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Social Security Testimony Before Congress |
Testimony by James B. Lockhart III Deputy Commissioner, Social Security Administration Hearing before Senate Committee on Aging Strengthening Social Security: "Can We Learn From Other Nations?" May 18, 2004 Thank you Mr. Chairman and Members of the Committee for inviting me to testify today about strengthening Social Security and what we can learn from experiences in other nations.� Learning from other countries is one of the reasons Social Security is actively involved in three international social security organizations. I also want to thank you again, Mr. Chairman for hosting a series of events last month in Idaho during which we discussed Social Security's future.� Achieving "Sustainable Solvency" is one of the Social Security Administration's four strategic goals. As President Bush and many of his predecessors have said, Social Security has been one of the most successful government programs.� Social Security is the foundation of well being for the elderly, the disabled and their families.� This may be why in a poll conducted by the National Archives, the Social Security Act was recently voted one of the ten most important documents in American history, sharing that distinction with the Declaration of Independence and the Constitution among others.� The Social Security Act and the Civil Rights Act were the only two pieces of legislation selected. Social Security continues to be one of the most successful government programs. Last year SSA paid over $470 billion in benefits to 47 million retirees, survivors, and disabled individuals and their dependents.� Social Security is much more than a retirement program.� Thirty percent of our beneficiaries are disabled or survivors -- widows, widowers and children.� Nearly 157 million American workers paid Social Security taxes last year.� They, their families, and the millions joining the system every year, are relying on Social Security for a major portion of their future financial security. Hearings like this, events like those in Idaho and reform lessons learned from other countries will help create a bipartisan consensus for reforms to keep Social Security successful for future generations. In my testimony I will review the Social Security program's financing and discuss the long-range status of the trust funds, particularly in terms of the changing demographics that will have a major impact on the program.� I will also discuss how many other nations face similar demographic issues and how some of those nations implemented reforms in their social insurance programs to address those issues.� Finally, I will discuss what lessons can be learned from the foreign experience. It is important to keep in mind that every
country has its own unique circumstances and that what works best in one
country may not be the best solution for the Social Security Financing The American Social Security program is financed primarily through payroll taxes.� Workers in covered employment, their employers, and self‑employed people are taxed on earnings up to an annual maximum amount.� The maximum amount, $87,900 for 2004, increases automatically in proportion to increases in average covered wages.� The combined employee-employer tax rate is 12.4 percent of earnings. Social Security is financed on a pay-as-you-go basis, under which most of the Social Security taxes paid by workers are immediately paid out in benefits.� Trust fund reserves serve as a contingency when program outgo exceeds income.� By law, trust fund assets that are not immediately needed to pay benefits are invested in special securities of the United States Treasury.� These securities earn interest which is paid in the form of special issue Treasury bonds. Status of the Trust Funds Social Security's trust funds grew by over $150 billion to $1.5 trillion last year.� Over half this growth was from interest on the trust funds.� But today Social Security faces serious long-range financing issues.� Under the 2004 Trustees Report's intermediate assumptions, it is projected that Social Security trust fund assets will be exhausted in 2042.� At that point, just prior to my two children's retirements, the incoming payroll taxes would cover only about 73 percent of scheduled benefits.� More importantly, the Trustees point out that pressure on the trust funds will begin in 2008, when the first Baby Boomers reach early retirement age.� Beginning in 2018, the trust funds are projected to begin paying out more in benefits than is collected in payroll taxes.� At that time, in order to pay benefits, the program will begin to rely on trust fund interest income and redemption of government bonds, which will put pressure on government finances.� So as you can see, the financing challenges faced by the program need to be addressed sooner rather than later.� As the Trustees said in their 2004 report, "The projected trust fund deficits should be addressed in a timely way to allow for a gradual phasing in of the necessary changes and to provide advance notice to workers.� The sooner adjustments are made the smaller and less abrupt they will have to be."� For example, the changes enacted to increase the retirement age in 1983 started last year -- 20 years later -- and will phase in over several decades.� Early action will also allow current workers plenty of time to properly plan for their retirement. Demographic Factors The reason Social Security is unsustainable
under current law is very simple - the aging of Looking just at retirees, the attached chart shows that in 1995 the ratio of workers to pensioners
was well over 2 to 1 in most of the developed countries.� By 2050, this
ratio is projected to fall dramatically to unsustainable levels in most
of these countries.� And in one country - As these data show, the world stands on the threshold of a great demographic sea change - global aging.� Just yesterday, the Social Security Administration sponsored a conference on global aging with some of the leading experts on the subject.� We are also now publishing a monthly newsletter of happenings in the international social security world. There are two forces behind global aging.� The first force is falling fertility rates --� people are having fewer babies, decreasing the relative number of younger people in the population.� The second force behind global aging is rising life expectancy.� People are living longer, thus enlarging the relative number of older people in the population.� Global aging is at different stages in different
countries.� As shown in the chart, the issue for Europe and For these reasons, the Reforms in Selected Countries Although Social Security reforms throughout the world have been complex and ever evolving, there are basically three major categories of reform:
The first two are the traditional reforms.� The Social Security payroll tax rate has been raised 19 times and the 1983 increase in the retirement age was a reduction in scheduled lifetime benefits.� As a country gets closer to a crisis, raising taxes or reducing benefits are the only choices. Many countries have decided to plan ahead
by prefunding future social security payments and investing those funds
in private sector securities to increase returns.� In some countries, such
as President Bush, in his State of the Union address this year, once again called for personal accounts for younger generations when he said, "Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account.� We should make the Social Security system a source of ownership for the American people." About 30 countries have implemented some type of personal account system as a component of their mandatory retirement insurance program.� In addition, several other countries have recently passed legislation or are considering reforms that include personal accounts. Now I would like to talk briefly now about
the experiences of six specific countries that have implemented reforms
to their systems.� These countries are the Let me begin with the The late 1980s saw an expansion of approved
options for personal account plans and the government actively encouraged
workers to opt out of the public system.� However, a series of scandals
in the "mis-selling" of these pension products and the abuse of a prominent
company's pension plan led to legislation to increase government regulation
and oversight.� In addition, other reforms were enacted to restructure
the second tier and tighten regulations and oversight of the pension industry.� These
reforms have increased participation in personal pensions by low wage workers
by providing greater investment options while capping administrative fees.� This
year, the In 1981, As the first country to transition from
a pay-as-you-go system to a system based upon a personal account approach, In 1993, in recognition of the demographic
changes, the Australian retirement system was reformed.� Thus, The second pillar is a mandatory personal account called the Premium Pension plan.� Both employers and employees contribute equally to the NDC account and Premium Pension.� The combined contribution rate is 18.5 percent of earnings (16 percent for the NDC and 2.5 percent for the Premium Pension). The Premium Pension accounts are privately managed, under public supervision, and can be invested in almost 700 domestic and foreign mutual funds.� Earnings are reported on an annual basis.� Recordkeeping and investing on behalf of licensed pension funds is carried out by the Premium Pension Agency, a regulatory authority.� Participants may choose to have the government manage their premium account balances instead of a private manager.� For those who fail to make any selection, there is a government managed default fund. Relatively low administrative costs are mandated.� Initial surveys indicate that many participants find the system to be complicated and feel that they are inadequately informed about the basics of the new system. The finances of the public pension system have rapidly deteriorated since 1999.� The government is now considering a package of reforms to the pension system that would significantly increase the tax contributions incrementally through 2017.� Simultaneously, benefits as a percentage of average salary would be gradually reduced.� The government is also proposing to increase its share of the national pension program expenditures.� At the same time, public skepticism in the viability of the pension system is growing and, as recent news reports indicate, many workers are not paying the required mandatory premiums into the system. In Fiscal pressures resulting from an aging population, combined with relatively early effective retirement ages and high replacement rates, prompted a series of pension reforms in 1992, 1999, and, most recently, in 2004.� This year, the government enacted two reform packages designed to address an estimated $10 billion shortfall in 2004.� The first of these reduced benefits by freezing the usual annual benefit increase and delayed the payment schedule of benefits from April 2004.� The second reform involved changing the way that pensions are calculated.� Effective January 1, 2005, a "sustainability factor" will be introduced into the pension benefit formula that will link the level of retirement benefits to the size of the workforce relative to the number of retirees.� As the "dependency ratio" rises, benefits are expected to fall from 53 percent of pre-retirement income to 46 percent by 2020.� Additional changes enacted in the March 2004 reform package include an increase in the statutory age for early retirement from 60 to 63 by 2008 and the elimination of credit years for time spent in school. Lessons Learned This brief review illustrates the diversity of responses to the challenge presented by global aging.� We can learn valuable lessons from international experience.� And I believe the American people want us to learn these lessons.� A recent poll by the Opinion Research Corporation reported that 60 percent of working age adults are not confident that Social Security will still exist when they retire.� The 25 to 44 year old group was the most pessimistic with 73 percent doubters.� Even 36 percent of near-retirees (those 55 to 64) were not confident that Social Security will be there when they retire. By looking at other countries that have made or are making reforms to their retirement systems, we can use their experience to improve decisions and avoid some of those same problems. The first lesson to learn is that Social Security reforms are inevitable.� Because of global aging, reforming social security systems is being discussed throughout the world.� As President Kennedy said in 1961, "The Social Security program plays an important part in providing for families, children, and older persons in times of stress.� But it cannot remain static.� Changes in our population, in our working habits, and in our standard of living require constant revision." The second lesson is the importance of acting sooner, rather than later, in beginning to implement reforms.� The experience of other countries shows us that strengthening social security programs takes a long time. The importance of early action is also highlighted
by the experience of continental Europe and A
third lesson is that, if personal accounts are established as part of a
plan to strengthen Social Security, it is important to keep administrative
costs in check.� Some countries, such as the In
the Another lesson we have learned from looking at the experience of other countries is the need to improve the public's general financial literacy.� Legislation passed by the Congress and signed by President Bush last December created the Financial Literacy and Education Commission, of which Commissioner Barnhart is a member.� The Social Security Administration has been active in promoting savings and financial literacy.� We have sponsored the "Save for Your Future" campaign with American Savings Educational Council to promote savings. A final lesson is that it is very important to help people understand the need for reform.� In many countries that I have discussed, reforms have been bipartisan and ongoing, no matter what political party is in power. Conclusion We live in an era defined by many challenges, but few are as certain as global aging and as likely to have such a large and enduring effect on the shape of national economies and the world order.� The developed and developing worlds must work together to engage this challenge constructively.� Putting off strengthening of our Social Security system will limit the possible choices available to us.� By taking action sooner, the changes to the program can be smaller and less abrupt.� Further, the sooner action is taken, the sooner confidence can be restored to the Social Security program. In conclusion, let me say we have much in common with many countries around the world as we face similar demographic challenges.� It is important to learn as much as we can from their experiences.� Mr. Chairman, I again commend you for holding this hearing and for your efforts in keeping this issue before the public and, especially, for your very strong leadership in the bipartisan effort to strengthen Social Security.� I will be happy to answer any questions you or the other Members have. |
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