[Congressional Record (Bound Edition), Volume 149 (2003), Part 14]
[House]
[Pages 18857-18860]
[From the U.S. Government Publishing Office, www.gpo.gov]




                            SOCIAL SECURITY

  The SPEAKER pro tempore (Ms. Harris). Under the Speaker's announced 
policy of January 7, 2003, the gentleman from Michigan (Mr. Smith) is 
recognized for 60 minutes as the designee of the majority leader.
  Mr. SMITH of Michigan. Madam Speaker, I am going to present sort of a 
tutorial on Social Security, and if my audience listens up, if they can 
stick with me for the next 25 or 30 minutes, they might know as much 
about Social Security as a lot of individuals in Washington, which is 
probably one of our most successful programs, but probably one of the 
programs that is most at risk as we continue to overspend, as we 
continue to have government take the surplus coming in from the Social 
Security taxes and spend them on other programs.
  Social Security is the largest Federal expenditure. As we view this 
chart, we can see Social Security is now spending 22 percent of the 
total Federal budget, 22 percent. This is more than defense, more than 
all of the discretionary programs of the 13 appropriation bills that we 
are agonizing over, more than all of the other entitlements put 
together, more than Medicare and Medicaid combined. Social Security is 
spending $475 billion this year in 2003.
  The risk to Social Security is that we are faced in the demographics 
of having the baby boomers retire. So 76 million baby boomers are going 
to start retiring in 2010, and that means they stop paying into the 
Social Security tax and they start taking out at the highest rate.
  Now, the next chart represents the predicament. As we see, the 
overall gross Federal debt between now and 2013 continues to increase 
to approximately $10 trillion in the next 10 years. Where the debt held 
by the public eventually, starting 10 years from now, diminishes a 
little bit, the overall debt is continuing to increase. And that is 
because government is borrowing every penny coming in in surplus from 
all the trust funds, from the Medicare Trust Funds, from the Medicaid A 
and B Trust Funds, from the Social Security Trust Fund, from the 
Federal Retiree Pension Trust Funds; government is taking this extra 
money, not saving it, but spending it on other government programs.
  So the challenge is, how is government going to pay this money back? 
In this case that we are talking about tonight, how is government going 
to come up with the money to pay back what is now $1.7 trillion that it 
owes Social Security, plus the unfunded liability of Social Security in 
the future?
  If we take how much money we would have to put in in investment 
accounts today, over and above the tax revenues coming in from Social 
Security, it would take $9 trillion invested today, and remember our 
Federal budget is about $2 trillion a year, it would take about $9 
trillion invested today to accommodate the demands and needs of Social 
Security if we are going to keep our current promises.
  This chart sort of represents in the short term surpluses that end 
about 2017; and the future deficits are in red at the bottom right hand 
of the page. This represents the trillions of dollars that are going to 
be needed in the future over and above tax revenues. So what do we do 
about it?
  One of the problems is that every time Democrats might suggest a 
solution, Republicans suggest, well, they are trying to ruin Social 
Security. More often, every time a Republican offers a solution, which 
have been several since I have been in Congress, starting in 1993, the 
Democrats have demagogued it the next election and scared seniors; and 
so everybody has sort of kept their hands off. They have been afraid to 
deal with this problem of saving Social Security.
  Let me go through some of these charts. Our pay-as-you-go retirement 
system will not meet the challenge of the demographic change. The 
demographic change is twofold: one, a slowing down of the birthrate and 
an increase in the length of time people live. So since more people are 
retiring, that means there are more people going to be taking out from 
Social Security than are putting into it. And make no mistake, there is 
no savings account with our name on it. There are no savings in Social 
Security. The money comes in from the Social Security FICA tax one week 
and within the next 10 days it is sent out to recipients.
  In terms of the demographics, in 1940 there were 42 people working, 
paying in their Social Security tax, for every one retiree. By the year 
2000, there were three people working, paying in their Social Security 
tax for every one retiree. And the estimate is, by 2025 there will only 
be two people working for every individual that is taking out Social 
Security benefits. So what we have done, of course, is increase the 
taxes on those working to make it tougher and tougher. So right now we 
have most

[[Page 18858]]

working people in the United States paying more in the Social Security 
tax than they do in the income tax.
  Insolvency is certain. The actuaries know how many people there are 
in this country and they know when they are going to retire. We know 
people will live longer in retirement. In 1934, the average age of 
death was 62, but the retirement benefits started for full benefits at 
65. So most people did not live long enough to collect Social Security. 
So the system went along very handily. And then people started living 
longer and longer, and today the average age of death is about 80 years 
old for a female and about 76 years old for a male. We know how much 
these individuals will pay into Social Security. We know how much they 
are going to take out.
  Payroll taxes will not cover benefits starting in the year 2017, and 
the shortfalls will add up to $120 trillion between 2017 and 2775. That 
means $120 trillion we are going to need over and above the tax 
revenues coming in for Social Security.
  I mentioned the $9 trillion. The $9 trillion is in today's dollars. 
If we came up with the $9 trillion today and put it in a savings 
account, that $9 trillion plus the interest on that savings account 
equals the $120 trillion between 2017 and 2075.
  Just to alert, Madam Speaker, Social Security right now is not a good 
investment. When we started in 1934, instead of all these people, after 
the Great Depression, going over the hill to the poorhouse, we decided 
to have enforced savings. So we came up with a program, FDR did, that 
said, Look, we are going to take some of your earnings today so that 
you have some social security of having some money coming in, not 
having to go to the poorhouse when you retire.

                              {time}  2145

  If you happened to retire in 1960, it took 2 years to get everything 
back that you and your employer put into Social Security. By 1980, it 
took 4 years after your retirement. By 1995, you had to live 16 years 
after you retired to break even on the money you paid into Social 
Security. And by 2005 it is going to be 23 years you have to live if 
you retire year after next. 2015 and all the way through 2025, you are 
going to have to live 26 years after you retire. Remember, in 1983 when 
we changed the Social Security law, the so-called Greenspan Commission, 
we said that we were going to index the retirement age upwards so that 
we have started going up to a full entitlement age of 67; and we 
started that last year, increasing gradually over the next 20 years, 
moving from 65 to 67 for the maximum income from Social Security 
retirement.
  Some people have suggested, well, the government has borrowed $1.3 
trillion of the surpluses that come in from Social Security. If 
government would just keep their hands off that extra money coming in, 
we would be okay. But I did this chart represented by these two red 
graphs to represent we would not just be okay. What government owes the 
Social Security trust fund, what we have borrowed since there have been 
surpluses coming into Social Security, we have borrowed $1.3 trillion. 
The shortfall, even after the repayment of the trust funds, is going to 
be $10 trillion. That is just to take us up to 2075. So huge problems 
of coming up with the dollars.
  And how do you do that? Do you raise taxes or do you cut benefits or 
do you increase borrowing? The system is stretched to its limits and 78 
million baby boomers begin retiring in 2008. Social Security spending 
exceeds tax revenues; the estimate is now 2017. It depends partially 
what happens to the economy in the next couple of years, whether that 
comes down to 2016 or not. And Social Security trust funds go broke, 
even if all the money borrowed is paid back, in 2037, although the 
crisis is going to arrive much sooner.
  Let me just explain a little bit why the crisis arrives in 2017. That 
is because there is not going to be any money to come up with to pay 
back the trust funds. There is no savings. The trust funds have been 
already spent on other programs. You either have to borrow more money 
or you have to increase taxes or you have to cut benefits.
  A lot of argument, should we be getting a better, a real return on 
the Social Security money paid in by American workers? When Franklin 
Delano Roosevelt created the Social Security program over 6 decades 
ago, he wanted it to feature a private sector component to build 
retirement income. Social Security in all of the literature sent out in 
those years 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 and private pension plans.
  Going to the archives, it is interesting, researching what happened 
to the debate on Social Security when it was debated in 1934 and 1935. 
The Senate actually said that it can be for savings and it would go 
into privately owned accounts where government could not own and 
control the money but individuals would own their own savings account 
but they could not take the money out of the account; but if they died, 
for example, before they reached retirement age, it would be their 
money that went into their estate. The House enacted a separate 
legislation that said, no, it has got to be a government account, 
everything comes into government, government then guarantees the 
payments that would go out to retirees. Then it went to conference 
committee. In conference committee, the negotiations went with the 
House version, so it became a government program with no personally 
owned savings account.
  I just think it is important, Madam Speaker, to mention that there is 
no entitlement to Social Security. It has gone before the Supreme Court 
twice now. On two different occasions, the Supreme Court has said that 
the Social Security taxes are simply a tax, the benefit program is a 
benefit program enacted by Congress, signed by the President, and there 
is no entitlement just because you pay in the Social Security tax.
  The diminishing returns of your Social Security investment, the real 
return of Social Security is 1.7 percent today. That is what the return 
is if you live the average age and you pay in the average payments in 
your FICA tax, you and your employer. The average return on that 
investment is 1.7 percent. For some workers, it is actually going to be 
negative. Minorities, for example, young black men die at an age of, I 
think it is 61 years old now. That means that they pay in most of their 
working life, but unless some money goes to their spouse, they do not 
take any money out. So minorities on an average have a negative return 
on the money they pay into Social Security. The average is 1.7 percent.
  But the marketplace, if you were to invest it in the marketplace, and 
in this chart I have a 7 percent real return, that means 7 percent over 
and above inflation, that is what the Wilshire 5000, the 5,000 stocks 
in the Wilshire index funds have returned between 1993 even with these 
last 3 bad years, still between 1993 and 2003 have returned a real rate 
of return of 7 percent, 7 percent over and above inflation.
  So how do we capitalize on some of that, that better return to start 
giving retirees something better than the bad investment now they have 
in Social Security, something closer to that 7 percent? The U.S. trails 
other countries in savings as far as its retirement system that allows 
individuals to own some of that money. In the 18 years since Chile 
offered the personal retirement savings accounts, 95 percent of Chilean 
workers have created accounts and their average return up till today 
has been 11.3 percent return. Again, compare that to what Social 
Security is giving workers in America, Madam Speaker, that is, a 1.7 
percent return. Among others, Australia has done it to allow personally 
owned accounts. Britain has allowed their workers to have part of their 
retirement in personally owned accounts. Switzerland and many other 
countries offer personally owned accounts that government cannot get 
their hands on.
  This chart just tries to emphasize that there is no Social Security 
account with your name on it. I wanted to quote a government source, 
the Office of Management and Budget, that

[[Page 18859]]

said when I was on the Committee on the Budget, testified that 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 
by raising taxes, borrowing from the public or reducing benefits or 
reducing other government expenditures. This was the OMB statement 
before the Committee on the Budget.
  Economic growth will not fix Social Security. Some people have said, 
well, if we can get the economy going, we will have enough revenue 
coming in to solve the Social Security problem. But because benefits 
are directly related to how much you are making, how much you are 
earning, so the more you make and the more you pay in, the more you get 
when you retire, so eventually it is going to catch up with you. I do 
this by these four blips. Social Security benefits are indexed to wage 
growth. When the economy grows, workers pay more in taxes but also will 
earn more in benefits when they retire. Growth. Makes the numbers look 
better now but leaves a larger hole to fill later. The administration 
has used these short-term advantages, I think, as an excuse to do 
nothing. I am not talking about the Bush administration; I am talking 
about the last four administrations that have found it easier to put 
off decisions on correcting and saving Social Security simply because 
it is a tough political issue. It is easy to go to seniors. We have 
almost two-thirds of our seniors now that depend on Social Security for 
most of their retirement income. So you can understand how it is easy 
to scare these individuals in an election. The demagoguery I think is 
unfair to the future of our kids and our grandkids who are going to 
have to come up with the tax money to pay future benefits.
  This Congress is a political body. We are not going to cut Social 
Security benefits probably. What we are going to do is cut Social 
Security benefits in a way you do not really realize they are going to 
be cut. Like when President Clinton came in, we cut Social Security 
benefits by increasing the taxes that you have to pay on the Social 
Security benefits that government pays you. Over the years, we have 
come up with gradually increasing the retirement age. We have come up 
with provisions where we increase the tax rate that you have to pay 
into Social Security to accommodate today's needs to pay current 
benefits. If you are going to depend on politicians to correct the 
problems for Social Security, without some pressure and some questions 
from constituents around the country in this next year's election, I 
hope everybody would ask the Presidential candidates, would ask every 
candidate for the U.S. House of Representatives, would ask the one-
third of the Senators that are going to run for reelection, what is 
your solution to save Social Security? It is easy for them to slide 
over and say, well, boy, we have really got to work on this, this is my 
top priority. Then follow up with a question, What is your priority? 
What is your solution?
  The biggest risk is doing nothing at all. Social Security has a total 
unfunded liability, as I mentioned, of over $9 trillion. The Social 
Security trust funds contain nothing but IOUs. To keep paying promised 
Social Security benefits, as I mentioned, the payroll tax will have to 
be increased by nearly 50 percent. The payroll tax will have to be 
increased by nearly 50 percent, or benefits will have to be cut by 30 
percent.
  This is a record of what we have done in the past. And what we have 
done in the past might be an indication of the dangers we face in the 
future. In 1940, we had a rate for Social Security on your FICA tax of 
2 percent on the first $3,000 you made. That is 1940. And so the 
maximum tax was $60. By 1960, we decided, well, we do not have enough 
money to pay benefits, we are going to increase the taxes again; so we 
increased it to 6 percent on the first $4,800 for a maximum of $288. By 
1980, it got up to 10.16 percent. The base was up to $25,000. Now the 
rate in 2000 is 12.4 percent. In 2000, it was $76,200. Today it is 
$82,000 in terms of the base that you pay that 12.4 percent on.
  As we are going to see by this next chart, most workers in America 
pay more now in the Social Security tax, as we have just continued to 
up and up the tax and up and up the base that that rate is applied to, 
so 78 percent of Americans pay more in the Social Security tax than 
they do pay in the income tax.
  If nothing else, it should be of pocketbook interest for Americans to 
say, look, do not dig yourself the kind of hole where you are going to 
have to increase taxes on us again, or do not dig yourself the kind of 
a hole where you are going to dramatically play creative financing 
games to lower our benefits.

                              {time}  2200

  Personal retirement accounts, they do not come out of Social 
Security. So they become part of their Social Security retirement 
benefits. A worker will own his or her own retirement account and limit 
it to safe investments that will earn more than the 1.9 percent paid by 
Social Security.
  I said 1.7 percent. It is between 1.7 and 1.9 percent.
  So can we come up with a way that does not give the snake oil 
salesman on Wall Street the opportunity to sell bad investments to 
individuals that still might own that retirement account? And the 
answer is yes. Here in Congress we have what we call a Thrift Savings 
Plan. We limit the investments that a Member of Congress can make, and 
they are sort of a savings investment plan that they take some of the 
salary out, the employer puts some of the money in, and it is limited 
to certain investments. It is limited to index stocks, index bonds, 
government bonds, index small cap funds, and they just added a foreign 
investment, but they have their choice of balance between those 
investments.
  And that kind of limitation is what we need in any Social Security 
bill that allows individuals to own their own account. We have got to 
say, look, they can only take this out for retirement, but it is going 
to be their money. If they die, it goes into their estate, unlike the 
current situation where they might get funeral expenses, but if they 
die without a wife or without a family, then they are going to have 
problems.
  I think it is important also as we face this next election year, and 
Social Security is going to be part of the debate this next election, 
from Presidential debates on down, Social Security is coming to the 
head with 76 million Americans retiring, starting to retire in just 4 
years.
  But do the Members know what else is going to happen in 4 years? The 
part of the Social Security program, the trust fund that pays benefits 
for disability and for beneficiaries for the spouses of workers, that 
trust fund is going to go broke. There is not going to be enough money 
in that trust fund in another 5 years to pay benefits, and that is a 
huge problem. Personal retirement accounts offer more income.
  Cato is a think tank organization, sort of libertarian. They are for 
personal retirement investment accounts, and Cato, in estimating the 
potential returns of taking 12.4 percent of a person's income that is 
making $36,000 a year from Social Security, that person would now make 
$1,280 a month if they had the average return of 7 percent a year over 
and above inflation, which has happened in the Wilshire 5000 index fund 
in the last 10 years. They would have $6,500 a month rather than the 
$1,280.
  On the Committee on the Budget, I chaired a bipartisan task force on 
Social Security. So for over a year we met with the experts throughout 
this country on what the problem was on Social Security and what the 
potential solutions were that might best accommodate the shortcomings 
of Social Security.
  One thing we found out is the longer we put off a solution, the more 
drastic a solution, and that goes back to the fact that Social Security 
surpluses are going to run out someplace between 2015 and 2017. So if 
we started using that surplus money today to get a better return, then 
it is easier than waiting several years or even waiting until a 
disaster hits and there is no more surplus coming in.

[[Page 18860]]

  A couple points we came up with in the bipartisan task force, and 
both sides agreed that private-owned accounts have to be part of the 
consideration, but we thought that guaranteed-return securities and 
annuities can be used with personal accounts as part of an investment 
safety net. So we can go to investment firms right now that will 
guarantee more than the 1.7 percent Social Security is paying that 
could result in an absolute guaranteed retirement income of more than 
what Social Security is paying.
  And the problem is, how do we make this shift from a pay-as-you-go 
program, using every dollar that is coming in from the FICA Social 
Security taxes and shift it over to a personal investment account so we 
take that money away from government? That is the challenge, but the 
longer we put it off, the more drastic the solutions are going to have 
to be.
  Another unanimous agreement was a universal Social Security survivor 
and disability program needs to be maintained. So nobody, nobody in any 
proposal that has ever come before Congress is suggesting that we 
privatize the disability part and the survivor benefit part of this 
program. In fact, most of the proposed legislation starts out at only 
taking 2 to 2.5 percent of their income out of the 12.4 percent taxes 
that are being paid in that could become owned by the worker and 
limited to safe investments.
  And, thirdly, 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, and I think that is 
reasonable. We have got to have that kind of an insurance program. So 
part of their Social Security taxes are insurance. That part of the 
insurance that is spread across America to all workers should not be 
touched and should not be changed and, in fact, should be guaranteed, 
if necessary, for money coming out of the general fund.
  Six principles of saving Social Security: protect current and future 
beneficiaries; allow freedom of choice, and that means that if they do 
not want to go into any private investment account, they do not have 
to. We can have a program that if they do go into those investment 
accounts, they can be guaranteed as least as much as Social Security 
would otherwise pay them.
  Preserve the safety net. Preserve the safety net for beneficiaries, 
preserve the safety net to make sure that nobody in America is going to 
be impoverished and have less than they would have had under the old 
Social Security program. Make Americans better off, not worse off. We 
can do that if we start getting a real return on investment of that 
money coming in from Social Security and create a fully funded system 
and no more tax increases. If anything, let us start working at taking 
less money out of the worker's pocket to accommodate the Social 
Security system in this country, and we can do that. We can do that by 
getting a real return and a better return instead of taking all the 
surplus dollars that are coming in and spending them for other 
government programs.
  I will be introducing my Social Security bill in 1 month when we come 
back, and that legislation is going to deal with some problems that we 
now have in Social Security. It is going to deal with more fairness to 
women. It is going to provide that women that decide to stay home with 
kids under 6 years can accrue benefits at the average of their total 
working career for those years that they stay home with children under 
six. It is going to provide an increase in benefits for surviving 
spouses that now are asked to live on one income instead of two incomes 
if their husband dies.
  Several other provisions that we are looking at suggest that if they 
do have a personal savings account and they select the option to have a 
personal savings account, they would add what the wife makes in terms 
of 12.4 percent of her income that is allowed to be put in a personal 
savings account, add what goes into the personal savings account from 
the man and the wife and add them together and divide by two so each 
spouse has an equal amount in that personal retirement savings account.
  Madam Speaker, I think the legislation is going to be interesting and 
challenging. I hope we can move ahead with real debate and not 
demagoguery.

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