[Congressional Record Volume 150, Number 42 (Tuesday, March 30, 2004)]
[House]
[Pages H1733-H1737]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
PREDICAMENT WE ARE FACING WITH SOCIAL SECURITY AND MEDICARE
The SPEAKER pro tempore (Mr. Burgess). Under the Speaker's announced
policy of January 7, 2003, the gentleman from Michigan (Mr. Smith) is
recognized for 60 minutes.
Mr. SMITH of Michigan. Mr. Speaker, last week the actuaries of the
Social Security Administration and the
[[Page H1734]]
Medicare came up with their estimates of the predicament that we are
facing in those two programs in terms of having less revenue, less
money coming in than is needed to pay for promised benefits. The news
was not good.
I wanted to start with this pie chart to give everyone an impression
of how we spend Federal Government money; and as you see by the title
of the chart, Social Security is the largest budget expenditure. This
is the Social Security piece of pie, if you will, at 21 percent of all
of the money spent by the Federal Government. That compares to 20
percent for defense, and defense, 2 years, 1, 2, 3 years ago was a
little over 18 percent. So, even though, defense has grown, Social
Security is growing even faster.
We have Medicare at 12 percent, but that is the fastest growing
program; and within 30 years, Medicare will overtake Social Security as
the top Federal budget spending program.
Other entitlements, 10 percent; domestic discretionary, 16 percent;
and here is a problem area over here, interest on the debt, 14 percent.
The reason that is a problem is because we are amassing a dramatic
increase in debt.
Last month, we celebrated Abraham Lincoln's 195th birthday. In his
famous Gettysburg Address, he sort of noted whether a country of the
people, by the people, and for the people could long endure. The Civil
War, of course, was sort of a testing ground, whether that Nation or
any Nation so conceived and so dedicated could last.
The actuaries in their report last month estimated that the total
unfunded liability, the amount of promises or the cost of those
promises over and above revenues coming in from the FICA tax, from the
payroll tax, was going to be $73.5 trillion. To put that in a little
bit of perspective, the budget that we are looking at for this current
year is about $2.28 trillion, and for next year the budget we are
working on is about $2.4 trillion. The unfunded liability, how we are
going to have to somehow cut benefits or increase borrowing or increase
taxes is $73 trillion or over $73 trillion; and breaking these down, we
see Medicare part A estimated at $21.8 trillion; Medicare part B at
$23.2 trillion; Medicare part D, the new prescription drug program, at
$16.6 trillion.
So passing the Medicare drug bill increased the unfunded liability by
$16.6 trillion, and Social Security with the trust funds comes to
almost $12 trillion. It is more than a quarter million dollars of the
unfunded liability for every American. Every baby that is born
tomorrow, every child and woman and man in this country, their share of
this unfunded liability that they are going to have to deal with the
extra interest on the debt and paying back that debt is over a quarter
of a million dollars.
This chart that Tom Saving came up with, an actuary in both Medicare
and Social Security, indicated how much of the general fund revenue is
going to have to be used up to pay for promised benefits in Social
Security and Medicare; and we see that within 16 years, by 2020, it is
going to take 28.6 percent of our current general fund budget to pay
for the promises we have made in Social Security and Medicare. By 2030,
it is going to take 52.7 percent of the general fund to pay for these
programs.
The reason that I am making this presentation tonight, Mr. Speaker,
is to call to my colleagues' attention, call to everyone's attention
the very serious situation of the promises that have been made over and
above the money that is coming in for those programs and how it is
going to impact other programs that government now provides.
We talked about the Civil War with Abraham Lincoln. The earlier group
talked about the Iraq War; but today, we face a threat to the country
that may well be more serious than any war we have had. It is not in a
dramatic clash of arms, but in neglect of the Nation's finances,
especially our long-term finances.
Voters vote for benefits, and politicians promise them, without
knowing where the money is coming from. They do not know how to pay for
it.
Just 3 months ago, Congress voted for a prescription drug benefit
that adds $16.6 trillion of the program's unfunded liability. That is
more than twice our Nation's entire national debt, without knowing
where the money is coming from; but when I say without knowing where
the money is coming from, actually it means that our kids and our
grandkids, that somehow some of these programs justify borrowing from
the money that our kids and grandkids have not even earned yet. So to
continue promising programs because it seems to be politically
favorable to individuals in their reelection is unconscionable in terms
of the burden that it is putting on our kids and grandkids.
From the founding of this country, Mr. Speaker, it took until 1975 to
amass the first $500 billion worth of debt. Unfortunately, we are now
adding more new debt to our books every year than it took in the first
nearly 200 years of this country to amass because we are going over
$500 billion every year.
The deficit for fiscal year 2003 was $536 billion. It is expected to
be $631 billion this year and another $534 billion next year. We have
never run a deficit this high, and we need to take decisive action in
this budget to address our overspending; and though this budget is, for
lack of a better word, more frugal than maybe any budget that we have
passed since 1996, it still increases total spending of the government
almost twice the rate of inflation, and it does not deal with unfunded
liabilities. It does not deal with changes to Social Security, with
changes to the Medicare program or the Medicaid program that are going
to allow these programs to survive without threatening future
generations with huge tax increases.
This is sort of a quick snapshot of the problems of Social Security,
a short-term surplus. In 1983 under the Greenspan Commission, they
raised the taxes so high that there was more money coming in than was
needed; and so that money, maybe the word is ``theoretically,'' was put
into a trust fund, but there is nothing there except IOUs because
government spent every cent of that money for other government
programs. So in the short run, we had extra money coming in, all spent;
and now in 2018 we are looking at there being less revenues coming in
from even that high tax increase than is needed to pay promised
benefits.
{time} 2145
So a very bleak future in terms of future deficits.
When I have given speeches on Social Security, a lot question, how
does Social Security work? So, very briefly, let me go through some of
the provisions of how the Social Security program works.
Benefits, first of all, are highly progressive. That means that if
you are a low-income earner, when you retire you can receive up to 90
percent of your average monthly check that you had for the 35 eligible
years that you gained your Social Security credits. If you are a very
high-income earner, then you come closer to getting back only maybe 15
percent of your average monthly check that you were earning when you
were paying in your social security taxes.
At retirement, all of a worker's wages, up to the tax ceiling, are
indexed to the present value. We are using wage inflation. The best 35
years of earnings are averaged out. So if you only worked 30 years, you
got 5 years that is zero, and that is averaged in and averaged out as
zero years. The average benefit for those retiring in 2004 equals 90
percent of earnings up to the first $7,344. This is the progressive
part. Ninety percent for that low income. Thirty-two percent of
earnings between $7,300 and 44,268, and then 15 percent of earnings
above the 44,268. Early retirees receive adjusted benefits.
SSI. A lot of complaints about SSI, about the abuse of the
Supplemental Security Income program and how that is hurting Social
Security. Actually, SSI does not come out of the Social Security Trust
Fund. It comes out of income taxes that go into the general fund.
Joining with colleagues who share my concern about government
overspending, I think we are coming to a good start this year in making
a difference on how we hold spending in line.
It is interesting that Franklin Delano Roosevelt, when he started
Social Security in 1934, actually was suggesting that the savings be in
private accounts but it be mandated savings based on earnings and that
you could
[[Page H1735]]
not use that savings until your age of retirement. But that changed.
Looking at the archives over here, it is interesting, the debate that
went on in the House and the Senate in those years.
The House passed legislation that said government should run the
whole program. Government should take the money and invest it and save
it and then give fixed benefits to retirees when they retire.
The Senate passed the bill saying these should be individually owned
accounts, where individuals could invest in limited investments, but of
course forced to save and forced to invest with that money and not
being allowed to be taken out until they retire.
When they went into conference, the House won that debate; and we
ended up with a program where government takes all the money in and
spends any extra money that is coming in and then promises that
benefits will be paid. Several times over the history of the program
since 1935 we have ended up with less money than we have needed, and
what has happened is this Chamber and the Senate Chamber across the
way, and the President, have simply said, every time money was short,
that we are going to cut benefits or raise taxes or do both. And that
is what has happened over the years.
The system is stretched to its limit in Social Security. There are 78
million baby boomers that will begin retiring in 2008. Social Security
spending exceeds revenues in 2017 and Social Security trust funds go
broke in 2037, although the crisis could arrive much sooner. The reason
the crisis is coming much sooner is because, even though the government
has IOUs to pay back the money it has borrowed, government does not
know where the money is coming from. So the danger when we come to the
point of 2017, when there is less money coming in than going out,
whether it is 2017 or 2018, is how does government come up with that
money to pay promised benefits? Well, they either cut benefits or
increase taxes or increase borrowing.
Social Security trust funds go broke technically in 2037, but that is
if government pays back everything it has borrowed. Insolvency is
certain. We know how many people there are and when they will retire.
We know that people will live longer in retirement, and we know how
much they will pay in and how much they will take out. We know that
payroll taxes will not cover the benefits starting in 2017, and the
shortfalls will add up to $120 trillion between 2017 and 2075. So that
is $120 trillion in tomorrow's dollars. That translates into $12
trillion that would have to be put in a savings account today, earning
whatever the CPI inflation is, to accommodate the $120 trillion that is
needed in future years.
The coming Social Security crisis, our pay-as-you-go retirement
system, will not meet the challenge of demographic change. Here is the
problem, Mr. Speaker. The problem with Social Security, the problem
with Medicare is the problem we would have with any program that is
based on a pay-as-you-go system, where existing workers pay in their
taxes which are then immediately sent out in benefits for existing
retirees.
The problem is that way back in 1940 we had 32 workers for each one
retiree. By the year 2000, we got down to three workers for each
retiree. And by 2025, the estimate is that there will be two workers
for every retiree. So it is understandable that if those retirees are
going to receive the same level of benefits, then each worker is going
to have to pay in more tax revenue; and that is what we have been
doing, is continually increasing the FICA taxes on existing workers
over the years.
So, two problems: Well, problems, I have to be careful of that word.
Two situations that have brought about the demographic changes: One is
the situation where people are living longer. The other is the birth
rate is going down. Now, remember the chart where we go from the green
to the red? That is because of the fact that the big birthrate increase
after World War II, the so-called baby boomers, are going to start
retiring in the next few years.
Some have suggested, well, if we can just get the economy going, that
will help; and there is no question that the economy helps in the short
run. It helps in the short run because, as wages go up and more people
are working, then there is more FICA tax coming in, more Social
Security tax coming in. But it does not help in the long run because
there is a direct relationship to wages while you are paying in and
eventually the benefits that you are going to be taking out. So when
the economy grows, workers pay more in taxes, but it also will earn
more in benefits when that individual retires. Growth makes the numbers
look better now but leaves a larger hole to fill later.
The administration has used, I think, sometimes, these shortcut
figures to say that the desperation date of when we are going to run
out of money is increasing, and that certainly happens with a strong
economy.
Now, Social Security trust funds versus the Social Security's
shortfall. A lot of people suggest that if government would just keep
their hands off that surplus money coming in, that Social Security
Trust Fund, everything would be okay.
I wanted this chart to show the relative difference between what is
in the trust funds, the IOUs that are now down in Virginia, and where
we have borrowed $1.4 trillion from Social Security over the years. But
the shortfall, as you remember, is $12 trillion. So even if we pay all
this money back, and we will, somehow. We will pay it back with extra
borrowed money or we will increase taxes on the workers in those years
when we make the change. The money will be paid back, but it is going
to be very difficult as we continually depend on tax increases to solve
the Social Security problem.
Let me tell you why I am saying that. The situation is real in
countries like France and Germany and Japan, where the senior
population is a larger percent of the working population than it is in
this country. The payroll taxes in France, for example, now are at
about 50 percent. So an individual goes to work and works and earns so
much money and half of that money is taken out for their taxes to cover
the seniors in that country. In this country, we are up to 15.2 percent
for our FICA tax. France is at 50 percent. Guess what Germany is?
Germany has just passed a 40 percent payroll tax to cover the benefits
for their senior population, and Japan is overwhelmed with the problems
of their senior population as they try to tax workers.
You can understand that if you have that high of a tax, that
businesses, that industry, that companies have to pay out, it comes
from two places. They have to increase the price of their product or
they decrease the salary and wages they are paying to their workers;
and that makes them, that makes that country much less competitive. So
you can sort of understand, simply by looking at the payroll taxes in
France, some of their problems that they are now having with what I
understand is 10 percent unemployment and some of the problems they are
having with trying to compete with the United States and other
countries.
The biggest risk for Social Security is doing nothing at all. Social
Security has a total unfunded liability of over $12 trillion. The
Social Security trust funds contain nothing but IOUs. 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 or we will continue increasing the debt of this country and the
borrowing, which means that there is going to be a mounting interest
rate.
When we look at the interest rate expense for this country, that is
based probably on one of the lowest interest rates that we have had in
a long time. So if interest rates go back up to normal, that can eat up
twice the amount of the total spending budget that we now have simply
because of the propensity of Members of Congress to spend more, to make
more promises without knowing how those promised benefits are going to
be paid for.
This is the diminishing returns on Social Security, and the reason
that I made this chart is to demonstrate that Social Security is not a
good 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 for the general market. So if you happen to be a
minority, which means on average you die before you reach the 65-year-
old retirement for maximum benefits, so the average return on the
investment for minority workers is a
[[Page H1736]]
negative figure. If you are average, then you average just under a 2
percent return.
But compare this with the Wilshire 5000 Index, where that index, in
equities, has earned 11.86 percent, and that is after inflation, over
the decade ending January 31, 2004. That is even through the slumping
years of 2001 and 2002 and somewhat in 2003.
{time} 2200
This is how long you are going to have to live after you retire if
you are going to break even on what you and your employer have paid in
to Social Security. The people who retired in 1940 at the beginning of
the program, it was pretty good. They only had to live 2 months after
retirement. By 1995, you had to live 16 years after retirement to get
your Social Security checks coming in to break even. By 2005, now you
have to live 23 years after. By 2015, you are going to have to live 26
years to break even on what you and your employer have paid in to
Social Security. This is what we have done to American workers. There
are 78 percent of American workers that pay more in the FICA tax, the
Social Security tax, than they pay in the income tax. So in terms of
tax breaks for working Americans, we should be looking at possibly
lowering their FICA tax, because that is where they are spending the
money.
Let me go into my proposals for changing Social Security. I chaired
the bipartisan Social Security task force. After about a year, every
member of that task force agreed that we had to do something very
quickly to save Social Security. The tendency of Congress is you wait
until the disaster hits and then you make changes. But the longer we
wait to solve Social Security, the longer we wait to solve the Medicare
and Medicaid problem the more drastic those solutions are going to be.
The six principles that I think are reasonable are protect current and
future beneficiaries; allow freedom of choice; preserve the safety net,
in other words, leave some of that trust fund money available; make
Americans better off, not worse off; create a fully funded system; and
no tax increases.
I have introduced legislation. This is my 12th year in Congress. I
have introduced Social Security legislation ever since I first came to
Congress. Actually, I wrote my first bill when I was chairman of the
Michigan Senate finance committee, because it was obvious, even in the
late eighties and early nineties, that Social Security was heading for
a cliff of very serious financial problems of solvency. The people
choosing to participate in the voluntary account program would continue
to receive benefits directly from the government. This is my bill that
I introduced a few months ago. Those benefits would be offset based on
the amount of money deposited into their account and not on the amount
of money earned in the account. This means that workers could expect to
earn more from their accounts than was the offset for the Social
Security benefits that would be reduced.
It is interesting to observe some of the municipalities that have
elected to have their own personal retirement savings plans rather than
have Social Security. When we passed the Social Security bill and
started it in 1935, the option for State government and local
government was to allow them to opt out of Social Security. Some of
those counties now in the United States that opted out of Social
Security are having retirees with benefits as high as 40 and 50 and
$60,000 a year because of personal investments as opposed to the
general Social Security program that has ended up with a 1.7 percent
return on Social Security.
I think it is important to mention that part of Social Security is
the disability program. The disability insurance program is not touched
by anyone that has suggested any changes in Social Security, so the
insurance part of that program continues to be a government insurance
program to protect eligible workers and make payments if they are
injured on the job.
The worker accounts, the question is, can we do better? Is there some
way to earn more than the 1.7 percent that we are now earning on Social
Security dollars coming in? All worker accounts would be owned by the
worker and invested through pools supervised by the government. In
other words, they would be limited to index stocks, index bonds, index
cap funds, and investments otherwise determined by the Secretary of the
Treasury to be safe investments. So the investments are limited, just
like anybody that works for government now. Our Federal payroll
deductions go into a Thrift Savings Plan with individual employees and
members able to choose how much of the money goes into each plan, but
there is a limited choice on the number of plans that you are eligible
to invest in. Regulations would be instituted to prevent people from
taking undue risks. And until the account balance reaches $2,500, a
worker would be limited to choosing one of three funds, an 80 percent
bond/20 percent stock fund or a 60/40 fund or a 40/60 fund. And after
the balance reaches $2,500, workers would have access to additional
safe funds as determined by the Secretary of the Treasury.
The legislation that we introduced, and this was bipartisan
legislation with Republicans and Democrats that signed on to my bill,
the bill would increase contribution limits for IRAs and 401(k)s and
pension plans. I put this in the bill because I think it is important
that we increase the savings of the United States. The savings of the
United States is one of the lowest savings rates in the world. And so
how do we get back to the days where the United States had one of the
highest savings rates in the world? I think allowing some tax
advantages to encourage savings is part of the motivation that can
bring us back to a reasonable savings.
The legislation I introduced would create a 33 percent tax credit for
the purchase of long-term care insurance up to $1,000, $2,000 for a
couple. It would create a tax credit to make it easier for low-income
seniors to live at home or with family rather than going to retirement
care. And low-income seniors would be eligible for the $1,000 for
expenses related to living in their own home. Households caring for
dependent parents would also be eligible for a $1,000 credit for
expenses.
I call this fairness for women. I suppose if I was politically
correct, I would call it fairness to spouses. But generally women have
been shortchanged in the Social Security program. These are the changes
that are incorporated in my legislation. For married couples, account
contributions would be pooled and then divided equally between husband
and wife. In other words, if one spouse was making $80,000 a year and
the other spouse was making $20,000 a year, they would be added
together; and the eligibility at $50,000 for each spouse and the
percentage allowed to go into their private investment account would be
based on adding the two incomes together and dividing by two. So both
husband and wife would have exactly the same amount every year in their
personally owned savings account.
The legislation would increase surviving spouse benefits to 110
percent of the higher earning spouse's benefit. Somehow we need to have
programs that encourage seniors to stay in their own homes rather than
nursing home care that can cost 40, 50, $60,000 a year. This is one of
the areas that instead of the current law that says you could have 100
percent of that higher benefit, this legislation would increase it to
110 percent of the higher benefit. The stay-at-home mothers with kids
under 5 would receive retirement credit. So for those limited years
that they have children under 5 years old, they would be credited for
the 35 years that is being used to determine benefits. For those years
that they are at home with these young kids, they would be credited
with the average earnings for those higher income years.
The Retirement Security Act has been scored by the Social Security
actuaries to restore long-term solvency to Social Security. There would
be no increases in the retirement age, changes in benefits for seniors
or near seniors, or changes in the Social Security COLA. Solvency would
be achieved by recouping a portion of the higher returns from worker
accounts and slowing the increase in benefits for the highest earning
retirees.
So what we do to help come up with the money to keep this program
solvent is we reduce the increase in benefits for higher-income
retirees, and secondly we allow a personal investment that can earn
more money, but that individual worker still can have a retirement
benefit that even though they are
[[Page H1737]]
working in modest income, they can retire at very much higher incomes.
The bill would also call for a loan of $900 billion from the general
fund to Social Security to ease in the transition as we go into some of
these private accounts. That loan is paid back over the years.
When I introduced my first bill in 1994 and 1996, it was not
necessary to borrow that money because the surplus coming in in those
early years was so much greater. Now the surplus coming in from Social
Security is declining; and, of course, as we noted on the one chart, it
is going to run out.
The program, the trust fund continues. The Retirement Security Act
would allow workers to create on a voluntary basis accounts funded from
their payroll taxes. It would be in their name; so if they die before
the age of 65, they own the money. The money would go to their heirs
and their kids. The accounts would start at 2.5 percent of income and
would reach 8 percent of income by 2075. Workers would own the money in
their accounts. It is their money. Investments would be limited and
widely diversified and investment providers would be subject to
government oversight. The government would supplement the accounts of
low-income workers making less than $35,000 a year to ensure that the
lower income workers build up the kind of equity that is going to allow
them to retire with much higher incomes.
The kind of spending that we have had in Congress means higher taxes
are coming, maybe not in the next year or two, but eventually. The same
Congress that could not bring itself to add a few real reforms to
Medicare in a gigantic benefit expansion bill is not likely to cut
benefits to the degree necessary to head off financial crisis. I take
some comfort in what is happening this year from a new willingness
among many Members of the Republican Conference to tighten our line on
spending. And though some Members express concerns that maybe you
should not have cuts in an election year, the overwhelming majority of
Republicans agree that we have got to cut down on spending, we have got
to have some kind of PAYGO rules that put some teeth, if you will, into
assuring that we are going to limit spending. Joining with colleagues
who share my concern with government overspending, we are going to
reimpose those caps that we had in the 1980s and through the surplus
period of the late 1990s.
Another aspect of the solution is improving the honesty of government
accounting. I would like to mention, Mr. Speaker, a bill that I am
introducing to require the CBO, the Congressional Budget Office, and
OMB to include unfunded liabilities, the $73.5 trillion that we
mentioned, in their budget projections. So it is legislation that is
going to make us more aware of the fact that we are making more
promises than we can afford.
To put $73.5 trillion in perspective, it amounts to 7 years of the
gross domestic product of the United States, more than 30 times the
President's proposed budget for this year; and it means that with 290
million Americans divided into that $73.5 trillion, every man, woman
and child has a responsibility for more than $250,000. Some people have
said that we should not worry so much about unfunded liability because
it can be wiped out by reforms. I think that is the challenge. Are we
going to do reforms this election year? Or are we going to put off
those reforms until maybe after the election and try to do them next
year?
{time} 2215
Congress and the President I think can redeem their record on
spending to a large degree if they push hard for Social Security reform
after this election. But it remains to be seen whether we will take on
that fight, and it will be a fight because steeply progressive taxes
and big government have been combined to form a powerful electoral
bloc.
Here again that bloc is 50 percent of earners in this country pay
less than 1 percent of the income tax; and, as with health care,
somehow everybody has got to participate in the taxes that run this
government if they are going to look at their demands for increased
government and know somehow that it affects their particular
pocketbook. The same is true with Medicare and Medicaid. Somehow the
reasonableness of those that are frugal in demanding additional health
care need to have some kind of reward and those that are wasteful need
to have some kind of scolding.
The old system, of course, before Medicare and Medicaid was that one
worked hard and they earned money and they wanted to save that money,
so they were very careful how they spent that money for health care and
they asked the doctor, look, how much is this going to cost and why are
you charging me this much on the bill? But when there are third-party
payers, when government is paying the full bill, it is easy not to be
as conscientious in demanding accountability from health care
providers.
Empires decline when they fail to act on fundamental problems; and I
wonder at times, Mr. Speaker, if we are not too distracted by endless
scandals and horse-race politics of our media culture to grapple with
what is best for our country. Too often, politics get reduced entirely
to who benefits and who pays, but there have been times when I have
been both surprised and inspired by the American people, by the people
in this Chamber and the Senate and the White House who say we have got
to come to grips with real problems that are facing this country.
Despite the fact that it would sometimes seem easy to say, well, let us
tax the rich and spend more money for the less rich and divide the
wealth, I think it is important to remember that this country was built
on a foundation and a motivation where those individuals that worked
hard and saved, that tried and invested and that were careful with
their spending ended up better off than those that did not.
So as we come with legislation that sometimes on the surface seems
attractive to divide the wealth, I think we have got to be very
careful; and this gives me help and hope.
As Lincoln concluded at Gettysburg ``that this Nation under God shall
have a new birth of freedom and that government of the people, by the
people, and for the people shall not perish from the earth,'' I think
he was right because we are going to come to grips with these problems.
It is just important that the American people this year remind their
elected representatives. In fact, I say to the American people when
they go to debates to ask those individuals running for President,
those individuals running for the U.S. Senate, those individuals
running for the U.S. House of Representatives, ``What bill have you
sponsored or signed on to to save Social Security and to save
Medicare?'' Do not let them give a lot of fast talk, but ask exactly
what are they going to do to deal with this huge unfunded liability
that this country is facing, where promises have far exceeded our
ability to pay for them.
____________________