[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]




 
    THE 2011 ANNUAL REPORT OF THE SOCIAL SECURITY BOARD OF TRUSTEES

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


                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 3, 2011

                               __________

                           Serial No. 112-SS4

                               __________

         Printed for the use of the Committee on Ways and Means




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                    SUBCOMMITTEE ON SOCIAL SECURITY

                      SAM JOHNSON, Texas, Chairman

KEVIN BRADY, Texas                   XAVIER BECERRA, California
PAT TIBERI, Ohio                     LLOYD DOGGETT, Texas
AARON SCHOCK, Illinois               SHELLEY BERKLEY, Nevada
ERIK PAULSEN, Minnesota              FORTNEY PETE STARK, California
RICK BERG, North Dakota
ADRIAN SMITH, Nebraska


                            C O N T E N T S

                               __________
                                                                   Page

Advisory of June 3, 2011 announcing the hearing..................     2

                               WITNESSES

Charles P. Blahous III, Ph.D.,Trustee, Social Security and 
  Medicare Boards of Trustees, Testimony.........................     9
Robert D. Reischauer, Ph.D.,Trustee, Social Security and Medicare 
  Boards of Trustees, Testimony..................................    16


    THE 2011 ANNUAL REPORT OF THE SOCIAL SECURITY BOARD OF TRUSTEES

                              ----------                              


                          FRIDAY, JUNE 3, 2011

            U. S. House of Representatives,
                   Subcommittee on Social Security,
                               Committee on Ways and Means,
                                                   Washington, D.C.
    The subcommittee met, pursuant to call, at 9:07 a.m., in 
Room B-318, Rayburn House Office Building, the Honorable Sam 
Johnson [chairman of the subcommittee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY FROM THE COMMITTEE ON WAYS AND MEANS

                       Chairman Johnson Announces

   Hearing on the 2011 Annual Report of the Social Security Board of 
                                Trustees

Friday, May 27, 2011

    U.S. Congressman Sam Johnson (R-TX), Chairman of the House 
Committee on Ways and Means Subcommittee on Social Security announced 
today that the Subcommittee will hold an oversight hearing on the 
findings in the 2011 Annual Report of the Social Security Board of 
Trustees. The hearing will take place on Friday, June 3, 2011 in B-318 
Rayburn House Office Building, beginning at 9:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    The Board of Trustees of the Federal Old-Age and Survivors 
Insurance (OASI) and the Federal Disability Insurance (DI) Trust Funds 
was established under the Social Security Act to oversee the financial 
operations of the OASDI Trust Funds.
      
    The Board is comprised of six members, four of whom serve by virtue 
of their positions in the Federal Government (the Secretary of the 
Treasury (who also serves as Managing Trustee), the Secretary of Labor, 
the Secretary of Health and Human Services, and the Commissioner of 
Social Security) and two members of the public who are appointed by the 
President and confirmed by the Senate.
      
    The Social Security Act requires that the Board, among other 
duties, report annually to the Congress on the financial status of the 
OASI and DI Trust Funds. The overview section of the 2011 report 
concluded, ``Under the long-range intermediate assumptions, annual cost 
for the OASDI program is projected to exceed non-interest income in 
2011 and remain higher through the remainder of the long-range period. 
The combined OASI and DI Trust Funds are expected to increase through 
2022, and then to decline and become exhausted and unable to pay 
scheduled benefits in full on a timely basis in 2036. However, the DI 
Trust Fund is projected to become exhausted in 2018, so legislative 
action will be needed as soon as possible.''
      
    The report also projected that the reserves held in the trust funds 
would reach nearly $2.7 trillion by the end of 2011. The U.S. Treasury 
bonds held by the trust funds, which are backed by the full faith and 
credit of the U.S. government, will be used to supplement current 
income through 2036. However, since no funds have been set aside to 
redeem these bonds, doing so will require the Federal Government to 
raise taxes, cut spending, or borrow more. Thereafter, in the absence 
of intervening Congressional action or changes in projections, the 
Trustees project that incoming revenues would be sufficient to pay only 
three-quarters of scheduled benefits.
      
    The Trustees concluded, ``Social Security will play a critical role 
in the lives of 56 million beneficiaries and 158 million covered 
workers and their families in 2011. With informed discussion, creative 
thinking, and timely legislative action, Social Security can continue 
to protect future generations.''
      
    In announcing the hearing, Chairman Sam Johnson (R-TX) stated, 
``This year's annual report again sounds the alarm that Social Security 
will be unable to keep its promises to the hard-working Americans who 
pay into the system. Americans want, need and deserve a Social Security 
program they can count on and a fact-based conservation about how to 
get there. This hearing will begin that conversation.
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the findings in the recently released 
2011 Annual Report of the Board of Trustees of the OASDI Trust Funds, 
the effect of the trust fund's current cash flow deficit status and 
future exhaustion, and the cost of delaying actions to address Social 
Security's fiscal challenges for workers and beneficiaries.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
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From the Committee homepage, http://waysandmeans.house.gov, select 
``Hearings.'' Select the hearing for which you would like to submit, 
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for the record.'' Once you have followed the online instructions, 
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Finally, please note that due to the change in House mail policy, the 
U.S. Capitol Police will refuse sealed-package deliveries to all House 
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problems, please call (202) 225-1721 or (202) 225-3625.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
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    1. All submissions and supplementary materials must be provided in 
Word or WordPerfect format and MUST NOT exceed a total of 10 pages, 
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Committee relies on electronic submissions for printing the official 
hearing record.
      
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be accepted for printing. Instead, exhibit material should be 
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or organizations on whose behalf the witness appears. A supplemental 
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address, telephone, and fax numbers of each witness.
      
    The Committee seeks to make its facilities accessible to persons 
with disabilities. If you are in need of special accommodations, please 
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four 
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materials in alternative formats) may be directed to the Committee as 
noted above.
      
    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://www.waysandmeans.house.gov/.

                                 

    Chairman JOHNSON. The committee will come to order.
    I want to thank our witnesses for being here today. And 
just know that we appreciate what you all do.
    You know, for over 75 years, Social Security has relied on 
the strong work ethic of American workers paying part of their 
hard-earned wages for promise of future benefits should they 
retire, become disabled, or die. You are going to get money 
when you die.
    Seniors, those with disabilities, widows, and their 
families count on these benefits to be there for them. Yet, 
according to the recently released annual report of the Social 
Security Board of Trustees--and, Doctor, I think you have 
spoken on this already--unless we act, Social Security won't be 
able to keep its promises.
    For example, Social Security's disability insurance program 
will be unable to pay full benefits in 2018. Let's face it, the 
program is almost broke right now. In addition, by 2036, tax 
income will cover only 77 percent of benefits. The average 
monthly benefit for a retired worker today is only about 
$1,175, a potential cut of about $270. And that is real money, 
especially for those that are on a fixed income.
    According to the trustees, Social Security is already 
running permanent cash flow deficits. As a result, Social 
Security must rely on general revenue to pay back, with 
interest, Social Security surpluses--with interest--do you hear 
that? We have been lying to ourselves for a long time.
    Over the next 10 years, Social Security's cash shortfall 
will reach $416 billion. And to pay its debt to Social Security 
in these times of record deficits and debt, the Treasury is 
going to need to borrow more. And we are at our debt limit, 
aren't we? We do so at our own economic peril.
    Today, the U.S. borrows 40 cents for every dollar it 
spends, a good amount of which comes from the Chinese, and 
sends the bill to our children and grandchildren. The bottom 
line is that China and other foreign governments are also 
financing our Social Security program.
    Families are right to be worried about the country's 
economic future. We face great challenges. But I believe in the 
greatness of this country we call America. We need to make sure 
this program is safe, secure, and sustainable. And let's be 
clear: Current and near retirees deserve the peace of mind of 
knowing they will get their promised retirement benefits. We 
are paying into it; we need to give them back what they have 
done.
    At the same time, though, we have a responsibility to 
ensure that Social Security will be there for younger workers. 
At the end of the day, Americans want, need, and deserve a 
Social Security program they can count on and a fact-based 
conversation about how to get there.
    I look forward to beginning that conversation today, and 
thank our two witnesses for the testimony we are about to hear.
    With that, I will recognize my famous ``companero,'' Mr. 
Becerra, the ranking Democrat.
    Mr. BECERRA. Mr. Chairman, thank you very much for holding 
this hearing.
    Let me begin first, Mr. Chairman, by disagreeing with you. 
Social Security is not broke. The trustees report for 2011 
shows that Social Security is once again the reliable workhorse 
in our economy. Social Security has weathered 13 recessions in 
the last 75 years, and never once--let me repeat--never once 
failed to pay, on time and in full, every retiree, widow, 
child, or disabled worker the benefits they have earned.
    Even through the Bush recession, the worst economic 
upheaval since the Great Depression where 8 million Americans 
lost their jobs and 6.7 million Americans lost their homes, the 
Social Security surplus continued to grow.
    The Bush recession has hit American families hard. From 
June 2007 to the beginning of 2009, it stripped Americans of a 
total of $19.4 trillion in household wealth. To put that in 
perspective, the Bush recession, by itself, took from Americans 
enough wealth to wash away the Nation's entire debt and still 
leave America with a $5 trillion-plus surplus. The average 
family saw its wealth--the value of its home, retirement, and 
other savings and investments--drop by $40,000, more than 25 
percent of their total net worth. In contrast--oh, by the way, 
families who own stock, they saw their portfolio of stock drop 
by more than a third.
    In contrast, Social Security remains strong, and the 
surplus is real. Social Security and seniors didn't cause the 
current deficit. Indeed, Social Security has never--I repeat, 
never--added a single cent to the Nation's debt.
    The trust fund's income from tax revenues and interest on 
the U.S. Treasury bonds that it owns is more than what is being 
paid today in benefits. So Social Security will run a surplus 
of $69 billion in 2011. At the end of 2011, the Social Security 
Trust Fund will hold $2.7 trillion in U.S. Treasury bonds. And 
the trustees project that the balance will continue to grow 
until 2022, when it reaches $3.7 trillion.
    In addition to payroll contributions, the trust fund earns 
interest on the Treasury bonds--the interest is real--on 
Treasury bonds purchased with workers' contributions. Over its 
lifetime, Social Security has so far collected $15.5 trillion 
and paid out a total of $12.8 trillion in benefits and 
administrative costs. Do the math. Americans have built up a 
$2.5 trillion surplus in their trust fund.
    The Treasury bonds held by the trust fund are real, and, 
just like all other bonds held by Treasury that have been 
issued over the last several years, they have real value. 
American workers know that their Social Security contributions 
are real. They see the amount deducted from their paychecks 
every week.
    In the long term, in about a quarter century, Social 
Security does face a shortfall. But this is a manageable 
challenge. The trustees report looks at Social Security 
solvency 75 years into the future. This gives Congress the 
ability to carefully consider how best to improve and 
strengthen Social Security for future generations.
    The cost of Social Security's shortfall, which begins 
around 2036, would be reduced, for example, by allowing the 
Bush tax cuts for the wealthiest 2 percent of Americans to 
expire. And we know how important Social Security has been to 
so many of our seniors who, today, do not live in poverty.
    Mr. Chairman, I appreciate that we are holding this hearing 
on Social Security's long-term outlook. However, as you know, 
the Social Security Administration has a more immediate need, 
which is to ensure that it can get beneficiaries their Social 
Security benefits today.
    I know that you and I both believe that it is essential 
that the Social Security Administration provide today's seniors 
with the benefits they have earned. Therefore, I would request 
that we also hold a hearing on the Social Security 
Administration's operating budget so that we can ensure that it 
can continue to provide essential services to today's 
beneficiaries, such as processing benefit claims on time and 
accurately, processing disability applications and appeals 
without lengthy waiting times, and answering calls and 
addressing problems for current and future beneficiaries.
    We have worked in a bipartisan way in the past to make 
Social Security and the Social Security Administration do its 
job and do it right. Most recently, we did that when we 
provided $500 million in the American Recovery and Reinvestment 
Act to reduce the disability backlog. Let's not undo that type 
of success. Let's continue to work together in a bipartisan 
fashion to strengthen Social Security in the long run.
    I yield back.
    Chairman JOHNSON. When we get the premise straight, we can 
work together. The system is broke, and you know it. They are 
borrowing money. Sure, we got pieces of paper over there, but 
that is not real money.
    Mr. BECERRA. Mr. Chairman, you tell that to any American 
who deposits money in a bank, and if the bank tells them, 
``That is not real money''----
    Chairman JOHNSON. I think our witnesses will confirm that.
    Mr. BECERRA [continuing]. They will tell you what they 
think about the banking system.
    Chairman JOHNSON. We have two witnesses today, both of them 
well-versed in the Social Security program.
    And I welcome you both here.
    Mr. Blahous, would you like to begin your testimony at this 
time, please?

  STATEMENT OF CHARLES P. BLAHOUS III, PH.D., TRUSTEE, SOCIAL 
            SECURITY AND MEDICARE BOARD OF TRUSTEES

    Mr. BLAHOUS. Thank you, Mr. Chairman, Mr. Ranking Member, 
all of the members of this subcommittee. It is a great honor to 
appear before you today to discuss the findings of the latest 
Social Security trustees report.
    My written testimony contains some basic background 
information about program benefits, taxes, trust fund 
operations. Because our speaking time is limited, what I would 
like to do is skip over most of that and just make three main 
points in my oral remarks.
    The first point is simply this, that Social Security 
expenditures are rising and that this carries important 
implications both for the program's own financing outlook as 
well as for the general Federal budget.
    Last year, in 2010, we reached the point, for the first 
time since the 1983 reforms, that program expenditures exceeded 
incoming program tax revenue. That deficit last year was $49 
billion. This year, we are expecting a similar cash deficit of 
about $46 billion in 2011.
    Now, what is significant about this, or what is new about 
this, is that this is actually the first trustees report, since 
there have been public trustees, to have concluded that an era 
of permanent annual cash deficits has been reached.
    Now, as noted in the opening remarks, the trust fund 
balance is going to continue to grow in the near term because 
of interest payments from the general fund to the trust fund. 
So we are in something of an unusual period right now where we 
are running a deficit of tax income relative to outgoing 
benefit obligations but the trust fund balance is still rising.
    A couple of important caveats to bear in mind about the 
rising nominal balance of the trust funds: One is that, in 
terms of their ability to finance benefits, the purchasing 
power of the trust funds has actually already begun to decline 
relative to benefit payments. The so-called ``trust fund 
ratio'' peaked in 2008. That basically measures the duration of 
time that the trust funds could finance benefits in the absence 
of payroll tax revenue. And the reason it has begun to decline 
is that the cost of paying benefits is rising faster than the 
nominal balance of the trust funds.
    Second, while the interest payments to the trust funds 
increase the balance of the funds, they don't have a unified 
budget impact. So what is determinative from a unified budget 
standpoint is the balance between the program's tax income and 
its outgoing benefit obligation.
    And, third, as you alluded to, Mr. Chairman, the data that 
I have just described pertains to the combined trust funds, but 
the disability insurance trust fund, individually, is in worse 
shape. We project trust fund exhaustion in 2018.
    The second major point I would like to make is simply that 
costs are growing for a very specific reason, and that is 
population aging. Before the baby boomers started entering the 
retirement rolls and before the recession hit in 2007, the cost 
of paying Social Security benefits amounted to about 11\1/2\ 
percent of the program's payroll tax base, basically 11\1/2\ 
percent of the taxable wages earned by workers.
    Now, it has risen since then, and it is going to continue 
to rise in the future. We are projecting that that will hit 17 
cents on the dollar by the mid-2030s. And this predominantly 
reflects a decline in the ratio of workers to collectors, as 
the baby boomers move out of the workforce and into the retiree 
population.
    The third and final point that I would make, Mr. Chairman, 
is simply that these financial challenges, as the trustees 
report states in multiple places, should be addressed soon if 
we want to minimize adverse impacts on vulnerable populations, 
including people already getting benefits, low-income workers, 
et cetera.
    One of the things the trustee reports do is they provide 
for these illustrative examples of how much benefits or taxes 
would have to be raised in order to keep the program sound from 
a financial standpoint. And these illustrations are useful 
insofar as they go, but obviously you, as legislators, have to 
consider a number of policy considerations and constraints as 
you make policy for the program.
    So we can show you, for example, that in 2036 benefits 
would have to be reduced by 23 percent to fit within projected 
tax revenues. But you might look at that and say, ``Well, I 
don't want to reduce benefits for people already receiving 
them.'' Historically, Congress has wanted any benefit changes 
to be prospective, to affect new retirees, rather than people 
already on the rolls.
    And so, if you asked the question again and said, how much 
would benefits have to be reduced in 2036 if we confine the 
changes to new retiree claimants, the answer is, the system 
wouldn't be in balance even if 100 percent of those benefits 
were cut off.
    So you start working through the problem backwards and ask 
yourself, well, if I want to take into account bipartisan 
policy reality that we don't want to change benefits for people 
now in retirement or on the verge of retirement, our window for 
acceptable action closes much sooner.
    So I would simply summarize by saying that the essential 
message conveyed by the reports is that Social Security faces 
real and substantial challenges, and we will best serve the 
interests of the public if financial corrections are enacted at 
the earliest practicable time.
    Thank you.
    [The prepared statement of Mr. Blahous follows:]

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    Chairman JOHNSON. Thank you, sir. Thank you for your 
testimony.
    Dr. Reischauer, you are recognized.

   STATEMENT OF ROBERT D. REISCHAUER, PH.D., TRUSTEE, SOCIAL 
            SECURITY AND MEDICARE BOARDS OF TRUSTEES

    Mr. REISCHAUER. Chairman Johnson and Ranking Member Becerra 
and Members of the Subcommittee, I appreciate the opportunity 
to discuss the 2011 trustees report with you and with my fellow 
public trustee, Dr. Blahous.
    We divided up the topic, so you wouldn't hear a repetition. 
What I thought I would do would be to cover the financial 
outlook changes from last year's report to this year's report.
    Every year, of course, the financial situation changes, 
sometimes by a little bit, sometimes by a moderate amount, 
sometimes by large and very significant amounts. As an 
indicator of how significant the changes are from year to year, 
the public and the press tend to focus on the dates at which 
the various trust funds are projected to be exhausted.
    By that metric, the changes between the 2010 and 2011 
report are pretty small. The exhaustion date for the OASI trust 
fund is now projected to be 2038, which is 2 years earlier than 
last year's report suggested.
    The projected exhaustion date for the DI trust fund remains 
unchanged, at 2018. The fact that it is unchanged shouldn't 
allow us to sleep any easier because, of course, 2018 isn't too 
far away. That suggests that you will be faced with making some 
adjustments sometime in the next 3 or 4 years to ensure that 
that trust fund pays on a timely basis full amounts.
    A more comprehensive measure of the trust fund's financial 
condition is its actuarial balance over the 75-year valuation 
period. This balance is essentially the difference between 
annual income and costs summarized over 75 years and then 
expressed as a percentage of taxable payroll. An actuarial 
deficit can be interpreted as the percentage points that would 
have to be either added to the current law income rate or 
subtracted from the cost rate for each of the next 75 years to 
bring the system into actuarial balance.
    While the actuarial balance of the DI trust fund has not 
changed from last year, it is still minus 0.3 percent; the 
actuarial balance for the combined OASDI trust fund has 
deteriorated by 0.3 percentage points. So how does this look in 
historical perspective? Is that big, or is it small? With the 
exception of the change that took place between the 2008 and 
2009 trustees reports, you have to go all the way back to the 
1994 trustees report to find a bigger change from one year to 
the next.
    Now, the year-to-year changes in Social Security's 
financial situation can occur for a whole lot of reasons. They 
occur almost inevitably because the valuation period changes 
when we move the whole estimation process forward 1 year. They 
also might occur because legislation is enacted, because the 
underlying economic and demographic assumptions are modified, 
because there are new administrative practices, or because 
projection methodologies and data are improved.
    If we look at what happened over the course of the 1-year 
period that I am contrasting, you find that the 75-year 
valuation period, which involved dropping from the year 2010 
and adding the year 2085, accounted for a sixth of the 
increase, 0.05 percent of the 0.30 percent that I was talking 
about.
    Clearly, there was no legislation enacted during the past 
year that had a significant impact on Social Security's long-
run financial position. However, there were important changes 
in the demographic and economic assumptions that were used in 
this year's report, and they did have a significant impact, as 
I said.
    Lower recent and projected mortality for those age 65 and 
older account for a third of the increase. Now, in one sense, 
that is good news: People are living longer, especially good 
news for people like me who are old. And this is the projection 
from new data for people 65 and over. That accounts for one-
third of the deterioration in the long-run actuarial balance.
    There have also been changes in net immigration that have 
to do with falloff in net immigration that occurred as a result 
of the weakness in the economy.
    The 2011 report also assumes that the economic recovery is 
a bit lower, that real earnings in the base year off of which 
these projections are made are lower, and it takes longer for 
earnings to get back to what would be regarded as a normal 
level, and that we have slightly lower real interest rates on 
trust fund assets.
    Those things, all together, combine to account for about a 
sixth of the year-to-year deterioration.
    Chairman JOHNSON. Doctor, can you wind it down? Your 5 
minutes are up.
    Mr. REISCHAUER. Okay. Well, let me just close with one 
additional comment----
    Chairman JOHNSON. Sure.
    Mr. REISCHAUER [continuing]. Because that was all I was 
really going to say about the changes.
    And that additional comment is, over the last 8 months, Dr. 
Blahous and I have had the opportunity to work closely with the 
chief actuaries and their staffs, as well as the professional 
staffs of the ex-officio members of the Board of Trustees--that 
is, Treasury, HHS, DOL, and SSA. One cannot but be impressed by 
the depth of their expertise, their objectivity, their 
willingness to engage in a free and open debate at all hours of 
the day and night, and their dedication and hard work.
    And this experience has convinced me, and I believe Chuck 
as well, that both the Congress and the public are being very 
well-served by the current support for these reports in 
providing good information to the Congress for its 
deliberations.
    Thank you.
    [The prepared statement of Mr. Reischauer follows:]

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    Chairman JOHNSON. Thank you, sir.
    You know, you mentioned that there are actually two funds, 
the old age and the disability. And it appears to me that the 
disability fund is in worse shape than anything else. Part of 
that is our problem, because we haven't had enough judges 
working and we haven't handled the situation properly. Mr. 
Becerra and I have talked about that, and I think that we need 
to try to fix that.
    Under current law, the trustees are required to warn 
Congress in writing when the program is in real trouble, 
meaning when the trust fund IOU assets can only cover 20 
percent of benefits for a given year. The chief actuary 
provided the unsigned copy of that letter at a recent staff 
briefing, and I will insert that into the record, without 
objection.
    Chairman JOHNSON. Hearing none, okay.
    Dr. Blahous, what does this year's report say about the 
status of the disability trust fund?
    Mr. BLAHOUS. Well, as you know, Mr. Chairman, from a trust 
fund financing standpoint, the disability insurance program 
faces a more severe challenge than the old-age and survivors 
portion of the program, what people think of as the retirement 
program.
    The disability insurance program began to show an excess of 
expenditures over tax income in 2005. It began to have a net 
draw on its trust fund assets by 2009. Its trust fund balance 
is already in decline; its trust fund ratio is in decline. The 
20 percent trust fund ratio warning that you referred to is 
something we would hit, I believe, in 2017. And we are 
projecting trust fund exhaustion in 2018.
    So it is in much more serious condition than the program as 
a whole.
    Chairman JOHNSON. Well, how many times has the disability 
trust fund faced exhaustion in the past, and what have we done 
about it?
    Mr. BLAHOUS. I don't know the exact number of times, but, 
certainly, there have been instances where, in the past, the 
disability insurance fund has come close to that 20 percent 
ratio. It neared there in the late 1970s. It neared there in 
the early 1980s. It neared there in the early 1990s. In the 
early 1990s, there was a reallocation of the tax rates between 
the retirement portion of the program and the disability 
portion of the program.
    Chairman JOHNSON. Yeah, but we are stealing from the Social 
Security retirement and survivors fund to do that, which will 
be broke.
    Do you support reallocating the payroll tax to improve the 
financing of the disability program at the expense of the 
retirement program? That is what we have done in the past.
    Mr. BLAHOUS. Well, I want to be very careful, obviously, 
sitting here as a trustee, not speaking for Dr. Reischauer, not 
speaking for the trustees as a group. But I would----
    Chairman JOHNSON. Your personal opinion.
    Mr. BLAHOUS. My personal opinion is that the tax rates 
certainly warrant review. I mean, we have a 2038 insolvency 
date projection for the retirement portion of the program, 2018 
for disability, which, in my view, powerfully suggests that we 
don't have the tax allocation right. I mean, if you had an 
appropriately proportional allocation between the funds, the 
two funds should be in a comparable state of financial health.
    So I do think it makes sense to review that allocation, 
though, as you say, it doesn't increase or improve the net 
financing position of the program as a whole. It would just 
move resources from one side of the program to the other.
    Chairman JOHNSON. You mean that is delaying disaster, is 
what you are saying?
    Mr. BLAHOUS. Well, you could say that it is putting the two 
programs on a comparable course of concern, rather than one 
being far worse than the other.
    Chairman JOHNSON. Okay.
    Dr. Reischauer, would you like to comment on those issues?
    Mr. REISCHAUER. I would agree with what Chuck said. Both 
programs need to be strengthened. It would be best, in my 
opinion, to address these problems together. And if they were 
on a comparable time pattern, that would probably facilitate--
--
    Chairman JOHNSON. I think that is one thing that Mr. 
Becerra and I do agree on, that we do need to have some reform.
    And do either of you have specific suggestions as to what 
actions we ought to be considering to solve these issues? And 
would you submit your recommendations for the record?
    Mr. BLAHOUS. I am happy to follow up with specific 
suggestions for the record.
    I would just say that the way I tend to conceptually think 
about the disability program, sort of in five pieces. One is, 
do we have the tax allocation right? And I think we probably 
don't.
    Second, remember, on the retirement side of the program, 
there are more levers you can pull. You can pull the 
retirement-age lever, you can pull the benefit-formula lever, 
you can pull the tax lever. You don't have quite as many levers 
on the disability side because the retirement-age lever doesn't 
do anything for you. And so, that suggests you almost have to 
look at things associated with the tax allocation and with the 
benefit formula. And I tend to believe that we do need to 
consider the rate of benefit growth above inflation, especially 
on the high-income end, in both programs.
    I also have a longstanding concern that the way that the 
benefit formula works, where it sort of mixes together its aims 
of keeping track of each individual's wage history and also 
being a progressive redistribution, both of which are worthy 
goals, but, combined in one formula, have the effect of really 
dampening work incentives on both sides. And that is a 
particular problem on the disability side, and I am happy to 
follow up with more details.
    Chairman JOHNSON. Thank you, sir.
    Mr. Becerra, you are recognized.
    Mr. BECERRA. Thank you, Mr. Chairman. Let me see if I can 
dissuade you that the Social Security program is broke. At 
least, I probably can find you a couple hundred million 
Americans who would challenge that statement, because sometime 
this week, when they receive their paycheck and their paycheck 
stub and they look at that paycheck stub, they are going to see 
a deduction from their pay for a tax contribution, a FICA tax 
contribution, that goes to Social Security and to Medicare.
    And, gentlemen, see if you can help me with something. The 
number I have from the inception of Social Security is that 
American workers, through their tax contributions, through 
their paychecks, have contributed $13.9 trillion straight out 
of their pocket into the system, into Social Security. And 
please correct me, shout out or raise your hand, if it is a 
wrong number--$13.9 trillion.
    Looking at SSA's records, I see that, since the trust fund 
was established in the 1930s to collect the tax contributions 
that Americans pay in and because we were collecting more than 
what was needed to pay the benefits for those who retired, we 
had excess contributions by American workers. Those were put 
into this fund, this trust fund. And the money was replaced 
with Treasury bonds, the most secure investment in the world, 
as far as I know. At least, that is why China continues to lend 
us money.
    And, to date, since the inception of the trust fund, those 
Treasury bonds that are exchanged for the contributions that 
taxpayers have paid into the system, those bonds have earned 
$1.6 trillion in interest in the trust fund. That quick math, 
if I can still remember how to do that, is $15.5 trillion.
    SSA says to us that, since the beginning of Social Security 
in the 1930s, we have had to pay out to Americans who have 
retired, who are disabled workers, or who are the survivors of 
an American worker who has perished and therefore can collect 
Social Security, that those Americans have been given, have 
been paid--Social Security has paid out to them a total of 
$12.7 trillion. And in terms of the cost of administering the 
program--and, by the way, the Social Security Administration 
runs a very tight ship here--the total cost for those 70-plus 
years is $0.1 trillion, or $100 billion, for a total cost to 
the system, to Americans, of $12.8 trillion.
    Again, with my quick math, if I subtract the $12.8 trillion 
that we have had to put out in benefits or to pay for costs and 
subtract that from all that has been collected from American 
taxpayers' contributions, I net $2.7 trillion as a balance that 
has not been used.
    Now, Mr. Chairman, you said that the system is broke. I 
defy you to find me another, whether government program or 
private enterprise, that can say it has $2.7 trillion in 
reserve, ready to use for the purpose it was contributed.
    Chairman JOHNSON. The money isn't there.
    Mr. BECERRA. Well, then, if that is a statement, that the 
money isn't there, it is not that American workers didn't 
contribute it with their taxes; it means that politicians have 
been stealing the money and lying----
    Chairman JOHNSON. You are exactly right.
    Mr. BECERRA. Okay.
    Chairman JOHNSON. That is what has happened.
    Mr. BECERRA. Well, then we make the distinction and there I 
think we can clearly define the lines here.
    There are some politicians who say, ``Continue, American 
worker, to pay those contributions in your taxes, have that 
deduction made, but while we tell you it is going to be put 
into a trust fund, we are lying to you, because we are going to 
use it to pay for other things we are not willing to pay for.''
    And so, Mr. Chairman, the only reason Social Security and 
American workers would not have $2.7 trillion that they can 
count on in the future to deal with the long-term challenges is 
because politicians are willing to steal the money that 
American workers have contributed for Social Security.
    Dr. Blahous, you mentioned some things that I want to get 
into.
    Are you fortunate enough to own your home?
    Mr. BLAHOUS. I am.
    Mr. BECERRA. Outright?
    Mr. BLAHOUS. I have a mortgage outstanding.
    Mr. BECERRA. Okay. Own your car?
    Mr. BLAHOUS. Yes.
    Mr. BECERRA. Outright?
    Mr. BLAHOUS. That one I own outright, yes.
    Mr. BECERRA. Do me a favor, can you tell me if, in your 
pocket, you have enough money to pay for your house right now, 
the mortgage?
    Mr. BLAHOUS. I am a little bit short.
    Mr. BECERRA. A little bit short? You are broke. According 
to those who say Social Security can't pay out benefits, you 
are broke.
    Because, see, you, yourself, used the word ``cash 
deficits'' to explain what Social Security is incurring, a 
``cash deficit.'' What you are saying there is that, today, 
Social Security isn't collecting from American workers 
contributions sufficient to pay for the benefits that are 
paying out. You are disregarding the more than $2\1/2\ trillion 
that was built up in the surplus. Because, as the chairman has 
said, politicians have been using the money.
    But just for the same reason, I could today say that you 
are broke. And I guarantee you, if I look at your balance 
sheet, I know you are not broke. Social Security is not broke. 
Social Security, if people want to be cute and talk about cash 
deficits, well, you could say we are broke. But just because 
for the same reason you don't carry hundreds of thousands of 
dollars in your pocket to pay off your mortgage or your car 
loan and you keep it in a bank where you think it will be safe, 
Americans trusted politicians who said that if you put the 
money in the trust fund, it will be there, the tax dollars you 
are contributing will be there, to pay benefits.
    And so, therefore, I think, Mr. Chairman, we can resolve 
this challenge that Social Security will face a quarter century 
from now, but you don't have to steal the money out of the 
Social Security Trust Fund that Americans have contributed to 
take care of Social Security.
    Chairman JOHNSON. Well, you need to work with us to not 
steal any more money.
    Mr. BECERRA. Mr. Chairman----
    Chairman JOHNSON. I would just about guarantee you that Dr. 
Blahous, if he decided to cash in all his reserves, could pay 
for his house.
    Mr. BECERRA. Absolutely. And if the Social Security 
Administration were to cash in all of its reserves out of the 
trust fund, it could pay benefits for quite some time.
    Chairman JOHNSON. Where are they going to get the money 
from? We are borrowing money from other countries.
    Mr. BECERRA. Oh, so you are essentially saying that those 
Treasury bonds that the American public owns through the trust 
fund are not real?
    Chairman JOHNSON. That is right.
    Mr. BECERRA. Okay. And so, do you tell that to China?
    Chairman JOHNSON. Well, is China going to fund it?
    Mr. BECERRA. No, Mr. Chairman, you have said that the 
American people have fake Treasury bonds. So are the Treasury 
bonds----
    Chairman JOHNSON. The Treasury bonds are there, and the 
full faith of the United States Government is behind them.
    Mr. BECERRA. Okay. So they are real.
    Chairman JOHNSON. But the United States Government doesn't 
have any money. We are borrowing it. You ought to go down there 
and look at Treasury borrowing money like it is going out of 
style.
    Mr. BECERRA. I understand what you are saying, Mr. 
Chairman. But what you are saying is that Social Security 
should pay the price for the terrible spending policies of 
others. We did a war in Iraq and Afghanistan, never paid for 
it. So Social Security recipients should pay for that?
    Chairman JOHNSON. Well, the baby boomers have had an effect 
on it.
    Mr. BECERRA. The Bush tax cuts, trillions of dollars of 
Bush tax cuts, never paid for. So Social Security recipients 
should pay for that?
    Chairman JOHNSON. Yeah, your time has expired.
    Mr. BECERRA. But fortunately not the Social Security Trust 
Fund.
    Chairman JOHNSON. Mr. Tiberi, you are recognized.
    Mr. TIBERI. I have a headache, Mr. Chairman.
    Wow. You know, my mom--and Mr. Becerra has heard this--my 
mom and dad are pretty simple people. And they say to me, you 
know, ``I watch a story on Fox News and then I watch MSNBC. I 
see the same story, and there is a different outcome to the 
story.'' Now I know what they mean, watching this. I am 
thoroughly confused.
    And let me kind of recap, and maybe you two can help me, 
without my editorial comment. But I will give some anyway.
    So you say permanent cash deficit. You say $46 million cash 
deficit. You guys say lower mortality rates, falloff on net 
immigration, population aging--all things that are part of the 
trustees report. I have had actuaries say to me that we have 
fewer workers for more retirees that plays into this. I have 
had actuaries say to me that we not only live longer, the 
system has--and I think, Dr. Reischauer, you alluded to this--
you have a system that wasn't designed for people living as 
long as they are living today. So they worked longer, were in 
retirement for a shorter period of time; so now you have people 
in retirement for a longer period of time.
    So Mr. Becerra says, and we heard a little bit more about 
it a little bit ago, Social Security remains strong and the 
surplus is real. Which is different than what the trustees 
report says, which is different than what you say.
    Mr. Becerra says, Mr. Chairman agreed, that the problem is 
because politicians have taken from the trust fund. But then 
you all have said, we paid back the trust fund with interest.
    I get a statement from the Social Security Administration 
that says, a few years after my full retirement, I can expect 
to get 75 percent of what I paid into it. Yet Mr. Becerra says 
the system is strong. And that is less than 25 years from now.
    Now, maybe----
    Mr. BECERRA. Will the gentleman yield?
    Mr. TIBERI. Oh, you had a lot of time. If I had more time--
--
    Mr. BECERRA. But you have mischaracterized what I said, Mr. 
Tiberi. I didn't say that----
    Chairman JOHNSON. Regular order.
    Mr. BECERRA. I just was asking----
    Mr. TIBERI. Go ahead.
    Mr. BECERRA. I said that the system is strong----
    Mr. TIBERI. For 25 years.
    Mr. BECERRA [continuing]. And, for the next 25 years, it 
will pay out full benefits.
    Mr. TIBERI. Right. Well, in my statement from the Social 
Security Administration--I will bring it in and show you--is, 
in less than 25 years, I, if I retire at 67, will get less than 
100 percent of the benefits that I paid. That is not from me; 
that is from them.
    Mr. BECERRA. Well, I would love to see that, if it is less 
than 25 years.
    Mr. TIBERI. Yeah, I will show you. I will show you. And Mr. 
Schock probably has a statement that is much scarier than that.
    So we can blame the Bush-Pelosi-Reid recession for this, 
but the reality is, I think, what you are telling us, the 
reality is actuaries, numbers, right? I mean, this isn't about 
politics. This isn't about blaming Bush, Pelosi, politicians, 
quite frankly. Based upon reading the trustees report, it 
appears to me--and we can't even agree on this--that this is 
actuarial, this is numbers, this is math. This is more people 
retiring, living longer, which Dr. Reischauer said is a good 
thing, and I agree. This is a country that has fewer workers 
for retirees and net immigration loss.
    Can you both expand upon that and help us clear this up? Is 
the trust fund being reimbursed by the general revenue fund 
with interest over the next 20 years, so that stealing of the 
money actually has been paid back? Can you comment on that?
    Mr. BLAHOUS. Sure. And, obviously, this discussion that is 
playing out today is one that you hear everywhere. It is a 
classic example of people looking at different parts of the 
animal.
    Mr. TIBERI. But you are the experts, so tell us.
    Mr. BLAHOUS. Right. Well, basically, there is truth in what 
everybody is saying. From the trust fund standpoint, they are 
real assets--the bonds in the trust fund are real assets of the 
Social Security system. They do earn interest, and it is paid 
from the general fund.
    A lot of the controversy about the trust funds has to do 
less with mechanically what is in there and are they assets for 
Social Security, but whether or not there is actually real 
saving there, whether there are real savings resources behind 
the trust fund, so that when the bonds need to be redeemed, we 
are in a position where we can pay those bonds back.
    I think all the things that have been said about the trust 
funds today are basically correct. I mean, the Social Security 
system has a trust fund balance of about $2.6 trillion. It is 
earning interest. The trust fund balance continues to rise.
    But there is also a lot of things that the trust fund 
balance doesn't tell you. It tells you what assets does the 
Social Security system command that establish its authority to 
pay out benefits. But it doesn't tell you such things as when 
you should take action to fix Social Security. If you were to 
wait until the point of trust fund depletion, you would have 
the harshest, least equitable outcome, relative to acting now 
and creating a more equitable schedule of benefits and taxes 
going forward.
    And it also doesn't tell you whether or not the problem is 
still soluble. I mean, we have a very unusual situation right 
now. In the 1980s, early 1980s, when they had a Social Security 
crisis, they were able to fix it, but one of the reasons they 
were able to fix it was that the trust fund balance had been 
pretty small, historically, up to that point. So, at the point 
when the trust fund was running out, incoming taxes and 
outgoing benefit obligations were still pretty close together. 
That is not the situation we are in now. If we were to try to 
ride the trust fund for the next quarter century and redeem all 
those bonds, we would be at a point, ultimately, where taxes 
and benefits were so far apart that there would be no 
historical political precedent for taking short-term action to 
close that shortfall.
    So we are in a much more difficult situation. Yes, the 
trust fund is real, from the system's perspective. It is an 
obligation from the general government's perspective. But it 
also doesn't tell you how soon you have to act to fix the 
system----
    Chairman JOHNSON. The time of the gentleman has expired.
    Mr. Schock, you are recognized.
    Mr. SCHOCK. Well, thank you both for your testimony.
    I, too, am a bit taken back by some of our friends on the 
other side of the aisle who seem to believe that everything is 
rosy and fine.
    You have mentioned that we can pay out benefits for the 
next 25 years. But, at the same time, after 25 years, what 
happens?
    Either one of you.
    Mr. REISCHAUER. What happens is that the Social Security 
system is not allowed to pay benefits in excess of the 
resources that are flowing in through tax revenues, plus 
whatever its accumulated asset position is. And so that is why 
your statement says that after 2036 there would be a ratable 
reduction in your benefit of roughly 25 percent.
    The discussion that we have been having from the trustees 
report assumes that these assets are real, that the Social 
Security Administration will be able to go to the Treasury and 
say, ``Here are these pieces of paper; we need cash,'' and that 
the Treasury will go and either borrow more money from the 
public or other taxes will be raised or other spending will be 
cut. And that is the----
    Mr. SCHOCK. To make good on those Treasuries.
    Mr. REISCHAUER [continuing]. Assumption. And if those 
aren't real, you would have a statement that would look very 
different. It would be flashing when you opened up your 
envelope.
    Mr. SCHOCK. So let me make sure I understand this. If I 
take Mr. Becerra's rosy view that these are real bonds that the 
government will make good on----
    Mr. BECERRA. That is a rosy view?
    Mr. SCHOCK. Well, I am just saying as opposed to our 
chairman's less rosy view. Okay? All right?
    So let's take the minority's view, all right, that we are 
going to get all the money on this, even in the best-case 
scenario, in 25 years you are going to be able to pay me or pay 
recipients 76 cents on the dollar?
    Mr. REISCHAUER. Correct.
    Mr. SCHOCK. Okay. So what this sounds like to me is what 
has happened in my State, which has now one of the largest 
unfunded liabilities in the Nation for States, whereby when I 
read my statement, it says I will still be entitled to my 
benefit and the benefit will accrue each year, but I will only 
be paid what the Social Security Administration has cash in 
hand to cover, correct?
    So, basically, the money now will no longer be borrowed 
from the Treasury, but Social Security, in essence, will be 
borrowing this money from people who are expecting to receive 
the benefit in present form?
    Do you understand my question?
    Mr. REISCHAUER. Yes, I understand your question. The point 
here is that the Social Security system sets up promises to 
individuals: If you pay in this amount, we will pay you when 
you retire that amount, subject to----
    Mr. SCHOCK. Only if we have the money.
    Mr. REISCHAUER [continuing]. The resources available at 
that time.
    Mr. SCHOCK. Thank you. And when I am looking at my 
statement, it says, based on what I have paid in, I am going to 
get about $3,000 a month if I keep working and wait until I am 
70. What do you think I am going to make--of the $3,000 a month 
I am supposed to get, 40 years from now, not 25 years, what 
percent of that $3,000 a month should I expect if we don't make 
any changes?
    Mr. BLAHOUS. I mean, if you didn't make any changes, then, 
by definition, it would be 77 percent declining to 74 percent. 
If we made changes, it would be somewhere between 77 percent 
and----
    Mr. SCHOCK. That is if I retired in 25 years.
    Mr. BLAHOUS. Right. But----
    Mr. SCHOCK. And the accrued liability only increases each 
year, because if you can only pay 76 percent of your 
obligations in year 1, even if you can pay 76 percent in year 
2, you are not going to pay 76 percent because you owe 25 
percent last year. Right? It becomes a snowball effect.
    Mr. BLAHOUS. Right. The percentage starts at about 77 cents 
on the dollar, and it goes down to about 74 by the end of the 
75-year valuation period. And what legally is expected to 
happen is that this would not be manifested by the Social 
Security Administration's arbitrarily doing a 23 percent cut 
across the board. Basically, they would have to delay the 
issuance of the benefit checks until the financing came in. So, 
in effect, your benefits would be cut 23 percent, gradually 
increasing to an annual benefit cut of about 26 percent. But it 
would happen simply through your getting fewer benefit checks.
    But roughly a quarter of your benefit.
    Mr. SCHOCK. Well, I would like to see at some point what 
happens each year, because I think that what is going to happen 
is something similar to what has happened in many States across 
this country, where the States have basically balanced their 
books on the back of providers who provide services to the 
State, and basically the State has become more and more in debt 
to the people to whom they owe money. And I would hate to see 
that happen to people who are expecting their Social Security 
check to live on.
    Chairman JOHNSON. Thank you. The gentleman's time has 
expired.
    Ms. Berkley, you are recognized.
    Ms. BERKLEY. Thank you, Mr. Chairman.
    I have a terrible head cold, and I dragged myself to this 
hearing. I feel like being here like I feel like having a 
toothache. But it is very important, what we are talking about.
    And I have about 408,000 Social Security recipients in the 
State of Nevada. My congressional district, which encompasses 
Las Vegas, has the fastest-growing senior population in the 
United States. So issues that affect seniors are very important 
to me. And this is about as rosy as I am going to be this 
morning.
    I am here to find out what it is we can do, given the fact 
that a third of the seniors that I represent have no other 
income but that Social Security check. They depend on it. They 
count on it. They don't have supplemental income. They don't 
come from rich families that can take care of them. They don't 
have other assets.
    What do we do to keep the program solvent beyond the 75-
year window so that other seniors--I actually heard an elected 
official in Nevada chide a group of seniors for being in the 
position that they are in because they didn't make good choices 
when they were young. Now, when I looked out at that audience, 
I saw a bunch of World War II vets that enlisted in the Army, 
served their country, came home, married their high school 
sweetheart, got a job, had children, their children went on to 
lead good lives, and now they are retired on their Social 
Security. They didn't make bad choices. They depended on the 
promises of their government to have an income that they had 
been paying into for many, many years since they started 
working.
    I don't think privatizing the system is a good way to go. 
If you are somebody in my income bracket and you have an 
extensive portfolio, you can invest in stocks and not have to 
worry about the bottom falling out from under you. But for most 
people that depend on this Social Security check, they have no 
alternative. And I think it is a little too risky to play, dare 
I say, roulette with people's only means of survival.
    So what suggestions do you have? You deal with this on a 
daily basis. What do we do as a Congress, where we obviously 
come from different positions, different belief systems, but 
know that this system is important enough to keep solvent and 
keep our seniors receiving their Social Security?
    I would like to hear it, because, as you can hear from 
here, we are nowhere near a conclusion that is going to be 
beneficial. And the longer we wait, the worse it is going to 
get.
    So what do you suggest we do in a political environment? 
This isn't actuarial, obviously. If it was, it would be an easy 
decision. What do you do? How do I protect my people?
    Mr. BLAHOUS. Let me answer in two parts.
    First, I would just stress the importance of acting soon. 
It is very important, especially if you are talking from the 
vantage point of people now receiving benefits. And the reason 
for that, if you did a solution today, you could honor full 
benefits to people now getting them, you could honor benefits 
to people on the verge of retirement, and you basically would 
face a set of choices that would be I think at least 
comparatively benign.
    If you wanted to, you could fix the system without raising 
taxes, and you could pay a rate of benefit growth for initial 
retirees going forward that is somewhere between the rate of 
inflation and wage indexation. If you want to pay something 
closer to the current benefit formula going forward, you would 
have to raise taxes somewhat.
    But at least you have comparatively benign----
    Ms. BERKLEY. Are you talking payroll taxes?
    Mr. BLAHOUS. Well, I am just sort of outlining the choices 
today, that basically, within a stable tax rate right now, we 
can afford not only to pay today's benefits but, actually, a 
level of benefits in the future that is somewhat higher, even 
relative to the inflation. Now, if you want to pay for the 
current benefit formula, you have to raise either the payroll 
tax base or the payroll tax rate somewhat to do it.
    But at least your choices today are comparatively benign. 
If you wait a while, because of all the baby boomers heading 
into the system, then you start facing much more difficult 
choices. Then you start facing choices of affecting people 
close to retirement or already in retirement or actually having 
real declines in benefit levels.
    And, of course, the nightmare scenario is you wait until 
2036, and then you have the choice between a 23 percent benefit 
reduction and a 16.4 percent payroll tax rate. So there is a 
huge advantage to today's seniors if we act earlier.
    Now, stepping back from that--and this is just my personal 
set of policy views. I am not speaking for the trustees. But I 
tend to think that the basic levers in Social Security, the 
three that I look at are: the eligibility age--right now we are 
living about 6 years longer at age 65 than when Social Security 
was first established, but we are actually--a typical 
beneficiary is collecting benefits 3 years earlier, because we 
moved the first age of claims from 65 to 62.
    Chairman JOHNSON. Could you summarize?
    Mr. BLAHOUS. Well, I would look at the eligibility age; the 
benefit formula, especially for high-income beneficiaries; and 
the work incentives provided in the system.
    Chairman JOHNSON. I think that Mr. Becerra and I are both 
energized to try to fix the system. And it can be fixed. And we 
agree with you that people who put their money in there expect 
to get a return from it.
    Ms. BERKLEY. And it is the safety net that millions of 
older Americans depend on for their very survival.
    Chairman JOHNSON. You are right. You are right. Thank you. 
Your time has expired.
    Mr. Paulsen, you are recognized.
    Mr. PAULSEN. Thank you, Mr. Chairman.
    First of all, thank you for being here and for sharing your 
expertise, because you are the experts, you deal with this. And 
I find much of what is in your report actually fascinating.
    Let me just follow up on some of the comments or questions 
that were offered a little earlier.
    Last night, I was signing high school graduation letters, 
and I had 800. I was signing for one of the high schools. I 
know a lot of the kids where my daughter is graduating. And, 
you know, these high school students are essentially set to 
retire in about year 2055. A long time away, right? And many of 
them will be going to college or entering the workforce. They 
are going to start paying Social Security payroll taxes.
    Can you comment, I mean, what rate of return can these 
young people expect on the taxes that they are paying? And how 
would that be different from the return of their grandparents 
and parents?
    Please, Mr. Blahous, first.
    Mr. BLAHOUS. A typical high school graduate today, they 
would probably expect a personal rate of return of about 1\1/2\ 
to 2 percent over inflation on their Social Security 
contributions. That would be a bit less than their parents. 
Their parents are probably 2, 2\1/2\. And their grandparents 
are probably 3 percent or so.
    It has been gradually drifting down, and that reflects a 
couple of things. One, it reflects population aging. So, as you 
have a declining ratio of workers to beneficiaries, if you want 
to have comparable benefit payments between generations, each 
succeeding generation has to face a higher tax rate to get it. 
And so that causes internal rates of return to be depressed 
over time.
    The internal returns were highest for the first recipients, 
the people who collected benefits without themselves putting in 
appreciable amounts into the system. So they were much higher 
in the very early years of the program.
    Mr. PAULSEN. Mr. Reischauer?
    Mr. REISCHAUER. I just want to ask Chuck a question.
    That assumes that the people retiring in 2055 don't have a 
ratable reduction in their benefit.
    Mr. BLAHOUS. Actually, I am assuming the ratable reduction.
    Mr. REISCHAUER. Oh, you are.
    Mr. BLAHOUS. Yeah. There is basically----
    Mr. REISCHAUER. So it would be higher if the system were 
fixed in some way without changing the benefit structure that 
exists now?
    Mr. BLAHOUS. Right.
    Mr. PAULSEN. Well, that goes to the question, then, of how 
does further delay impact these young people and future 
generations? I mean, a future delay in acting on fixing the 
program, right? Because this is the trustees report. It is 
offering us the challenge of 2036 and, you know, 75 years out.
    Mr. BLAHOUS. I mean, I would say that delay--obviously, 
delay is costly from the perspective of your choices as 
legislators. But it is especially costly from the standpoint of 
younger generations, because you wind up in a situation where 
the effects of balancing the system are concentrated much more 
on younger participants.
    So the longer that you leave the current imbalance between 
scheduled benefits and projected revenues on the table, and you 
have cohort after cohort after cohort of baby boomers entering 
the rolls who, themselves, aren't contributing to removing that 
imbalance, you are loading up on the younger generation the 
adverse consequences of that imbalance.
    So delay is particularly costly from the standpoint of 
younger workers.
    Mr. PAULSEN. You know, it seems to me--and I don't know the 
exact wording of the statute, but the reason we have the 
trustees report and the reason that you are out there to 
provide us the expertise and the benefit of your knowledge and 
share information with us, the Members of Congress, is not to 
give us sort of the snapshot of where we are right now, but it 
is to share the picture of where this program is going, right? 
Isn't that what the trustees are responsible for?
    Mr. REISCHAUER. ``Under no change in the law'' is what we--
We are not, with our public trustees hats on, opining on 
various methods to strengthen the system or alter it.
    Mr. PAULSEN. Right. Right.
    Well, I just think this is an important point, Mr. 
Chairman. I mean, I haven't been in Congress very long, just 
for 2 years. But I just notice that Congress always tends to 
deal with short-term thinking. We are always thinking 6 months, 
2 years. We are never thinking for the long term. And some of 
the issues that are portrayed here are no different than what 
faced us with AMT, estate taxes, or other issues. If you don't 
tackle them earlier, they become much more difficult--the doc 
fix--to address down the road. And I think your warnings, early 
warnings, are really important.
    I mean, there are a couple of things that just really stick 
out to me. Right now, cash flow deficits that started earlier, 
they are projected to be permanent. That is right around the 
corner. And that is going to continue permanently right on down 
the road. And the gap is real. And, again, by 2036, it is 
either a 32 percent increase in taxes or it is going to be a 23 
percent reduction in benefits down the road. I mean, that is 
significant.
    So I just want to thank you for being here. I know we have, 
bipartisanly, have a lot of opportunity and challenge in 
addressing this, Mr. Chairman.
    Chairman JOHNSON. Thank you, sir. I appreciate your 
testimony.
    Mr. Smith, you are recognized.
    Mr. SMITH. Thank you.
    I appreciate the opportunity to have a dialogue here today. 
I think we owe the American people a sincere discussion here. 
And I am kind of intrigued by the preview of some future 
campaign advertisements. But I hope that, as we do look at the 
balance, we realize the fact that there is an imbalance.
    Would you say that characterizing our situation with Social 
Security as an imbalance is accurate?
    Mr. REISCHAUER. As looked at over the long run, yes.
    Mr. SMITH. Right. And I appreciate that. Because I think, 
if anything, though, we can add emphasis to the fact that we 
have a commitment to seniors that we will fulfill. And as we 
look at trying to address things--I mean, it is fairly cut and 
dry as to what needs to be done or what could be done to 
address this imbalance long term.
    But I share the concern of my colleagues when I see young 
people paying out, paying into the system, and, yet, without 
the assurance that that balance can be achieved, because there 
are political games played here in Washington that I think come 
at a huge price tag for the future of young Americans who want 
to pursue economic freedom.
    And I am one who thinks that economic freedom is one of the 
fundamental, core principles of our country, that we can make 
sure that there is the safety net well into the future for 
those who have been dealt a different hand, certainly no fault 
of their own oftentimes.
    But if we wanted to balance things out long term--
obviously, we have to look at it that way--what would be the 
age--if the retirement age were increased, how much would we 
have to raise the retirement age for things to be in balance, 
doing nothing else?
    Mr. BECERRA. I want to hear this one.
    Mr. BLAHOUS. Yeah, it is a lot. I mean, at this point, it 
is a lot.
    With retirement-age changes, much depends on the rate at 
which you phase it in. So, you know, a lot of proposals have it 
going very, very gradually. If you look at the Simpson-Bowles 
proposal, they start phasing in a retirement-age increase by 1 
month every 2 years. You basically run out of the valuation 
period; the 75-year period runs out before the retirement age 
gets up fast enough to actually close the imbalance. So you 
would have to raise it much more dramatically.
    But I think, in theory, you would have to get it well up 
into the mid 70s, the normal retirement age, if you wanted to 
close the imbalance through retirement-age changes alone. The 
proposals that are often talked about to raise it to 67, 68, 
and 69 over time only solve a small fraction of the actuarial 
deficit.
    Mr. SMITH. Thank you.
    Mr. REISCHAUER. Just to clarify things, the normal 
retirement age is the age at which you get full benefits, and 
that is 66 now. And it will gradually rise, starting in a few 
years, to become 67. Then there is the early retirement age, at 
which you are eligible for reduced benefits.
    And so the answer to your question could also depend on 
whether you are moving the early end and the normal retirement 
age up together or you are just moving the normal retirement 
age up. And when you move the normal retirement age up alone, 
the benefits you receive at the early retirement age go down 
very significantly.
    Mr. SMITH. Okay.
    Thank you, Mr. Chairman. I yield back.
    Chairman JOHNSON. Thank you.
    Mr. Berg, you are recognized.
    Mr. BERG. Thank you, Mr. Chairman.
    Well, first of all, I just really appreciate you being here 
and presenting. And I can't imagine all the work that has gone 
into the last 12 months and what your trustees have brought 
forward.
    I don't know where to even start on this thing, but, you 
know, I got elected to take on some of these problems and fix 
the problems. And I think we have political agendas, we have 
financial agendas, we have people on a lot of different agendas 
here. But I just want to make it really, really simple. And I 
am not asking you to represent anyone except yourself.
    But if I said to you, we have to fix this problem so it is 
stable, so cash flows for the long term, what specifically 
would you do if we said, the next 30 days we have to fix this, 
what would you do? What are the key things you would do, for 
both the old age and disability?
    Mr. BLAHOUS. Just very visibly and publicly taking off my 
trustees hat, I tend to think in terms of three main levers on 
Social Security.
    One is the eligibility age. As Dr. Reischauer said, there 
are moving parts even to the eligibility age. There is normal 
retirement age, there is early eligibility age. And so, to 
understand what you get at a given age of claim, you have to 
know a lot of things, you know, what those are and, also, what 
the basic benefit is at normal retirement age.
    Longevity has increased about 6 years at age 65 since 
Social Security was first established. But due to the 
establishment of early eligibility age, people are more 
typically claiming benefits at 62 now. So a typical beneficiary 
is getting benefits for about 9 additional years. Even if the 
early eligibility age went gradually up to 65 and the normal 
retirement age went gradually up to 70, you would still be in a 
position----
    Mr. BERG. So what would your age number be?
    Mr. BLAHOUS. Well, I wouldn't do it all through--I mean, 
again, this is personal speculation. But I think any 
eligibility-age changes have to be very gradual. And I happen 
to be of the view that it is important to raise the early 
eligibility age at least back to 65 so that people aren't 
claiming earlier than they were when the system was first 
established.
    Even if the early eligibility age went back to 65 and the 
normal retirement age went to 70, people would still be 
claiming benefits no later than they were then and getting a 
much higher benefit because of the numerous benefit increases 
since then. So that is one lever.
    Another one is just constraining the growth of benefits on 
the higher-income end. There are sort of two families of plans 
to do that. There are the so-called progressive indexing plans, 
where, basically, benefits on the lower-income end rise at the 
rate of wage growth in the economy, and on the higher-income 
end they rise at the rate of inflation, and everybody else is 
somewhere in between. That is one family of plans. Another one 
sort of surgically gets into the benefit formula and changes 
the numbers in the benefit formula to target benefit growth on 
the high-income end. That is basically the Simpson-Bowles 
approach. They are both valid approaches, and they both have 
the same intended effect.
    And the last category of things I personally would look at 
is, there are a lot of very skewed work incentives in the 
current system. The current system, the actuarial penalty for 
early retirement claims may not be adequate. The actuarial 
reward for delayed retirement claims may not be adequate. This 
may incentivize people to leave the workforce earlier.
    There are quirks in the way the benefit formula works. The 
way the benefit formula works now, it is trying to do two 
things: It keeps track of your wage history so it knows whether 
you are a high-income person or a low-income person, but it is 
also trying to be progressive. It is trying to pay a higher 
return to people on the lower-income end. So what happens is, 
the longer you work, your lifetime average earnings rises. And 
because of the progressivity of the benefit formula, your 
internal returns drop.
    And once you hit 35 earnings years, then your personal 
returns really plummet. So when you are a senior, you are 
contemplating whether to a transition job, a part-time job in 
transition to retirement, the system is basically telling you 
that if you keep working and paying payroll taxes, there is 
going to be almost no change if your benefit.
    So there are a lot of changes I would make to that just to 
better incentivize work. But, again, not speaking as a trustee.
    Mr. BERG. Thank you.
    Take a crack at it?
    Mr. REISCHAUER. Yes, I was hoping you were going to run out 
of time. But I will take off my trustees hat, as well, and say 
that, were I the czar and asked to go off in a room and try to 
do this without considering political consequences, I would 
first of all----
    Chairman JOHNSON. We are going to build a wall right here.
    Mr. REISCHAUER [continuing]. Would raise the eligibility 
age and index it to longevity. Do it very gradually and not by 
huge amounts.
    I would increase the computation period over which benefits 
are calculated. Now we take your top 35 years of earnings and 
average them, and that leads to a situation where we don't make 
as much of a distinction as I believe we should between 
individuals who have very high earnings in a few years versus 
somebody who works a long career at a relatively low wage. And 
so I would make an adjustment on that front.
    I would adjust the benefits in ways that would probably 
raise them at the bottom and dampen their growth at the top, 
and institute some kind of minimum benefit that was more 
adequate than what we have now.
    I would phase in coverage for all State and local workers, 
about a quarter of whom are now outside the system. And it 
leads not only to huge administrative complexities but certain 
inequitable situations.
    And I would raise the taxable maximum, which is now indexed 
to the growth of average wages but has led to a situation where 
the fraction of total earnings that are covered, which has 
bounced around at about 91 percent in certain years, is down in 
the mid to low 80 percent now.
    And also make an adjustment for the fact that a larger 
fraction of total compensation that people are getting now 
comes in the form of nontaxable fringe benefits, namely health 
insurance.
    And so, making some adjustments that way. And I think, you 
know, a balance between taxes----
    Chairman JOHNSON. The gentleman's time has expired. Can you 
put that----
    Mr. REISCHAUER. As soon as I said ``taxes''?
    Chairman JOHNSON. Can you put some of that in writing, 1, 
2, 3, 4, 5, for us, please?
    Mr. REISCHAUER. Yes. Both of us will.
    Chairman JOHNSON. I would appreciate it. We probably have 
it on the record anyway, but thank you.
    Mr. Brady, you are recognized.
    Mr. BRADY. Thank you, Mr. Chairman.
    Today's job numbers are heartbreaking for job seekers, 
especially coming on a string of bad economic news: first-
quarter GDP just anemic; manufacturing index going down. 
Consumer confidence is almost as low as it was more than 2 
years ago. And, in fact, the unemployment rate at 9.1 percent 
is artificially low. That is because people have given up 
looking for work. In fact, we have the fewest percentage of 
Americans in the workforce in a quarter of a century. And a lot 
of them have given up hope, and, frankly, many of them will 
struggle to get back into the workforce.
    Who would have thought the highlight of the Obama recovery 
was two Christmases ago? We are in real trouble. And the 
failure to get this economy going has a direct impact on Social 
Security.
    Today, we have heard two major red flags raised. Dr. 
Blahous has said this is the first report since 1983 projecting 
permanent cash-flow deficits. And Dr. Reischauer said that, in 
looking at the 75-year outlook, this is the largest single-year 
deterioration since 1994. That ought to be real red flags and 
certainly, I think, counters the argument that things are just 
rosy in Social Security. You would have to be in denial to 
believe we don't have a real problem in this program.
    These cash deficits that are now permanent, as I look at 
the estimations, it looks like Social Security's cash shortfall 
in the next 10 years will be $416 billion. My question is, the 
current deficits we are running, is it fair to say that Social 
Security's permanent and growing cash-flow deficits are adding 
to the unified Federal deficit? And, if so, does that increase 
the burden of debt we are leaving to our kids and grandkids?
    Dr. Blahous, is that adding to our debt?
    Mr. BLAHOUS. I would say yes. From a trust fund standpoint, 
the trust fund balances are continuing to rise. So if you 
looked narrowly at the world of the Social Security Trust Fund, 
its balances are rising. But if you look at the unified Federal 
budget, the shortfall of tax income relative to outgoing 
benefit expenditures adds to the unified Federal deficit.
    Mr. BRADY. And, right now, we are borrowing to make up the 
difference.
    Mr. BLAHOUS. That is right.
    Mr. BRADY. Dr. Reischauer, is this adding to the unified 
debt?
    Mr. REISCHAUER. Yes, by definition, it is.
    Just one comment on your preamble, and that is, I said that 
the deterioration in the actuarial balance was as large or 
larger than any since the early 1990s, but a very small portion 
of that is due to economics, changed economic assumptions. Most 
of it was due to changes in demographic assumptions and 
improved data and----
    Mr. BRADY. Are you concerned about----
    Mr. REISCHAUER [continuing]. Some improved methodologies.
    Mr. BRADY. If Congress doesn't act, are you concerned about 
the future of Social Security?
    Mr. REISCHAUER. Yes. No, I mean, I think this is a----
    Mr. BRADY. Yes or no?
    Mr. REISCHAUER. Yes. No, yes. I said yes----
    Mr. BRADY. No, comma, yes. Okay. I get it.
    Mr. REISCHAUER. Yes, yes.
    Mr. BRADY. I knew that.
    Mr. REISCHAUER. You know, this is a challenge going 
forward. It is not like the debt ceiling, something that has to 
be addressed in the next few months or even the next few years. 
As Dr. Blahous has said, the sooner you address it, the better 
off we will be. The options will be greater, the ability of 
affected parties to respond will be more.
    Mr. BRADY. I know the answer to this, but there is probably 
a need to clear things up. And I stepped out for a minute. But 
in the trust fund today, we don't have cash in the trust fund 
today, correct? We don't have a Social Security Trust Fund 
comprised of cash?
    Mr. REISCHAUER. No, you don't. But your bank account 
doesn't have cash in it either, and yet, when you put your ATM 
card in, cash comes out.
    Mr. BRADY. Yeah. But that is because you have actually 
deposited cash before and the bank is holding it. Today--
    Mr. REISCHAUER. Well, the bank has actually lent it to 
somebody. So the bank doesn't always even have it.
    Mr. BRADY [continuing]. The U.S. Government is holding 
those IOUs, correct? And these are nonmarketable securities. So 
there is a difference between the security sold to a firm or to 
China versus the nonmarketable securities within the trust 
fund. Right now, because we are running a deficit, in effect, 
we have borrowing authority to make up any difference each year 
in Social Security.
    Correct, Dr. Blahous?
    Mr. BLAHOUS. Yes, the bonds in the trust fund are special-
issue Treasury bonds. And, basically, they earn a rate of 
interest that is pegged to a market rate of interest. But they 
are unusual bonds in the sense they are basically called as 
needed by the Social Security system.
    Mr. BRADY. And the call is on taxpayers and the Federal 
Government.
    Mr. BLAHOUS. Right.
    Mr. BRADY. So when we are running short, as we are--and you 
said permanently running short in this program--that means we 
permanently borrow to make up the difference each year.
    Thank you, Mr. Chairman.
    Chairman JOHNSON. Thank you.
    Mr. REISCHAUER. But right now the Treasury is giving an 
interest payment that is larger than the amount that you have 
to borrow. So----
    Mr. BRADY. And that has to be paid back, is another call on 
taxpayers and the government.
    Chairman JOHNSON. Yeah, they sell Treasuries every day. 
Have you been down there and watched them? We borrow money like 
it is going out of style.
    Mr. Becerra, you are recognized for one quick question. And 
then, we have a vote, so we will have to adjourn.
    Mr. BECERRA. Thanks. Thanks, Mr. Chairman.
    I just want to clarify, these nonmarketable special-issue 
bonds, they are not just held by Social Security, they are also 
held by foreign governments and other folks, as well.
    Mr. BRADY. No, that is not true.
    Mr. BECERRA. That is true, absolutely true. It absolutely 
is true.
    Mr. BRADY. You can answer.
    Mr. BECERRA. So----
    Chairman JOHNSON. Wait a minute. Let him respond.
    Mr. BLAHOUS. Well, I mean, I am not an expert in the 
broader set of securities sold by the Federal Government, but 
the bonds that are issued to Social Security are sort of a 
special-issue creation of the Social Security Act that is sort 
of uniquely created for the Social Security system.
    Mr. BECERRA. Right, backed up by the money that taxpayers 
contribute into the system. It is not as if they are fictitious 
bonds. They are bonds backed by the money that taxpayers put 
into it.
    Mr. BRADY. But they are different from the securities, the 
Treasuries that are held by the public.
    Mr. BECERRA. If, by that, you mean that the money that 
foreign countries give us is better than money that American 
taxpayers give to the Federal Government, then perhaps they are 
different. But a dollar is a dollar.
    One quick question I just wanted to ask because we have--I 
think everyone agrees that, long term, we want to do something 
to make sure that we don't have a shortfall in Social Security 
but that, right now, the Social Security system continues to 
contribute.
    The question I have is this. Has the Social Security system 
ever contributed a cent to the deficit that the country faces 
today?
    Mr. BLAHOUS. I mean, I would state that it is contributing 
to the deficit now in 2011 and did in 2010, as well.
    Mr. BECERRA. And how is that?
    Mr. BLAHOUS. Well, basically, the amount of revenue the 
program is generating----
    Mr. BECERRA. On an annual basis.
    Mr. BLAHOUS [continuing]. Is less, on an annual basis, is 
less than the amount that the program is sending out the door.
    Mr. BECERRA. And so, Dr. Blahous, then you are taking the 
fact that the money that was contributed in the last 10 years--
I won't even talk about the last 30 years, but the last 10 
years--when taxpayers were contributing more than was being 
used by Social Security, that no longer exists?
    Mr. BLAHOUS. Well, no question, I understand the 
fundamental point, which is that if you take the total value of 
Social Security's positive contributions to the budget balance 
since the 1980s, that far outweighs the negative contribution 
it is making in 2010 and 2011. So I certainly recognize that 
point.
    Mr. BECERRA. Right, but, I mean, I think it is important 
for American taxpayers to understand what folks are saying. 
When they contribute out of their paycheck for Social Security 
and the government takes that money and says, ``We don't need 
it all today, so we are going to put some of it into Treasury 
bonds so that now we can use that money today as the Federal 
Government for other operating expenses, but you are going to 
hold Treasury bonds so that when you do retire you can collect 
it''--if you say that we are running deficits today, then you 
have essentially said that those Treasury bonds that were 
backed up by the money that same worker contributed last year 
has evaporated.
    Chairman JOHNSON. Yeah, let's call it quits to the 
interrogation.
    And I would like to make one comment. FactCheck.org says it 
this way: Quote, ``Some senior Democrats are claiming that 
Social Security does not contribute one penny to the Federal 
deficit. That is not true. The fact is, the Federal Government 
had to borrow $37 billion last year to finance Social Security 
and will need to borrow more this year. The red ink is 
projected to total well over a half a trillion dollars in the 
coming decade.''
    Mr. BECERRA. FactCheck's pants are on fire, I think.
    Chairman JOHNSON. And, with that, we are going to close the 
hearing. We have a vote going on.
    I appreciate the two of you being here. That was very good 
testimony. Thank you.
    The committee is adjourned.
    [Whereupon, at 10:27 a.m., the subcommittee was adjourned.]

QUESTIONS FOR THE RECORD

    Charles P. Blahous III, Ph.D.

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    Robert D. Reischauer, Ph.D.

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                       SUBMISSIONS FOR THE RECORD

    The Center for Fiscal Equity

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