[Senate Hearing 111-49] [From the U.S. Government Publishing Office] S. Hrg. 111-49 BOOMER BUST? SECURING RETIREMENT IN A VOLATILE ECONOMY ======================================================================= HEARING before the SPECIAL COMMITTEE ON AGING UNITED STATES SENATE ONE HUNDRED ELEVENTH CONGRESS FIRST SESSION __________ WASHINGTON, DC __________ FEBRUARY 25, 2009 __________ Serial No. 111-1 Printed for the use of the Special Committee on Aging Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html U.S. GOVERNMENT PRINTING OFFICE 50-872 WASHINGTON : 2009 ----------------------------------------------------------------------- For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 SPECIAL COMMITTEE ON AGING HERB KOHL, Wisconsin, Chairman RON WYDEN, Oregon MEL MARTINEZ, Florida BLANCHE L. LINCOLN, Arkansas RICHARD SHELBY, Alabama EVAN BAYH, Indiana SUSAN COLLINS, Maine BILL NELSON, Florida BOB CORKER, Tennessee ROBERT P. CASEY, Jr, Pennsylvania ORRIN HATCH, Utah CLAIRE McCASKILL, Missouri SAM BROWNBACK, Kansas SHELDON WHITEHOUSE, Rhode Island LINDSEY GRAHAM, South Carolina MARK UDALL, Colorado KIRSTEN GILLIBRAND, New York MICHAEL BENNET, Colorado ARLEN SPECTER, Pennsylvania Debra Whitman, Majority Staff Director Michael Bassett, Ranking Member Staff Director (ii) C O N T E N T S ---------- Page Opening Statement of Senator Herb Kohl........................... 1 Statement of Senator Mel Martinez................................ 2 Statement of Senator Robert P. Casey, Jr......................... 6 Statement of Senator Mark Udall.................................. 6 Statement of Senator Blanche Lincoln............................. 7 Panel I Statement of Jeanine Cook, Baby Boomer, Myrtle Beach, SC......... 8 Statement of Dallas L. Salisbury, President and CEO, Employee Benefits Research Institute, Washington, DC.................... 12 Statement of Dean Baker, Co-Director, Center for Economic and Policy Research, Washington, DC................................ 45 Statement of Ignacio Salazar, President and CEO, Ser-Jobs for Progress, Washington, DC....................................... 51 Statement of Barbara B. Kennelly, President and CEO, National Committee to Preserve Social Security and Medicare, Washington, DC............................................................. 55 Statement of Deena Katz, CFP, Associate Professor, Texas Tech University, and Chairman, Evensky & Katz, Coral Gables, FL..... 62 APPENDIX Written Testimony submitted by Thomas M. Shapiro, Ph.D., Director, Institute on Assets and Social Policy Pokross Profressor of Law and Social Policy, Brandeis University....... 89 Statement by Mellody Hobson, President, Ariel Investments, LLC and Chairman Ariel Mutual Funds Board of Trustees.............. 90 Statement submitted by Women's Institute for a Secure Retirement (WISER)........................................................ 92 Written Testimony submitted by Richard W. Johnson, Senior Fellow, The Urban Institute............................................ 96 Statement from Matthew D. Hutcheson, Independent Pension Fiduciary...................................................... 105 Statement from the American Benefits Council..................... 115 Information submitted by Joseph C. Nagengast, Target Date Analytics...................................................... 135 Information submitted by Institute on Assets and Social Policy... 151 The Ariel-Schwab Black Paper..................................... 176 (iii) BOOMER BUST? SECURING RETIREMENT IN A VOLATILE ECONOMY ---------- -- WEDNESDAY, FEBRUARY 25, 2009 U.S. Senate, Special Committee on Aging, Washington, DC. The Committee met, pursuant to notice, at 10:35 a.m. in room SD-106, Dirksen Senate Office Building, Hon. Herb Kohl, Chairman of the Committee, presiding. Present: Senators Kohl [presiding], Lincoln, Casey, Whitehouse, Udall, Gillibrand, Martinez and Specter. Index: Senators Kohl, Martinez, Casey, Udall, and Lincoln. OPENING STATEMENT OF SENATOR HERB KOHL The Chairman. Good morning to everyone. Thank you for being here, first and foremost. I would like to extend a warm welcome to Senator Mel Martinez, the Aging Committee's new ranking member, hailing from the great State of Florida. He is no stranger to the constituency we serve, and the issues we confront. I'm so pleased to join together with Ranking Member Mel Martinez in leading this Committee, and I'm confident that he and his staff will contribute greatly to the Committee's agenda. With the country aging at a rate never seen before, the issues that come before this Committee are timely, urgent and ever-changing. Just two years ago this month, we held a hearing to examine how the onslaught of baby boomer retirees would affect our, then robust, economy. But what a difference two years can make. Today we will turn that issue on its head as we examine how the now flailing economy is affecting baby boomers. For the millions of Americans who thought they were on the precipice of retirement, a dark cloud has rolled in and obscured the golden years they were just beginning to see over the horizon. This morning, we will hear from a woman whose struggles typifies those that many boomers are now experiencing. She is not alone. Over the past year, 401K plans and other defined contribution participants have experienced devastating losses. In these hard times, American companies have also had to cut back benefits. Thousands of American employers, large and small, have stopped providing 401K plans, 401K matching contributions to their employees. With the volatility in the stock market, many Americans are left wondering whether they should continue investing in their 401K at all. The answer is yes, they should continue to save for their retirement, but perhaps with updated strategies, and more reliable investments. That is why, with more and more Americans relying on 401Ks and other defined contribution plans as their primary source for retirement savings, we need to make sure their savings are well protected with strong oversight and regulation. In the past, this Committee has called for the disclosure of 401K fees to employers and participants and a ban on ill- conceived products like the 401K debit card. Today, we will take a close look at 401K target day funds, which are designed to gradually shifts to more conservative investments, as workers approach their retirement. A Committee investigation of investment funds designed for people planning to retire in 2010 has found that there's a wide variety of stock exposure. The results of excessive risk can be devastating for those on the brink of retirement. One 2010 fund lost 41 percent in 2008. Despite their growing popularity, there are absolutely no regulations regarding the composition of these funds. I've sent letters to Secretary Linda, Holly Solis, and U.S. Securities and Exchange Commission Chairman, Mary Shapiro, asking them to consider regulations to better define target date funds. Depending upon their response, I may consider legislation options, as well. Today's hearing will also focus on the housing downturn, and its affects on seniors and retirees, so many Americans who were counting on the value of their home to provide a secure retirement, are now at a loss and wondering what to do. The result is that older Americans are forced to consider all their options. For many of them, the economic downturn will mean working longer. One of our witnesses today will describe the labor market for older workers, and the challenges they face. To confront those challenges, I'm introducing several pieces of legislation this week that would make it easier for older Americans to continue working past retirement age. Finally, experts will share with the Committee how boomers should move forward with a revised plan to shore up their retirement savings. Now, more than in recent decades, older Americans will need to rely on our bedrock government programs like social security and Medicare, and many may find some relief from provisions passed in the recent stimulus package. None of us can say when we will see the end of this economic downturn. The best we can do is to reassess, reallocate, and recommit to finding stability in a volatile economy. We thank the witnesses for being with us today, and we now turn to Ranking Member Martinez for his statement. STATEMENT OF SENATOR MEL MARTINEZ Senator Martinez. Mr. Chairman, thank you so very much, and thank you for your very kind welcome to the Committee. I really have looked forward to working with you. I have been a very interested member of the Committee, and now as a--in a position of ranking member--it's a real honor to work with you, and a pleasure, and I know there's so much that working together, we can accomplish for the good of the American people, particularly those--the aging population of our country. I want to thank our panelists for coming today to join us on this very important topic of the issues impacting America's baby boomer and retiree generation. One of the greatest concerns of these Americans is the current financial crisis, and what it meant for their future. From losses in the stock market to declining home values, those focused on retirement are right to be concerned about their financial future. According to the Employee Benefit Research Institute, Americans aged 55 to 64, who have been enrolled in a program for 20 years or more, saw the value of their 401K retirement account decline by an average of 20 percent this year. One consequence of the worsening economy, is that an increasing number of Americans have had to put retirement on hold. According to a recent AARP study, an estimated 70 percent of employee 62 and older plan to continue working. Numbers from the Bureau of Labor Statistics also suggest this trend. The number of Americans 55 and older with full-time jobs increased from 15.5 million in 2005, to almost 18 million in 2008. Another concern among baby boomers and retirees is the state of the housing market. For many Americans, a home is the largest investment a family will make. As widespread foreclosures continue to take a direct toll on families, the value of nearby homes is also negatively affected. This is a huge concern for seniors looking to downsize their homes, and use the proceeds of a home sale to help with their retirement. Every American should have the opportunity to live comfortably after retirement. Through some financial planning, aging Americans can better plan for their future, by learning ways to save enough to enjoy retirement. I have talked to a number of these individuals in my home State of Florida, where an estimated 17 percent of the residents are 65 and older, compared to 12 percent of the nation, as a whole. Among the top concerns for financial security--preparing to live on a fixed income, paying healthcare and hospital bills, and finding affordable housing during retirement. I look forward to working with Chairman Kohl to develop practical solutions to help aging Americans weather the current storm, and prepare for some of the challenges that lie ahead. I also look forward to hearing from our experts joining us today, here. One of our experts will discuss the importance of entitlement reform, which I believe is necessary to ensure the availability of programs vital to seniors. Programs such as Medicare, Medicaid, and Social Security could be rendered insolvent, if Congress fails to act. To address this problem, I support the Conrad-Gregg bill that would help Congress and the President find the political will to address the nation's long-term fiscal imbalances. The bill would establish a task force that would recommend changes to current law related to spending and taxes, especially on entitlement programs. The task force will consist of equal number of an equal number of Republicans and Democrats, and two members from the Administration. This effort will ensure bipartisan solutions to entitlement reform, and long-term fiscal stability. The plan the task force sends to Congress will require a super-majority for passage, meaning that we would truly reach a bipartisan solution to one of the most vexing issues facing our nation today. Decisions on entitlement solvency have been delayed for far too long. I want to thank the panel for being here today, and for joining us to lend your expertise to these serious problems that we face. I know that from your information that you will share, we will be better informed, and better able to guide legislation that will need to be looking at the entirety of the landscape that we face today, which is so different than what we have had in year's past. Oh, thank you for being here, I look forward to hearing from you. [The prepared statement of Senator Martinez follows:] Prepared Statement of Senator Mel Martinez Thank you Chairman Kohl. It gives me great pleasure to take part in my first Aging Committee Hearing as Ranking Member. I would like to thank our panelists for joining us today to discuss several issues impacting America's Baby Boomers and retirees. Among the greatest concerns of these Americans is the current financial crisis and what it means for their future. From losses in the stock market to declining home values, those focused on retirement are right to be concerned about their financial future. According to the Employee Benefit Research Institute, Americans age 55 to 64 who have been enrolled in a program for 20 years or more saw the value of their 401k retirement accounts decline by an average of 20 percent last year. One consequence of the worsening economy is that an increasing number of Americans have had to put retirement on hold. According to a recent AARP study, an estimated 70 percent of employees 62 and older plan to continue working. Numbers from the Bureau of Labor Statistics also support this trend. The number of Americans 55 and older with full-time jobs increased from 15.5 million in 2005 to 17.9 million in 2008. Another concern among Baby Boomers and retirees is the state of the housing market. For many Americans, a home is the largest investment a family will make. As widespread foreclosures continue to take a direct toll on families, the value of nearby homes is also negatively affected. This is a huge concern for seniors looking to downsize their homes, and use the proceeds of a home sale to help with retirement. Every American should have the opportunity to live a comfortable life after retirement. Through sound financial planning, aging Americans can better plan for their future by learning ways to save enough and enjoy retirement. I have talked to a number of these individuals in my home state of Florida, where an estimated 17 percent of the residents are 65 and older, compared to 12 percent of the nation as a whole. Among their top concerns is financial security--preparing to live on a fixed income, paying health care and hospital bills, and finding affordable housing during retirement. I look forward to working with Chairman Kohl to develop practical solutions to help aging Americans weather the current storm and prepare for some of the challenges that lie ahead. I also look forward to hearing from our experts joining us here today. One of our experts will discuss the importance of entitlement reform, which I believe is necessary to ensure the availability of program vital to seniors. Programs such as Medicare, Medicaid, and Social Security could be rendered insolvent if Congress fails to act. To address this problem, I support the Conrad-Gregg bill that would help Congress and the President find the political will to address the nation's long-term fiscal imbalances. The bill would establish a task force that will recommend changes to current law related to spending and taxes, especially on entitlement programs. The task force will consist of equal Republicans and Democrats, and two members from the Administration. This effort will ensure a bipartisan solution to entitlement reform and long-term fiscal stability. The plan the task force sends to Congress would require a supermajority for passage meaning we would truly reach a bipartisan solution to one of the most vexing issues facing our nation today. Decisions on entitlement solvency have been delayed for that too long. This bill will force Congress to vote on a bipartisan plan to make sure that future generations do not bear an incredible burden on debt. So I want to thank our panel of experts for joining us today, and I look forward to hearing your thoughts on how we might better prepare this critical group of Americans for the challenges presented by today's turbulent economy. The Chairman. Thank you very much, Senator Martinez. We're very pleased to welcome our panel today. Our first witness will be Jeanine Cook. Mrs. Cook has worked as a business agent for SEIU Local 47, in Cleveland, OH, and for the United Way of Lake County. She was active in a variety of charity organizations in the Cleveland area, before recently moving to Myrtle Beach, SC. She will testify about the challenges boomers are facing as they transition toward retirement. Our second witness will be Dallas Salisbury, the CEO and President of the Employee Benefit Research Institute. Mr. Salisbury has written and lectured extensively on economic security topics, winning several awards for his professional excellence. He has served on the ERISA Advisory Council, and the PBGC Advisory Committee, the U.S. Advisory Panel on Medicare Education, as well as the Board of Directors of the National Academy of Social Insurance. Also joining us today is Dean Baker. Mr. Baker is the co- director of the Center for Economic and Policy Research. His analysis economic issues is frequently cited in major media outlets, and he was one of the leading economists warning of a housing bubble. Today, he is releasing a new report analyzing the effects of the housing downturn on baby boomers. Next, we will be hearing from Ignacio Salazar. Mr. Salazar is the head of SER--Jobs for Progress, an organization that trains low-income, older Americans in over 18 States, including my own State of Wisconsin. He will share with us the challenges and opportunities for those who may want to or need to continue working. He's a previous President of the Detroit, MI affiliate of SER, and has had leadership positions with several Detroit non- profits. Barbara Kennelly is our next witness. She is currently the President and CEO of the National Committee to Preserve Social Security and Medicare. She has spent 25 years serving the citizens of Connecticut at local, State, and Federal levels, including 17 years as a member of the U.S. Congress. We welcome you all here today, we look forward to your testimony, and I would like to ask Senator Martinez to introduce our last witness. Senator Martinez. Thank you very much, Mr. Chairman. I would like to say a few words about Deena Katz who is an Associate Professor in the Personal Financial Planning Division at the Texas Tech University in Lovett, TX. Deena is an internationally recognized financial advisor and practice management expert, the author of six books on financial planning and practice management topics, and a frequent guest on local and national network programs for CBS, ABC and PBS. Deena, thank you for being with us today. The Chairman. Thank you. Before we commence our testimony, I'd like to ask Senator Casey to make a few comments, if he wishes. STATEMENT OF SENATOR ROBERT P. CASEY, JR. Senator Casey. Mr. Chairman, thank you very much, I appreciate you calling this hearing, and appreciate the presence of the new ranking member, Senator Martinez. I won't be here for the entire hearing, and I wanted to make sure that it was stated on the record. I'll be here for a limited period of time, but I want to thank the witnesses for your presence here today, for the commitment that you bring to all of these issues that come under, I guess, a broad umbrella of retirement security, especially at this time in our nation's history. I know that in the State of Pennsylvania, where we have the second-highest percentage of people over the age of 65, other than the ranking member's home State, I know how worried people are. I have some sense of the anxiety that they feel, and this issue is critically important--not only for our State, but for the country. We have an obligation in the Congress, in both parties, to do everything we can to provide some peace of mind that comes with retirement security for those who fought our wars, or worked in our factories, or taught our children, or gave us life and love, and today's testimony that you will provide--and the passion and scholarship and experience you bring to that testimony--will inform us and will keep us focused on making sure that we're doing everything possible, especially at a time of this trauma--economic trauma--for our families, that we stay focused on the urgent question of retirement security. So, we're grateful for your presence and for your work here, and we will make sure even if we're not here for the whole hearing that we review, and try to incorporate the testimony in our work. Thank you very much. The Chairman. Thank you, Senator Casey. Senator Udall. STATEMENT OF SENATOR MARK UDALL Senator Udall. Thank you, Mr. Chairman, I'll be brief. I, too, want to let it be known that I'm particularly honored to be a member of your Committee, and the ranking member, as well. I want to associate myself with the fine words of you and Senator Martinez, and Senator Casey. I don't think I can improve on them. I do have a statement, I would like to ask unanimous consent that I can include in the record. Again, I look forward to working with you, Mr. Chairman, to understand and then act in ways that are appropriate to ensure retirement security, and be an active and involved member of this Committee. So, thank you. [The prepared statement of Senator Udall follows:] Prepared Statement of Senator Mark Udall First, I would like to thank Chairman Kohl and Ranking Member Martinez for holding this hearing today. I am pleased to have the opportunity to serve as a member of the Special Committee on Aging. With millions of baby boomers reaching retirement age, issues facing older Americans continue to be important to the people in my home state of Colorado and across the country. I look forward to bridging the divide and working with the members of the Committee on both sides of the aisle to address policies that will improve the lives of older Americans. The state of our nation's economy is at the forefront of people's minds. I have heard from many Coloradans greatly concerned about the economic crisis facing all of us. The volatility and uncertainty of these distressed economic times have left people fearful of losing their jobs, their homes and their life savings. Older Americans, who worked hard and planned for the future, are faced with the reality of diminishing funds for retirement. Increasingly, they are being forced to reenter the workforce--into a growingly difficult job market--to make ends meet. Additionally, the baby boom generation is quickly approaching retirement age, and in the coming years, millions of Americans will begin receiving Social Security funds and drawing on their pensions and retirement savings. In recent months, as the stock market has plummeted, these boomers have watched their nest eggs shrink, and as housing prices tumbled, they have experienced decreasing equity in their homes. Due to these financial constraints, they are faced with tough choices, such as delaying retirement. Many are seeking guidance on the best ways to protect their pensions, manage their 401(k)s and ensure that they are financially secure when they reach retirement. This hearing is timely, and I look forward to the testimony of the witnesses today. I hope to learn not only more about the scope of the issue, but I am seeking solutions to share with Coloradans affected by these challenges. The Chairman. Thank you, Senator Udall. Senator Lincoln. STATEMENT OF SENATOR BLANCHE LINCOLN Senator Lincoln. Mr. Chairman, thank you once again--as always--bringing up such great issues for us to focus on, and we appreciate so much--we appreciate the panel being here to share your wisdom and background, in terms of retirement security. I noticed, at dinner the other night, my husband looked at my kids and said, ``Ya'll got to get to basketball practice, because we may need a scholarship.'' When you look at what's happened to people's savings in so many ways--whether it's for college, or retirement, or anything else--people are frightened, and there's lots to be done. We're all going to be working hard to make sure we turn our economy around, so all of those things do prove out to be a good and positive thing. We're looking forward to having your suggestions of how we can ensure the confidence that Americans need in their retirement security. So, thank you, Mr. Chairman, and thanks to all of you all. We appreciate it. The Chairman. Thank you, Senator Lincoln. So, we will now turn to Jeanine Cook, and for your statements, if you would be so kind as to keep them to 5 minutes. Jeanine Cook. STATEMENT OF JEANINE COOK, BABY BOOMER, MYRTLE BEACH, SC Ms. Cook. Thank you. Chairman Kohl, Ranking Member Martinez, and distinguished member of the Committee, my name is Jeanine Cook, and I would like to tell my story. It's a very personal story, and bear with me. I am 58 years old, and have been married for 36 years. My husband Robert and I lived in our home in Ohio for 33 of those years. My husband retired last July at age 61, he has severe heart damage; half of his heart is functioning. He also is an insulin diabetic. Robert served in the United States Marine Corps for 8 years, then he worked for the Gould Corporation, which closed, and he went to work for CEI, which is now First Energy, and Paines Fellow in East Lake, OH, as an Operating Engineer for a fossil fuel plant. This job requires a lot of physical labor, as well, which he was unable to do. Our house was fully paid, but we ended up having to take out a home equity line on our home a few years ago to help our children, and family members, hurt by the recession in Ohio. We thought the hardship was--the one we were experiencing--would be only temporary. Early this year, we ended up defaulting on the payments for that home equity line, and our home went into foreclosure. At home, when I open the local newspaper, there were five pages of foreclosures, and it's a large paper, our News Herald. Neighbors names were in, but it was absolutely humiliating to see my own name. My husband and I decided that the only thing that we could do to bring our payments current was to use his retirement fund he received from working--we took it out as a lump sum, even though he had to retire early, at 61, we received 5 percent less, and we had no other avenue in which to use. We even have to pay taxes on that money. Our son lost his job 6 months ago, he ended up moving into our home with us, in Ohio. Then our daughter, and 5-year-old granddaughter needed to move in because her husband walked out on her. While we planned to sell our home in Ohio when we retired, we cannot sell our home, because our children would have no place to live. With the current housing market, we were told that our home was worth 30 to 40 percent less than it was a few years ago, and this was our nest egg. Yet, we cannot sell our home, because our children would be homeless. We had to get away because the stress was eating me alive. So, we moved in with my sister, Mary, and her husband. They retired in Murrells Inlet, SC, which is just south of Myrtle Beach. We took about $175,000 out of the retirement lump sum to buy a small home, because we could not live with my sister forever. Now we have about $50,000 left in the account, until my husband reaches 62 years of age, and that won't be until next July, when he begins to draw Social Security out of that. We have to keep our health insurance, which has doubled since my husband retired. We pay about $425 a month. We both have serious medical conditions. In addition to Rob's heart disease and diabetes, I suffer from depression, I have a genetic blood disorder, and I'm in Stage 3 kidney failure. I am also a diabetic. I have had six surgeries in the last 6 years. I filed for Social Security Disability, and was denied, and I plan to appeal that decision. My problem is, once the $50,000 is gone, we have nothing else to live on but the Social Security income, and I still have four years to go before I retire. This is not how I thought we would live during our golden years. We thought our retirement was secure. We played by the rules, we both worked very hard, we paid our taxes, we did everything right. But there's too many Americans in our position. You save for a rainy day, and it's pouring. It's pouring out there, and it isn't getting better. We need some relief. We are all--all we do is worry. What will our children look forward to? What will their future, and our grandchildren's future be like? Is this what they have to look forward to? In closing, I would like to thank you for the opportunity you gave me today to testify and I would be pleased to answer any questions you may have. [The prepared statement of Ms. Cook follows:] [GRAPHIC] [TIFF OMITTED] 50872.001 [GRAPHIC] [TIFF OMITTED] 50872.002 The Chairman. Thank you, Ms. Cook. Mr. Salisbury. STATEMENT OF DALLAS SALISBURY, PRESIDENT & CEO, EMPLOYEE BENEFITS RESEARCH INSTITUTE, WASHINGTON, DC Mr. Salisbury. Chairman Kohl, Senator Martinez, member of the Committee, it's a pleasure to be here. I will focus my comments on some new research that we have put out on the total system. Supplementation of Social Security has been--it has been stressed--left a voluntary effort. Just released survey data from the Federal Reserve show dramatic increases in family asset levels since 1989, as a result of participation in voluntary programs. The most recent data suggest today that from this voluntary system about 17 percent of all private workers, or about 20 million, are active participants in defined benefit plans, and 56 percent--or about 66 million workers--are active participants in a defined contribution plan. About 36 million individuals are also separated participants or retirees who are receiving income from these programs. In addition, in the voluntary system, small employers can sponsor plans such as Individual Retirement Accounts, and an estimated 50 million individuals are now in such programs at some level. The Pension Protection Act which the Congress enacted in August 2006, sought to increase the use of these voluntary programs through auto-enrollment and default investment in order to increase diversification. Record-keeping data suggest that auto-enrollment since the passage of PPA has increased dramatically, and in some programs participation has gone from 50 percent to in excess of 80 percent as a result of those provisions. Related to portfolios, EBRI data showed that at year-end 2007, 13 percent of participants had no money in equities, while 43.4 percent had 80 percent or more in equities, in other words, another objective change from PPA. Data show widespread adoption of defaults in the life cycle and target date funds that provide for automatic diversification, and ongoing rebalancing. Of those offered target date funds in the most recent year, 36.9 percent had at least some portion of their accounts in those funds at the end of 2007. Among those identified as auto-enrollees, approximately 80 percent of those investing in target date funds had all of their assets in those funds, which is the intent of the way that they are designed. Among participants between the ages of 56 and 65 who had been in the average target date fund at the end of 2007, approximately 40 percent would have had at least 20 percent decrease in their equity concentrations, again, leading to the greater diversification, was an objective of PPA. Based on simulations we've looked at with a survey population for 2000 to 2006, if all participants in 401K plans had invested in target date funds, at the median, balances would have been larger than they were, in fact, based on individually selected allocations--again, meeting the objective of PPA. Compared to actual participation in 401K plans, we found that with the use of target date funds, all four age cohorts that we analyzed would have had larger balances had they been in target date funds. When the most conservative target date funds were compared to actual participation, 3 of 4 of the cohorts would have had better returns; only those over the age of 45 would have seen relative losses. Our February Issue Brief just released, presents calculations on how long it might take for individual participants to make up for the significant equity market losses that have taken place since the market high in the fall of 2007. Looking at a 5 percent equity rate of return assumption, those with the longest tenure would need about 2 to 5 years in order to recover. If equity rate of return, instead, ends up being a zero rate of return for the next 5 years, on average, the recovery would take 2.5 years, at the median, and for those at the extreme, 9 to 10 years. This is both from investment returns and new contributions going into the fund. To conclude, voluntary defined benefit and defined contribution plans in the private sector provide current retirement income to millions of retirees, and hold assets for million of workers and retirees. Recent public policy changes are increasing the number of participants, and the diversification of those accounts. Mr. Chairman, member of the Committee, I commend you for exploring thee topics, offer our help in the future, and thank you for the opportunity to appear today. 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Thank you very much, Mr. Salisbury. Mr. Baker. STATEMENT OF DEAN BAKER, CO-DIRECTOR, CENTER FOR ECONOMIC AND POLICY RESEARCH, WASHINGTON, DC Mr. Baker. I want to thank you, Chairman Kohl and Ranking Member Martinez for inviting me to testify. I want to take my time to talk primarily about this financial situation of the baby boom cohorts in the wake of the collapse of the housing bubble and the recent decline in the stock market. Then I also would like to take at least a couple of moments to talk about what I see as some of the main policy implications of this collapse which I think have not been fully appreciated. My analysis--we released a paper today, based on analysis of the survey, Federal Reserve Board's Survey of Consumer Finance from 2004. I should say they just released the data from 2007, we haven't fully analyzed it, yet, but I can tell you that basically, we got the same results. Although this is somewhat dated, nothing substantive, I don't think, would change. Our analysis shows that there's a huge decline in the wealth of the baby boom cohorts, primarily because of a decline, first and foremost, in their home. I think it--we often fail to appreciate the extent to which housing equity is, in fact, the primary form of wealth for most middle income people. Even if middle income people may not perceive housing wealth as being a source of retirement income it, in fact, is in very fundamental ways, first and foremost because people anticipate not having a mortgage to pay off through their retirement years, so that's based on the fact of accumulated equity. Second, people often anticipate moving during their retirement years to a home that may be more suited for their retirement, as opposed to the home that they raised their children in, and third, because of emergency situations, healthcare or other unfortunate situations as Ms. Cook had just described to us. So, the equity in people's homes, for middle income people, that is their major source of wealth in retirement. The sharp drop in housing prices over the last two--two and a half-- years, has in effect, decimated the wealth that baby boomers have managed to accumulate in their working years. So, just to give some quick numbers to sort of summarize the circumstance, if we look at the median wealth for younger baby boomers--those aged between 45 and 54--that fell by 45 percent from what it was in 2004 to what we project for 2009. So that the median household would have just over $82,000 in wealth. This, again, is the median--$82,000 in wealth would translate to less than half of the purchase price of the median home. In other words, if they took all of their wealth, all of their assets, everything they had accumulated, they would be able to pay for less than half the price of a typical home. Alternatively, if we think of it the other way, they took all of the equity out of their home, and they were looked by annuity at age 65, that would get you an annuity of about $7,000 a year, less than $600 a month in income. Again, this is the median. If we got to the second quintile, people between the 20th percentile and 40th percentile, the wealth for that group--the average wealth for that group--is $23,200. Even the fourth quintile--relatively well-off, elderly, people between 60th and 80th percentile--their wealth would simply be $215,000--enough for an annuity of $17,000. Again, not a very good income; not a very good supplement to Social Security, for people who were relatively affluent in the scheme of things. For older baby boomers who had a comparable situation, the decline of wealth for this group--age 55 to 64--was 38 percent that gave them a median wealth of $142,000. Enough, if they took their whole accumulation to purchase 80 percent of the median house price, or alternatively, to get an annuity of about $11,000 a year. What this means is that most baby boomers--the vast majority of baby boomers--would be almost entirely dependent on Social Security and Medicare. I should also point out, another number we looked at, we said, ``How many people--what percent of the people in these age groups would actually need to bring money to a closing?'' They wouldn't have enough to pay off their mortgage, pay the closing costs--it was 30 percent of the younger-aged cohort, 15 percent of the older-aged cohorts. In other words, these people would have literally nothing to put down as a down payment for a home in retirement. Now, just very quickly, a point on new generational equity that, for whatever reason, I don't think has been fully appreciated. The loss in wealth that we've seen, due to the collapse of the housing bubble, and the stock market collapse, is an intergenerational transfer. What we've seen was a loss in the order of $15 trillion of wealth, which was overwhelmingly held by older people--young people don't have wealth. This is, in effect, a huge loss to the older generations, it's in effect a gain to the younger generations, they will be able to buy homes at 30 to 40 percent below the prices they anticipated just 2 years ago, and they'll be able to buy our nation's capital stock on the stock market for half the price you would have paid just one and a half years ago. When we have discussions of intergenerational equity, and we've just had a transfer of wealth on the order of $15 trillion, from those who are older to those who are younger, it's a little hard for me to see that we're doing some injustice to those who are younger. I hope that Congress will take that into consideration when it thinks about policy for Social Security and Medicare in the future. Thank you. [The prepared statement of Mr. Baker follows:] [GRAPHIC] [TIFF OMITTED] 50872.034 [GRAPHIC] [TIFF OMITTED] 50872.035 [GRAPHIC] [TIFF OMITTED] 50872.036 [GRAPHIC] [TIFF OMITTED] 50872.037 The Chairman. Thank you very much, Mr. Baker. Mr. Salazar. STATEMENT OF IGNACIO SALAZAR, PRESIDENT & CEO, SER-JOBS FOR PROGRESS, WASHINGTON, DC Mr. Salazar. Mr. Chairman, and members of the Senate Special Committee on Aging, I am pleased to have the opportunity to testify before you today. The training, and retraining, of the elder worker is not a political issue, but a people issue, and the employment and training needs of the older workforce must remain a priority for this Congress and this new Administration. For over 44 years, SER-Jobs for Progress, National, and its network of partners, have worked to ensure that workforce development needs throughout our communities are met. Currently SER National, its affiliate network, provides services in the areas of education, employment and training, as well as services focused on economic development, business growth, and job creation. The SER Network remains steadfast in our continued efforts to cultivate America's greatest resource--its people. The SER Network consists of 35 affiliates operating more than 200 offices in 19 States, Puerto Rico, and the District of Columbia, serving over 100 million people annually. Additionally, SER National manages the training and employment needs of over 3,500 mature workers, 55 or older, in the Senior Community Service Employment Program, SCSEP, funded by the United States Department of Labor. In its 5th year of operation, SCSEP is administered by SER sub-grantees in Wisconsin, Florida, California, Colorado, Illinois, Kansas, Rhode Island, and Texas. Today there is a new crisis in the American workforce. This conflict unfolding before us in the 21st workplace is being defined by a series of increasing generational collisions that are affecting American productivity. In similar fashion, whether diversity movements have partially paralyzed the labor force--whether racial, religious, or gender related-- generational conflicts at work are causing dysfunctional results, like reduced profitability, loss of valuable employees, poor customer service, and wasted human potential. The former flow of power, authority and responsibility from older to younger employees has been disrupted because of significant economic downturn, changes in life expectancy, increases in the average individual period of productivity, and demographic trends of the American workforce. In addition, changes in lifestyles, the distribution of highly desirable technological skills, and the possession of a knowledge base necessary for global competitiveness have creating a jarring upheaval to the natural flow of career progression. The pecking order is eroding, and so is the social and physical separation of generations in the workplace. Upward mobility in the job setting is now facilitated by rapid access to information, and the ability to disseminate such information in efficient fashion. The gold standard of a senior, experienced applicant is no longer as valuable as in the past. Experience alone is no longer an indicator or predictor of success. The above factors are leading to an increase in the number of older workers being forced out of careers with no viable retraining mechanism currently in place. The economic downturn has created an overwhelming demand for Federal and State employment and training programs within the one-stop system. Programs offered through the Workforce Investment Act, in partnership with Wagner Peyser Services were never designed to serve the older worker demographic. Traditional WIA services tend to focus on services such as youth programs, young adult training, and dislocated worker training, leaving little or no resources available for the harder-to-serve older worker. In reality, the increasing number of one-stop customers, coupled with the specialized training needs of the older workers, make it apparent that the one-stop system is ill- equipped to meet the employment and training needs of the elder worker. In 2006, the Older Americans Act, Title V Program, or SCSEP, was amended to allow for workforce skills training. This minor change in this legislation has made a world of change in our SCSEP participants. With renewed hope and an enhanced skill set, our older worker participants are finding better employment opportunities, and are returning to the workforce with increasing success. We would suggest that funding be appropriated to providing workforce skills training to the older worker population who are currently ineligible, or just outside the SCSEP program. We feel strongly that short-term training focused on core skill areas of language acquisition, with a limited English speaker, financial literacy, critical 21st Century technology skills, and mature worker career readiness training, can create the pillars for success for the retraining of the elder worker. On behalf of SER-Job for Progress, and the participants we serve, I would like to thank the Committee, and the Chairman for the opportunity to present these recommendations as we move forward in our joint mission of preparing America's workforce for the future. Thank you. [The prepared statement of Mr. Salazar follows:] [GRAPHIC] [TIFF OMITTED] 50872.038 [GRAPHIC] [TIFF OMITTED] 50872.039 The Chairman. Thank you, Mr. Salazar. Ms. Kennelly. STATEMENT OF BARBARA B. KENNELLY, PRESIDENT AND CEO, NATIONAL COMMITTEE TO PRESERVE SOCIAL SECURITY AND MEDICARE, WASHINGTON, DC Ms. Kennelly. I greatly appreciate the opportunity to come before you today and testify, regarding the current economic crisis, and its impact on retirement security, and I thank Senator Martinez for taking this additional duty on. As President of the National Committee to Preserve Social Security and Medicare, I represent over 3 million seniors who understand the importance of Social Security and Medicare, and share a passion to see these critical programs preserved and strengthened. Mr. Chairman, it's particularly appropriate to include Social Security in your hearing on the economic crisis today because the program was borne out of economic circumstances somewhat like we're living in today. Today, Social Security provides modest benefits--the average benefit is only $13,800. But these benefits are crucial. A full two-thirds of the elderly receive more than one-half of their income from Social Security and one in five have no other income but Social Security. If you don't count Social Security today, almost one-half of those over age 65 would have incomes below the poverty line, just about the same poverty rate as before the enactment of Social Security. Many people don't realize that Social Security is also our nation's largest disability program, and our largest children's program. Social Security is a rock in the chaotic financial world we live in today. Unlike what you've just heard about the condition of private retirement savings, Social Security checks keep coming, every month, like clockwork. The Social Security Administration did not miss a step after Hurricane Katrina and Rita, and the first benefit checks went out to the families of those who perished in 9/11 within 2 weeks of that catastrophic situation. Through wars, national disasters, or financial calamity, Social Security checks provide stability and cash to those who have lost everything else. Some economists have been pushing for cuts in Social Security benefits as a way of addressing a long-term budget deficit. I'm here to tell you, this would be an extraordinarily bad idea. Benefits are modest to begin with, and benefits for future retirees are already being reduced as a result of a phase-in of an increase in retirement age. Seniors spend significant portions of their income on healthcare. Even with Medicare, and if current projections hold true, future retirees could see one-half of their Social Security check absorbed by healthcare out-of-pocket cost by 2025. Skyrocketing healthcare costs are the true economic crisis. Future retirees also face a traditional pension system that is significantly eroded, plummeting housing values and individual savings that have evaporated. They will also need to stretch their retirement savings over a longer period of time as they will live longer than the generations before them. Our children will clearly need a dependable, solid Social Security benefit just as much as today's retirees. Mr. Chairman, I would like to conclude by thanking this Committee for its support of including seniors in the American Recovery and Reinvestment Act. The $250 check that was included in the legislation will be much appreciated, and should provide a stimulative effect, as seniors historically spend over 90 percent of their income. The funds included for the Social Security Administration are desperately needed to address the additional disability claims that always accompany bad economic times, especially at a time when the agency is already straining to clear our extensive disability backlog. Funds for programs funded through the Older Americans Act will help meet an ever-increasing need. I thank you very much for looking at Social Security as a basic need; something that people can rely on. For the first time, seniors seem to be in better position than some others, and I thank you, Mr. Chairman, for appreciating that. [The prepared statement of Ms. Kennelly follows:] [GRAPHIC] [TIFF OMITTED] 50872.040 [GRAPHIC] [TIFF OMITTED] 50872.041 [GRAPHIC] [TIFF OMITTED] 50872.042 [GRAPHIC] [TIFF OMITTED] 50872.043 [GRAPHIC] [TIFF OMITTED] 50872.044 The Chairman. Thank you very much, Ms. Kennelly. Ms. Katz. STATEMENT OF DEENA KATZ, CFP, ASSOCIATE PROFESSOR, TEXAS TECH UNIVERSITY, AND CHAIRMAN, EVENSKY & KATZ, CORAL GABLES, FL Ms. Katz. Thank you, Mr. Chairman. Thank you, Ranking Member Martinez and other distinguished member of this Committee for providing me the opportunity to address the critical issue from the perspective of the financial planning professional. I'm a certified financial planner, and a Professor of Personal Financial Planning at Texas Tech University, as well as Chairman of Evensky & Katz, a fee-only firm in Florida, and a member of the Board of Directors of Financial Planning Association. But I am attending this hearing on my own cost as a concerned professional. You've heard many statistics here today, the following are the only ones I will use. There are 77 million baby boomers. According to research, one boomer will turn 59.5 every 7 seconds between now and 2025. We need to put all of these statistics into context, and that's what I'm going to do. Boomers have been big consumers, known for wearing and driving all of our assets, rather than saving or investing them. We've made a massive use of credit, and its over-reliance on credit has threatened our future security. We haven't done a very good job of teaching our children to be fiscally responsible, otherwise why would they wind up back in our spare bedroom, between jobs, with three kids and a dog? Many of us are caring for our aging parents, either physically, financially, or both. This drains our already limited retirement resources. As we've heard, the housing crisis resulted in a serious drop in boomer home values. Additionally, the economic typhoon of the last year has seriously damaged boomer portfolios. Boomers are now moving into their financial de-cumulation phase, which is not just about withdrawing money, it's about timing and strategies, and frankly about how best you can make the peanut butter and the jelly last until the end of the sandwich. But it's also about making lifestyle changes that come with the next phase choices. Boomers have an unrealistic view of their own mortality; many say they don't intend to live to their nineties, but mortality tables suggest otherwise. The good news is that we're living longer, the bad news is we're living longer, and we need to figure out how to pay for it. To address their investment issues, many retirees search for a safe retirement portfolio, 100 percent bonds to generate income or replicate paychecks. This confuses certainty and safety. Payment of bonds is certain, but it' certainly not safe, especially in terms of purchasing power. The fact is, boomers don't need income at retirement, we need an income stream that grows regularly with the inflation rate. The use of target date funds to solve this has an inherent problem, I believe. Target date funds should not be age- specific, but risk specific. Boomers want to stay vital and active. We will work. But it will be a positive action, not a forced reaction to lack of resources, even if that's true. Truthfully, I'm not comfortable with the word retirement-- few boomers are. As a country, we need to keep a positive spin, encourage our boomers to plan for their next phase with the independent advice of a financial planner who will holistically examine their lives, not just their investment issues. As professional advisors, we tell our boomer clients, ``Don't focus on how much you were worth yesterday, begin your planning with a realistic appraisal of your financial position today. Plan your future without simple solutions, and don't adopt rules of thumb. Continue to invest in your 401K, even if your employer is no longer making matching contributions. Utilize any available catch-up provisions that may allow you more money to put away for the future. ``You have no control over investment markets, but you do have a significant control over expenses and taxes. All you can really count on is what you've earned after expenses, after taxes, and net of inflation. Seek competent financial planning assistance. Insist that your advisor acknowledge, in writing, his fiduciary responsibility to you.'' My suggestions for this legislative body include, use the prestige and visibility of the Federal Government to remind the financial services industry of its responsibilities to its clients. Ensure all financial advice offered to investors be based on fiduciary principles, and hold all professionals who provide advice to retirees to that fiduciary standard. When developing plans and solutions for us, remember, we are boomers, and not senior citizens. Encourage the offering of financial education for retirees, but focus on financial planning as a process, and not one that promotes product- centric solutions. Do not restrict our ability to continue to participate in an active way in our economy. Revisit legislation that makes it difficult or impossible for us to continue working into our seventies and eighties. Mr. Chairman, Ranking Member Martinez, I thank you for addressing this topic. As you well know, the financial services industry represents billion of dollars of economic clout. Wall Street can well afford to provide professional, sophisticated representation for its interests before Congress. My professional affiliations are with organizations that identify more closely with the public's interests, and not those of Wall Street. That's why--along with my academic and professional colleagues and the investing public--are pleased that you, the true representatives of public interest, are taking the time to consider these issues related to securing our good retirement in the volatile economic times. I'm confident that your collective wisdom will result in actions that will benefit us all. Once again, I thank you, I will respond to any questions you have. [The prepared statement of Ms. Katz follows:] [GRAPHIC] [TIFF OMITTED] 50872.045 [GRAPHIC] [TIFF OMITTED] 50872.046 [GRAPHIC] [TIFF OMITTED] 50872.047 [GRAPHIC] [TIFF OMITTED] 50872.048 [GRAPHIC] [TIFF OMITTED] 50872.049 [GRAPHIC] [TIFF OMITTED] 50872.050 [GRAPHIC] [TIFF OMITTED] 50872.051 [GRAPHIC] [TIFF OMITTED] 50872.052 [GRAPHIC] [TIFF OMITTED] 50872.053 [GRAPHIC] [TIFF OMITTED] 50872.054 [GRAPHIC] [TIFF OMITTED] 50872.055 The Chairman. Thank you very much, Mrs. Katz. We turn now to Senator Martinez for questions. Senator Martinez. Mr. Chairman, thank you very, very much. I want to thank you for convening this hearing, and I'm pleased that I had a part in it as well, because I think this is a very timely and important topic, and one that I think cuts across Republican, Democrat, Floridian, or Ohioan--this is really an American issue that has hit at the real core, and at the heart of what is happening to our country today. Ms. Cook, I'd just like to begin with you, and first of all to--my heart goes out to you for all of the concerns and problems that you and your family have had. I am most intrigued as to whether or not you have pursued your Social Security Disability appeal, because there's a timeframe for that, and I do think that you may have a very valid case, there, so I want to make sure you don't lose your--I used to be a lawyer, you know? I can't help myself but want to be lawyering here for you. Ms. Cook. Thank you, I appreciate that. Yes, in fact, I am appealing the decision. But I was told that this is rule of thumb, everybody's denied. Senator Martinez. Right. Are you having--do you have some help in doing this? I mean, are you-- Ms. Cook. Yes, I have a--I have a counsel, yes sir. Thank you. Senator Martinez. OK, very good. Beyond that, I hope that all of your different issues sort themselves out, but I think your problems are emblematic of what our generation is going through. So, I think it's very, very opportune that you would be here with us today, and thank you for sharing your personal problems with us, and with the nation. I think it's important that we hear stories like yours, so that we might better deal with the problems of so many others who are here, not speaking directly, but speaking through you. So, thank you. Ms. Cook. Thank you. I really think that I'm here speaking for a lot of the seniors that are out there. Thank you. Senator Martinez. You know, I'm not accustomed to thinking of myself as a senior, I think of myself as a boomer, but anyway, I think that the two may be about to-- Ms. Cook. I think so. Senator Martinez [continuing]. Coincide here, pretty good. Mr. Baker, I want to talk to you about housing, and your thoughts on the housing situation. I thought--I was very intrigued by your analysis that there is a wealth transfer taking place, here, I really hadn't thought of it in those terms, and I'm not sure I fully agree with you, but I think it's an interesting thought that perhaps there is a wealth transfer taking place. What I wanted to ask is, since you were one of those who were forecasting a bubble while many of us were being convinced by so many others that that wouldn't happen, what is your forecast now as to how we might evolve out of the current depression in housing prices, into a more normal market? Mr. Baker. Well, Senator, first let me just say that if I got you to re-think your view of housing, my trip here was very much worthwhile. But, in terms of where we're going, I'm very concerned that, basically was, looking at--with the housing bubble and how I recognized it--was that we'd had a long pattern where house prices had just more or less kept even with the rate of inflation. We had a sharp divergence from that, beginning in the mid-nineties, and it peaked in 2006 with house prices more than 70 percent above the overall trend level. Now, we're about to fall back at the current rate of house price decline, we'll be back at the trend level, probably at about the middle of this year. House prices are now falling extremely rapidly--more than 20 percent at an annual rate, in most recent data. My concern is that we'll overshoot. So, instead of just getting back to where we might think house prices should be-- and not that we know exactly where that is, but roughly where they should be--house prices will continue to fall, which is going to dampen the economy, and further drag on the economy, certainly further drag on the situation of baby boomers as they prepare for retirement, and could cause the downtrend to last much, much longer than would otherwise be the case. My concern--I don't think you want to get extensively in housing policy--my concern is that there's been a failure to focus on trying to shore up prices where you can do it, where the bubble has already deflated, as opposed to, in effect, throwing good money after bad, trying to shore up prices everywhere, including markets where the bubble has not yet fully deflated. Senator Martinez. So, your view is that it should be more targeted assistance? Mr. Baker. Exactly. So, you have many markets where you could say that there either was not a bubble, or whatever was there has since deflated. There, I think, it makes sense to try to do what we can to shore up prices. Other markets where you still have a long way to go, you're just throwing your money away. Senator Martinez. So, a targeted approach? Mr. Baker. Exactly. Senator Martinez. To where to help, as opposed to helping everywhere in the country? Mr. Baker. Exactly. Senator Martinez. That's politically difficult to do. Mr. Baker. I understand. Senator Martinez. Yeah. Mr. Baker. I'm just an economist. Senator Martinez. I understand. [Laughter.] Mr. Salazar, I'm so pleased to see you again, and I'm again very proud of the work that you're doing. I just wanted to ask whether you could share with us, beyond what you told us during your testimony, any strategies that you think could be employed. As we look at what Mr. Baker said, and that wealth transfer taking place, the obvious need, as others have testified, for folks to be dependent, really almost solely on their Social Security, extending the work life may become a total necessity. Have you confronted issues that we, perhaps, ought to be addressing from a legislative standpoint, while allowing folks to continue to work longer, without receiving penalties until their Social Security entitlement, benefits, and things of that nature? Mr. Salazar. That would be an obvious benefit, of course, Senator. The areas that we focused on, in trying to promote changes, have centered around the area of retraining individuals. We have the opportunity to work with individuals who fall at 125 percent of the poverty level. So, for example, the poverty level for an individual--a single individual--is $10,000. Anyone making less than $12,500 is eligible for our program. They come to us with many barriers. Obviously, with age we have some challenges ahead of us, and some of those are lack of finances, obviously, but lack of training, and retraining, to go into an adequate job. Transportation is an issue, supportive services is an issue. We're working with individuals who were trained in a different economy, and this is a different kind of world that we live in today that we need to prepare them for. So those are the kind of things that we're centered around, is providing those kinds of supports, so they can be self- sufficient. I was looking last night at some of the kinds of things that we do with individuals who, in our program, working probably up to 20 hours per week at minimum wage, making the transition, and I was looking at Milwaukee as an example. There, individuals going through our program, where they were provided the opportunity to have supports, to have retraining, to prepare them to do something differently, were drivers. There was an individual, George Taylor, who was with J.C. Triplett Moving, he's a driver today, making $11 an hour. James Jones at Arbor Gardens, in Milwaukee, making $11 an hour. We have Jane Jankowki, Milwaukee Security Detention Facility, who is a Program Assistant there, making $13 an hour, and Adolfo Villaral, who's with Raul's Construction, who is making $12 per hour. These are individuals who were making the minimum wage, before, of $6.55, who have been given the opportunity to go out and get full-time employment so they have additional income. What we provide is up to, usually, between 15 to 20 hours per week, and it's a short-term program. It used to be long- term for individuals, and that was changed. If that's changed, we need to prepare them to be successful, once they're exited the program because of a term limitation, in terms of how long they can be in the program. But, to provide support for individuals to continue their life in a productive way is what we're attempting to do with those kinds of supports. Senator Martinez. Mr. Chairman, my time is up. Thank you. The Chairman. Thank you, Senator Martinez. Senator Gillibrand. Senator Gillibrand. Thank you, Mr. Chairman, for holding this hearing. This could not be more timely. Thank you, all of you, for coming to testify before our Committee. I've spent the last few weeks traveling around New York State. When I've met with my seniors, their concerns are overwhelming. They're very worried about being able to afford their retirement. They are very worried about their savings-- should they have any--that they've declined so rapidly, that they feel enormous economic insecurity, and financial insecurity. I want to talk a little bit about some of the issues that you've brought up on the 401Ks. I understand the issues that you've raised about the target date and the need for regulation. So, I'd like to hear what kind of regulation you think would be most effective. Second, some of the seniors I've spoken to have said that their 401Ks have required draw-downs. I know that's something that we were looking at through the Fed, to adjust that, that they don't have to draw down. Because if their portfolio has been declined by over 30 percent, now is not the time, necessarily, to draw down, when those stock prices are so reduced. Third, I wanted to talk a little bit about commercials that you see on television where you have these organizations that are offering services that say, ``If you have a paid settlement or an annuity, it's your money, get your cash now.'' Those are very appealing ads to many members of my community, because they have such a financial need, currently, and they're willing to cash in those annuities or those paid settlements, but those companies are taking an enormous cut into the value of those annuities. In some respects, they may well be inappropriate, or really taking advantage of our seniors. So I want your thoughts on that. Then the last issue on the financial issues is, we had a hearing in my former district in upstate New York that Congresswoman Carolyn Maloney, who's the subcommittee chairwoman on the Financial Services Committee on the House side, about seniors being taken advantage of through credit card advertisements. I heard the worst stories of seniors who were, you know, encouraged to take out a credit card, and they would buy, you know, a television for maybe $300. Then because they couldn't make the payments regularly enough, or fell behind, those payments, and the requirements--because of the fees--they would be paying over $1,000 in fees, for one $300 purchase. So, I have very grave concerns about that, and we did pass some legislation to begin to address it, but I'd like your thoughts on whether that legislation has taken care of that problem, or if that problem still exists. To whomever wants to take those questions. Mr. Salisbury. I'd start, Senator, on a couple of your points, not all of them. On the issue of commercials and settlement agencies, that is something that has been out there, and to your point, has proven attractive to individuals. I just use an example from the retirement income system more broadly, defined benefit pension plans, those like Federal employees receive that only pay life income annuities', they do not offer single-sum distributions. Over half of private defined benefit plans now offer single-sum distributions as an alternative to annuity income, and when that offer is given, on average, 95 percent choose the single sum distribution, only 5 percent choose the life income annuity. If one looks at the most recent trend in defined benefit plans, it was announced last week that Coca-Cola had followed this, shifting from a so-called ``traditional'' defined benefit plan to a hybrid cash balance plan, that now accounts for about 30 percent of the private defined benefit plans that are covered by the Pension Benefit Guaranty Corporation. Almost all of those plans offer single-sum distributions, and out of those plans, again, more than 95 percent of participants take the single sum; only less than 5 percent take a life-income annuity. Finally, if you look at it vis-a-vis 401K plans, only about 20 percent of defined contribution plans even offer an annuity option, but like the Federal Thrift Plan, where they do have extensive numbers, less than 1 percent of those given the choice of a life-income annuity or a single-sum distribution take the life-income annuity. So, the settlement issue, and why people are driven there, is very symptomatic of designs and behavior in most of the population, regardless of age. So, I think your regulatory issue on that is the need to make sure there is not fraud, and there's proper pricing. But as long as that market is there, what we know from retiree behavior, coming out of the retirement system, if you give people a way to take all of the money right now, as opposed to spreading it over a lifetime, what we know from the hard research, is that will most always do that. It goes back to Social Security, why it is an annuity-only, COLA annuity. During the debates of the past, if individuals out of Social Security were given the ability, the choice, the data says they would take the single sum. Senator Gillibrand. Mr. Chairman, may I just ask one follow-up on that line? If you were going to propose regulation, what would it be, and would you ever recommend there be an alternative--some kind of not-for-profit organization, or some kind of government-led organization, that is in the seniors' interest, and can offer very little overhead fee for that payout? Some competition, as it were, in the market of being able to give those funds in a lump sum? Would you recommend that? I'd like your thoughts. Mr. Salisbury. Well, there is regulation in that area, there is competition in that area. The regulation tends to be somewhat limited. I think that, again, it may need to be increased vis-a-vis fraud in advertising. On the retirement side, I think this is an issue--I first testified before this Committee and the late Senator John Heinz on this topic in 1981, of annuities versus single-sum distributions. That becomes, frankly, you either mandate annuitization if you want people to have life income security or they will not make that choice. Senator Gillibrand. I guess I want you to address the current practice. If these companies are taking 20 percent or 30 percent of the value of that annuity in exchange for the lump-sum cash payment, do you think there should be competition in the system that might only take 2 percent or 3 percent as a fair overhead of the transaction cost? Mr. Salisbury. Ideally, absolutely, yes. Ms. Kennelly. Senator? Senator? The Chairman. Ms. Kennelly. Ms. Kennelly. I can remember when I first went to Congress, employees had defined benefit pension plans. Then came the 401K plans, and I remember being on Ways and Means, and addressing the issues raised by those changes. When you talk about annuities, they're not necessarily wise choices for everyone. The reason I'm sitting here today is we have one solid rock, and that's Social Security. The beauty of Social Security is you can't out-live it, and it's adjusted for inflation. So, we should have all of these private products, no doubt about it, if you want as a supplement. But the main thing is to keep the rock, Social Security. The Chairman. Ms. Katz. Ms. Katz. All of the things that you've asked about have really one common thread, and that is that our seniors at-- frankly, the American public--are not really well-educated about their financial lives. So when they get desperate, they make the wrong choices. Leaving an annuity or an income stream for a lump sum is appealing because they have some control over it, but they don't know what to do with it. So, when we talk about legislation, I think we need to talk about the inherent issue, is most people are not educated to their own financial life. They do not know how to handle a lump sum. We've made proposals to even make changes to Social Security, which is a serious issue, of letting people handle their own situation. So, we're just creating more and more opportunity for them to make bigger mistakes. We need to tighten up all of those things with legislation, so that they cannot make these mistakes, and we need to educate them, starting at a much earlier age then when they start retirement years. Senator Gillibrand. Many folks believe you should start educating children in the earliest years, so that they understand what financial health is, at a very young age. Ms. Katz. Absolutely. Mr. Baker. Just very quickly, I think the situation you're describing--because there's both the issue about people getting--replacing annuity with a lump sum, but also, I think the question you specifically asked about the fees involved. I think there of a situation that's very analogous to what we just saw with the mortgage chaos the last few years, is that it's very easy for a sophisticated person to come in there, and take advantage of someone who's not engaged in these transactions on a daily basis, and I think there, there really is a role for the government to regulate this, to make it very difficult--we're not going to make it illegal for someone to take their annuity and take a lump sum, but I think it's important to say that we have standardized contracts, and make it very difficult for someone to go outside that, so it's an unfriendly legal environment for those who might try and take advantage of people that way. One other point, just very quickly, the issue of draw-downs from retirement funds I think has been misrepresented. I was testifying yesterday and the gentleman from the Investment Institute agreed with me on this, that there are very few people who reach age 70 and have their whole fund invested in equities. So, the idea that someone's going to have to sell their stock and lock in a really big loss, that's almost inconceivable. I mean, there may be a few people in that situation, but almost everyone's going to have enough money in their account at that age, in a money fund or a bond fund that they could make their withdrawal from that. Now there's a separate issue, do you want to force withdrawals? That's a separate issue that Congress should reasonably consider. But the idea that you're forcing someone to lock in a loss, that really isn't a plausible scenario. Senator Gillibrand. What's your opinion with regard to the last point you just made? About forcing people to draw down or not? Mr. Baker. Well, there is an issue, you may change the timing on that, given increased life expectancies. I mean, I wouldn't consider that a top priority, but obviously as we go through the years, and we project, and certainly, hopefully will see increasing life expectancy, we may want to change the timing on that, that' a reasonable thing, certainly, for Congress to consider. The Chairman. Thank you very much. Ms. Kennelly, listening to you talk about Social Security this morning, I am led to wonder whether or not you were a strong supporter of President Bush's thoughts about privatizing Social Security? No? Ms. Kennelly. Senator, you know I wasn't. [Laughter.] The Chairman. But, you talk about it, in terms of how important it is, and maybe all of you, how important Social Security and Medicare is. You know, President Obama is talking about the need to reform the entitlements, and I--while he hasn't been specific, he hasn't talked about expanding the benefit, he's talking about the hard choices that we have to look forward to. What are some of your thoughts on that? Ms. Kennelly. Well, Senator, I--look, I've been around a long time, and I know that we have a long-term problem with Social Security. I was on the Ways and Means Committee in 1983 when we reformed it the last time. We took some very hard votes. You know, I voted to increase the payroll tax, increase the retirement age. I wonder how I got reelected. But the fact of the matter is Social Security still is the basic retirement system for the United States of America. What I really have great worries about, is this idea of a fast-track Commission to look at entitlements. Now, last night the President made it very clear that the real crisis we have in this country is healthcare. But is there a long-term gap in Social Security? Yes. We have a shortfall. But I would hate to see a Commission produce legislation that is on fast track with no amendments, permitted. I think the Committees--Ways and Means, Finance--they've got the expertise to do a reform bill through regular order. You could have the debates, and the public could understand what we have to do. Do we have to make sacrifices? Of course we do. But, there isn't a lot of room to cut Social Security. When you think about it, Senator, two-thirds of those people who collect Social Security--that's half their income, half their income. For twenty percent--20 percent--Social Security is all they've got. I saw a statistic recently, African-Americans--40 percent of those collecting Social Security--that's all they've got. But I think we have to understand, the very reasons that Franklin Deleanor Roosevelt created Social Security are still there. When you get old, the paycheck stops. That's it. Jeanine was talking about helping her children--life can get tough. But if you have Social Security, at least you have something. Any nation worth its salt has a Social Security program that's much more robust than the one we have. So I would urge the President to be very careful. He's got to do healthcare reform, it's going to be the toughest thing elected officials are going to have to deal with. But, you know, be careful with Social Security, because it's the basis of our retirement system. The Chairman. How so is the Medicare benefit any less important to seniors than a Social Security benefit? Aren't they on a par, almost? Ms. Kennelly. Well, of course they are. But the point is that-- The Chairman. No, I'm bringing this up by way of asking your opinion on that entitlement program, in terms of its cost, and the President's discussion about having to reform that program, as well as Social Security. Ms. Kennelly. No, you've heard how passionate I am about Social Security, because I feel it's a necessity. Medicare is in crisis, there's no doubt about it, just like the whole healthcare system is in crisis. What I'm scared to death, about Senator, is that we're going to try to look just at Medicare, not at the whole healthcare system. Right now, the only ones that have a universal healthcare system are those 65 and older. We've got to keep that in place. I came from Hartford, CT. I can remember when those insurance companies didn't want to touch people over 65. But once you put them in a pool, and spread the risk, it was OK. So, I'm delighted to hear the President and his people want to look at healthcare, because they've got to look at it together--Medicare, and the whole healthcare system. Because I will tell you something, Senator--if they can fix healthcare, then half the cost of Medicare will disappear. We'll be OK because what's left of the long-term funding problems will be easier to fix. The Chairman. Any comments from the rest of the panel on Medicare and Social Security? Mr. Baker. Mr. Baker. Yeah, just very quickly--I would say in the case of Medicare--and I was very happy to see that President Obama, I think, has said exactly this, that the problem with Medicare is the problem with healthcare. That our healthcare costs on a per-person basis are about twice those for other nations-- Canada, Germany, whoever you throw in there--and they're projected to keep growing, relative to the rest of the world. This is a problem for the economy as a whole. One of the reasons General Motors is coming to us--coming to the government for help is its healthcare costs. They did a back of the envelope calculation, if we had the same per-person healthcare costs as Canada--everything else exactly the same, but just paid the same per-person healthcare costs--General Motors, over the last 10 years, would have $22 billion more than it does today. Healthcare is going to devastate our economy, even if we got rid of Medicare and Social Security. So, the priority has to be to fix healthcare. If we fix healthcare--not to say Medicare won't be an issue--but it will be a much more minor issue, it will be a workable issue. If we don't fix healthcare, there's nothing we can do to fix Medicare. The Chairman. Mr. Salisbury. Mr. Salisbury. Senator, I'd add a point on that, which is that with the dramatic decline in what private employers have provided as supplemental medical coverage for individual populations, Medicare becomes even more important with the accounting standards that have just gone into place for State and local governments for retiree medical benefits. For the very first time they're having to deal with the long-term costs of the commitments that they have made. We expect that you will begin to see State and local governments back away from the retiree medical promises that they've made in the past, for at least new hires and those not yet retired, even if they honor those promises for current public sector retirees. As you know, in the last budget that President Bush submitted to this Congress he had proposed for even Federal workers that the eligibility for retiree medical upon Federal retirement be based on tenures of work immediately before retiring, as opposed to the current provision of 5 years. Were that to be done in the context of this, that would affect the Federal workforce. So, essentially what we're seeing through the voluntary system is a cutting back in a way that essentially, with each and every year, is making Medicare even more important to a larger proportion of the seniors in our population. If you then take a point that the Congresswoman made, which is so compelling to me, that the Part B and Part D expenses of Medicare, which currently absorb about 19 percent of the average Social Security beneficiary's Social Security income, one currently projected to go to 50 percent of the average Social Security income by 2025. That frankly is using a health inflation assumption that is about 40 percent less than what is actually occurring in the economy. So, our estimate is that if health costs are not somehow brought under control by 2025, the proportion is likely to be closer to 70 percent, as opposed to 20 percent. As someone whose mother at 93 is now dependent for all of her income on Social Security and the size of the payment she is making for health insurance. The concept of the Medicare payment proportion of her Social Security income continuing to climb is concerning. There will be inter-family transfers to make sure Mom's fine, but for the overall population, to reemphasize Deena's point, figuring out a way to bend the cost curve on future medical expense is absolutely essential to the long-term security of Social Security, and for Social Security income to be enough for anyone--even at the very high replacement levels--meaning lower income individuals. If you don't solve the health cost problem, then Social Security will have more and more retirees facing poverty-level income in retirement. The Chairman. How important is it to do everything we can, legislatively, and offering inducements to employers, as well as individual retirees to continue in the workforce after age 65? Mr. Salisbury. I personally think that it is essential--one of the points that was made by Deena is that in our surveys, individuals--she hadn't mentioned our surveys, but I will--what we know is that individuals dramatically underestimate how long they will live today. My mom and dad were born in the teens, meaning 1913, and 1916. My father lived to one month short of age 94, and my mother is 93 and doing quite well from a health perspective. That means I should expect to live to 105 to 108. Most individuals today believe that even if they retire in their early sixties, they will only be alive for 20 years. Which means everybody assumes they won't make it to average life expectancy. Why don't they take a life income annuity? Because they think a cash sum distribution is a better deal, because I'm going to die young. You then add all of this together, working an extra 2 or 3 or 4 years, and with the current economy, my wife has told me to plan on at least 5 to 6. I'm turning 60, so I've said, ``OK, I'll go to 66, and that's full Social Security eligibility.'' But, I think for everybody, if one has the ability to keep working, physically, the easiest way to deal with what would otherwise be an adequate retirement income is to work an extra few years, either full-time or part-time, and the easiest way to make sure one can deal with health insurance provision and avoid catastrophic health problems is to keep working until at least age 65, when Medicare becomes available. Mr. Baker. If I can just very quickly throw in a point on that, that again, this points out the urgency of healthcare, that obviously if employers are providing healthcare insurance, it makes them very reluctant to take on an older employee, because they know that's a very large bill. So, again, if Congress could pass legislation that will bring healthcare costs more down to reasonable levels, then the prospect of hiring an older employee will be less burdensome to employers. The Chairman. Ms. Katz. Ms. Kennelly. Mr. Chairman, as you know, you and I--we are the models of working longer, and older. But, you have to remember something. I said in my testimony that the average payment for Social Security is $13,800--it's very moderate. What we always have to remember, and you have to remember as you address this question, is that if, in fact, you raise the retirement age for Social Security, you are effectively cutting benefits--especially in an economy where jobs are scarce. The Chairman. Ms. Katz. Ms. Katz. I think we need to explore, also, partial retirement benefits, so that people can work on a part-time basis, or even full-time, and still have access to some of their benefits. Boomers, as I pointed out before, want to stay vital and active in the workforce. The fact is, if we all quit, we wouldn't have enough people to replace us, anyway. So, we need to take a very positive view on working, we need to take a look at those arbitrary restrictions on mandatory retirement. I mean, 65 was an arbitrary number to begin with. So, we need to take a good long look at this. Coupled with giving employers some benefits for supporting that healthcare, will also help prop up a lot of the problems that we're having. The Chairman. You want to say something, Mel? Senator Martinez. I was going to ask--yes, thank you. Ms. Katz, I was going to ask whether--in your financial planning--you take a different approach with, you know, the baby boom generation, I guess, spans from those of us at the beginning of it, at 46 to mid-sixties, I guess, right? Are there different challenges in trying to prepare for retirement, obviously, depending on the age of the people within that timeframe? Ms. Katz. Well, there are, simply because their resources are being strained from so many different levels. So, one of the things we do is to encourage people to work longer. But, there are not--there's not a lot of flexibility in making those plans, and I think that's where legislation can help. Most boomers that I see are making a life transition. They are willing to accept working in a less lucrative business, to be able to have more personal satisfaction, that's the nature of boomers moving into the next phase of their life, that's why we don't relate to the word retirement. So, as a result, we're going to see people working in a lot of other areas that they haven't been working in before, for less money, changing their lifestyle, downsizing, which is why we call it ``decumulation,'' it's not distribution, it's ``decumulating'' in a whole lifestyle. So, we're talking more about lifestyle choices, and fitting those into needs and circumstances with boomers than we ever did with the past generation. Senator Martinez. Thank you. The Chairman. Go ahead, Mr. Salazar. Mr. Salazar. In our experience in providing financial education to the SCSEP population that we work with, we found that it makes a huge difference in their lives. I mean, we encounter so many individuals that are un-banked--that don't have any kind of a relationship with a financial institution, and then become very vulnerable to predators out there. There's just a huge market that we encounter that have never opened up an account, anywhere. The kinds of things that they learned and the situations that they relate to you, is shocking at times. But it makes a huge difference in preparing them, to once they're making an income, to be able to keep that income and pay for the--for the things that they have that are necessities in their life, as opposed to giving it away to somebody who's just trying to take advantage of them. The Chairman. Yes. As you point out, Ms. Katz, there is a real need for older people to stay in the workforce. It's not that we have to find a way to keep them there even though we don't need them there-- the opposite is true. That employers need their experience, and their wisdom, and their willingness to work in a more flexible, part-time arrangement to run their business. All of the predictions about the future indicate that this is going to be true, isn't it? Ms. Katz. Absolutely. I mean, we don't have enough people in the workforce under retirement age to replace us. So, I think that's going to be a very big issue. Having legislation dealing with older workers' rights, and opportunities will be very vital in the future. We can't go away, and second, we don't want to go away. We want to stay active. The Chairman. Yes. Ms. Katz. That's part of why we need to encourage a whole shift in what we have been looking for in the past. The Chairman. There's a big mental satisfaction in keeping people in the workforce beyond 65, to them, isn't there? Ms. Katz. Well, you know what? As planners, we had started out saying, ``You can't retire. You're going to have to work longer.'' Boomers would say back to us, ``We don't want to retire. We want to stay in this. We want to contribute, we have a knowledge base that can't be replaced.'' So you is us. But give us that opportunity to be used. So, what they're doing is putting a positive spin on something they have to do anyway, and that's work longer because we need the resources. But now, we're working longer because we really want to stay in the economic community. We want to participate. The Chairman. Very good. Mr. Salisbury. Senator, and even for those that may not be so thoroughly motivated, this is America Saves Week, and we released yesterday a survey that we had done with the Consumer Federation of America, tied to America Saves Week. One of the things that that new survey data showed, which was just collected 2 weeks ago, is that the proportion of individuals who--as a result of the current economic situation--say that they now intend to work significantly longer, has gone up significantly. If one's looking for some potential silver linings out of the current situation that we're facing, is it does appear to be serving as somewhat of a sledgehammer against many people's realities as to really thinking through what their savings levels are, how much they need in the future, and whether they can actually afford to retire. I think that the good news of that is that as our data has always suggested, a large proportion of those that retire have done it, literally, without having made any calculation of what their income or expenses would be. They hit eligibility, somebody said, ``Oh, you're eligible to retire. Oh, that means I must be able to do it.'' They have done it. The current situation is causing people, from the survey data and behavioral data, to at least stop, think, plan, far more thoroughly. So, I think that is in and of itself going to lead to later retirement ages, and to far more thorough planning by individuals, relative to their exit from the workforce. Since Mr. Bernanke said yesterday that we're likely to be in a recession through the balance of 2009, the data suggest that that extended period is going to cause tens of millions of older Americans to very thoroughly reevaluate what their plans were, and boomers--if you will, Senator--and that that is likely to change patterns dramatically from what some might have thought as recently as a year or two ago. The Chairman. Ms. Katz. Ms. Katz. The big problem is, we give people the opportunity to retire, but we don't give them the tools to make the decision intelligently. I'm surprised that, in the Stimulus Package, we didn't include some kind of financial planning support for people, because it's really what we're talking about here, at every age. They do not have the tools to make good decisions about their retirement, so the forced working is a result of not planning very well earlier, as well as a lot of economic downturn that we've suffered in the last couple of years. So, legislatively, I would like to see us provide more financial literacy programs, more education, more tools to retirees, more encouragement to seek intelligent, non-biased, fee advice to be able to make those decisions. More people make--spend more time on what kind of refrigerator to buy--then what they're going to do with their retirement. The Chairman. Well, that's great. This has been a wonderful panel, I guess I'm moved to say that hearings like this where the Senators learn an awful lot by listening to the panelists don't occur every day, but it's occurred today. You brought a lot of information and wisdom to the table, and I think a lot of it's going to be translated in action in the months to come. So, I thank you so much for being here and we thank you all for being here. We are adjourned. 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