[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
__________
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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
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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.
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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.
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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.
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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.
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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\
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\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.
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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\
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\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.
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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\
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\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.
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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\
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\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).
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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.
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\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).
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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.
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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\
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\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.
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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.
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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.
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\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.
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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.
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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.
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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.
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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\
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\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.
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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.
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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).
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\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.
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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.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
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