good risk 
after all. If 80% of subprime loans are performing, expanding 
homeownership through weaker buyers has worked. Homeownership adds a 
significant tax revenue base and equity wealth to borrowers, local 
towns and strengthens the national economy as a whole. To achieve a 
better success rate, we must support policy that:

    (1)  Expands homeownership across the board, and
    (2)  Fashions incentives or controls necessary to lower the 20% 
subprime foreclosure rate by refining the market risk-pricing 
structure, and adding intelligent refinements and risk mitigation 
devices and techniques to the bargain.

    Should We Expand Homeownership? Yes we should. The argument against 
such expansion includes the idea that not all Americans can afford 
homeownership, and we are entering a period of continued deficits and 
mounting baby boomer entitlement costs that preclude America from 
engaging in such growth. Both arguments fail. The former because the 
80% subprime success rate proves it can work, but is in want of 
refinements as discussed in this report. The later because the 
authoritative study quoted by Chairman Bernanke (COB Budget Outlook 
2005) testifying at the Committee on the Budget, U.S. Senate January 
18, 2007, concerning the risk of weakness in the U.S. economy over the 
next decade or two, fails to take into account ``new immigrant and 
increased subprime homeownership''--and its positive effect on the 
economy. Frankly, the study hypothetical dealing with the relationship 
of both increasing immigration from 1 million to 2 million (per year) 
and entitlement costs, must be revisited with offsetting economics from 
both homeownership from new and existing immigrant family members, and 
increased subprime homeownership. Housing creates jobs and tax 
revenues. We must remember that about 20% of GDP is related to housing. 
In 1998, some 50% of all homeowners held 50% of their net worth in home 
equity. (The State of the Nation's Housing, Harvard ``JtCtr'' 2002) 
Every 1000 homes built create 2,448 jobs and $79.4 million in wages and 
$42.5 million in federal, state and local tax revenues and fees. (JtCtr 
citing National Association of Home Builders 2002 (NAHB)) Twenty 
percent (20%) of all consumer spending is linked to household wealth. 
Every $1,000 gain realized from a home sale boosts spending by some 
$150; $30-50 from stocks. (JtCtr citing Federal Reserve Board). We can 
add 15.61 million homeowners over the next 14 years (approx. 1.2 
million per year). Demand may require 1.7 million new homes and 
apartments per year (JtCtr) which could pour billions into the tax and 
wage base. Homeownership creates a backbone of wealth throughout 
America like no other financial product to date. ``The American Dream'' 
begets hope, confidence and success. Greater homeownership can help 
balance the budget. On January 20, 2001, President Bush indicated that 
poverty was unworthy of our citizens, and that we all have a duty to 
help eradicate it. Now let's work on lowering that 20% figure.

Problems & Solutions Concerning The 20%_Subprime Homeowner Defaults, 
        Foreclosures

    Although the general economic indicators appear positive, the 
economy may not be stable if the mortgage banking industry experiences 
significant defaults or foreclosures from homeownership. Residential 
real estate is losing power (Grubb & Ellis Multi Housing Report 2007, 
www.grubb-ellis.com). Wages have not caught up to home prices. Home 
inventories are growing and prices are falling but prices are still 
historically high (CVBT reporting PMI 1/24/07). However, if Chairman 
Bernanke returns to fighting inflation with interest rate hikes during 
periods of declining home values, homeowners will become locked-in with 
no way out, creating a bigger foreclosure industry and additional 
social problems. Worse, if Congress, the government or industry simply 
implement solutions that tighten markets and eligibility, growth in 
homeownership and the economy will stall. Homeownership will continue 
to play the most significant role in wealth creation for the middle 
class American (family) than any other financial vehicle. The effective 
``saving'' of money for a down payment is not a realistic policy for a 
newly defined middle class thrown into a new American economy mixed 
with historically inflated home prices and lagging wages. Demographics 
prove that the current and future middle class will not be the same as 
it was after WWII. This new middle class homeowner will be largely new 
immigrants, non-family or singles, and women (JtCtr). ``Affordability'' 
and ``eligibility'' of homeownership will become more important to the 
national economy, if not critical. We must also realize that expanding 
the dream of homeownership in the near and long-term, will strengthen a 
soon to be vulnerable economy under unique pressure from the aging baby 
boomers, growing entitlement demands, deficits and changing 
demographics.
    We now see over 100,000 home-foreclosures per month (for the last 5 
months) (RealtyTrack 1/07). On January 24, 2007 the Central Valley 
Business Times (CVBT) reported on the latest PMI Group study entitled 
Economic & Real Estate Trends (Milner, Henry), saying: ``There's a 
greater risk of price declines in 34 of the nation's 50 largest metro 
areas, PMI says. That translates into a 34.2 percent chance that home 
prices will decline in 2 years, according to PMI's formulas. Nineteen 
MSAs face a greater than 50 percent chance that home prices will 
decline, up from 18 last quarter, it adds. While year-over-year 
appreciation remained in the double digits in 14 of the 50 largest 
MSAs, the rate of appreciation slowed in 43. The risk of price declines 
continues to be concentrated in California and along the eastern 
seaboard. Of the 19 MSAs facing a greater than 50 percent chance of a 
price decline, eight are located in California, eight are in the 
Northeast, and two are in Florida.'' In high-price areas such as 
California, ``foreclosures were up nearly seven-fold in the fourth 
quarter of 2006 and the number of notices of default, the first step in 
the foreclosure process, were up 145 percent compared to the figures 
from a year earlier, according to real estate information company 
DataQuick Information Systems of La Jolla.'' Recent reports of 
increases in loan applications don't necessarily show a healthy 
homeownership market, but reveal possible panic to replace adjusting 
Option A.R.M.S. as values and appraisals fall. Millions of homeowners 
are about to lose their homes from default or foreclosure over the next 
few years in waves, as adjustable loans and HELOCs reset. One of five 
subprime mortgages over the last 2 years will end in foreclosure, 
nearly double the projected rate from 2002. When distressed prepayments 
are added in, total ``failure rate'' approaches 25 percent. Of the 
subprime loans, over 50% went to African-Americans, and 40% to 
Hispanics. (Center Responsible Lending 12/2006) The foreclosure sub-
culture is now gearing up (for the kill) and growing rapidly. 
Foreclosures are here and about to break the dam with dramatic numbers 
each and every year over the next few years corresponding to the reset 
dates of adjusting mortgages. Homeowners are already becoming locked-in 
with no way out. The negative consequences to the economy will be 
devastating when compounded by the strain of changing demographics.

Immediate Solutions: We can help stop defaults and foreclosures now_
        with what I call Interim Loan Measures (``ILM'')?

    We must help keep people in their homes, and offer immediate 
remedial measures and relief from default or foreclosures; but we must 
pay for such risk with mortgage insurance type devices or risk 
mitigation techniques. The conceptual solutions are also found in the 
long-term solutions recommended below, but applied in the short-term by 
law, policy and incentives. Lender and investor Loss Mitigation 
departments must be more receptive to quick and orderly loan workouts 
with borrower relief from certain negative credit damage, costs, 
(refinance) deficiency judgments and tax debt or tax uncertainties. 
Recall most loan workouts leave the borrower with negative credit and 
more burdensome terms; and most foreclosure market workouts leave the 
borrower with ``nothing''--not even ``relocation expenses''! The 
foreclosure industry attempts to give the borrower relocation expenses 
(against Bank policy or law) under the guise of a separate transaction 
by purchasing the borrower's personal property. Since an old picture or 
stove will not truly be worth $15,000, the legal or banking 
prohibitions on giving the borrower any money whatsoever create yet 
another quagmire in the system for helping a person in need. The 
current system helps create a growing foreclosure market, and the 
current system helps restrict or preclude helping the unfortunate who 
find themselves in the system. Meanwhile we need to help the people 
now. We need education and real joint venture assistance with business, 
media and homeowner groups (like NeighborWorks, National Urban League, 
GM, GE, Bank of America, WFB, Washington Mutual, Countrywide, Lilly 
Endowment, Gates Foundation, Goldman Sachs, Merrill Lynch, CitiGroup, 
CUNA (CU360), etc.).
    Long Term Solutions: Additionally, in a comprehensive fashion, we 
must also expand the homeownership market for the betterment of that 
social public policy and for the national economy. We must do this by 
adding risk mitigation devices and techniques to our mortgage banking 
system. We need to add more affordable and flexible shared-costs and 
shared-benefits mortgage insurance devices (and funds) along with our 
newly created refinements such as:

``Truly Intelligent Disclosures'' (``TID'')

``Safe Harbor Intelligent Loan Options'' (``SHILO'')

``Shared Mortgage Insurance'' (Government, Borrower, Lender, Investor, 
        Insurance Company) (``SMI'')

``Foreclosure Mortgage Insurance'' (``FMI'') (``GFMI'')

``Default Mortgage Insurance'' (``DMI'')(``GDMI'')

``Investment Mortgage Insurance'' (``IMI'') )(``GIMI'')

    The Stage is Set for Change: The stage is uniquely set (in 2007) 
for positive change for increasing the Dream of American Homeownership 
as starting in 2007 mortgage insurance will be tax deductible, and 
F.H.A. is offering new no or low down loan programs. We need to expand 
creative loan programs by using risk absorption devices, make mortgage 
insurance a permanent tax break, and add tax relief from ``forgiveness 
of debt'' with simple clarifications to such tax laws. The present tax 
laws breed uncertainty in a time which requires certainty and 
confidence. We must not tease mother-economy any longer. Moreover, 
Congress, the Administration, Industry and the American public must 
consider a reallocation of the risk-pricing formula in the mortgage 
banking loan industry. Inherent in this relationship is what I call 
``RAhD'' (randomly activated hidden debt) and ``RAhC'' (randomly 
activated hidden contingencies). We must mitigate RAhD and RAhC in our 
long term solution to homeownership and the current mortgage banking 
foreclosure challenges. Although foreseeable to some extent, its 
quantification is uncertain, but some price must be paid for such risk 
mitigation. Such is the market price of confidence.
    As such, Congress must consider the growing economic strain from 
mounting baby boomer entitlement programs, and the looming deficit. If 
legislation causes the shrinkage of eligibility and homeownership, its 
effect will help spoil the economy, especially if we are entering into 
a period of new uncertainty and inherent weakness due to changing 
demographics. Chairman Bernanke testifying at the Committee on the 
Budget, U.S. Senate, January 18, 2007, warned us that the near future 
is riddled with economic uncertainty or weakness (RAhD and RAhC), 
stating: ``Although the retirement of the baby boomers will be an 
important milestone in the demographic transition--the oldest baby 
boomers will be eligible for Social Security benefits starting next 
year (2008)--the change in the nation's demographic structure is not 
just a temporary phenomenon related to the large relative size of the 
baby-boom generation.'' He went on to say: ``Unfortunately, we are 
experiencing what seems likely to be the calm before the storm.'' The 
Federal Reserve Chairman made clear that: ``The only time in U.S. 
history that the debt-to-GDP ratio has been in the neighborhood of 100 
percent was during World War II. In contrast, under the scenario I have 
been discussing, the debt-to-GDP ratio would rise far into the future 
at an accelerating rate. Ultimately, this expansion of debt would spark 
a fiscal crisis, which could be addressed only by very sharp spending 
cuts or tax increases, or both.'' \6\ However, another solution would 
be to add new and growing homeownership to the economy from new and 
existing (or even from an increased rate of) immigrants and the ever-
changing family structure. Homeownership will be a positive offset to 
mounting entitlement and budget deficits. Chairman Bernanke also warns 
us to act comprehensively. He stated: ``[However], the unified budget 
deficit does not fully capture the fiscal situation and its effect on 
the economy, for at least two reasons. First, the budget deficit by 
itself does not measure the quantity of resources that the government 
is taking from the private sector. An economy in which the government 
budget is balanced but in which government spending equals 20 percent 
of GDP is very different from one in which the government's budget is 
balanced but its spending is 40 percent of GDP, as the latter economy 
has both higher tax rates and a greater role for the government. 
Second, the annual budget deficit reflects only near-term financing 
needs and does not capture long-term fiscal imbalances. To summarize, 
because of demographic changes and rising medical costs, federal 
expenditures for entitlement programs are projected to rise sharply 
over the next few decades. However, if early and meaningful action is 
not taken, the U.S. economy could be seriously weakened, with future 
generations bearing much of the cost.'' If we are to be true to our 
social public policy of bringing the American Dream of homeownership to 
the masses and if expanding homeownership can help secure the national 
economy over this historically unique and vulnerable upcoming decade, 
then we must expand opportunity, not restrict it to only ``prime'' or 
quasi-prime borrowers. The solution is in the problem. Let's refine it 
now before it's too late.

Secret or Silent Risks/Overburdened Borrowers/Naked Lenders and Naked 
        Government Backed Securities/``RAhD'' (randomly activated 
        hidden debt)/``RAhC'' (randomly activated hidden contingencies)

    RAhD is (randomly activated hidden debt). RAhC is (randomly 
activated hidden contingencies). RAhD and RAhC are a part of risk. They 
are risk contingencies, and as such they are a critical part of the 
risk-pricing bargain. They are like free radicals. They are a 
foreseeable contingency with unknown ramifications, unknown activation 
date(s), or an unknown contingency with unknown ramifications--all due 
to insufficient disclosures or failed market bargains. I first coined 
the phrases RAhD and RAhC on my review of the Enron debacle. Enron had 
numerous special purpose entities (or ``SPEs'') holding debt or 
contingency type commitments hidden ``off-balance sheet'' and not 
disclosed or understood on the public financials used by investors. 
When random or inevitable events caused Enron to make good on such 
debts, the world became aware the true state of its financial sickness. 
If you're as sick as your secrets, and unknown, over-priced, mis-
priced, or unmitigated RAhD and RAhC are the secret, the economy will 
become sick. We must fairly reallocate risk-price mitigation. Micro 
RAhD and micro RAhC are also contained in the risk-pricing of each 
market participant's deal. If disclosures are insufficient whether to 
the borrower or government sponsored entities (GSEs) or investors, then 
risk is not accurately defined or mitigated. The market ``bargain'' 
between price, risk and return is then corrupted. Thus the risk pricing 
paradigm is faulty. True market risk-pricing has failed. This 
discrepancy in market risk-pricing becomes a contingency in itself 
infused into the market in unknown proportions with untold 
consequences. This is the threat of RAhD/RAhC. This is where we are in 
history concerning our homeowner mortgage banking system. RAhD and RAhC 
are infused into the risk-price bargain inherently, but unnecessarily 
because of three forces:

    (1)  failed disclosures to or risk pricing by government sponsored 
entities (GSEs) or investors
    (2)  failed disclosures to the borrowers
    (3)  failed historical bargaining positions of market participants

        (1)  Failed Disclosures to Government Sponsored Entities (GSEs) 
        or Investors

    So called ``exotic'' loans are not so exotic at all. They are 
purpose driven. They fulfill specific market needs. They are however 
the 2007 Congressional tell-tale of a pending unmet need of the 
borrower. Of course, in the wrong hands a misused loan product or a 
misinformed borrower can result in devastation. What I think is exotic 
is the possible infusion of unnecessary ``RAhD'' and ``RAhC'' into the 
mortgage banking market system. The sad truth is we may have naked 
lenders and naked government backed securities. Ginnie Maes are 
guaranteed against principal loss by the full faith and credit of the 
federal government, but Fannie Mae and Freddie Mac are not. Fannie Mae 
and Freddie Mac have to absorb the foreclosure fall out if borrower's 
default. These mortgage pools are not rated. Are the triple-A corporate 
sponsor bonds able to support the risk? We have a large volume of high 
loan to value loans (with a high risk of default) that will reset to 
even higher rates compounded by a period of lowering property values, 
without mortgage insurance. This is critical because the lowering 
property values will create borrowers with no exit capabilities. These 
factors have the potential to feed upon itself and create broad 
economic trouble and loss of market liquidity. Lenders created and 
brokers sold non-insured loans (especially high ratio piggyback first 
liens with high variable rate revolving home equity line of credit 
(``HELOC'') second liens) to meet the market demand and rapid growth of 
homeownership. But did the government sponsored entities or GSEs (such 
as Fannie Mae and Freddie Mac) understand the risk of a first 
``conforming'' (80%) lien without mortgage insurance; tied to the same 
borrower who had a piggyback overpriced 20% silent or secret second 
without mortgage insurance? Did the market properly price this risk? 
Did investors overcharge borrowers for this risk by overloading the 
borrower's monthly cash burden? Worse yet, many of these secret seconds 
are not closed ended seconds, but revolving credit (card) type HELOCs. 
The GSE regulatory reporting guidelines were developed before the 
avalanche of piggybacks (The Hidden Risks of Piggyback Lending, C.A. 
Calhoun, PhD). Whether the market truly understands these risks or not, 
the risk therein must be truly mitigated by mortgage insurance type 
products that are shared in costs and benefits by all market 
participants, including the borrower.

        (2)  Failed Disclosures to the Borrowers

    We know any loan may go into default or foreclosure due to known or 
unknown reasons. A borrower may lose a job, get sick, become disabled, 
die, get divorced, lose a lawsuit, incur an underinsured or uninsured 
event from a hurricane, tornado, water damage, auto accident, 
environmental and mold burden, etc. Creative or adjustable loans have 
added another layer of risk (RAhD, RAhC) to the borrower especially if 
the borrower didn't understand or can't afford the risk of paying the 
monthly burden as loans adjust or reset. These loans may in fact hold 
the answer, but we need better disclosures.

    a. ``Truly Intelligent Disclosures'' (``TID''). Creative or exotic 
loan products and easy credit are not the problem per se, but in fact 
may be part of the answer per se. However, in any case, a truly 
uninformed borrower or misinformed borrower is truly a problem. If the 
system of fulfilling the American Dream includes a broker gatekeeper 
who holds all of the cards by virtue of the borrower's non existent 
relationship with the ``unknown lender'' who is motivated to keep 
costs, fees, and more shockingly interest rates, higher (Losing Ground: 
Foreclosure Sub-prime Market/Cost to Homeowners, citing Jackson, Berry, 
Kickbacks or Compensation: Yield Spread Premiums, Harvard (Jan. 8, 
2002)), then the borrower has little chance to obtain the most 
effective or ``suitable'' loan package for his/her needs. Effectively, 
market competition may not have fully prevailed in this round of 
mortgage lending. In such event, we all suffer. We must refine the 
relationship, and better share risk and price. We should expand, not 
limit creative loans and available credit. However, creative loan 
products should require what I call: ``truly intelligent disclosures'' 
(``TID''). However, we do not need more disclosures for disclosures 
sake. We truly have enough paper for paper's sake. Maybe we need less 
of that. We need (1) more accurate, meaningful and easy to understand 
disclosures, and (2) additional borrower disclosures with intelligent 
``underwriting business type analytics'' (of the borrowers' risks and 
analytical probabilities in changing and projected conditions such as 
the effect of declining property values on this particular loan 
especially with rising interest rates). Those risks need to be clearly 
disclosed to the borrower in a summary format. Over the last 10 years 
numerous third party computer information services have gathered and 
computerized relevant information needed to supply the borrower with an 
intelligent short summary form disclosure (in real time) sufficient to 
enhance real issue warnings and ``suitability'' concerns (First 
American, Experian, Equifax, TransUnion, PMI Group, CUNA Mutual/CMG, 
Mortgage Bankers Association, DataQuick, DataTree, RealtyTrack, 
DataPlace, Risk Profiler, GAO, FDIC, CRL, HUD, Fannie Mae (GSEs), 
MassHousing, BankRate.Com, HSH, etc.) If Congress or the industry 
mandated truly intelligent numeric summary disclosure formats (TID), I 
would estimate that the industry could be ready to operate with same 
within 18 months or so. The partial (summary) list below is a list of 
disclosures that were commonly insufficient in the last lending cycle 
(also couched as TIDs), in addition to newly suggested TIDs:

    1. Lack of TID re accurate (or industry consistent) calculations of 
loan characteristics such as ANNUAL PERCENTAGE RATE (APR), and relevant 
instruction or examples on how to use or evaluate such information.
    2. Lack of TID of CLEARLY LABELED FEES AND COSTS including broker 
yield interest rate spread compensation and junk or inflated loan costs 
including points or buy downs. These figures should be shown alongside 
applicable industry norms or legally permissible charges so the 
borrower can make intelligent decisions concerning the cost/benefit 
bargain of the loan offer.
    3. Lack of TID re the lender's ACCEPTABLE MINIMUM INTEREST RATE 
REQUIREMENT PER APPLICABLE CREDIT SCORE for this particular loan. This 
would allow the borrower to know and negotiate to avoid (abusive) 
interest rates hikes caused by broker yield-rate spread compensation. 
This is not a suggestion to totally eliminate such compensation, but 
such compensation must be justified, the effect on the borrower must be 
disclosed, and it must be subject to the borrower's rejection of those 
terms (or the loan offer based on those terms).
    4. Lack of TID re BORROWER'S CONSENT ON SUITABILITY based on a 
numeric summary sheet disclosure including the EFFECT ON THE BORROWER 
AND PROPOSED LOAN PROGRAM(S) WHEN THE MARKET AND PROPERTY VALUATIONS 
CHANGE (i.e.: decline) as related to INTEREST RATE CHANGES (i.e.: 
rise), including but not limited to the change in monthly payment 
amounts, potential (non)eligibility of alternative loan payment 
options, loan modifications or common market loan programs, all 
indicating applicable Loan to Value (LTV, CLTV) and Income to Debt 
ratios, prepayment penalty burdens, negative amortization loans, the 
effect on other key eligibility barometers and LACK OF (EXIT, SALE or 
REFINANCE) OPTIONS over a projected 1, 3, 5 and 15 year period. Many 
borrowers may have a perfectly good reason to choose a negative 
amortization loan, interest only loan, option arm loan or other 
variation of them, and may in fact realize true financial and related 
benefits therefrom. But the borrower needs to understand them to make a 
proper suitability decision. Lenders and brokers must have a duty to 
disclose and obtain the borrower's consent on suitability.

    CRITICAL; Loan Comparison Summary Sheet Disclosure With All Common 
Or Applicable Loan Programs, With Mortgage Insurance & Tax Analysis: 
The TID re ``BORROWER'S CONSENT ON SUITABILITY'' must include a 
COMPARISON OF ELIGIBLE LOAN PROGRAMS WITH AND WITHOUT MORTGAGE 
INSURANCE including a COSTS/BENEFITS/LOSS analysis with PRE-TAX and 
AFTER-TAX EXAMPLES (showing legally deductible amounts based on tax 
assumptions developed by the actual numbers reported to underwriting of 
the borrower. For example the borrower should be able to quickly look 
at a summary sheet and see the estimated total loss to borrower and 
lender due to limited default and foreclosure, MI coverage and 
projected payout amounts, lender exposure and other projected Need-To-
Know and What-If relationships. More importantly the borrower would be 
able to confirm or object to the broker's representation that a 
Piggyback (80/20) loan is less expensive than a single loan with MI. 
Now these loan programs and concepts can truly compete because the 
borrower will have intelligent summary comparisons to use in making 
his/her decisions. Note--PMI GROUP has a computerized disclosure model 
that I have tested. Other mortgage insurance companies may as well. It 
does much of what I am concerned with, not all however. Also we need a 
more advanced version for professionals and a simple summary version 
for consumers to enhance understandability and allow a meaningful 
decision to be made by the borrower on ``suitability''.

        5.  Lack of TID to the borrower concerning the HISTORY OR 
        DESIRABILITY OF THE LOAN SERVICER.
        6.  Lack of TID on the truth that certain GOOD FAITH ESTIMATES 
        may not at all be accurate and the reasons why. The industry 
        must move to more comprehensive and automated information 
        system with accurate estimated TIME TABLES in the loan 
        processing itself and related parties must respond with info 
        (payoff demands, etc.) within short legal deadlines.
        7.  HUD AMENDMENTS: Lack of TID on the HUD-1 disclosure forms 
        reflecting and incorporating the above TIDs. The GOOD FAITH 
        ESTIMATES and the HUD-1 disclosure should be amended to include 
        the appropriate TIDs or appropriate summary material therefrom.

3. Failed Historic Bargaining Positions of Market Participants

    Borrower's Risk Pricing: The borrower is carrying too much risk and 
paying too high a price for such risk. The borrower's monthly cash 
burden is too high. The borrower's RAhD and RAhC are much too high. The 
risks of failed exit options for the borrower are too high. The market 
participants have attempted to mitigate this risk by simply charging 
the borrower, but the borrower simply cannot afford the price. We are 
at a time in history where the price for risk has been proven to be too 
high for the borrower--if we want to continue the public policy of 
increasing homeownership. Risk must have a price and someone or 
something must pay for that risk. Who or what pays for the risk and how 
it is paid for are the key questions etched in the fabric of the 
solution. Answer them and you will have a refined solution.
    Risk can be paid for with risk mitigation devices and risk 
mitigation techniques. The solution will require an integrated 
combination of both.

A. RISK MITIGATION TECHNIQUES

    ``Safe Harbor Intelligent Loan Options'' (``SHILO''). We can and 
should foresee delinquency, default and foreclosure contingencies and 
handle them in the loan agreements at origination. Why wait for the 
effect of costly defaults and foreclosures until we handle the 
solution? We are creating a sub-industry based on failed attempts at 
the American Dream which cause further economic market uncertainty, 
economic ruin, and human disgrace. Is that what we want? If not, why 
not build-in some contractual remedies to enhance certainty in the 
marketplace and help save people at the same time? I recommend that we 
consider contractual risk mitigation techniques in the loan agreements 
at origination. I call this concept:

Safe Harbor Intelligent Loan Options or ``SHILO''

    ``SHILO'' is a minimum set of borrower (lender, insurer, or 
government) loan option rights concerning issues of payment, default, 
and foreclosure including forbearance or deferment options, loan 
modification or conversion rights, refinance rights, short refinance 
rights, short sale rights, and/or exit options contained in the loan 
agreements that may or must be used in the event of pre-default or 
foreclosures circumstances. The Lender and the Borrower may also 
negotiate for additional SHILO. These provisions directly benefit the 
borrower, but on many levels also directly and indirectly benefit the 
lender, the local State and Federal Governments, investors, and the 
economy. Presently the borrower in trouble has a lack of exit options 
available. This causes ``liquidation type forced sales'' and creates a 
feeding frenzy in the foreclosure markets. This often causes great loss 
to the borrower, lender, local State and Federal Government, investors, 
and the economy. When a borrower is in trouble and in need for loan 
modifications, he is generally experiencing financial, medical or 
market distress, or has a specific economic or other reason for wanting 
same. We need contractual remedies that offer relief from the 
foreseeable financial and personal problems that we know will occur and 
unforeseeable contingencies as well. Obviously persons in financial 
trouble will not be able to qualify for many of the current extra-
contractual options. It creates another set of problems. The current 
loan agreements create RAhD and RAhC risk. Substituting predefined 
contractual solutions (SHILO) for those unknown and known potential 
problems would reduce the size of the foreclosure marketplace and help 
stabilize the risk benefit pricing structure. SHILO would cause real 
estate markets to experience or realize less extreme risks. This would 
reduce the risk, costs and losses to all participants in the 
marketplace. The SHILO solutions are the current concepts used by the 
foreclosure industry including but not limited to:
    (1) Forebearance with Reinstatement or Repayment Plan Agreement, 
(2) Loan Modification, (3) Short Refinance, (4) Short Sale, (5) Market 
Sale, (6) Investor Sale, (7) Investor Sale and Lease Back, (8) Deed in 
Lieu of Foreclosure (9) Reverse Mortgage, (10) Bankruptcy, (11) Hand in 
Keys & Walk Away Clean, (12) Walk Away Dirty, (13) FHA Partial Claim 
(14) Gift Equity Transfer, Etc. The key is to allow a borrower when in 
financial trouble to access prescribed contractual payment or exit 
solutions without requiring good credit standards. We must stop kidding 
ourselves; we all know that the borrower who is in trouble will not 
have good credit or feasible foreclosure market solutions. We may see 
$164 billion in equity loss over the next few years. In an optimal or 
evolving economic society, we must refine this market inefficiency with 
non-cash substitutes or equivalent risk-pricing (``ERP'') with MI.

B. RISK MITIGATION DEVICES 

    There must be a price paid for risk absorption, but it doesn't have 
to be ``cash upfront'', nor paid for by the borrower. The problem to 
solve now for the future, is can we mitigate risk inherent in the 
middleclass or subprime rated borrower without creating unrealistic 
``cash'' carrying burdens? We can and must by using risk mitigation 
devices such as mortgage insurance or funds, with TID and SHILO.
    Mortgage Insurance (Funds) (``MI'') Type Products: The costs of 
avoiding MI may be too high for market stability. The default and 
foreclosure rates prove that it is too high for the middle class, 
subprime borrowers and borrowers in high-priced market areas like 
California and the eastern seaboard. Is the investor and lending 
industry taking too much in fees without mitigating risk in the market 
especially on non-conforming second liens? Should all market 
participants pay for risk mitigation or MI type products? The 
``concept'' of private mortgage insurance or ``MI'' (``PMI'') is a good 
one from a market standpoint because it insures and shares risk. 
Insuring or sharing risk is what makes markets work. It protects the 
mortgage holder (lender) from complete loss in the event of default. It 
hedges some risk inherent in the financial mortgage vehicle. Borrowers 
generally have a negative opinion about MI. They view it as too cash-
expensive. Now that President Bush in late December 2006 signed into 
law allowing tax deductions for mortgage insurance the comparison of 
using MI or using piggyback loans without MI will change. Borrowers 
must always remember that piggybacks with adjustable high rate HELOCs 
can be deadly. Piggybacks and non-piggybacks are in need of MI type 
risk mitigation, and an overhaul or intelligent refinement that takes 
into account the borrower's affordability. High rate second liens 
overload the borrower's carrying burden. MI should insure such second 
liens, or better facilitate one-loan programs. The GSEs will have to 
change policies to meet this need as well.
    TID, SHILO & MI Integration: We must integrate TID and the SHILO 
solutions with the new and existing MI solutions. This will allow for 
more price risk alignment and enhanced stability in loan products. 
Joseph Thomas of Retirement Networks (Florida), and the author suggest 
the following risk mitigation conceptual examples at a no or low cash 
cost basis to the borrower:
    Foreclosure Mortgage Insurance TM (``FMI'')--FMI under 
certain conditions may cover certain cost burdens as well as return 
FRESH START money, credit or opportunities to the borrower. Remember, 
the wealthier the borrower, the less risk is introduced into the 
markets.
    Default Mortgage Insurance TM (``DMI'')--DMI under 
certain conditions, may cover missed payments; up to12 months or more.
    Investors Mortgage Insurance TM (``IMI'')--Second liens 
have been over priced from the borrower's perspective; especially 
certain adjustable rate piggybacks with high rate seconds (HELOC). If 
piggybacks are to continue, the cumulative risks inherent must be 
mitigated without simply charging the borrower more cash-burdened 
money. Investors in such loans must be offered risk mitigation 
insurance benefits as a ``substitute'' or ``equivalent'' for increased 
price burdens on the borrower. The borrower alone can not afford to pay 
the price for this risk.
    Key Risk Benefit Pricing & Tax Reallocations. To effectuate a 
solution, risk and cost of risk mitigation must be shared more equally 
by all of the parties to the bargain. A comprehensive solution would 
also require:
    New Tax Laws: Congress must extend and make permanent (beyond 2007) 
the new (2007) tax deduction for borrower paid MI. Congress must allow 
the borrower to deduct same if the cost of the MI was effectively 
transferred or absorbed by the borrower whether or not paid in cash by 
that party. New tax laws must allow borrowers to avoid forgiveness of 
debt on certain loan workouts, and the ``uncertainty'' of such taxes. 
Bulk rate MI should be implemented on a grand scale with shared tax 
deductions. Risk absorption should yield a tax deduction whether it's 
cash based or not. These tax breaks are paid for by the taxes and 
liquidity concomitant in increased market wealth through new 
homeownership.
    Conclusion: You're As Sick as Your Secrets/Sustainable 
Homeownership--Increasing ``penalties'' or shrinking the market will 
not prevent abusive lending or foreclosures. But if you preempt the 
transaction itself which is subject to foreclosure abuse by allowing 
the parties to the relationship to invoke prescribed contractual 
solutions, you will remove the opportunity for others to violate the 
weaker party to that relationship, which is invariably the borrower. We 
must correct by refinement our ``secret'' market defects to achieve 
less sickness. If 80% of subprime loans have been successful, TID, 
SHILO, and new cash-affordable MI products will reduce defaults and 
foreclosures in the 20% high risk group, and by definition enhance 
``sustainable homeownership''. Nothing will be 100%, and it shouldn't 
be. This risk of loss and risk of success create market opportunities--
as long as price is fairly set with risk mitigation. Expanding 
homeownership will create more wealth and better local, national and 
international economies. Let's stop knee-jerk non comprehensive rules 
and laws; let's refine, expand and enjoy the ever changing new America, 
and the first historic period of American retirement--supported by 
homeownership wealth.

                                 

 Statement of Lawrence Stahl, American Prepaid Legal Services Institute
    I am Lawrence Stahl, President of the American Prepaid Legal 
Services Institute. The American Prepaid Legal Services Institute (API) 
is a professional trade organization representing the legal services 
plan industry. Headquartered in Chicago, API is affiliated with the 
American Bar Association. Our membership includes the administrators, 
sponsors and provider attorneys for the largest and most developed 
legal services plans in the nation. The API is looked upon nationally 
as the primary voice for the legal services plan industry.
    The hearing today deals with the economic challenges facing middle 
class families. Committee Chairman Rangel noted in calling the hearing 
that ``Many American families are finding it harder and harder to hold 
on to the American dream. We need to take a deeper look at what is 
driving these concerns so we can build and maintain an economy that 
works for all Americans.''
    One of the economic challenges facing working families is surviving 
in an increasingly complex financial environment. Currently working 
families are in an extremely precarious economic position. A perfect 
storm of adjustable rate mortgage increases, credit card interest rate 
increases, layoffs and cutbacks have put many families on the edge of 
economic collapse. A single event, such as a divorce or illness that 
interrupts cash flow is enough to trigger defaults on mortgages, 
evictions or collection lawsuits. Now is the time when working families 
need access to the legal system, through employer-provided legal plans, 
to save their homes, deal with debt collectors and keep the family 
intact.
    I offer this written testimony in support of employer-paid group 
legal services for working families. Employer-paid group legal services 
provide a vital safety net for middle-income families. However, this 
safety net has been compromised ever since the tax-preferred status of 
the group legal services benefit fell out of the Code.
    Since the loss of the tax-preferred status in 1992, existing plans 
have been forced to cut back and few new plans have been added. 
Congress has the opportunity to reinstate Section 120 of the Internal 
Revenue Code of 1986 and restore the exclusion from gross income for 
amounts received under qualified group legal services plans. This will 
provide an incentive for existing plans and tax relief for working 
families and businesses.
    Bills have been offered in the past several Congresses, most 
recently as H.R. 897, introduced by Representative Camp and Chairman 
Rangel and co-sponsored by 29 members, including 16 members of this 
committee.
    Section 120 was originally enacted in 1976 and extended on seven 
separate occasions between 1981 and 1991. The provision encourages 
legal services benefits for employees and their families by excluding 
from income and social security taxes employer contributions towards 
qualified group legal services plans. Unfortunately, when this 
exclusion expired, it triggered a tax increase for millions of working 
Americans whose employers contribute to such plans. Currently employees 
and retirees are taxed on the employer's contribution, whether or not 
they use the benefit.
    These plans are important to working Americans. With the growing 
complexity of today's world, ordinary citizens need access to 
preventive legal advice. Access to the legal system is especially 
important for so many middle income families who are living paycheck to 
paycheck with very little cushion in the event of illness or injury 
Group legal plans provide employees with low cost basic legal services, 
including assistance with the purchase of a home, the preparation of a 
will, probate, and domestic relations issues, such as child support 
collection. Many plans also offer assistance with elder care issues and 
the growing problem of identity theft. Plans do not allow for suits 
against the employer, class actions or fee generating cases.
    More than 2 million working families are now covered by legal 
plans. They are offered by such national companies as Caterpillar, 
DaimlerChrysler, J.I.Case, Mack Truck, John Deere, Ford Motor Company, 
General Motors, and thousands of small businesses.
    Many people do not realize that Group Legal plans cover not only 
active workers but also cover retirees, surviving spouses and 
dependents. Much of the legal work done by legal plan attorneys is 
designed either to prepare workers for retirement or to handle issues 
that arise after retirement. This is part of the American Dream that 
Chairman Rangel focused on in calling this hearing.
    Retirement is a complex task today. Those individuals anticipating 
retirement must consider how to:

          Protect their spouses and children in the event of 
        death.
          Anticipate the need for long term care, as well as 
        Medicare and Medicaid issues.
          Instruct medical professionals on how they want to be 
        treated in the event of a serious illness or a life threatening 
        accident.
          Instruct family members on how they want their 
        property handled in the event of incapacitating illness or 
        accident.
          Address financial management and investment issues in 
        the face of a decreased income.

    Legal plans provide the advice and legal documents to accomplish 
these tasks including wills and trusts, powers of attorney, living 
wills/medical directives, guardianship and conservatorships, nursing 
home contract review, Medicare and Medicaid appeals and home 
refinancing document review. These important legal services provide 
retirement security.
    Legal plans also provide a significant educational benefit on a 
multitude of issues important to working and retired Americans and are 
a vital component of any retirement education plan. By learning how to 
protect their savings, middle class citizens can achieve their dream of 
retirement.

Legal plans:

    Educate consumers about budgeting and debt problems.
    Present seminars on preparing for retirement covering estate 
planning, social security and review of IRAs, including such issues as 
what to do with the IRA when the first spouse dies.
    Educate clients on how to avoid identity theft and what steps to 
take if a client is a victim of this crime.
    While qualified employer-paid plans have proven to be highly 
efficient, there is still a cost to the employer for providing this 
aspect of retirement security. Employers must pay an additional 7.65 
percent of every dollar devoted to a legal plan as part of its payroll 
tax, whether for an active employee or a retiree. Employees pay the 
payroll tax plus income tax on the cost of the benefit whether they use 
it or not in any given year.
    As employers seek to reduce or eliminate benefits in general, 
targeting benefits that are not tax preferred are high on employers' 
lists. Recently this trend toward reducing benefits has taken a toll on 
existing group legal plans. Large employers such as Rouge Steel, Delphi 
and Visteon have either dropped the benefit entirely or created a two-
tier benefit system that eliminates group legal for their newest 
employees. The lack of a tax preference for group legal plans makes the 
benefit vulnerable for reduction or elimination by employers.
    Benefit to retirees and the value of the legal services far exceeds 
the cost of the plan. Many retirees have commented that without a legal 
plan they would not have the money to hire an attorney to solve their 
legal problem, which could be as serious as defending against a 
wrongful foreclosure. Our most vulnerable middle class citizens, our 
retirees, are at risk of losing the dream they worked so hard to 
achieve.
    Still employers can provide a substantial legal service benefit to 
participants at a fraction of what medical and other benefit plans 
cost. For an average employer contribution of less than 100 annually, 
employees and retirees are able to take advantage of a wide range of 
legal services often worth hundreds and even thousands of dollars, 
which otherwise would be well beyond their means.
    Reinstating Section 120 would repeal this tax increase, restore 
equity to the tax treatment of this benefit and ease the administrative 
burden on employers. Reinstatement also grants access to the legal 
system for millions of middle class families who might otherwise be 
priced out of justice. Restoring the tax-preferred status will also 
demonstrate to millions of hardworking low- and middle-income workers, 
not only that this Congress supports them, but that the tax code can be 
beneficial for them.
            Respectfully,

                                                     Lawrence Stahl
                                                     President, API

                                 
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