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




 
                       SOCIAL SECURITY'S FINANCES

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

                                HEARING

                               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 23, 2011

                               __________

                           Serial No. 112-SS6

                               __________

         Printed for the use of the Committee on Ways and Means

                      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
RICK BERG, North Dakota              FORTNEY PETE STARK, California
ADRIAN SMITH, Nebraska
KENNY MARCHANT, New York

                       Jon Traub, Staff Director

                  Janice Mays, Minority Staff Director


                            C O N T E N T S

                               __________
                                                                   Page

Advisory of June 23, 2011, announcing the hearing................     2

                               WITNESSES

Thomas A. Barthold, Chief of Staff, Joint Committee on Taxation..     7
Stephen C. Goss, Chief Actuary, Office of the Chief Actuary, 
  Social Security Administration.................................    47
Tim Lee, Texas Retired Teachers Association, on behalf of 
  Coalition to Preserve Retirement Security......................    60
Alex Brill, Research Fellow, American Enterprise Institute.......    69
Mark J. Warshawsky, Ph.D., Former Assistant Secretary for 
  Economic Policy, U.S. Department of the Treasury...............    77
Andrew G. Biggs, Ph.D., Resident Scholar, American Enterprise 
  Institute......................................................    82

                       SUBMISSIONS FOR THE RECORD

Questions for the Record.........................................   104
The Honorable Mr. Becerra........................................   114
The Honorable Mr. Batchelder.....................................   116
Center for Fiscal Equity.........................................   118
International Association of Fire Fighters.......................   126
Jim Miller.......................................................   129
National Committee to Preserve Social Security and Medicare......   130


                       SOCIAL SECURITY'S FINANCES

                              ----------                              


                        THURSDAY, JUNE 23, 2011

     U.S. House of Representatives,        
               Committee on Ways and Means,        
                     Subcommittee on Oversight,    
                                         joint with
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:04 p.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 Social Security's Finances

June 23, 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 a hearing on Social Security's 
current revenue streams, proposed changes to those structures and the 
impact they would have on the program, beneficiaries, workers and the 
economy. The hearing will take place on Thursday, June 23, 2011 in B-
318 Rayburn House Office Building, beginning at 1:30 p.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 2011 Annual Report of the Social Security Board of Trustees 
again highlighted the financing challenges facing the Old Age and 
Survivors Insurance (OASI) and the Disability Insurance (DI) programs. 
The trustees project permanent and growing cash flow deficits, and by 
2036 the combined OASI and DI Trust Funds are projected to become 
exhausted and unable to pay scheduled benefits. The DI Trust Fund is 
projected to become exhausted in 2018. The Public Trustees expressed 
the need for action soon in order to be able to protect vulnerable 
populations and those at or near retirement age.
      
    Social Security benefits are financed primarily by payroll taxes on 
covered wages. The Federal Insurance Contributions Act (``FICA'') 
imposes a tax on covered wages up to the taxable wage base of $106,800 
in 2011, divided between employers (6.2%) and employees (6.2%). Self-
employed taxpayers are subject to payroll tax under the Self-Employed 
Contributions Act (``SECA'') on the same wage base with a rate equal to 
12.4 percent (the total combined employer-employee rate). The wage base 
is adjusted annually based on average wage growth, if a Social Security 
cost-of-living adjustment is payable.
      
    The Tax Relief, Unemployment Insurance Reauthorization, and Job 
Creation Act of 2010 reduced the OASDI payroll tax paid by the worker 
by 2 percentage points in calendar year 2011. The law also required the 
Secretary of the Treasury to make general revenue transfers to replace 
revenues temporarily diverted from the trust funds.
      
    According to the Social Security Administration, about 94 percent 
of workers in paid employment and self-employment are covered under the 
OASDI program. The majority of non-covered workers are in State, local, 
or the Federal Government.
      
    In addition to Social Security payroll taxes, certain Social 
Security beneficiaries must include a portion of Social Security 
benefits in taxable income for the Federal income tax, and the Social 
Security program receives part of those taxes.
      
    According to the 2011 Annual Report of the Social Security 
Trustees, in calendar year 2010, Social Security non-interest income 
was $637.3 billion from payroll taxes and $22.7 billion from the 
taxation of benefits. Social Security tax income as a percent of 
taxable payroll will grow from 12.52 in 2011 to 13.31 in 2086, due to 
growth in income from the taxation of benefits.
      
    The Social Security actuaries have estimated a number of revenue 
generating proposals, including those proposed by the President's 
Fiscal Commission which would require all newly hired state and local 
workers to participate in Social Security and increase the amount of 
earnings subject to Social Security payroll taxes by increasing the 
taxable wage base.
      
    In announcing the hearing, Chairman Sam Johnson (R-TX) stated, 
``When Social Security first began, the payroll tax was only 2 
percent--evenly split between employers and employees--on the first 
$3,000 in wages. Today the payroll tax is 12.4% on the first $106,800 
in wages. Yet despite the tax increases, Social Security is in trouble. 
Clearly tax hikes have not been a panacea. This hearing will provide an 
opportunity to learn more about Social Security revenues, options for 
change and their impacts.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the sources of Social Security's 
revenues, how those sources have changed over time, options for change 
and their impacts.
      

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 
page of the Committee website and complete the informational forms. 
From the Committee homepage, http://waysandmeans.house.gov, select 
``Hearings.'' Select the hearing for which you would like to submit, 
and click on the link entitled, ``Click here to provide a submission 
for the record.'' Once you have followed the online instructions, 
submit all requested information. ATTACH your submission as a Word or 
WordPerfect document, in compliance with the formatting requirements 
listed below, by the close of business on Thursday, July 14, 2011. 
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 
Office Buildings. For questions, or if you encounter technical 
problems, please call (202) 225-1721 or (202) 225-3625.
      

FORMATTING REQUIREMENTS:

      
    The Committee relies on electronic submissions for printing the 
official hearing record. As always, submissions will be included in the 
record according to the discretion of the Committee. The Committee will 
not alter the content of your submission, but we reserve the right to 
format it according to our guidelines. Any submission provided to the 
Committee by a witness, any supplementary materials submitted for the 
printed record, and any written comments in response to a request for 
written comments must conform to the guidelines listed below. Any 
submission or supplementary item not in compliance with these 
guidelines will not be printed, but will be maintained in the Committee 
files for review and use by the Committee.
      
    1. All submissions and supplementary materials must be provided in 
Word format and MUST NOT exceed a total of 10 pages, including 
attachments. Witnesses and submitters are advised that the Committee 
relies on electronic submissions for printing the official hearing 
record.
      
    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.
      
    3. All submissions must include a list of all clients, persons and/
or organizations on whose behalf the witness appears. A supplemental 
sheet must accompany each submission listing the name, company, 
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 
business days notice is requested). Questions with regard to special 
accommodation needs in general (including availability of Committee 
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. Thank you all for being here. I want to 
apologize to our witnesses and audience for the delay due to 
the vote, and I thank you for your patience. This meeting will 
come to order.
    I want to thank you all for your testimony ahead of time. 
As we heard from the public trustees at our June the 3rd 
hearing, Social Security revenues will cover only 77 percent of 
the benefits by 2036. Congress needs to act, and the sooner we 
do so, the sooner we can protect those who are most vulnerable, 
along with current retirees and those nearing retirement. And 
for younger workers and families we have a responsibility to 
provide certainty about the future of their Social Security.
    To that end, I was heartened to learn of the deliberations 
of AARP's volunteer board, and welcome their acknowledgment 
that Social Security will be unable to pay benefits promised in 
the future, and how the program needs to be strengthened for 
generations to come.
    Today we will learn more about Social Security's current 
revenue sources, proposed changes to those sources, and their 
impact on Social Security workers, beneficiaries, and economic 
growth.
    Since its beginning, Social Security has been a program 
primarily financed by workers for workers. Workers' hard-earned 
payroll taxes fund the majority of the benefits Social Security 
pays out each year. It is important to point out, as well, that 
the number of workers paying into Social Security has been 
steadily declining over the years. In 1950, for instance, there 
were 16\1/2\ workers for each beneficiary. Today, just 2.9 
workers, and in 14 years, 2.3 workers per beneficiary.
    You are shaking your head; you agree.
    [Laughter.]
    Chairman JOHNSON. In 1935, the tax rate for employers and 
employees each was just 1 percent on earnings, up to $3,000 a 
year. How far we have come. Congress has raised the payroll tax 
14 times since then. Today the tax rate is 6.2 percent for 
employees and employers, for a combined 12.4 percent.
    The amount of earnings subject to payroll tax, however, 
known as the taxable wage base, has also grown over time. In 
1935 the taxable wage base was $3,000. Over the life time of 
the program, the taxable wage base has been statutorily 
increased by Congress 10 times. In 1972, Congress passed 
legislation that increased the base automatically to reflect 
the growth in average wages. However, soon afterwards, Congress 
increased the wage base even further over a number of years.
    Annual tax increases have generally been in autopilot since 
1982. Since then, the wage base has increased 26 times from 
$32,400 to its current level of $106,800. Probably go up again 
this year, too, you all think?
    But despite these tax increases, Social Security is still 
in trouble. Not enough young workers are paying this tax to 
sustain the Baby Boomer wave of retirees leaving the workforce 
and drawing benefits at the rate of 10,000 a day for the next 
19 years. Clearly, we can't tax our way to sustainable 
solvency.
    And, as we consider the program's financial state, we can't 
lose sight of the fact that throughout the history of the 
program, Congress has also increased benefits beyond the 
ability of the program to pay for them in the long run.
    The challenge Congress now faces goes beyond just 
rebalancing Social Security's finances. With chronic 
unemployment, falling incomes, and so many young workers unable 
to start their careers, nothing we do should make it harder for 
Americans to find good-paying jobs.
    I am sure, if you ask any ordinary citizen, what is vitally 
important to them, you will likely hear, ``good paying jobs.'' 
They worry America is falling behind, and that their children's 
futures will be dictated by foreign predators. Americans want 
and expect a balance between creating a new and better economy 
for their children and caring for their elders.
    That is why, as we look ahead, Social Security must be what 
its founders intended: a program that lives within its means. 
Americans want, need, and deserve nothing less. We must do this 
for the American people. And I am confident that, by working 
together, we will.
    Mr. Becerra, would you care to make a statement?
    Mr. BECERRA. Yes, Mr. Chairman, I would. Mr. Chairman, 
thank you very much. Thank you for holding this hearing today.
    I would like to begin, first, by acknowledging something 
the chairman said, that we are looking at somewhere around 2036 
before Social Security will face a situation where it doesn't 
go broke, it won't go bankrupt, but it will have a challenge in 
providing the benefits that Americans today expect to receive 
when they retire in that year of 2036.
    I think that is an important acknowledgment, Mr. Chairman, 
because too often the conversation--or should I say the 
debate--on Social Security is one where some would discount the 
money that Americans, on a daily basis, are contributing to 
Social Security through a tax, the FICA tax, that they 
contribute to the Social Security system and the trust fund.
    The more we acknowledge that today Social Security is 
paying benefits on time and in full, and has always done that 
for more than 75 years, and that it will continue to do so for 
another good 20-some-odd years, it becomes very important. 
Because, unlike the rest of the Federal Government, which is in 
fiscal crisis, Social Security today goes forward.
    Remember, as well, that, at the same time that Social 
Security has never missed a payment, most Americans a couple of 
years ago were afraid to look at their 401(k) or IRA 
statements, because they saw what was happening to their 
private savings and their pension funds. It becomes very 
important for us to have a conversation about Social Security 
that talks about the facts on the ground.
    And, Mr. Chairman, I think many people will have to 
acknowledge that the facts are very stubborn things. They don't 
lie. And the reality is that today we have a system that has 
never failed the American public. And I don't believe anyone in 
this chamber would like to see Social Security fail. And that 
is why I do believe, Mr. Chairman, like you, that there is a 
chance for some bipartisan cooperation in dealing with the 
future challenges that Social Security will face, much because 
of the Baby Boom generation, but many of them simply because of 
the fact that America, like every other country, continues to 
change.
    The challenge has nothing to do with any sneaky numbers or 
broken magic on the part of Social Security to pay benefits. It 
is a very straightforward system. You put something in, and 
we've been able to guarantee that we put something out to pay 
you.
    I actually disagree with you on one point, Mr. Chairman. 
Social Security is not overly generous. Social Security hasn't 
gotten too big when it comes to what it provides to Americans. 
The benefits today are very modest. And most seniors have very 
limited incomes. The average benefit for a senior today is 
somewhere around $14,000 a year. Among senior households, the 
median income is only about $24,000. So when you are talking 
about a household that may have more than one senior, you are 
still only looking at about $24,000.
    One out of every three beneficiaries under Social Security 
depends on that Social Security paycheck to provide virtually 
all of their income. And less than half of seniors in America 
have a pension or a savings plan from their work. Only the 
wealthiest one-fifth of seniors in this country have any 
significant income from assets.
    Keep in mind, as I said before, that were it not for Social 
Security, in 2008 all those folks who are ready to retire in 
this country probably were looking at a collapse of their IRA 
and their 401(k). At least a third of the value of those 
privately held assets had disappeared.
    And that is why, Mr. Chairman, it does disturb me that some 
of the proposals we see from my Republican colleagues call for 
nothing but cuts to the benefits in Social Security, whether it 
is the privatization plan presented by Mr. Sessions, a member 
of the leadership in the House Republican Conference, or 
whether it is the plan of the chairman of the Budget Committee, 
Mr. Ryan, who has had plans in the past to privatize the 
system, and whose budget calls for a fast-tracking on future 
cuts of Social Security, or whether it was the recent proposal 
by Senator Hutchinson to reduce the COLA by one percent at a 
time when seniors haven't received a COLA increase in two 
years, these are all cuts.
    And at a time when all Americans are suffering through 
difficult economic times, I don't believe we want to see our 
seniors go back to the 1930s when, what was it, some 3 out of 
every 4 that would retire retired into poverty.
    And so this is a fabulous program that has worked well. But 
demographics will make it more challenging in about a quarter 
of a century. And rather than wait a quarter of a century, we 
should tackle it now. And that is why, Mr. Chairman, I look 
forward to working with you and all of our colleagues on this 
committee to try to present to our colleagues and the rest of 
the House a proposal in the future that can really take us a 
long ways in making sure that Social Security will once again 
be there for all Americans, as it has for more than 75 years.
    I yield back.
    Chairman JOHNSON. Thank you. Just know that you and I 
disagree on how the money is being counted, and there are a 
lot----
    Mr. BECERRA. I think you have made that very clear, Mr. 
Chairman.
    Chairman JOHNSON. There are a lot of IOUs out there in the 
Social Security trust fund that have to be paid from the 
general revenue.
    Mr. BECERRA. China, Japan, and every major corporation in 
America knows the same thing, and they are waiting to be paid, 
as well.
    Chairman JOHNSON. I know. Before we move on to our 
testimony today, I want to remind our witnesses to limit your 
oral statements to five minutes, if you can.
    Without objection, all the written testimony will be made 
part of the permanent record.
    We have one panel today, and our witnesses who are seated 
at the table are Tom Barthold, Chief of Staff, Joint Committee 
on Taxation; Stephen Goss, Chief Actuary, Office of the Chief 
Actuary, Social Security Administration; Tim Lee, Texas Retired 
Teachers Association, on behalf of the Coalition to Preserve 
Retirement Security--we have had some arguments over that one, 
too--Alex Brill, research fellow, American Enterprise 
Institute; Mark Warshawsky, Ph.D., former Assistant Secretary 
for Economic Policy, U.S. Department of the Treasury; and 
Andrew G. Biggs, Ph.D., resident scholar, American Enterprise 
Institute.
    I thank all of you for being here today.
    And, Mr. Barthold, you are recognized for five minutes.

    STATEMENT OF THOMAS A. BARTHOLD, CHIEF OF STAFF, JOINT 
                     COMMITTEE ON TAXATION

    Mr. BARTHOLD. Well, thank you, Chairman Johnson and Mr. 
Becerra. Your subcommittee staff had asked if my staff and I 
could prepare background discussion of the Social Security tax 
base, and that is what was provided to you and your staff in 
our publication JCX-36-11. I will take my couple of minutes 
here to summarize the high points, many of which you actually 
introduced in your opening remark.
    The Social Security and Medicare trust funds are primarily 
financed by payroll taxes on covered wages. The payroll taxes 
include the FICA tax, Federal Insurance Contribution Act, and 
the SECA tax, the Self-Employed Contributions Act. There is 
also, for the Medicare trust fund, an additional hospital 
insurance tax. And, in addition, funds are contributed to both 
the Medicare and Social Security trust funds from an income tax 
on certain included Social Security benefits.
    I will discuss first, in brief, the payroll taxes. FICA 
imposes taxes on both employers and employees, based on an 
amount of wages paid to the employee during the year. It is 
composed of two parts. The OASDI tax equals 6.2 percent of 
covered wages, up to the maximum wage base, $106,800 for this 
year, as noted by the chairman. And there is an HI tax equal to 
1.45 percent of covered wages. The employee's tax is generally 
equal to the amount of tax imposed on the employer.
    Likewise, the SECA tax has two components, and the rate of 
the SECA tax is set to equal the combined rates of the employee 
and the employer under the FICA tax. So, under the OASDI 
component, the current rate of tax is 12.4 percent on self-
employment income, up to the Social Security wage base of 
$106,800. And under the HI component, the tax rate is 2.9 
percent on all self-employed employment income.
    Now, I should note that, for the current year, there is a 
two percentage point reduction in the OASDI rate to 4.2 
percent, both for the employee portion of FICA, as well as for 
SECA. This was enacted as a provision in late 2010.
    The present law--as noted by the chairman, the present law 
wage base is indexed each year, based on growth in average 
wages in the national economy. Now, under these taxes the law 
provides certain exceptions from the wage base for certain 
types of employment and certain types of remuneration.
    One type of employment exempted from Social Security tax is 
based on categories of workers who are covered under 
alternative retirement systems. These include certain state and 
local government employees, employees of the Federal 
Government, and workers whose compensation is subject to the 
Railroad Retirement tax system.
    A second type of exempted employee involves workers with 
religious beliefs whose beliefs preclude participation in the 
Social Security system.
    A third type of exempted employment is wages to students. 
There has been a recent--I will note that there is a recent 
dispute resolved by the Supreme Court in the so-called Mayo 
case. The Supreme Court in that case upheld an IRS regulation 
providing that medical residents are not students, and, 
therefore, are subject to Social Security taxes, where wages 
paid to other students are exempt.
    Now, even when a worker's type of employment is covered by 
the Social Security, certain types of remuneration paid to the 
worker are not subject to that tax. This generally follows 
income tax exclusions. Examples of such exempted compensation 
include employer-provided retirement benefits and employer-
provided health benefits. There are similar elective 
contributions for health benefits through health FSAs, which 
are also excluded from both the income and Social Security 
taxes.
    In general, the FICA taxes apply to workers who are 
employees. The SECA taxes apply to workers who are self-
employed or independent contractors. One ongoing issue 
regarding payroll tax liability is the determination of whether 
a worker is properly treated as an employee or as an 
independent contractor. If a person is an employee, the 
responsibility for reporting and withholding FICA rests with 
the employer. If you are an independent contractor, then 
reporting and withholding rests with the worker. This 
determination shifts the burden of compliance, not the 
underlying liability.
    I also noted another component of funding for the trust 
funds is the income tax. Individuals with incomes above certain 
thresholds must pay income tax on a portion of their Social 
Security benefits, and the revenue raised from the Social 
Security benefits finance--from the taxation of Social Security 
benefits, excuse me--finances both the Social Security and the 
Medicare trust funds.
    And, with that, I will conclude my brief summary, and be 
happy to answer any questions that the Members might have.
    [The prepared statement of Mr. Barthold follows:]

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    Chairman JOHNSON. Thank you, I appreciate that. I want to 
welcome our newest member, Mr. Kenny Marchant, from the great 
state of Texas, as a member of this committee. Glad to have you 
aboard.
    Mr. MARCHANT. Glad to be here.
    Chairman JOHNSON. Stephen Goss, chief actuary, Office of 
the Chief Actuary, Social Security Administration. You are 
recognized for five minutes, sir.

  STATEMENT OF STEPHEN C. GOSS, CHIEF ACTUARY, OFFICE OF THE 
         CHIEF ACTUARY, SOCIAL SECURITY ADMINISTRATION

    Mr. GOSS. Thank you very much, Chairman Johnson, Ranking 
Member Becerra, Members of the Subcommittee. It is really a 
pleasure to be here, and thank you for the invitation.
    I would like to take these couple of minutes to sum up the 
written testimony that I submitted, but also to put in 
perspective the history and the expectations for the future of 
what the costs of Social Security are going to be, and what 
they mean for us, to make sure that the system is set up 
properly for the future.
    Chairman Johnson, you quite rightly pointed out some of the 
very interesting facts of Social Security, about the incredibly 
fundamental ratio of numbers of workers for every beneficiary 
that we have to support the system.
    And we should keep in mind about Social Security, that when 
the first monthly benefits were paid in 1940, we had somewhat 
over 40 workers for every beneficiary. And the reason for that 
was clear; we were taxing virtually all the workers, starting 
right off the bat, but the only people in 1940 who could get 
monthly benefits were people who had worked for at least 2 
years in the years 1937, 1938, or 1939. Not many very, very old 
people had worked for two years in that period.
    So, it was a long time, not until about 1975, until the 
system actually matured, and we reached the point where we 
reached a rather stable level of 3.3 workers per beneficiary. 
We stayed at that level from 1975 until about 2008.
    As you mentioned, Chairman Johnson, after 2008, starting 
around 2010, the recession has gotten a head start on moving in 
the direction of having a drop in the number of workers per 
beneficiary.
    It is important to understand why that is happening. It is 
happening in part because of the Baby Boomers moving over from 
the ages which have been working ages over the next 25 years, 
into the ages in which they will be retirees. But, actually we 
wouldn't even call them the Baby Boom bulge if, in fact, they 
had all had 3.3 kids themselves as people in 1946 through 1965 
did.
    Historically, birth rates have been at about 3 children per 
woman, especially if you look at the number of children 
surviving to age 10. Between the end of the Baby Boom period 
and the mid-1970s, we actually had a drop in the birth rate in 
this country from an average of 3 kids down to an average of 2 
children. If we are going to support elders in our country, and 
they all had three kids in the past, and now in the future they 
are all going to have two kids, that really is a fundamental 
shift.
    The point is that this isn't just a matter of people living 
longer. There is some of that. The fundamental change over the 
next 25 years, in the cost of the system relative to GDP, 
relative to payroll, and in the number of workers per 
beneficiary, is really due to the drop in the birth rate. It is 
not that we are going to do anything about this change, but it 
is important for understanding how we got there.
    The implication of this drop in the birth rate is really 
quite striking. As both the chairman and the ranking member 
mentioned, we are in a situation where we are going to have a 
drop in the number of workers per beneficiary, and this is 
going to cause the cost of Social Security, of the benefits 
that are scheduled now, to change from about 4.3 percent of 
GDP--which it has been for decades--to rise up to about 6 
percent of GDP.
    The fundamental question before you all, as our elected 
representatives is, ``Where do we want to go? What do the 
American people want to do? Do they want to have the kind of 
benefits that are scheduled in current law, and raise the 
revenue up from the 4.5 percent of GDP that is scheduled in 
current law now up to 6 percent? Or, do they want to keep 
revenue at 4.5 percent of GDP and lower benefits?'' There is 
really a fundamental choice between raising revenue by a third, 
reducing the scheduled benefits by a fourth, or some 
combination of those two.
    In my position--I am sure also for Tom Barthold and 
probably most of us--we are not in a position to tell you what 
really makes the most sense. But these are the choices that are 
before you on behalf of your and all of our constituents.
    Let me speak a little bit about the very near term 
situation for Social Security. There has been a lot of talk 
about the year 2010, in which we had the first year--for quite 
a while, since 1972--in which we had more cost for the system 
than we had taxes coming in. Now, the trust fund is still 
growing, because interest more than exceeded the amount of 
shortfall we had in taxes, and that will continue until 2023. 
But we did have of taxes in the year 2010, and this is what a 
recession looks like; we have more people coming and getting 
benefits, fewer people working.
    We are projecting now for the years 2012, 2013, and 2014, 
that we will have cash flow deficits--that is, cost exceeding 
the taxes in the system, by a little less than 20 billion a 
year, where in the prior trustee's report, in 2010, we were 
projecting a little bit less than a $10 billion-per-year 
surplus.
    That kind of a swing is significant. But for a $700 billion 
per year cost program and a federal budget where we are running 
deficits on the order of $1 trillion per year, that kind of 
swing was probably not all that traumatic.
    So, we are facing a situation over the next 25 years in 
which we are going to have this dramatic shift. We are going to 
be having increasing cost, we are going to have to find a way 
to get there. The trust funds do stand as the cushion to give 
us the authority to be able to augment the taxes that we have 
coming in to be able to pay scheduled benefits, as you both 
mentioned, until 2036.
    But the fundamental question that is before us is, ``What 
do we do thereafter?'' Are we going to raise taxes? Are we 
going to lower benefits? One thought that I would really want 
to leave you with is that we should not analyze a change in 
taxes or a change in benefits from just one perspective.
    For example, if we decided that, in order to continue 
paying the full benefits, even through 2036, we want to raise 
taxes during that period to have more money coming into the 
trust funds, what that will mean is that we will dip into the 
trust funds less. If we raise taxes and have more revenue 
coming to pay benefits during that period, that means that we 
will have less spending down of the trust funds and----
    Chairman JOHNSON. Can you close it down? Your time has 
expired.
    Mr. GOSS. Okay, sorry. If we have more taxes, we will have 
less borrowing from the public. Both of those have economic 
implications. We should not look at an increase in taxes, just 
as the implication of taxes, but also what that means in terms 
of borrowing less from the public.
    I have submitted a number of individual provisions that 
have been considered. I am hoping in the questions we might be 
able to get into some of those.
    [The prepared statement of Mr. Goss follows:]

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    Chairman JOHNSON. Thank you, sir.
    Mr. GOSS. Thank you very much.
    Chairman JOHNSON. Tim Lee, Texas Retired Teachers 
Association, on behalf of the Coalition to Preserve Retirement 
Security. You are recognized for five minutes.
    Mr. LEE. Thank you very much.
    Chairman JOHNSON. Are you from Texas?
    Mr. LEE. Yes, sir.
    Chairman JOHNSON. Where do you live?
    Mr. LEE. I live in Austin.
    Chairman JOHNSON. Okay.
    Mr. LEE. Yes, sir.

 STATEMENT OF TIM LEE, TEXAS RETIRED TEACHERS ASSOCIATION, ON 
      BEHALF OF COALITION TO PRESERVE RETIREMENT SECURITY

    Mr. LEE. Chairman Johnson, Ranking Member Becerra, and 
distinguished Members of the Subcommittee, my name is Tim Lee, 
and I am the executive director of the Texas Retired Teachers 
Association. I am testifying today in my capacity as a board 
member of the Coalition to Preserve Retirement Security, 
specifically here to talk about the issue of mandating Social 
Security coverage with public workers.
    Over the years some have recommended bringing all public 
workers into the Social Security program. However, mandating 
that all newly hired public workers must participate in the 
Social Security system would create significant new cost 
pressures for the affected state and local government 
jurisdictions, while providing only minimal benefit to the 
program.
    These jurisdictions, with their own long-standing defined 
benefit retirement plans, would have to make difficult choices. 
Adding an additional 6.2 percent payroll tax per worker to the 
benefit cost of public employers would almost certainly result 
in cut-backs to their existing defined benefit plans, cuts in 
government services and/or increases in taxes or fees to absorb 
the added costs. The disruption that would likely occur for 
these public jurisdictions and their workers seems a high price 
to pay for adding an estimated two years of solvency to the 
Social Security program.
    It is estimated that mandatory Social Security coverage 
would cost the affected states and localities $44 billion over 
5 years. The additional financial burden, which will impact all 
50 states to one degree or another, could be an insurmountable 
budgetary hurdle, particularly during these very difficult days 
of huge revenue shortfalls hitting virtually every state.
    In Texas, for example, our state legislature has finished 
its regular session and is now in special session. The regular 
session was particularly difficult, as we all struggled with a 
budget reduction for the biennium that exceeded $15 billion. 
The state budget reduction has hit public sector--particularly 
our public schools--very hard. Tens of thousands of public 
school employees, including classroom educators and support 
personnel, have been sent reduction in force notices, and are 
not anticipating being rehired in the coming school year.
    To the issue of added cost, due to the mandating Social 
Security, the impact would be devastating to 95 percent of 
Texas school districts. These school employers and employees 
already make a contribution equal to 6.4 percent of their 
salary to the Texas teacher retirement system. The state 
legislature is bound by the Texas constitution to make a 
contribution, a minimum of six percent of the aggregate active 
teacher payroll.
    I think it is speculative, at best, to assume that any of 
these contributions to the teacher retirement system in Texas 
will remain in the event that Congress mandates Social Security 
coverage for all public employees.
    School districts and employees would be hard-pressed to 
make an additional contribution to the Social Security trust 
fund, as well as maintaining contributions to the TRS pension 
fund. Our Texas TRS fund is presently valued at around $110 
billion. It is about 82.3 percent funded. Redirecting 
contributions away from this fund to cover a new federal 
mandate for Social Security coverage would quickly destabilize 
the fund, and jeopardize the long-term financial security of 
1.3 million Texans. To break that number down even further, 1 
out of every 20 Texans depends on the TRS Texas as their 
primary source of their retirement or future retirement 
security.
    Texas has taken bold steps to maintain the health of the 
public retirement system, and projections suggest that TRS 
Texas is able to meet current and future obligations through 
the year 2114. Mandating Social Security coverage would have a 
profound negative impact on that funding status, and leads us 
in the wrong direction, and jeopardizes the long-term funding 
of the retirement system.
    Some suggest that current retirees may be held harmless by 
mandating Social Security coverage for only newly hired active 
employees, contending this would make it less onerous for 
public employers. But nothing could be further from the truth. 
Public sector-defined benefit plans rely on constant reliable 
revenue stream in order to meet actual real goals and provide a 
retirement benefit for plan participants at affordable 
contribution levels. Proponents of this solution fail to 
understand that the normal cost of the existing retirement plan 
will increase as percentage of payroll as younger members are 
eliminated from the plan.
    Thus, employers and new workers will not only have to add 
additional 6.2 percent of the new payroll tax, but employers 
may also have to increase contributions to the existing plan, 
or cut benefits. When states and localities are under extreme 
fiscal stress, as they are currently, this added expense will 
create enormous burdens with negligible, if any, positive 
outcomes.
    Those positive outcomes are significantly less positive 
than one may realize. A study by the General Accountability 
Office concluded that a new hire would only add two years, at 
most, to the Social Security solvency. The same report stated 
that moving to mandatory coverage would be very costly to the 
states involved. As a result, mandatory coverage provides no 
long-term solution to the Social Security issue, but it creates 
a huge, unfunded mandate on state and local governments. 
Destabilizing state designed, state-funded public pension plans 
would have grave repercussions across a public and private 
spectrum alike.
    Considering this, the--consider this. The teacher 
retirement system pension fund pays about 6.6 billion annually 
in benefits to over 300,000 current TRS Texas retirees. These 
benefit payments have a substantial impact on the Texas 
economy, including $640 million in state taxes paid, 260 
million in local government revenues, and helps create more 
than 91,500 permanent jobs in Texas.
    And I will skip to the end, Mr. Chairman. Mandating Social 
Security coverage for all public sector workers would only 
create an enormous unfunded federal mandate on state and local 
taxpayers, and major costs and burdens for public employers, 
without contributing significantly to the solvency of the 
Social Security program. Millions of public employees have 
placed their faith and their future in the pension plans, and 
have planned for their retirement accordingly. It is absolutely 
critical to maintain the stability and confidence, the security 
of those public pension plans for their employees. And we will 
work to continue to do so.
    Thank you for the opportunity to testify, and thank you for 
your staff's work in helping me be here today.
    I appreciate it.
    [The prepared statement of Mr. Lee follows:]

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    Chairman JOHNSON. Thank you, sir.
    Mr. LEE. Thank you.
    Chairman JOHNSON. Thank you for being here. And you know, I 
don't think there are very many of us that want to impose a tax 
on any state. And, as you know, the state of Texas, along with 
a lot of others, some of their associations, fireman and 
police, opted out of Social Security for a private retirement 
fund. And that is what America is all about, in my view.
    Alex Brill, a research fellow, American Enterprise 
Institute, you are recognized for five minutes.

 STATEMENT OF ALEX BRILL, RESEARCH FELLOW, AMERICAN ENTERPRISE 
                           INSTITUTE

    Mr. BRILL. Thank you very much, Chairman Johnson, Ranking 
Member Becerra, other Members of the Subcommittee, for the 
opportunity to appear before you this afternoon to testify on 
this important topic.
    To establish Social Security as a sustainable, solvent 
program, changes are certainly necessary. Absent structural 
reforms, scheduled benefits will exceed income by roughly 30 
percent in 25 years. From a mechanical accounting perspective, 
a sustainable Social Security program could be achieved by 
either a reduction in the rate of growth of future benefits, or 
through tax increases. But these two options have different 
economic effects, particularly the effect on labor supply. 
Advocates of reform proposals that offer a combination of both 
revenue increases and benefit reductions sometimes argue that a 
solution involving both sides of the ledger is a ``balanced 
approach.'' However, once one considers the economic impact of 
different changes, that balance may shift considerably.
    This hearing is about the revenue matters with regard to 
Social Security. And so, in my testimony I will focus briefly 
on the economic consequences of tax changes.
    First and foremost, I would like to stress that in 
evaluating any tax increase geared at addressing the solvency 
of the Social Security system, the burden of the tax is greater 
than just the tax itself. Taxpayers alter their behavior in 
response to tax changes. And this behavioral response is not 
without consequence. It gives rise to what economists call an 
excess burden. The greater the taxpayers' response to avoid the 
tax, the greater the excess burden. This behavioral response, 
that may result from an increase in the payroll tax rate, 
includes fewer hours worked and a shift from taxable wage 
income to non-taxed fringe benefits.
    Described earlier, the payroll tax is a tax on wages, not 
total worker compensation. And, therefore, it generally creates 
a distortion between wage compensation and non-wage 
compensation, such as health benefits and many other non-taxed 
fringe benefits. When an employer pays a worker wages, the 
employer deducts that cost from his own taxes, while the worker 
reports the wages as taxable income. However, when an employer 
compensates a worker with a non-taxable fringe benefit, it too, 
is deducted from the employer's income, but excluded from the 
worker's income.
    As a result of this distortion, there has been a decrease 
of wages as a share of total employee compensation. Today, 
approximately one out of every five dollars of compensation is 
non-wage, almost all of which is excluded from taxable income--
income tax and payroll taxes. The shift from wage to non-taxed 
fringe benefits has eroded the payroll tax base over time. And 
while many Social Security reform proposals subject a greater 
share of payroll to the payroll tax, few have focused on more 
broadly taxing compensation income.
    For some workers, higher payroll taxes affect decisions 
about whether or how much to work. With regard to the impact of 
higher payroll taxes on labor supply, it is important to also 
note that the behavioral responses vary considerably across 
workers of different types. For example, a number of economists 
have documented that married female workers are more likely to 
reduce their labor supply as a result of a marginal tax 
increase. It has also been documented that high marginal tax 
rates also discourage entrepreneurship, and reduce the business 
activity of sole proprietorships.
    Tax rate increases will generate more income for the Social 
Security trust funds, but that additional revenue comes at a 
cost. Higher marginal rates will discourage labor supply and, 
through other means of shifting, reduce taxable income. In 
addition to less economic output, such a change will lead to a 
significant decline in both federal and state income taxes.
    The least bad of the various tax options would be a 
broadening of the tax base by taxing fringe benefits. This 
would at least eliminate some of the existing distortions 
between wage and non-wage compensation. Such a change, if 
combined with a reduction in the statutory payroll tax rate, 
could reduce the excess burden of the payroll tax.
    However, there are many other reforms worth adopting before 
considering tax increases. While those issues are beyond the 
scope of this hearing, I would encourage the committee to 
explore changes to the retirement age, the benefit formula, and 
the consumer price index methodology for calculating cost of 
living adjustments before considering tax increases.
    I will conclude by reiterating that raising tax rates to 
prevent insolvency is likely to discourage work, and thus, 
long-term economic growth.
    I would also like to express to the committee my view that 
Congress need not wait until a full reform that actuaries 
estimate will return the trust funds to long-run solvency can 
be agreed to. Many incremental reforms can and should be 
considered now. The sooner Congress adopts pro-solvency 
measures, the less consequential they need to be. Thank you, 
and I look forward to answering your questions.
    [The prepared statement of Mr. Brill follows:]

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    Chairman JOHNSON. Thank you, sir. I appreciate your 
remarks.
    Dr. Warshawsky, a former assistant secretary for economic 
policy, U.S. Department of the Treasury, you are recognized, 
sir.

   STATEMENT OF MARK J. WARSHAWSKY, PH.D., FORMER ASSISTANT 
 SECRETARY FOR ECONOMIC POLICY, U.S. DEPARTMENT OF THE TREASURY

    Mr. WARSHAWSKY. Thank you very much, Chairman Johnson, 
Ranking Member Becerra, and Members of the Subcommittee on 
Social Security. I appreciate the opportunity to be here. I 
would like to congratulate you for holding this hearing 
discussing the revenue options for Social Security reform.
    As the recent Social Security trustees report shows, the 
program's financial status has worsened both in the short and 
long term. Social Security is now running large and soon to be 
rapidly growing cash flow deficits, adding to the federal debt 
outstanding held by the public and the budget deficits of the 
Federal Government. The day is steadily growing closer when 
benefits by law will have to be cut. Indeed, for disabled 
beneficiaries and their families, this is projected to occur in 
seven years.
    It is good that we are now discussing more actively options 
to strengthen Social Security, and it is promising that many 
groups and individuals and legislators have put forward 
specific proposals. At the same time, not all provisions and 
all reform plans are good policy.
    For example, there are proposals coming from the deficit 
reduction commissions and elsewhere to increase Social Security 
payroll taxes substantially by increasing the contribution and 
benefit base. In particular, the commissions propose to 
increase the Social Security contribution and benefit base--
also called the taxable maximum--by an additional two percent 
each year, starting in 2012, until 90 percent of total earnings 
of the labor force are taxed.
    If the increase were to happen in one step in 2012, the 
taxable maximum would be about $215,000, up from $106,800 
today. This is a very large tax increase on about 10 million of 
our most productive workers. Almost 99 percent of workers would 
then be subject to Social Security taxation on all of their 
earnings, up from about 94.5 percent today.
    This proposed provision is a bad idea for at least four 
reasons, in addition to the general ill effects of tax 
increases.
    It unfairly targets a specific segment of the population 
that has not seen particularly large gains in earnings. It is 
an extra burden, in addition to the new taxes imposed on this 
and other groups to finance Medicare and in the recent health 
care legislation. It will cut pre-retirement savings. And it 
represents an unnecessary expansion of Social Security. Let me 
explain briefly each.
    Those who advocate an increase in the taxable maximum have 
indicated that their goal is to have 90 percent of total 
earnings in the labor force subject to Social Security 
taxation. This taxable coverage ratio has fluctuated over the 
history of the program, from as little as 71 percent in 1965 to 
a high of 90 percent in 1983. And most recently, in 2009, it 
was 85.7 percent. The use of this ratio for policy design seems 
very arbitrary. But I think what the advocates are getting at 
is a deeper concern about the distribution of income and 
earnings, more broadly. And they claim, based on some research, 
that there has been an increase in inequality.
    But then consider another study that focuses on the wages 
of private sector workers, ages 25 to 60, over a long period of 
time. It finds that the increase in equality has slowed since 
the late 1980s, and that the vast majority of the increase for 
the top 20 percent of workers, the first group since 1980 is 
due to those above the 1 percent, the top percentile, the 
second group that is, those earning more than $215,000. And 
this is confirmed also looking at estimates from Social 
Security wage data.
    So, the first group, which is the larger group, has had 
wage increases much more modest than the upper group. Punishing 
the first group with a much bigger tax increase than the second 
group would be very unfair.
    The second reason why an increase in the taxable maximum is 
a bad policy is that workers in this segment--and also those 
with higher earnings, in the upper earnings distribution--are 
already bearing significant increases in payroll taxes, and are 
scheduled for further increases soon.
    In 1991 the earnings cap for Medicare health insurance was 
increased, and in 1994 it was lifted entirely. So these workers 
already have seen a significant payroll tax increase of 2.9 
percent of earnings. Under the new health care law, an 
additional payroll tax, HI payroll tax of .9 percent will be 
levied from workers earning above $200,000 for singles, 
$250,000 for joint filers. Because these thresholds are not 
indexed, many of the same workers would be hit by this tax 
increase as the increase that was proposed by lifting the 
Social Security taxable maximum.
    The third reason for opposition to this increase is that it 
will reduce private retirement savings. We have done work using 
a comprehensive retirement planning model for some illustrative 
household situations, and a colleague and I have found that 
those individuals earning above $106,000 that would be hit by 
this tax increase would reduce their retirement savings by 
about 4 percent.
    When you translate that across 10 million workers, that is 
a significantly lower amount of domestic sources of investment 
capital.
    Finally, an increase in the wage contribution of benefit 
base is an unnecessary expansion of the program. An increase is 
unnecessary, because there are fairer and better ways to bring 
Social Security to permanent solvency with no payroll tax 
increase, which would involve changes in several aspects of the 
program affecting different groups that, together, add up to 
sustainability. Thank you.
    [The prepared statement of Mr. Warshawsky follows:]

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    Chairman JOHNSON. Thank you, sir. I agree with your last 
statement, wholeheartedly.
    Andrew Biggs, doctor--is it Andy?
    Mr. BIGGS. It is.
    Chairman JOHNSON. Yes, that's what I thought. Resident 
scholar, American Enterprise Institute, you are recognized for 
five minutes.

   STATEMENT OF ANDREW G. BIGGS, RESIDENT SCHOLAR, AMERICAN 
                      ENTERPRISE INSTITUTE

    Mr. BIGGS. Thank you very much. Mr. Chairman, Ranking 
Member Becerra, Members of the Subcommittee. Thank you for 
offering me the opportunity to testify today with regard to 
Social Security's finances.
    The American population is aging, which means that smaller 
numbers of workers must support larger populations of retirees. 
To help them do so, public policy should encourage individuals 
to do three things: work more, meaning more hours of the week 
and more weeks of the year; save more, meaning greater 
contributions to retirement plans and other savings vehicles; 
and retire later, meaning delaying retirement past 62, the most 
common age of claiming Social Security benefits.
    If we improve the incentives for Americans with regard to 
work, saving, and retirement ages, we can boost the economy and 
increase our capacity to finance rising entitlement costs. How 
would fixing Social Security through tax increases affect these 
efforts?
    Put broadly, increased taxes generally mean that 
individuals will work less, because the reward for working has 
been reduced; save less, because they have less after-tax 
income with which to save, and less reason to save, as 
entitlement programs would be more generous; and retire 
earlier, because Social Security benefits would appear more 
generous, relative to their after-tax pre-retirement earnings. 
In other words, higher taxes work opposite to economic-level 
goals that most analysts would accept.
    We may disagree regarding how large the effects of raising 
taxes would be. We might also conclude that some policy goals 
are so important that the negative economic effects of tax 
increases are a price worth paying. But we should not dispute 
that raising taxes imposes a cost on the economy's ability to 
support growing populations of retirees.
    The most common proposal for raising Social Security taxes 
is lifting or eliminating the maximum taxable wage. With regard 
to raising the so-called tax max, I would make four points.
    First, the current payroll tax ceiling is not unusually 
low, by historical standards. As of 2009, 85 percent of total 
wages were subject to the payroll tax. From 1937 through 2009, 
the average was 84 percent. And from 1950 through 1970, only 78 
percent of total earnings were subject to taxes.
    Second, Social Security's payroll tax ceiling also is not 
unusually low, relative to other developed countries. Across 22 
OECD countries, pension taxes were, on average, applied up to 
2.1 times the average wage. In the U.S., the Social Security 
payroll tax is applied up to around 2.9 times the average wage, 
a significantly higher tax cap than in the UK, Germany, Canada, 
or other competing countries.
    Third, eliminating the payroll tax ceiling could lead to 
very high marginal tax rates. Based on the tax rates proposed 
by the administration, eliminating the tax max would raise the 
top all-in marginal tax rate to an average of 63 percent, and 
higher than that in some states. And these taxes would be 
before we had done much of anything to fix Medicare and 
Medicaid.
    Fourth, roughly one-quarter of the revenue gains from 
eliminating the tax max would be offset by lower tax receipts 
in other areas. This result does not depend on assuming that 
individuals change their work behavior. Rather, employers would 
reduce workers' wages to compensate for their own higher 
payroll tax liabilities. These reduced worker wages would lower 
receipts from federal income taxes, Medicare payroll taxes, and 
state income taxes.
    If individuals made even modest behavioral responses to 
higher taxes, then about half the gross revenues from 
eliminating the payroll tax ceiling would be lost, according to 
a study by Professors Jeffrey Liebman of Harvard University, 
and Emmanuel Saez of the University of California, Berkeley.
    Lawmakers face a choice: policies that encourage work and 
saving, or retaining the safety net for the poor, versus 
policies that discourage work and saving. Our ability to care 
for those in need springs from the goods and services produced 
in the economy. If we penalize workers who produce those goods 
and services, the goals of Social Security and other federal 
programs will be more difficult to achieve. Thank you very 
much.
    [The prepared statement of Mr. Biggs follows:]

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    Chairman JOHNSON. Thank you, sir. I appreciate all of your 
testimony. I don't think any of us up here--on this side, 
anyway--want to raise taxes. But we will have to see what falls 
out.
    Mr. Goss, in 2010 the maximum amount of earnings subject to 
the 12.4 percent payroll tax was 106,800, same as this year. 
And 84.2 percent of covered earnings were subject to the tax. 
What would the maximum amount be this year if 90 percent of 
covered earnings were subject to the payroll tax?
    Mr. GOSS. Dr. Warshawsky addressed that point already, and 
it would be somewhat in excess of 200,000. We estimate that by 
the time we get to 2020, if we were to go to a 90 percent 
taxable instead of the roughly 82.5 percent taxable that we 
expect to have at that time, it would be a little bit over 
double the taxable maximum amount that we would have, 
otherwise.
    Chairman JOHNSON. Yes. Are you in favor of that?
    Mr. GOSS. We are in favor of solvency and strengthening 
Social Security----
    Chairman JOHNSON. Okay.
    Mr. GOSS [continuing]. Absolutely, by whatever means you 
all determine.
    Chairman JOHNSON. Okay, 202,500 is what it would be today.
    Dr. Biggs and Mr. Brill, the Congressional Budget Office 
produced a policy option publication for Congress last July. In 
it they stated, ``Like all taxes on earnings, Social Security 
taxes reduce the award from work, which tends to decrease how 
much people work.''
    The Joint Committee on Taxation recently completed a 
revenue analysis for me, and the analysis says that 2.8 
trillion in self-employment income, and 13.4 trillion in wage 
income, would be subject to payroll taxes over the next decade 
if the wage base were eliminated. If the taxable wage base were 
lifted to cover 90 percent of earnings, those numbers would be 
500 billion and 4.4 trillion, respectively.
    Given these facts from CBO and Joint Tax, do you think that 
raising the wage base would keep this country from creating new 
jobs in this country that we desperately need? Either one of 
you.
    Mr. BIGGS. Well, as I noted in my testimony, I believe that 
we need to concentrate on economy-level goals of work, saving, 
investment, the things that will strengthen the economy and 
allow us to support larger populations of retirees.
    With regard to the effects of taxation, I think I would 
raise three points. One is that the negative economic effects 
of a tax increase depend, first, on the size of the tax 
increase. A 12.4 percent increase in the marginal tax rate is 
large, by itself.
    Second, it depends on the tax it's already stacked on top 
of. If people are already paying high marginal tax rates, and 
then you add more to it, the economic effects are more 
significant than if you were stacking that tax increase on a 
low tax rate.
    Third, higher-income individuals tend to be the most 
sensitive to marginal tax rates. So, essentially, you are 
applying this tax increase in the place where you are going to 
have the most negative economic effects from it. So I think it 
is just not, in my mind, a particularly productive way of going 
about this problem.
    Chairman JOHNSON. Do you agree with that?
    Mr. BRILL. I do agree. I agree with Mr. Biggs's points. And 
I would just add that the response that we could anticipate--
your question focused on labor and job creation--a number of 
the small business and medium businesses are pass-through 
entities, taxed through the ordinary individual income tax, not 
the corporate tax system. Roughly half of small business income 
is taxed by individuals at relatively high income rates. 
Raising the cap, whether it be to 90 percent--in other words, 
to $200,000--or taking the cap off all together, would raise 
the marginal rates significantly on those small businesses.
    Chairman JOHNSON. Yes, and small businesses--our studies 
indicate that is where most of the jobs are created. Is that 
true?
    [No response.]
    Chairman JOHNSON. Dr. Biggs and Mr. Brill, from an economic 
viewpoint, how do you think small business owners would react 
if Congress raised their marginal payroll tax 12.4 percent? 
What would be the business response, particularly during these 
times?
    Mr. BRILL. Research by Doug Holtz-Eakin and Bob Carroll and 
others have noted that the response from sole proprietorships 
to increases in tax rates can be significant. So a reduced 
amount of business activity from these small employers. It 
could be on the order of magnitude to a five to seven percent 
reduction in activity.
    In addition, there is a shift in the amount of taxable 
income that is reported, different than a shift in the economic 
activity. But both of these are important consequences. So 
there is both an effect to federal revenues on the income tax 
side, as well as a real effect on the economy.
    Chairman JOHNSON. Thank you.
    Mr. BIGGS. I believe the effects would be larger on the 
small business end than they would be for individuals working 
for other employers. Small businesses have more capacity to 
shift the way compensation is paid out, where individual 
employees have less. So I think the negative effects we are 
talking about would be larger on the small business end than 
they would be in the rest of the workforce.
    Chairman JOHNSON. Yes, it is negative overall, in my view, 
too.
    Mr. Becerra, you are recognized for five minutes.
    Mr. BECERRA. Thank you, Mr. Chairman, and thank you all for 
your testimony and for having taken the time to shed some light 
on the issues of Social Security.
    Interesting, Mr. Brill, I take a couple of things from your 
testimony that I think are very important that we have to 
really consider. Non-wage compensation does not get taxed, for 
payroll purposes, to provide the funds for Social Security.
    So we find ourselves in a situation where, if you are a 
worker in America who relies principally on your paycheck, and 
your income is anywhere between, you know, 0 to $106,800, you 
are subject to the full level of the Social Security payroll 
tax contribution to the system. But if you rely on a paycheck 
for part of your income, but the lion's share of your income 
comes from other non-payroll sources--and obviously, an extreme 
example would be a Bill Gates or perhaps a Wall Street 
executive, there is a good chance that the vast majority of 
their income doesn't get taxed for payroll purposes.
    So there are a whole bunch of Americans who are making vast 
sums of income who, because they don't get it through a 
paycheck, don't have to contribute to the Social Security 
system beyond whatever they get as a paycheck for a directly-
compensated wage. That is an excellent area of examination. 
Because I think you talked about how you have to figure out how 
you broaden the base in a fair way. And I think we should try 
to explore that a bit more.
    Mr. Biggs, you pointed out something that I think most 
Americans don't often think about, and may have to swallow kind 
of hard to recognize or accept, and that is--you said you have 
to work more, save more, and retire later. I think in America, 
the goal of most Americans is to be able to retire earlier--
save more, and retire earlier, rather than have to work more, 
have to save more, and retire later.
    And I think the way you tried to explain it, though, it 
makes it clear you are not telling folks, ``Hey, this is a new 
day in America, where we are going to work longer and get 
less,'' what we are simply saying is, ``Be smart about the way 
you save, understand what it means to have to work hard, and be 
prepared to know what it will take for you to live out the rest 
of your years, if you are going to retire, whether you retire 
early or not.''
    And I think, too often, Americans don't really plan for 
what it will take to live out their retirement in dignity. And 
then that is where I think Social Security has become a 
tremendous asset in this recent heavy recession, and I think 
makes it very clear why so many seniors have become so 
protective of Social Security benefits.
    I want to ask a quick question. Are any of you familiar 
with Mr. Sessions's--Pete Sessions--legislation that he 
recently introduced, H.R. 2109?
    [No response.]
    Mr. BECERRA. I referenced it in my opening remarks. It is 
legislation which essentially privatizes Social Security, 
because it allows workers today to not contribute into the 
system, and instead, create their own private accounts.
    And unlike previous privatization proposals, in this case, 
in the Sessions legislation, there would be no backfilling of 
the lost revenues by having today's workers no longer put money 
into the system, and instead, only put money into a private 
account. Most of the previous privatization proposals at least 
recognized that Americans who are retired today because they 
were working and contributing to the system yesterday should 
not be expected to take the massive loss of benefits, as a 
result of having today's workers no longer contributing to the 
system.
    Mr. Goss, I have tried to explain an aspect of the Sessions 
legislation. Obviously, it goes well beyond that into other 
areas, as well. But what would happen if you had a system where 
you created a system--I would no longer call it Social 
Security, because it would become a privatized system, where no 
longer would American workers contribute, starting today, into 
the Social Security system and the trust fund? What would 
happen to today's retirees?
    Mr. GOSS. Very good question. We have not been asked to do 
a formal estimate of the plan, but we are familiar with it. My 
understanding of the plan is that workers today who are not yet 
retired and not receiving benefits would have the option to 
start paying one half of the taxes, and after 15 years not to 
pay any of the taxes themselves, and by their employers.
    People who are over 40--especially over 50--probably 
wouldn't want to do this, because they have a substantial 
investment in Social Security already. For people who are under 
40, they may well decide that the amount of money that they 
could put into an account would be sufficient that they would 
be willing to walk away from the Social Security benefits that 
have been scheduled for them.
    What this would mean, though, to the extent that people did 
this, is that the amount of revenue coming into Social Security 
would be dramatically reduced. Already, as many on the panel 
have pointed out, we do not have enough taxes coming in over 
the future to be able to pay for scheduled benefits, as it is. 
Taxes would be reduced--essentially, immediately--by a 
substantial degree, and we would not have any offsetting 
reduction in benefits until people who are under 40 now got to 
the point of receiving benefits.
    So, for Social Security--the ability to pay benefits to 
people who are currently receiving or are now approaching the 
time of receipt of benefits would be severely compromised. 
Trust fund exhaustion would certainly come much sooner than 
2036. And the extent to which we have cash flow shortfalls, and 
the speed with which we would be spending down our trust fund 
assets, would be much, much faster.
    Mr. BECERRA. Thank you. Thank you, Mr. Chairman.
    Chairman JOHNSON. Thank you. Mr. Smith, you are recognized.
    Mr. SMITH. Thank you, Mr. Chairman. And thank you to our 
witnesses, for sharing your expertise and your time.
    We have heard various characterizations of Social Security, 
that everything is just fine and so forth. And I am trying to 
grapple with various points of information and perspectives.
    But Mr. Goss, would you describe Social Security as 
actuarially sound?
    Mr. GOSS. Thank you very much for the question. Clearly, we 
do not project that Social Security is solvent over the next 75 
years. We will reach the point in 2036, if nothing is done--and 
we trust something will be done--that the trust funds will 
become exhausted and won't be able to pay full benefits. As 
Chairman Johnson indicated, at that point in time, 77 percent 
of scheduled benefits would be payable.
    So, changes clearly need to be made. We need to either 
increase revenue or, to reduce the scheduled benefits to match 
the revenue already being put on the table under current law.
    Mr. SMITH. But is there even a mechanism to reduce those 
benefits, should nothing be done?
    Mr. GOSS. Well, actually, there is. Social Security OASI, 
DI, and the Medicare Hospital Insurance funds are special in 
the Federal Government. Most programs in the Federal 
Government, as we know too well, can run deficits for a long 
time, and actually build up a lot of debt. We have over $14 
trillion of total federal debt now. Social Security does not 
have any debt. In fact, it cannot have debt, by statute. It is 
not allowed to have debt.
    From the point of its inception, it has to always have 
taken in more money than it has paid out. So there is a natural 
breaking force spending, there is a scrutiny that is applied to 
the trust fund programs. If we reach the point where the trust 
funds run out, and there is no action by Congress, we will have 
no choice but to pay out only then what the trust funds have 
available, which will be $.77 on a dollar.
    That would be--I don't know if catastrophic is too strong a 
word, but that would be a terrible situation. You cannot--
anybody would not want to have our beneficiaries, from one day 
to the next, drop by 23 percent in the amount that they 
receive. So we have absolute confidence that the Congress will 
act between now and that time, and hopefully sooner.
    Mr. SMITH. Okay, thank you. Dr. Biggs, in your testimony 
you note that while only six percent of workers reach the 
taxable maximum in a given year, almost a quarter of workers 
would be affected by such an increase over their lifetimes. 
Could you expand on this?
    Mr. BIGGS. Sure. In an given year, around six percent of 
employees have earnings above the taxable maximum of around 
$107,000. We had periods in the past--I think from 1950 to 1970 
that actually were around 20 or 22 percent of workers were 
above that tax cap in any given year.
    Today it is only six percent, but it is not the same six 
percent year after year. Some people have good years, some 
people have bad years. If you look at the course of 
individuals' full working lifetimes, somewhere--my number is 
around 24 percent--would have had some earnings above that cap 
at some point in their career. And so, if you lift or eliminate 
the cap, would have been subject to that higher tax rate.
    Mr. SMITH. Mr. Brill, certainly the six percent sounds like 
a small number. But if these are entrepreneurs and job 
creators, how does that impact our economy and our effort to 
reverse this recession?
    Mr. BRILL. I think, actually, the more important number is 
the larger number that you referenced, the 24 or 25 percent, 
because what is important to keep in mind is it is not only 
those taxpayers who are facing the higher tax rate currently, 
but those that would risk facing it if they were successful.
    So, research on the economic consequences of 
entrepreneurship have confirmed this, that if an individual who 
is making $100,000 is considering a new venture, a risky 
venture that, if things work out well, his income or her income 
would jump to $200,000, knowing that their tax rate would 
increase substantially at the same time may discourage some of 
that activity.
    So, it is important to focus not just on those who are 
actually affected at the moment, but those who are at risk of 
facing the higher tax, as well.
    Mr. SMITH. Okay. Dr. Warshawsky, would you care to comment?
    Mr. WARSHAWSKY. I agree with the statistics that have been 
put forward. But I think it is also very helpful to give some 
characterization of who these workers are. The typical earnings 
profile of many workers is that they reach their peak in their 
early fifties, when they have their highest earnings potential. 
This is after years of education, hard work, supporting growing 
children. And these people have been hit pretty hard by high 
education costs, high health care costs.
    So, I think it is important to sort of get a sense of the 
character of these workers.
    Mr. SMITH. Okay. Thank you. Thank you, Mr. Chairman. I 
yield back.
    Chairman JOHNSON. Thank you, Mr. Smith. Mr. Berg, you are 
recognized.
    Mr. BERG. Well, thank you, Mr. Chairman. I wanted to 
explore a little bit the question that comes up always that 
there is income that people receive that they are not paying, 
you know, FICA or SECA on. What is an example of what people 
use for that? There is some specific revenue that you hear a 
lot? Please.
    Mr. GOSS. We have on page nine of the written testimony 
identified a couple proposals that could generate revenue that 
have been put forth by the bipartisan policy center workgroup, 
and one of them actually by Paul Ryan, in his roadmap plan, 
that would not increase the taxable maximum amount. These are 
plans, instead, that would look at employee compensation that 
is now not taxed, but would become taxed.
    One of these items that would cover about 42 percent of our 
75-year shortfall would be to tax the employer-sponsored group 
health insurance premiums, whether those are paid for by 
employees or by employers. Currently, they are generally not 
subject to the FICA tax. If those were subject to the FICA tax 
over a gradual period of time, phased in as this particular 
proposal would suggest, we could cover almost half of the 75-
year shortfall.
    Another smaller approach toward covering a portion of this 
would be to cover certain Section 125 cafeteria plans by which 
employees can pay for a portion of some fringe benefits that 
they receive. These are also tax exempt currently. Most of 
this, as we have learned from our friends at Joint Committee on 
Taxation, is the employee share of employer-sponsored group 
health insurance. If we were to make that no longer FICA tax-
exempt, that would cover about 10 percent of the long-term 
shortfall for Social Security.
    So, there are options, other than just raising taxes.
    Mr. BERG. And I was just curious, because I hear people 
talking about that, and now I know that what they are talking 
about is simply taxing health care benefits, or employer-
provided health care benefits.
    The other question I had--and again, we had a reduction in 
2010 where we went from 6.2 to 4.2, and I guess I was just 
wondering if any of the panelists here have--do we have any 
results from that, that we can say, ``Hey, that was a good 
decision,'' or a poor decision, or--what was the impact of 
that? Anyone wish to address that? Or is it too early to tell?
    Mr. GOSS. Well, I would just----
    Mr. BERG. Do you get paid extra? Are you getting paid by 
the--no.
    Mr. GOSS. Okay.
    Mr. BERG. No, no.
    Mr. GOSS. A portion of that legislation suggests that the 
trust funds, per se, would not be affected. The revenue coming 
into the trust funds has been maintained exactly as though the 
tax rate were not reduced.
    So, effectively, one might suggest that it was a mechanism 
by which the amount that employees and self-employed had to pay 
to the Federal Government was reduced by 2 percent of their 
pay, up to the $106,800. Trust funds are not affected, and the 
long-term solvency is not affected.
    Mr. BERG. I can't understand that. Why is the trust fund 
not affected, or the long-term? Are we taking dollars and 
putting it in there to offset that two percent?
    Mr. GOSS. We----
    Mr. BERG. Okay.
    Mr. GOSS. The trust fund continued to be credited, not by 
money that was coming in in payroll taxes, but money from the 
general fund to the treasury.
    Mr. BERG. Right, right, okay.
    Mr. GOSS. And this is a special----
    Mr. BERG. I follow you, I follow you.
    Mr. GOSS [continuing]. A special one-year thing in 2011.
    Mr. BERG. So now, what is the benefit, then?
    Mr. GOSS. Well, the benefit--I think some of our economists 
could probably speak better----
    Mr. BERG. I see some smiles, though.
    Mr. GOSS [continuing]. To this than I.
    Mr. BERG. Whoever has the biggest smile starts.
    Mr. WARSHAWSKY. I am anxious to hear what Steve will say.
    [Laughter.]
    Mr. GOSS. But we have heard much discussion about the 
impact on economic growth and desire to work by having taxes 
increase. This effectively was a one-year decrease in taxes for 
employees and for self-employed. The intent, presumably, was to 
encourage more work and more employment during that period. I 
am not sure that anybody can really measure what the impact is.
    Mr. BRILL. I would just comment that if we are thinking 
about changing the tax rates as a tool to create jobs, we need 
to distinguish between temporary tax policies and permanent 
policies. This policy, which was a temporary one, while 
technically it may be too early to do the analysis, and it is 
always hard to know the but-for case, but certainly the labor 
market is not improving while this policy is in place.
    Mr. WARSHAWSKY. I would just comment again. I have not seen 
any studies in it. I would imagine it is premature. But I think 
the American public sees that Social Security has financial 
troubles, and that the Federal Government has financial 
troubles, and with this sort of temporary tax cut, people, you 
know, are uncertain. They don't know. Does that mean taxes will 
increase in the future?
    Mr. BERG. I just--let me--it is clear to me. I, of course, 
just come from little old North Dakota. And it seems that out 
here everything is pretty temporary, and a cloud of uncertainty 
over business and over everything. A cloud of uncertainty is 
over Social Security. People need to know what is going to 
happen.
    And again, just to add to that, I think we need long-term 
solutions for solvency, whether it is our country's cash flow, 
whether it is our country's regulatory environment, whether it 
is our country's tax environment, simply having a path that 
people can look down the road and have confidence that it is 
going to be there is really what is critical.
    So, just one final question. What is the cost? Does anyone 
know what the cost of the two percent is, then, to the general 
fund? Do we have a number on what that is?
    Mr. GOSS. So for 2010 and some of the cost for 2011 
slipping into 2012, it is about $110 billion in total.
    Mr. BERG. And that is set to expire in December of 2011, 
or----
    Mr. GOSS. Or the beginning of 2012. Work in 2012 will no 
longer be subject to the 2 percent reduction.
    Mr. BERG. Okay.
    Mr. GOSS. In payroll tax.
    Mr. BERG. Thank you. I yield back.
    Chairman JOHNSON. Thank you, Mr. Berg. Mr. Marchant, you 
are recognized.
    Mr. MARCHANT. Thank you, Mr. Johnson. Mr. Brill, the 
President is proposing that we cut the employer's payroll taxes 
to create jobs. Other Members of Congress--the Democratic 
Members of Congress--are proposing that we raise payroll taxes 
in order to make the Social Security fund solvent.
    Which of those two policies would create more jobs, or make 
the fund become more solvent? Which one of those policies 
should we select?
    Mr. BRILL. Are there any other choices?
    [Laughter.]
    Mr. MARCHANT. I won't select either one of those, but those 
are the proposals----
    Mr. BRILL. I would just note again, as I remarked to 
Congressman Berg, the important distinction between those two, 
in addition to the fact that one is going up and the other one 
is going down, is that one is temporary and the other one is 
permanent. The evidence of temporary tax policies on permanent 
job creation is shaky, at best.
    And as we were just noting, a recent experience may be too 
soon to analyze, but it seems unlikely that we would get a 
large benefit from a temporary payroll tax, whether it be on 
the employee side or the employer side. Of course, there have 
been a number of attempts at temporary policies in the last few 
years, none of which seem to have been particularly effective.
    On the other side, raising the cap is a permanent policy, 
and employers and employees experiencing long-term, higher 
marginal rates are less likely to engage in work.
    Mr. MARCHANT. As someone that is a small employer, as well 
as a Member of Congress, and my brother as well, we have had 
this discussion in the last week about what happens in January, 
when all of a sudden the two percent goes away, and all of a 
sudden the same exact check to one of our--the foreman in this 
case, $68, will--the foreman will be paid exactly the same 
amount, but there will be $68 less in his paycheck.
    Is there any of you on the panel that have any opinion 
about how--what effect that is going to have on employment, if 
Congress or the administration is not able to extend that 
deduction? Dr. Biggs, how about you?
    Mr. BIGGS. I think I would agree with some of the others, 
that I suspect the effects on employment of temporary payroll 
tax cuts will be small. And so, if we didn't see a lot of job 
gains through the payroll tax cut--and I suspect we didn't--
then probably we won't see a lot of job losses when the payroll 
tax goes back to its original level. That is my gut on this.
    It may be possible to do some research in further years and 
figure it out, but if you are looking to hire somebody, 
particularly if you are looking to hire somebody for a quality 
job, you know, what we call a ``good job,'' it is somebody you 
want to have them stick around for a while, you know, a 
permanent employee, a two percent cut in your labor cost in one 
year is not really enough to say, you know, ``I am going to go 
out and add a whole load of new people.'' It is just--the 
temporary nature of it just--I don't think will have that big 
an effect.
    So, I tend to think the positive effects were small, and 
the negative effects, when it goes away, also will be small.
    Mr. MARCHANT. And, Mr. Chairman, if I could ask a question 
that I promised a gentleman last week--when he found out that I 
was going to be on the Social Security Subcommittee, he asked 
me to ask this as a question.
    What is--and I will ask this to Mr. Goss--what is the 
definition of a gap baby? Notch baby, I am sorry.
    Mr. GOSS. Notch.
    Mr. MARCHANT. Because this gentleman obviously is a notch 
baby.
    Mr. GOSS. Okay.
    Mr. MARCHANT. And he calls often.
    [Laughter.]
    Mr. GOSS. We apologize for that. There was a certain period 
of time during which births reached retirement age in a period 
when, as a result of the 1977 Social Security amendments, 
because the benefit levels were rising at, really, an 
unsustainable rate, these so-called replacement ratios, 
benefits relative to wage levels, were growing out of control. 
And the 1977 Social Security amendments came along and 
corrected that.
    But the Congress at that time decided that the benefits had 
risen to a level that was about six percent higher than they 
thought made sense. So they actually, over a period of five or 
six years worth of retirees, pulled the benefit levels down. As 
a result of having the benefit levels pulled down over that 
period, we ended up with a situation which really defines what 
a notch is: people retiring this year, say at 62, actually 
getting less when they retire at 62 than a person who is now 
63, had the same job, and retired a year ago.
    And so, if a person retiring now is getting less than a 
person who retired a year ago from the same job, then that is 
defined as a notch that is something which, when we design 
proposals--everybody who is sitting behind you knows well--this 
is something we strive to avoid, having notches in the future 
so you won't have any more cards and letters.
    Mr. MARCHANT. Okay. Thank you, Mr. Chairman.
    Chairman JOHNSON. Try not to ask that question any more.
    [Laughter.]
    Chairman JOHNSON. Let's see, Mr. Tiberi.
    Mr. TIBERI. Thank you, Mr. Chairman. Thanks for having this 
hearing.
    Mr. Goss, remind us up here. When Social Security was 
created, my understanding is that President Roosevelt stressed 
that this would not be a welfare system, that this would be a 
system that the benefits, the taxes that you paid, would equal 
the benefits that you incurred. And, therefore, if you were 
making $100,000, and paying tax on the $100,000, your benefit 
will be higher over a period of time if your average wage over 
time was $50,000, and thus you paid $50,000 into--or taxes 
based on the $50,000. Is that correct? Is that how it works?
    Mr. GOSS. That is absolutely correct. People who earn more, 
and therefore pay higher taxes, do get higher benefits. But it 
is not in direct proportion.
    Mr. TIBERI. Right.
    Mr. GOSS. If you have somebody who makes $50,000 versus 
$100,000, the $100,000 will pay twice as much in the way of 
taxes. But because of the way the benefit formula has been put 
together, they will not get twice as much in the way of 
benefits.
    Mr. TIBERI. But they will get a percentage higher, because 
they put a percentage more in.
    Mr. GOSS. They definitely will get more benefits.
    Mr. TIBERI. If we lift the cap--the proposals to lift the 
cap haven't corresponded to the theory that President Roosevelt 
has proposed, is that correct? My understanding is those who 
want to lift the cap want to also cap the benefit and then use 
the remainder to fund the system. Is that correct, or am I 
wrong?
    Mr. GOSS. Well, we have a variety of proposals. One that 
has been discussed much here is to gradually raise the taxable 
maximum up, so that we will again be taxing 90 percent.
    Actually, the fiscal commission and the bipartisan policy 
center commission came up with slightly different flavors of 
that. Generally speaking, if we do raise the taxable maximum, 
extra earnings that people have above the current taxable 
maximum might be confronted in our benefit formula with getting 
only a 15 percent return, as compared to about the average 48 
percent return that earnings tend to get.
    The fiscal commission actually suggested that the extra 
earnings should get not a 15, but a 5 percent return. So they 
were trying to achieve actually more solvency kick out of 
raising the taxable maximum than the bipartisan policy center 
is.
    Other proposals have been put forth that would say that for 
the extra taxes paid in for higher earnings, there will be no 
extra benefit gains. So there is a great variety of 
possibilities that you might consider.
    Chairman JOHNSON. Dr. Biggs, would we lose public support, 
in your opinion, if we raise the tax? And we have heard from 
you and Mr. Brill about the negatives of raising the tax. But 
put that aside for now. Would we lose public support of the 
system, in your opinion, if we took the cap off and retirement 
benefits would be less than they are today for those earners, 
based upon the tax paid and the benefits received, whether it 
is 48 percent versus 15 or 48 percent versus 5 for the added 
amount?
    Mr. BIGGS. Well, I think that that is an important issue, 
sort of a political economy issue, of how people view the 
program, and how that affects their support for it.
    Historically, that issue is very, very important for 
President Roosevelt. He appointed a commission to develop sort 
of the skeleton of the Social Security program.
    The interesting thing of what the committee on economic 
security came up with is they originally set this wage cap of 
$3,000, and they argue that anybody above that wage cap 
shouldn't even participate in the program, that they should 
just go save on their own. So, under their structure, you 
wouldn't have had any redistribution from these high earners to 
low earners. It was really seen as a universal insurance 
program, where everybody paid in, everybody got out.
    The compromise they came to was a cap where you pay in 
taxes based up to $100,000 in earnings, and your benefits are 
based on those same taxes. So there was always this interchange 
between the two. If you made it too progressive, the argument 
was, it would be come to be seen was what Roosevelt called 
relief--the phrase we use today is ``welfare.''
    Now, the question is how far can you push that. You can say 
we are going to eliminate the cap, and you are going to get an 
extra penny of earnings, or an extra penny of benefits. People 
say, ``Okay, clearly, that is sort of a--that makes kind of a 
joke of the situation.'' So the question is, how far can you 
push it before you get the lack of political support, which, 
really, people have counted on for the program? If people don't 
feel a program is fair, then the political support does tend to 
fall apart.
    Chairman JOHNSON. Thank you. Mr. Brill, you commented about 
the concern that, in raising Social Security revenue, there 
would be a detrimental impact on overall federal revenue. Can 
you expand upon that, why you believe that?
    Mr. BRILL. Sure. I think this is an important consequence 
to appreciate when looking at raising the cap or raising the 
payroll tax rate. It depends, in part, on exactly the 
sensitivity of the workers, to what degree they respond to this 
higher tax rate. And there is a debate among academics to that 
response.
    But there is absolutely shifting that will occur, and it 
would be reflected in any analysis that Tom and his team would 
undertake, or any work done by the CBO on this issue.
    One paper that many have noted on this area is a working 
paper by Jeffrey Liebman and Emmanuel Saez. In that paper, they 
estimate the impact on a per-worker basis of raising the 
payroll cap. In one example, a more conservative example, 
raising the cap to 90 percent from where it is now would result 
in $155 more in payroll taxes, but $67 less in other taxes 
being paid, as the workers shift their behavior and either work 
less or report less taxable wages. And so, in that sense, there 
is a decreasing amount of general fund revenues in exchange for 
increasing amounts of Social Security revenues.
    Chairman JOHNSON. Thank you. You know, you guys didn't talk 
about raising the age limit at all. I am surprised.
    And, Mr. Lee, you didn't push your teachers out there, I am 
sorry to hear. Tell them hi when you get back, will you?
    Mr. LEE. I will, thank you.
    Chairman JOHNSON. I thank you all for being here today. 
This subcommittee will continue to monitor progress to make 
sure that Social Security is done right, within its means.
    With that, the committee stands adjourned. Thank you all 
for being here.
    [Whereupon, at 3:28 p.m., the subcommittee was adjourned.]
    [Submissions for the Record follow:]

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