[House Prints 106-2]
[From the U.S. Government Publishing Office]




                           [COMMITTEE PRINT]

                        HOUSE OF REPRESENTATIVES

                        COMMITTEE ON THE BUDGET

                               __________

                              R E P O R T

                                 of the
 
                     TASK FORCE ON SOCIAL SECURITY

                                 to the

                        COMMITTEE ON THE BUDGET

             (Together with Additional and Minority Views)


                                     
[GRAPHIC] [TIFF OMITTED] TONGRESS.#13

                                     

                              JANUARY 2000

                               __________

                            Serial No. CP-2

                               __________

           Printed for the use of the Committee on the Budget
                                  (ii)


                         COMMITTEE ON THE BUDGET

                     JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia,            JOHN M. SPRATT, Jr., South 
  Speaker's Designee                     Carolina,
CHRISTOPHER SHAYS, Connecticut         Ranking Minority Member
WALLY HERGER, California             JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey                 Leadership Designee
NICK SMITH, Michigan                 LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa                     BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan             DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California     KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire       JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota             ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee              EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire        DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania           EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan            GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas                BOB CLEMENT, Tennessee
JIM RYUN, Kansas                     JAMES P. MORAN, Virginia
MAC COLLINS, Georgia                 DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee                 KEN LUCAS, Kentucky
MARK GREEN, Wisconsin                RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky             JOSEPH M. HOEFFEL III, 
GARY MILLER, California                  Pennsylvania
PAUL RYAN, Wisconsin                 TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania

                     Task Force on Social Security

                     NICK SMITH, Michigan, Chairman
WALLY HERGER, California             LYNN N. RIVERS, Michigan, Ranking
MAC COLLINS, Georgia                 KEN BENTSEN, Texas
PAUL RYAN, Wisconsin                 EVA M. CLAYTON, North Carolina
PAT TOOMEY, Pennsylvania             RUSH D. HOLT, New Jersey

                           Professional Staff

                    Wayne T. Struble, Staff Director
       Thomas S. Kahn, Minority Staff Director and Chief Counsel



                            C O N T E N T S

                              ----------                              
                                                                   Page
Letter of Transmittal............................................     v
Findings.........................................................     1
Letter from Chairman of the Task Force on Social Security to the 
  Committee on the Budget on the Task Force's Recommendations....     3
Task Force Action................................................     5
List of Briefings and Hearings...................................     5
Summary of Briefings and Hearings................................     6
Additional Views.................................................    34
Additional Views of Congressman Nick Smith.......................    59
Minority Views...................................................    63
      
                         LETTER OF TRANSMITTAL

                     U.S. House of Representatives,
                                   Committee on the Budget,
                                  Washington, DC, January 20, 2000.
Hon. John R. Kasich,
Chairman, Committee on the Budget, House of Representatives, 
        Washington, DC.
    Dear Mr. Chairman: By the direction of the Task Force on 
Social Security, I submit herewith the Task Force's report to 
the Committee on the Budget. The report is based on hearings 
and briefings held by the Task Force during the first session 
of the 106th Congress.
            Sincerely,
                                      Nick Smith, Chairman.


106th Congress                                                Committee
                        HOUSE OF REPRESENTATIVES
 1st Session                                                Print No. 2

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


                        SOCIAL SECURITY FINDINGS

                                _______
                                

July 15, 1999.--Submitted to the Committee on the Budget and ordered to 
                               be printed

                                _______
                                

 Mr. Smith, from the Task Force on Social Security of the Committee on 
                  the Budget, submitted the following

                              R E P O R T

                             together with

                     ADDITIONAL AND MINORITY VIEWS

      [To Accompany Findings of the Task Force on Social Security]

    The Task Force on Social Security of the Committee on the 
Budget, which was authorized pursuant to a unanimous consent 
request by the Committee on the Budget, having considered 
findings regarding Social Security, do report the following 
findings:

    1. Social Security is a universal program that has provided a 
safety net for Americans.
    2. Time is the enemy of Social Security reform and we should move 
without delay.
    3. Change should be gradual to allow workers to adjust their 
retirement plans and any change for current or near-term retirees 
should be minimal.
    4. Social Security under the current structure is projected to 
become insolvent during the next 75 year period.
    5. The Social Security Trust Fund is a secure, legal entity 
comprised of U.S. Treasury Bonds backed by the full faith and credit of 
the U.S. Government. While the United States has never defaulted on any 
of its obligations, these represent a legal claim on future Federal 
revenue. Such securities will have to be redeemed from funds outside 
the Trust Fund itself.
    6. Solvency and reform are not necessarily tied together.
      

                                  (1)

      
    7. The current demographic projections may very well underestimate 
future life expectancy.
    8. Any reform must consider the effects on all generations, 
genders, and those currently receiving Social Security benefits.
    9. No payroll tax increase.
    10. Social Security surpluses should only be spent for Social 
Security.
    11. Social Security reform should encourage savings and overall 
economic growth.
    12. We can learn from the experiences of other countries to more 
effectively develop Social Security reforms.
    13. Investment in the capital markets presents an opportunity to 
restore Social Security's solvency.
    14. Any investments in the capital markets should be limited for 
retirement years.
    15. Private or other capital investments can be managed to minimize 
administrative costs to avoid substantial reductions in rates of return 
on investment.
    16. Guaranteed return securities and annuities can be used with 
personal accounts as part of an investment safety net.
    17. A universal Social Security survivor and disability benefit 
program needs to be maintained.
    18. Congress should consider paying for a portion of disability 
benefits for workers who have been in the system a short time, using 
moneys from the general fund.


   LETTER FROM CHAIRMAN OF THE TASK FORCE ON SOCIAL SECURITY TO THE 
      COMMITTEE ON THE BUDGET ON THE TASK FORCE'S RECOMMENDATIONS

                                     U.S. Congress,
                                  House of Representatives,
                                                  October, 5, 1999.
    To my colleagues on the Budget Committee: Public opinion 
polls are consistent. Social Security is one of America's most 
popular Federal programs. Born in the Depression, Social 
Security was originally designed to bring peace of mind to 
Americans who lived longer than 65 years--an age that most 
failed to reach. The public view of its 65-year old citizens 
was akin to the way we view those who reach 80 today. Frail 
bodies and minds could not be expected to sustain themselves in 
the rigors of the workplace. To guarantee that the elderly 
would live with some security, Congress approved a modest 
payroll tax on a limited amount of wages, earmarking the funds 
for seniors over 65.
    Over time, Americans of all ages have grown healthier. We 
all enjoy a high probability of living past 65. For the first 
time, we can view our elderly years as a period of retirement 
activities. Today, workers who retire at 65 can look forward to 
an average of 17 years of retirement. They will have time to 
enjoy the company of family members and friends, participate in 
charitable activities, and take up long-neglected hobbies. This 
is one of the great health and social achievements of the 20th 
century. Social Security must keep pace with these advances. It 
takes much larger resources to spread a safety net across 39 
million retirees than it did to insure one-tenth that number 
just 40 years ago. With the certain prospect that this number 
will double in the next 30 years, it is time to review the 
adequacy of our resources to the task at hand and to evaluate 
options to assure its continuance.
    To assist the Congress in this objective, House Budget 
Committee Chairman John Kasich requested in May 1998 that I 
chair a bipartisan task force on Social Security. Budget 
Committee Ranking Member John Spratt asked Representative 
Rivers to serve as ranking member of the task force. Working in 
a collegial atmosphere, the House Budget Committee Social 
Security Task Force has taken statements from 29 individuals. 
Its members have explored numerous issues that we believe are 
essential to a comprehensive understanding of this vital 
program.
    We began our work by reviewing the insolvency problem. We 
heard first from Social Security's top actuaries, then we held 
closed sessions with Alan Greenspan and now Treasury Secretary 
Larry Summers. Our scope then broadened into inquiries about 
the possibility that life expectancy may reach 100, or even 120 
years of age. We then explored the mechanics of creating 
personal retirement savings accounts, trying to determine the 
advantages and disadvantages of such a system--how much workers 
might benefit from their creation even if they are unwilling to 
expose themselves to equity market risk, and answering 
questions about administrative costs and feasibility. We moved 
on to a discussion of how other nations are handling their 
demographic challenge as the ratio of workers to retirees 
plunges throughout Europe, Japan, and else-

where--just as it is here. As is appropriate for a Budget 
Committee task force, we explored how operation of the Social 
Security Trust Funds will interact with other elements of the 
Federal budget, how Social Security affects taxpayers of all 
generations, and how to quantify transition costs that must be 
covered as part of Social Security reform.
    We learned from congressional Members who made personal 
appearances to outline their reform plans, including: 
Representatives John Kasich, Bill Archer, Clay Shaw, Jim Kolbe, 
Charlie Stenholm, Roscoe Bartlett, and Peter DeFazio; Senators 
Judd Gregg, John Breaux, and Charles Grassley.
    As we come to the end of our 4-month fact finding mission, 
we can proudly say that Republicans and Democrats found many 
points of agreement. The fact that the Task Force members 
reached consensus on 18 findings gives us hope that a 
bipartisan reform solution can be reached within the next 2 
years. I believe the attached compendium answers many questions 
about Social Security reform, and we are pleased to distribute 
it to our colleagues as a useful guide in their own 
deliberations.
    I would like to take this opportunity to express 
appreciation to the many individuals who helped make this 
experience rewarding and personally enjoyable. The Task Force 
benefited from the active participation and thoughtful 
contributions of its members: Wally Herger, Mac Collins, Paul 
Ryan, Pat Toomey, Ken Bentsen, Eva Clayton, and Rush Holt. In 
addition, I want to thank the Budget Committee for providing 
valuable support. Finally, special appreciation goes to my own 
staff--Kurt Schmautz and Susan Sweet--for the hundreds of hours 
spent in research and for their work in guiding the Task Force 
through a most intensive inquiry of the current problems and 
possible solutions for Social Security.
            Sincerely,
                                                Nick Smith,
                                   Chairman, House Budget Committee
                          Bipartisan Task Force on Social Security.
                           TASK FORCE ACTION

    By unanimous consent on January 20, 1999, the Budget 
Committee authorized the Task Force on Social Security for a 
period of 6 months. The Task Force was authorized to hold 
hearings and issue a report on the budgetary implications of 
the proposed reforms of the Social Security reform.
    The Task Force held hearings and briefings from March 2, 
1999 to July 13, 1999.
    On July 15, 1999, by voice vote, the Task Force agreed on 
18 findings and reported their recommendations.

                                         LIST OF BRIEFINGS AND HEARINGS
----------------------------------------------------------------------------------------------------------------
        Date                              Topic                                       Witnesses
----------------------------------------------------------------------------------------------------------------
March 2               The state of Social Security (briefing)       Steve Goss, Chief Deputy Actuary, Social
                                                                     Security Administration; Representative
                                                                     Nick Smith, Chairman, Task Force on Social
                                                                     Security
----------------------------------------------------------------------------------------------------------------
March 16              Effect of investing Social Security moneys    Lawrence Summers, Deputy Treasury Secretary
                       in the capital markets (briefing)
----------------------------------------------------------------------------------------------------------------
March 23              The need for comprehensive structural reform  Alan Greenspan, Chairman, Federal Reserve
                       to Social Security (briefing)
----------------------------------------------------------------------------------------------------------------
April 13              How will advances in health sciences and      Dr. William Haseltine, Human Genome
                       increased life-expectancy affect Social       Sciences; Dr. Kenneth Manton, Duke
                       Security (briefing)                           University Center for Demographic Studies;
                                                                     Felicity Bell and Steve Goss, Social
                                                                     Security Administration
----------------------------------------------------------------------------------------------------------------
April 27              Administrative costs of privatization         William Shipman, Principal, State Street
                       (briefing)                                    Global Advisors; Dallas Salisbury,
                                                                     President, Employee Benefits Research
                                                                     Institute
----------------------------------------------------------------------------------------------------------------
May 4                 How uniformity treats diversity (hearing)     Larry Kotlikoff, Professor of Economics,
                                                                     Boston University; Darcy Olsen,
                                                                     Entitlements Analyst, Cato Institute;
                                                                     Kilolo Kijakazi, Center on Budget & Policy
                                                                     Priorities
----------------------------------------------------------------------------------------------------------------
May 11                Using long-term market strategies for Social  Dr. Roger Ibbotson, Professor of Finance,
                       Security (hearing)                            Yale University; Dr. Gary Burtless, Senior
                                                                     Fellow, Brookings Institute
----------------------------------------------------------------------------------------------------------------
May 18                Establishing a framework for evaluating       Dr. Robert Reischauer, Brookings Institute;
                       Social Security reform (hearing)              Stephen Entin, Institute for Research on
                                                                     the Economics of Taxation
----------------------------------------------------------------------------------------------------------------
May 25                National retirement reforms in other          Dan Crippen, Director, Congressional Budget
                       countries (hearing)                           Office; David Harris, Watson Wyatt
                                                                     Worldwide; Lawrence Thompson, Senior
                                                                     Fellow, Urban Institute, President-elect of
                                                                     the Board of Directors, National Academy of
                                                                     Social Insurance
----------------------------------------------------------------------------------------------------------------
June 8                The Social Security Trust Fund (hearing)      Ken Holt, AARP; David Koitz, Congressional
                                                                     Research Service
----------------------------------------------------------------------------------------------------------------
June 15               Guaranteed Investments and Life Annuities     James Glassman, Resident Scholar, American
                       (hearing)                                     Enterprise Institute; Steven Bodurtha,
                                                                     Merrill Lynch; Mark Warshawshy, TIAA-CREF
----------------------------------------------------------------------------------------------------------------
June 22               The Social Security Disability Program        Jane Ross and Mark Nadel, Social Security
                       (hearing)                                     Administration; Marty Ford, Consortium for
                                                                     Citizens With Disabilities
----------------------------------------------------------------------------------------------------------------
June 29               Review of Current Proposals (hearing)         Senators Breaux, Grassley, Gregg;
                                                                     Representatives Archer, Bartlett, DeFazio,
                                                                     Kasich, Kolbe, Shaw, Smith, Stenholm
----------------------------------------------------------------------------------------------------------------
July 13               Social Security Transition Costs (hearing)    Dr. Rudolph Penner, the Urban Institute;
                                                                     David John and William Beach, the Heritage
                                                                     Foundation
----------------------------------------------------------------------------------------------------------------

                   SUMMARY OF BRIEFINGS AND HEARINGS


  April 13 Briefing: How Advances in Health Science Affect SSA's Long-
                           Range Projections

    Statements provided by: Steven Goss, Deputy Chief Actuary, 
Social Security Administration; Felicity Bell, Actuary, Social 
Security Administration; Dr. Kenneth Manton, Director, Duke 
University Center for Demographic Studies; Dr. William 
Haseltine, President, Human Genome Sciences.

    When Alan Greenspan gave a closed briefing to the Task 
Force on March 23, he advised the members that we faced many 
uncertainties in developing a plan for Social Security reform; 
however, a falling dependency ratio could be considered a 
certainty, and must be planned for. Under the pay-as-you-go 
structure of Social Security, the retirement benefits paid are 
financed by taxes deducted from the wages earned by current 
workers. As the baby boom generation retires, the income of a 
growing number of Social Security beneficiaries will depend on 
the payroll taxes of a dwindling number of workers. When Social 
Security was enacted, tax revenue from 36 workers supported 
each retiree. Today, that ratio of workers to retiree stands at 
3 to 1, and will fall to 2 to 1 by 2030.
    Social Security actuaries are charged with the important 
responsibility of estimating events for many years into the 
future so that policy makers can make the correct decisions in 
the present. Retirement programs will affect government cash 
flows for many years to come. On April 6, 1999, the Washington 
Post reported that The Veterans Administration is still paying 
retirement benefits promised to Civil War veterans over 130 
years ago, and the Civil Service Retirement System, which 
stopped accepting new employees in 1983, will pay benefits 
until 2070.
    Life expectancy projections are a key factor that affects 
both sides of the worker/retiree dependency ratio. Social 
Security currently estimates that women and men who retire at 
age 65 today will collect Social Security benefits for 19 years 
and 16 years, respectively. Some baby boomers will live a third 
of their life in retirement--an unprecedented high that results 
in fewer workers and more retirees.
    Medical advances during the twentieth century--vaccines, 
antibiotics, more widely available health care--have 
dramatically reduced child mortality and increased life 
expectancy. In 1900, male newborns had an average life 
expectancy of 46 years, 3 years less than female life 
expectancy of 49 years. In the following 80 years, both life 
expectancy and the male/female longevity gap rose materi-

ally. A male baby born in 1980 was expected to live 70 years, 
compared to 78 years for females. More children have grown into 
adult workers. In addition, the mortality rate for working 
adults dropped significantly from 1900 to 1960. Even these 
improvements have not kept the worker/dependency ratio from 
falling.
    Medical advances on the horizon in the 21st century promise 
marginal improvements in child and middle age mortality, but 
significant increases in life expectancy and quality of life 
for the aged. Scientists expect many of these improvements to 
become cost-effective anti-aging tools that become widely 
available. Lifestyle changes in exercise and diet can add up to 
10 years of life. New drugs control afflictions that disable 
the elderly, such as high cholesterol and osteoporosis. 
Computer controlled mechanical devices, such as hearing aids, 
are further lowering disability rates among the elderly. 
Improved cancer surveillance is reducing cancer death rates.
    Dr. William Haseltine provided his vision of what the 
future holds for tomorrow's elderly. As President of a firm 
that participates in the human genome research project, he 
knows of the medical benefits we can expect from the 
culmination of years of gene mapping research. He expects this 
research to produce more transplant technology and a new 
generation of drugs that will slow the aging process. In 
addition, Dr. Haseltine is a pioneer in regenerative medicine, 
which uses gene mapping technology to develop medicines that 
can repair physical damage and slow the signs of aging--
extending baby boom life expectancy to 120 years for Generation 
X. One goal of regenerative medicine will be to first halt the 
process of aging, then reverse it. Human Genome Sciences has 
started clinical trials on three potential drugs: one helps 
protect bone marrow cells from the effects of chemotherapy; 
another speeds recovery from burns, wounds, or chemotherapy; 
and a third helps regenerate blood vessels. Dr. Haseltine is 
aware of research that will lead to joint regeneration, 
reversing the effects of arthritis and rheumatism.
    Such ground breaking research causes Dr. Manton to believe 
that the medical community is entering a turning point that 
will make it impossible to use past trends to accurately 
project future improvements in life expectancy, as Social 
Security now does. He sees reductions in the risk of stroke and 
cardiovascular disease mortality. He expects improvements in 
elderly health stemming from the long-term effects of reduced 
incidence of smoking, improved nutrition, revolutionary drugs, 
and greater public understanding of the benefits of a healthy 
lifestyle. Dr. Manton expects many of the baby boomer's 
children to reach their 100th birthday. Therefore, Social 
Security's projections overstate the future dependency ratio 
and understate the system's unfunded liability.
    Manton's demographic trends indicate that a defined benefit 
Social Security system will continue to provide the greatest 
benefits to members of the Asian/Pacific Island ethnic group. 
Current Census Bureau estimates place male and female life 
expectancy at 80 and 86 years. White women will continue to 
receive a higher than average of both retirement and disability 
benefits. African American life expectancy will continue to 
fall short of the average, giving this group less from Social 
Security. However, African Americans have a higher prevalence 
of chronic disability, which Manton expects to continue, and 
are more dependent on disability benefits. Hispanics will 
experience the greatest gains in life expectancy, and they will 
be receiving a greater share of Social Security benefits.
    Both Dr. Manton and Dr. Haseltine are nationally recognized 
experts in aging and the elderly. Since they anticipate 
unprecedented increases in life expectancy, they both 
emphasized the importance of developing policies that encourage 
the elderly to remain in the workforce.
    Manton and Haseltine acknowledge the important role that 
such policies will play in restoring long-term solvency to 
Social Security. However, they consider a greater reason to be 
the need to integrate the growing ranks of the elderly into 
productive society and expand human capital. They view this as 
essential to maintaining a healthy, active lifestyle long past 
our current retirement age. As we move to a more information-
based economy, with more jobs requiring less physical exertion, 
the job opportunities for elderly workers will grow.

         April 27 Briefing: The Administrative Costs of Reform

    Statements provided by: Dallas Salisbury, President, 
Employee Benefit Retirement Institute (EBRI); William Shipman, 
Principal, State Street Global Advisors; James Phelan, 
Associate, State Street Global Advisors.

    Various reform plans introduced in Congress include 
personal retirement savings accounts. In his briefing, Mr. 
Greenspan called the administrative costs of personal accounts 
a mechanical problem that could be solved.
    EBRI published a November 1998 analysis that identified the 
following issues as obstacles to reform using personal 
retirement savings accounts:
     No existing system has the capacity to administer 
an undertaking as large as universal personal accounts for 140 
million workers.
     Social Security reform cannot be compared to 
employment-based retirement savings plans.
     Pay-as-you-go is less difficult to administer than 
a personal account system.
     Some proposed reform plans would significantly 
increase employer burdens.
     Accounting for personal accounts of married 
couples as joint property may pose significant administrative 
challenges.
     Many reform proposals only vaguely address the 
structure of personal accounts.
     Administrative costs significantly influence the 
anticipated rate of return from personal retirement savings 
accounts.
    In his statement, Mr. Salisbury added that administrative 
cost models do not provide for educational programs to 
introduce the new accounts to workers, and that the cost of 
annuitization of accounts at retirement may further increase 
the administrative costs of personal accounts. Although he was 
a member of the CSIS panel that recommended 2 percent personal 
accounts, Mr. Salisbury stated that he does not personally 
support individual accounts. If re-

form is enacted with personal accounts, he advised that 
provisions should be made for low-income workers that have 
small balances so that fixed administrative costs assessed on a 
per-account basis do not consume a majority of account 
earnings.
    Mr. Shipman of State Street Corporation presented a study 
of administrative costs that based its conclusions on State 
Street's actual cost experience as a major pension fund 
manager. The State Street study, published in March 1999, 
designs a plan that creates personal accounts owned by each 
worker that give them the opportunity to invest in the capital 
markets. It advocates personal choice and offers inexperienced 
investors a variety of professionally managed index funds. 
Administrative costs are shared by a large pool of accounts, 
ensuring reasonable costs for all participants, regardless of 
income. Technology and automated services already in use by 
private financial firms will minimize costs, as well.
    State Street recommends a three-level plan that will 
minimize employer costs. It expects each account to cost 
between $3.38 and $6.58 per account annually, depending on the 
level. In Level One, account contributions are deducted from 
payroll and invested in a collective money market fund. The 
funds stay in this privately managed collective account until 
contributions are reconciled with individual W-2 forms. Within 
six to eighteen months, the Social Security Administration will 
have the information needed to transfer an appropriate amount 
of funds and accrued interest into personal accounts. Then, a 
worker's savings are treated as Level Two assets and invested 
in index funds. A worker can choose from one of four index 
funds--three balanced funds and a money market account. The 
funds would be managed by professional firms chosen through 
open competitive bidding.
    After approximately 3 years, the average account balance 
will grow to an amount that can be efficiently managed by a 
financial services company meeting reasonable and specified 
standards. Each worker will have the option to transfer account 
balances to a Level Three manager. Administrative costs will 
rise for individuals who choose Level Three, as they will be 
paying for more active management of their account. The 
administrative costs for Levels One and Two are only a few 
basis points. Costs rise in Level Three as individuals choose 
actively managed accounts; however, individuals have the option 
of moving funds back to the lower-cost Level Two.
    The dilemma of managing the cost of smaller accounts is a 
major reason that the President's plan exempts low income 
workers from USA accounts. Both Mr. Salisbury and Mr. Shipman 
advocate universal availability, if reform incorporating 
personal accounts is enacted. Mr. Shipman advised members to 
establish accounts with percentage contributions that are large 
enough to achieve administrative efficiencies. This is one 
reason Mr. Shipman supports comprehensive reform and opposes 
piecemeal changes to the system that will be expensive to 
implement.
    Mr. Salisbury commended the State Street study for focusing 
on detail and questions of feasibility. As Chairman of the Task 
Force, Mr. Smith requested that the Government Accounting 
Office study the methods and conclusion of the State Street 
study to determine its accuracy. In a report made public on 
July 19, the GAO states that the State Street study provides 
the most detailed analysis of costs per administrative function 
based on known costs.

 May 4 Hearing: How Uniformity Treats Diversity: Does One Size Fit All?

    Witnesses: Dr. Laurence Kotlikoff, Professor of Economics, 
Boston University; Darcy Olsen, Entitlements Policy Analyst, 
Cato Institute; Dr. Kilolo Kijakazi, Senior Policy Analyst, 
Center on Budget and Policy Priorities.

    Under the current Social Security system, all workers pay 
the same payroll tax and all retirees receive a benefit based 
on the same payroll calculation. However, Social Security 
treats people differently. For example, although women pay 38 
percent of all Social Security payroll taxes, they receive 53 
percent of the Social Security benefits. Some critics of the 
current Social Security system note that African Americans 
start working at a younger age and pay FICA taxes for a longer 
period of time, yet they have a lower life expectancy, so they 
receive retirement benefits for a shorter period of time.
    Since Social Security is a pay-as-you-go system, the taxes 
of working generations are being used to pay benefits to 
current retirees. However, under current law formulas, benefit 
payments exceed tax receipts every year after 2014, and the 
Social Security Trust Fund is depleted in 2034. Over time, 
either workers' taxes will increase or retirees' benefits will 
be cut. These reforms will treat people differently, too. Some 
young workers worry that they may be on the losing end of 
Social Security if benefits are cut for future retirees. They 
are asking Congress to make reforms that increase the rate of 
return earned on the tax payments they make to support Social 
Security.
    Dr. Kotlikoff presented testimony that described the theory 
of intergenerational accounting which strives to measure how 
various age groups receive different treatment from Social 
Security. Generational accounts compare the present value of 
taxes paid to benefits received by age group. If benefits 
exceed taxes for a particular age group, the residual 
represents an obligation left for future generations. For 
countries expecting to have a slowly growing working population 
and a faster growing senior population, as in the United States 
during the next decades, a stable system must keep a balance 
between taxes and benefits.
    Using numbers provided by the Social Security 
Administration, Dr. Kotlikoff's research team has completed a 
microsimulation of Social Security, including survivor, mother, 
father, and children benefits, earnings testing, and early 
retirement. This quantitative research, included with his 
written testimony, shows that women fare much better than men 
in terms of internal rate of return, but even women are earning 
less than a risk-free rate of return provided by long-term 
Treasury bonds protected against inflation. People of color 
have a slightly worse rate of return than men do. The 
noncollege educated do not do as well as the college educated. 
No group enjoys a rate of return from the current Social 
Security program that is higher than 4 percent.
    Dr. Kotlikoff advocates radical reform that creates a 
private Social Security retirement system for all new workers, 
depositing 8 percent of taxable wages into personal retirement 
accounts. Transition cost financing is accomplished through an 
8 percent consumption tax that will decline over time. His plan 
keeps a 4.4 percent FICA tax in place to pay for disability and 
survivors insurance.
    In conclusion, Dr. Kotlikoff said, Social Security does not 
represent a very good deal for postwar Americans. On average, 
they are losing 5 cents out of every dollar they earn to the 
OASI program. * * * The problem is that Social Security's 
generally bad actuarial deal is likely to get lots worse 
because this is a system which is not going to be able to pay 
for itself through time. He cited a 1998 study by the 
Congressional Budget Office and the Federal Reserve, which 
found that an immediate and permanent income tax increase of 24 
percent would be needed to eliminate the unfunded liability and 
assure that future generations pay the same FICA tax rates that 
workers pay today. He added: The only way we are really going 
to help our kids in the long run--and that means with the poor 
male kids, poor nonwhite kids, and poor female kids as well in 
the future--is to limit their fiscal burden.
    Ms. Olsen agreed that the current Social Security system 
gives every worker, regardless of income, ancestry, or gender, 
a meager return on a lifetime of payroll tax contributions. 
This poor rate of return leaves women with an average 
retirement benefit of about $600 per month, three-quarters of 
the average monthly retirement benefit for a male worker. As a 
result, poverty rates among women are twice as high as among 
men. In addition, 25 percent of working women pay into the 
system for years, but receive no higher benefit than they would 
if they had never worked.
    Cato's research shows that all women are better off under a 
privatized system that increases the rate of return that all 
workers can earn on their FICA taxes. Ms. Olsen advocated 
transition to a fully private Social Security system. She 
argues that a fully private plan will give married, divorced 
and widowed women at least $200,000 more in retirement benefits 
than does Social Security or the partly private system proposed 
by various reform plans.
    Dr. Kijakazi's testimony emphasized the importance of 
Social Security to elderly people of color. Since its 
inception, Social Security benefits have reduced the elderly 
poverty rate from about 50 percent to 12 percent. She argued 
that women and minorities have received the greatest 
antipoverty relief because they are less likely to have other 
sources of retirement income, such as a pension. Social 
Security makes up 43 percent of the income of elderly African 
Americans and 41 percent of the income of elderly Hispanic 
Americans, compared to 36 percent of income for white senior 
citizens. She believes that the benefits that African Americans 
receive from the disability and survivors programs balance 
their lower retirement benefits due to shorter life expectancy.
    Social Security's design benefits women in several ways. 
Since women earn lower wages than men, women benefit from 
Social Security's progressive benefit formula. Women live 
longer, so they are paid more in benefits for the same earnings 
history than men are, and these benefits are adjusted for 
inflation which protects the purchasing power of the elderly. 
The spousal benefit grants monthly income to women who do not 
have the personal earnings history to support their own 
benefit. Women are more likely to receive survivors benefits.
    Dr. Kijakazi recognized that reform is needed to assure 
that Social Security can continue to pay 100 percent of current 
benefits once the trust fund is depleted in 2034. She called 
reform of the disability program a high priority issue, since 
the disability trust fund is depleted in 2022. She questioned 
the viability of personal accounts reform plans, arguing that 
they may not provide sufficient rates of return after 
accounting for administrative costs and annuitization expense. 
She criticized the Archer-Shaw Social Security proposal for 
diverting Federal funding from discretionary programs to 
finance its personal retirement accounts. She praised the 
Clinton proposal for using the budget surplus to pay down debt, 
thereby reducing future interest payments, and for establishing 
USA accounts which would be targeted to low-wage and moderate-
wage workers. She supported having the government invest a 
portion of the trust fund in equities, as the Clinton proposal 
does.

 May 11 Hearing: Using Long-Term Market Strategies for Social Security

    Witnesses: Dr. Gary Burtless, Senior Fellow, Brookings 
Institution; Dr. Roger Ibbotson, Professor of Finance, Yale 
University.

    Today's Social Security system almost included a personal 
investment option. During floor debate on Social Security in 
1935, various Senators argued vigorously to support choice in 
the Federal retirement program, and the Senate bill included 
this option. This was eliminated in conference. Instead, 
Congress opted for pay-as-you-go financing that matched current 
tax receipts to benefits. Long-term investment strategies were 
not relevant to a pay-as-you-go structure, but are now being 
considered as the Social Security surpluses become larger and 
the unfunded liability grows.
    Social Security's $9 trillion funding gap can be closed in 
only three ways: Cut benefits; raise taxes; or increase the 
rate of return earned on workers contributions. The current 
Social Security programs give the average worker a 1.8 percent 
investment return on their payroll taxes. In contrast, 
corporate stocks have given investors average annual rates of 
return of 8.1 percent, measured from 1926 to 1998. Stock prices 
fluctuate, but over time the upswings outweigh the downturns, 
and investors have learned that they can count on higher 
returns for funds that can be invested for the long run. Since 
many workers pay Social Security taxes for forty years or more, 
they can use long-term investment strategies with confidence.
    Dr. Roger Ibbotson has been recognized as a leading expert 
in measuring rates of return for the last 20 years. In 1974, 
during one of the worst bear markets in U.S. history, Dr. 
Ibbotson predicted that the Dow would reach 10,000 by 2000, 
actually underestimating this landmark by a year. He is now 
expecting to see the Dow reach 100,000 by the year 2025. Dr. 
Ibbotson serves as Chairman of Ibbotson Associates, which 
publishes an annual yearbook of rates for stocks, bonds, 
treasury bills, and inflation. This yearbook is used broadly 
within the financial industry, and is considered the definitive 
source by investment experts. Ibbotson has made the following 
long-term forecasts for the period between 1999 and 2025:

               Ibbotson's Long-Term Investment Forecasts

Total Return on Stocks                                      11.6 percent
Total Return, Long-Term Government Bonds                     5.4 percent
Total Return, Treasury Bills                                 4.5 percent
Forecasted Inflation Rate                                    3.1 percent
Dow Jones Industrial Average, 12/25                              120,368

    Dr. Burtless deferred to Dr. Ibbotson's opinions concerning 
financial history, and directed his testimony toward how 
investment return can be used to provide greater social 
insurance protection. Using fifteen-year investment horizons, 
Dr. Burtless has modeled the earnings that a 40-year old worker 
can expect if 2 percent of his taxable payroll is invested in 
stocks and converted to a life annuity at retirement. He found 
a high variability in the retirement income a worker would 
enjoy, depending on market conditions in these fifteen-year 
horizons and at the time that the investment account was 
annuitized. Income from annuitized personal accounts could be 
up to six times higher for some workers who made the same 
contributions as others and retired at a time when stock market 
values were high. In addition, he warned that simple annuities 
did not protect against inflation, so retirees would find their 
living standards falling as they grew older.
    Dr. Burtless supports using stock investments to increase 
Social Security's rate of return. However, he opposes personal 
retirement accounts. He believes that government investment on 
a collective basis is more consistent with the spirit of social 
insurance that provides crucial protections to the elderly. 
However, he recognizes that public opinion does not support 
collective government investment in individual securities. To 
refute these arguments, he pointed to the Federal Reserve 
Board's retirement plan and the Thrift Savings Plan as examples 
of how such a system could work. If individual accounts are 
incorporated in reform, he does not believe that the government 
should offer a minimum return guarantee. Such a guarantee would 
only encourage individuals to take more risk, since they have 
loss protection, and increase the government's contingent 
liability. Most current reform proposals convert only a portion 
of Social Security taxes to personal investment accounts. If 
individuals make higher-risk decisions that result in losses, 
they will still have a smaller Social Security benefit for 
their retirement.
    Dr. Ibbotson pointed out that Social Security's pay-as-you-
go structure operates as a wealth-transfer system, taking funds 
from current workers to pay benefits to current retirees. No 
investment fund has been accumulated to support future 
benefits. Any plan that utilizes equity investment, either by 
individuals or by the government, will need prefunding. He 
emphasized that long investment horizons are needed to measure 
the true benefit of higher compounded rates of return. A dollar 
invested in stocks earning 11.2 percent, the historic rate 
including inflation over the past 73 years, grew to $2,351; a 
dollar invested in treasury bonds, earning a modest 5.3 percent 
return, grew to $44. While stocks represent higher risk, the 
odds are high that long-term investment strategies including 
stocks will yield a higher rate of return.
    Dr. Ibbotson recommended that individual account reform 
proposals restrict choices to a limited number of accounts that 
emphasize diversification. If government is allowed to invest 
funds collectively, it should be limited to index funds to 
minimize political intervention in investment choices. 
Government investment in individual company's securities should 
not be allowed. To minimize the risk that savings converted to 
annuities in a down market would give workers lower retirement 
income, he recommended that a series of annuities be purchased 
starting several years before retirement.

   May 18 Hearing: Cutting Through the Clutter--What's Important for 
                        Social Security Reform?

    Witnesses: Stephen Entin, Executive Director, Institute for 
Research on the Economics of Taxation; Dr. Robert Reischauer, 
Senior Fellow, Brookings Institution.

    During the past 50 years, Congress has enacted reforms that 
both expanded and contracted the Social Security program. In 
1972, Congress increased benefits by 20 percent. The following 
year, as the House of Representatives voted for an additional 
11 percent increase--raising benefits by more than 30 percent 
in just 2 years--Representative Barber Conable stated: Nobody 
is worrying about where we are headed with Social Security. We 
better not put off a careful review much longer if we are to 
face the next generation with as much sympathy as we are here 
showing to the last generation.
    In less than 5 years, the system faced financial crisis. 
Congress passed legislation in 1977 that included tax increases 
and benefit cuts to fix Social Security's problems.
    By the early eighties, Social Security again faced 
insolvency. Representative Conable was among the experts who 
served on the Greenspan Commission, which recommended reforms 
that were to assure Social Security's long-term health. Many of 
the recommendations of the Greenspan Commission were enacted by 
Congress in 1983. Despite these reforms, Social Security today 
has a $9 trillion unfunded liability, and is facing a cash 
deficit as early as 2013.
    History shows the difficulty of enacting reforms that will 
end the cycles of insolvency that Social Security has 
experienced in the last 20 years. Developing a framework for 
evaluating reform proposals is an important part of this 
process. Such guidelines will point us to the key issues that 
must be addressed in any comprehensive reform plan.
    Mr. Entin encouraged the Task Force to consider wholesale 
reform that makes higher output and productivity a priority, 
and not to settle for piecemeal changes, as Congress did in 
1977 and 1983. Effective reform will make workers more willing 
to work by letting them direct a portion of their payroll tax 
to personal accounts. Mr. Entin opposes an add-on approach to 
finance personal accounts, which would decrease the incentive 
to work. Higher output requires more saving and investment. Mr. 
Entin supports investment incentives, such as faster 
depreciation and extension of IRA-type tax treatment to other 
forms of saving.
    Mr. Entin made six additional recommendations concerning 
design:
    1. Do not keep younger people in the system.
    2. Maintain an independent safety net that is not mixed 
into the retirement plan.
    3. Do not allow the government to own or vote stock in U.S. 
businesses.
    4. Do not cut COLAs.
    5. Do not change benefits significantly for people who are 
55 or older.
    6. Do not force annuitization of personal retirement 
accounts.
    Mr. Entin pointed out that the Social Security trust fund 
does not provide a source of assets to continue to pay 
benefits. The Treasury securities in the trust fund represent 
the authority to request funds from the Treasury without a 
specific authorization and appropriation. The Secretary of the 
Treasury will have to come up with funds by issuing public 
debt, or Congress will provide funds by raising taxes or 
cutting spending. Ultimately, Congress will be forced to trim 
benefits or cut other government spending to preserve overall 
economic growth.
    Mr. Entin's quantitative analyses treated all government 
revenues, whether taxes or new debt, as revenues, and all 
government outlays, whether appropriated spending or redemption 
of debt, as outlays. To finance the transition to a prefunded 
system of personal accounts, Mr. Entin presented estimates of 
how spending reductions, debt financing and tax increases 
affect GDP and GNP. Government spending reductions brought up 
to 8 percent increases in GDP, depending upon the amount of 
debt financing that is needed. In order to reduce the debt 
burden, Mr. Entin recommended the sale of Federal assets that 
are not in use. The data presented measured a strong saving 
response, which assumed that the additional saving in personal 
accounts does not substitute for other saving while it lowers 
the cost of capital and stimulates investment. A weak saving 
response assumed that the additional saving in personal 
accounts displaces other saving in the absence of tax relief, 
and that it neither lowers the cost of capital nor spurs 
investment without changes in the tax treatment of investment. 
With the right incentives for saving and investment and proper 
rewards to labor, reform could boost real after-tax wages by 6 
percent to 10 percent, and create an additional 4 to 7 million 
jobs.
    In closing, Mr. Entin advised that time is not on our side, 
but no reform is better than piecemeal solutions. Comprehensive 
growth-focused reform will give people higher incomes in their 
working years and during their retirement. The public is ahead 
of the Congress. Once they understand the benefits to them, 
they will urge Congress to proceed.
    Dr. Reischauer opened his testimony by reflecting on why 
Social Security was established, explaining: The reason was the 
belief that, left to their own devices, many workers would not 
save sufficient amounts to support themselves and their 
dependents when they could no longer work. People tend to be 
myopic. They focus on immediate needs and those crowd out their 
long run needs. In addition, there are those whose earnings are 
so low or so unstable that even if they did salt away what any 
reasonable person might think was a pretty hefty proportion of 
their incomes each year for retirement, the amount that they 
would have accumulated by the time they turned 65 would not be 
sufficient to purchase an annuity of an adequate size. He 
presented six criteria to evaluate reform proposals:
    1. Benefit adequacy with protection against inflation; 
Stability/Predictability, avoiding unexpected fluctuations in 
incomes; and Equity, including protection for widows/widowers, 
divorcees and others
    2. Equitable distribution of risk between taxpayers and 
beneficiaries, and sharing of adverse events
    3. Fair return on contributions
    4. Administrative efficiency, simplicity, and ease of 
compliance for government, employers, and participants
    5. Political sustainability; the current system has become 
too rigid, and should be changed to reflect the social, 
economic and demographic changes since 1935, but these changes 
should be adequately funded and should not put Social Security 
in constant flux.
    6. Macroeconomic consequences on national saving and labor 
supply, assuring that reform adds to national saving and 
economic growth and does not discourage labor participation
    Dr. Reischauer supports a reform plan that cuts benefits, 
raises tax revenue, and increases the rate of return by 
allowing the government to invest a portion of the Social 
Security trust fund in the capital markets. He does not favor 
COLA reductions. He strongly favors paying down debt. He 
believes it will strengthen the economy, reduce interest 
payments, and prepare us for the second decade of the next 
century, as the baby boomers begin to retire. A former 
Congressional Budget Office Director, Dr. Reischauer agreed 
that the Social Security trust fund is an accounting device. 
However, he also sees it as a political device that sends a 
signal about the need where the adjustments will be made, 
saying: It strikes me it would be inconceivable to say to 
beneficiaries we are going to reduce your benefits or even to 
payroll taxpayers, workers, that we are going to raise the 
payroll tax to make the necessary adjustment. The adjustment 
would take place in the balance of our budget. It might take 
the form of increased borrowing or increased income taxes or 
reduced spending on discretionary items or Medicare cuts or 
something like that.
    In closing, Dr. Reischauer commented that reform would not 
move forward without strong and consistent presidential 
leadership that involved significant political risk. He did not 
see that happening right now.

          May 25 Hearing: International Social Security Reform

    Witnesses: Dan Crippen, Director, Congressional Budget 
Office; Estelle James, Lead Economist/Policy Research, World 
Bank; Lawrence Thompson, Senior Fellow, the Urban Institute; 
David Harris, Research Associate, Watson Wyatt Worldwide.

    The United States was the last of the developed countries 
to adopt a compulsory social insurance program that was aimed 
at eliminating poverty among the elderly. When Congress passed 
the Social Security Act in 1935, it looked to the examples 
provided by other countries to design the U.S. system.
    The demographic changes behind the unfunded liability of 
pay-as-you-go systems are a global phenomenon. Most European 
countries face even more alarming dependency ratios than in the 
United States, and already have higher payroll tax rates. In 
Eastern Europe, the average payroll tax rate exceeds 40 
percent. In Western Europe, the average payroll tax rate is 
above 20 percent.
    International reform initiatives undertaken over the last 
20 years give us the opportunity to learn from experiences 
abroad--taking the best ideas and learning from others' 
mistakes. Once we have learned from these examples, we can 
design a reform plan that will become a model for more than 135 
countries that have yet to implement reforms that bring 
stability to their Social Security systems for the next 
century.
    Dr. Crippen offered testimony concerning CBO's January 1999 
report, Social Security Privatization: Experiences Abroad. The 
report studied reform initiatives undertaken by Chile, the 
United Kingdom, Australia, Mexico, and Argentina. All of these 
countries started out with an old-age income support system 
that relied on pay-as-you-go financing. They have converted to 
a system with personal retirement accounts that prefund at 
least a portion of retirement income by requiring people to 
accumulate savings during their working years. Moving from pay-
as-you-go to a prefunded private system imposes a financial 
burden on transitional generations who must support retirees 
under the old system while saving for their own retirement. 
However, such prefunding can have benefits for the economy by 
increasing private savings. As long as government savings do 
not decline by an amount equal to or greater than the increase 
in private savings, the economy experiences an increase in 
capital stock and productive capacity.
    All of the countries in the CBO study have aging 
populations due to increases in life expectancy and a steep 
drop in birth rates. However, there are many differences 
between these five countries and the United States. There are 
great differences in wealth as measured by GDP per capita. 
Their annual GDP growth rates range from 2.4 percent in the 
United States and the U.K. to 7.2 percent in Chile, and annual 
inflation varies widely.
    The existing reform plans could not be adopted as is, but 
they provide examples of what can work. In addition, they 
identify problems that every country had to solve. The report 
found four relevant issues that all countries had to address in 
designing their reforms:
     Who will pay for the transition between the pay-
as-you-go system and a prefunded system? This issue is not 
unique to plans that advocate privatization, and must be faced 
as part of any reform that moves toward a prefunded system.
     Will the new system be voluntary or mandatory? 
Allowing choice can mean that the pay-as-you-go system lingers 
on, resulting in an additional administrative burden.
     Should there be a minimum benefit guarantee? If 
so, how much; should it be means tested; should it be paid from 
the retirement program or from general revenues? Without 
guarantees some retirees may not have adequate income. Such 
guarantees, however, impose a new contingent liability on 
future generations.
     How much regulation is needed for investment 
managers, and what rules should be imposed on the use of 
retirement funds? Rules and regulations that control fraud and 
imprudence also restrict an individual's choice about 
investment and retirement.
    CBO found that the major reform plans it studied had three 
structures. Chile, Mexico, and Argentina used a model in which 
workers establish private retirement accounts. The United 
Kingdom allowed its workers to choose between the old pension 
system and the new. Australia requires employers to contribute 
to retirement accounts for workers. The CBO report noted that 
the countries it studied were not successful in designing a 
government-run savings program, and ultimately chose to fund at 
least a portion of benefits from private retirement accounts. 
It concluded that Social Security privatization in these 
countries probably increased national savings and economic 
growth. Finally, it found that administrative cost concerns can 
be overcome with appropriate attention to detail.
    The experience of these countries suggests that 
privatization can help meet our obligations to future retirees. 
However, any plan must address two critical questions: Can the 
reform help economic growth, and can it reasonably be expected 
to work? Dr. Crippen emphasized the primacy of economic growth, 
asking: Does whatever we are trying to do, reform of any kind, 
increase net national savings either by the government or 
individuals and, in so doing, boost economic growth and give us 
a larger economy? This is the first and foremost question.
    Ms. James agreed that economic growth is a crucial element 
of successful reform. The preliminary evidence from Chile, 
which was the first country to enact reform, indicates that 
private accounts have a positive impact on savings, financial 
markets, and growth. Here testimony focused on the experiences 
of Australia, Chile, and the United Kingdom.
    Ms. James' international studies have found two approaches 
to transition costs and administrative costs. The Latin 
American model uses a carve-out that diverts funds from the old 
system to the prefunded accounts in the new program, and 
requires moneys to pay benefits during the transition. The OECD 
model achieves prefunding through add-on contributions. 
Countries adopting carve-outs have covered transition costs 
through four methods:
     Gradually downsizing the old system in a way that 
does not affect current pensioners;
     Using hybrid structures that still rely on pay-as-
you-go;
     Employing other resources, such as a budget 
surplus or privatization assets; and
     Borrowing money during the early years of 
transition, spreading the burden over many generations.
    Research done by Ms. James indicates that administrative 
costs for personal accounts will average out to between 70 and 
100 basis points over a worker's lifetime. Preliminary 
estimates of 15 to 20 percent in the Latin American model are 
too high. They assume that start-up costs and early expenses 
will continue as the system matures. However, the data shows 
that countries using retail mar-

keting of retirement investment accounts are experiencing 
higher expense rates. Other countries are attempting to control 
administrative costs through competitive bidding and fee 
ceilings.
    Ms. James has seen growing consensus in the Social Security 
reform debate since 1994. She finds general agreement that some 
degree of prefunding is needed to restore system insolvency as 
well as strengthen the economy of the whole. She believes that 
prefunding should be done in personal accounts to insulate 
these moneys from political manipulation, but these accounts 
should be designed carefully to keep administrative costs low.
    Unlike Ms. James, Mr. Thompson does not consider any 
international reform plan implemented to date to be an 
acceptable model for the United States. There are two key 
differences that particularly influence reforms with personal 
accounts: U.S. policymakers seem unwilling to increase the 
employer reporting burden, as other countries have done; and 
the 2 percent contribution rate used in most plans is lower 
than what other countries have, which increases administrative 
cost pressure.
    Mr. Thompson provided a summary of major international 
reform models:

                                        MAJOR INTERNATIONAL REFORM MODELS
----------------------------------------------------------------------------------------------------------------
                                       Chile         Switzerland        Australia          UK          Sweden
----------------------------------------------------------------------------------------------------------------
Mandatory Participation?           Yes            Yes                Yes              No            Yes
----------------------------------------------------------------------------------------------------------------
Contribution Rate                  13 percent     7-18 percent       9 percent        4.5-5.8       2.5 percent
                                                                                       percent
----------------------------------------------------------------------------------------------------------------
Budget General Funds Financing?    Transition     No                 No               Partial       No
----------------------------------------------------------------------------------------------------------------
Who Collects Taxes/Contributions?  Pension Fund   Pension Fund       Pension Fund     Tax           Tax
                                                                                       Authority     Authority
----------------------------------------------------------------------------------------------------------------
Who Sends In Taxes/Contributions?  Employer       Employer           Employer         Employer      Employer
----------------------------------------------------------------------------------------------------------------
Who Maintains Records?             Pension Fund   Pension Fund       Pension Fund     Investment    Government
                                                                                       Manager
----------------------------------------------------------------------------------------------------------------
Employer Reporting Frequency       Monthly        Monthly            Monthly          Annual        Annual
----------------------------------------------------------------------------------------------------------------
Who Selects Investment Manager?    Worker         Social Partners    Employer         Worker        Worker
----------------------------------------------------------------------------------------------------------------
Who Selects Investment             Investment     Investment         Investment       Worker        Worker
 Strategies?                        Manager        Manager            Manager
----------------------------------------------------------------------------------------------------------------
How Many Investment Options do     None/Investmt  None/Investmt Mgr  0-5              Unlimited     Unlimited
 Individuals Have?                  Mgr chooses    chooses
----------------------------------------------------------------------------------------------------------------
Time Lag for Investment Changes    Days           Days               Days             18-24 mos.    18-24 mos.
----------------------------------------------------------------------------------------------------------------
Lump Sum Withdrawal Allowed?       No             Up to 50 percent   Yes              Up to 25      No
                                                                                       percent
----------------------------------------------------------------------------------------------------------------
Annuities Mandatory?               No             Yes                No               Yes           Yes
----------------------------------------------------------------------------------------------------------------
Price Indexing Required?           Yes            No                 No               To 3 percent  Not decided
----------------------------------------------------------------------------------------------------------------
Who Picks Annuity Provider?        Worker         Pension Fund       Worker           Worker        Government
----------------------------------------------------------------------------------------------------------------
Guaranteed Absolute Rate of        No             Yes                No               No            No
 Return?
----------------------------------------------------------------------------------------------------------------
Guaranteed Relative Rate of        Yes            No                 No               No            No
 Return?
----------------------------------------------------------------------------------------------------------------
Guaranteed Minimum Benefit?        Yes            No                 No               No            No
----------------------------------------------------------------------------------------------------------------

    According to Mr. Thompson, the devil is in the details. To 
address these details, Social Security reform plans with 
personal retirement accounts should be judged by the following 
objectives:
     Provide a reasonable rate of return, after 
adjusting for expected administrative costs and annuitization 
fees. The goal of minimizing administrative costs must be 
balanced against the desire to provide individual choice, which 
increases costs. Mr. Thompson observed that systems providing 
more guarantees limit individual investment choice and 
management options.
     Establish proper regulation for contribution 
reporting and to ensure prudent investment choices.
     Give workers a reasonable degree of choice about 
how their money will be invested.
     Avoid an increase in the employer's reporting 
burden.
     Insulate the economy from inappropriate political 
interference.
    Proposals that create huge government guarantees need 
careful examination. Mr. Thompson believes that these plans 
mortgage the future by betting that the stock market will 
continue to rise. He supports a forthright approach that deals 
with the fact that if people live longer, they are either going 
to have to work longer or else save more each year they work. 
He believes that we can learn about what works and what doesn't 
work from these international examples and apply these lessons 
to our own reform program.
    Mr. Harris agreed that no one particular international 
model can be used as a template for Social Security reform in 
the United States. However, he believes we can take many 
lessons from Australia's reforms, which were implemented by a 
liberal government with the support of a broad coalition of 
trade unions, businesses, and consumer groups. He explained: 
What is striking about the Australian system is that political 
pressures are the reverse of those in the United States. It was 
a Federal labor government, a largely liberal-leaning 
administration, who established and extended individual 
retirement accounts in 1987 and again in 1992. This policy was 
not only supported by organized labor but also was actively 
encouraged by the leadership of the Australian Council of Trade 
Unions (ACTU). Businesses and consumer groups also backed the 
changes. He attributes this consensus to overall fiscal 
concerns about the impact of an aging population on the 
economy.
    As a first step, the government introduced a superannuation 
program in 1986 that required contributions equal to 6 percent 
of payroll--a 3 percent payroll tax paid by the employer, and a 
3 percent contribution made into individual retirement 
accounts. The 3 percent payroll tax acts as a source of revenue 
for the government to pay a means tested, pay-as-you-go Old Age 
Pension benefit equal to 25 percent of inflation-adjusted 
average weekly earnings. In 1992, the second pillar of 
superannuation was established. Each worker's individual 
account received 7 percent of an employee's salary over $450 
Australian per month; the contribution rate increased to 9 
percent over time. The government also established a third 
pillar, which consists of additional voluntary contributions 
that receive favorable tax treatment. Workers are making 
voluntary contributions of 4 percent above the 7 percent 
compulsory contribution.
    The Australia model depends on private competition to 
control administrative fees. These fees have fallen as managers 
have gained more experience. In 1997, the administrative costs 
averaged between 69 to 83 basis points as a percentage of 
assets, or about 66 cents U.S. per week.
    Mr. Harris urged members to learn lessons from Australia, 
Chile, and the United Kingdom, where individual account reforms 
have been put in place. However, he did not highlight increased 
rate of return as the greatest benefit of reform. Instead, he 
identified reduced political risk, citizen involvement in their 
own retirement planning, and reduced long-term liabilities 
related to the retiring baby boomer generation as key reasons 
to move ahead. The demographic shifts that drive Social 
Security's unfunded liability in the United States are 
happening around the world. Countries that address these fiscal 
imbalances will gain a competitive edge in the world markets 
during the 21st century.

                       PROJECTED FUTURE STATE SPENDING ON PENSIONS AS A PERCENTAGE OF GDP
                [Countries noted in bold have implemented comprehensive retirement system reform]
----------------------------------------------------------------------------------------------------------------
                                                           1995    2000    2010    2020    2030    2040    2050
----------------------------------------------------------------------------------------------------------------
Australia...............................................     2.6     2.3     2.3     2.9     3.8     4.3     4.5
Canada..................................................     5.2     5.0     5.3     6.9     9.0     9.1     8.7
France..................................................    10.6     9.8     9.7    11.6    13.5    14.3    14.4
Germany.................................................    11.1    11.5    11.8    12.3    16.5    18.4    17.5
Italy...................................................    13.3    12.6    13.2    15.3    20.3    21.4    20.3
Japan...................................................     6.6     7.5     9.6    12.4    13.4    14.9    16.5
Netherlands.............................................     6.0     5.7     6.1     8.4    11.2    12.1    11.4
New Zealand.............................................     5.9     4.8     5.2     6.7     8.3     9.4     9.8
United Kingdom..........................................     4.5     4.5     5.2     5.1     5.5     4.0     4.1
United States...........................................     4.1     4.2     4.5     5.2     6.6     7.1     7.0
----------------------------------------------------------------------------------------------------------------

    Mr. Harris explained: Developed countries that delay 
necessary reforms will be spending two to four times more of 
their Gross Domestic Product (GDP) on public pensions by 2010 
than countries that have implemented comprehensive reform.

                          Additional Testimony

    Dr. Crippen provided further written testimony in response 
to an analysis of the CBO study that criticized its 
methodology. The critics claimed that the CBO analysis chose 
countries that have little relevance to the U.S and 
predeterminined the conclusion that privatization could help 
restore solvency to Social Security without exploring the 
possibility of prefunding Social Security investment on a 
collective basis through the Federal Government. In addition, 
the critics faulted the CBO for not evaluating the impact of 
the Social Security trust fund and surpluses on solvency.
    Dr. Crippen wrote: My testimony, which focused on 
experiences abroad, included a simple observation drawn from 
CBO's January 1999 analysis--none of the five countries CBO 
studies successfully maintained permanent prefunding of their 
government-run defined benefit pension systems, although four 
of them expressly intended to do so. He noted that the Social 
Security system was originally set up as a collectively funded 
system in 1935, but the goal of building large reserves was 
shortly abandoned, and the pay-as-you-go structure was adopted.
    In response to comments concerning the Social Security 
trust fund, Dr. Crippen said: Despite projections that current-
law Social Security revenues will exceed benefits until 2014, 
some observers believe that pressures will inexorably mount to 
use the resulting Social Security surpluses for either tax cuts 
or additional spending. That view has some currency at many 
points along the political spectrum. * * * A review of recent 
fiscal history suggests that the surpluses that accumulated in 
the Social Security trust funds were spent on other items in 
the budget. Indeed, after adjusting for the effects of the 
business cycle, the unified deficit in the next 12 years 
remained higher than it was in 1983. * * * Yet as the Social 
Security surpluses grew, even without adjustment the unified 
deficit fluctuated with no apparent relation to the trust 
funds. Since 1983, the Social Security surpluses have been 
spent on other programs, and the government accumulated debt, 
not assets. And at least through the last fiscal year, at the 
same time that the Federal Government has been collecting 
historically high revenues, an on-budget deficit remains--
because we are still using some of the Social Security surplus 
to finance the rest of the budget.
    Dr. Crippen concluded: Although alternative explanations 
are possible, the coincidence of U.S. history and that of other 
countries raises legitimate concerns about the potential 
difficulties of prefunding Social Security.

    June 8 Hearing: The Social Security Trust Fund--Myth and Reality

    Witnesses: Ken Huff, AARP; David Koitz, Congressional 
Research Service.

    The Social Security trust fund has existed as only an 
accounting entity since 1937, when Congress transformed the 
system to pay-as-you-go. It was created to keep track of all 
the funds that the government collected for Social Security. 
When Social Security taxes received exceed Social Security 
benefits paid, the Treasury entered a credit in the trust fund.
    Until the 1983 reforms, the trust fund balances did not 
grow to a significant amount. After 1983, this changed. 
Congress passed the recommendations of the Greenspan 
Commission, which included a payroll tax increase, the taxation 
of some benefits, and an increase in the retirement age. The 
higher payroll tax brought money rushing into the Social 
Security trust funds, which now holds more than $740 billion 
for the Old Age Survivors programs and $90 billion more for 
Disability. Current Social Security projec-

tions show that cash uses exceed cash sources in 2014. After 
that, the actuaries anticipate redeeming Old Age Survivors 
trust fund assets to make up the difference between inflow and 
outgo until 2034. In 2035, program receipts will fund more than 
70 percent of the benefits now paid under current-law formulas.
    Although the trust funds hold Treasury securities, these 
have a different meaning than they would for private citizens. 
It means one part of the government has an obligation to pay 
another part of the government. When these funds are needed in 
2015 and later, the government can only obtain the cash by 
borrowing, reducing other expenditures, or taxing citizens. Few 
people expect the government to default on its obligation to 
repay the trust funds. However, meeting the cash needs of 
Social Security by redeeming Treasury securities will affect 
the ability of the government to fund other government programs 
in the future.
    Ken Huff, AARP Vice President for Finance, outlined the 
organization's position on Social Security. It supports prompt 
action on reform to allow time to adopt more incremental 
solutions and gradually phase in changes. However, it does not 
consider Social Security to be in crisis. The system produces 
surpluses until 2013, and these funds will build up the trust 
fund. Since the Federal Government has never reneged on its 
debts, AARP expects that trust fund assets will be available to 
pay benefits until 2034, and disputes the argument that trust 
fund assets are worthless IOUs. The trust funds currently hold 
about 14 percent of the national debt. Mr. Huff contested a 
July 1998 Harris/Teeter finding that 79 percent of the American 
people agreed that the Federal Government had used the Social 
Security trust funds for other purposes. He asserted: There has 
been no raid or misappropriation of the Social Security trust 
funds.
    The AARP is encouraging discussion of bipartisan 
comprehensive reform, not just debate of whether 2014 or 2034 
is the year that Social Security first faces financial 
difficulty. It believes that reform solutions should maintain 
the program's guiding principles of old age income security, 
ensure benefit adequacy, and achieve solvency in a fair and 
timely manner.
    Mr. Koitz's testimony addressed five questions: Where do 
surplus Social Security taxes go; Does this mean that the 
government borrows surplus Social Security taxes; Are the 
Federal securities issued to the trust funds the same sort of 
financial assets that individuals and other entities buy; What 
is the purpose of the trust funds; How much of the system's 
future benefits would be payable if the system relied 
exclusively on its tax receipts?
    Like all taxes paid to the U.S. Treasury, Social Security 
funds flow into government accounts each day. Excess funds do 
not sit idle. These funds become part of the government's cash 
accounts used to pay all Federal expenses, including Social 
Security benefits. The Treasury issues bonds to the Social 
Security trust funds to keep track of Social Security moneys it 
has taken into its operating accounts. The trust funds do not 
pay benefits; the Treasury does. As the Treasury issues checks 
to beneficiaries, it reduces the trust fund security holdings 
by an equal amount.
    The balances of the Social Security trust fund represent 
what the government has borrowed from Social Security, plus 
interest. Trust fund securities are not marketable, but their 
interest rates are set to reflect the market. They have 
specified maturity dates. They are legal obligations of the 
U.S. Government. However, they are not backed by assets that 
can be used to repay the debt when it comes due. When Social 
Security needs these funds in the future, the Treasury must 
find a source of funds to repay the trust fund debt.
    The Federal securities have a political reality. They 
represent permission to spend. As long as a trust fund holds 
securities, the Treasury Department has legal authority to keep 
issuing checks for the program. Even though the government has 
not set aside assets to pay future benefits, it still has the 
responsibility to honor the securities when they are presented 
for payment. If the Treasury does not hold the cash on hand, it 
must borrow the funds, or Congress must enact legislation that 
immediately raises revenue or cuts spending.
    Starting in 2014, incoming Social Security receipts will 
cover only a portion of projected benefits, based on the 
trustees 1999 intermediate or best estimate. The average annual 
shortfall over this 20-year period amounts to approximately $85 
billion, in 1999 dollars:

------------------------------------------------------------------------
                                          Percentage of benefits covered
                  Year                       by current year receipts
------------------------------------------------------------------------
2014...................................  99 percent
2020...................................  85 percent
2034...................................  71 percent
Average, 2014-2034.....................  78 percent
------------------------------------------------------------------------

    This table shows that Social Security cash needs will 
affect the Federal budget long before 2034.
    Mr. Koitz submitted a recent CRS memorandum for the record, 
written by Thomas Nicola, Legislative Attorney, American Law 
Division. The memo expressed the opinion that, if Social 
Security revenue is insufficient to cover benefit payments, 
then-current beneficiaries would have a legal claim to promised 
benefits. However, until the system received funding to pay 
these benefits, the beneficiaries would just get a judgement 
against the United States for the amounts due.

 June 15 Hearing: Secure Investment Strategies for Private Investment 
                         Accounts and Annuities

    Witnesses: James Glassman, DeWitt Wallace-Reader's Digest 
Fellow, American Enterprise Institute; Stephen Bodurtha, Senior 
Director & First Vice President, Merrill Lynch & Co.; Dr. Mark 
Warshawsky, Director of Research, TIAA-CREF.

    Submitted to the Record: ``The Costs of Annuitizing 
Retirement Payouts from Individual Accounts,'' James Poterba, 
Mark Warshawsky.

    Many young people today are concerned about the rate of 
return that their Social Security tax payments will earn. 
Retirees and others nearing retirement age worry that they will 
be left unprotected if future Social Security deficits force 
unexpected benefit cuts. A better return on investments can 
restore confidence in Social Security. As Dr. Roger Ibbotson 
has testified, equity investments held over 20 years or more 
have always historically given investors a high positive 
return.
    Mr. Glassman supports Social Security reform with personal 
retirement accounts in a system that gives individuals a broad 
choice of investments. He believes that the increased returns 
individuals can earn through continual investments in a 
diversified portfolio of stocks over a long period of time 
justify the risks of equity investments. He noted that no 
investment is entirely risk-free, not even Treasury bonds, 
which may lose value in periods of inflation. Social Security 
payments have been protected from market risk by the 
government's power to tax.
    According to Mr. Glassman, personal retirement account 
investments should be concentrated in equities, and the best 
vehicles for stock investing are broadly diversified mutual 
funds--either index funds that track the S&P 500 index or the 
Wilshire 5000 index. Individuals who are concerned about losing 
money in the stock market, despite its historical performance, 
can protect themselves by purchasing alternative equity 
investments that provide guarantees against loss but gives the 
investor the gain. The most popular product available today, 
Market Index Target-Term Securities (MITTS), has been developed 
by Merrill Lynch. Paine Webber, Salomon Smith Barney, Lehman 
Brothers, and other investment firms offer similar vehicles. 
Insurance companies, including Nationwide and American Skandia, 
offer annuities with similar loss protection. Merrill Lynch 
offers MITTS linked to a technology index, a health care index, 
a European index, the Consumer Price Index, and more.
    A MITTS security trades like an individual stock, but it is 
tied to a particular index, such as the S&P 500. The first 
MITTS was sold to the public in January 1992 at $10 a share 
with a guarantee that, in August 1997, investors would be 
repaid the original $10, plus any gain equal to 15 percent 
above the percentage increase in the S&P 500 from 1992 to 1997. 
Investors who bought $10 shares in 1992 were paid $24 in 1997. 
They gave up some of their potential gains to be insured 
against losses that have less than a 10 percent likelihood of 
occurring, based on past market performance.
    Mr. Glassman recommends MITTS as a natural investment for 
risk-averse investors to purchase for personal retirement 
accounts. There are many benefits, but investors should be 
aware of the differences between private guaranteed securities 
and public debt:
     The security's guarantee is backed by a private 
entity. Some of the products have been combined with bank 
deposits so that deposit insurance protects against losses up 
to $100,000 in the event the issuer cannot repay the 
investment.
     Such products do not distribute periodic earnings 
(interest or dividends).
     Currently, MITTS have negative tax consequences if 
they are held in taxable accounts. Reform proposals will need 
to assure that taxes on gains are deferred until funds are 
drawn during retirement.
    Mr. Glassman concluded: Complete insulation from risk is 
impossible but the kind of risk reduction that prospective 
retirees want and should have is not only possible but it is 
here today.
    Mr. Bodurtha was one of the specialists who designed 
Merrill Lynch Protected Growth Investing, which incorporates 
the MITTS product. Growth-oriented investments, such as stocks, 
historically have provided the best opportunity to increase 
wealth over the long run. However, potential downside risk 
keeps many people from investing in stocks, even when long-term 
growth is the objective. Mr. Bodurtha said: When aversion to 
risk stands in the way of investing for long-term growth, 
people may fail to achieve important financial goals.
    Merrill Lynch advises Protected Growth Investing to allow 
investors to:
     Build wealth but protect against downside risk.
     Maintain and add to equity exposure, even if they 
are concerned that the market is near a peak or may be entering 
a period of volatility.
     Diversify a portfolio that is heavily weighted in 
bonds, yet minimize risk.
     Enter into new markets and hedge against losses 
while they learn how these markets work.
    Addressing his comments toward Social Security reform that 
includes personal accounts, Dr. Warshawsky testified in favor 
of converting investment accounts into life annuities at 
retirement, which would guarantee monthly income to a retiree. 
In its most basic form, an annuity, whether issued by a life 
insurance company, an employer pension plan, or a government 
program, pools the mortality risks of people together. He 
advocated mandatory annuitization of personal retirement 
accounts for the following reasons:
     Moral Hazard. If individuals accumulate a large 
sum of money at retirement to enable them to support themselves 
comfortably in old age, some will spend or lose their 
retirement assets quickly and be forced to rely on public 
assistance. Alternatively, individuals will underestimate their 
life expectancies, avoid the purchase of individual annuities, 
and spend down their assets before they die.
     Adverse Selection. Individuals with higher than 
average mortality risk may conclude that annuities are too 
expensive for them, and not buy them. If this avoidance is 
widespread, it will be impossible for insurance companies to 
sell low-priced annuities based on a large pool of 
participants.
     Marketing Costs. Annuitization through the Social 
Security Administration or a trustee of personal accounts will 
minimize costs through scale economies and competitive bidding.
    While at TIAA-CREF, Dr. Warshawsky has seen many benefits 
from a life annuity. He believes that a annuity will pay a 
higher flow of income--as much as 30 percent--to each 
participant. TIAA-CREF recently introduced an inflation index 
bond account that can be used for variable life annuity 
payments, giving retirees COLA-like benefit increases.
    Dr. Warshawsky submitted a comparative analysis of 
annuitization costs for retail annuities sold to individuals to 
private annuity contracts negotiated by the Thrift Savings Plan 
and TIAA-CREF. His research indicates that higher annuity 
payouts can be negotiated through competitive bidding contracts 
that offer a high volume of investment funds. Annuitization 
through a fund man-

ager may lower the administrative costs to individual retirees, 
thereby increasing their retirement income.
    In the design of a system to invest in the markets, Dr. 
Warshawsky advised the Task Force to keep in mind the 
inevitable trade-offs between cost and choice of who invests, 
and in what to invest, saying: There definitely is a trade-off, 
and it is a very difficult trade-off between the political 
issues that are involved in centralized investments versus the 
costs, the inevitable administrative costs which are involved 
in decentralized individual investments. He also emphasized the 
importance of educating workers if a personal account system is 
adopted.
    During questions to witnesses, various opinions about the 
safety net and a government guarantee surfaced. The need for a 
guarantee is a political issue. However, the more generous the 
guarantee becomes, the greater the moral hazard for the 
government. Mr. Glassman commented: Risk is an important 
discipline. It makes people invest wisely. If you take that 
away, people are going to do things which, down the road, will 
end up costing the Federal Government a lot more money.
    With regard to indexed annuities, Dr. Warshawsky sees new 
products coming that will expand choices for retirees. Although 
these annuities are new to the U.S. market, companies in the 
United Kingdom have much more experience. Annuities could be 
priced on a unisex basis, comparable to current Social Security 
benefit calculations.

        June 22 Hearing: The Social Security Disability Program

    Witnesses: Jane Ross, Deputy Commissioner for Policy, 
Social Security Administration; Mark Nadel, Associate 
Commissioner for Disability and Income Assistance, Social 
Security Administration; Marty Ford, Consortium for Citizens 
with Disabilities.

    In 1965, 1 million workers were collecting disability 
benefits. In 1998, 6 million workers and family members 
received $49 billion in Social Security disability benefits. 
Reforms that restore solvency to Social Security are especially 
important for the disability programs, because we have less 
time before the disability trust fund reaches insolvency. By 
2010, program outflow will exceed receipts. By 2020, when 
Social Security projects that 11 million people will be 
receiving disability benefits, the Disability trust fund will 
be depleted.
    In his briefing to the Task Force, Federal Reserve Chairman 
Alan Greenspan told us that one key reason the 1983 reforms 
have not ensured Social Security's solvency for the 75 year 
period projected at the time was an unanticipated explosion in 
disability beneficiaries and, ultimately, disability insurance 
costs.
    Approximately 6.2 million of current Social Security 
beneficiaries are disabled workers and their children, and 
200,000 are the surviving family members of deceased disabled 
workers. Ms. Ross equates Social Security's disability coverage 
to a $233,000 insurance policy for a young, married average 
worker with two children. Benefits are funded through a 1.7 
percent payroll tax on covered earnings, paid by employees/
employers and the self-employed.
    Qualification for disability enables these Social Security 
beneficiaries to participate in the Medicare program. 
Eligibility for health insurance is a very important benefit, 
because disabled workers do not usually have employer health 
plans and do not meet underwriting qualifications for private 
insurance. Medicare paid over $24 billion in benefits.
    Ms. Ross explained that qualification for Social Security 
disability benefits depends on a determination that a worker 
suffers from a medical condition that lasts at least 12 months 
which leaves the worker unable to perform any substantial work 
in the national economy. Applicants must have worked 20 
quarters during the 40 quarter period ending with the quarter 
in which disability began, and they must complete a 5-month 
waiting period after the onset of the disability. Social 
Security undertakes substantial administrative review of 
disability cases, which increases the program's administrative 
costs to 3.3 percent of benefits.
    The GAO considers Social Security DI to be a high-risk 
program, which means it has greater vulnerability to waste, 
fraud, abuse, and mismanagement. Ms. Ross described the fraud 
prevention programs that Social Security employs. She did not 
view fraud enforcement as a likely means of reducing benefit 
growth.
    The latest GAO Performance and Accountability Series found 
that only 1 in 500 disability beneficiaries return to work 
after receiving benefits. Ms. Ross provided details about the 
vocational rehabilitation programs that Social Security is 
initiating to improve these statistics. Ms. Ford pointed out 
that rehabilitated beneficiaries who lose their disability 
status also lose their Medicare coverage. This is a strong 
disincentive to rehabilitation, and she encouraged Congress to 
pass legislation that allowed them to stay on Medicare.
    Social Security disability benefits are integrated with 
most state workers compensation programs so that the combined 
Social Security/workers compensation amounts are limited to 80 
percent of pre-disability earnings. Similarly, most employer-
sponsored long-term disability plans are integrated with Social 
Security disability and workers compensation. Individuals can 
purchase private disability insurance that will provide 
benefits in addition to the integrated Social Security/workers 
compensation/employer disability payments. However, few workers 
buy such coverage. High-risk applicants who might want the 
additional coverage often cannot meet the private insurers 
underwriting requirements.
    Ms. Ross concluded: Only Social Security provides coverage 
to all workers and dependents--coverage that is provided at 
lower cost and greater value than now available on the private 
market.
    Ms. Ford emphasized the insurance characteristics of Social 
Security are extremely important to the disability program. She 
cited Social Security Administration statistics that say a 20-
year-old today has a 1-in-6 chance of dying before reaching 
retirement age and a 3-in-10 chance of becoming disabled. 
Noting that the poverty rate for working age adults with 
disabilities is 30 percent, she said: The capacity of 
beneficiaries with disabilities to work and to save for the 
future and the reality of their higher rates of poverty must be 
taken into consideration in any efforts to change the Title II 
programs.
    Ms. Ford believes that privatized reform plans with 
personal retirement accounts that shift risk from the 
government to the individual are not in the best interest of 
the disabled. Reform programs that establish personal 
retirement accounts offer less benefit to disability 
recipients. They typically have shorter work histories with 
long periods of unemployment, so they are not earning wages or 
making ongoing contributions to personal accounts.
    The Consortium of Citizens with Disabilities believes that 
Congress should only consider legislation that maintains the 
basic structure of the current system and preserves the social 
insurance disability, survivors, and retirement programs. It 
supports strengthening the trust funds to meet the needs of 
current and future beneficiaries and implementing program 
changes that do not undermine or dismantle the basic structure 
of Social Security. Social Security reform proposals have 
targeted their design changes toward the retirement program. 
However, disabled beneficiaries are indirectly affected by 
various provisions:
     Changes to the Benefit Formula. Modifications to 
the Primary Insurance Amount (PIA) decrease both retirement and 
disability benefits. Current proposals reduce disability by as 
little as 8 percent or as much as 45 percent. Reductions to the 
lowest bend point without any minimum benefit provisions will 
force more of the disabled into poverty.
     Access to Retirement Accounts. The personal 
accounts established by many reform plans cannot be accessed 
until a worker reaches age 62. The disabled do not have access 
to income from these funds to supplement reduced Social 
Security payments. In addition, adult disabled children and 
workers who are disabled early in their work years will have no 
personal account to access.
     Adequacy of Accounts. Social Security currently 
pays benefits to spouses, children, adult disabled children, 
surviving spouses, and former spouses. The assets of personal 
accounts could not provide equivalent benefits to this many 
beneficiaries. In plans that require life annuitization of 
personal accounts, there will be no account left to provide for 
dependents and adult disabled children.
     Computation of Years of Work. Plans that increase 
computation years disproportionately reduce the benefits of 
workers with more low or no earnings years.
     Raising the Normal Retirement Age (NRA). 
Increasing the retirement age will increase disability 
applications in two ways. First, if the NRA rises, the early 
retirement benefit available at age 62 will fall. Unless 
disability benefits give a similar reduction, workers will 
apply for disability instead of opting for early retirement. 
Second, manual laborers who cannot work the additional years 
will seek to stop working at an earlier age by applying for 
disability.
     Capacity to Manage Accounts. Disabled 
beneficiaries who suffer from mental retardation, mental 
illness or other cognitive impairments may not have the ability 
to make wise and profitable investment decisions. Privatization 
places these individuals at substantial personal risk.
    In concluding, Ms. Ford recommended that reform proposal 
evaluations include a beneficiary impact statement from the 
Social Security Administration.

      June 29 Hearing: Review of Current Social Security Proposals

    Witnesses: Senators Breaux, Grassley, and Gregg presenting 
the Bipartisan Plan as a panel; Representatives Archer and Shaw 
presenting the Archer/Shaw plan as a panel; Representatives 
Kolbe and Stenholm presenting the 21st Century Retirement 
Security Act as a panel; Representative Kasich presenting the 
Kasich Social Security plan; Representative Smith presenting 
the Social Security Solvency Act; Representative DeFazio 
presenting the DeFazio Social Security reform plan; 
Representative Bartlett presenting H.R. 990 as a panel.

    Statements from: Senators Gramm and Moynihan, 
Representatives Markey and Nadler.

  Overview of Reform Proposals Presented to the Social Security Task 
                                 Force

    All proposals except H.R. 990 restore long-range solvency, 
depend on general revenue transfers; all proposals except H.R. 
990 and the DeFazio plan modify or eliminate the earnings test.

         Social Security Solvency Act/Representative Nick Smith

     Diverts a growing percentage of OASDI tax rate to 
voluntary Personal Retirement Savings Accounts (PRSAs), which 
are used to finance future OASI benefits and give workers the 
opportunity to increase their retirement income.
     Accelerates the scheduled increase in full 
retirement age.
     Increases benefits for aged surviving spouses.
     Future benefit calculations reflect changes in 
life expectancy.

21st Century Retirement Security Act/Representatives Kolbe and Stenholm

     Diverts 2 percent of OASDI tax rate to mandatory 
Individual Security Accounts (ISAs) which offset future OASDI 
benefits; allows additional voluntary contributions.
     Provides government match on voluntary 
contributions made by low wage earners (funded from general 
revenues).
     Reduces COLAs.
     Accelerates the scheduled increase in full 
retirement age.
     Increases the early eligibility age for 
retirement.
     Lengthens benefit computation period from 35 to 40 
years, but lower wage earner in a two-earner couple keeps 35 
year period.
     Future benefit calculations reflect changes in 
life expectancy.
     Redirects income from taxation of Social Security 
benefits to OASDI.
     Establishes a guaranteed minimum benefit.

     Social Security Guarantee Plan/Representatives Archer and Shaw

     Establishes mandatory Social Security Guarantee 
Accounts (SSGAs) funded by an annual tax credit equal to 2 
percent of OASDI taxes.
     Guarantees a benefit at least equal to current law 
benefit.
     Reduces OASDI tax rate by 2.5 percent in 2050 and 
an additional 1 percent in 2060.

 Bipartisan Social Security Reform Plan/Senators Breaux, Grassley, and 
                                 Gregg

     Diverts 2 percent of OASDI tax rate to mandatory 
Individual Security Accounts (ISAs), which offset future OASDI 
benefits; allows additional voluntary contributions.
     Provides government match on voluntary 
contributions made by low wage earners and establishes KidSave 
accounts (funded from general revenues).
     Reduces COLAs.
     Raises taxable earnings base.
     Accelerates the scheduled increase in full 
retirement age.
     Lengthens benefit computation period from 35 to 40 
years, but lower wage earner in a two-earner couple keeps 35 
year period.
     Future benefit calculations reflect changes in 
life expectancy.
     Redirects income from taxation of Social Security 
benefits to OASDI.
     Phases in benefit to surviving spouses equal to 75 
percent of combined benefit.

           Kasich Social Security Plan/Representative Kasich

     Diverts a percentage of OASDI tax rate to 
voluntary Personal Retirement Savings Accounts (PRSAs), which 
are used to finance future OASI benefits.
     Reduces the growth rate for future benefits.

       DeFazio Social Security reform plan/Representative DeFazio

     Taxes all wages, but exempts the first $4,000 from 
payroll tax.
     Allows the government to invest 40 percent of the 
Social Security surplus in the stock market.
     Increases benefits 5 percent at age 85 and allows 
up to five drop-out years in benefit computation.

                    H.R. 990/Representative Bartlett

     Invests a portion of the Social Security trust 
fund in the stock market to extend solvency of Social Security.

         July 13 Hearing: The Cost of Transitioning to Solvency

    Witnesses: Dr. Rudolph Penner, American Enterprise 
Institute; David John, Heritage Foundation; William Beach, 
Heritage Foundation.

    Submitted to the Record: ``Would a Privatized Social 
Security System Really Pay a Higher Rate of Return?'' John 
Geankoplos, Olivia Mitchell and Stephen Zeldes.

    The topic of transition costs is an essential element of 
the Task Force's mission to review the long-term budget 
ramifications of the various Social Security reform proposals. 
There are only three ways to eliminate Social Security's $9 
trillion unfunded liability and return the system to solvency: 
raise taxes, cut benefits, or increase the rate of return 
earned on the taxes workers pay. This transition to solvency 
will change the system we have today. By initiating 
comprehensive reform as soon as possible, we can phase in 
changes slowly--minimizing the Federal budget impact and giving 
workers time to plan for the changes.
    In its early years, Social Security's pay-as-you-go system 
paid retirees much more than they had contributed in taxes. 
Rate of return calculations comparing the present value of 
taxes paid to benefits received estimate that early retirees 
received a high return on their taxes, but that the rate of 
return has been dropping steadily as the system matured. 
Current money's worth calculations show that workers can expect 
less than a 2 percent real rate of return on their taxes. When 
this is compared to the 8.5 percent return that Dr. Ibbotson is 
expecting from equities over the next 25 years, the question 
naturally arises: How can we give the American worker a better 
deal? Although the method of investment varies, most reform 
plans use equity returns to enhance the yield on taxes paid.
    However, higher equity yields will only be achieved by 
prefunding a portion of Social Security--putting cash aside to 
be invested in the markets. This changes Social Security from 
pay-as-you-go to a hybrid system. Such a conversion imposes 
transition costs by diverting pay-as-you-go funds from current 
consumption to future benefits. During periods of surplus, 
prefunding imposes no cost on current retirees. However, this 
flexibility is lost once Social Security enters into a 
projected period of never-ending deficits. Then, the transition 
to prefunding reduces cash available to pay benefits to 
retirees.
    Dr. Summers addressed transition costs in his closed 
briefing for the Task Force. He called current surpluses an 
opportunity to partially cover transition costs and provide 
fiscal space by paying down debt and investing a portion of the 
Social Security trust fund in the stock market to enhance 
returns. He argued that using funds to pay down debt will 
reduce future interest costs and will give us fiscal space in 
the future as Social Security and Medicare spending rises. Dr. 
Summers supported government investment in the stock market to 
spread the market risk across a large pool of beneficiaries, to 
minimize administrative costs, and to maintain Social 
Security's progressive nature by assuring that low-income 
workers were given a higher benefit as a percentage of wages.
    Dr. Penner urged members not to confuse these two types of 
transition costs, saying: In current policy discussions, the 
problems of fixing the current system are often merged and 
muddled with the problems involved in moving toward funding. 
The two problems are distinct and should be separated 
conceptually. But it is desirable to solve both simultaneously, 
and it is necessary to consider this twofold burden when 
analyzing reforms. Dr. Penner supports a hybrid system that 
uses income from personal retirement accounts to offset 
traditional fixed benefit reductions. Although he advocated 
gradual changes to the current Social Security benefit, he 
acknowledged that a go-slow approach means that the ultimate 
reduction in benefits will be greater. Future generations pay a 
higher cost for delays in reform now.
    In theory, there should be no difference in rate of return 
and economic benefit between government investment and personal 
retirement accounts. However, Dr. Penner doubts that the 
government could resist dipping into the reserves of a public 
account to fund deficits in other government accounts. In 
addition, he worries that the government would use its 
investment policy to achieve political ends instead of 
maximizing long-run portfolio returns.
    Transition costs cannot be avoided, Mr. John asserted, 
saying: High transition costs will be a fact of life for Social 
Security regardless of whether the program is radically 
reformed or just left as it is. While some consider transition 
costs to apply only to proposals that would reform Social 
Security, this is not the case. Since the existing program will 
begin to run cash flow deficits in 2014, the transition costs 
of various reform proposals should be measured against the 
costs associated with doing nothing at all. He presented a 
Heritage Foundation analysis which evaluated current reform 
plans, using a definition of transition costs as the total 
amount of money that must come from sources other than Social 
Security payroll taxes at the current level and the small 
portion of the income tax on benefits paid to certain higher 
income retirees. In 2030, the transition cost in 1999 dollars 
for current-law Social Security OASI is $252 billion, compared 
to $133 billion for the Kolbe-Stenholm plan, $130 billion for 
the Senate Bipartisan plan, $187 billion for the Kasich plan, 
$95 billion for the Smith plan, and $255 billion for the 
Archer-Shaw plan. Current-law OASI annual solvency-only 
transition costs reach $516 billion in 2070.
    Where will the money come from to fund these transition 
costs? Future Congresses will be forced to weigh the economic 
effect of large tax increases against massive spending 
reductions for discretionary budget categories such as 
education, highways, or defense. Deficit spending and mounting 
Federal debt will again be in vogue.
    Like Dr. Penner, Mr. John saw Social Security reform in 
intergenerational terms, concluding, ``[t]he real question is 
how responsible this Congress and the one following wants to be 
to future generations. It can do nothing and place a 
significant burden on our children and grandchildren, or it can 
act responsibly and reduce that burden.''
    The paper submitted by Geanakoplos/Mitchell/Zeldes warns 
against depending on a higher rate of return to avoid 
structural reform that cures Social Security's unfunded 
liability, which they estimate to be $10 trillion. The paper 
suggests that unless investment accounts--either individual or 
government-owned--are prefunded and actually invested in the 
equities market, there is no potential for enhanced returns in 
the future. Furthermore, gradual reform that phases in 
prefunding will benefit future generations, but the go-slow 
prefunding approach does not cure the projected deficits for 
the baby boom generation. In addition, administrative costs and 
transition costs for both solvency and prefunding will lower 
the rate of return for near-term retirees. The authors believe 
there is no free lunch, and Social Security reform must balance 
the sacrifices needed to achieve solvency across generations. 
Finally, the authors argue that other factors--economic impact, 
savings incentives, minimization of political risk, and anti-
poverty goals--should influence the design of reform.

[GRAPHIC] [TIFF OMITTED] T2180.001

    Facts are stubborn things. As the official projections by 
the actuaries of the Social Security Administration make clear, 
America's most popular program is headed for financial 
collapse.
    The Social Security program, which is vital to the well 
being of millions of Americans, must be reformed so that it can 
continue to provide workers the retirement and disability 
protection they deserve. Although the financing crisis may seem 
distant now, as we enjoy record surpluses, in just 15 years, 
surpluses will be a thing of the past. By 2014, Social 
Security's expenditures will begin to exceed its tax revenue by 
ever increasing amounts.
    Federal Reserve Board Chairman Alan Greenspan, who presided 
over the 1982-83 Social Security Commission, told the Task 
Force that the program's unfunded liability equals $9 trillion. 
This is a staggering sum. Put another way, a private pension 
fund would require the legal right to collect 12.4 percent of 
the nation's payroll in perpetuity, plus an up front payment of 
$9 trillion, in order to cover the Social Security system's 
financial obligations.
    During the past two decades, the program has experienced 
two serious crises, one in 1977 and another in 1983. By waiting 
until the last moment, previous Social Security reformers had 
to cut benefits with almost no warning, generating claims of 
unfairness. In 1977, for example, reform legislation created 
``Notch Babies'' who receive lower benefits than those granted 
to friends who were born just 1 year earlier. Again, in 1983, 
when Congress passed legislation that raised the normal 
retirement age to 67, it also, for the first time, taxed up to 
half of a beneficiary's Social Security income. This new tax, 
coupled with a 6-month delay in cost of living adjustments, cut 
net benefits to some retirees by 27 percent. Further-

more, when the 1993 Budget Act passed, some seniors suffered 
net reductions of 14 percent when the Clinton Administration 
and Congress decreed that up to 85 percent of Social Security 
benefits were taxable. The millions who were affected by such 
changes were given at most a few months to prepare. This is not 
how a great nation should treat its citizens.
    Another crisis is approaching. Indeed, Social Security's 
long-term shortfall is larger today than it was before the 1983 
amendments were enacted. This time, we must not wait until the 
last minute to take action. Learning from the mistakes of the 
past, we recommend that Congress and the Clinton Administration 
adopt necessary changes now and implement them gradually. This 
will provide ample notice to workers so that they know well in 
advance what to expect when they reach retirement age. The 
longer we delay the more difficult it will be to eliminate the 
unprecedented deficits that loom over the horizon. Delay risks 
hitting future workers and retirees with unexpected and 
unnecessary tax increases and benefit cuts. Social Security 
must be put on sound financial footing for the long-term. There 
are no responsible excuses for delay.
    The majority of this Task Force believes Social Security 
must be transformed into a system that includes personal 
savings accounts funded out of the current payroll tax, giving 
workers direct personal ownership of their retirement accounts. 
Such a transformation cannot be achieved overnight, and it must 
take place while the government continues to honor its current 
promises and maintain the income safety net provided by Social 
Security. Current retirees who count on their monthly benefits 
must be confident that the Federal Government will faithfully 
keep the promises it has made. Older workers who have paid 
Social Security taxes for decades must be assured that Social 
Security will have the funds to pay benefits when they retire. 
Restoring solvency to Social Security and modernizing it are 
not easy tasks. However, successful reform will come from 
forward-looking leadership that weighs the value of change 
against the cost of delay. We must take action to give our 
children a robust, solvent system that will stand up to the 
uncertainties that we cannot predict today. The longer we wait, 
the more difficult our task becomes.

              Social Security Reform is Only a First Step

    The troubled Social Security system is part of an even 
larger challenge. Other essential entitlement programs are 
unsoundly financed, too. In 1995, the Bipartisan Commission on 
Entitlements and Tax Reform published its findings that in the 
years ahead total entitlement spending would rise from 11 
percent of Gross Domestic Product to 20 percent by 2030. The 
Commission's calculations showed that if taxes were raised to 
accommodate increased spending, the Federal receipts and 
outlays would be balanced with taxation reaching 30 percent of 
GDP, an historic high. If future spending is financed through 
new debt, with additional interest costs, the Commission 
calculated that Federal spending would hit 37 percent of GDP in 
2030. Senator Kerrey and Senator Danforth, the Commission's 
cochairmen, warned that unless Congress enacted changes that 
limited nondiscretionary spending, the Federal Gov-

ernment would no longer exercise real control over the Federal 
budget. In the words of Senator Kerrey, it would ``act as an 
oversized ATM machine whose only function is to collect money 
and hand it back out.'' The bipartisan Balanced Budget Act of 
1997 represented an important first step toward reclaiming 
control over our fiscal future. The Budget Resolution for FY 
2000 made further progress toward this goal. However, much more 
will be needed, and on a bipartisan basis, if we are to avoid 
mortgaging our children's future. As a first essential step, we 
must move a portion of Social Security from a fixed benefit to 
a fixed contribution.

 Actuarial Projections May Be Understating the Social Security Problem

    The actuaries at the Social Security Administration (SSA) 
have the official responsibility for preparing the 75-year 
solvency projections needed by policy makers to make 
appropriate long-term decisions. For some time now, their 
annual reports have confirmed the adage that ``demographics are 
destiny.'' In 1945, 41.9 workers contributed FICA taxes to pay 
the benefits of each retiree--a ``dependency ratio'' of 41.9-
to-1. Today, that ratio is 3.4-to-1. According to the 
actuaries, declining birth rates and rising life expectancies 
will result in a dependency ratio of 2.1-to-1 by 2030.
    Since Social Security is funded on a pay-as-you-go basis, 
the ratio of workers to beneficiaries determines how much the 
system will cost. Today, the average benefit is about 36 
percent of the average wage, and there are 3.4 workers per 
beneficiary. Therefore, the cost of the program is about 11 
percent of wages (i.e., 36 percent / 3.4). By 2030, there will 
only be 2.1 workers per beneficiary, therefore, the cost of the 
program will be approximately 18 percent of wages. By 2075, the 
ratio is expected to decline to 1.8-to-1. The cost of the 
program to each worker will rise substantially, to nearly 20 
percent of wages.
    Unfortunately, estimates of long-term life expectancy 
projected by SSA actuaries may be understated. Medical advances 
already on the horizon promise significant increases in life 
expectancy and quality of life for the aged in the 21st 
Century. Many scientists expect these cost effective anti-aging 
tools will be widely available within 20 years. Yet, the SSA 
projections anticipate only a 3-to-4 year increase in life 
expectancy over the next 75 years for individuals reaching 65 
years of age.
    Dr. Kenneth Manton, recognized widely as one of the world's 
leading experts on aging, told the Task Force that medical 
science is entering a ``turning point'' that will make it 
impossible to use past trends to accurately project future 
improvements in life expectancy, as SSA now does. For example, 
he forecasts substantial reductions in stroke and 
cardiovascular disease mortality. These two diseases, along 
with cancer, are currently the leading causes of death for 
seniors. He also expects improvements in elderly health 
stemming from the long-term effects of reduced smoking, 
improved nutrition, and revolutionary drugs. Dr. Manton expects 
many of the baby boomer's children to reach their 100th 
birthday.
    Dr. William Haseltine, perhaps the nation's foremost 
pioneer in human genome research and regenerative biology, 
advised the Task Force to expect even better results from 
science than Dr. Manton suggested. As President of a firm in 
the forefront of the Human Genome research project, he is in a 
unique position to judge the likely impact of years of future 
gene mapping research. He expects this research to produce a 
new generation of drugs that will sharply slow the aging 
process, extending life expectancy to 120 years for Generation 
Xers.
    This is amazing and wonderful news, but it calls into 
question how centenarians and those even older can have the 
resources necessary to make their long lives rewarding. 
Government promises about future benefits will mean little if 
the future worker/beneficiary ratio collapses toward 1-to-1--
creating not only a tax burden on future workers but a 
deterrent on economic expansion. The possibility these 
predictions will occur creates even more urgency for action 
now. Social Security is not the only problem we face. We must 
address the long term needs of Medicare and Medicaid, as well.

              Redeeming Trust Fund Assets Will Not be Easy

    It is important to draw the correct conclusions about the 
meaning of the Treasury securities held by the Old Age 
Survivors and Disability Insurance trust funds. Although these 
trust funds are expected to hold $887 billion in Treasury 
securities by the end of this year, that does not mean the 
government will have the money it needs to redeem these 
securities and pay benefits in the future. As the President's 
Office of Management and Budget (OMB) has observed:

          ``These [trust fund] balances are available to 
        finance future benefit payments and other trust fund 
        expenditures--but only in a bookkeeping sense. * * * 
        They do not consist of real economic assets that can be 
        drawn down in the future to fund benefits. Instead, 
        they are claims on the Treasury that, when redeemed, 
        will have to be financed by raising taxes, borrowing 
        from the public, or reducing benefits or other 
        expenditures. The existence of large trust fund 
        balances, therefore, does not, by itself, have any 
        impact on the Government ability to pay benefits.'' 
        Budget of the United States Government FY 2000, 
        Analytical Perspectives, Washington DC, Government 
        Printing Office, 1999, page 337.

    In short, these securities simply mean one part of the 
government has an obligation to pay another part of the 
government. While most people believe the government will honor 
its obligations, meeting the rapidly escalating cash 
requirements of Social Security to pay promised benefits will 
seriously compromise the government's ability to fund other 
worthwhile programs in the future.
    In his appearance before the Task Force, David Koitz, a 
Specialist in Social Legislation with the Congressional 
Research Service, explained the nature of the relationship of 
the Trust Funds to the rest of the budget. By answering five 
questions, he explained how Social Security's future imbalance 
between spending and revenue will pressure other program as 
early as 2014:
          Where Do Surplus Social Security Taxes Go? Along with 
        all other government receipts, Social Security funds 
        flow each day into and out of thousands of depository 
        accounts maintained by the government and become part 
        of the government's operating cash pool. Once these 
        taxes are received, they become indistinguishable from 
        other moneys the government takes in. They are 
        accounted for through the issuance of Federal 
        securities, but the trust funds themselves do not 
        receive or hold money.
          Does This Mean That the Government Borrows Surplus 
        Social Security Taxes? Excess funds do not sit idle. 
        They are used to finance other operations of the 
        government. The balances of the Social Security trust 
        fund represent what the government has borrowed from 
        Social Security, plus interest.
          Are the Federal Securities Issued to the Trust Funds 
        the Same Sort of Financial Assets That Individuals and 
        Other Entities Buy? They are not marketable, but they 
        do earn interest at market rates, have specific 
        maturity dates, and by law represent obligations of the 
        U.S. Government. However, they are not assets for the 
        government. These claims are not resources that the 
        government has at its disposal to pay future Social 
        Security benefits.
          What is the Purpose of the Trust Funds? The Federal 
        securities issued to any Federal trust fund represent 
        ``permission to spend.'' As long as a trust fund holds 
        securities, the Treasury Department has legal authority 
        to keep issuing checks for the program. Money has not 
        been set aside for Social Security purposes, but this 
        does not dismiss the government's responsibility to 
        honor the securities when they are redeemed. If the 
        Treasury does not have the cash on hand to meet these 
        claims, it must borrow the funds--or, alternatively, 
        Congress would have to enact legislation to raise 
        revenue or cut spending.
          How Much of the System's Future Benefits Would Be 
        Payable If the System Relied Exclusively on Its Tax 
        Receipts? Starting in 2014, incoming Social Security 
        receipts will cover only a portion of projected 
        benefits, based on the trustees' 1999 base projections. 
        The average annual shortfall over this 20-year period 
        amounts to approximately $85 billion.

------------------------------------------------------------------------
                                          Percentage of benefits covered
                  Year                       by current year receipts
------------------------------------------------------------------------
2014...................................  99 percent
2020...................................  85 percent
2034...................................  71 percent
Average, 2014-2034.....................  78 percent
------------------------------------------------------------------------

  Reform Will Bring Economic Growth, Financial Stability, and Federal 
                           Budget Flexibility

    During his presentation before the Task Force, Federal 
Reserve Board Chairman Alan Greenspan urged Congress to adopt 
reforms that will increase long-term savings and investment to 
generate the largest possible future resource base. He pointed 
out that it is easier to be generous with Social Security 
beneficiaries when resources are plentiful because of years of 
sustained economic growth. Enhanced savings and investment, he 
told us, will produce the larger resource base. On a related 
question, Chairman Green-

span stated that reducing Social Security's unfunded liability 
will cause the capital markets to respond favorably, lowering 
interest rates. Lower interest rates also will lead to expanded 
investment and a larger future resource pool. Thus, tax reform 
and Social Security reform compliment each other in our efforts 
to provide for future retirees and to carry out other vital 
missions of the Federal Government. He cautioned against 
depending on revenues outside of the Social Security system to 
support benefit payments that cannot be funded through the FICA 
tax. In the short run, the income tax base offers a new source 
of revenue; however, this ``solution'' does not take 
entitlement spending off its unsustainable growth track.

              Reform Must Be Comprehensive, Not Piecemeal

    Stephen Entin, Executive Director of the Institute for 
Research on the Economics of Taxation and a former Deputy 
Assistant Secretary of the Treasury, warned the Task Force not 
to do another ``patch job.'' Less than 5 years after the 1977 
amendments, the Social Security trust fund was again on the 
brink of insolvency. Despite the reforms enacted in 1983, he 
pointed out that only 16 years later the system faces 
insolvency early in the next century. Reforms that just make 
adjustments to the existing system do not provide a long-term 
solution. To safeguard the system for the future, more 
fundamental change is needed. As a policy prescription, he 
encouraged the Task Force to make higher private savings a 
priority, saying, ``This is one of those reforms where more is 
better than less. The more people can put their own saving to 
work in a real funded system, the better the retirement income 
picture is going to be.'' A well-crafted proposal must address 
four key elements:
     Labor supply. Reform can increase the rate of 
return workers get from FICA contributions by diverting a 
portion of their taxes to personal accounts that can be 
invested in the capital markets. For the same work effort, they 
will receive more retirement income--in effect, raising their 
overall compensation. As compensation rises, labor force 
participation and hours worked will follow suit.
     Personal saving. The savings deposited into 
personal accounts must represent additional savings, not just a 
replacement of one account with another. More favorable tax 
treatment of personal savings will assure that the overall 
savings rate increases once personal retirement accounts are 
established.
     National saving. Additional Federal borrowing 
should be avoided. As entitlement spending grows, this means 
that government spending must be restrained.
     Capital formation. Additional savings will mean 
that more capital will be available for businesses to invest 
and expand. Favorable domestic tax treatment of investment 
capital and depreciation will keep these funds in the United 
States, so American workers benefit through higher productivity 
and greater employment opportunities.
    As explained by Mr. Entin, letting workers direct a portion 
of their payroll tax to personal accounts will make them more 
willing to work. He opposes an ``add on'' approach to finance 
personal accounts. Proposals that increase the tax burden for 
current workers, either through mandated ``add on'' 
contributions above the current FICA tax or through other 
direct tax increases, will decrease their incentive to work. 
Mr. Entin also supports increased savings investment 
incentives, including faster depreciation schedules for 
business investment and expanded IRA-type tax treatment for 
other forms of saving.
    Mr. Entin presented estimates of how spending reductions, 
debt financing and tax increases to finance the transition to a 
system of personal retirement accounts would affect GDP. 
According to Mr. Entin, with the right incentives for saving 
and investment and proper rewards to labor, Social Security 
reform could boost real after-tax wages by 6 percent to 10 
percent, and create an additional 4 to 7 million jobs.
    Time is not on our side, warned Mr. Entin, as he said, 
``Very soon you are going to have no choice but to solve the 
funding problem. You have got a deadline. If you just solve the 
funding problem, there will be a great tendency on the part of 
Congress to say, ``We have done the job, let us not do any 
more.'' In that case, it will have passed up the opportunity to 
give people much higher incomes while they are working and much 
higher incomes while they are retired.

         An Essential Element of Reform: Market Rates of Return

    Expert recommendations differ on the details of reform; 
however, numerous reform proposals rely on higher rates of 
return to reduce the gap between future payroll taxes and 
promised benefits. The current Social Security programs give 
the average worker a 1.8 percent investment return on his 
payroll taxes. In contrast, corporate stocks have given 
investors average real annual rates of return of 8.1 percent, 
measured from 1926 to 1998. Stock prices fluctuate, but over 
time the upswings outweigh the downturns, and investors have 
learned they can count on higher returns on funds that are 
invested for the long run. Since most workers pay Social 
Security taxes for 40 years or more, they should use long-term 
investment strategies with confidence.
    Professor Roger Ibbotson of Yale University, the leading 
expert in measuring historical rates of return on numerous 
assets, described to the Task Force how higher rates of return 
materially increase retirement income. A dollar invested in 
stocks 73 years ago would have earned a nominal annual yield of 
11.2 percent, growing to $2,351 today; a dollar invested in 
treasury bonds, earning a modest 5.3 percent return, grew to 
just $44 over the same 73 years. While stocks may represent 
higher risk in the short-term, the odds are very high that, 
over time, investors will come out far ahead in the stock 
market.
    The Majority found Dr. Ibbotson's presentation especially 
thought provoking. In 1974, during one of the worst bear 
markets in U.S. history, Dr. Ibbotson predicted that the Dow 
would increase to 10,000 by the year 2000, actually 
underestimating this landmark by a year. He now expects the Dow 
to reach 100,000 by early 2024. Dr. Ibbotson has made the 
following forecasts for the period between 1999 and 2025:

    Ibbotson's Long-Term Nominal Rate of Return/Investment Forecasts

Total Return on Stocks                                      11.6 percent
Total Return, Long-Term Government Bonds                     5.4 percent
Total Return, Treasury Bills                                 4.5 percent
Forecasted Inflation Rate                                    3.1 percent
Dow Jones Industrial Average, 12/25                              120,368

    If retirement savings are invested in securities that give 
a higher rate of return, workers of all ages will benefit. They 
will have more retirement income in the future:

  COMPOUND INTEREST'S POWER: COMPARATIVE RATES OF RETURN IN TODAY'S DOLLARS FOR $100 INVESTED NOW PLUS $10 WEEK
----------------------------------------------------------------------------------------------------------------
                                                               Current law        Long-term
                                           Treasury bills    Social Security  Government bonds       Stocks
----------------------------------------------------------------------------------------------------------------
For 20 years............................           $12,122           $12,640           $13,326           $26,736
For 30 years............................           $19,509           $20,802           $22,568           $68,493
For 40 years............................           $27,998           $30,557           $34,169          $162,903
For 50 years............................           $37,753           $42,218           $48,732          $376,363
For 60 years............................           $48,963           $56,156           $67,014          $858,992
For 70 years............................           $61,845           $72,817           $89,963        $1,950,208
----------------------------------------------------------------------------------------------------------------
Source for Social Security's projected annual real rate of return of 1.8 percent is the Urban Institute; all
  other annual real rates of return provided by Ibbotson Associates (T-bills, 1.4 percent; Government bonds, 2.3
  percent; stocks, 8.5 percent).

    During his briefing before the Task Force, then Deputy 
Treasury Secretary Lawrence Summers called current surpluses an 
opportunity to provide fiscal space by paying down debt and 
investing a portion of the Social Security trust fund in the 
stock market to enhance returns. The question of investing 
Social Security funds in the capital markets is not if; it is 
when and how.

  Individually Owned Accounts, Not Government Investing, Is The Best 
                                Approach

    There are several compelling reasons why the majority feels 
that it would be inadvisable for the Federal Government to 
control investing the Social Security surpluses rather than 
individual workers. First, the ``government-as-shareholder'' 
approach brings with it unavoidable conflicts of interest. 
Experience with some state pension funds suggests that short-
term political interests often take precedence over the long-
term interest of retirees. Hard working Americans should not 
have to worry about government officials trying to decide which 
duty comes first, producing the largest returns for retirees, 
or promoting the partisan objectives of the party in power.
    Second, Federal investment opens up unnecessary avenues for 
government corruption. Imagine the potential for abuse when a 
few government officials meet in secret to buy or sell billions 
of publicly traded securities. Consider the consequences if 
these officials have the ability, through large discretionary 
stock purchases, to pressure CEOs, who receive large stock 
options as incentive pay, to make campaign contributions.
    Third, government investment will not give workers the 
retirement security they deserve. Under government entitlement 
programs, there is no legally binding relationship between the 
amount that a worker contributes to Social Security and the 
benefits a worker receives. This is not subject to debate. The 
Supreme Court has confirmed this fact in two important cases, 
Flemming v. Nestor (1960), and Richardson v. Belcher (1971):
     It is apparent that the noncontractual interests 
of an employee covered by the Act cannot be soundly analogized 
to that of the holder of an annuity. * * * To engraft upon the 
Social Security system a concept of `accrued property rights' 
would deprive it of the flexibility and boldness in adjustment 
to ever-changing conditions which it demands.
     ``The fact that Social Security benefits are 
financed in part by taxes on an employee's wages does not in 
itself limit the power of Congress to fix the levels of 
benefits under the Act or the conditions upon which they may be 
paid. Nor does an expectation interest in public benefits 
confer a contractual right to receive the expected amounts.''
    With no legal connection between tax payments and 
retirement benefits, there is no guarantee that future retirees 
would receive any of the gains earned through government 
investment. The gains could be used for some entirely different 
purpose. Workers would have no enforceable right to these 
gains, their retirement income would remain at risk.
    In the 1930's, the architects of Social Security, President 
Roosevelt and a Democrat-controlled Congress, rejected the idea 
of allowing the Federal Government to invest Social Security 
surpluses outside of the government because of these very 
dangers. Those who support such investment today must explain 
why the architects were wrong.

               Social Security's Intergenerational Impact

    Since Social Security is a pay-as-you-go system, each 
generation of workers pays taxes to support the retirement of 
current retirees. However, as future benefit payments exceed 
tax receipts, either taxes will have to increase or benefits 
will have to be cut. Generational accounting systems, such as 
the one developed by Professor Laurence Kotlikoff of Boston 
University, provide a useful way of evaluating the current 
system. Generational accounts compare the present value of 
taxes paid to benefits received by age group. If benefits 
exceed taxes for a particular generation, the residual 
represents an obligation left for future generations.
    Using numbers provided by the Social Security 
Administration, Prof. Kotllikoff's research team completed a 
microsimulation of Social Security, including survivor, mother, 
father, and children's benefits, earnings testing, and early 
retirement. This quantitative research shows that no group 
enjoys a rate of return from the current Social Security 
program that is higher than 4 percent. Dr. Kotlikoff concluded, 
``Social Security does not represent a very good deal for 
postwar Americans. On average, they are losing 5 cents out of 
every dollar they [contribute] to the OASI program. * * * The 
problem is that Social Security's generally bad actuarial deal 
is likely to get lots worse because this is a system which is 
not going to be able to pay for itself through time.''
    Gradual implementation of personal savings accounts will 
help balance the intergenerational impact of reform. Younger 
workers with long-term horizons can invest in equities and reap 
the long-

term gain. Older workers who have more immediate retirement 
needs can invest appropriately for a shorter time frame. When 
each worker retires in the future, Social Security payroll 
taxes will give the system the resources to augment personal 
accounts so that Social Security continues to play an important 
role in combating poverty and providing retirement security by 
maintaining an income safety net. Gradually, the higher yield 
from personal accounts will reduce the Social Security system's 
dependence on taxes collected from current workers. The 
``dependency ratio'' will no longer control the future of 
Social Security.

  Administrative Costs and Fees Can Be Kept Low to Give Workers High 
                                Returns

    Testimony before the Task Force refuted one objection 
frequently cited as a major reason why individual accounts 
should not be created--that administrative costs would consume 
much of the higher investment returns intended for workers. 
This objection has always puzzled reformers who are aware that 
the Federal Thrift Savings Plan, which offers personal accounts 
to Federal workers, operates with an annual expense ratio of 
0.08 percent of assets.
    As further evidence, William Shipman, from State Street 
Global Advisors, presented the Task Force with a program for 
administering a universal private account system that costs 
only pennies a day per person. Subsequent to Shipman's 
testimony, the General Accounting Office (GAO) released its own 
analysis of administrative costs and found that the annual cost 
for administering individual accounts invested in index funds 
would be as low as 0.1 percent of assets. The GAO analysis 
reviewed the State Street study presented to the Task Force. 
GAO concluded that the study ``provides the most detailed 
analysis of costs per administrative function based on known 
costs.'' Dallas Salisbury, President of the Employee Benefit 
Research Institute (EBRI), a pension expert called by the 
Minority, commended the State Street study for its detailed 
focus on questions of feasibility.
    The State Street study, published in March 1999, outlined 
the following goals:
     Create individual accounts with assets owned by 
the account holder.
     Ensure reasonable costs for all participants, low- 
as well as high-income workers.
     Minimize employers' administrative burden.
     Provide the opportunity for workers of all incomes 
to invest in capital markets.
     Ensure that inexperienced investors will not 
suffer poor returns relative to experienced investors.
     Provide investment choice.
     Offer a solution for workers who make no 
investment choice.
     Automatically adapt to changing technology and 
services offered by the financial services industry.
    State Street advocates a three-level approach:
     Level one: Collective Account Accumulation. 
Workers' savings are deducted from payroll and invested in a 
collective money market fund, where the funds are held until 
contributions are rec-

onciled with individual W-2 forms. Upon reconciliation, the 
funds and accrued interest are transferred to each worker's 
account.
     Level two: Personal Accounts Invested in Index 
Funds. For the first 3 years the funds are held in a worker's 
personal account, they are invested in one of four index 
funds--three balanced funds and a money market account--
selected by the worker. The funds would be managed by 
professional firms chosen through open competitive bidding.
     Level three: Individual Chooses to Transfer Moneys 
From Index Funds to Actively Managed Retirement Accounts. After 
building up account balances for approximately 3 years, the 
individual has the choice, but not the obligation, to transfer 
their assets to a qualified account with a financial services 
company meeting reasonable and specified standards.
    The administrative costs for Levels One and Two estimated 
to range between $3.38 and $6.58 per account annually, equally 
only 1 or 2 cents a day. Costs rise in Level Three as 
individuals choose actively managed accounts; however, 
individuals always have the option to move funds back to the 
lower-cost Level Two.
    Accounts with small balances present the largest 
administrative cost challenge. Cost concerns are a major 
reasons that the President's plan exempts low income workers 
from USA accounts. Provisions should be made for low-income 
workers that have small balances so that fixed administrative 
costs assessed on a per-account basis do not consume a 
disproportionate share of account earnings.

      Annuitization Provides Opportunities for Retirement Security

    We believe that personal accounts are well suited to 
annuitization at retirement. This is important since many 
personal account proposals either recommend or require 
annuitization of some or all of a worker's account balances to 
guarantee stable monthly income throughout retirement. Workers 
should be offered cost-effective annuities that give them the 
opportunity to set up a stable monthly retirement benefit. As 
needed, future Social Security taxes can be used to augment 
annuity income, keeping the program's antipoverty safety net in 
place. Studies show that centralized managers can negotiate 
annuitization structures that will minimize the cost of 
annuities. Dr. Mark Warshawsky, Director of Research, TIAA-
CREF, testified in favor of converting investment accounts into 
life annuities at retirement, which would guarantee monthly 
income to a retiree. In its most basic form, an annuity, 
whether issued by a life insurance company, an employer pension 
plan, or a government program, pools the mortality risks of 
individuals.
    Dr. Warshawsky believes there are many benefits from a life 
annuity. He asserted, ``It pays out a higher flow of income--
about 30 percent--to each participant for his or her entire 
lifetime than if each individual were left to his or her own 
devices.'' Dr. Warshawsky has completed a comparative analysis 
of annuitization costs for retail annuities sold to individuals 
to private annuity contracts negotiated by the Thrift Savings 
Plan and TIAA-CREF. His research indicates that higher annuity 
payouts can be negotiated through competitive bidding contracts 
that offer a high volume of investment funds. Annuitization 
through a fund manager may lower the administrative costs to 
individual retirees, thereby increasing their retirement 
income.

Market Investment Can Offer Workers Higher Returns With Loss Protection

    The Task Force also learned that cautious workers who would 
shun equity investments despite higher long-term returns do not 
need to ``settle'' for low-yielding Treasury bond investments. 
Their concerns can be addressed through expansion of private 
investment products that already exist. Individuals who are 
concerned about losing money in the stock market, despite its 
historical performance, can protect themselves by purchasing 
investment products that provide guarantees against loss while 
giving investors the right to reap most gains. One product 
available today, Market Index Target-Term Securities (MITTS), 
has been developed by Merrill Lynch. Merrill Lynch offers MITTS 
linked to a technology index, a health care index, a European 
index, the Consumer Price Index, and more. Paine Webber, 
Salomon Smith Barney, Lehman Brothers, and other investment 
firms offer similar vehicles. Insurance companies, including 
Nationwide and American Skandia, offer annuities with similar 
loss protection.
    A MITTS security trades like an individual stock, but it is 
tied to a particular index. Merrill Lynch's first MITTS was 
tied to the S&P 500. It was sold to the public in January 1992 
at $10 a share with a guarantee that, in August 1997, investors 
would have the right to be repaid their original $10.
    James Glassman of the American Enterprise Institute told 
the Task Force that investment products like MITTS are 
``natural'' investments for risk-averse investors to purchase 
for personal retirement accounts. Stephen Bodurtha, one of the 
specialists who designed Merrill Lynch Protected Growth 
Investing, encourages investing in stocks for the best 
opportunity to increase wealth over the long run. However, 
potential downside risk keeps many people from investing in 
stocks, even when long-term growth is the objective. Mr. 
Bodurtha said, ``When aversion to risk stands in the way of 
investing for long-term growth, people may fail to achieve 
important financial goals.''

            Other Countries Face Similar Demographic Shifts

    One finding that gave the Task Force little solace is the 
fact that we are not alone.

   PROJECTED FUTURE STATE SPENDING ON PENSIONS AS A PERCENTAGE OF GDP
   [Countries noted in bold have implemented comprehensive retirement
                             system reform]
------------------------------------------------------------------------
                                           1995    2000    2010    2020
------------------------------------------------------------------------
Australia...............................     2.6     2.3     2.3     2.9
France..................................    10.6     9.8     9.7    11.6
Germany.................................    11.1    11.5    11.8    12.3
Italy...................................    13.3    12.6    13.2    15.3
Japan...................................     6.6     7.5     9.6    12.4
United Kingdom..........................     4.5     4.5     5.2     5.1
United States...........................     4.1     4.2     4.5     5.2
------------------------------------------------------------------------
Source: Watson Wyatt Worldwide.

    The demographic changes behind the unfunded liability of 
pay-as-you-go retirement systems are a global phenomenon. 
European countries face even more alarming future worker/
beneficiary ratios than the United States does. Many countries 
already have higher payroll tax rates. In Eastern Europe, the 
average payroll tax rate exceeds 40 percent. In Western Europe, 
the average payroll tax rate is above 20 percent. Countries 
that address these demographic imbalances now will gain a 
competitive edge in the world markets during the 21st Century. 
Developed countries that delay necessary reforms will spend two 
to four times more of their GDP on public pensions by 2010 than 
countries that have implemented comprehensive reform.
    Countries that are delaying reform are already suffering 
economic consequences. A September 28 article in the Washington 
Post, ``In Europe's Economic Boom, Finding Work Is a Bust,'' 
tells the stories of young workers in Europe who cannot find 
permanent employment. Sixteen million people in the European 
Union (EU) are looking for work while employers in their 
countries are outsourcing work elsewhere to avoid high payroll 
taxes and mandated benefits for permanent workers. In Germany, 
payroll taxes and fringe benefits add 70 percent to the average 
textile worker's salary. One-third of young Italians are 
jobless. Only one EU country is successfully fighting 
unemployment--and that is the country that has reformed its 
Social Security program. Great Britain is experiencing the 
lowest unemployment rate since 1980.
    International reform initiatives undertaken over the last 
20 years give us the opportunity to learn from experiences 
abroad by taking their best ideas and learning from their 
mistakes. In January 1999, the Congressional Budget Office 
(CBO) published ``Social Security Privatization: Experiences 
Abroad.'' CBO Director Dan Crippen summarized the results of 
this report in testimony to the Task Force on May 25, 1999. The 
report analyzed reform initiatives undertaken by Chile, the 
United Kingdom, Australia, Mexico, and Argentina. All of these 
countries started out with an old-age income support system 
that relied on ``pay-as-you-go'' financing. They have converted 
to systems with personal retirement accounts that pre-fund at 
least a portion of retirement income by requiring people to 
accumulate savings during their working years.
    The CBO report found four relevant issues that other 
countries addressed in designing their reforms:
     Who will pay for the transition between the pay-
as-you-go system and a prefunded system?
     Will the new system be voluntary or mandatory?
     Should there be a minimum benefit guarantee?
     How much regulation is needed for investment 
managers, and what rules should be imposed on the use of 
retirement funds?
    CBO drew the following conclusions:
     None of the countries successfully maintained 
permanent funding of their government-run defined benefit 
system and are now deriving at least a portion of benefits from 
a defined contribution private account plan.
     Social security privatization in these countries 
has probably increased national savings and economic growth.
     Administrative concerns, including the costs of 
administration, do not appear insurmountable, but the details 
are important.
    Economists who have studied international reform efforts 
presented testimony to the Task Force reviewing their concepts 
on what constitutes successful reform. Their findings can guide 
other reformers through the task at hand.
    Estelle James, an analyst with the World Bank, told the 
Task Force that the pace of economic growth after reform is an 
important measuring rod of success. The evidence from Chile, 
which was the first country to enact comprehensive reform, 
supports the view that private retirement accounts have a 
positive impact on savings, financial markets, and economic 
growth.
    Lawrence Thompson, an analyst with the Urban Institute, 
recommends Congress use the following objectives to ``rate'' 
reforms:
     Provide a reasonable rate of return, after 
adjusting for expected administrative costs and annuitization 
fees.
     Establish proper regulation for contribution 
reporting and to ensure prudent investment choices.
     Give workers a reasonable degree of choice about 
how their money will be invested.
     Avoid an increase in the employer's reporting 
burden.
     Insulate the economy from inappropriate political 
interference.
    He concluded, ``What we can learn from experience abroad is 
what not to do. We don't want the employer burdens that are 
associated with the Australian, Swiss and Latin American 
systems. We don't want the administrative costs associated with 
the U.K. and Latin systems. Instead, we want choice, we want 
security, and we want the politicians to keep their hands off 
of the funds.''
    David Harris believes we can take many lessons from 
Australia's reforms, which were implemented by a liberal 
government with the support of a broad coalition of trade 
unions, businesses, and consumer groups. He explained, ``What 
is striking about the Australian system is that political 
pressures are the reverse of those in the United States. It was 
a Federal labor government, a largely liberal leaning 
administration, who established and extended individual 
retirement accounts in 1987 and again in 1992. This policy was 
not only supported by organized labor but also was actively 
encouraged by the leadership of the Australian Council of Trade 
Unions (ACTU). Businesses and consumer groups also backed the 
changes.''
    The consensus reform created a retirement system with three 
distinct pillars. The first pillar is a means tested, pay-as-
you-go Old Age Pension which provides benefits equal to 25 
percent of inflation-adjusted average weekly earnings. Benefits 
are paid from general revenue funding. The second pillar is a 
mandated individual account which receives 7 percent of an 
employee's salary over $450 Australian per month; the 
contribution rate will increase to 9 percent over time. The 
third pillar consists of additional voluntary contributions, 
encouraged through savings rebates and tax credits. Workers are 
making voluntary contributions of 4 percent above the 7 percent 
compulsory contribution.
    Australia has used competition to drive down administrative 
fees. In 1997, the administrative costs averaged between 0.69 
to 0.83 percent of assets, or about 66 cents U.S. per week. 
Administrative costs are continuing to decline as the system 
matures.
    Mr. Harris does not highlight increased rate of return as 
the greatest benefit of reform to Australia. Instead, he 
identified reduced political risk, citizen involvement in their 
own retirement planning, and reduced long-term liabilities 
related to the retiring baby boomer generation as key reasons 
to move ahead.

    Comprehensive Reform Must Retain Safety Net for Disabled Workers

    In his briefing to the Task Force, Federal Reserve Chairman 
Alan Greenspan told us that one key reason the 1983 reforms did 
not ensure Social Security's solvency for the 75 year period 
projected at that time was an unanticipated explosion in 
disability insurance. In 1965, one million workers were 
collecting disability benefits at a cost of $1.6 billion. In 
1998, six million workers and family members received $49 
billion in Social Security disability benefits.
    Most Social Security reform proposals generally focus on 
the retirement and survivor programs. However, comprehensive 
reform cannot ignore the interests of the most vulnerable in 
our society. Approximately 6.2 million current Social Security 
beneficiaries are disabled workers and their families and 
200,000 are the surviving family members of deceased disabled 
workers. The separate benefits are currently funded by 1.7 
percent of the total 12.4 percent payroll tax.
    We have even less time to enact changes that bring the 
disability program into balance. By 2010, program outflow will 
exceed receipts. By 2020, Social Security projects that 11 
million people will be receiving disability benefits, and the 
Disability Insurance trust fund will be depleted. Long-term 
solutions may involve shifting a portion of program funding 
from the payroll tax to general revenues, as Congress did for 
Medicare in 1997 in the Balanced Budget Amendment. In addition, 
we should encourage the Social Security Administration to 
expand its efforts to provide training that returns disabled 
workers to the workforce. The latest GAO ``Performance and 
Accountability Series'' found that only 1 in 500 disability 
beneficiaries return to work after receiving benefits.
    Congress should consider changes to Medicare that will 
encourage SSA's rehabilitation efforts. Qualification for 
disability enables beneficiaries to participate in the Medicare 
program. This health insurance is very important to disability 
recipients, who often are not covered by employer health plans 
and cannot find private insurance because of their medical 
condition. Beneficiaries who lose their disability status also 
lose their Medicare coverage. This is a strong disincentive to 
rehabilitation that must be addressed.
    We must reinforce the government safety net for the 
disabled. However, ignoring the pending financial problems of 
retirement portion of Social Security will not help us achieve 
this goal.

          The Challenge of Transitioning to Long-Term Solvency

    If we were designing a retirement system today from a clean 
slate, we could choose from a menu of attractive options. But, 
we have not been given a clean slate. We have been given a 
Social Security program with an unfunded liability of $9 
trillion. This funding gap can be closed in only three ways--
cut benefits; raise taxes; or increase the rate of return 
earned on workers' contributions.
    Because Social Security funds invested in personal accounts 
will no longer be available to pay for current benefits, 
critics contend that prefunding benefits will impose additional 
``transition costs.'' However, in testimony to the Task Force, 
Dr. Rudolph Penner, a Senior Fellow at the Urban Institute and 
former Director of the Congressional Budget Office, urged 
members not to confuse the cost of paying for the current 
system with the cost of setting up personal accounts. ``In 
current policy discussions, the problems of fixing the current 
system are often merged and muddled with the problems involved 
in moving toward prefunding. The two problems are distinct and 
should be separated conceptually. But it is desirable to solve 
both simultaneously, and it is necessary to consider this 
twofold burden when analyzing reforms.''
    As David John of the Heritage Foundation explained, ``High 
transition costs will be a fact of life for Social Security 
regardless of whether the program is radically reformed or just 
left as it is. While some consider transition costs to apply 
only to proposals that would reform Social Security, this is 
not the case. Since the existing program will begin to run cash 
flow deficits in 2014, the transition costs of various reform 
proposals should be measured against the costs associated with 
doing nothing at all.''
    Since the cost of Social Security will rise from less than 
11 percent of wages today to nearly 20 percent of wages by 
2075, ``doing nothing'' means promised benefits must be reduced 
by 33 percent, or payroll taxes must be increased by 50 
percent. Thus, when considering the alternatives the proper 
question to ask is how do they compare to the cost of 
maintaining the current system?

           How the Alternatives Compare to the Current System

    The Task Force heard from a number of Members who outlined 
their proposals for reforming Social Security. While the 
details vary, each of these plans rely on some combination of 
benefit cuts, tax increases, stock market investment, and 
general revenue transfers. While the transfers from general 
revenue would be funded out of the projected budget surpluses, 
it seems unlikely these surpluses will be large enough or last 
long enough to cover all of the proposed transfers. Any 
remaining shortfall would have to be offset by raising taxes, 
reducing spending or borrowing from the public, just like under 
current law.
    The proposals that provide promised benefits without 
raising taxes must by definition rely on general revenue. If 
these transfers are invested in the capital markets, we will 
reduce our future liability as these funds earn a higher rate 
of return than the government bond rate used to calculate the 
current $9 trillion unfunded liability. While higher rates of 
return are virtually guaranteed over the long-run, annual 
fluctuations in the stock market might create temporary 
shortfalls. During any period in which market returns are less 
than the historical average, general revenues transfers would 
be required to cover the shortfall.
    The proposals that combine stock market investment with tax 
and benefit adjustments recognize the fact that the market will 
not always earn the historical average. Rather than depending 
on future taxpayers to make up any unanticipated shortfall, 
they balance the Social Security system on a pay-as-you-go 
basis first, and only then do they provide the opportunity for 
individuals to earn additional retirement income by investing 
in the stock market. They view fixing Social Security and 
helping workers save for retirement as distinct, yet 
complementary goals.
    While opponents of personal accounts focus on the 
uncertainties of investing in the stock market, there is one 
thing that is absolutely certain, the cost of ``doing nothing'' 
will be much higher than any of the alternatives. In his 
testimony before the Task Force, Senator Gregg clearly 
articulated the terms of the current debate: ``What we have to 
do is begin to advance fund the current system, and that means 
taking some of that surplus Social Security money today out of 
the Federal coffers and into a place where it can be saved, 
invested--owned by individual beneficiaries. That money would 
belong to them immediately, even though they could not withdraw 
it before retirement. But it would be a real asset in their 
name. By doing this, we can reduce the amount of the benefit 
that needs to be funded in the future by raising taxes on 
future generations. This is the critical objective, but it 
allows for flippant political attacks. If you give someone a 
part of their benefit today, in their personal account, and 
less of it later on, some will say that it is a ``cut'' in 
benefits. It is no such thing. Only in Washington can giving 
people ownership rights and real funding for a portion of their 
benefits, and increasing their total real value, be construed 
as a cut. Accepting such terminology can only lead to one 
conclusion--that we can't advance fund, because we simply have 
to be sure that every penny of future benefits comes from 
taxing future workers. So we need to get out of that rhetorical 
trap.''

    Summary of Social Security Proposals Presented to the Task Force

    Every proposal but Bartlett/Markey has been scored by the 
Social Security Administration. This scoring is predicated on 
two challenging assumptions: First, debt to the Trust Fund will 
be repaid, and second, 75-year solvency is achieved.

                                      SUMMARY OF SOCIAL SECURITY PROPOSALS
----------------------------------------------------------------------------------------------------------------
         Sponsor(s)                        Revenue change                            Benefit change
----------------------------------------------------------------------------------------------------------------
Archer/Shaw                   All workers would receive a refundable    The Social Security earnings test would
                               income tax credit equal to 2 percent of   be eliminated.
                               taxable wages to fund personal           Personal accounts would be used by the
                               accounts.                                 government to fund the Social Security
                              The payroll tax rate would be reduce by    benefits promised under current law.
                               2.5 percent in 2050 and 1.0 percent in
                               2060.
----------------------------------------------------------------------------------------------------------------
Bartlett/Markey               The government would invest $1.2          The stock market investments would be
                               trillion of general revenue in the        used to help fund the Social Security
                               stock market between 2001 and 2015.       benefits promised under current law.
----------------------------------------------------------------------------------------------------------------
Gramm                         All workers would be allowed to invest 3  Workers with a personal account would be
                               percent (rising to 8 percent) of their    guaranteed an amount equal to 120
                               taxable wages in a personal account.      percent of the Social Security benefits
                               Workers age 35-55 in 2000 could invest    promised under current law.
                               5 percent, rather than 3 percent.
----------------------------------------------------------------------------------------------------------------
Gregg/Breaux/Grassley         All workers would be required to invest   The Social Security earnings test would
                               2 percent of their taxable wages in a     be eliminated.
                               personal account.                        A new Kid-Save account ($1,000 at birth,
                              The annual CPI indexing of the income      $500 from age 1 to age 5) would be
                               tax brackets, personal exemption, and     created.
                               standard deduction would be reduced by   Annual COLAs would be reduced by 0.5
                               0.5 percent.                              percent.
                              The amount of wages subject to the        The scheduled increase in the normal
                               payroll tax would be increased.           retirement age would be accelerated,
                                                                         and then indexed to life expectancy.
                                                                        Social Security benefits would be
                                                                         reduced by a portion of a worker's
                                                                         personal account balance.
----------------------------------------------------------------------------------------------------------------
Kasich                        Workers under age 55 would be allowed to  Initial Social Security benefits for
                               invest from 1.0 percent to 3.5 percent    workers under age 55 would be increased
                               of their taxable wages in a personal      by the CPI rather than by average
                               account.                                  wages.
                              Wage from $0 to $72,599: 3.5 percent.     Social Security benefits would be
                              Wage $72,600 up: 1.0 percent.              reduced 0.33 percent for each year a
                                                                         worker contributes to a personal
                                                                         account, up to maximum of 15 percent.
----------------------------------------------------------------------------------------------------------------
Kolbe/Stenholm                All workers would be required to          The Social Security earnings test would
                               contribute 2 percent of taxable wages     be repealed.
                               to a personal account.                   A new poverty level minimum benefit
                              The annual CPI indexing of the income      would be created.
                               tax brackets, personal exemption, and    Annual COLAs would be reduced by 0.5
                               standard deduction would be reduced by    percent.
                               0.3 percent.                             The scheduled increase in the normal
                                                                         retirement age would be accelerated,
                                                                         and then indexed to life expectancy.
----------------------------------------------------------------------------------------------------------------
Nadler                        The amount of wages subject to the        The additional payroll taxes and the
                               payroll tax would be increased.           stock market investment would be used
                              62 percent of annual unified budget        to help pay for the Social Security
                               surpluses over the next 15 years would    benefits promised under current law.
                               invested in the stock market.
----------------------------------------------------------------------------------------------------------------
Moynihan/Kerrey               The payroll tax would be reduced by 2     The Social Security earnings test would
                               percent, and workers would be allowed     be eliminated.
                               to contribute that amount to a personal  A new Kid-Save account ($3,500 at birth)
                               account.                                  would be created.
                              The amount of wages subject to the        Annual COLAs would be reduced by 1.0
                               payroll tax would be increased.           percent.
                              The payroll tax rate would be increased   The scheduled increase in the normal
                               to 12.4 percent in 2030, rising to 13.7   retirement age would be replaced with a
                               percent by 2060.                          life expectancy index.
                              The amount of Social Security benefits
                               subject to the income tax would be
                               increased.
                              The annual CPI indexing of the income
                               tax brackets, personal exemption, and
                               standard deduction would be reduced by
                               0.5 percent.
                              All newly hired State and Local workers
                               would be covered under Social Security.
----------------------------------------------------------------------------------------------------------------
Smith                         Workers under age 65 would be allowed to  Increase Social Security benefits by 10
                               invest 2.6 percent (rising to 9           percent surviving spouses.
                               percent) of their taxable wages in a     The scheduled increase in normal
                               personal account. Spousal accounts are    retirement age would be accelerated,
                               held jointly in equal amounts.            and then indexed to life expectancy.
                              All newly hired State and Local workers   A portion of the Social Security benefit
                               would be covered under Social Security.   formula would be indexed to the CPI
                              Disability beneficiaries returning to      rather than to average wages.
                               work would be eligible for Medicare or   Social Security benefits would be
                               equivalent coverage.                      reduced by a portion of a worker's
                              Earnings test is eliminated.               personal account balance.
----------------------------------------------------------------------------------------------------------------

            Moving Forward Requires Presidential Leadership

    Time is running out. Energized by the unanimous bipartisan 
finding of the Task Force that time is of the essence, we 
should begin the process of reform now. Unfortunately, the 
proposals released thus far by the Administration are a step 
backward in the search for real reform because they falsely 
suggest that there is a ``painless'' way to achieve a 
``partial'' solution. A ``partial'' solution is just a band-
aid, not a cure. Simply putting more government securities in 
the Social Security trust fund as the President suggests does 
not reduce the burden on future taxpayers of redeeming these 
securities. By exercising fiscal discipline and not spending 
the current Social Security surplus on other government 
programs, we are making a good start. However, this action 
alone will not solve Social Security's long-term problems.
    We must not be satisfied with ``partial'' solutions which 
are only placebos that lull some people into thinking that 
something significant has been accomplished. Extending the life 
of the trust fund for few years will only reinforce the belief 
among younger workers that Social Security won't be there for 
them. A ``partial'' solution, which will only require 
additional solutions later, will prevent workers from reliably 
planning for their retirement years. As long as the future of 
Social Security remains in doubt, public cynicism and 
uncertainty will continue to grow.
    Congress and the administration must provide the vision 
that moves the cause of comprehensive reform forward. We urge 
the President to put forward a credible plan to close the $9 
trillion funding gap and stop playing politics with our 
nation's retirement future. Only by outlining his own proposal 
to solve the long-term problem can this debate be fairly 
joined. We encourage the Republican and Democratic leadership 
in the House and Senate to work together on consensus 
solutions. The scope of the problem demands leadership 
committed to bipartisan agreement, not demagoguery, and is the 
stuff from which legacies are made.

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               ADDITIONAL VIEWS OF CONGRESSMAN NICK SMITH

    Congress and the administration must provide the leadership 
that moves the cause of comprehensive reform forward. I urge 
everyone to put aside demagoguery so we may work together to 
reach bipartisan consensus. We must not be satisfied with 
partial solutions which are only placebos that lull some people 
into thinking that something significant has been accomplished.
    In his closed briefing to the Task Force, Chairman 
Greenspan advised us to start by addressing three questions:
    1. Do we use general revenue? Members of the 1983 reform 
commission considered using general revenues to achieve 
solvency, but ultimately decided against it. They decided that 
a dependence on general revenues would make the program less 
like social insurance and more like welfare.
    2. Do we make changes to taxes and benefits? The 1983 
reforms achieved solvency by tax increases, such as income 
taxes imposed on higher income retirees, and benefit 
reductions, such as an increased retirement age.
    3. What data do we use?
    I recommend the Social Security Task Force Statement of 
Findings serve as the foundation for bipartisan reform. These 
findings were developed from the testimony the Task Force heard 
during 4 months of fact finding hearings, that are summarized 
in this additional comment.

  Chairman Smith's Comments on the 18 Findings of the Bipartisan Task 
                                 Force

    Social Security is a universal program that has provided a 
safety net for Americans. The Task Force heard the opinions of 
experts who may disagree on many details of reform, but agree 
that Social Security has combated poverty among the elderly and 
disabled and should not be jeopardized by demographic changes.
    Time is the enemy of Social Security reform and we should 
move without delay. Current surpluses give us the opportunity 
to use funds so that changes to the system will be less severe 
and can meet the benefits of current future retirees. Social 
Security taxes are estimated to exceed benefits until 2014. 
Every year of delay increases the challenge of meeting these 
obligations.
    Change should be gradual to allow workers to adjust their 
retirement plans and any change for current or near-term 
retirees should be minimal. There are transition costs related 
to restoring solvency to Social Security and more transition 
costs related to prefunding our future obligations. These 
changes should be made over time so that several generations 
can shoulder the burden and so that those with less time to 
make adjustments have greater assurance that promised benefits 
will continue.
    Social Security under the current structure is projected to 
become insolvent during the next 75 year period. In 1983, 
Social Security's unfunded liability equaled 1.8 percent of 
payroll, and the actuaries judged it to be insolvent, as 
measured over its 75-year horizon. An immediate payroll tax 
increase of 1.8 percent would have been needed to restore 
solvency for the 75 year period. The data provided by the 
Social Security trustees in its 75 year projections done this 
year show that cash outflow exceeds receipts in 2014 and that 
the Social Security Trust Fund is depleted in 2034. Expressed 
in terms of taxable payroll, the unfunded liability today 
equals 2.1 percent of payroll.
    The Social Security Trust Fund is a secure, legal entity 
comprised of U.S. Treasury Bonds backed by the full faith and 
credit of the U.S. Government. While the United States has 
never defaulted on any of its obligations, these represent a 
legal claim on future Federal revenue. Such securities will 
have to be redeemed from funds outside the Trust Fund itself. 
Under its pay-as-you-go structure, Social Security did not 
historically maintain large balances in its trust fund. The 
moneys that were put into the trust fund account were invested 
in special Treasury bonds. After the 1983 reforms mandated 
higher taxes, the trust funds balances began to grow, and the 
amount of special Treasury bonds held by Social Security now 
equals over 2 years worth of estimated benefits. As Social 
Security needs these funds to pay benefits after 2014, it will 
present the bonds for redemption. The Treasury will increase 
public borrowing to repay its indebtedness--or, as has happened 
in the past, Social Security taxes will be increased so that 
depletion of the Trust Fund is put off. Paying back the Trust 
Fund out of the General Fund may reduce the amount of Federal 
moneys available to pay for other government programs in the 
future.
    Solvency and reform are not necessarily tied together. 
Solvency can be achieved by enacting changes to the system that 
eliminate the 2.1 percent of payroll funding shortfall. Many 
reform plans recommend altering the current pay-as-you-go 
structure and providing for prefunding that presents the 
opportunity of increasing the projected rate of return for 
future Social Security benefits. This prefunding requires 
additional financing above the 2.1 percent of payroll, and new 
sources for these funds must be identified.
    The current demographic projections may very well 
underestimate future life expectancy. Public health education, 
lifestyle changes, and medical advances are increasing the 
probability that more Americans will enjoy long, productive 
retirement years. Fewer workers per retiree than now projected 
will result in more deficit for Social Security.
    Any reform must consider the effects on all generations, 
genders, and those currently receiving Social Security 
benefits. The tradeoffs involved in various solvency and reform 
proposals should be evaluated by using a beneficiary impact 
statement from the Social Security Administration and 
intergenerational accounting measures being developed by the 
Congressional Budget Office.
    No payroll tax increase. The current Social Security OASDI 
tax rate of 12.4 percent already inhibits the ability of many 
working Americans to save. For 72 percent of American workers, 
this is a higher tax burden than their personal income tax 
liability.
    Social Security surpluses should only be spent for Social 
Security. Considering Social Security projected cash deficits, 
its funds should not be diverted to other uses that makes 
paying future benefits more difficult and reduces the possible 
return on investment.
    Social Security reform should encourage savings and overall 
economic growth. Another way to improve Social Security's 
financial condition is to increase economic output. This will 
lead to higher employment and more taxable income. Social 
Security benefits cannot accommodate the needs of retirees and 
more individual personal saving will be needed to finance a 
reasonable retirement income.
    We can learn from the experiences of other countries to 
more effectively develop Social Security reforms. The 
demographic trends that are driving the need for reform in the 
United States are occurring all over the world. The successes 
achieved by other countries, as well as their mistakes, can 
help us design our own model.
    Investment in the capital markets presents an opportunity 
to restore Social Security's solvency. Rate of return measures 
show that future Social Security retirees will earn less than a 
2 percent investment yield on the taxes they are paying today. 
Over the next 25 years, the most respected experts in the 
United States are predicting that the stock market will average 
over 8 percent. Investing a portion of Social Security taxes in 
the stock market will reduce our reliance on taxes to pay 
future benefits.
    Any investments in the capital markets should be limited 
for retirement years. Successful stock investment strategies 
depend on long-term horizons. If reform includes personal 
retirement accounts enacted, withdrawals should not be allowed 
for any reason other than retirement.
    Private or other capital investments can be managed to 
minimize administrative costs and avoid substantial reductions 
in rates of return on investment. Careful design of trustee 
accounts that builds on existing systems in the Treasury 
Department and the Social Security Administration can use 
economies of scale to assure cost efficiencies, driving 
administrative costs to as low as .08 percent of assets.
    Guaranteed return securities and annuities can be used with 
personal accounts as part of an investment safety net. If 
reform that includes personal retirement accounts is enacted, 
individuals should be allowed to invest in securities that 
guarantee against principal losses and in annuities that will 
assure them income through their retirement. These investments 
are sold in the private market today and will offer risk-averse 
investors a higher-yield alternative to Treasury securities.
    A universal Social Security survivor and disability benefit 
program needs to be maintained. Proposed Social Security reform 
plans have focused their attention on reforms to the retirement 
program that reflect demographic shifts in the population. 
There should be no unintended impact on the disability and 
survivor insurance programs, which are now funded by 1.7 
percent of taxable payroll. However, the disability program 
(DI) is in greater financial peril than OASI, and separate 
reforms should be considered to make sure this safety net 
remains intact.
    Congress should consider paying for a portion of disability 
benefits for workers who have been in the system a short time, 
using moneys from the general fund. Currently, a person must 
have paid Social Security taxes for 40 quarters (10 years) to 
receive disability benefits. Assistance to other disabled 
individuals is now paid from the General Fund. If reforms that 
bring solvency to the DI portion require that the number of 
qualifying quarters must be increased, Congress should consider 
an increase in General Fund financing to support the benefits 
of disabled beneficiaries with short work histories.

                             MINORITY VIEWS

                              Introduction

    The minority agrees that Social Security faces serious 
challenges that require responsible action on the part of the 
Congress. To a great extent, demographic trends, notably the 
retirement of the baby boom generation and the assumption that 
longevity will continue to increase, largely drive the long-
term projections showing that this crucial program will have 
insufficient resources to pay the benefits promised, given the 
system's current structure.
    Therefore, we regret that the Social Security Task Force of 
the House Budget Committee largely did not concern itself with 
addressing these challenges facing Social Security. Instead, 
the Task Force focused to a great extent on promoting 
individual investment accounts, or privatization, as a full or 
partial replacement for Social Security. The possibility that 
the existing system might be fixed and its solvency restored 
was left largely unexplored.
    This is unfortunate, because Social Security has important 
strengths that must be preserved. These strengths derive for 
the most part from underlying principles concerning the social 
insurance aspects of the system. Social Security is premised on 
the assumption that the risks of low lifetime earnings and 
premature death or disability should be shared as broadly as 
possible. The current system is designed to share such risks 
across the income distribution and across generations.
    If a worker has low lifetime earnings, whether due to lack 
of skills, time out of the workforce for family 
responsibilities, or just bad luck, Social Security ensures 
that his or her twilight years will not be lived in 
destitution. If a worker suffers disability, Social Security 
ensures that he or she does not suffer the additional calamity 
of poverty. If a worker dies prematurely, the collective 
insurance provided by Social Security provides a basic safety 
net for the worker's surviving dependents.
    Social Security enjoys strong support among the American 
people and has been a tremendous success. In 1959, the poverty 
rate among the elderly was over 35 percent. By 1998, the 
poverty rate for seniors had dropped to just over 10 percent. 
Without the program's benefits, more than half of the elderly 
would live below the official poverty line. More than three 
fifths of seniors receive a majority of their income from 
Social Security. Social Security provides the only disability 
coverage for three quarters of American workers. The disability 
and survivors' benefits of Social Security are essentially 
equivalent to two $300,000 insurance policies.\1\
---------------------------------------------------------------------------
    \1\ Social Security Administration and ``Social Security: Brief 
Facts and Statistics'' by David Koitz, Congressional Research Service 
Report 94-27.
---------------------------------------------------------------------------
    Individual investment accounts, which have been proposed as 
a replacement for Social Security, are premised on a different 
idea. Supporters of such accounts believe that life's risks can 
better be addressed by allowing individuals as much latitude as 
possible in making their own provisions. Individual accounts 
are thus primarily vehicles, which enable citizens to 
accumulate resources to meet life's financial challenges. To a 
great extent, proponents of in-

dividual accounts believe that citizens should self-insure 
through their investments.
    Because proponents of individual accounts focus on the 
investment aspects of Social Security rather than its insurance 
aspects, the core of their argument typically relies on 
comparisons of ``rates of return.'' Their calculations 
typically show that the financial returns from Social Security 
compare unfavorably with the hypothetical returns from private 
accounts.
    These comparisons of rates of return, however, are 
misleading. Proponents can only achieve the higher returns 
claimed for individual accounts by ignoring most of what Social 
Security's defenders consider important. Most obvious among the 
factors that individual account supporters ignore are the 
insurance protections represented by the nearly one third of 
Social Security payments dedicated to survivors' and disability 
benefits. One shouldn't expect insurance against calamity to 
provide a handsome financial return.\2\ After all, a person 
wouldn't be disappointed never to receive a financial payoff 
from, say, fire insurance.
---------------------------------------------------------------------------
    \2\ 1999 Annual Report of the Board of Trustees of the Federal Old-
Age and Survivors Insurance and Disability Insurance Trust Funds.
---------------------------------------------------------------------------
    In addition to Social Security's survivors' and disability 
protections, though, the program also insures against the 
vicissitudes faced by workers as they prepare for retirement. 
The defined benefit nature of Social Security's retirement 
provisions shares as broadly as possible the risk of reaching 
old age without adequate personal resources to live out one's 
final years with dignity. As a result, Social Security provides 
retirees with income that is insulated from inflation and that 
lasts as long as the beneficiary lives.
    Proponents of individual accounts typically try to skate 
past this issue of retirement security by pointing to the high 
average returns earned by private investments over long time 
spans in the past. Focusing on average returns, though, 
obscures the substantial and inescapable market risk that would 
burden a retirement system based on private accounts. In such a 
system, the individual would bear this market risk, eliminating 
much of the protection that Social Security's insurance 
function provides. In any fair comparison with Social Security, 
the average returns claimed for private accounts should be 
adjusted down to account for this added individual risk.
    In addition to reducing returns of private investments to 
account for the current system's insurance protections, one 
must also deduct the cost of providing benefits already 
promised. To a great extent, the low financial returns 
projected for future Social Security beneficiaries result from 
the fact that the system is largely pay-as-you-go, with 
benefits promised in the past paid for with current revenues. 
Benefits paid to today's retirees, survivors, and the disabled 
consume 90 percent of the contributions paid into the 
system,\3\ and no return can be earned on these funds. Social 
Security's pay-as-you-go structure results from a decision made 
at the system's inception to provide benefits to the generation 
of the Great Depression and World War II, even though its 
members had paid very little into the system.
---------------------------------------------------------------------------
    \3\ Ibid.
---------------------------------------------------------------------------
    The vast majority of the American workforce has earned 
benefits by paying into the current system, and no one is 
suggesting that these promises be annulled. If one were to 
replace Social Security with a different system, the 
accumulated $10 trillion in promised benefits would have to be 
paid. Thus, any fair comparison between Social Security's 
returns and those of individual accounts should deduct from the 
latter the $10-trillion cost of making the transition to a new 
system over several decades.
    The presumed returns from privatization also must take 
account of the high administrative costs associated with 
individual accounts, which reduce realized returns even 
further. The current Social Security system has exceptionally 
low administrative costs, equal to less than 1 percent of 
yearly revenues. Any transition to a system of individual 
accounts would involve maintaining at least part of the 
existing system and adding a new administrative superstructure 
upon it. Responsible estimates of these additional costs are 
several multiples of the administrative expenses of Social 
Security, and they significantly reduce the returns available 
for retirement income.
    Thus, the presumed superiority disappears once one adjusts 
rates of return for market risk, for the cost of providing 
survivors' and disability protections, for the promises already 
made to Social Security beneficiaries, and for administrative 
expenses. In order to get the higher returns claimed for 
private accounts, one would need to cover these costs with a 
massive infusion of resources from outside the system, 
presumably from general revenues. In fact, Federal Reserve 
Chairman Greenspan told the Task Force that there was no 
difference between a public and a private retirement system 
with respect to their returns, and he emphasized that 
privatization in and of itself doesn't do anything to address 
the projected insolvency.
    Often, the arguments of those advocating privatization of 
Social Security are rhetorical. They typically talk about 
``allowing'' citizens to invest in private securities to 
achieve higher returns, as if this were an expansion of the 
choices available. But Americans already are allowed to invest 
in private securities through their own saving. The government 
does not forbid private saving, and in fact has created a 
variety of tax-preferred vehicles to encourage private saving, 
though these tend to be used primarily by the affluent.
    Social Security has always been intended to serve as only 
one component of retirement income, with private saving and 
private pensions being the others. Social Security provides a 
safety net, a secure but modest foundation upon which to plan 
one's work life and retirement. As a supplement, one can invest 
in private markets with the possibility of higher returns, 
though those returns come without many of the protections that 
Social Security provides. People can choose to invest in 
private securities despite their higher risk, in part because 
of the assurance that the government safety net is backstopping 
some of that risk.
    Proponents of privatization, though, would like to 
transform the social insurance safety net from a defined 
benefit program that protects against risk to a defined 
contribution system. This sacrifices the mixed approach of the 
current system because it forces workers to accept increased 
risk, turning the idea of diversification on its head. Instead 
of the current system, where social insurance protections can 
be combined with a private investment strategy, workers would 
be obliged to make their work life and retirement plans based 
solely on investments.
    The current system, with Social Security providing a 
minimal defined benefit to which one adds returns from private 
savings and pensions, has served Americans well for over six 
decades. The minority believes that Social Security's financial 
challenges can and should be addressed by strengthening the 
existing system without eliminating the universal safety net 
that has been a hallmark of the program since its inception. We 
agree with the Task Force witnesses who emphasized that 
restoring solvency to Social Security and completely 
overhauling the system are not one and the same. Any attempt to 
significantly restructure Social Security either will not 
retain the current system's greatest strengths or will retain 
those strengths only by sacrificing the purported advantages of 
a privatized system.

             The Overriding Problem of Existing Obligations

    The place where Social Security debates begin is the fact 
that the current system faces a shortfall between its long-term 
projections of revenues and benefits. The system faces unfunded 
obligations over the next 75 years that equal about $3 trillion 
in present-value terms.\4\ This means that Social Security 
would be made solvent for 75 years if $3 trillion were injected 
into the Social Security Trust Funds.
---------------------------------------------------------------------------
    \4\ Social Security Administration.
---------------------------------------------------------------------------
    This $3-trillion problem is the cost of keeping the 
existing system going. It represents a considerable challenge 
for those who would preserve Social Security in something like 
its current form. This solvency question can be addressed 
completely independently of ``reforms'' that would change the 
basic nature of the system. Such ``reforms'' may well be worth 
considering on their own merits, but restructuring proposals 
often have nothing to do with meeting the unfunded obligations 
that have given rise to current debates.
    Unfortunately for those who advocate fully or partially 
replacing the existing system with individual accounts, the 
unfunded obligations associated with closing down Social 
Security, so-called ``transition costs,'' are even larger. 
About 140 million American workers have paid into the Social 
Security system, and about 40 million Americans currently 
receive benefits. If, for instance, the entire payroll tax were 
immediately diverted into individual accounts, the government 
would still face obligations to pay benefits already earned by 
current workers and retirees worth about $10 trillion in 
present value terms.\5\
---------------------------------------------------------------------------
    \5\ ``Would a Privatized Social Security System Really Pay a Higher 
Rate of Return?'' by John Geanakoplos, Olivia S. Mitchell and Steven P. 
Zeldes, Working Paper No. 6713, National Bureau of Economic Research, 
August 1998.
---------------------------------------------------------------------------
    This $10-trillion cost would have to be born through higher 
taxes, benefit cuts, or increased borrowing, whether one 
abruptly closed down Social Security or whether the transition 
took place over several decades. One Task Force witness who 
favors private accounts, Lawrence Kotlikoff of Boston 
University, advocated a plan for replacing Social Security that 
would have paid Social Secu-

rity's existing obligations by adding a new 8-percent business 
cash flow tax, which would decline over several decades to 
about 2 or 3 percent.\6\
---------------------------------------------------------------------------
    \6\ Hearing of the House Budget Committee Social Security Task 
Force, May 4, 1999.
---------------------------------------------------------------------------
    It is important to emphasize that the cost of covering 
existing obligations in the transition to a new system is 
necessarily larger than the unfunded liability of the current 
system. If one fully or partially replaced Social Security with 
a system of individual accounts, one still would have to pay 
the benefits already earned under the current system but 
without access to at least a portion of future payroll taxes. 
Because some or all of the future stream of payroll taxes would 
be going to private accounts instead of paying Social Security 
benefits, the unfunded liabilities of privatization must exceed 
those already facing the current system.
    As noted in the introduction, the cost of existing 
obligations would weigh heavily on the higher financial returns 
that privatization supporters claim derive from individual 
accounts. In fact, one influential paper in the economics 
literature states:

          ``If the system were completely privatized, with no 
        prefunding or diversification, the Social Security 
        system would need to raise taxes and/or issue new debt 
        in order to pay benefits already accrued. If the burden 
        were spread evenly across all future generations via a 
        constant proportional tax, the added taxes would 
        completely eliminate any rate of return advantage on 
        the individual accounts.''\7\
---------------------------------------------------------------------------
    \7\ Op. cit., Geanakoplos, Mitchell and Zeldes.

    For this reason alone, it would seem that private accounts 
don't measure up to the existing system since they would lack 
both the current protections of Social Security and also fail 
to achieve higher returns. This conclusion is seconded by a 
---------------------------------------------------------------------------
National Academy of Social Insurance analysis, which states:

          ``[I]f the current Social Security system were to be 
        fully replaced, it would be necessary to recognize the 
        large unfunded obligation of Social Security. That is, 
        some portion of current and future Social Security 
        revenues, or some other revenue source, is needed to 
        pay benefits to those already retired and those who 
        will retire during any transition to a different 
        system. This cost cannot be avoided if the expectations 
        of retirees and those nearing retirement are to be met. 
        Neither the unfunded obligation nor the costs of 
        financing it go away by diverting revenue from the 
        defined-benefit part of Social Security to individual 
        accounts. These costs need to be paid even if a switch 
        is made to an individual account system. If all of the 
        cost of the unfunded obligation were allocated to 
        individual accounts, it would completely eliminate the 
        rate of return advantage of individual accounts.'' \8\
---------------------------------------------------------------------------
    \8\ ``Evaluating Issus in Privatizing Social Security'' National 
Academy of Social Insurance, December 1998 as published in the Social 
Security Bulletin, Vol. 62, No. 1, 1999.

    This creates a disagreeable problem for privatization 
advocates. It means that, however large the tax hikes or 
benefit cuts needed to keep the current system going, moving to 
a different system would require even larger tax hikes, benefit 
cuts or deficit spending. After all, if the revenues currently 
pouring into the trust fund ultimately will be inadequate, then 
diverting some of those revenues into private accounts will 
make the trust fund even less solvent. For instance, diverting 
2 percentage points of payroll taxes into private accounts, as 
called for in many privatization proposals, essentially doubles 
the size of the unfunded obligation. Therefore, these proposals 
double the size of the tax hikes or benefit cuts needed to 
restore solvency to the current system because of the added 
costs of transition to a new one.

                 Using the Non-Social Security Surplus

    Some have suggested that benefits need not be cut nor taxes 
raised because the projected non-Social Security surplus could 
be used to finance the transition to a new retirement system 
over several decades. There are several problems with this. 
First of all, while the projected non-Social Security surplus 
is almost large enough to cover the unfunded obligations of the 
existing system, it is too small to accommodate the larger 
liabilities resulting from transition to a new system. 
Currently, OMB projects that the non-Social Security surplus 
over the next 15 years is just shy of the $3 trillion needed to 
restore solvency to the Social Security Trust Fund. As noted 
above, the cost of covering existing obligations in the 
transition to a new system is somewhere between $3 trillion and 
$10 trillion, depending on the extent to which the existing 
system is supplanted.
    Even more troublesome, the Republican majority already has 
decided that the entire non-Social Security surplus should be 
used to pay for a multiyear tax cut. The Majority claims that 
their tax cut does not jeopardize Social Security because they 
have not dipped into the Social Security surplus. However, the 
system's $3-trillion shortfall already takes the projected 
near-term Social Security surplus into account, and preserving 
it does nothing to extend solvency.
    The Task Force repeatedly heard testimony, even from 
advocates of privatization, that both solvency and 
restructuring would require resources from outside the system. 
Thus, devoting the entire non-Social Security surplus to the 
Republican tax cut means that none of these resources are 
available either to address the accrued obligations of the 
existing system or the additional cost of transition to a new 
system.
    There is also considerable doubt about whether the 
projected non-Social Security surplus will materialize even 
without enactment of the Republican tax cut. It must be 
remembered that the surpluses to which we now look forward are 
projections, and those projections are based on assumptions 
that might or might not come true. As always, one might 
question whether the economy will perform as expected or 
whether unfavorable shocks might cause the projected surpluses 
to evaporate.
    More important, though, is the precariousness of the 
political assumptions on which the projected surpluses are 
premised. The projected surpluses assume that the current and 
future Congresses will stay within the appropriations caps 
stipulated in the 1997 budget deal. This will require sharp 
cuts in real purchasing power for many basic government 
functions.
    House Budget Committee Democrats (using CBO estimates) have 
shown that realizing the $1-trillion non-Social Security 
surplus projected for the next 10 years will require real 
purchasing power for total appropriations to be reduced 10 
percent by 2009. However, if defense spending is increased as 
both the President and Congress have proposed and spending for 
highways and mass transit are increased as already called for 
in law, then the real purchasing power of all other 
appropriations in 2009 will have to be cut by 31 percent.\9\
---------------------------------------------------------------------------
    \9\ ``How Solid is the Surplus?'' House Budget Committee Democratic 
Staff Study, July 1999.
---------------------------------------------------------------------------
    Such cuts in appropriated spending would far exceed 
anything that Congress has been willing to do thus far. It 
would require deep cuts or even wholesale elimination of 
programs like NIH, the FAA, veterans' health care, Head Start, 
the FBI, the National Weather Service, flood control, Pell 
Grants, the FDA, the Coast Guard, the National Parks, DEA, and 
FEMA. Even now, the Republican Majority in Congress is finding 
that they cannot make even the modest appropriations cuts 
needed to stay within the FY 2000 cap. It will be even more 
difficult to make the far deeper cuts needed to adhere to the 
caps in FY 2001 and FY 2002 and then maintain that degree of 
austerity for a decade or more.

                   The Fallacy of the Equity Premium

    Some advocates of private accounts acknowledge the sizeable 
transition costs associated with implementing a new retirement 
system to replace Social Security. They recognize that large 
transition costs might eliminate the higher rates of return 
earned on individual accounts during the decades of transition. 
However, they argue that going to a different system would be 
worth the trouble and expense because rates of return would be 
better once the transition was complete, albeit many years from 
now.
    These advocates point to the fact that returns to private-
sector investments have consistently exceeded the returns on 
the government bonds held by the Social Security Trust Fund, 
provided investments are held for long periods of time. The 
margin by which returns on private-sector investments have 
exceeded returns on government bonds over such long periods is 
called the ``equity premium.''
    There is a rather wide consensus among economists, however, 
that returns to individual accounts might not be superior, even 
after the hurdle of transition costs has been overcome. These 
economists argue that private securities have averaged higher 
returns over long periods because their returns over short 
periods vary so much more than the returns to safe securities 
like Treasury bonds. Economists tend to believe that the equity 
premium cannot be exploited to solve fiscal problems because 
higher returns come with an added problem of their own, namely 
risk.
    In order to get the higher returns that private equities 
offer over long periods of time, one must also deal with the 
problem that there will be years when returns are inadequate to 
serve their intended purposes. Thus, economists argue that both 
Treasury bonds and private securities are willingly held in 
portfolios and that investors do not believe that the latter 
are inherently superior. Rather, investors hold both types of 
assets because their strengths, safety on the one hand and high 
returns on the other, complement each other.
    As a reflection of this, economists typically argue that 
total national saving, rather than the financial form that that 
saving takes, is what determines the future incomes of workers 
and retirees. Merely shifting money out of government bonds and 
into private equities without altering the total flow of new 
saving by governments, businesses, and individuals, does 
nothing to increase capital investment or economic growth. 
Chairman Greenspan made this argument in testimony before the 
Senate Budget Committee:
    ``As I have argued elsewhere, unless national savings is 
increased, shifting Social Security Trust Funds to private 
securities, while increasing government system income, will 
lower retirement incomes in the private sector to an offsetting 
degree. This would not be an improvement to our overall 
retirement system.'' \10\
---------------------------------------------------------------------------
    \10\ Senate Budget Committee Hearing, October 7, 1997.
---------------------------------------------------------------------------

                          The Meaning of Risk

    Economists believe that financial markets rationally price 
returns on investments and that the equity premium reflects 
greater risk associated with private-sector securities. The 
return on government bonds, like those held by Social Security, 
are relatively low because they are safe. The United States has 
never defaulted on its obligations, a policy established at the 
Nation's beginning by Alexander Hamilton. The bonds held by the 
Social Security Trust Fund are backed by the full faith and 
credit of the U.S. Government, just like other U.S. Treasury 
securities, and defaulting on them would be unthinkable. 
Furthermore, inflation-adjusted returns for Treasury bonds have 
been much less volatile than those for private-sector stocks 
and bonds. This stems from the fact that Treasury bonds are 
backed by the Federal Government's power to tax rather than the 
uncertain earnings of businesses.
    As noted in the introduction, advocates of privatization 
tend to de-emphasize the variability, or risk, of private 
investments. Instead, their arguments feature average rates of 
return for investments held a very long time. These advocates 
do not deny that market returns vary considerably over short 
periods of time. However, they claim that the ups and downs 
average out when private-sector securities are held for several 
decades, as they would be in private retirement accounts.
    The claim that the short-term volatility of returns to 
private securities should not be a concern ignores the fact 
that accumulation in individual accounts would take time. 
Because account balances that accumulate over time are largest 
right before retirement, they would be subject to short-term 
market volatility near the end of a person's working years. 
After all, it is only the first installment to the account that 
receives the 40-year rate of return. The fact that most workers 
earn more later in life further magnifies the influence of 
short-term volatility late in the accumulation period, be-

cause the largest contributions to the account would be held 
for shortest periods.
    The testimony of Task Force witness Gary Burtless of the 
Brookings Institution clarified this weakness of private 
accounts. Burtless showed that different workers with identical 
wage histories and identical, index-fund investment strategies 
could have vastly different final returns, depending on when 
they retired. The differences in the returns earned resulted, 
as argued above, from short-term market movements in the years 
just preceding retirement when accumulations were largest. 
Furthermore, the variability of outcomes is largely insensitive 
to attempts to diversify just before retirement because of 
periods like the 1970's when inflation-adjusted returns of both 
stocks and bonds turned negative. Burtless testified:

          ``Workers fortunate enough to retire when financial 
        markets are strong obtain big pensions; workers with 
        the misfortune to retire when markets are weak can be 
        left with little to retire on. The biggest pension [in 
        Burtless' calculations] is more than five times larger 
        than the smallest one. Even in the period since the 
        start of the Kennedy Administration, the experiences of 
        retiring workers would have differed widely. The 
        biggest pension was 2.4 times the size of the smallest 
        one.'' \11\
---------------------------------------------------------------------------
    \11\ Hearing of the House Budget Committee Social Security Task 
Force, May 11, 1999.

    Privatization advocates frequently point out that even 
though the returns to individual accounts might vary, it is 
still unlikely that they would ever turn negative. This is a 
terribly low standard. A market downdraft in the years 
immediately preceding retirement would overthrow decades of 
retirement planning. In Burtless' calculations, for instance, a 
worker who retired in 1974 would have had a pension less than 
half the size of someone with an identical wage history and 
investment strategy who retired only 6 years earlier. One can 
imagine the kind of disruption in the lives of those unlucky 
enough to retire in such a market downdraft, watching their 
retirement plans evaporate in the face of falling asset prices 
just as their working years come to a close.
    Variability of retirement outcomes resulting from economy-
wide forces over which individuals have no control could easily 
undermine the political sustainability of a system of private 
accounts. Workers whom the government obliged to contribute to 
individual accounts, whom government prevented from accessing 
those accounts before retirement, and whose choice of 
investments was regulated by government might well insist that 
the government make them whole if they retired during a weak 
market. Such pressure could dwarf the controversy that 
surrounded the so-called ``notch babies,'' who were Social 
Security beneficiaries whose pensions differed only slightly 
from those of retirees born a couple years earlier.
    It is also important to emphasize that these risks would be 
born by the individual, even though they might result from 
broad-based economic forces. An individual's risk would be 
greater still if a system of private accounts allowed workers 
discretion over the types of investments permitted in the 
accounts. Burtless' calculations are all based on the 
variability of broad market averages. Allowing individuals to 
choose their portfolios would increase the variability of 
retirement incomes further, as some people received above-
average returns and others received below-average returns.
    One must ask why such risks should be imposed on workers. 
As pointed out in the introduction, people already can take 
risks in the market with private savings to whatever degree 
suits them. In the current environment, the risks that savers 
take with their money in the market is backstopped by the 
predictable defined-benefit income from Social Security. Fully 
or partially replacing Social Security with private investment 
accounts would undercut this protection, which stems from the 
insurance principles that underlie the current system's design. 
As Burtless concludes:

          ``Social Security provides workers with crucial 
        protections against financial market risks. It is worth 
        remembering that when the system was established in 
        1935, many industrial and trade union pension plans had 
        collapsed as a result of the 1929 stock market crash 
        and the Great Depression, leaving workers with no 
        dependable source of income in old age. The private 
        savings of many households were wiped out as well. 
        Given these circumstances, most voters thought a public 
        pension plan, backed by the taxing power of the Federal 
        Government, was preferable to sole reliance on 
        individual retirement plans.'' \12\
---------------------------------------------------------------------------
    \12\ Hearing of the House Budget Committee Social Security Task 
Force, May 11, 1999.
---------------------------------------------------------------------------

  The Cost of Duplicating Social Security's Strengths: Administrative 
                                 Costs

    The costs of administering individual accounts constitute 
another reason that workers might never see the high returns 
promised by privatization's supporters. This seemingly minor 
consideration actually looms almost as large as the costs of 
meeting existing obligations or individual risk when comparing 
Social Security's strengths with those reputed for private 
accounts. Indeed, one Task Force witness, Lawrence Thompson of 
the Urban Institute, argued that the difficulties of keeping 
administrative costs low could easily reduce benefits by 50 
percent from what theoretically could be achieved with private 
accounts.\13\
---------------------------------------------------------------------------
    \13\ Hearing of the House Budget Committee Social Security Task 
Force, May 25, 1999.
---------------------------------------------------------------------------
    The problems of administering a universal system of 
individual accounts stem from the huge numbers and great 
diversity of workers who would participate. Currently, there 
are about 140 million workers paying into Social Security. Over 
40 percent of these workers earn less than $15,000 per year, 
and most people work for relatively small employers. In our 
dynamic economy, many workers change jobs and locations 
frequently, with the result that 20 percent of workers at any 
point have been at their jobs a year or less.\14\ Millions 
leave and re-enter the workforce as a result of family 
responsibilities. Workers come from a variety of household and 
family situations.
---------------------------------------------------------------------------
    \14\ ``Individual Social Security Accounts: Issues in Assessing 
Administrative Feasibility and Costs,'' Issue Brief No. 203, Employee 
Benefits Research Institute, November 1998.
---------------------------------------------------------------------------
    The current Social Security system manages to keep track of 
our highly varied workforce at a cost of only 0.7 percent of 
annual contributions. The Employee Benefit Research Institute 
estimates that this amounts to only $10 per covered life per 
year. Such extraordinarily low costs result from the 
simplification achievable in a social insurance system, which 
would be unattainable with individual accounts.\15\
---------------------------------------------------------------------------
    \15\ Briefing of the House Budget Committee Social Security Task 
Force, March 22, 1999.
---------------------------------------------------------------------------
    For instance, Social Security need only reconcile 
contributions with workers' earnings histories once a year. In 
a privatized system, posting contributions to a worker's 
account after such a long lag would be very costly in terms of 
the investment earnings that would be lost. Unfortunately, it 
also would be costly to have more prompt posting, given the 
huge number, diversity, and mobility of workers owning 
accounts.
    Advocates of privatization sometimes extrapolate the costs 
associated with administering IRAs and 401Ks when assessing the 
likely burden of universal individual accounts. As a rule, 
these costs are expressed as a percent of the assets managed in 
an account. This tends to badly understate such costs, 
especially for small accounts.
    If one instead looks at costs in dollar terms, as was done 
by Task Force witness Dallas Salisbury of the Employee Benefits 
Research Institute, a very different picture emerges. After 
all, a small account would still need to have regular 
statements mailed, records accurately maintained, and phone 
inquiries answered, irrespective of the value of the account's 
assets. Using plausible dollar-cost estimates of such 
administrative tasks, Salisbury concludes that administering a 
universal system of individual investment accounts would cost 
between five and twelve times as much as Social Security.\16\
---------------------------------------------------------------------------
    \16\ Briefing of the House Budget Committee Social Security Task 
Force, March 11, 1999.
---------------------------------------------------------------------------
    Salisbury's estimate, however, does not take into account 
the considerable additional expenses associated with investor 
education, marketing, and annuitization. Investor education 
would be essential given that a majority of people do not have 
any financial market experience despite the recent increase in 
stock ownership. To the extent that workers could choose among 
different investments, there would be additional costs 
associated with firms' competition for their business.
    Finally, in order to duplicate Social Security's guarantee 
of inflation-adjusted retirement benefits irrespective of 
longevity, workers would have to purchase annuities with the 
same protections. Salisbury's estimates don't include 
annuitization costs either. The cost of private-market 
annuities currently offered in the market reduces the size of 
retirement nesteggs by about 20 percent,\17\ and that's without 
inflation protection. Annuities with inflation protection, 
especially for the small accounts of low-wage workers, would 
reduce the value of accounts even further.
---------------------------------------------------------------------------
    \17\ ``New evidence on the money's worth of individual annuities,'' 
by Olivia S. Mitchell, James M. Poterba and Mark Warshawsky, National 
Bureau of Economic Research Working Paper No. 6002, 1997.
---------------------------------------------------------------------------
    Most analysts acknowledge that a tradeoff exists between 
having accounts that can be tailored to individual's specific 
needs and keeping administrative costs low. As Lawrence 
Thompson of the Urban Institute testified, ``Choice costs 
money.'' Costs can be kept low but only if operations are 
centralized and individuals are offered limited investment 
options. This presents difficulties for privatization, one of 
whose benefits is supposed to be greater autonomy for 
individuals' decisions about retirement. Such autonomy can only 
be purchased at the expense of significantly lower returns. As 
Thompson puts it:

          ``Administrative costs are the Achilles Heel of all 
        the decentralized individual account systems currently 
        in operation around the world. In the Latin American 
        systems, roughly one-quarter of the money that goes 
        into the funds is lost to administrative fees. In the 
        U.K., administrative charges are averaging 40 percent 
        of the system's resources. Before long, these countries 
        will find that they are spending more than 1 percent of 
        their GDP just to administer their pension systems. * * 
        * No country has yet successfully implemented 
        individual accounts in a way likely to be acceptable in 
        the United States.'' \18\
---------------------------------------------------------------------------
    \18\ Hearing of the House Budget Committee Social Security Task 
Force, May 25, 1999.

    Employers, particularly small employers, are concerned that 
a significant portion of these costs might fall on them. The 
current system only requires annual reporting, and the reports 
needn't be especially prompt. A system of private accounts 
would inevitably require more frequent and complex reporting by 
employers, raising costs to them. Not surprisingly, the 
Employee Benefits Research Institute found that support for 
individual accounts among small employers dropped dramatically 
when they were made aware of the likely additional costs that 
would fall to them.\19\
---------------------------------------------------------------------------
    \19\ Briefing of the House Budget Committee Social Security Task 
Force, March 11, 1999.
---------------------------------------------------------------------------

  The Cost of Duplicating Social Security's Strengths: Disability and 
                          Survivors' Benefits

    For the most part, advocates of privatization do not 
address the question of disability and survivors' benefits, 
focusing exclusively on the retirement functions of Social 
Security. This is unfortunate because about one-third of all 
Social Security benefit payments are made to nonretirees. 
Disability and survivors' benefits constitute major elements of 
Social Security's insurance protections, and those protections 
are linked to the structure of the retirement program. In the 
words of Deputy Social Security Administrator Jane Ross:

          ``Social Security pays benefits to more than 4.7 
        million disabled workers, nearly 1.5 million children 
        of disabled workers, and almost 200,000 spouses of 
        disabled workers. Because about 25 to 30 percent of 
        today's 20-year-olds will become disabled before 
        retirement, the protection provided by the SSDI program 
        is extremely important.'' \20\
---------------------------------------------------------------------------
    \20\ Hearing of the House Budget Committee Social Security Task 
Force, June 22, 1999.

    Social Security provides the only disability insurance for 
three quarters of U.S. workers, and it provides the only 
meaningful life insurance coverage for a majority of workers. 
In her testimony before the Task Force, Deputy Commissioner 
Ross stated unequivo-

cally that private insurers could not offer disability 
insurance that even approached Social Security's low cost. She 
noted, for instance, that private disability insurers returned 
only about half of their premiums as benefits, whereas Social 
Security remitted 97 percent of its revenues to beneficiaries.
    Like the disability program, Social Security's survivors' 
benefits also are underwritten by the broadest possible risk 
pool and profit from the low costs of centralized 
administration. There is no evidence that the private market 
could offer anything like the life insurance protections of the 
current system, especially for low-income individuals.
    It is difficult to overemphasize the importance of the web 
of interlocking protections provided by the entire Social 
Security program, not just its retirement component. The 
National Academy of Social Insurance has illustrated the 
multiple risks that the system addresses. For a hypothetical 
group of 100 young men first entering the workforce, only 58 
can be expected to retire without prior disability. Of the 
rest, about 10 will die suddenly during their work lives, 
triggering survivors' benefits for spouses or children. Another 
13 will die after becoming disabled, and Social Security in 
these cases would provide disability benefits during the 
worker's life and survivors' benefits for dependents and the 
spouse. Another two of these men will become disabled and 
recover, eventually retiring. These workers would receive 
disability benefits (temporarily) as well as the usual 
retirement and aged survivor benefits. Finally, 18 of these men 
could be expected to be disabled beneficiaries at retirement 
age.\21\
---------------------------------------------------------------------------
    \21\ ``Individual Accounts in Social Security Reform; Questions 
About Benefit Design,'' by Virginia Reno, National Academy of Social 
Insurance presentation to the Senate Democratic Task Force on Social 
Security, December 1998.
---------------------------------------------------------------------------
    Given these strengths of the existing Social Security 
system, it is disappointing that many privatization plans 
completely avoid questions about this part of the program. 
Worse yet are those plans that propose changes in the basic 
retirement benefit that would have severe, presumably 
unintended, consequences for the disability and survivors' 
programs. Social Security has a common benefit structure that 
determines monthly benefit levels for retirement, survivors', 
and disability benefits alike. Thus, cutting back Social 
Security's primary benefit amount (as many privatization plans 
do to overcome transition costs) would cut survivors' and 
disability benefits as well. Task Force witness Marty Ford of 
the Consortium for Citizens with Disabilities testified that 
some privatization plans would reduce disability benefits 
between 8 and 45 percent.\22\
---------------------------------------------------------------------------
    \22\ Hearing of the House Budget Committee Social Security Task 
Force, June 22, 1999.
---------------------------------------------------------------------------
    This consequence of privatizing Social Security is 
aggravated by the fact that disability and survivors' benefits 
typically go to multiple beneficiaries. Dependents of workers 
who become disabled or who die before retirement receive 
benefits, as do spouses of deceased retired workers. Because 
death or a disability can trigger Social Security payments to a 
number of individuals, it would be difficult for individual 
accounts to offset the reductions of traditional Social 
Security benefits that would likely result from privatization.

   The Cost of Duplicating Social Security's Strengths: Annuitization

    Social Security provides retirees income whose purchasing 
power is protected from inflation and which continues as long 
as the beneficiary lives. This is a crucial strength of the 
current system, since it provides workers the peace of mind 
that they can count on a guaranteed, if minimal, level of 
support after they stop working. As with so many of Social 
Security's strengths, advocates of privatization give short 
shrift to the inflation-adjusted annuity that the system 
provides.
    If a system of individual accounts largely replaced Social 
Security and retirement incomes largely derived from those 
accounts, there would be a strong argument for mandatory 
annuitization of at least part of each account. Without at 
least some mandatory annuitization, retirees might spend down 
their nest eggs too quickly, gambling that a government safety 
net would catch them if they outlived their assets. To ensure 
that workers' accounts were used to provide a floor level of 
income in retirement, government would have to require some 
annuitization and also require that private accounts not be 
accessible prior to retirement for other purposes. Otherwise, 
taxpayers would bear the cost of mistakes by the imprudent and 
impatient.
    However, mandatory annuitization creates problems of its 
own. As already noted, inflation-adjusted annuities would be 
quite expensive to provide for the entire population, 
significantly reducing the value of individual accounts. In 
addition, the fact that annuities would have to be purchased at 
a particular point in time makes the value of private accounts 
even more susceptible to short-term market fluctuations. 
Depending on exactly which day one chose to convert an account 
into an annuity, the amount of money available to fund a 
multiyear stream of retirement income could vary by as much as 
several percentage points, depending on daily market 
fluctuations at the time.
    Furthermore, there are difficulties that stem from the very 
nature of annuities themselves. Annuities work by pooling 
longevity risks. The money saved from annuitants who die 
unexpectedly early is used to pay income to those who live 
unexpectedly long. Thus, mandatory annuitization of private 
accounts would tend to redistribute wealth from the poor to the 
rich, from blacks to whites, and from the sick to the healthy, 
in each case because the latter tends to live longer. Of 
course, the current system also redistributes money, but 
usually in the other direction. The benefits schedule is very 
progressive, so that low-income workers receive proportionately 
more than the affluent, and the survivors' and disability 
protections redistribute money in favor of those with health 
problems and those who die early.
    The fact that annuities redistribute wealth also undercuts 
one of the basic tenets of privatization: that individual 
accounts are private property. In what sense are the accounts 
``property'' if their owners are required to join risk pools 
that redistribute the accounts' wealth in fairly predictable 
ways? In what sense are accounts ``property'' if their owners 
can't access them prior to retirement for other worthy 
purposes? In what sense are the accounts ``property'' if they 
aren't inherited by survivors after the retiree's death, but 
instead are used to fund someone else's retirement?
    One can imagine, for instance, the sense of injustice for 
someone in their early sixties with an aggressive cancer or 
severe heart disease who was forced to annuitize. Despite the 
claim that the worker's account was personal property, he or 
she would be prevented from using the account's accumulated 
savings for urgent medical care both before and after 
retirement. If the worker's spouse decided to divorce, the 
spouse could claim some of the account if the divorce occurred 
before annuitization but not after. If the worker died, the 
wealth in the account might be inheritable if he or she died 
before retirement but not after.

 The Cost of Duplicating Social Security's Strengths: Protecting Women 
                             and Minorities

    Social Security's benefits are derived from formulas that 
are neutral with regard to sex and race. Nonetheless, the 
system's interlocking protections against life's risks are 
especially important to women and minorities. Social Security's 
progressive benefit structure, its inflation-adjusted lifetime 
retirement annuity, and its survivors', disability, and spousal 
benefits all provide support for risks that bear more heavily 
upon women and minorities.
    Certainly, the importance of Social Security as it 
currently exists to women and minorities is evident from its 
impact on poverty among these groups. Without Social Security 
benefits, more than half of elderly women would have incomes 
below the poverty line. In fact, more than three fifths of all 
income received by elderly women comes from Social Security. 
Two thirds of elderly women rely upon Social Security for a 
majority of their income, and one third rely on it for at least 
90 percent of their income.\23\
---------------------------------------------------------------------------
    \23\ Hearing of the Social Security Task Force on Social Security, 
May 4, 1999.
---------------------------------------------------------------------------
    Similarly, for the median elderly African-American 
household, Social Security provides 77 percent of income, while 
for the median elderly Hispanic-American household the system 
provides 86 percent of income. In fact, 23 percent of elderly 
Hispanic couples and 40 percent of elderly Hispanic individuals 
rely exclusively on Social Security for their retirement 
income. Without Social Security's retirement support, most 
minority elderly would fall below the poverty line.\24\
---------------------------------------------------------------------------
    \24\ Ibid.
---------------------------------------------------------------------------
    However, it is not just Social Security's retirement 
features that provide a safety net for women and minorities. As 
noted above, the system's comprehensive package of protections 
against low lifetime earnings, inflation, unexpectedly long 
life, and premature death or disability of a breadwinner work 
together to create a web of insurance for women and minorities.
    The most important strength of Social Security in this 
regard is the progressive nature of the system, whereby the 
basic benefit (from which retirement, disability, survivors', 
and spousal benefits are calculated) is relatively more 
generous for low-income workers. Of course, this benefits women 
who tend to have lower incomes both because they spend on 
average 11.5 years out of the paid labor force and because they 
tend to be paid less than men even when they work full time. It 
also disproportionately benefits minority workers who have 
lower incomes because of prejudice, weaker education and skill 
levels, and the lack of job opportunities.
    Social Security's guarantee of an inflation-adjusted 
retirement benefit for as long as the recipient lives is 
particularly important to women and Hispanic-Americans. Because 
these two groups tend to have greater longevity, Social 
Security's life annuity with inflation protection means that 
women and Hispanic-Americans receive benefits that are large 
relative to their FICA contributions. For instance, women 
receive 53 percent of Social Security retirement and survivors' 
benefits but only pay 38 percent of payroll taxes. For the 
median female retiree, Social Security replaces 54 percent of 
lifetime earnings, compared with 41 percent for the median 
male. Hispanic-Americans benefit in a similar fashion from 
Social Security's guarantee against inflation in old age and 
outliving one's assets.\25\
---------------------------------------------------------------------------
    \25\ ``Women and Retirement Security,'' National Economic Council, 
October 1998; ``Social Security Reform and Hispanic Americans,'' Center 
on Budget and Policy Priorities, September 1998; ``Social Security 
Reform, What Proposed Changes Mean for African Americans,'' by Cecilia 
Conrad and Wilhelmina Leigh, Joint Center for Political and Economic 
Studies.
---------------------------------------------------------------------------
    African-Americans have relatively short life expectancies, 
which has led some supporters of privatization to conclude that 
they receive poor returns from the current system. However, 
these analyses ignore the fact that Social Security's 
survivors' benefits disproportionately favor African-Americans. 
Although African-American children account for 16 percent of 
all U.S. children, they make up 24 percent of the children 
receiving survivors' benefits. Furthermore, African-Americans 
accounted for 21 percent of the spouses with children who 
received survivors' benefits. Thus, when premature death takes 
an African-American worker, benefits to that worker's spouse 
and children compensate for the loss of retirement benefits 
that workers otherwise would have received.
    Furthermore, disability benefits are extremely important to 
African-Americans. Although African-Americans represent only 11 
percent of the workforce, they account for 18 percent of those 
receiving Social Security disability benefits. In addition, the 
children of disabled workers are eligible for benefits, and 
African-Americans accounted for 23 percent of children and 15 
percent of spouses receiving benefits because of a 
breadwinner's disability.
    Finally, there is a range of spousal benefits that are of 
particular importance to women. Social Security provides extra 
benefits to spouses with low lifetime earnings, even if they 
did not work at all outside the home. Almost three fourths of 
elderly widows receive benefits based on the earnings of their 
deceased husbands. Social Security also provides benefits to 
spouses of any age who care for children if a breadwinner is 
retired, becomes disabled, or dies. Women account for 98 
percent of spouses receiving such benefits.
    It is hard to imagine a system of private, individual 
accounts providing these kinds of protections for women and 
minorities. Account balances would be smallest for those with 
low earnings. As a consequence, retirement incomes would almost 
certainly be smaller for women and minorities in a privatized 
system. Furthermore, the disability and survivors' benefits 
that figure so large in the benefits that women and minorities 
receive from Social Secu-

rity would largely be absent or severely curtailed in a 
privatized system.
    Advocates of individual accounts claim that these concerns 
could be taken care of through arbitrary adjustments. Such 
adjustments, though, would result in added regulation, 
complexity, and cross-subsidization in a system of private 
accounts. These kinds of restrictions on private accounts would 
tend to undermine any sense of ownership that the holders of 
those accounts might have.

                 Conclusion: Save Social Security First

    Democrats find the Majority's headlong campaign to fully or 
partially replace Social Security with individual accounts to 
be a distraction from the task at hand. The debate about Social 
Security's future always begins with an acknowledgment that the 
current system has unfunded future obligations, but it never 
seems to end with proposals for the best way to solve that 
problem. That, at least, was the experience of the Task Force. 
The investigation of Social Security's impending challenges 
quickly became diverted into a discussion of the even greater 
difficulties of replacing it with a new system of private 
accounts.
    By contrast, Democrats' position is simple: One needn't 
destroy Social Security in order to save it. No evidence was 
presented to the Task Force to indicate that creating 
individual accounts, in and of itself, would address existing 
unfunded obligations. Certainly, Democrats see great virtue in 
efforts to promote private wealth-building, particularly among 
low-income families who do little or no saving now. The 
President's proposals for progressively funded USA accounts 
that would buttress traditional Social Security benefits is one 
such constructive proposal. However, these efforts should not 
distract from the more important challenge of repairing the 
social insurance system that has served generations of 
Americans well.
    The Majority's insistence that private investment accounts 
are the answer to the current system's troubles is highly 
questionable. Along with the promise of higher returns, 
individual accounts create manifold additional costs, 
complexities, and problems on top of the sufficient challenges 
faced by the current system that could render the promise of 
better returns illusory.
    Huge transition costs, which necessarily exceed the 
existing system's unfunded liability, and burdensome 
administrative expenses may well overwhelm any advantage that 
private accounts might have with respect to rates of return. 
Even without transition and administrative costs, the better 
return claimed for private investments must reflect the greater 
individual risks associated with them. If the government 
stepped in to insure the new risks that individuals faced, the 
fiscal problem that private accounts were supposed to solve 
would again press on government finances--and those burdens 
might well be greater than the fiscal problems that Social 
Security already faces.
    Attempting to duplicate the strengths of Social Security 
within the context of private accounts creates still greater 
costs, complexities, and inefficiencies. In order to preserve 
the existing protections for disability, for death of a 
breadwinner, for inflation, for outliving one's resources in 
retirement, for women, and for society's most vulnerable 
citizens, a system of individual accounts would have to include 
considerable regulation. Building in these protections would 
presumably require extensive cross subsidies and greatly 
restrict individuals' control over their accounts. This would 
undercut the other purported advantage of privatization, namely 
the sense of ownership over the accounts.
    This means that replacing Social Security with private 
accounts might not be politically sustainable over the long 
time spans by which one evaluates Social Security reforms. With 
the government obliging workers to do the saving in the first 
place, restricting the choice of investments in the accounts, 
preventing workers from having access to their money until 
retirement, and insisting that workers annuitize at least part 
of their nesteggs, the citizens might well come to the 
conclusion that their accounts are anything but private 
property.
    If any aspect of such a privatized system proved 
unacceptable, beneficiaries might conclude that taxpayers as a 
whole, rather than individuals, should shoulder the 
responsibility. This would return us to the same fiscal dilemma 
faced by the current system.
    For these reasons, the minority advocates that Congress 
first take steps to shore up the existing Social Security 
system before engaging in wholesale restructuring. In taking 
such steps, great care should be taken to preserve the system's 
strengths. Supplemental efforts should also be made to 
encourage low-income families to save more on their own. 
However, these efforts should not come at the expense of 
preserving the safety net that keeps more than half of the 
elderly out of poverty and insures families against the loss of 
a breadwinner to death or disability.
    Shoring up Social Security can be accomplished in one major 
reform or through cautious, gradual steps. Some might question 
an approach that relies on incremental reform rather than 
dramatic steps that attempt to fix the problem once and for 
all. The conventional wisdom suggests that taking modest steps 
now can avoid the necessity for more drastic measures if we 
wait. The conventional wisdom, though, must be qualified by the 
fact that 75 years, the standard for Social Security solvency, 
is a very long time. Much is uncertain over time spans that 
long, and a compelling argument can be made for proceeding 
incrementally, especially if the alternative is dismantling 
Social Security.
    After all, Social Security didn't even exist 75 years ago. 
In 1924, all retirement savings consisted of private, 
individual accounts. No one looking forward 75 years at that 
time could have foreseen the Great Depression, which gave rise 
to Social Security, nor the convulsions of World War II and its 
Baby Boom, the Cold War, the computer revolution, the onset of 
AIDS, or any number of other developments. And yet, the 
standard for ``fixing'' Social Security assumes that we can 
project events over such a very long period of time.
    The uncertainties of making projections of 75 years are 
magnified by the fact that those projections are based on only 
about 50 years of economic data. Demographic data goes farther 
into the past, but comprehensive economic data gathering didn't 
really begin until after World War II. Even if we had 75 years 
of eco-

nomic data, that would still provide us only one example of how 
a period that long might unfold.
    Even the demographic data, which extends much farther back, 
doesn't help much to improve the accuracy of projections. 
Demographers using this long-term data still failed to predict 
the postwar Baby Boom and also failed to foresee the equally 
dramatic decline in fertility that occurred in the 1970's. The 
actuaries' current projection assumes that birth rates will 
stay close to the lows of the 1970's, but that could easily 
reverse. Clearly, the errors in 75-year projections can be huge 
even with good data because the future is inherently 
unpredictable.
    Projections over several decades necessarily are driven by 
the underlying assumptions because of these huge uncertainties. 
As a reflection of this, each year's report from the Social 
Security actuaries presents two alternative scenarios in 
addition to their intermediate estimate. The pessimistic 
scenario assumes that the economy barely grows for decades on 
end and demographic changes are unfavorable. An optimistic 
alternative assumes that the economy performs the way it did 
during the first thirty years of the postwar period and that 
demographics are somewhat more favorable.
    In the pessimistic case, the trust fund quickly goes broke, 
while in the optimistic case it remains permanently solvent by 
a wide margin. These highly divergent possibilities stem from 
rather minor differences in the underlying assumptions. But 
that is what one should expect from 75-year projections. When 
dynamic systems, like Social Security, are projected far into 
the future, minor differences in assumptions usually result in 
radically different outcomes. In fact, mathematicians would 
argue that the conditions that give rise to stable paths over 
such long periods represent a ``knife-edge'' case.
    Another possible reason to repair Social Security in steps 
is that we should be cautious about presuming to know what 
future generations will want. Future generations might find 
that radical steps taken today to achieve full 75-year solvency 
were poorly suited to future circumstances. For instance, some 
have suggested eliminating a substantial portion of Social 
Security's unfunded obligation by indexing the retirement age 
to longevity. However, if future generations discovered that 
increased longevity didn't translate into a comparable 
extension of work life, we would have bequeathed unexpected 
problems to our children. One of the benefits of a democratic 
form of government is that future generations are permitted to 
address the problems of their own time with knowledge 
unavailable to their predecessors.
    We also should recognize that these future generations will 
be richer than we are. Indeed, the actuaries' assumption of 
growing real incomes is one factor that drives calculations of 
the system's unfunded obligations. They project that real GDP 
per capita will be 46 percent higher than today in 35 years, 
when Social Security is currently scheduled to run short of 
money. By the end of the 75-year window, real GDP per person is 
projected to be more than twice as high as today, despite the 
actuaries' projection of only 1.4 percent economic growth over 
the period.
    This argues against being too hasty in imposing relatively 
large economic burdens on today's generations. Doing so could 
mean that current generations sacrifice so that wealthier 
subsequent generations face fewer difficulties. One might argue 
instead that wealthier future generations should share the 
burdens of preserving Social Security, recognizing that their 
superior economic position allows them greater latitude to do 
so.
    All of this leads Democrats to conclude that steps should 
be taken now to strengthen Social Security but that these 
measures should be thoroughly considered. Even if such steps 
stop short of full 75-year solvency, they must be real, rather 
than just band-aids and quick fixes. Reforms should leave 
current beneficiaries and those soon to retire unaffected.
    Democrats are confident that moderate changes can be made 
now to the structure of Social Security that can extend 
solvency in ways with little immediate impact but significant 
long-term consequences. Policy adjustments can be phased in 
over many decades to address a problem projected to unfold over 
many decades. We can take prudent, cautious steps now, while 
still fully recognizing that additional steps might be needed 
in the future.
    Addressing the unfunded obligations projected for Social 
Security over the next 75 years is a major challenge. However, 
it is no greater than challenges our society has faced many 
times in the past. For instance, the Social Security actuaries 
project that total benefits as a percent of GDP will rise by 
2.2 percentage points over the next thirty years as the Baby 
Boom retires. This is somewhat less than the shift in national 
resources that occurred when the Baby Boomers were children. 
Between 1950 and 1975, the share of the economy devoted to 
public education rose by 2.8 percentage points, a larger shift 
over a shorter time period.\26\
---------------------------------------------------------------------------
    \26\ ``Can We Afford Social Security When Baby Boomers Retire?'' by 
Virginia Reno and Kathryn Olson; Social Security Issue Brief No. 4, 
National Academy of Social Insurance, November 1998.
---------------------------------------------------------------------------
    During the early years of the Cold War, defense spending as 
a share of GDP rose 2.5 percentage points in the space of only 
2 years. Between 1980 and the present, defense spending as a 
share of the economy first increased by 1.5 percentage points 
over 6 years and then declined by 2.6 percentage points over 
the next 10 years.\27\ Also, the President's proposal to 
substantially pay off the public debt would reduce government's 
interest expense by about 2 percentage points of GDP. Clearly, 
the kinds of shifts in national resources contemplated for 
Social Security over the coming decades can be effected at 
least as easily as these fiscal challenges.
---------------------------------------------------------------------------
    \27\ Ibid.
---------------------------------------------------------------------------
    It is time to stop distracting ourselves from the real 
business at hand with untested and risky schemes. Social 
Security faces serious but manageable difficulties. We have an 
obligation to take carefully considered steps now to address 
those difficulties. But radical measures, taken in haste, are 
the wrong prescription for problems projected to unfold over 
several decades for the comprehensive social insurance system 
that continues to serve us well.
                                   Lynn Rivers.
                                   Ken Bentsen.
                                   Eva Clayton.
                                   Rush Holt.

                                
