[Senate Hearing 113-864]
[From the U.S. Government Publishing Office]




                                                        S. Hrg. 113-864
 
                   STATE OF THE AMERICAN SENIOR: THE
             CHANGING RETIREMENT LANDSCAPE FOR BABY BOOMERS

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

                                HEARING

                               BEFORE THE

                       SPECIAL COMMITTEE ON AGING

                          UNITED STATES SENATE

                    ONE HUNDRED THIRTEENTH CONGRESS


                             FIRST SESSION

                               __________

                             WASHINGTON, DC

                               __________

                           SEPTEMBER 25, 2013

                               __________

                           Serial No. 113-10

         Printed for the use of the Special Committee on Aging
         
         
         
         
         
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                       SPECIAL COMMITTEE ON AGING

                     BILL NELSON, Florida, Chairman

RON WYDEN, Oregon                    SUSAN M. COLLINS, Maine
ROBERT P. CASEY JR, Pennsylvania     BOB CORKER, Tennessee
CLAIRE McCASKILL, Missouri           ORRIN HATCH, Utah
SHELDON WHITEHOUSE, Rhode Island     MARK KIRK, Illinois
KIRSTEN E. GILLIBRAND, New York      DEAN HELLER, Nevada
JOE MANCHIN III, West Virginia       JEFF FLAKE, Arizona
RICHARD BLUMENTHAL, Connecticut      KELLY AYOTTE, New Hampshire
TAMMY BALDWIN, Wisconsin             TIM SCOTT, South Carolina
JOE DONNELLY Indiana                 TED CRUZ, Texas
ELIZABETH WARREN, Massachusetts
                              ----------                              
                  Kim Lipsky, Majority Staff Director
               Priscilla Hanley, Minority Staff Director
               
               
                                CONTENTS

                              ----------                              

                                                                   Page

Opening Statement of Chairman Bill Nelson........................     1
Statement of Ranking Member Susan M. Collins.....................     2

                           PANEL OF WITNESSES

Joanne Jacobsen, American Senior.................................     4
Olivia S. Mitchell, Ph.D., International Foundation of Employee 
  Benefit Plans Professor, The Wharton School, University of 
  Pennsylvania...................................................     6
Paula A. Calimafde, Chair, Small Business Council of America.....     8
Richard W. Johnson, Ph.D., Senior Fellow and Director, Program on 
  Retirement Policy, The Urban Institute.........................    11

                                APPENDIX
                      Prepared Witness Statements

Joanne Jacobsen, American Senior.................................    34
Olivia S. Mitchell, Ph.D., International Foundation of Employee 
  Benefit Plans Professor, The Wharton School, University of 
  Pennsylvania...................................................    37
Paula A. Calimafde, Chair, Small Business Council of America.....    44
Richard W. Johnson, Ph.D., Senior Fellow and Director, Program on 
  Retirement Policy, The Urban Institute.........................    54

                  Additional Statements for the Record

William K. Zinke, President, Center for Productive Longevity.....    72


                   STATE OF THE AMERICAN SENIOR: THE



             CHANGING RETIREMENT LANDSCAPE FOR BABY BOOMERS

                              ----------                              


                     WEDNESDAY, SEPTEMBER 25, 2013

                                       U.S. Senate,
                                Special Committee on Aging,
                                                    Washington, DC.
    The Committee met, pursuant to notice, at 2:15 p.m., in 
Room 562, Dirksen Senate Office Building, Hon. Bill Nelson, 
Chairman of the Committee, presiding.
    Present: Senators Nelson, Manchin, Donnelly, Warren, 
Collins and Scott.

       OPENING STATEMENT OF SENATOR BILL NELSON, CHAIRMAN

    The Chairman. Good afternoon. We welcome our witnesses. We 
want to thank you for being here as we discuss the retirement 
security of senior citizens, particularly Baby Boomers.
    The American senior is in some difficulty of financial 
trouble. Changes in the retirement system, higher health care 
costs and this recent recession have all combined to put Baby 
Boomers on a shakier financial footing than their parents and 
their grandparents.
    The American Dream--if you work hard, play by the rules, 
you can be rewarded with a comfortable retirement. For some of 
our seniors, that is fading away.
    People today are not only retiring with less money coming, 
but more money is going out to pay off expenses like debt or 
medical bills, and that does not even factor in the financial 
challenges faced by seniors with long-term health care needs.
    So, here in the Congress, in the midst that we are now, as 
we speak, going through a harangue on the floor about whether 
or not we are going to pay our bills, whether or not we are 
going to have a continuation of appropriations next Tuesday--
well, it is important to think about all of that impact on the 
people who are already living with too little to no disposable 
income.
    More than three in five just in my State of Florida, on 
Social Security, get at least half of their income from those 
retirement benefits.
    Over 3.5 million Floridians--1 in 5 residents--rely on 
Medicare.
    And what about the people in our State who could get 
Medicaid if the State would expand its program for 1.2 million 
people? Under the Affordable Care Act, if the State would 
expand its eligibility, that would cover health care for 1.2 
million Floridians that otherwise are between the eligibility 
levels in the State Medicaid and 138 percent of poverty.
    So folks between the ages of 50 and 64 are particularly 
going to be affected, if they do not expand Medicaid, until 
they get to the age of 65 for Medicare.
    Now we have had all kinds of stories from my State about 
how shaky finances are in retirement.
    Michael Vita of Miami works for a financial planner. So all 
of his papers and investments are in order, but even he is only 
bringing in $50 more per month than he has to spend. So any 
real expense that comes his way could have a real impact on his 
financial well being.
    Jim Marzano of Tampa says he is nowhere near where he was a 
decade ago before the recession. He has been out of work a 
total of three years. He kept being told he was overqualified 
for jobs. Now both he and his wife are working, and between the 
2 of them, they are making what he made by himself 11 years 
ago. So he, too, will be working for a long time.
    And so what can be done to stem this tide?
    What can we do to make sure our seniors have enough money 
to last them for retirement?
    And that is what we are here convening today in the Aging 
Committee.
    This is a crisis that is not only in the making, it is 
made, and I hope our witnesses today will shed some light on 
this.
    I want to turn to our Ranking Member, Senator Collins, for 
her comments.

         OPENING STATEMENT OF SENATOR SUSAN M. COLLINS

    Senator Collins. Thank you very much, Mr. Chairman.
    I also want to thank and welcome our new colleague to the 
Senate, Senator Scott, for coming today.
    The Chairman. Welcome.
    Senator Scott. Thank you.
    Senator Collins. I know he is very eager to play an active 
role on this Committee, and it is great to have him, as well as 
Senator Warren, join us as we explore this very important 
topic.
    On January 1, 2011, the first members of America's Baby 
Boom Generation celebrated their 65th birthday. Since that day, 
more than 10 million Americans have reached that milestone, and 
10,000 more will be added to that number every day for the next 
17 years.
    After four decades in the workforce, these Americans should 
be confident that they will have the resources to enjoy their 
retirement years without fearing that they will run out of 
money and fall into poverty. Yet, far too many American seniors 
struggle to get by and have real reason to fear that they will 
outlive their savings.
    Nationally, 1 in 4 retired Americans has no source of 
income beyond Social Security. In my State, Maine, the number 
is 1 in 3. And 4 in 10 rely on that vital program for 90 
percent of their retirement income.
    Bear in mind that Social Security provides an average 
benefit of just a little over $1,200 per month--less than 
$15,000 per year. It is hard to imagine stretching those 
dollars far enough to pay the bills. Certainly, a comfortable 
retirement appears to be out of the question.
    The importance of Social Security to low-income retirees 
cannot be overstated. Social Security benefits represent 85 
percent of the income of low-income retirees. By contrast, 
retirees in the top income quarter receive just 17 percent of 
their income from Social Security.
    According to a survey published last year, more than half 
of all Americans are worried they will not be able to maintain 
their standard of living in retirement, up sharply from 34 
percent 2 decades ago, and they are right to be concerned. 
Projections published in the year 2010 by the Employee Benefit 
Research Institute, known as EBRI, showed that nearly half of 
the early Boomers, those between ages 56 and 62, are at risk of 
not having enough money to pay for basic costs in retirement, 
including uninsured health care costs.
    EBRI found that the rate of inadequate retirement income 
has risen across all age groups and income levels since its 
previous study in 2003. Early Boomers will need to save an 
additional 3 percent of compensation each year to cut in half 
their chances of running out of money in retirement just to 
make up for the losses they sustained in the 2008-2009 
financial crisis.
    To a great extent, the decline in retirement security is 
traceable to the severity of that crisis, which wiped out 
nearly one-quarter of the accumulated wealth of all U.S. 
households. Seniors were particularly hard hit. While the weak 
financial recovery has restored some of their losses, many 
retirees have been forced to accept a lower standard of living 
that may well be permanent.
    Other factors that have weakened the retirement security of 
today's retirees are rising health care costs, the need for 
long-term care and the fact that Americans are living longer.
    The shift from employer-based defined-benefit plans to 
defined contribution pension plans, like 401(k)s, has also 
played a role. Employees of smaller businesses are much less 
likely to participate in employer-based retirement plans. 
According to a recent GAO study, more than half of the 42 
million Americans who work for businesses with fewer than 100 
workers lack access to a work-based plan to save for 
retirement.
    Proposals to make it easier for small businesses to provide 
retirement plans for their workers could make a significant 
difference in financial security for many Americans as long as 
they do not impose costly new mandates that discourage smaller 
companies from hiring employees in the first place.
    Again, Mr. Chairman, thank you for calling this important 
hearing. I look forward to hearing from our witnesses.
    The Chairman. And, after we hear from our witnesses, I am 
going to turn over to our Committee members' questions, and 
then I will do a clean-up of remaining questions of you all.
    We are delighted to have you all today. Your written 
testimony will be entered into the record. I would ask you to 
keep your comments to about five minutes so we can get into the 
questions.
    And we are going to have:
    Ms. Joanne Jacobsen. She is a senior. She is experiencing 
some of these difficulties that we have talked about.
    Dr. Olivia Mitchell, International Foundation of Employee 
Benefit Plans Professor at The Wharton School.
    Paula Calimafde--close. Give it to me.
    Ms. Calimafde. Calimafde.
    The Chairman. Calimafde.
    Ms. Calimafde. You are in good company, Senator.
    The Chairman. And she is Chair of the Small Business 
Council of America.
    And Richard Johnson--Dr. Richard Johnson--Senior Fellow and 
Director, Program on Retirement Policy at The Urban Institute.
    So we welcome you all.
    Ms. Jacobsen, we will start with you.

         STATEMENT OF JOANNE JACOBSEN, AMERICAN SENIOR

    Ms. Jacobsen. Thank you, sir.
    Chairman Nelson, Senators Collins, Scott, Ms. Warren, my 
name is Joanne Femino Jacobsen. I am 63 years old. I was born, 
grew up and lived in Massachusetts until I was 56, and I now 
live in Venice, Florida, whose average age, by the way, is 
67.6. So I am speaking for the other 24,000 people that live 
there.
    I have two sons who still live in New England--one in 
Massachusetts and one in New Hampshire.
    I have saved money. I supported my sons. I planned for 
retirement. Yet, when I reached what should have been my 
retirement age, the promise that I would receive health and 
benefits for the rest of my life was broken and so were my 
hopes of retiring comfortably in Florida.
    Like many Baby Boomers battered by the recession, I am 
still in the workforce and will probably remain on the job for 
the foreseeable future. I have worked in some form since I was 
15 years old. Although I dropped out of college at 20 because 
my father got sick, I had a good job at the phone company, as 
we used to call it, then AT&T.
    I got married, got divorced, raised two sons with no 
support. I worked for the phone company for 18 years, got my 
bachelor's degree at night, which enabled me to get a promotion 
into management. Thus, I was able to send my sons to college 
and also returned to college and got my master's Degree at 50.
    In January of 2002, I was laid off at age 52, 9 months 
short of full retirement of 30 years. It was a time when 
thousands of management employees were being laid off in 
downsizing measures in many industries.
    During my time at the phone company, I did all the things I 
was supposed to do. Even though I was enrolled in the company's 
defined benefit pension plan, I also participated in the 
company savings plan. I even bought a few stocks.
    I participated in financial planning offered by the 
company, and I kept track of my promised and retirement 
earnings benefits every year. All my booklets I have saved all 
these years.
    I began planning my retirement in my 30s. My goal was to 
retire to Florida in my 50s. And I am results-oriented type of 
person.
    All of my financial and retirement planning was centered on 
my employer's promised benefits and pension and retirement 
health care benefits. All that was factored into my budget for 
retirement.
    After being laid off, I spent the next few years in three 
different jobs before fulfilling one of my retirement dreams, 
which was moving to Florida. Because I was concerned about what 
would happen to my pension payments in retirement, given all 
the turbulence of the company and changing of ownership, I took 
a lump sum payout and rolled it over into an IRA.
    I was not in any position to stop working, with children in 
college. However, I took a series of jobs that were all, 
unfortunately, adversely impacted by the recession. One company 
went out of business. One government job--Sarasota County--was 
eliminated. Even finding a job was tough because I suspect I 
was a victim of age discrimination.
    But still, at the age of 62, I felt confident enough about 
my financial status to convert my IRAs into annuities and 
enroll in Social Security benefits.
    Six weeks after I enrolled in Social Security, out of the 
blue and one day before the Affordable Care Act was ratified, I 
received a letter from my company that took over the pension 
plan, stating that they would no longer provide health care 
benefits and would even discontinue my life insurance. Try 
buying life insurance after you are 60 years old.
    For those people 65 and older, the recission of these 
benefits took place almost immediately, within 30 days.
    For those under 65, like me, health care premiums increased 
immediately. My health care premium doubled. All of the 
company's subsidies for health care will stop at the end of 
this year when the Affordable Care Act takes effect.
    I have shopped around for health care plans. They all will 
be very expensive, especially if I want long-term care at my 
age. So I am back at work as a realtor to pay for health care, 
and my annuities and my Social Security barely cover my basic 
costs of mortgage, taxes, ever escalating insurance, car 
payments, utilities, daily living, business expenses.
    But then I cannot make too much money, drawing Social 
Security benefits, because they will be taken away because I 
have not hit the full retirement age of 66. Although I visited 
my Social Security office four times in the last year, I did 
not learn until coming here that the money would not be 
withheld forever, that I will get an enhanced benefit at age 
66.
    Regardless, that does not help me now because living on a 
limited budget. The last year or so, I have had to charge 
doctor visits, dentist visits, along with unanticipated 
expenses to my credit cards. Until now, my debt has always been 
manageable, and my credit rating near 800. Now it has swollen 
to five figures, and my credit rating has been diminished. I 
even lost an opportunity to refinance my house because my 
credit score had dropped.
    So there are no vacations or cruises or luxury items for 
me. There will be no thoughts of ever retiring, and I will 
still be working into the unforeseeable future or until my 
health holds out.
    But what we are seeing here is we are witnessing the demise 
of the pension system in America as major corporations divest 
themselves of their fiduciary responsibilities to long-tenured 
employees and retirees. These corporations have ignored their 
obligation to fulfill pension benefits stated--stated in 
writing--as part of the employee and retirement compensation 
package, making it an option, not an obligation.
    What we need here is relief. This is truly a life or death 
matter. People will die for the lack of affordable and quality 
health care.
    So I thank you today for inviting me to share my story, and 
I, ultimately, welcome your questions. Thank you.
    The Chairman. Thank you, Ms. Jacobsen.
    Dr. Mitchell.

     STATEMENT OF OLIVIA S. MITCHELL, PH.D., INTERNATIONAL 
 FOUNDATION OF EMPLOYEE BENEFIT PLANS, PROFESSOR, THE WHARTON 
               SCHOOL, UNIVERSITY OF PENNSYLVANIA

    Ms. Mitchell. Good afternoon, Senators, and thank you for 
inviting me to discuss the changing face of retirement security 
in America.
    My name is Olivia Mitchell, and I am a professor at The 
Wharton School and Director of the Pension Research Council. As 
a researcher and as a Baby Boomer, I commend you for bringing 
up this important issue.
    I believe, like many here, that this is a very challenging 
time to be reaching retirement age.
    Thirty years ago, my parents retired. At that time, they 
had a secure lifetime pension and a generous retiree medical 
plan; interest rates were high enough to secure them a steady 
income without spending down their nest eggs too quickly. They 
also had inflation-protected lifetime benefits from Social 
Security and Medicare, and they held no debt. Moreover, they 
had four children they had sent to college, who were always 
ready to help them out.
    By contrast, we Boomers face a very different future. We 
worry that Social Security and Medicare, as well as the 
disability insurance system, are fragile. Few of us have 
retiree medical coverage or traditional defined-benefit 
pensions. Some of us with defined-contribution plans have not 
put enough in, and what we have put in we have seen decline, 
nor are we converting our assets into lifetime income so that 
we cannot run out in old age. Interest rates are so low that 
holding TIPS is a losing proposition. And, with longer life 
spans in the offing, we very much need protection for long-term 
care costs, but the products simply are not available or 
unaffordable.
    And the topic of my discussion today is debt. Many more 
Boomers are in debt than ever before.
    In a recent report, I compared three cohorts of people, age 
56 to 61, in a health and retirement study. This is a study 
where you can follow cohorts over their lifetimes. We focused 
on people age 56 to 61 in 1992, in 2002 and in 2008.
    For each group, right on the threshold of retirement, we 
measured total debt as well as the ratio of debt to assets. 
Additionally, we focused on patterns of financial fragility, 
using both the HRS and the FINRA National Financial Capability 
Study, known as NFCS. We came to two major conclusions about 
older Americans' debt levels.
    First, Americans today are much more likely to arrive at 
retirement with debt than in the past. For the earlier group, 
back in the early 1990s, about 64 percent held debt. Over 70 
percent of the Boomers now do so.
    Moreover, not only do more people hold debt, they hold more 
debt; that is, median debt more than quadrupled between 1992 to 
2008. And the top quarter of the distribution owing the most 
owed $50,000 back in the early 90s. They now owe over $100,000.
    This is important because Boomers retiring in the next 
several years are much more likely to carry this debt into 
retirement compared to previous cohorts, and since debt 
payments typically rise faster than interest rates that 
retirees can earn on their investments, people will likely be 
more vulnerable during retirement.
    Now a key reason we found that Boomers are facing 
retirement with so much more debt is they spent more on housing 
than did previous generations. As a result, Boomers are much 
more likely to have very expensive primary residences.
    Of course, some of those declined somewhat in value over 
the last few years, and their mortgages values have grown 
faster than the values of their homes. Median home loans 
relative to assets rose from 6 percent back in the early 90s to 
over 25 percent now. So Boomers will need to continue servicing 
their home loans into retirement, and they are going to 
continue being much more leveraged than groups in the past.
    We drilled down further to look more closely at debt, and 
we found that in addition to mortgage debt Boomers have had 
expensive financial habits. They have not paid off their credit 
cards in full. They have used their credit cards for cash 
advances. They are charged fees for late payments or exceeding 
their credit card bills.
    Another piece of the story is medical bills are also a 
source of financial problems. This has been mentioned by almost 
a quarter of the Baby Boomers.
    Even more striking was the fact that only about a third 
said that they thought they could not come up--sorry let me say 
that again. Only about a third said that they were likely to be 
able to come up with $2,000 in the next month if faced with an 
unexpected bill. And this is not a huge bill. This might be a 
car repair bill or a moderate-size home bill.
    So, in the wake of the financial crisis and the Great 
Recession, we now know that more can be done to protect 
Americans from these problems. We know, in particular, that 
there is a strong positive link between financial literacy, 
planning, saving for retirement and assets into retirement. 
Those who are not financially savvy are much more likely to 
have debt and have lower savings.
    Now protective legislation can be useful when people lack 
the opportunity to make repeated purchases such as, for 
example, with annuities, where probably you buy them once. It 
can also be helpful to better inform Americans when they face 
potentially expensive decisions that they do not really 
understand, such as buying a home, taking out a mortgage, 
cashing out their 401(k) plans or taking out credit card loans.
    I also believe Boomers could do better with more access to 
financial advice, which could generate potentially important 
rewards in the form of lower debt for those nearing retirement.
    They also need more information on the benefits of delaying 
claiming their Social Security benefit. In fact, a number of 
Baby Boomers have already reached this conclusion on their own. 
For example, delaying claiming benefits from 62 to 70, not that 
that is what everyone should do, but that in itself will mean 
an additional 76 percent more in monthly payments that can do a 
lot to help the income streams in retirement.
    Let me stop there and thank you for your attention. I am 
happy to answer your questions.
    The Chairman. Thank you, Dr. Mitchell.
    Ms. Calimafde.

STATEMENT OF PAULA A. CALIMAFDE, CHAIR, SMALL BUSINESS COUNCIL 
                           OF AMERICA

    Ms. Calimafde. Still Calimafde.
    The Small----
    The Chairman. Calim----
    Ms. Calimafde. Calimafde.
    The Chairman. Calimafde.
    Ms. Calimafde. Quite honestly, I was the kid at school who 
all the teachers knew me by my first name, like the first day 
of school. They did not want to deal with my last name. So, 
just you can call me Paula.
    So the Small Business Council of America and the Small 
Business Legislative Council appreciate the opportunity today 
to be submitting this testimony to you.
    The SBCA is a national nonprofit organization which 
represents the interests of privately held and family-owned 
business in the Federal tax, health care and employee benefit 
matters. Through our members, we represent well over 20,000 
successful small businesses in the retail, manufacturing and 
service industries.
    Virtually all of our members provide health insurance and 
retirement plan benefits for their employees. That is a 
somewhat unusual statistic for small businesses, but that is 
the SBCA's statistic.
    The SBLC is a 35-year-old permanent, independent coalition 
of 50 trade and professional associations that share a common 
commitment to the future of small business. And, again, SBLC 
members represent areas as diverse as manufacturing, retailing, 
distribution, professional and technical services, 
construction, transportation and agriculture.
    And the way we decide our policy is it is developed by a 
consensus of all those different trade associations hammering 
out what they think will work in the small business area.
    I am the Chair of the Small Business Council of America. I 
am a member of the board of directors and a past Chair of the 
SBLC. I am also a practicing tax attorney, and I practice in 
the area of retirement plans and employee benefits.
    And I am here today to present our views as to how 
important retirement plans are to America's retirement 
security, also to discuss how small business retirement plan 
coverage can be increased, and finally, I wanted to discuss 
ways to incentivize employees to increase their savings inside 
the retirement plan.
    We have some statistics that are pretty startling.
    One of these statistics is--this was done by EBRI--that 
individuals of all economic levels are more likely to save 
inside a retirement plan than outside a retirement plan. And 
the actual statistic is workers are 14 times more likely to 
save in a retirement plan offered by their employer than to 
save through an IRA--14 times more likely.
    For those of us who work with small businesses--of course, 
now this statistic applies across the board, so this goes to 
mid-size and larger businesses as well--the magic is payroll 
deduction.
    So you have your paycheck. The contribution you are making 
to the plan is automatically taken out of that paycheck. There 
is nothing the employee is doing. It is all on automatic pilot. 
And not only did you not have to do anything to get the money 
into the retirement plan, but it is not in your pocket. So it 
is much harder to think of spending it because it is not there.
    I think we all have walked down the street with a dollar in 
our pocket and without a dollar in our pocket, and we know what 
happens. When you do not have it in your pocket, you do not 
spend it.
    So the retirement security of our Nation is intended to 
rest primarily upon three sources, and very often you may have 
heard this referred to as the three-legged stool. The first is 
Social Security. The second is the voluntary private retirement 
plan system. And the third is individual savings.
    Today--well, we know Social Security is a defined-benefit 
system. It is based on an annuity type of framework. There is 
not that much choice on the part of the individuals with Social 
Security. You can pick a few different start dates, and that is 
about it. You cannot outlive your payments coming from Social 
Security.
    The qualified voluntary private retirement system today is 
primarily based on a defined-contribution system, and methods 
of payment out of these plans can include annuities, 
installments--usually, that is coming from an IRA--lump sums or 
a combination of one or more of those different methods of 
payment.
    The voluntary private retirement system is heavily 
regulated by Department of Labor and IRS. But even though it is 
heavily regulated, there is a lot of flexibility in the system 
so that small businesses, and mid-size and large businesses, 
are able to create retirement plans that fit their particular 
business and their particular employees the best.
    Of course, individual savings is totally open-ended, and 
initially, it was thought that this would be done outside a 
retirement plan because it really was not until the 401(k) plan 
that it became clear that this was going to be a major vehicle 
for Americans to save.
    The Social Security system, I think we all know, is 
probably in pretty good shape. I imagine with some--I do not 
believe great--amounts of shoring it would be made successful, 
but I can understand it would be painfully political to shore 
it up.
    The private retirement system is in fairly good shape in 
large part due to a series of laws that were passed by Congress 
in the last decades that recognized that the system had become 
too complex and that there was not enough in the system for 
small business owners to join the system, and the result of 
that is those laws reversed it. So the cost-benefit analysis 
for small business owners became so that an owner would say it 
makes sense for my company to sponsor a retirement plan because 
the benefits to the owners outweighed the costs and burdens 
that were inherent in that system.
    Let's just talk about payroll deduction quickly because we 
know it is an easy and painless way to save. We know it is done 
automatically by the employer, and we know it is much harder to 
spend money you do not have. And the third thing about it is in 
the 401(k) area, also the 403(b) plan area, employees do not 
have easy access to the money.
    So not only is it taken away automatically; it is sort of 
locked inside. You can get to it by loans and hardship, but 
neither of those are easy ways to get your money. So the money 
keeps growing, tax-free.
    I hope by now you are understanding that part of what I am 
getting to is encouraging savings inside a retirement plan is a 
very good thing for all of us to do and that we should be 
trying to educate all employees, particularly younger 
employees, to take advantage of this feature in their plan.
    Interestingly, what we do know is it does not matter if it 
is a large business, a mid-size business or a small business. 
Once a plan is offered to an employee, it is almost the same 
take-up rate by the employees regardless of the size of 
entities. So, once again, we know that it is to the benefit of 
the retirement security of our Americans to promote these plans 
and encourage formation of the retirement plans, particularly 
in the small business sector.
    Two other things we know are very successful right now, and 
it is somewhat startling.
    One is auto enrollment, and what auto enrollment means is 
when an employee is hired they are automatically enrolled in 
the plan. To get out of the plan, you have to take steps to say 
I do not want to be in the plan; take me out. So you are 
automatically enrolled.
    The other is auto escalation, which means that you might 
start off with a 3 percent contribution being made, meaning the 
employee is putting 3 percent of their income--their 
compensation from that employer--into the plan. The next year 
it might be 4 percent; next year, 5 percent; next year, 6 
percent. That is called auto escalation.
    And you would think--I mean, I would think when I first 
started hearing about these is, why is this successful?
    And then when I started realizing and thinking about what I 
know about small business employees, not only from my own 
business but from SBCA members, is inertia is a huge thing 
going out there with small business employees. And I am not 
sure I know why, but it is easier to be enrolled and stay 
enrolled than it is to take all the steps to get yourself out 
of the plan. And the same thing--it is easier to let the 
savings go in the plan than to take the steps to get out of it.
    So we know that that is also a very, very effective thing.
    Finally--okay. Am I way over my time here?
    Okay, then I will stop here.
    The Chairman. Thank you, Ms. Calimafde.
    Dr. Johnson.

   STATEMENT OF RICHARD W. JOHNSON, PH.D., SENIOR FELLOW AND 
  DIRECTOR, PROGRAM ON RETIREMENT POLICY, THE URBAN INSTITUTE

    Mr. Johnson. Thank you. Chairman Nelson, Ranking Member 
Collins and members of the Committee, thank you for the 
opportunity to testify today about the challenges confronting 
our retirement income system.
    As you know, concern is growing about how well future 
retirees will fail. And we have been tackling this question at 
The Urban Institute, and we have been using our modeling 
capabilities to project retirement incomes for Boomers and 
later generations, and so today I would like to share the 
results from that research and some of the conclusions that I 
draw from them.
    So, first, a bit of good news--retirement incomes will 
continue to increase over the next 30 years even after 
accounting for inflation because women are earning more than 
ever, productivity gains will boost average wages in the 
economy, and many people are delaying retirement and working 
longer.
    But now the bad news--more Americans will see their living 
standards fall as they enter retirement because retirement 
incomes are not projected to keep pace with earnings.
    Now it is not clear how much income is necessary for 
retirees to live as comfortably as they did, in retirement, but 
a common rule of thumb is that they need about 75 percent of 
their pre-retirement earnings. And the thinking here is that 
they need less money than they did while working because they 
do not have to cover employment costs, they do not have to pay 
payroll taxes, and they do not have to save for retirement.
    Now we projected over the next 30 years the share of 70-
year-olds who cannot meet this 75 percent replacement rate 
threshold will increase from 25 percent today to 30 percent. So 
that is a 5 percentage point increase over about 30 years. This 
decline in retirement preparedness may not qualify as a 
retirement crisis, but it certainly is a worrisome trend.
    And a bigger threat to retirement security, however, is 
rising health care costs. Older Americans already devote a 
substantial portion of their incomes to health care. Although 
Medicare covers nearly all adults ages 65 and older, many end 
up paying substantial costs out of pocket because of premiums, 
deductibles and uncovered services. Half of all Americans ages 
65 and older now spend more than 12 percent of their incomes on 
health care. And among those with incomes below 200 percent of 
the poverty level, half spend more than a fifth--more than 20 
percent--of their incomes on health care.
    Out-of-pocket health care spending by older Americans is 
projected to rise sharply in coming decades as health care 
costs continue to grow. A common benchmark for burdensome 
health care spending is 20 percent of income. Now, if health 
care spending grows at the intermediate rates assumed by the 
Medicare trustees, in 2040, about 45 percent of all adults 65 
and older will experience burdensome costs, including about 70 
percent of those in the bottom two-fifths of the income 
distribution.
    Now perhaps the greatest financial risk for older Americans 
is the prospect of becoming disabled and needing expensive 
long-term care. One estimate indicates that 7 in 10 Americans 
who survive to age 65 will eventually need long-term services 
and supports and 1 in 5 will need help for 5 or more years.
    Most will receive informal help from family and friends, 
often creating significant financial, physical and emotional 
burdens for their helpers. However, increasing numbers of older 
Americans will receive home care from paid helpers, especially 
as family caregivers become less available because family sizes 
are falling and middle-aged women, who provide most of the 
informal care today, are now working more than in the past.
    And as many as half of older adults may end up in nursing 
homes. Long-term care costs are prohibitive. A year of nursing 
home care in a semi-private room now averages about $80,000 
nationwide, with average costs as much as 75 percent higher in 
certain parts of the country.
    A frail, older adult receiving 60 hours of paid home care 
per month--that is the median amount--would incur costs of 
about $15,000 per year.
    We lack a system to adequately finance these costs. 
Standard health insurance plans do not cover long-term care, 
and Medicare covers long-term care only in special 
circumstances. Only about 12 percent of adults 65 and older 
have private long-term care insurance, and there are signs that 
this private market is shrinking. As a result, long-term care 
costs can quickly deplete household savings, and many long-term 
care recipients, especially those with extended nursing home 
stays, end up going on Medicaid which requires a beneficiary 
surrender nearly all of their income and wealth.
    Because out-of-pocket medical and long-term care costs are 
substantial and growing, seniors may need as much money in 
retirement as when they were working. But according to our 
projections, 45 percent of those born between 1970 and 1974 
will lack enough income at age 70 to replace all of their pre-
retirement earnings.
    So, as Congress grapples with these issues, I would 
recommend focusing on protecting incomes for the most 
vulnerable seniors, ensure Social Security's long-term 
financial health and add a meaningful minimum benefit, 
modernize the Supplemental Security Income Program by 
increasing asset limits for beneficiaries, protect seniors from 
catastrophic medical expenses by setting a limit on out-of-
pocket spending in Medicare and create a mandatory program to 
help families finance long-term care.
    Thank you.
    The Chairman. Thank you, Dr. Johnson.
    Okay, we are going to get into some questions now.
    Senator Collins.
    Senator Collins. Thank you, Mr. Chairman.
    Ms. Jacobsen, I want to thank you very much for coming 
today and sharing your personal experience. It is important 
that we put a human face on the issue that we are discussing, 
and you did just that in sharing your personal experience. So I 
thank you for that.
    I am curious about your case because it seems like you 
planned. You did everything right. You were frugal. I mean, if 
you had a credit rating of 800, that is awfully good. You were 
paying your bills.
    Ms. Jacobsen. Seven seventy-seven, to be exact.
    Senator Collins. There you go.
    And, yet, here you find yourself in difficult circumstances 
beyond your control.
    So I am wondering what happened to the pension that you 
were promised because if a company goes bankrupt we have the 
Pension Benefit Guaranty Corporation to which premiums are paid 
that is supposed to step in.
    Now you would have gotten a lower pension amount, but you 
would have gotten something. So why didn't that happen in your 
case; do you know?
    Ms. Jacobsen. Let me clarify. I do have my pension itself 
because I took it as a lump sum and rolled it into an IRA 
because I did not know what the company was going to be called 
tomorrow.
    It is my health care benefits and my life insurance and all 
the benefits that now cost us thousands of dollars a year to 
come up with. So that has not been factored into the retirement 
budget.
    What Verizon is doing now is what they call de-risking, and 
it has sold off its pensions to another company--Prudential, in 
this case--to avoid paying the premiums to the PBGC.
    So now it is now guaranteed to the rest of those employees. 
I got out when it was, and I took the money and left.
    Senator Collins. So people after you are in even worse 
situations.
    Ms. Jacobsen. Right, people that are collecting on 
annuities now are collecting it from the mother company, 
Verizon. They are collecting it from Prudential, which does not 
guarantee, which is not covered by the PBGC.
    Senator Collins. Very interesting. Thank you.
    Ms. Jacobsen. It is called de-risking.
    Senator Collins. Thank you for----
    The Chairman. Could I add?
    Senator Collins. Certainly.
    The Chairman. But you were nine months shy of retirement.
    Ms. Jacobsen. Full retirement, right.
    The Chairman. What would that have given you?
    Ms. Jacobsen. That would have given me more dollars for my 
medical benefits.
    Senator Collins. Would it have increased the size of your 
pension?
    Ms. Jacobsen. That, too, somewhat, yes. Correct.
    Senator Collins. But, Dr. Mitchell, you made an incredibly 
important point about the potential benefits for some people of 
delaying claiming benefits under Social Security.
    Obviously, we see a significant number of seniors 
collecting Social Security at age 62, and sometimes for 
excellent reasons. Some of them may be working in physically 
very demanding jobs, and they need that income and cannot 
continue.
    But we know that minimum benefit--and Dr. Johnson touched 
on this--for Social Security is extremely low. I have always 
felt that when we look at Social Security reform we need to 
increase that minimum benefit, but that is a whole nother 
issue.
    My question for you is, do you think that seniors 
understand what a huge difference it makes in their Social 
Security lifetime benefits, delaying the receipt?
    I was shocked at the 76 percent figure that you gave, and I 
follow this fairly closely.
    So what should Social Security--the Social Security 
Administration--be doing to make sure that seniors understand 
that if they choose age 62 they are going to get far less than 
if they are able to delay the receipt? Sometimes they cannot, 
or there are good reasons not to.
    Ms. Mitchell. Excellent question. Up until very recently, 
maybe three or four years ago, the Social Security field agents 
had a policy of describing this choice about when to claim your 
benefits in terms of a so-called break-even level.
    So, for example, they might say if you claim at 62 you get 
$1,000 a month, just to pick a number out of the air. If you 
work 1 more year, you will get $1,127.27 a month.
    But then they would say, do you realize that you would 
forfeit the $12,000 plus the interest you could have earned on 
it--and they use the F-word, forfeit--if you do not live for 
sure another 14 years.
    Now that, obviously, gives people the cold chills, and they 
think, oh, I do not want to forfeit anything, and so they tend 
to be encouraged to take it early.
    I will say that the Social Security field agents have moved 
away from that presentation. Nonetheless, in surveys of 
financial advisors, two-thirds of the financial advisors today 
still use that forfeit, break-even presentation.
    So you are absolutely right; we do not inform people well 
enough about what a good deal it might be if you can afford to 
delay it--maybe not until 70, but a year or 2. It is the best 
deal going. In terms of lifetime protection, inflation index 
benefits, you cannot get it anywhere else.
    Senator Collins. Thank you.
    And, finally, very quickly, Paula--I am not going to try. 
Could you tell us just quickly, if you could pick one policy 
change that you would recommend to us to encourage--not 
mandate, but encourage--more small businesses to provide 
retirement plans for their employees, what would it be?
    Ms. Calimafde. I think I am going to answer that in the 
negative. The most important thing Congress could do is not cut 
back on the contribution levels to retirement plans.
    In the small business world, the owners are making the 
contributions to the plan, in effect, out of the profits of the 
company, which if they did not put it into the retirement plan 
or put it back in the business they would take out as 
compensation.
    So they are making the contributions for themselves and for 
all their employees. And, if there is not enough of a benefit 
in the plan to encourage them to save, then it makes sense for 
them to take it out as compensation or put it back into the 
business otherwise, but not to put it in the retirement plan.
    So the number one thing is with all of the policy issues 
you all are facing with debt reduction and tax expenditures, 
the tax expenditure for the retirement plan system is a huge 
number. And, yet, if you look at it one way, it is not even an 
expenditure because the money that the government is foregoing 
by having people put money into the plan and having it grow 
tax-free comes back to the FISC at the time the people retire 
and the money comes back.
    So the real cost is the time value of money. That is what 
the government is losing. But because of the way it is being 
shown on the budget windows, it looks like a total loss that 
never comes back in.
    So I know there is a number of proposals trying to cut back 
on the retirement plan contributions, and all of those would 
really hurt.
    Senator Collins. Thank you.
    The Chairman. Senator Warren has done quite a bit of 
research on senior debt as a professor.
    Senator Warren.
    Senator Warren. Thank you very much, Mr. Chairman.
    Thank you and Ranking Member Collins for doing this 
hearing. You all show such great leadership every time in 
these, and getting these issues out here is powerfully 
important.
    I think it is fundamental that we all believe that if you 
work hard you ought to be able to retire with dignity, and yet, 
Social Security provides just the barest minimum for most 
people. And rising costs--rising costs for food, rising costs 
for health care, rising costs for drugs--are really putting the 
squeeze on families.
    The Chairman mentioned--you are right. I did a lot of 
research on this. I spent a lot of time talking about working 
on how families struggle economically.
    And among the different studies I did was one that showed 
that in families from 1991 to 2007 we saw 150 percent increase 
in the percentage of people over the age of 65 who were forced 
to file for bankruptcy--in bankruptcy because of rising medical 
costs out-of-pocket, in bankruptcy because of divorce or the 
death of a spouse as families break up, in bankruptcy, even at 
that age, because they lost jobs that they needed to be able to 
keep their budgets together.
    So I have seen this, and I know it is a terrible problem. I 
appreciate the work you are doing to bring this to our 
attention.
    And thank you, Ms. Jacobsen. As Ranking Member Collins 
said, it is very important to have a personal face on this, and 
I appreciate your coming here today.
    I would just like to ask a question about helping people 
save more for retirement--the idea of how they can best take 
care of themselves. And we know from the research that if there 
is an employer-sponsored plan, I think as you said, Ms. 
Calimafde, that we will see more people in that plan. I think 
you said 14 times as many people will get into a retirement 
plan if we have got employer sponsorship of those plans.
    And yet, we know from the Employment Benefits Research 
Institute that about half of all employers offer no retirement 
plan of any kind, and the GAO tells us that for companies that 
have 100 or fewer employees the rate at which--that 72 percent 
offer no retirement plans of any kind.
    Now, as I understand it, for small businesses, since this 
is obviously a problem, fewer small businesses are offering 
retiree plans and that one of the principle reasons they talk 
about are the high administrative costs--that it is very 
expensive for small businesses to do this.
    And so businesses have pooled together. We have the 
multiple employer plans so that small businesses can work 
together to try to get benefits for their employees.
    Now today, I joined Chairman Nelson and Senator Murray in a 
letter to the Department of Treasury encouraging them to go 
forward with rulemaking to protect small businesses in the 
multiple employer plans by ensuring that an entire plan will 
not become disqualified in the event that one particular 
company breaks the rules--the bad apple problem.
    And so what I would like to do is just ask if you could--I 
thought I would start with you, Ms. Calimafde--if you could 
just speak briefly to the question of how important it is to 
remove obstacles so that small businesses are more likely to 
participate in employer-sponsored pension plans.
    Ms. Calimafde. Well, that is critical, but I want to start 
off by saying that I think the GAO study, as far as coverage in 
the small business sector, is wrong and that there is a study 
that was done in 2011 by the Social Security Administration 
that relied on W2 data, rather than surveying employees.
    And what they found--and I have got this exactly in my 
report, but basically, if you were looking at a small 
business--and I will just pick one side--that employs 25 
employees but less than 50, 60 percent of those businesses 
offer retirement plans. So the numbers are much better.
    And, again, those of us who work in this area are not 
surprised because employees very often do not even know they 
are making 401(k) contributions to the plan and, even more 
strangely, they do not even know their company is making 
contributions for them.
    So the world is not as dark as we thought. It is much 
better than we thought, but that does not mean we should not 
encourage more formation because the more formation--and we 
know people take up the 401(k)s, so the savings in the plan. So 
that is the way to go.
    MEPs--I encourage and applaud you trying to get rid of the 
bad apple rule. It is not a fair rule. Basically, in a MEP, 
where you have a group of employers coming together, if one of 
them has a plan that is disqualified, it disqualifies all the 
plans that were covered.
    I think the goal of a MEP, to lower administrative costs, 
is a good goal. I have a feeling it would end up like a lowest 
common denominator type of plan. Hopefully, it would be like a 
starter plan because I have a feeling that the choices, as far 
as investment choices and whatever, would not be as good as you 
would normally get in a regular brokerage house or insurance 
company plan.
    Senator Warren. So, if I can, Mr. Chairman, can I just 
follow up with one more question on pensions?
    The Chairman. Yes.
    Senator Warren. And then we will have this one out here 
because I just think it is so important.
    And that is whether we are talking about 40 percent of the 
employees of small businesses not having any employer-sponsored 
plan or whether we are talking about 70 percent not having 
them, it is still way too many, and we are looking for ways to 
try to get more people into employer-sponsored plans.
    So I want to ask one more question about that, and that is 
that the GAO also found that small businesses pay higher fees 
than larger employers and that small businesses, because they 
lack the economies of scale of larger employers, sometimes are 
just left out here and that much of the increased cost comes 
from the lack of expertise of the small businesses in picking 
these plans and having to deal with these plans.
    So, last year, the Department of Labor implemented new 
401(k) employee fee disclosures to try to help small businesses 
and participants better understand the fees they are paying.
    And I understand that disclosures are always enormously 
valuable. I am never going to object to having more disclosure. 
But the real question I have is, would it be more helpful if we 
just made these rules simpler and encouraged the Department of 
Labor to get simpler rules out there for the employers and for 
the employees?
    Dr. Mitchell, would you like to speak to that?
    Ms. Mitchell. Being against simplification, I think, is un-
American, but absolutely--you know, I have been working in this 
area for 30 years.
    Senator Warren. I am sorry Let me just say it this way. 
Would it make a real difference? Maybe that is the way I should 
put it.
    Everyone is in favor of it, but do you think it would make 
a real difference?
    Ms. Mitchell. Well, the issue is that Congress has used tax 
law and a number of other laws to shape the environment in 
which we save for retirement. So there is a certain amount you 
can put in tax-qualified. There is a certain amount you can 
take out without a penalty. There are certain ages. It is very 
complicated.
    I do believe that the research has shown, however, that 
automatic enrollment works. If you have an employer who can put 
in place a pension and pop everybody into it, people stay in. 
They know they should be saving for retirement.
    There is also the issue of if you auto enroll people, what 
do you put them into in terms of investments?
    I think Congress did the right thing and the Labor 
Department did the right thing in putting folks into target 
date funds. Again, there is a big variety of them, but by and 
large, it is better than holding your money in money market 
funds for the next 70 years.
    The big question is, what happens at retirement?
    So those of us that have defined-contribution plans--401(k) 
plans--get there with a lump sum, and then we are left adrift. 
How do we manage the money so we do not outspend it in 
retirement?
    So I think that is the crucial issue--how to inform people, 
how to make employers comfortable with helping people through 
the pay-out phase.
    Senator Warren. Thank you very much.
    And thank you for your indulgence, Mr. Chairman.
    The Chairman. Thank you, Senator Warren.
    Senator Scott.
    Senator Scott. Thank you, sir.
    Dr. Mitchell, in the insurance business, we call that too 
much month at the end of the money. Unfortunately, it is an 
often occurrence.
    Ms. Calimafde, a couple questions on the simplification 
process for small businesses who want to engage in finding 
plans--I spent, I guess, 25 years of my professional life in 
the insurance business, trying to find a way to create access 
and information as well as education to those employers, 
especially the smaller ones--one employee to ten. They were 
clueless, really, on the number of opportunities and options in 
the marketplace for as little as $400 or $500 a year to get 1 
plan started.
    And so my question to you is a question on time horizons 
and tax preferences.
    One, the plans are pretty simple. You can get an age-
weighted plan from one of the major mutual fund companies for a 
very small fee to get it started.
    So the question really comes down to the knowledge horizon. 
With all the stuff going on in small businesses, the space for 
making retirement decisions seems to be eliminated because of 
the lack of profit being made over the last five to seven 
years.
    Would you comment on the notion of positioning small 
employers to make good decisions on doing the research so they 
know what is available in the marketplace?
    Ms. Calimafde. Great question.
    And I have to applaud those in the insurance industry 
because they have gotten it that the 30-second sound bite and a 
single piece of paper with charts on it and colors goes a long 
way with a small business owner rather than a 10-page----
    Senator Scott. It does not work.
    Ms. Calimafde [continuing]. Legal document where they are 
going, oh, I am not going to read this today.
    We do know from the Small Business Administration that half 
of all small businesses do not make it through the first five 
years.
    Senator Scott. Right.
    Ms. Calimafde. So, if you are a business in that first five 
years, the chances you are sitting around thinking about 
retirement benefits for yourself or anyone else----probably 
not. Hopefully, you are trying to keep the business alive.
    After 10 years, only a third make it through. Those are 
pretty sad statistics.
    However, the ones that do make it through are very stable. 
And because the owners--most of the small businesses are not 
going to be able to be sold. So they cannot rely on the 
business for their retirement security.
    And we know the nonqualified deferred compensation world, 
which is so important in the larger businesses, is not in the 
small business world because of the tax code.
    So I would think one of the most important things would be 
for accountants and insurance people to advise the small 
business owners. And, in fact, we often find that it is the 
accountant who is the first person to talk to the small 
business owners and say, you know, you have got some profit 
this year; you can put in a retirement plan.
    And I agree with you. I think plans are fairly easy to be 
put in, and I do not think they are that expensive. There is a 
number of brokerage houses out there who are very good at doing 
it now, and insurance companies. And I probably have missed 
somebody else in that world, but--trade associations are 
putting together plans.
    I mean, the problem is not the plan, and there is some very 
good investment advice out there.
    If you look at a typical 401(k) plan today from the 
employee's viewpoint, they can go on a web site. They can see 
their different fund choices. They see how much they have 
saved. They usually have a pie chart that shows them what they 
have done. If they do not want to do any of that, they just go 
into the default, which is almost always a target fund.
    So the real magic is getting them to the plan.
    Senator Scott. Yes.
    Ms. Calimafde. And I really think the advisors are the key.
    Senator Scott. Okay. Dr. Mitchell, perhaps on the whole 
dysfunction of our tax code and how to incent more dysfunction, 
my next comments will help us get there quickly.
    I have a notion that the long-term care component which, of 
course, is not covered by your health insurance plan--so the 
whole financial literacy concept needs to include, and fuse 
into it, the notion that long-term care and the activities of 
daily living that is a trigger for it to start are not a part 
of your health insurance, nor will it be.
    So my question is really on a tax preference in the tax 
code that would provide some type of tax incentives to purchase 
long-term care--the impact of that.
    And my second question for any of the panelists, as I run 
out of time here in 35 seconds, is a question about simple 
math. Part of the challenge that we face today for our seniors 
will be repeated except for it will be exasperated over the 
next generation. Where 50 or 60 years ago we had 16 Americans 
working, we had 1 retired, and the expiration happened 3 years 
later, today, we have 3 working with 1 retired, and the 
expiration happens 15 years later.
    So we are dealing with a problem of math, and I would love 
to have someone talk about how we change the contributions that 
are necessary for us to sustain a system that is based on a 
formula that is obsolete.
    And the first question being a question about tax 
preferences as it relates to long-term care and/or those types 
of things that would allow for folks to make better decisions 
because they have the tax incentive to do so.
    Ms. Mitchell. Well, long-term care is one of the most 
fraught challenges that I think we really face.
    Recently, my employer decided to offer long-term care, not 
as a tax-subsidized vehicle, but as a payroll tax--a payroll 
deduction off of my paycheck. And I finally bought it. I 
dropped my life insurance and bought the long-term care 
insurance because I figured that is the next challenge.
    Two percent of employees at most, in my experience, in an 
employer setting, buy long-term care when it is offered to 
active workers. And you might think, well, we could wait and do 
it later when we retire, but by that point you may well be 
underwritten; you may be uninsurable.
    And so it is a very, very big challenge.
    One of the concerns also is that in an environment where we 
cannot predict future medical care costs very well and we 
cannot predict longevity very well, the insurance companies 
themselves--and I am sure you know this from your experience--
do not really know what they are insuring.
    So, as a consequence, there is a lot of passing the buck 
going on and a lot of people not knowing what they can afford 
to do when they do buy coverage. It gets more expensive.
    All I can say is there are other models. It may be worth 
your while to go take a look at what they did in Japan. They 
have actually mandated long-term care insurance, which is 
privately provided, but everybody from the age of 40 has to pay 
into a pool. So you do not get any adverse selection, and 
everybody is covered. That has not corrected the problem, but 
it does mean that there is more protection.
    The benefits are also means-tested, I would add. So, if 
turns out you are quite wealthy when you get to retirement age, 
you get less than if you do not.
    Senator Scott. Thank you.
    The Chairman. Thank you, Senator Scott.
    You know, we passed a long-term care act, and it was so 
expensive that then we had to backtrack.
    Senator Manchin.
    Senator Manchin. Thank you, Mr. Chairman.
    And, if I could ask Dr. Mitchell, the GAO has identified 
about 15 different agencies trying to give financial literacy 
service. Millions and millions of dollars are being spent, and 
nothing seems to be--the results have not changed.
    Do you have recommendations to us about how we could help 
you streamline the system?
    Ms. Mitchell. I have been doing some work recently with a 
colleague of mine, Annamarie Lusardi, and what we have done is 
survey Baby Boomers as well as younger people and, in fact, 
people all around the world about the key, fundamental, simple 
financial facts that you need to know in order to be able to 
make smart financial decisions.
    So we have asked questions, for example--and I am not 
putting you to a test. We will not make you answer.
    Senator Manchin. No, I am asking you. Hold on. Hold on one 
second.
    Ms. Mitchell. Suppose you had $100 in a savings account.
    Senator Manchin. One second.
    Ms. Mitchell. Yes.
    Senator Manchin. Let me ask you. We know the GAO has 
identified 15 different Federal agencies spending $60 million 
to $70 million a year. You are watching all this, and we are 
not seeing the results, sitting here. So, if the GAO has given 
us a report that there should be some consolidation, can you 
identify for us the overlapping agencies that maybe should be 
consolidated rather than individually keeping these alive?
    Ms. Mitchell. So my answer to you would be before we decide 
to consolidate we ought to figure out what is in the core 
curriculum? What is it that Americans need to know?
    And then with that benchmark we can go out and say, what 
are these folks providing? What kind of information are they 
providing?
    The other issue is that Baby Boomers, and people older than 
they are, are maybe not web friendly so that if a lot of the 
information is on the web they are much more likely to be going 
and trusting their Social Security field agency than 101 
different other providers.
    So we have to figure out first what they need to know, and 
I think interest compounding is critical, and risk 
diversification is critical. And then we ought to figure out 
who is the most trusted conduit of that information and work 
that route. That would be my recommendation.
    Senator Manchin. I think we are on two different pages. I 
am just saying there is 15.
    Have you evaluated what they are trying to educate my 
generation on, whether I am web friendly or not web friendly?
    Do I have 15 doing the same thing? Do I have 10 doing the 
same thing?
    Can you recommend that this should not happen; we should 
have maybe a portal with 1 or 2 doing what 15 are doing now? 
That is what I would ask you to evaluate.
    I only have so much time. So maybe we will get more into 
that.
    Ms. Mitchell. Let's talk offline because I can give you 
some recommendations of useful studies.
    Thank you.
    Senator Manchin. Thank you so much.
    Dr. Johnson, nursing home care--I was a former Governor of 
the State of West Virginia, and it is a great concern. I have 
an elderly population. But I just saw the inhumane treatment 
when a person who has been a breadwinner all their life had to 
divest themselves of all their money in order to become a 
Medicaid recipient.
    Something is just not right there when you take everything 
away from a hardworking individual and say, guess what? Now you 
are going to be a ward of the state.
    There has got to be a better way to do it. Have you all 
looked into that, or can you give us any recommendations or 
help on that?
    I have always thought need-based sliding fee scale. So my 
mother or father, God forbid if they would have needed that, 
they could have at least felt like they were taken care of and 
providing for their own care a little bit. Now they have to 
basically--in a two-year period of time, they divest all their 
assets and worldly possessions in order to get down to the 
poverty level so Medicaid kicks in.
    Eighty percent of the people in nursing homes are on 
Medicaid in my State. I do not know if that is the national 
average, but I know it is high because they have learned how to 
scam the system.
    Mr. Johnson. That is certainly true, and our system of 
financing nursing home care is almost nonexistent. So there are 
kind of two approaches that have been suggested.
    One is to try to get more people to purchase private 
insurance. Basically, get more people to save on their own. 
Either put lots of money away so you can cover this nursing 
home expense when you need--and that is almost impossible to do 
because the costs are so.
    And the other alternative is to get them to purchase 
private insurance. Right now, only 12 percent of seniors have 
private insurance--private long-term care insurance. We see 
that there is very little effect of tax incentives. It 
increases it a little bit but not much.
    We tried to have a voluntary system in the CLASS Act that 
was recently repealed. That does not work because you have a 
whole set of adverse selection problems. Only the sickest 
people are going to join this program. That means the program 
is not sustainable.
    It seems to me that one solution is to include more long-
term care costs within Medicare, perhaps raising premiums, 
raising taxes, raising payroll taxes, having the payroll tax 
contribute and fund some of these future long-term care 
benefits. That is a way, though, that you would at least avoid 
this problem of people having to forego all of their assets to 
get----
    Senator Manchin. I am just saying here that the nursing 
home industry does a great job. They take care of people and do 
it well, and we are very pleased in our State with mostly all 
the nursing home care that we are giving.
    It has been brought to my attention that a person is 
demeaned to the point where they get an allowance, where they 
are allowed to have so much money and not, and this and that. 
And they just even would think that--and the families, too--if 
they could pay a certain percentage of that income towards a 
sliding fee scale, or a means-tested, would help an awful lot 
more with adding dignity and, I think, a little respect to an 
elderly person who has made their way or paid their way all 
their life.
    And I do not know if you all have looked, and we will 
talk--I know my time is up. We will talk about that later, but 
that is what we are trying to find--some way with dignity and 
pride, as we grow older, that we can still pay our way as much 
as possible.
    Thank you, Mr. Chairman.
    The Chairman. I want to invite the members of the Committee 
to chime in as I do some cleanup here, and feel free to 
interrupt.
    Ms. Jacobsen, you mentioned you see age discrimination in 
trying to find employment. Tell us about that.
    Ms. Jacobsen. Well, I did--I mean, when I was in between 
jobs, I sent out over 100 resumes, and I had several 
interviews.
    I had one interview in a company in Sarasota, and I walked 
in, and there were six people there going to interview me 
simultaneously. And they were extremely impressed with not only 
my resume but the things that I said in the meeting. In fact, 
they were nudging each other and saying, did you hear that? 
That was a great idea, et cetera.
    The vice president sent me an email and said the next day--
it was on a Thursday--we have one more candidate, but it is 
just a superficial thing. We will get back to you on Tuesday. 
You are our number one candidate.
    I have that on a written email.
    Tuesday came. Wednesday came. Thursday, I did not hear from 
him. So I sent him an email. He said, oh--email in writing--
forgot to call you. We hired somebody else.
    Just enough time to do a background check--I was number one 
on Thursday, and on Tuesday they forgot my name.
    So----
    Senator Manchin. What did the background check show?
    Ms. Jacobsen. How old I was.
    The Chairman. Her age.
    Ms. Jacobsen. My resume does not say how old I am.
    Senator Manchin. [Inaudible.]
    Ms. Jacobsen. Well, thank you, but numbers are numbers.
    Senator Manchin. You had a first interview?
    Ms. Jacobsen. Oh, yes, with six people in the room--vice 
president and several.
    Senator Manchin. So they did not have a problem until 
they----
    The Chairman. Find out how old you are, yes.
    Ms. Jacobsen. Right.
    Oh, and may I make a comment? I am sorry I know this is 
interjecting.
    The Chairman. Certainly.
    Ms. Jacobsen. But we have all concurred that this is a 
problem, and what we are lacking here is financial education.
    I have told my sons, this is a do-it-yourself economy. If 
you do not do it for yourselves, no one else is going to do it 
for you.
    But how are they going to learn how to do it for you?
    We need financial education in high schools and in college, 
and it has got to be mandatory. You cannot let companies 
default on their pension promises and then go, ah, do it 
yourself.
    Well, how are they going to do it themselves, if they do 
not know how to do it?
    Let's have financial education.
    Thank you. I am sorry.
    The Chairman. Thank you.
    Dr. Johnson had noted that the median value of retirement 
accounts held by households in the age range of 55 to 64 is 
$100,000--retirement accounts.
    The median retirement account balance for 55 to 64 for all 
households--believe it or not, we have a study here--$12,000.
    Median retirement account balance for 55 to 64 for 
households with savings--$120,000.
    So that does not go very far, does it, Dr. Johnson?
    Mr. Johnson. No, it certainly does not. If you were to 
annuitize that amount at age 65 today, you would maybe get $500 
or $600 a month. So it helps. Every little bit helps, but it is 
not going to allow you to live comfortably.
    That really is the challenge we face--how to get those 
account balances larger--and that is why people have been 
talking about this auto escalation, auto enrollment, to get 
people into it.
    I think part of the problem is that a lot of people do not 
participate at all in their 401(k) plans.
    I mean, first, you have people who are not offered 401(k) 
plans. Then you have people who are offered them, who do not 
participate, people who participate but do not invest enough, 
people who deplete some of their assets before they retire 
because they dip into their assets. They take loans from this 
money. They take them out when they change jobs. There are all 
kinds of things that can go wrong along the way to retirement, 
and it is a major problem.
    I think we should also look at, though, that there is a lot 
of attention--there is this thinking that the defined-benefit 
world was so much better. The defined-benefit world did not 
work that well for a lot of people, though. You would get a lot 
of money if you stayed on the job for a long time. If you 
changed jobs frequently, either by choice of your own or 
because the employer went bankrupt, or because of family 
reasons you had to move, you did not make much in that account 
either.
    The Chairman. Well, we are coming to some tough conclusions 
here. Work longer is one conclusion. This certainly was not the 
way it was in the previous generation.
    Anybody want to offer some hope?
    Ms. Calimafde. Could I make a comment?
    The Chairman. Please.
    Ms. Calimafde. We are saying work longer, but when Social 
Security was first formed the average life expectancy, I think, 
was like 65 or 66. So they were putting together a program that 
had a life expectancy of 10 months or 11 months for the average 
person.
    Today--and it is too bad Senator Scott has left, but--one 
of the problems insurance companies are having is the life 
expectancy is increasing so dramatically right now that they 
really do not even know how to put their life insurance 
policies together.
    So to say, gee, it is a shame you have to work longer; 65 
today is not 65 30 years ago, 40 years ago. I would submit it 
is not even the same it was 10 years ago.
    I mean, if you are going to live until you are 85 or 89 or 
90, maybe we want people to keep working longer so that they 
can provide a function in society. But also, I would think it 
would be more interesting for them to keep working longer than 
all of a sudden--I do not think most of us are set up for 40-
year retirements. That is sort of not where we are.
    I was also going to quickly mention that one of the things 
in the tax code that I think----
    The Chairman. Let me interrupt you there.
    Senator Warren has a comment.
    Senator Warren. So I just want to push back on that notion, 
though. I understand that people are living longer, but that 
does not necessarily mean that someone can work longer. Living 
until you are 85 does not mean you can still manage a 
construction job at 65----
    Ms. Calimafde. True.
    Senator Warren [continuing]. Or that you can still take 
care of small children where there is lots of bending and 
lifting and carrying----
    Ms. Calimafde. Right.
    Senator Warren [continuing]. Or that you can still work as 
a nurse.
    There are so many jobs, well, that require you to be 
strong, that require--or that have battered people's bodies for 
years.
    Ms. Calimafde. Well, I agree with that, Senator, but I am 
just saying that there is a lot of jobs out there where people 
are being put out to pasture at age 65 and 65 is a very vital 
person today.
    So I am almost turning it on its head, saying these forced 
retirement ages that companies are coming up with are really 
not--they do not fit with today and who people are at 65 today.
    Senator Warren. Maybe we are just describing different 
parts of the problem----
    Ms. Calimafde. Right.
    Senator Warren [continuing]. Because I think I would say 
this the other way around. As I understand it, we do not have 
most forced retirement ages anymore.
    Ms. Calimafde. We do.
    Senator Warren. What we have got are people who are trying 
to work and who cannot get work, or people for whom it is just 
not possible to continue to work for years to come.
    And the question is how we are going to manage longer 
retirement periods, and I think expecting people to work until 
they are 68, 70, 72 is just not realistic and, frankly, just 
not right.
    For those who want to work, for those who can work, for 
those who can find the right kinds of jobs and part-time jobs, 
I am all for it. But, if we think the solution to dealing with 
the coming economic crisis around retirement is to expect 
people to work until 72, I just think that is wrong. I do not 
think we can do that, and I do not think we should be looking 
in that direction.
    Sorry, Senator.
    The Chairman. Okay. I want to raise a very contentious 
issue that we are going to face shortly if there is a grand 
bargain, and who knows in this political environment what is 
going to happen.
    But one of the suggested parts of a grand bargain is to 
make Social Security more actuarially sound by not increasing 
the tax on higher-level income folks but, rather, altering the 
CPI from the existing one to what is known as Chained CPI, 
which is still being evaluated. But the essence is that it is a 
lower CPI than the existing one. Therefore, seniors' monthly 
payments on Social Security would be a little less.
    Does anybody want to have any comment about that?
    Yes, ma'am, Ms. Jacobsen.
    Ms. Jacobsen. Then you are talking life and death because 
it cannot get any lower and people cannot live.
    Senator Manchin. Can I chime in?
    Ms. Jacobsen. We are talking food. We are talking--just 
food. People cannot live.
    Senator Manchin. Ms. Jacobsen, I think what the Senator 
might have been saying is let's say that you come to retirement 
age, and you have done quite well in your life. But you have 
other people that basically have not done quite as well in 
their life, and they need that. That is the substance they 
have.
    Ms. Jacobsen. Yes.
    Senator Manchin. Do you think this society--and this is a 
discussion that goes on. Would society be able to have it 
flexible?
    Let's say my parents have done very well, and they might 
not need the CPI. They might not need the cost of living.
    Ms. Jacobsen. Right.
    Senator Manchin. And they are above 250 percent of the 
poverty guidelines. Their income is still $60,000, $70,000, 
$80,000 a year of investments in that.
    But someone who basically needs it to adjust to their rent 
and their utilities and that would get it.
    Ms. Jacobsen. Okay.
    Senator Manchin. My parents would not be upset. My parents 
would not be upset to say, guess what, John and Mary? You all 
are not going to get the COLA, but Aunt Theresa over here will 
get the COLA because she did not do quite as well.
    They could live with that, but we cannot come to grips 
politically with that.
    Ms. Jacobsen. Right.
    Senator Manchin. It is either a Chained CPI or a change in 
the whole COLA. You know, the amount.
    Ms. Jacobsen. Yes.
    Senator Manchin. There are just some people that basically 
have done very well. They are going to get their Social 
Security because they paid into it, but they do not 
automatically have to get, nor do I think they would demand or 
think that it is unfair if they did not get a COLA so that we 
could keep COLA for the people that really need it because 
everybody has paid into Social Security. Right.
    Does that make sense to you?
    Ms. Jacobsen. It does, and I have been paying into it since 
I was 15.
    And you are right, but at what level? What discriminatory 
level?
    Senator Manchin. I will use 250 percent of the poverty 
guidelines.
    So take whatever the poverty guidelines are in your state--
--
    Ms. Jacobsen. Right.
    Senator Manchin [continuing]. And then 250 percent above 
that. And, if you still had that--I am just using it 
hypothetically.
    But these are discussions that we have, that go on, and 
they are not done in public, but it needs to be talked about.
    Ms. Jacobsen. Right.
    Senator Manchin. Is there a social acceptance to it?
    I know I have talked to my family members who are older, 
and they would say, as long as I get my Social Security back, I 
am okay. I am okay if I do not get the COLA. I am still in 
pretty good shape.
    But I can tell you our neighbor over here; she has to have 
it. She has to have it.
    Ms. Jacobsen. Right. I am a generous person. I feel the 
same way you do. But is everybody else going to? Are your 
constituents going to?
    Senator Manchin. Well, I do not know. That is why you have 
to have--around here they are afraid to have your guilt by 
conversation; let alone guilt by association. So they are 
afraid to even talk about that.
    The Chairman. And that is why I said it was a contentious 
issue.
    Now, interestingly, the flip side of that is you could 
solve the Social Security actuarial problem. And there is an 
actuarial problem, and you all have described it. We have got a 
lot more people that are coming into the system than are paying 
into it. A lot more people that are beneficiaries is what I 
meant.
    Now you could--on the level of someone's salary, $110,000, 
you could impose a Social Security tax on the amount of income 
above that. I do not know the specific amount of the tax, but 
you could virtually solve the actuarial problem for Social 
Security with that.
    Senator Manchin. I think, again, what we are talking about 
is if you make $250,000 a year--or, 110. You quit taking it by 
6.2 percent participation. Should that go up to at least what 
the value of the dollar was when we started that, when 110 went 
into effect, and would it be 180 or 190 today?
    There has to be a reasonable way to do it, responsible and 
what nobody thinks is gouging, but just done in a way that this 
would have been the natural increments that should be today. 
That is where I think the cash flow might take care of itself, 
but there are people that say that is just raising the taxes. 
You know.
    The Chairman. Senator Collins.
    Senator Collins. Thank you.
    I just want to point out that when the President proposed 
moving to a Chained CPI he also proposed increasing the minimum 
benefit, and I think when we have this discussion that that is 
really important to remember.
    And the minimum benefit, as I said in my opening statement, 
is only about $15,000 a year.
    So I think you cannot look at just the proposal for the 
Chained CPI without looking at the fact that if it were 
desirable to move to that you have to increase the minimum 
benefit because, from my perspective, someone who has worked 
their entire life should not retire in poverty. That ought to 
be one of our baseline goals.
    I noticed Dr. Mitchell was trying to jump in here, if we 
could hear from her.
    The Chairman. Sure, Dr. Mitchell.
    Ms. Mitchell. With your permission, thank you.
    I would only say that in the view of many economists the 
issue about how to correctly measure inflation is really a 
completely different discussion than the issue of whether we 
can fix poverty in old age.
    And in my view, personally, if the Chained CPI is a better 
way to measure the cost of living for seniors, then we should 
do it. But we also need to focus on the issue of inadequate 
ability and control over resources and inadequate consumption.
    And so I will only say in passing that I was on the 
bipartisan 2001 Commission to Strengthen Social Security, and 
we did propose, aside from private accounts--I am not going 
there. We did propose a change in the indexation of benefits 
prior to retirement, and that generated enough money to raise 
survivor benefits, which are very important, and also to raise 
minimum benefits to 120 percent of the poverty line.
    So let's just stop there, but I wanted to bring that to 
your attention.
    The Chairman. Senator Warren.
    Senator Warren. If I can, I just want to go back to the 
point, though, that Senator Manchin raised. When Senator 
Manchin talks about the difference between using a Chained CPI 
for some people and perhaps not for others, what you are really 
doing is just acknowledging that, at least as the Chained CPI 
has been laid out, we are just talking about over time a cut in 
benefits.
    And I think that Senator Collins goes to the right point 
when she says the fundamental question we have to address is 
whether the benefits are adequate. And then we have to find the 
right way to grow them over time for people, but that is the 
baseline question.
    And pretending that this is a question that somehow goes 
away if we use a different inflation index, I think, just 
misses the whole point. We have got to make sure we are paying 
people enough, exactly as you said, Senator Collins, so that 
people are not retiring in poverty.
    The Chairman. Senator Manchin.
    Senator Manchin. If I could just chime in, I have talked to 
enough people on the bottom of the food chain and the top of 
the food chain, and this is something socially that we have to 
come to grips with as policymakers, basically. We have to have 
a cost of living, or COLA, no matter what you call it. Let's 
say even the present formula that we are using to do our COLAs 
with. But there has to be one that adequately takes into 
account the essential living costs of people that basically the 
majority of their income is their Social Security check.
    But, on the other hand, there are people that basically 
have done so well, the 110 that they have been capped at--you 
follow me? That Social Security check does not make or break 
them. They do not need and do not look for it, but they do 
deserve it because they have paid into it. So we do not want to 
take anything away, but I have found it to be more receptive 
for the people who have done well in the food chain.
    I do not know where the breaking point would be. I use 250. 
It could be 300 percent. You know, we could all come to an 
agreement on what it should be.
    But, to me, that would be a more compassionate way of doing 
it and making sure the people that have not done as well are 
able to have enough of an adjustment that they can keep lights 
on, food on the table and take care of themselves, and the 
people on the top end do not feel like you have kept a benefit 
away from them. That might be something we should be looking 
at.
    We are looking at revamping and really reinventing the 
wheel. And you said if it really represents the purchasing 
power, Dr. Mitchell, then that is what should be done.
    I can tell you right now it is not bought that way, as 
Senator Warren had said.
    And I know that we have had that presentation made to us 
that Senator Collins spoke about--that there are certain 
preventions and certain stop-gaps that really help people in 
certain categories of the Chained CPI. It just has not been 
accepted that way.
    So, with that being said, would they accept another 
approach?
    That is all we are doing, and we are doing this out in the 
public forum as today. We need to be able to talk about this 
because there are certain people in my State who cannot make 
it. Social Security in the State of West Virginia--60 percent 
of retired seniors--that is their income.
    Yes, ma'am.
    Ms. Calimafde. One comment about the idea of increasing the 
level at which you keep paying on Social Security is for small 
businesses, particularly for those who are sole proprietors, 
they end up paying Social Security for themselves as an 
employee and then they pay for it for themselves as an 
employer. So, as you move that number up, that would really hit 
the small business community very hard.
    The Chairman. Any other comments from the Senators?
    [Pause.]
    Well, this has been a most helpful discussion.
    And I think as you, Ms. Paula, indicated, the three-legged 
stool--Social Security, a person's employment pension or 
retirement, and their private savings. We see how important it 
is for all of them.
    And any one of them may get cut, which then, Ms. Jacobsen, 
gets to the point that seniors rely on that Social Security 
benefit because if they have the misfortune that you have 
chronicled today then what is the safety net.
    Okay. Now we just got into today the discussion of having 
long-term care, and what we are going to do is in another month 
we are going to have a hearing on long-term care. We have 
scheduled that for October the 23rd.
    So thank you all for participating, and the meeting is 
adjourned.
    [Whereupon, at 3:53 p.m., the Committee was adjourned.]



      
      
      
      
      
      
      
      
      
      
      
      
      
      
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