[Congressional Record Volume 147, Number 20 (Tuesday, February 13, 2001)]
[House]
[Pages H315-H319]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
SOCIAL SECURITY REFORM
The SPEAKER pro tempore (Mr. Culberson). Under the Speaker's
announced policy of January 3, 2001, the gentleman from Michigan (Mr.
Smith) is recognized for 60 minutes.
Mr. SMITH of Michigan. Mr. Speaker, what is facing the United States
Congress right now is a decision of where do we go to help make sure
that the economy keeps growing. What do we do in terms of President
Bush's suggestion on tax cuts? How far should we go on those tax
reductions to achieve tax fairness? How do we make sure that what we do
is going to help make the economy stronger in the long run?
I would like to start with a chart that represents how the Federal
Government spends money. This chart represents the spending of the
Federal Government. And as we see from this pie, the largest
expenditure is Social Security. So Social Security takes 20 percent of
what the Federal Government spends. The next largest, of course, is the
domestic discretionary budget. That is what this Congress, this body,
the House and the Senate, with the White House, debate and argue on
every year in 13 appropriation bills is the discretionary spending, in
addition to defense. Defense spending is 17 percent; interest is 13
percent. That is why paying down the debt and continuing to do that is
very important.
Today, this House made a decision that we were not going to spend any
of the surplus coming in from Social Security taxes or Medicare taxes.
I think that is a good start. Our goal has got to be to try to reduce
the increase in spending of the Federal Government because the question
that everybody in this Chamber needs to ask, the question that America
needs to ask is how high should taxes be. Is there a point where taxes
are so high that it discourages some people from going out and working,
starting a new business and hiring more people? Is it possible that
taxes become so high that people do not go get that second job to try
to do well for their family because government takes most of the money?
Mr. Speaker, I ask everybody that might be listening to make an
estimate of how many cents out of every dollar the average American
taxpayer earns goes to pay for government. The answer is a little over
41 percent. Forty one cents out of every dollar that an individual
earns goes for local, State, and Federal Government. And it would be my
suggestion that we lower that. So I support President Bush's suggestion
that we have greater tax fairness; that we leave a little more money in
the pockets of those individuals that earn it.
One of the challenges, probably two of the biggest challenges that
face this Congress, that face this country in terms of government
programs, is Social Security and Medicare. When Social Security
started, Franklin Roosevelt said, coming out of the Depression, that we
need some alternatives except going over the hill to the poor house. So
we started a Social Security system.
Social Security was supposed to be one leg of a three-legged stool to
support retirees. It was supposed to go hand in hand with personal
savings accounts and pension plans. One-third. Today, a lot of people
depend, over 90 percent, on just their Social Security check. So it is
understandable during this last Presidential election that some seniors
became concerned when Vice President Gore suggested that they might be
losing benefits if we hired this other Governor Bush to be our next
President.
I think the challenge much greater than that is not doing anything on
Social Security. So I would encourage this administration to move ahead
as aggressively as possible to try to make sure that we do not just
talk about putting Social Security first but we move ahead to make the
kind of changes that are not going to leave a huge debt for our kids
and our grandkids and will make sure that Social Security is solvent,
and to do that without cutting benefits and without increasing taxes on
American workers.
The Social Security system right now is stretched to its limit.
Seventy-eight million baby boomers begin retiring in 2008. Social
Security spending exceeds tax revenues starting around 2015, maybe a
little sooner. And Social Security trust funds go broke in 2037,
although the crisis arrives much sooner than technically when the trust
fund goes broke.
Let me try to give my impression of what the Social Security trust
fund is. Starting in 1983, when we had the Greenspan commission to
change Social Security to make sure it kept solvent for the next 75
years, we passed into law a bill that the experts said would keep
Social Security solvent. And the action that was taken at that time was
to dramatically increase the taxes that American workers paid and to
reduce benefits. And that has happened several times throughout
history. So I suggest that it is very important that we not delay or
neglect making the changes in Social Security now so that it will keep
solvent without lowering benefits or increasing taxes.
Insolvency is certain, and that is because we know how many people
there are and we know when they are going to retire. We know that
people will live longer in retirement. We know how much they will pay
in and how much they will take out, and payroll taxes will not cover
benefits starting in 2015, and the shortfall will add up to $120
trillion between 2015 and 2075. The shortfall. In other words, there
will be $120 trillion less coming in from the Social Security taxes
than is needed to pay the benefits that are now promised.
Right now Social Security gives a wage earner, on average, a 1.7
percent return on the money they and their employer put in. So in 10
years we are looking at a situation where retirees will be receiving
someplace maybe even closer to a 1 percent return because of Social
Security taxes continually increasing, and the suggestion of expanding
benefits is ever on the minds of this body. So the challenge before us
certainly is how are we going to keep Social Security solvent. What are
the changes that can be made? How do we get better than a 1.1 percent
return on that particular money?
[[Page H316]]
And of course we know that a CD at the local bank will do much better
than that. The question before the United States, before the American
people, is should some of this money go into the stock market. Should
some of the money be put into bonds? And how risky is it if some of
this money went into equities? And I think that is what I sort of want
to discuss, what the history of equities is.
First, let me say, to make it absolutely clear, that Social Security
is not solvent. We can say it is going bankrupt or broke, but the fact
is that there is going to be less money coming in than we need. So then
we look at the Social Security trust fund and we say to the House and
the Senate and the President, look, we borrowed this money for other
spending for the last 40 years, now it is time to pay it back.
So what does Congress do to pay back the money that it has borrowed?
What does Congress do to pay back the funds in the so-called Social
Security trust fund? Probably one of three things: they either say,
look, so that we do not have to pay back so much, we are going to again
lower benefits; or we reduce spending on other programs to come up with
the money for Social Security; or we increase taxes. Those are the
three options.
If there was no such thing as a trust fund, but we have a law that
says these are benefits, what would government do to come up with the
money to keep its promise to pay those benefits? Same three things: we
either reduce other spending, or we reduce the benefits going out to
retirees, or we increase taxes on current American workers. So in
reality we should not look to the trust fund as the savior of Social
Security.
What is happening is on two fronts with Social Security. It is a pay-
as-you-go program. Since 1934, when we started Social Security, it was
current workers paying in their taxes that went immediately out to
current retirees. So a pay-as-you-go program, but what is happening is
fewer and fewer workers in relation to the number of retirees. Our pay-
as-you-go retirement system will not meet the challenge of demographic
change.
In 1940, there were 17 workers for every one retiree. By 2000, there
were only 3 workers. Today, there are only three workers paying in
their tax that immediately goes out to pay a retiree's benefits. And
the estimate is that by 2025 there will be two workers paying in their
Social Security tax. So a tremendous extra burden on those two workers,
and the threat of increasing the tax on those two workers is even
greater if we do not step up to the plate and make some changes now.
So now is the time. We have surpluses coming in. We have a surplus
this year of $236 billion. We have a total surplus in next year, the
budget that we are now working on, of $281 billion. The following year
the surplus is $303 billion, and we have heard $5.6 trillion surplus
over the next 10 years. So I suggest, Mr. Speaker, I suggest that we
take some of that surplus now and we fix Social Security and we fix it
in such a way that it can stay solvent, that our kids are not burdened
with the threat and the probability of those higher taxes.
This chart represents the short-term good times over on the top left
in blue, and then when we hit 2012, with less money coming in than is
needed to pay benefits. We have a huge challenge of future deficits.
And, like I mentioned, in today's dollars it is an unfunded liability
of $9 trillion. If we take it in tomorrow's dollars, as we need the
extra money over the years, in those future years up till 2075, it is
going to take $120 trillion. But if we can fix the problem today with a
couple trillion dollars of that surplus and start getting a better
return on the money that is invested, then we can keep Social Security
solvent.
{time} 2130
A lot of people I talk to around the country on Social Security have
the feeling that somehow there is a Social Security account with their
name on it. I quote from the Office of Management and Budget. ``These
trust fund balances are available to finance future benefit payments
and other trust fund expenditures but only in a bookkeeping sense.''
They are claims on the Treasury that when redeemed will have to be
financed, like I said, either raising taxes, borrowing from the public,
or reducing benefits or reducing some other expenditures.
It is interesting to note that the Supreme Court, now on two
decisions, has said there is no entitlement to Social Security, that
simply because you paid in taxes all of your working life and your
employer paid in those taxes, there is no entitlement to Social
Security, it is simply another tax that Government has imposed on
workers of America, and the benefits are simply additional legislation
that can benefit retirees. So no promise that you are going to get any
benefits.
So I think there is some good justification for putting some of that
money in accounts of individuals, to put it into the safe kind of
investments where we can guarantee that it will earn more than what
Social Security will pay under the current program, where we can
guarantee, if you will, that individuals that decide that they want to
stay with the old system will have that option, or they can have the
option to have the kind of, what in Federal Government we call a thrift
savings account where there are limited, if you will, safe investments
that everybody that works for the Federal Government can choose the
different investments that they think will give them the maximum return
on their investment.
Now is a difficult time to maybe convince some people that they
should have part of that investment in equities, in the stock market.
Yet, if we just look at last month, last month there was almost a 3\1/
2\ percent increase in the money invested in the stock market.
Since the 1890s, there has never been a 12-year period where there
has been a loss of money invested in equities in the stock market.
I want to make mention of the public debt versus Social Security
shortfall. Right now we are talking about paying down the debt held by
the public. We have a debt in this country of $5.7 trillion. Of that
5.7 trillion, about 3.4 trillion is what I call the Wall Street debt,
or the debt that is lent out by the Treasury in Treasury paper,
Treasury bills, U.S. Government bonds.
That totals 3.4 trillion. But over the next 75 years, we are looking
at a Social Security shortfall in today's dollars, not in tomorrow's
dollars, of $46 trillion. So it is just in that time period we are
looking at $46 trillion needed up until 2057.
Economic growth will not fix Social Security. Some people have
suggested, well, if we can make the economy strong enough, if we can
keep growing like we have been, that will help Social Security. Not so,
because of the fact that Social Security benefits are indexed to wage
growth, in other words, they are indexed to how strong the economy is.
So the stronger the economy is, the higher the wages. The higher the
wages, the more benefits that are paid out. When the economy grows,
workers pay more in taxes but also will earn more in benefits when they
retire.
So, in the short-term, a strong economy helps out the problem because
individual workers are paying more money in, but when they retire,
because there is a direct relationship between what the benefits they
are going to get and the money that they paid in in taxes, in the long-
run, it is not going to solve the problem.
Growth makes the numbers look better now but leaves a larger hole to
fill later. I think the past administration did a lot for us when
President Clinton said, we have got to put Social Security first. At
least it brought it to the consciousness of the American people that it
was important.
I am disappointed that we have not done anything on Social Security
for the 8 years that I have been in Congress. I urge this
administration to move ahead with the Social Security proposal that
will keep Social Security solvent, because the biggest risk is doing
nothing at all.
Social Security has a total unfunded liability of $9 trillion. The
Social Security trust fund contains nothing but IOU's. To keep paying
promised Social Security benefits, the payroll tax will have to be
increased by nearly 50 percent or benefits will have to be cut by 30
percent. Neither one, Mr. Speaker, is acceptable to the American
people.
So again, it is important we move ahead with solving Social Security.
[[Page H317]]
This chart that I made represents the diminishing return of your
Social Security investment. The real return of Social Security is less
than 2 percent for most workers and shows a negative return for some
compared to over 7 percent return in the marketplace for any period
over a 15-year period.
Social Security's real rate of return, this is Black History Month,
minorities, because a young black worker dies at an earlier age,
receives a negative return on the money that they pay into Social
Security.
We need changes there. If they are average, then they get about a 1.7
percent return. But that is going down to just a little over one
percent within the next 15 years. And the market is showing a return of
7 percent. So are there some safe investments?
Insurance companies testified before the Social Security Task Force
that I chaired for the last couple years and said we can guarantee a
return because we are selling it to the public now. We can guarantee
you a return of 4.8 percent, or different companies have different
percentages.
So it seems reasonable that if we are comparing a system that has a
return of around 1 percent to something that we could invest the money
in CDs or Government bonds or many other investments that would have a
guaranteed return much greater than that, then at least part of the
option that American people would choose would say, well, what is going
to make me better off when I retire? And, obviously, as we are going to
show in a minute, it is going to be some of those private investments.
And the private investments are not only a greater return, but it is
the security of knowing it is your money, not having politicians in the
future reach into that pot and say, well, times are tough in America.
We are going to have to reduce benefits or we are going to have to
increase taxes on American workers.
This is a chart I made up on the years that it is going to take to
get back your Social Security tax. If you happen to retire in 1940,
then it took 2 months to get back everything that you and your employer
paid into Social Security. By 1980, it took 4 years to get it back.
Look what it takes to get it back today. Today you have got to live
23 years after you retire to break even to get back the money you and
your employer paid into Social Security.
I have been trying to preach that increasing payroll taxes again is
not the answer. And everybody in this Chamber agrees. They said, right,
we cannot increase taxes on those American workers. Too many American
workers already pay more in the Social Security tax, the FICA tax, the
payroll deduction than they do in the income tax.
However, that is not the history in this country. Even though past
Congresses have said the same kind of promises, what we have done over
the years is continue to increase the tax on Social Security.
In 1940, the tax was one percent on the employee, one percent on the
employer for the first $3,000. That made a maximum tax every year of
$60 per worker. By 1960, it got up to a 6 percent rate, and the base
went up also to $4,800 for a total annual tax maximum of $288.
By 1980, the tax got up to 10.16 percent and the base was increased
also to $25,900. That made an annual tax a maximum of $2,631. Today we
have increased the tax to 12.4 percent. We did that in the 1984
legislation. And we increased the base and indexed it to inflation.
So this year it is approximately $80,000 that you pay the 12.4
percent on, or approximately this year $10,000 for those workers that
make that $79,000 a year.
So, again, I suggest that it is not out of reach, that if push comes
to shove, if we keep putting off the solution to this problem, we are
going to end up with some people saying, well, there is no other way,
we need more revenues, let us increase taxes on our kids and grandkids
and great-grandkids so that we have enough money to pay benefits.
What is interesting is that we think the senior population is strong
politically today. When the baby boomers start retiring in 2008, we are
going to have such a huge retirement population and they are living
longer and the political power of that retired population is apt to
demand that their benefits be increased, not reduced; and so, the only
alternative, if we do not fix it today, is the threat of tremendously
increasing taxes on our kids.
In an earlier chart, I showed that taxes would have to increase up to
50 percent, an increase in taxes of 50 percent, if we are going to
continue to pay those benefits if we do not do anything to try to fix
Social Security.
Seventy-eight percent of families now pay more in the payroll tax
than they do in the income tax.
The six principles of saving Social Security. One, protect current
and future beneficiaries. Two, allow freedom of choice. So you can
either stay in the current system or you can have flexibility if you
are sure you can get more than that 1.1 percent return on the money
that is going in. Should part of that, at least part of that, be
allowed for you as individual workers to have it in your own name, in
your own account, and preserve the safety net.
Look, this is a country where we are not going to allow anybody to go
hungry or to go without clothing or without lodging. So we do have a
safety net to make sure in essentially every proposal that has been
introduced in Congress on fixing Social Security, and most of those
have some private investment aspect, in every case, there is a safety
net. We make Americans better off, not worse off. We create a fully-
funded system and no tax increases.
Personal retirement accounts. They do not come out of Social
Security. They become part of your Social Security retirement benefits.
I suggest that, if it is necessary to reach into the surplus over and
beyond the surplus that is coming in from Social Security, to make sure
that we save Social Security, now is the time to do that, that we use
some of these surpluses to make sure that we keep the program solvent
and we do that by getting a better return on the investment than the
1.1 to 1.7 percent the average retiree is going to make.
A worker will own his or her own retirement account, and it is going
to be limited to safe investments that will earn more than this says,
1.9 percent paid by Social Security. 1.9 percent is the high rate of
return that you can make on your Social Security investment. And as we
saw by that other chart, a lot of individuals have a negative return
from what they put into Social Security.
{time} 2145
Personal retirement accounts offer more retirement security. If John
Doe makes an average of $36,000 a year, he can expect monthly payments
in Social Security of $1,280. If it is in a PRA, a personal retirement
account, the way they have performed for the last 50 years, then it
would be $6,514.
Choosing personal accounts. When we passed the Social Security law,
we left the discretion that State and county government employees could
have an option of being in Social Security or in a retirement pension
plan of their own with their own investments. Galveston County, Texas
chose that option, to not pay into Social Security but to pay, in the
same percentage, into their own pension retirement plan. Employees of
Galveston County, Texas, are now making $75,000 in death benefits
compared to Social Security's $253 in death benefits. The retirees from
the Galveston plan have disability benefits of $2,749. Social Security
would pay $1,280. The retirement benefits, Galveston County plan,
$4,790 per month, compared to Social Security's $1,280 a month.
I am showing these because some parts of the country have opted to go
into some kind of private investment plans. Many of the State
governments have private investment plans. Half of the people in the
United States now have some investments in equities, in 401(k)s or
other retirement efforts. San Diego enjoys PRAs as well. A 30-year-old
employee who earns a salary of $30,000 for 35 years and contributes 6
percent to his PRA would receive $3,000 a month in retirement. Under
the current system, he or she would contribute twice as much but
receive only $1,077 from Social Security.
I thought this was interesting: even those who oppose PRAs agree that
they offer more retirement security. This is a quote from a letter that
Senators Barbara Boxer and Dianne Feinstein
[[Page H318]]
and Ted Kennedy sent to President Clinton. They said, ``Millions of our
constituents will receive higher retirement benefits from their current
public pensions than they would under Social Security.'' That is the
truth.
The U.S. trails other countries in saving its retirement system. In
the 18 years since Chile offered PRAs, 95 percent of Chilean workers
have created accounts. Their average rate of return has been 11.3
percent per year. Among others, Australia, Britain and Switzerland
offer workers PRAs. Many of the industrial countries of the world and
many of the developing countries are now ahead of the United States in
allowing individuals to have their own passbook that increases every
year to give greater assurance in their retirement.
British workers choose PRAs. Ten percent returns on British workers.
Two out of three British workers are enrolled in the second-tier Social
Security system and now are getting a 10 percent return. The pool of
PRAs in Britain exceeds nearly $1.4 trillion, larger than their entire
economy.
This is the real rate of return in stocks from 1901 to 1999. So you
see the ups and downs. But the fact is if you keep it longer term, if
you keep it in for over 12 years, then there is not a loss. The average
gain has been 6.7 percent. Again I compare that to the current 1.7
percent in Social Security, soon to be 1.1 percent return, with some
parts of our population actually getting shortchanged and getting a
negative return. This is the rate of return for the last 100 years, 6.7
percent.
Based on a family income of $58,475, the return on a PRA of course is
better. I separated this to putting in 2 percent of your salary or 6
percent of your salary or 10 percent of your salary. Of course Social
Security is 12.4 percent of your salary. If it was just for 20 years
and you put it in at the 6 percent level, it would equal $165,000 at
the end of 20 years. At the end of 30 years, at 10 percent it would be
over $800,000. In 40 years, and I guess that is how long most of us are
probably planning to work, that is 25 to 65, if you were investing this
money over 40 years, even at the low 2 percent rate, it would still
equal over a quarter of a million, almost a million if you put in 6
percent of your salary; and if you were tithing and putting in 10
percent of your salary into an average indexed investment, it would be
worth almost $1.4 million at the end of that time period, $1,389,000.
I have introduced a Social Security bill since I first got here. When
I was in the Michigan legislature, I was chairman of the Senate tax
committee, and I was concerned to see that our productivity in
comparison to other countries was going down. But what concerned me
even more is our rate of savings compared to other countries was
embarrassing. The United States that used to save 12 to 15 percent of
every dollar they made back in the 1940s and 1950s now end up with an
average savings rate in this country of about 4 percent.
That compares to countries like Japan where they are saving about 19
percent and Korea where they are saving about 35 percent of every
dollar they make. And because saving and investment is so important to
the economic strength of our country, because that is where companies
get money to do the research, to buy the tools and machines that are
going to increase productivity, increase efficiency and therefore
increase wages, it is important that somehow we encourage increased
savings. We have done this over the last several years, because what we
have done in the United States Congress is we have said, look, we are
going to have an IRA that encourages through our tax system more
savings. If President Bush has his way, we are going to increase the
allowable amount that individuals can save and still have a tax break.
We developed the Roth IRA that says if you save the money now, when you
take it out in 20, 30, 40 years, whatever that increased value is, you
do not have to pay tax on it. So increasing savings is key.
One way to increase savings, of course, in this country is to
encourage people to invest in their own personal retirement savings
account. My proposal does not increase taxes. It repeals the Social
Security earnings limit. It gives workers the choice to retire as early
as 59\1/2\ years old and as late as 70. In my proposal if you delayed
retirement between 65 and 70, you could receive an additional 8 percent
increase in your retirement benefits for every year that you delayed
retirement. What is interesting is that it is actuarially sound. It
does not cost any money to do that, so we should be encouraging people
to put off that retirement if they know that they can have that much
extra return on their retirement benefits.
It gives each spouse equal shares of PRSAs and increases widow and
widower benefits to 110 percent. Right now if one spouse works and
makes good income and the other does not, there are provisions where
the lower-income spouse if there is not enough to equal at least 50
percent of the higher-income spouse's Social Security benefits, that 50
percent will be promised as a minimum benefit for that second spouse.
What this does, in terms of the personal retirement savings account,
if just one spouse is working, let us say it is the husband and the
wife is staying home for the time being with the kids, everything that
spouse makes will be divided in half, half going into the name of the
stay-at-home mom and half going into the man's name or if the man stays
home, just vice versa. It passes the Social Security Administration's
75-year solvency test and protects the trust fund with special lockbox
provisions. That is what we did in this Chamber today. The lockbox
simply says that we are not going to do what has been done for almost
the last 42 years and, that is, when you have a surplus from Social
Security, use that money for other government spending. So it is a good
start.
What we also did in that legislation today is we said, we are not
going to spend any of the Medicare trust fund. Social Security and
Medicare are the two big trust funds. There are approximately 116 trust
funds of the Federal Government. What we have been doing is we have
been, if you will, overcharging those particular people that are paying
into those trust funds so that there is a surplus into the trust fund.
So when we say in the past year, for example, that there was a surplus,
there was no surplus except for the surplus coming into the trust fund.
This next year, in 2002, we will have a surplus over and above the
trust funds. And so it seems to me that another, almost a synonym,
another definition for surplus is overtaxation, is we are overtaxing
somebody, and that is why there is more coming in than we know what to
do with. The danger, of course, is that this body finds it to their
political advantage, most Members find it to their political advantage
to come up with new programs, to take home pork-barrel projects where
they get their picture cutting a ribbon on the new library or the new
jogging trail or whatever. So the tendency has been over the years to
increase spending. That is the challenge: How do we discipline
ourselves to hold the line on increased spending?
I am encouraged by what I have seen this new President do in terms of
his aggressive enthusiasm to search out and find out where the
weaknesses are in Federal spending, to find out where the abuse is,
where the fraud is, where the inefficiencies are. It is extremely
important we do that. We have got a very inefficient Federal
Government. If we divide $1.9 trillion out by every Member of this
Congress, it still is such a huge amount of dollars that it is
difficult to keep track of.
The Social Security Solvency Act for 2000 takes a portion of the on-
budget surpluses over the next 10 years; it uses capital market
investments to increase the Social Security rate of return above the
1.8 percent workers are now receiving and over time PRSAs grow and the
Social Security fixed benefit is reduced. It indexes future benefit
increases to the cost-of-living increases instead of wage growth.
There are only two ways to fix Social Security, either bring in more
revenues or you reduce the amount going out. What we are suggesting is
one way to bring in more revenues is real investments. It could be a CD
at your local bank, or it could be a United States savings bond. Or it
could be the kind of investments that are indexed to maximize safety
over the long run in those investments. Everybody should start
thinking, is there a way that I could invest money better than what the
government is doing in terms of what they give me back in Social
Security?
[[Page H319]]
Can I get a better rate of return on some of that money that would
exceed the 1.1 percent return that we are expecting in the future on
Social Security benefits? I think the answer is yes.
Mr. Speaker, I am encouraged and excited about a President that is
suggesting that we hold the line on spending, a President that is
suggesting that we pay down the debt, a President that is suggesting
giving back some of this surplus and letting it stay in the pockets of
the people that earned it.
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