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



 
      2012 ANNUAL REPORT OF THE SOCIAL SECURITY BOARD OF TRUSTEES 

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

                                HEARING

                               before the

                    SUBCOMMITTEE ON SOCIAL SECURITY

                                 of the

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

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 21, 2012

                               __________

                          Serial No. 112-SS17

                               __________

         Printed for the use of the Committee on Ways and Means


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                      COMMITTEE ON WAYS AND MEANS

                     DAVE CAMP, Michigan, Chairman

WALLY HERGER, California             SANDER M. LEVIN, Michigan
SAM JOHNSON, Texas                   CHARLES B. RANGEL, New York
KEVIN BRADY, Texas                   FORTNEY PETE STARK, California
PAUL RYAN, Wisconsin                 JIM MCDERMOTT, Washington
DEVIN NUNES, California              JOHN LEWIS, Georgia
PATRICK J. TIBERI, Ohio              RICHARD E. NEAL, Massachusetts
GEOFF DAVIS, Kentucky                XAVIER BECERRA, California
DAVID G. REICHERT, Washington        LLOYD DOGGETT, Texas
CHARLES W. BOUSTANY, JR., Louisiana  MIKE THOMPSON, California
PETER J. ROSKAM, Illinois            JOHN B. LARSON, Connecticut
JIM GERLACH, Pennsylvania            EARL BLUMENAUER, Oregon
TOM PRICE, Georgia                   RON KIND, Wisconsin
VERN BUCHANAN, Florida               BILL PASCRELL, JR., New Jersey
ADRIAN SMITH, Nebraska               SHELLEY BERKLEY, Nevada
AARON SCHOCK, Illinois               JOSEPH CROWLEY, New York
LYNN JENKINS, Kansas
ERIK PAULSEN, Minnesota
KENNY MARCHANT, Texas
RICK BERG, North Dakota
DIANE BLACK, Tennessee
TOM REED, New York

         Jennifer Safavian, Staff Director and General Counsel

                  Janice Mays, Minority Chief Counsel

                                 ______

                    SUBCOMMITTEE ON SOCIAL SECURITY

                      SAM JOHNSON, Texas, Chairman

KEVIN BRADY, Texas                   XAVIER BECERRA, California
PATRICK J. TIBERI, Ohio              LLOYD DOGGETT, Texas
AARON SCHOCK, Illinois               SHELLEY BERKLEY, Nevada
RICK BERG, North Dakota              FORTNEY PETE STARK, California
ADRIAN SMITH, Nebraska
KENNY MARCHANT, Texas




                            C O N T E N T S

                               __________

                                                                   Page

Advisory of June 21, 2012 announcing the hearing.................     2

                               WITNESSES

Charles P. Blahous III, Ph.D. Trustee, Social Security and 
  Medicare Boards of Trustees, Testimony.........................     6
Robert D. Reischauer, Ph.D. Trustee, Social Security and Medicare 
  Boards of Trustees, Testimony..................................    15

                       SUBMISSIONS FOR THE RECORD

The Honorable Pete Stark.........................................    43
NCPA.............................................................    45

                   MATERIAL SUBMITTED FOR THE RECORD

Questions For The Record:

Charles P. Blahous III, Ph.D.....................................    50


      2012 ANNUAL REPORT OF THE SOCIAL SECURITY BOARD OF TRUSTEES

                              ----------                              


                        THURSDAY, JUNE 21, 2012

             U.S. House of Representatives,
                       Committee on Ways and Means,
                           Subcommittee on Social Security,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 9:06 a.m. in 
Room B-318, Longworth House Office Building, the Honorable Sam 
Johnson [Chairman of the Subcommittee] presiding.
    [The advisory of the hearing follows:]

HEARING ADVISORY

  Chairman Johnson Announces Hearing on the 2012 Annual Report of the 
                   Social Security Board of Trustees

Thursday, June 21, 2012

    U.S. Congressman Sam Johnson (R-TX), Chairman of the House 
Committee on Ways and Means Subcommittee on Social Security announced 
today that the Subcommittee will hold an oversight hearing on the 
findings in the 2012 Annual Report of the Social Security Board of 
Trustees. The hearing will take place on Thursday, June 21, 2012 in B-
318 Rayburn House Office Building, beginning at 9:00 a.m.
      
    In view of the limited time available to hear witnesses, oral 
testimony at this hearing will be from invited witnesses only. However, 
any individual or organization not scheduled for an oral appearance may 
submit a written statement for consideration by the Committee and for 
inclusion in the printed record of the hearing. A list of invited 
witnesses will follow.
      

BACKGROUND:

      
    The Board of Trustees of the Federal Old-Age and Survivors 
Insurance (OASI) and the Federal Disability Insurance (DI) Trust Funds 
was established under the Social Security Act to oversee the financial 
operations of the OASDI Trust Funds. The Board is comprised of six 
members, four of whom serve by virtue of their positions in the Federal 
Government (the Secretary of the Treasury (who also serves as Managing 
Trustee), the Secretary of Labor, the Secretary of Health and Human 
Services, and the Commissioner of Social Security) and two members of 
the public who are appointed by the President and confirmed by the 
Senate. The Deputy Commissioner of Social Security Administration 
serves as Secretary of the Board.
      
    The Social Security Act requires that the Board, among other 
duties, report annually to the Congress on the financial status of the 
OASI and DI Trust Funds. The overview section of the 2012 report 
concluded, ``Under the long-range intermediate assumptions, annual cost 
for the OASDI program is projected to exceed non-interest income in 
2012 and remain higher through the remainder of the long-range period. 
The combined OASI and DI Trust Funds are expected to increase through 
2020, and then to decline and become exhausted and unable to pay 
scheduled benefits in full on a timely basis in 2033. However, the DI 
Trust Fund becomes exhausted in 2016, so legislative action is needed 
as soon as possible.''
      
    In the absence of intervening Congressional action or changes in 
projections, the Trustees project that incoming Social Security 
revenues would be sufficient to pay about three-quarters of scheduled 
benefits starting in 2033 and over the rest of the 75-year period.
      
    In their ``Message from the Public Trustees,'' the Public Trustees 
concluded that Social Security's finances had deteriorated primarily 
because of a weak economy and higher-than-expected inflation. They 
said, ``[t]he Social Security outlook has worsened significantly 
relative to last year's report. The actuarial deficit in its combined 
trust funds is now 2.67 percent of taxable payroll, the highest 
recorded since the last major Social Security financing reforms roughly 
three decades ago.'' They also said, ``While there is no way to know 
what mixture of additional revenue and restraints on benefit growth 
will prove to be the most palatable means of strengthening Social 
Security's financial position, lawmakers should be aware that it will 
become increasingly difficult to avoid adverse effects on current 
beneficiaries, those close to retirement, and low-income beneficiaries 
in all birth cohorts if legislative actions are delayed much further.''
      
    In announcing the hearing, Chairman Sam Johnson (R-TX) 
stated,``Americans have long known that without change, Social Security 
will be unable to keep its promises to the hard-working taxpayers who 
pay into the system. According to this year's report, not only is 
Social Security's outlook worse, it is clear that the longer we wait 
the harder it will be to protect benefits for those who rely on them 
most. I hope this hearing will help lead us to find commonsense 
solutions to secure Social Security's future.''
      

FOCUS OF THE HEARING:

      
    The hearing will focus on the findings in the recently released 
2012 Annual Report of the Board of Trustees of the OASDI Trust Funds, 
the effect of the trust funds' current cash flow deficit status and 
future exhaustion, and the cost of delaying actions to address Social 
Security's fiscal challenges for workers and beneficiaries.
      

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

      
    Please Note: Any person(s) and/or organization(s) wishing to submit 
for the hearing record must follow the appropriate link on the hearing 
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 5, 2012. 
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 or WordPerfect 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. This hearing will come to order. Good 
morning to both of you. Thank you for being here.
    According to this year's report from the Social Security 
Board of Trustees, Social Security will be unable to keep its 
promises to the hard working Americans who pay into the system.
    We will hear today that not only is Social Security's 
financing looking worse, but it will also be increasingly 
difficult to protect benefits for those who rely on them most 
if we delay action much longer.
    As Commissioner Astrue said ``This year's Trustee Report 
contains troubling but not unexpected projections about Social 
Security's finances, and once again emphasizes that Congress 
needs to act to ensure long term solvency of this important 
program.''
    According to the Trustees, the Old Age and Survivors 
Program will be unable to pay full benefits beginning in 2035, 
three years earlier than projected in last year's report.
    That means workers who are 44 years old today will reach 
their full retirement age in 2035, at which point everyone else 
will face benefit cuts of 25 percent unless Congress acts.
    In less than 4 years, Social Security's Disability 
Insurance Program will be unable to pay full benefits.
    The average monthly benefit for a disabled worker today is 
only $1,111. In 2016, revenues will cover 79 percent of 
benefits. That is a potential cut of about $233. That is real 
money for those who are getting by on fixed income.
    Social Security's last major reform was in 1983, then 
Social Security faced an imminent disaster. In their 1982 
annual report, the Social Security Trustees said, ``Without 
corrective legislation in the very near future, the Old Age and 
Survivors Insurance Trust Fund will be unable to make benefit 
payments on time beginning no later than July 1983.''
    Members of Congress and the President were able to develop 
and ultimately pass on a bipartisan basis the Social Security 
Amendments of 1983.
    Despite the near failure of the Greenspan Commission and 
despite the opposition of senior advocacy groups including 
AARP, as this year's report makes clear, Social Security is in 
trouble, but just as in 1983, I believe our nation has the will 
to again save Social Security.
    We should not follow the path Europe has taken by waiting 
for a financial disaster to force changes that ultimately could 
end up hurting the most vulnerable.
    Today we will hear from Social Security's Public Trustees, 
but we in Congress are trustees, too, and the public knows the 
longer we wait, the more difficult the choices will become, and 
the less time Americans will have to prepare.
    With all the financial anxiety that Americans face, we 
should not increase the burden on them by failing to fulfill 
our duty in protecting our nation's most important safety net 
program. We need to act now before it is too late.
    Do you have an opening statement?
    Mr. BECERRA. I do.
    Chairman JOHNSON. What do they say, up from the grave he 
arose.
    Thank you again for listening. I will recognize Mr. Becerra 
now for any opening statement you have.
    Mr. BECERRA. Thank you, Mr. Chairman. I also want to thank 
Mr. Stark for being here in the event I was not able to make 
it. I got my daughter to her program on time and I am able to 
be here. Thank you very much for being here to the two 
gentlemen, our Trustees who are here.
    I would just like to say what I have been saying for quite 
some time. Social Security, even through the worst recession 
since the Great Depression, is a program that people have grown 
to rely upon and can trust.
    Between 2007 and 2010, a typical middle class family lost 
somewhere between $26,000 to $87,000 in their net worth. That 
is about four out of every ten dollars of their assets and 
savings.
    Between 2007 and 2010, Social Security added $439 billion 
to its trust fund surplus, while paying Americans their earned 
benefits on time and in full.
    Here we saw Americans with their private savings and 
retirement pensions watching it go down at the same time during 
this great recession. We saw Social Security continue to 
increase the monies it had to pay out benefits to its 
recipients.
    Over 77 years now, through 13 recessions, Social Security 
has added not one penny to our deficit or to our debt.
    In 2011, Social Security provided earned benefits to more 
than 55 million seniors, widows, disabled workers, and 
children, while saving all the reserves in its trust fund to 
pay future benefits.
    Six out of ten seniors who get Social Security rely on 
Social Security for a majority of their income. There are 
1,300,000 children who are lifted out of poverty because they 
receive Social Security.
    In the long term, Social Security faces a manageable 
challenge. It is not now and never will be broke.
    This April, the Social Security Trustees warned that 
without action, Social Security will be insolvent by 2033. 
Let's be clear about what that means.
    In 2033, worker contributions are projected to cover about 
76 percent of Social Security's costs. The remaining balance in 
Social Security's trust fund will pay another five percent of 
costs. The shortfall is stable. After 2033, Social Security's 
income will be enough to pay about three-fourths of earned 
benefits until at least 2087, and likely longer after that.
    Social Security's long term shortfall is a problem that we 
need to address, but even when the reserves building up now run 
out, Social Security will not be out of money. It will have a 
shortfall of about .9 percent of GDP, just slightly more than 
the cost of extending the Bush tax cuts for people who earn 
more than a quarter of million dollars a year.
    Social Security does face a crisis in the short term, one 
manufactured by a series of budget cuts forced by House 
Republicans.
    If they continue, the cuts could delay benefits and damage 
Social Security's well earned public image.
    In 2011, the Republican-led a four year continuing 
resolution cut the Social Security Administration's budget by 
$600 million, despite rising numbers of Americans applying for 
Social Security.
    In 2012, SSA's budget was frozen below the 2010 level.
    I strongly oppose these budget cuts which are kind of like 
the cable company starting to bill you for a service while you 
are at home waiting for them to show up and connect it.
    Social Security's trust fund funds the entire cost of 
paying Social Security benefits. In 2011, workers contributed 
over $600 billion to Social Security's trust fund. Because of 
Social Security's budget cuts in 2011, all Social Security 
field offices started closing half an hour early each day.
    Social Security permanently closed over 300 contact 
stations and small field offices and waiting times for initial 
disability decisions rose and are likely to be over 130 days by 
the end of 2012.
    SSA faces an even bigger cut through the sequestration 
process, automatic cuts scheduled by the Budget Control Act. 
Although Social Security benefits are protected, if Congress 
does not act soon, on January 2, Social Security's operating 
budget will be cut by over $1 billion.
    $1 billion in cuts translates into 40 days in which Social 
Security is shut down. Offices are closed and locked. No one 
answers the phone. No applications processed. No one makes sure 
benefit checks are sent to the right place.
    Mr. Chairman, Social Security has been there for Americans 
for 77 years. I hope we can continue to work to make it strong 
for another 77 years. We can start by addressing the 
preventable crisis of short-sighted budget cuts.
    With that, I yield back the balance of my time.
    Chairman JOHNSON. Thank you. We have one witness panel 
today. Seated at the table are our two Public Trustees, Charles 
Blahous, Ph.D., and Robert Reischauer, Ph.D.
    Robert Reischauer, I would like to congratulate you on your 
award last night at the National Academy of Social Insurance. 
We are lucky to have someone with your breadth of experience 
working as a Public Trustee. Thank you and congratulations.
    Mr. Blahous, you are recognized.

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

    Mr. BLAHOUS. Thank you, Mr. Chairman, Mr. Ranking Member, 
all the Members of the Subcommittee. It is a great honor to 
appear before you today to discuss the findings of the latest 
Trustees' reports.
    In view of the time constraints we are all under, what I 
would like to do is gloss over most of the background 
information in my written remarks and just proceed to some 
primary points about Social Security financing.
    The first simple point is that Social Security costs are 
rising, most of that cost increase is going to play out from a 
period that started in 2008 through 2035. The primary driver of 
those cost increases is demographic.
    If you think about Social Security costs, there are really 
two main pieces. One is growth in the per capita benefit level, 
and that is driven by the benefit formulas in law, but also 
just the growth in the number of beneficiaries.
    On the revenue side, the primary driver is growth in the 
number of workers and the wages that are subject to tax. That 
ratio of workers to beneficiaries is very important for Social 
Security financing. That ratio is in the process of dropping.
    We had 3.3 workers to support each beneficiary in 2007. Now 
we are down to 2.8, and under our current projections, we will 
be down to 2.0 by 2035.
    Part of that is longevity increases, but the bigger and 
more immediate factor is simply fertility patterns. We have 
this big baby boom generation going onto the retirement rolls 
prior to 2035.
    Under our current projections, the combined Social Security 
trust funds will be depleted in 2033. That is three years 
earlier than we projected in last year's report. Each year what 
the Trustees do is they estimate the program's actuarial 
deficit, usually expressed as a percentage of the tax base, the 
program's tax base, and this year, our projection is 2.67 
percent of worker wages over the next 75 years.
    That sounds arcane, but basically what that means is you 
have a 12.4 percent payroll tax rate now, if you immediately 
added 2.67 points to that, you would have the program in 
balance for 75 years, or if you immediately had an equal 
subtraction in benefit obligations.
    That is an average figure. The shortfalls are smaller in 
the near term, bigger in the long term. It is also a 
substantial increase from last year's projection.
    Last year, we were at 2.22 percent. It may not sound like a 
big difference, but by Social Security norms, it is a pretty 
substantial deterioration. We have only had one other report 
over the previous 30 years that showed as much deterioration in 
a single year as this year's report does. My colleague, Mr. 
Reischauer, will review some of the reasons the outlook has 
grown worse.
    Also important, the figures I just cited pertain to the 
combined trust funds. Social Security has two trust funds, and 
under law, they each have to be kept solvent to maintain their 
benefit payments.
    The Social Security disability insurance trust fund is in 
the more severe condition of the two. It is projected to be 
depleted in 2016.
    What is happening over time is the program is going to pose 
under current law a greater financial strain on the larger 
budget, and some of the strain is a result of discretionary 
policy choices, of course, that are made along the way.
    One of them, for example, this year, the payroll tax rate 
has been cut from 12.4 points to 10.4 points. Social Security 
has been held harmless for that change. There is a provision of 
that law which transfers general revenues over to Social 
Security so that its ability to finance benefits is not 
affected.
    Basically, what is happening is that part of the financing 
responsibility has been moved from Social Security's payroll 
tax to the general revenue side of the ledger.
    A final point, there are significant costs to delay in 
addressing the financing shortfalls. It is often cited that in 
2033, we will have only enough funds to pay 75 percent of 
scheduled benefits. It is important to bear in mind that does 
not mean 75 percent of scheduled benefits for those retiring in 
2033, that includes everybody. It includes people already on 
the rolls in 2033, including many people who are drawing 
benefits today.
    If you were to say well, we do not want to cut benefits for 
people already on the rolls in 2033, what if the benefit 
reductions were confined to new claimants.
    We would not be able to balance the system in that year 
without a substantial unprecedentedly large tax increase even 
if we cut off the entirety of benefits to new claimants.
    By 2033, it is really too late, far too late to protect 
previous beneficiaries from substantial dislocations.
    If you start working through the problem backwards and you 
say how soon do we have to act if we want to prevent reductions 
for people in retirement, near retirement, low income 
beneficiaries, and prevent a tax increase of a size we haven't 
countenanced before, we would have to do that pretty soon.
    Finally in closing, Mr. Chairman, I would just say that the 
legislative achievement in creating the Social Security program 
remains historically a remarkable one.
    It has provided critical social insurance protections for 
hundreds of millions of Americans. It has done this at 
exceptionally low administrative cost. It has done it with 
financing methods that are not without their critics but 
nevertheless have been generally accepted by most of the 
American public as relatively equitable.
    That is a hard thing to do in legislation, and with 
responsible bipartisan action, Social Security can continue to 
fulfill its vital role, but such action must be prompt and 
sufficiently decisive if the program is going to serve future 
generations as well as it has served previous ones.
    Thank you.
    [The prepared statement of Charles P. Blahous, III, 
follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Chairman JOHNSON. Thank you. You said ``pretty soon.'' What 
do you mean? Do you have a definitive date?
    Mr. BLAHOUS. Well, you will get different answers if you 
ask different experts. My own view is the window of opportunity 
is closing relatively rapidly.
    We already face a shortfall that is significantly larger 
than the one that was repaired in 1983, which is probably the 
high water mark politically of what can be accomplished in 
terms of a short term resolution.
    Obviously, each year we wait, the problem grows larger and 
more difficult to solve.
    Chairman JOHNSON. I understand that. When are we going to 
fall off the cliff? That is what I am asking you. You can 
answer later.
    Mr. Reischauer, you are recognized.

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

    Mr. REISCHAUER. Thank you, Chairman Johnson, Ranking Member 
Becerra, Members of the Subcommittee. I appreciate the 
opportunity to appear before you to discuss how the Social 
Security program's financial outlook has changed since the last 
Trustees' report.
    To judge whether the financial health of Social Security is 
improving or deteriorating, the media and the public tend to 
focus on whether the years in which the two trust funds are 
projected to be exhausted has receded or advanced.
    By this measure, there has been a significant deterioration 
in the financial health of the Social Security programs since 
the 2011 report. The exhaustion date, as the Chairman has 
mentioned, for the OASI program is now projected to be 2035, 
three years sooner than was projected last year.
    The DI trust fund exhaustion date has advanced two years, 
from 2018 to 2016, and the exhaustion date for the two trust 
funds combined has now moved to 2033, three years sooner than 
projected last year.
    A more comprehensive measure of the trust fund's financial 
condition is the actuarial balance over a 75 year evaluation 
period.
    This measure is essentially the difference between the 
annual income and costs of the program summarized over the 75 
year period and expressed as a percentage of taxable payroll 
over that period.
    A negative actuarial balance, meaning an actuarial deficit, 
can be interpreted as the percentage points that would have to 
be either added to the current law income rate or subtracted 
from the cost rate in each of the next 75 years to bring the 
fund into actuarial balance.
    The actuarial deficits of both Social Security trust funds 
have deteriorated since last year's report. The DI trust fund's 
actuarial deficit has worsened by seven one-hundredths of a 
percent of taxable payroll. That for the OASI fund has 
deteriorated by 38 one-hundredths of a percent of taxable 
payroll, and the combined trust funds have weakened by 44 one 
hundredths of a percentage point.
    This deterioration in the combined trust funds is the 
largest decline since the measure was first calculated in 1982, 
save for the change that occurred in 1994.
    There are lots of reasons why the actuarial balance can go 
up or down from one year to the next. One of them, of course, 
is that the valuation period changes. We add 2086 to the 
valuation period and subtract 2011, and that accounts for about 
nine percent of the deterioration in the actuarial balance.
    Clearly, there was no legislation that affected this in a 
significant way over the past year, so that is not a factor.
    Demographic assumptions in this year's report are identical 
to those that were assumed in the previous report, but we have 
updated starting values and the transition from those starting 
values to the ultimate values do affect the actuarial balance.
    Specifically, more recent data has shown that birth rates 
for 2009 and 2010 were lower than assumed in the last report. 
Immigration in 2010 was a bit lower than was assumed in the 
previous report. There was a slightly smaller initial 
population than we assumed before.
    A little less than half of the increase in the actuarial 
deficit between 2011 and 2012 is accounted for by changed 
economic assumptions and more recent information about the 
economy's performance.
    Two-thirds of this is related to updated starting values 
and less optimistic assumptions about near term growth of the 
economy.
    Price inflation, as you all know, was higher than 
anticipated between the third quarters of 2010 and 2011, and 
rather than a seven-tenths of a percentage point COLA in 
December of 2011, Social Security gave out a 3.6 percentage 
point COLA. That makes a huge difference, as you can imagine.
    Real interest rates in 2011 and those projected in the 2012 
report are lower than assumed before. The new investments that 
the trust funds make get less interest earnings than we thought 
they would get when the 2011 report was put together.
    Together, these economic factors make the gap between non-
interest income and costs over the next few years significantly 
larger than projected in last year's report, but when the 
economy has recovered, about the end of this decade, 2020 or 
so, the gap between what was expected last year and what was 
expected this year will be close to disappearing.
    However, it is important to recognize that we made a new 
assumption in the 2012 report that causes the gap between 
income and costs to grow over the long run, and this had to do 
with what we expect the changes in the average number of hours 
worked per week to do.
    In last year's report, we said hours were not going to 
change in the future. In this year's report, we assumed they 
will decline five one-hundredths of a percentage point a year. 
We did this to reflect the aging of the workforce and the 
belief that as productivity goes up, incomes go up, people will 
want to take more leisure, and that will translate into working 
a few less hours as it has in the past. This assumption 
obviously acts to reduce taxable earnings and payroll tax 
revenues from what was assumed in 2011.
    We also made a change in our assumptions about the 
incidence of disability. Compared to last year's report, the 
ultimate age adjusted disability incidence rates were increased 
by two percent for males and five percent for women. These are 
more consistent with what the historical values and trends have 
been over the last decade.
    The deterioration in the actuarial deficits that I have 
just summarized here today underscore the need for legislative 
action to put Social Security on a more sustainable path.
    The sooner we address this challenge, as Chuck as said, the 
less disruptive the changes will be. If the reforms are adopted 
soon, those most adversely affected can be given time to 
prepare. The burden can be spread more equally across different 
generations, and political animosity and public anxiety 
associated with these unavoidable changes can be moderated.
    The changes in the trust funds' financial well being that I 
have discussed also call attention to the importance of 
maintaining a strong economy and vibrant long term growth.
    Let me conclude with a comment about the staffs of the 
Social Security Administration and the Departments of Treasury, 
HHS and Labor, with whom we worked to produce the Trustees' 
reports.
    They are an incredibly hard working, talented group of 
analysts who are dedicated to providing the public and the 
Congress with as objective and sophisticated set of estimates 
as is possible, and I think we are all in their debt for the 
service they provide to us.
    Thank you.
    [The prepared statement of Robert D. Reischauer follows:]

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    Chairman JOHNSON. Thank you. You went three minutes over.
    [Laughter.]
    Mr. REISCHAUER. That is a better performance than last 
year. I want to be graded on the curve.
    Chairman JOHNSON. Thank you. I am going to as customary 
limit my time to five minutes and ask all my colleagues to do 
the same.
    Social Security was designed so that workers pay into the 
system and earn their benefits. Franklin Roosevelt understood 
the importance of making Social Security different from a 
welfare program.
    He once said ``We put those payroll contributions there so 
as to give contributors a legal, moral and political right to 
collect their pensions and their employment benefits.
    With those taxes in there, no damn politician can ever 
scrap my Social Security program.''
    Mr. Blahous and Mr. Reischauer, in your messages from this 
year's annual report, you point out payroll taxes represent 
only 70 percent of the total Social Security income in 2011 due 
in large part to general revenue transfers replacing lost 
income from a payroll tax holiday.
    If we continue to replace payroll tax revenues with income 
tax revenues, how long before Social Security is no longer 
perceived as an earned benefit, and what is that going to do 
for public support?
    Go ahead, Mr. Blahous.
    Mr. BLAHOUS. I would say my answer to the second part of 
your question is no one can know when that point might be 
reached obviously, but that statement is in the report 
obviously because we wanted to call law makers' attention to 
the fact that Social Security historically has had a certain 
rationale for its financing, and as you pointed out, it does go 
back to Franklin Roosevelt.
    If you go back and read his early statements, he placed a 
very high level of importance on the notion that this was an 
earned benefit. He did not want it to be merged in with the 
general budget. That is why we have a separate trust fund. That 
is why we have a separate payroll tax. That is why we have 
trustees.
    He was very concerned. In multiple statements he says if 
you want to have a universal participation program, it costs a 
lot of money to do that, so if you have it as part of the 
general budget, it is going to be competing for funding with 
other programs and would be subject to great political risk, 
that the benefits of this program could be cut back.
    He was very attentive to the idea of how do you structure 
this program so it has enduring political support, and not only 
FDR, but subsequent Social Security advisory councils over the 
years have repeatedly said that one of the bases of the program 
enduring political support is the idea that workers have earned 
these benefits and they came out against--all these advisory 
councils came out against funding the program from the general 
fund.
    Just speaking for myself as a Trustee, I think one of the 
things we wanted to do was just draw law makers' attention to 
the fact that if the program does continue to get transfers 
from the general fund, it does potentially create a situation 
where we would have a departure from FDR's intentions on that 
point.
    Chairman JOHNSON. It is not your personal money any more. 
About $0.45 out of every $1.00 of public debt is held by 
foreign governments, mostly China.
    Mr. Blahous, if we continue the payroll tax holiday and the 
general revenue transfers to replace lost payroll tax revenue, 
do we risk turning Social Security from a program paid by 
Americans to one dependent on the whims of foreigners who 
invest in our bonds?
    Mr. BLAHOUS. I think it is certainly the case that the 
general revenues that were transferred to Social Security along 
with the payroll tax cut were financed with debt. They were 
financed by increasing the deficit. We cut payroll taxes and 
added that amount to the deficit.
    Certainly, while there is an ongoing argument over who 
really finances the redemption of bonds held in the trust fund, 
clearly, in this instance, this would be case of the financing 
for Social Security being provided by the people who invest in 
U.S. Treasury bonds.
    Chairman JOHNSON. Can you tell me why you think tax 
increases are no answer for fixing Social Security? It seems to 
me to fix Social Security for good, we need to make sure our 
reform efforts align tax revenues with benefit outlays on a 
sustained basis. That did not happen during the last major 
reform.
    Seventy-five year solvency was achieved by building annual 
surpluses in the near term followed by growing annual deficits 
in the long term, even though that was not intended at the 
time. Is that correct?
    Mr. BLAHOUS. That is correct, although I have to say that 
if you were to bring ten experts up here, you would have a few 
that would disagree with me on the point.
    If you go back and study the 1983 reforms, one of the 
things that is striking about them is that they did not measure 
financial success the way we do it now.
    When they analyzed Social Security's future balance, they 
did not count the carry over balance of the trust fund. They 
did not count interest earnings of the trust fund.
    They used a different actuarial method that basically 
presumed that all benefits in the future would be paid by 
taxing the wages of future earners.
    If you read the comments of people who developed the 
reforms, whether they are Jake Pickle or Senator Pat Moynahan 
or Robert Myers, who was the Executive Director of the 
Commission, they said in multiple places that it was their 
intention to keep the program financed on a pay-as-you-go 
basis.
    The fact that they wound up with a solution that had big 
surpluses in some years and big deficits in other years, was 
not as intentional as many people now believe.
    What they were trying to deal with was a short term 
emergency, trying to make sure the benefit checks did not stop 
in 1983, and they were trying to arrive at an average actuarial 
balance over the long term.
    As you point out, that resulted in an unsustainable 
solution because as time went on, the surplus years faded into 
the past and more deficit years appeared on the horizon.
    Again, they were trying to do a lot of things under 
emergency conditions in 1983. The intention is not to critique 
what they did, but simply to point out that as they defined the 
long term balance, they did not give the same level of 
attention to what was happening on an annual basis that we do 
in the Trustees' reports now.
    Chairman JOHNSON. Okay. I presume you agree with him?
    Mr. REISCHAUER. Actually, I probably would disagree with 
all three of the answers that Chuck gave.
    [Laughter.]
    Mr. REISCHAUER. That is why you have two Trustees. Do you 
want me to disagree or shall I keep my lips sealed?
    [Laughter.]
    Chairman JOHNSON. I will let Mr. Becerra ask. My time has 
expired. Thank you.
    Mr. BECERRA. We will just leave it at there is disagreement 
on that.
    Let me ask the two of you--by the way, thank you for your 
testimony and the work that you do as Trustees, we appreciate 
that.
    Both of you mentioned in part of your testimony the 
deterioration in the outlook for the program, which is why I 
think all of us should be trying, as Mr. Blahous said, dealing 
with this sooner than later.
    I think your pie charts in your testimonies, the 
information you provided, show a great portion of that 
deterioration occurred as a result of the recession, which hit 
pretty hard.
    It became pretty clear that when you lose jobs in America, 
you lose workers who are paying their FICA contributions, their 
Social Security contributions, fewer workers contributing to 
Social Security, less money going into the pot to pay out 
benefits.
    Job one for Congress should be creating jobs, helping the 
private sector create those jobs. You get more folks to work. 
It does not just help them and their families, it helps Social 
Security because there is more money going into the system, the 
Social Security system and the trust fund.
    Mr. Reischauer, you mentioned immigration passingly. Does 
the fact that we have had, unlike other countries, a consistent 
flow of immigrants over the last several decades help the 
Social Security system and its trust fund when it comes to 
being able to pay out benefits?
    Mr. REISCHAUER. That is a very complicated question. In 
fact, the influx of immigrants has increased the labor force, 
it has increased the number of individuals paying payroll 
taxes, which over the short run, clearly helps the ability of 
the program to pay benefits to retired and disabled workers and 
survivors.
    Mr. BECERRA. I think the other part of that that you do not 
mention is in the long run, if they become recipients of Social 
Security benefits, then they will draw as well.
    It is one of those things where it is not plus an automatic 
plus because they at some point will qualify to receive those 
benefits as well.
    Mr. REISCHAUER. Yes, but it is very complicated and will 
depend on what their earning patterns are over time and 
different groups of immigrants have different pluses and 
minuses in sort of a narrow fiscal sense.
    Mr. BECERRA. Or if they stay in the country. Some of these 
folks will move back.
    Mr. REISCHAUER. Many leave and do not end up collecting 
benefits.
    Mr. BECERRA. Right. I have some numbers here that show that 
between 2007 when the recession was starting and then got 
really deep through 2010, nearly 6,000 companies in this 
country terminated their pension plans.
    In 2009 alone, those terminated pension plans were short $9 
billion of what they needed to pay out in benefits to the 
workers who had those pensions under those companies.
    During that time, 2007 to 2010, Social Security did not 
lose any money, did it?
    Mr. BLAHOUS. No, Social Security continued to make payments 
in full and the nominal balance of its trust funds continued to 
rise.
    Mr. BECERRA. Right. We all know the examples of Circuit 
City that shut down its pension plan. We remember Enron when it 
went bankrupt, and how those companies left their employees and 
their pensions.
    The reason why I think it is so important, you mentioned 
how we should be acting now to try to resolve any longer term 
issues for Social Security, is that we do not want to get to 
the point where you compare Social Security to Enron or Circuit 
City.
    Fortunately, we still have some funds, even if Congress 
cannot get its act together, to keep the Social Security system 
going smoothly for the next 20 some odd years, and even after 
that it would be paying out 75/76 percent in benefits.
    I do not think anyone today is paying into Social Security 
to get 75 percent of what today's beneficiaries are getting.
    I hope what you all will continue to do is give us the 
recommendations that you feel will help us move toward 
something sooner than later.
    I think most people are getting to the point of agreeing it 
is pretty simple math, as I think you mentioned, Mr. Blahous. 
You can go to the benefit side. You can go to the revenue side. 
You can figure out a way to get yourself in an actuarial 
balance for the next 75 years.
    Hopefully, what we will do is we will sit down at some 
point soon in Congress and try to come up with that tough 
political response.
    Appreciate your testimony here today and your service with 
the Trustees, and I hope you will continue to come and testify 
before this Committee. Thank you. I yield back.
    Chairman JOHNSON. Thank you. Mr. Brady, you are recognized.
    Mr. BRADY. Thank you, Mr. Chairman. We hear these days that 
everything is doing fine with Social Security on Capitol Hill. 
No need to act. Things are not fine with Social Security.
    As Chairman Johnson pointed out, in the last year, America 
borrowed roughly $140 billion, much of it from China and other 
foreign investors, just to pay our Social Security benefits.
    This year we will borrow $150 billion roughly from China 
and other foreign investors just to pay our benefits to 
seniors. That is not fine.
    If you do not like that, get used to it, because your 
report said we face permanent deficits forever in Social 
Security programs.
    We are told maybe this is due to the recession but truth is 
we are told the economy is doing better but this had the 
largest single deterioration since 1994, Social Security, so it 
is getting worse, not better.
    I have three questions. I would hope we could have a no 
spin zone here and just ask the Trustees, those responsible for 
the financial stability of Social Security, just to give us 
your best advice to Congress and the White House. One, should 
Congress and the White House continue to delay reforms on this 
important program, or should we act now?
    Mr. Blahous.
    Mr. BLAHOUS. I am an advocate of acting as soon as 
possible.
    Mr. BRADY. Mr. Reischauer.
    Mr. REISCHAUER. I think speedy action is called for.
    Mr. BRADY. How much time?
    Mr. REISCHAUER. Whether the actual changes in policy you 
make need to be implemented next year or after is a totally 
separate issue. This is an area where we generally phase policy 
in over a long time.
    Mr. BRADY. You both made the point that if we do not act 
soon, it will be impossible to protect current and near 
retirees. Again, your advice to us. What is the time table? How 
soon do we need to act? This year? Next year? Your advice to 
us.
    Mr. REISCHAUER. I think you should act when the climate is 
right, when changes are being made----
    Mr. BRADY. I am asking you as a Trustee looking at the 
numbers, how much time would you say we have to act in your 
belief?
    Mr. REISCHAUER. I would hope that you would act within the 
next five years.
    Mr. BRADY. Mr. Blahous.
    Mr. BLAHOUS. Yes, with the disclaimer, if you were to line 
up ten experts here, I am probably on the pessimistic end of 
those ten with respect to how bad it is going to be for the 
future of the program if we delay too long, but I certainly 
agree definitely within five years. I would hope to do it even 
faster.
    Mr. BRADY. The payroll tax holiday was important to many 
families, but it did blow a hole in Social Security's revenue 
stream. It was backfilled by general revenue. We know that 
cannot continue.
    Again, no politics in this, your advice as Trustees, should 
we continue the payroll tax holiday or should we restore the 
full stream of revenue to Social Security?
    Mr. Blahous.
    Mr. BLAHOUS. Here I am speaking very much for myself. I 
would urge that Social Security go back to its 12.4 percent 
rate.
    Mr. BRADY. Restore to the full stream. We have to deal with 
how we do that. Your advice would be restore the full amount of 
money?
    Mr. BLAHOUS. That is a personal view. Obviously, not the 
Board of Trustees.
    Mr. BRADY. I understand. Mr. Reischauer?
    Mr. REISCHAUER. Mine is obviously a personal view, too, but 
I would phase it out with all deliberate speed.
    Mr. BRADY. Thank you, Mr. Chairman.
    Chairman JOHNSON. Thank you. Mr. Schock, you are 
recognized.
    Mr. SCHOCK. Thank you, Mr. Chairman. It does not seem like 
the news is getting much better. I want to get a little 
parochial here. You said we need to act soon. I am just curious 
what the younger generation of Americans have in store for 
themselves if we don't act soon.
    Mr. BLAHOUS. Two part answer. The mathematical part of the 
answer is a net income loss. There is a table in the Trustees' 
Report that says if you just held all current participants in 
the system harmless, current benefit formulas, current tax 
formulas, then people coming into the system would lose a net 
of about four percent of their taxable wage income to Social 
Security. That is a net, that is after they receive all 
benefits.
    Those income losses would be higher on the higher income 
side but they would also be present on the lower income side. 
You would have whole generations that were losing money net 
through the program.
    That is the mathematical answer. Getting back to the 
questions that were asked earlier, I think they would also face 
the risk that we might not be able to generate the political 
will to keep the program operating on a self financing basis.
    Then if we could not keep the program going on a self 
financing basis and had to merge into the general fund or 
subsidize it from the general fund, I think they would lose 
something else, which is sort of the legacy of Social Security 
as a separate stand-alone self financing system that has a 
certain degree of political protections that other Federal 
programs do not have.
    Mr. SCHOCK. Mr. Reischauer.
    Mr. REISCHAUER. You asked young generations, what should 
they expect, and the answer is less income in retirement years. 
Future generations will run more risk with respect to 
disability as well, payments they would get in disability and 
as survivors.
    They need to divert more of their income into private 
pension plans or 401(k)s or other retirement vehicles.
    Mr. SCHOCK. Why are you saying they would need to do that?
    Mr. REISCHAUER. If they wanted to maintain adequate incomes 
in retirement.
    Mr. SCHOCK. Because of Social Security?
    Mr. REISCHAUER. Social Security payments would be less for 
them.
    Mr. SCHOCK. How much less?
    Mr. REISCHAUER. Well, as Chuck explained and the Chairman 
and others have mentioned, Social Security would be able to pay 
about three-quarters of the benefits now promised.
    Mr. SCHOCK. That is based on what age category?
    Mr. REISCHAUER. This would be across the board for all 
existing beneficiaries and future beneficiaries starting after 
2033.
    Mr. SCHOCK. For the next 100 years?
    Mr. REISCHAUER. Well, we do not go out that far. We go out 
through 2086. It stays roughly in that area.
    Mr. SCHOCK. Assuming the same number of people live the 
same number of years and have the same number of children?
    Mr. REISCHAUER. No, I mean we do vary this over time in our 
projections according to the best information that we have 
available.
    Mr. SCHOCK. What happens to people that are not as young, 
perhaps they are 50, and they are 15 years from retirement? 
What is going to happen to their Social Security if we do not 
do anything?
    Mr. BLAHOUS. The literal no action scenario is that--
literal no legislative action would be a 25 percent benefit 
reduction in 2033. Those people presumably would collect full 
benefits for some years and then experience a sudden benefit 
reduction in 2033.
    Obviously, it is unlikely that is the way it would play out 
in practice. Congress would probably not permit a sudden 25 
percent benefit reduction.
    There would probably be some alternative mix of pain 
allocated between beneficiaries and taxpayers, but the literal 
no action scenario is 25 percent benefit reductions.
    Mr. SCHOCK. Are you assuming we would be responsible?
    Mr. BLAHOUS. Let's just say there is no historical 
precedent for Congress allowing a sudden benefit cut of that 
magnitude.
    Mr. SCHOCK. Is there historical precedent for Congress 
allowing Social Security to become this broke?
    Mr. BLAHOUS. No. That is actually a very important 
question.
    Mr. SCHOCK. Has it ever been this broke?
    Mr. BLAHOUS. We have never had an actuarial deficit as 
large as it is now. We have come closer to the insolvency 
point. In 1983, we were a few months away from not being able 
to send out the benefit checks, but the size of the current 
actuarial imbalance is larger than it has ever been, at least 
since before the 1983 reforms.
    There was an indexing mistake that was made in the 1970s, 
and there was temporarily a huge long term deficit that was 
created by that indexing mistake that was fixed in the 1977 
amendments.
    Since that correction, this is the largest actuarial 
deficit we have seen since prior to the 1983 reforms.
    Mr. SCHOCK. Mr. Reischauer, do you agree?
    Mr. REISCHAUER. Yes.
    Mr. SCHOCK. If you have a Republican and Democrat to agree, 
maybe we should leave Capitol Hill now.
    [Laughter.]
    Mr. SCHOCK. Thank you, Mr. Chairman.
    Chairman JOHNSON. Every now and then we do. Mr. Stark, you 
are recognized.
    Mr. STARK. Thank you, Mr. Chairman. Thank you for holding 
this hearing and thank our witnesses for their service.
    I have to mention, Mr. Blahous, before you choose to 
criticize my testimony, we both have the same background. I 
notice you have a doctorate in physical chemistry.
    I also have a great deal of experience in physical 
chemistry. I think I took ten semesters of it at MIT. However, 
it was all second semester chemistry that I had to repeat over 
and over again before I could pass it, but it is a great 
background.
    The Republicans want to kill Social Security. I think that 
is quite obvious, and turn it into a voucher plan.
    Mr. BRADY. Mr. Chairman, if the gentleman would yield on 
that.
    Mr. STARK. I will be happy to.
    Mr. BRADY. Mr. Stark, as you know, Republicans are very 
strongly supportive of Social Security. Our mom's and our 
dad's----
    Mr. STARK. Rich people. Let the poor people pay for it. I 
do not buy that. The Republicans want to kill Social Security 
and Medicare and turn them into voucher systems.
    Mr. Reischauer, actually, they are stealing your thunder. 
You are one of the original founders and your thunder, of 
course, is to have Medicare have premium support.
    Fortunately, it also gave you an umbrella for that 
thunderstorm, which was a guaranteed benefit.
    Would you support the idea of premium support without a 
guaranteed benefit?
    Mr. REISCHAUER. As you know, Mr. Stark, the term ``premium 
support'' came out of an article that Henry Arron and I wrote 
in 1995 suggesting that there be private or non-profit options 
for Medicare beneficiaries along with fee for service, that the 
benefit be a defined guaranteed benefit, and that the payment 
be one that was indexed to the growth of health care costs over 
time.
    Our belief was that this might generate more efficient 
delivery systems and better care for America's seniors along 
with some cost savings.
    The emphasis was on the quality of care and offering a more 
diverse set of delivery systems.
    Mr. STARK. Thank you. The Affordable Care Act, which the 
Republicans would like to defeat, according to actuaries, it 
would extend solvency eight years longer than if the 
Republicans had their plan to kill health reform.
    Would you suggest that is correct?
    Mr. REISCHAUER. Yes. There is a projection that HI costs 
would be reduced and the trust fund would be solvent----
    Mr. STARK. I ask unanimous consent to submit for the record 
a CMS press release with the Trustees' report which states that 
``Without the Affordable Care Act, the health insurance trust 
fund would expire eight years earlier, in 2016.''
    Mr. Reischauer, can you put a dollar number--I keep hearing 
that Social Security is going to go broke in 20 years, 
something like that. What will the total negative amount be? 
How many billions would you guess if you project that, it is 
going to be short over the total period?
    Mr. REISCHAUER. Over the next 75 years?
    Mr. STARK. Is it going to take 75 years to go broke?
    Mr. REISCHAUER. No. It will exhaust the trust funds in 2033 
if you combine the trust funds. I do not have a number at the 
tip of my tongue.
    Mr. STARK. Any idea, Mr. Blahous?
    Mr. BLAHOUS. The projections have the trust funds solvent 
through 2033. The shortfall would be 2033 through the end of 
the 75 year period. We have a present value estimate of that, 
about $8.6 trillion.
    Mr. STARK. $8.6 trillion. Do you have any idea what the two 
wars we are fighting and not paying for costs over the same 
period of time?
    Mr. BLAHOUS. I do not.
    Mr. STARK. Would you be surprised to know it probably cost 
a lot more than that, and I am not hearing anybody on the other 
side ask that we pay taxes, particularly those of us who maybe 
have high incomes, like Members of Congress, we are not being 
asked to contribute anything to pay for that war. Lower income 
people maybe are.
    Thank you, Mr. Chairman.
    Chairman JOHNSON. Thank you. Without objection, the CMS 
memo that you referred to will be entered into the record.
    [The information referred to follows: The Honorable Pete 
Stark]

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    Chairman JOHNSON. Mr. Marchant, you are recognized for five 
minutes.
    Mr. MARCHANT. Thank you, Mr. Chairman. My question is about 
the actual mechanics of how when you approach let's say 2016 
and the disability shortfall begins to appear in the disability 
program. What is the number that Congress would need to 
appropriate out of general funds in those threshold years just 
to maintain the benefit?
    Mr. BLAHOUS. Just as a very crude estimate, it is about $30 
billion a year, the shortfalls that appear from 2016 through 
the rest of the decade.
    Mr. MARCHANT. We look at things over ten years usually.
    Mr. BLAHOUS. They would start in 2016. It would be about 
$30 billion a year, I guess, over the last six years of that 
valuation period.
    Mr. MARCHANT. Is there a trigger put into the law where the 
Congress immediately is confronted with having to make that 
legislative decision, or will it be a legislative decision 
through the entire Congress and then be signed by the 
President?
    Mr. BLAHOUS. The way the law reads is that the disability 
insurance program can only make payments from monies that are 
in its trust funds. If you assume Congress does nothing, then 
basically you would have--when the trust fund balance got down 
to zero, you would have delays in outgoing benefit payments 
until incoming tax revenues came in to finance more benefit 
payments.
    The effect of that through just delaying payments would be 
to reduce total payments on an annual basis by about 21 percent 
per year.
    If you wanted to maintain full scheduled benefit payments 
100 percent, you would have to find other revenues and put them 
in the trust funds to allow the full scheduled benefits to be 
paid.
    Mr. MARCHANT. You would basically have an appropriation 
that would be made into the trust fund and the trust fund would 
basically then make its payments adequately?
    Mr. BLAHOUS. Right.
    Mr. MARCHANT. If we reach that threshold in the main Social 
Security trust fund, what would be the amount of money needed 
that Congress would have to appropriate in that first year, 
based on the projections that you are making now, to keep the 
benefit at 100 percent, when we reach the 75 percent threshold? 
All of us get that warning when we open our yearly statement 
and look at it.
    Mr. BLAHOUS. Right now, I do not have the precise dollar 
figure off the top of my head, but just to put it in today's 
terms, it is about 25 percent of scheduled benefits.
    Today, the cost of paying benefits is a little bit shy of 
$800 billion. It is about $790 billion per year.
    If you wanted to think of it in today's terms, the amount 
by which you would be short, in today's equivalent, a little 
bit shy of about $200 billion a year.
    Mr. MARCHANT. $200 billion. That would be the choice 
Congress would have at that point, to keep benefits basically 
at the projected level. Congress would have the decision of 
just simply appropriating the money to go in?
    Mr. BLAHOUS. Yes. This cuts to a point I made earlier about 
the difficulty of the choices Congress would face. Obviously, 
the path of least resistance at that point is just to turn to 
the general fund and say here is another $200 billion. It will 
be much higher in nominal terms in 2033. The equivalent of $200 
billion and put it into Social Security.
    Obviously, that would end the principle that Social 
Security was supposed to be financing itself.
    If you wanted Social Security to finance itself, you would 
either have to raise payroll taxes or cut benefit payments by 
enough to fill in that gap.
    Mr. MARCHANT. By doing that, you would completely end the 
philosophy of a self-paying system, and you would transfer it 
like many of the states have done. They have gone in and raided 
their pension plans over the years to where the pension 
obligations in many of the states now is just a current 
appropriation.
    They have depleted their trust funds, borrowed against them 
or cashed them in to where instead of it being a payment out of 
the trust fund based on earnings, they just simply have a fixed 
liability to them.
    Mr. BLAHOUS. That is right.
    Mr. MARCHANT. Would that law just become law by the fact 
that we had not fixed the system?
    Mr. BLAHOUS. You would have to take an affirmative 
legislation action to support the program with general 
revenues. Under current law, there is no provision for doing 
that. The program cannot borrow from the general fund, cannot 
receive, without additional legislation, an appropriation from 
the general fund.
    You would have to change the law in order to have that 
result.
    Mr. MARCHANT. I think it is reasonable to expect that most 
of us will still be here in 2016. I certainly hope to be.
    That threshold that you are talking about in the Social 
Security retirement fund, we are approaching with the 
disability fund.
    Whether we are acting or not acting, we are making some 
very conscious decisions on how we are going to handle this 
disability trust fund.
    I suspect the mentality of Congress at this point is well, 
we will just appropriate the money so that no one loses their 
benefit.
    When you make that conscious decision, are you not making a 
much bigger decision at that point?
    Mr. REISCHAUER. In the past, when faced with this same 
challenge, the Congress has reallocated tax revenues from the 
OASI system, the old age survivor system, to the disability 
system; tweak the division of the total payroll tax between the 
two trust funds, thereby avoid making a difficult decision.
    Mr. MARCHANT. Thank you, Mr. Chairman.
    Chairman JOHNSON. The gentleman's time has expired. Mr. 
Smith, you are recognized.
    Mr. SMITH. Thank you, Mr. Chairman, and thank you to our 
witnesses.
    Mr. Blahous, we frequently hear actually that Social 
Security is a separate account and does not attribute to the 
deficit. I think my colleague, Mr. Marchant, was touching on 
some of this.
    In your testimony, you indicate that Social Security 
operations are currently adding to the unified Federal deficit 
and will add substantially more in the years to come.
    Could you expand on that?
    Mr. BLAHOUS. I think perhaps the best way for me to answer 
this is to say the parts of my answer that I think all analysts 
would agree with, and then I will get into the part that there 
is some disagreement on among analysts.
    I think all analysts agree that to the extent Social 
Security is supported by its own payroll tax revenue or by the 
taxation of benefits, to that extent, it is not adding to the 
Federal budget deficit.
    I think most analysts would also agree that to the extent 
Social Security is receiving a subsidy from the general fund, 
like the general fund transfers that accompanied the payroll 
tax cut, that portion does add to the deficit.
    Where you get into the murky area where analysts argue with 
each other has to do with the interest payments that are made 
to the Social Security trust fund.
    Right now, to a very large extent, from now to through 2033 
and certainly into the 2020s, Social Security is going to 
subsist to a large extent based on the interest payments from 
the general fund.
    If you ask two different analysts to interpret what is 
going on there, you are going to get two different answers.
    From a mechanical standpoint, the payments of interest go 
from the general fund to Social Security. You could say from a 
mechanical and unified budget standpoint, those interest 
payments do not represent money coming into the U.S. Treasury 
and therefore, represent money going to Social Security without 
reducing the unified budget deficit, and then representing an 
extent to which Social Security is adding to the overall 
deficit.
    You will also have a school of thought, and I do not agree 
with this, but there is also a school of thought that says 
those interest payments represent the extent to which Social 
Security has reduced the amount of borrowing in the past that 
the Federal Government has had to do, and therefore, represents 
a reduction in unified budget interest payments.
    Therefore, to the extent Social Security receives interest 
payments, it is not adding to the unified budget deficit.
    You are going to have competing views on that. I am on one 
side of that discussion and other people are on the other.
    I think with respect to other parts of Social Security, 
there is less ambiguity. I think to the extent that the program 
is receiving transfers of general revenues, it is clearly 
adding to the deficit, and to the extent it is relying on its 
payroll tax income, it clearly is not.
    Mr. SMITH. Thank you. I will yield back.
    Chairman JOHNSON. Thank you. Mr. Berg, you are recognized.
    Mr. BERG. Thank you, Mr. Chairman. Thank you to the 
witnesses.
    Mr. Reischauer, I appreciate your article in 1995 about 
premium support and where that would go.
    My question to you is what happens when--I am sure at the 
time people called that ``vouchers''--people said that is going 
to wreck Medicare, what was your response back then?
    Mr. REISCHAUER. Our response was that changes were 
unavoidable, that this was a promising approach towards 
providing beneficiaries with more choice, possibly higher 
quality coordinated care, and possibly a reduction in 
Government spending from competition among plans.
    Mr. BERG. Thank you. Jumping back, I kind of wanted to 
follow up on a question that Representative Marchant had on the 
Disability Insurance Trust Fund.
    We talk about how we have one to five years to make some 
decisions. I am sitting here looking at 2016 and I am saying 
that is not five years. That is four years. If you are going to 
not fall off the cliff, you are probably talking one to three 
years to do something.
    As you explained the reality of how things may happen and 
where money would come out of the other fund to kind of 
subsidize this fund, if you pooled those two funds, what is the 
year that we are not going to cover the benefits?
    Right now, we are saying the one is 2035 and this one is 
2016. If the old age started subsidizing this other one, at 
what point is it going to bring that down?
    Mr. Blahous.
    Mr. BLAHOUS. Basically, right now the old age and survivors 
fund, the so-called ``retirement fund,'' that is scheduled for 
depletion in 2035. Disability is 2016.
    If you put them together, the combined funds would be under 
in 2033.
    Mr. BERG. It would be the same?
    Mr. BLAHOUS. 2033 is the figure that we often throw around 
in the vernacular, because it refers to Social Security as a 
whole. That is the figure you hear the most.
    If you split it into the two funds, one of them is 2035 and 
other one is 2016.
    Mr. REISCHAUER. The 2033 assumes that you re-jigger the 
allocation of the payroll taxes between the two trust funds?
    Mr. BERG. For the old age and survivors, you are seeing 
today with this report it is still 2035.
    Mr. REISCHAUER. It is not ``still.'' It was 2038 last year, 
right?
    Mr. BERG. It has come down from 2038 to 2035. The other 
point, I just want to be clear, when you present value this 
unfunded liability, we are talking about $8.6 trillion, which 
is over two years of all Federal spending, but that includes 
2.7 using that money within the trust fund.
    Mr. BLAHOUS. You are right. That is basically the size of 
the actuarial deficit on top of redeeming the trust fund, and 
redeeming the trust fund, basically you are saying redeeming 
the trust fund counting it as an asset and then the shortfall 
from 2033 out to the end of the valuation period is where that 
$8.6 trillion comes from.
    Mr. BERG. If you did not value that Trust Fund amount, you 
are $10 to $11 trillion in that unfunded liability to make it 
solvent?
    Mr. BLAHOUS. That is right.
    Mr. BERG. I think there are a lot of different terms that 
are being used, and sometimes it makes it confusing. It cash 
flows for a while here, but it is not solvent.
    From my perspective, I just really think we have to look at 
these facts and the facts are the facts, and if it is not 
solvent long term, and quite frankly, if we care about Social 
Security, we need to do some things to ensure it is solvent.
    I obviously personally am very open to any ideas from 
anywhere. I think the solution needs to be bipartisan. I think 
that is the only way you can present it to the American people. 
I am just hopeful we will get some of those bipartisan 
solutions coming forward.
    Thank you, Mr. Chairman. I will yield back.
    Chairman JOHNSON. Thank you. You can always raise the age 
to 100, you know. That might take care of it.
    I am going to ask one more question. Mr. Blahous, in order 
to fix Social Security for good, we need to make sure our 
reform efforts ultimately align tax revenues with benefit 
outlays on a sustained basis, and that did not happen during 
the last major reform in 1983.
    Then 75-year solvency was achieved by building annual 
surpluses in the near term followed by growing annual deficits 
in the long term, even though that was not intended by the 
reformers at that time. Is that correct? Could you talk about 
that?
    Mr. BLAHOUS. Again, and my colleague, Mr. Reischauer, may 
want to leap in and disagree, but my read of the 1983 
amendments is that what they intended to do and what they 
actually did were somewhat different.
    I think they aimed at avoiding an immediate insolvency 
problem. The benefit checks were not going to go out in a few 
months and they wanted to prevent that from happening.
    They also aimed at a long term actuarial balance. If you 
actually go back and read the documents of the deliberations 
and the memo's of the Greenspan Commission exchanged, and how 
they measured fiscal success, it is very clear they did not 
look at it the way we do it now.
    When we make a measure of the condition of the trust funds, 
we count the carry over balance of the trust fund. We count the 
interest payments of the trust fund. We basically treat the 
trust fund as an asset in Social Security, and therefore, 
within that mindset, you could certainly do something that 
builds up the trust fund and then draws it down over a period 
of time.
    That is not actually how they went about it. What they did 
is they used a different method for calculating the program's 
financial condition. It was called the ``average cost method,'' 
basically.
    It assumed that in any given year, you were going to fund 
the program by incoming wages from workers. They did not count 
the carry over balance of the trust fund. They did not count 
the interest payments of the trust fund.
    If you read the commentary of the Greenspan Commission 
members and the staff director, they say it is our intent to 
keep the program going on a pay-as-you-go basis, not to have 
big imbalances from one year to the next.
    Jake Pickle wrote a letter, my memory is slipping, but 
either to the New York Times or the Wall Street Journal, saying 
the public would never stand for a big trust fund build up 
because they would not trust the Government to control 
trillions of dollars of investments and save the money, so we 
want to keep this program going on a pay-as-you-go basis.
    What happened instead was they got big surpluses in some 
years and big deficits in other years, but that result was not 
fully apparent until so late in the legislative process, that 
they could not really go back and revisit it.
    Obviously, what they were dealing with was a big emergency. 
They did not want to disrupt the political deal that had been 
reached, so they got a result where the program's actuarial 
balance on paper was a little bit more apparent than real, 
which is why it has slipped since then.
    Chairman JOHNSON. If we get a solution this time, there are 
going to be political consequences as well.
    Do you care to comment, Mr. Reischauer?
    Mr. REISCHAUER. Yes, I do care to comment. There is a real 
dilemma here. If you operate a program like this on a strictly 
pay-as-you-go basis, then you are saying as demography changes 
and changes may be in unexpected ways or trend economic growth 
changes, you are going to have to raise taxes or lower taxes or 
raise benefits or lower benefits.
    For a program that is designed to provide the American 
population with some kind of assurance that it is going to be 
able to plan its retirement or how much insurance it needs for 
its potential disability, that is not really a satisfactory way 
to go.
    The other option is you can build up reserves and deplete 
reserves over time.
    I agree with Mr. Blahous that the intent was not to build 
up these big reserves. The future course of demography was not 
fully appreciated by those responsible or anybody at that time.
    Was the baby bust a permanent phenomenon. We have had huge 
social changes that have gone on in the last 30 to 40 years. 
Smaller family size, more immigration, more women in the 
workforce, et cetera, that make these things very hard to put 
in place and then stick with your decision for the next 75 
years.
    I do not think there is a right answer to this question.
    Chairman JOHNSON. Thank you, sir. Mr. Becerra, you have one 
more question?
    Mr. BECERRA. Yes. To sort of feed off this, I think often 
times we have this conversation because we are accustomed to 
having this conversation.
    I think we do not explain it in terms that most Americans 
will look at it from.
    Essentially, back in 1983, when Social Security was nearing 
a point where it would not be able to pay all benefits, 
Congress, working with President Reagan, worked to deal with 
that.
    The result was a system where Americans paid a little bit 
more, those who retired got a little less in benefits. The 
result was this reserve that was being built up. Americans have 
since 1983 been contributing more into the system that has been 
needed to pay recipients, the beneficiaries.
    I think most Americans would say if I gave you hard cash, 
whether you are a bank or any other place where I can store my 
money, and you tell me you are going to pay me interest on that 
cash, that you are expecting at some point to get to collect on 
that cash, essentially by law, that is what we did.
    We told Americans that when they deposited their Social 
Security contributions from their paycheck to the Government 
for Social Security, what was not used--actually, all of it 
when it comes in goes into Treasury bonds.
    From there, the Social Security system uses what it needs 
from those Treasury bonds to pay for benefits. It cashes in 
those Treasury bonds.
    Because it has not needed to cash in all of those Treasury 
bonds to pay for current retirees, it has been building up this 
surplus, and that surplus has been earning interest, small, 
because Treasury bonds earn less interest than some more risky 
investment on Wall Street, but it has been earning interest. 
That is the $1.6 trillion in interest that has been earned.
    Mr. Blahous, you are saying some people would question 
whether that is real money because it is interest and it was 
essentially a transaction between one arm of the Government, 
Social Security, to the other arm of Government, which is the 
general operating budget of the Federal Government.
    Those Treasury bonds are real. As the Chairman pointed out 
earlier, 45 percent of our debt held by the public is owned by 
foreigners. They own that debt and they get to collect on it 
because they own Treasury bonds.
    Those who say it is not real money that Social Security 
holds, guess what, we are in pretty good shape because 45 
percent of our debt that is held by foreigners is not real 
money either, so we do not owe the foreigners.
    If you do not owe Social Security to Americans that paid 
into it, then we do not owe the foreigners either.
    That is why I do not understand the logic of those who say 
it is not real money. Americans paid real money into the 
system. It was secured by the most secure form of currency 
there is, which is a Treasury bond.
    To say it is not real money simply because it was done by 
Social Security giving the money to the Government and getting 
a Treasury bond to hold onto that money, I think is a real 
either mistake to say or a real injustice to the American 
people who continue to pay into the system today.
    That reserve is going to continue to grow for several more 
years before we have to start using it to pay for benefits.
    I think the public will want to understand--I did the quick 
math on this. In the 77 years Social Security has been around, 
you and I and everybody who works and has worked, we have 
contributed about $14 trillion into Social Security with our 
paychecks, our FICA contributions.
    In that 77 years, the calculation was that we have used up 
about $13 trillion in paying out benefits. Hard cash left over, 
simple math, 14 minus 13, there is $1 trillion that Americans 
have contributed in cold hard cash to Social Security that has 
never been used.
    That has helped produce part of that reserve. Because for 
decades that reserve has been gaining interest because it is 
held in Treasury bonds, it has added another $1.6 trillion.
    I think most Americans would tell you if you only wanted to 
give them back their $1 trillion and not the 1.6 they earned in 
interest, if this were a bank, we would have a big run on that 
bank. In fact, we would probably burn that bank down.
    I think we want to be very careful when we talk about funny 
money for Social Security. Either we tell China and the rest of 
the world that we are not going to pay them because they have 
the same funny money, or we should keep our obligations to 
Americans who contributed money.
    The final point I want to make is this, and my colleague 
friend from Texas, Mr. Brady, mentioned that Social Security 
faces a permanent deficit forever, I want to make it clear, and 
I think Mr. Blahous and Mr. Reischauer would concur, under the 
law, Social Security cannot run deficits.
    Is that correct?
    Mr. BLAHOUS. That is correct.
    Mr. BECERRA. Social Security will never face a deficit. 
What we do face, and I think, Mr. Blahous, you have used the 
right word, an ``actuarial deficit.'' The actuaries see the 
difference between what we are collecting and what we hope to 
pay out, and there is a deficit there, and that is what we have 
to tackle sooner than later.
    Can the Social Security system ever run deficits? By law, 
it can never run deficits. The cold hard fact is we would have 
to say--I think Mr. Blahous said, we would have to tell 
Americans in 2033 guess what, all of a sudden your benefit went 
from 100 percent of what you have been getting to 75 percent, 
which would be cruel, and that is what we have to deal with.
    Never has Social Security run a deficit and never can it 
until we in Congress change the law.
    With that, I would yield back.
    Chairman JOHNSON. Do you want to make a final comment on 
that?
    Mr. BLAHOUS. I certainly do not want to be construed as 
implying that the bonds in the trust fund are not real assets 
to Social Security. As my testimony indicates, I think the 
Trustees' report makes clear those bonds are backed by the full 
faith and credit of the U.S. Government, true assets to the 
program.
    Where you get into these controversies about the trust 
fund, it is not really so much about whether they are real 
assets to Social Security, but it usually has to do with these 
arguments between analysts as to who is paying for the trust 
fund bonds.
    For example, the interest payments, we did $200 billion 
plus in general revenue transfers this year to Social Security 
from the general fund, without collecting any taxes based on 
that $200 billion.
    Those bonds are going to earn $400 billion or so of 
interest up through 2033. You have this analytical question, 
who is really paying for that interest, the taxpayer who 
finances the general fund of the U.S. Government or the person 
investing in the Treasury bonds.
    It is not necessarily the case they were paid for by 
workers on Social Security and there is just a fierce 
analytical argument as to whether that portion of Social 
Security's financing comes from contributions made by workers 
or some other source.
    I certainly do not want to be construed as saying that it 
is not real money for Social Security.
    Mr. BECERRA. Mr. Chairman, this is what I love about 
hearings. When we actually can have this kind of a discussion, 
this is what I think the public would love to here, rather than 
just our doing our five minutes of asking questions and you 
only getting five minutes to respond or give your testimony, I 
think actually Chairman Camp has done a great job on this on 
taxes where he has allowed us to have these informal off the 
record kind of conversations with experts on tax reform, and I 
think we could do more of those, maybe even on Social Security.
    For example, Mr. Blahous, you pointed out something very 
important. When we did the payroll tax cut to try to help 
working families with this recession, you are right, we told 
them you have to contribute less to your FICA taxes to Social 
Security.
    Congress intentionally said we are not going to damage 
Social Security. We are going to take money from the general 
fund and replace the money that otherwise would have gone in.
    I would respond to your point, which I think is a valid 
point, is that real money that should earn interest through 
these Treasury bonds because it really came from the general 
fund, and I would say absolutely it should earn interest.
    We consciously in Congress said we do not want to undermine 
Social Security, we want to help the economy and give working 
families who pay FICA taxes a bit of a break, but we do not 
want to do that at the expense of Social Security when these 
folks retire.
    I would say the decision was consciously made by Congress 
that we knew that money would be used to buy Treasury bonds 
that would then earn interest and therefore, we knew that would 
become money that the Federal operating budget would owe to 
Social Security when the time came to collect on those Treasury 
bonds.
    Your point is absolutely well taken. That is the kind of 
parsing that I think we have to discuss. Otherwise, everyone 
gets confused about is it real money, is it not real money. I 
appreciate the point you made.
    Chairman JOHNSON. I want to thank both of you for being 
here today. I think we have had a positive discussion. We do 
need to fix Social Security and we intend to do it.
    I want to thank all the members for being here today as 
well. Mr. Stark, thank you for coming.
    With that, the meeting stands adjourned.
    [Whereupon, at 10:28 a.m., the subcommittee was adjourned.]

    [Submissions for the Record follow:]

                       The Honorable Pete Stark 

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                                  NCPA

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                   MATERIAL SUBMITTED FOR THE RECORD
                       Questions for the Record:
                     Charles P. Blahous III, Ph.D.

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