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[109 Senate Hearings]
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S. Hrg. 109-24
SOCIAL SECURITY: DO WE HAVE TO ACT NOW?
=======================================================================
HEARING
before the
SPECIAL COMMITTEE ON AGING
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
FIRST SESSION
__________
WASHINGTON, DC
__________
FEBRUARY 3, 2005
__________
Serial No. 109-2
Printed for the use of the Special Committee on Aging
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SPECIAL COMMITTEE ON AGING
GORDON SMITH, Oregon, Chairman
RICHARD SHELBY, Alabama HERB KOHL, Wisconsin
SUSAN COLLINS, Maine JAMES M. JEFFORDS, Vermont
JAMES M. TALENT, Missouri RUSSELL D. FEINGOLD, Wisconsin
ELIZABETH DOLE, North Carolina RON WYDEN, Oregon
MEL MARTINEZ, Florida BLANCHE L. LINCOLN, Arkansas
LARRY E. CRAIG, Idaho EVAN BAYH, Indiana
RICK SANTORUM, Pennsylvania THOMAS R. CARPER, Delaware
CONRAD BURNS, Montana BILL NELSON, Florida
LAMAR ALEXANDER, Tennessee HILLARY RODHAM CLINTON, New York
JIM DEMINT, South Carolina
Catherine Finley, Staff Director
Julie Cohen, Ranking Member Staff Director
(ii)
?
C O N T E N T S
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Page
Opening Statement of Senator Gordon Smith........................ 1
Opening Statement of Senator Herb Kohl........................... 2
Opening Statement of Senator Thomas Carper....................... 3
Opening Statement of Senator Bill Nelson......................... 5
Opening Statement of Senator Jim DeMint.......................... 5
Opening Statement of Senator Mel Martinez........................ 6
Panel I
Douglas Holtz-Eakin, director, Congressional Budget Office,
Washington, DC................................................. 7
David Walker, comptroller general, Government Accountability
Office, Washington, DC......................................... 22
Panel II
David C. John, research fellow, Thomas A. Roe Institute for
Economic Policy Studies, The Heritage Foundation, Washington,
DC............................................................. 61
Robert L. Bixby, executive director, The Concord Coalition,
Arlington, VA.................................................. 73
John Rother, director of Policy and Strategy, American
Association of Retired Persons, Washington, DC................. 112
APPENDIX
Prepared Statement of Senator Larry Craig........................ 131
Prepared Statement of Senator Hillary Rodham Clinton............. 132
Prepared Statement of Senator Susan Collins...................... 132
Statement submitted by National Association of Chain Drug Stores. 134
(iii)
SOCIAL SECURITY: DO WE HAVE TO ACT NOW?
---------- --
THURSDAY, FEBRUARY 3, 2005
U.S. Senate,
Special Committee on Aging,
Washington, DC.
The committee convened, pursuant to notice, at 2:06 p.m.,
in room 628, Dirksen Senate Office Building, Hon. Gordon H.
Smith (chairman of the committee) presiding.
Present: Senators Smith, Martinez, DeMint, Kohl, Lincoln,
Carper, Nelson, and Clinton.
OPENING STATEMENT OF SENATOR GORDON SMITH, CHAIRMAN
The Chairman. I will call to order this hearing of the
Senate Special Committee on Aging.
Today's hearing is its first on Social Security in the
109th Congress. This is the beginning of a series of hearings
this committee will hold on Social Security in the coming
months. Anyone who listened to the State of the Union Address
knows that this is Topic A on the Hill right now.
It is with great hope that we convene as colleagues to
examine this program, for we are truly at a unique crossroads
as a nation. Social Security has been the most successful
endeavor by government in attempting to assure income security
for the elderly and the disabled and no other program has
served the nation's seniors so effectively for so long.
Now itself at age 65, Social Security is a mature program,
and as with anything that has evolved over so many years and
touched the lives of so many Americans, the complexity of
determining how to assure its continuance as an effective base
of retirement and disability income for future generations
cannot be understated.
Social Security is the cornerstone of the nation's multi-
faceted retirement system, and as we will hear from the
exchange among our witnesses today, how best to proceed
involves more than examining how two trust funds can be brought
into balance over the next 75 years. The first of the baby
boomers are only a few years from entering the ranks of senior
citizens and the challenges that their swelling numbers will
place on this and other vital programs of government are
enormous.
The President's willingness to confront these issues, to
take the lead, gives us a rare and perhaps small window of
opportunity to set partisan differences aside, wherever
possible, and attempt to achieve what many in recent years have
felt was unreachable, greater retirement security not just for
today's seniors, but for our children and our grandchildren.
I am pleased that we are starting off this series of
hearings with the heads of Congress' own support agencies. CBO
and GAO have been reviewing and studying the problems of Social
Security in a nonpartisan fashion for many years and their work
has been and remains a vital tool in assisting the Congress in
its consideration of these issues.
Before we proceed, I am pleased to turn to my colleague,
the ranking member of this committee, Senator Herbert Kohl of
Wisconsin, and I know he has some remarks of his own. Senator
Kohl.
OPENING STATEMENT OF SENATOR HERB KOHL
Senator Kohl. I thank you, Mr. Chairman, and we welcome our
distinguished witnesses here today.
Today, this committee will address the issue of Social
Security, which the President pushed to the very top of the
national agenda last night in his State of the Union address. I
want to make very clear that while Social Security faces
financial challenges in the future, it is clearly and
indisputably not broke. Even using the most conservative
estimates on economic growth for the next 40 years, Social
Security will continue to be able to pay full benefits to
seniors that have earned and deserve those benefits.
It is important to remember that Social Security has been
one of the most successful programs, as Senator Smith said, in
our nation's history. This program has reduced poverty among
the elderly from what it was in the 1930's, almost 50 percent,
to 10 percent today. It has helped seniors live out their
retirement years in more comfort and security than otherwise
would have been possible or even dreamt of. So as we work to
strengthen Social Security, we need to be careful to mend it
and not to break it.
We have all heard the arguments that Social Security will
be broke, bankrupt, and not able to pay benefits to future
retirees, but factually, that is not so, for even if we did
nothing to fortify the program, which, of course, is not an
option that we intend, but even if we did nothing, Social
Security would be able to pay 78 percent of benefits in the
year 2052. I believe that CBO will confirm that very important
fact today.
We need to take steps to strengthen and mend Social
Security so that its promise of a secure retirement is just as
real for seniors in the future as it has been for seniors up
until today. But those who want to radically change Social
Security need to clearly explain why we should so demonstrably
alter a program that has been so successful and has kept so
many seniors out of poverty over the years.
It is also important to point out that under the
President's proposal, as has been explained so far, people are
not given a choice between keeping what they have today or
starting new private accounts. But whether you choose a private
account or not, the President's plan apparently requires
significant cuts in the guaranteed benefit that seniors have
come to rely on in their retirement.
There are a variety of options to choose from to make
Social Security solvent far into the future. We need to start
considering those options so we can protect Social Security for
the seniors of today and tomorrow. We need to have an honest
dialog that gives us the real picture of Social Security's
finances and challenges. We look forward to this hearing with
the hopes that we can begin to accomplish exactly that.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Kohl.
Senator Carper, do you have an opening statement?
OPENING STATEMENT OF SENATOR THOMAS CARPER
Senator Carper. I do, Mr. Chairman. Thank you very much. It
is good to be here with you and Senator Kohl and see our
witnesses here. We look forward to your testimony. I am going
to be called out to another meeting here in just a few minutes,
but I want to hear at least the beginning of your remarks, so I
will be brief.
I was elected to the U.S. House of Representatives in 1982
and was sworn in on January 3, 1983. One of the first things I
learned as I was looking for the men's room was that we had a
crisis with regard to Social Security, not a long-time
challenge, which is what I think we face today with respect to
Social Security, but a real crisis. The system was going to run
out of money soon if we did not act.
Ronald Reagan was President then, and a year or so before I
was elected, he and Tip O'Neill got together on an idea. They
created a true bipartisan commission and their Commission, I
think, with a number of members appointed by the President and
at least as many members, maybe even more members appointed by
the Democratic leaders of the House and the Senate. You may
recall that those members included Alan Greenspan, who I think
was the Co-Chairman of the Commission. They included Senator
Bob Dole, my colleague Claude Pepper from Florida, and a number
of other wise men and women.
They came back to us in 1983 with a whole laundry list of
recommended steps to take to shore up Social Security well into
the 21st century, and very much in a political environment, a
highly charged political issue, we adopted those
recommendations almost lock, stock, and barrel.
The outcome of those actions with Social Security was it
was strengthened, as Senator Kohl says, well into this century,
to probably the middle part of this century.
We have had an experience with another bipartisan
commission more recently that was created on the heels of 9/11
and chaired by Governor Tom Keane and by my former colleague in
the House, Congressman Lee Hamilton, a highly regarded
Republican and Democrat, surrounded by folks who were Democrat
and Republican, selected by the President and some by our
Democrat leaders, but they did great work, I think, for this
country, and led us through last year, literally an election
year, certainly a highly charged election year, to a consensus
around the steps that we needed to take, 40-some
recommendations. In the end, we adopted almost all of them.
I don't know if maybe we couldn't take a play out of the
playbook of a couple of really good politicians, Ronald Reagan
and Tip O'Neill, in this decade and apply it, again, not to a
crisis but to a challenge that we face, a long-term challenge
that we face in Social Security, and take a page out of our
playbook from last year where we created the 9/11 Commission.
I don't know that Democrats or Republicans or any others
should be knee-jerk opponents of creating private accounts, but
if we are going to do that, or examine that or support that, I
think we need to agree on a couple of basic principles and one
of those is we are not going to do so in a way that increases
our nation's debt. It is all well and good we talk about giving
young workers the opportunity to set aside monies to save for
their retirement, but at the same time, increasing the debt,
the burden of debt that they are going to inherit, is not what
we should be about.
Further, I don't believe we should be doing this at a time
and in a way that would reduce the benefits for those senior
citizens who are going to be looking for them, either now or a
few years down the road.
Let me close with this, Mr. Chairman, if I could. I have
just come from a meeting where folks were discussing options if
we are ever to further explore not only how to shore up Social
Security well beyond the middle of this century, but also to
allow people to either establish accounts that are add-ons,
which is what I, frankly, favor, or some would suggest a carve-
out.
Among the approaches that have been suggested, I think
Senator Lindsey Graham has suggested that we help put Social
Security on a sounder footing and enable a new benefit by
raising the cap that now exists. We pay the payroll tax on
income up to about, I want to say $90,000, but it has been
suggested that we increase that. I think I have heard Chairman
Greenspan talk about whether or not we should apply the CPI,
Consumer Price Index, to the annual benefit and use that as the
annual benefit increase each year instead of the wage index.
I think President Bush said last night in his address, ``I
don't know if it was Congressman Tim Penny, my former
colleague, good friend, or former Senator Moynihan about
indexing the full retirement age with life expectancy.'' As we
live longer, live healthier lives, maybe we could do that.
Someone suggested at a lunch meeting where I was that maybe
we should consider allowing Social Security to invest certainly
not all or not the lion's share of the trust fund monies in
equities, not just in U.S. Treasury obligations, but some
portion could be in equities, as well, which is what we do with
our pension funds in the State of Delaware and, frankly, in a
lot of other places.
So those are all things that are on the table. I wanted to
put them on this table, Mr. Chairman and my colleagues, and I
thank you for the chance to do that and we welcome you today.
Thank you.
The Chairman. Thank you, Senator Carper. I don't think you
put anything on the table that the President didn't put on the
table last night.
Senator Nelson, you arrived next. Do you have an opening
statement?
OPENING STATEMENT OF SENATOR BILL NELSON
Senator Nelson. Speaking of that, I wish that our
distinguished panel, who I have had the pleasure of hearing
both of you in these past couple of days, might clarify for us
on what was changed in what the President said and what the
White House put out with regard to what had been put out by the
White House previously in the press. We don't know the details
of the President's plan, but some additional information was
released yesterday and I would like that to be filtered through
the eyes of both of you and give us your interpretation and how
that would affect the ultimate final product.
It is no secret, Mr. Chairman. I have made a couple of
fairly definitive statements this week, both in Florida and
here on the Senate floor, that I am not going to support
anything that is going to be a huge transfer of new debt out of
the Social Security Trust Fund, nor am I going to support
something that will have a diminution of the benefits. Now, I
agree that everything ought to be on the table and if
everything is on the table, then we can start realistically
picking and choosing.
I will just close by saying that I, too, was a Member of
Congress when one of the finest examples of bipartisanship has
ever been rendered in American history, and that was when
Ronald Reagan and Tip O'Neill decided that they were going to
save Social Security in the early 1980's. They appointed this
Commission, and it was bipartisan, and as a result of that,
they came to an agreement and then they came to another very
significant agreement, that nobody was going to play ``gotcha''
politics and that there was not going to be used the final
result, which was a give and take in the process of compromise,
otherwise known as consensus building, that they were not going
to use that to someone's disadvantage in the coming election.
They honored that agreement and that is why we had the saving
of Social Security back in the 1980's.
Thank you, Mr. Chairman.
The Chairman. Thank you.
Senator DeMint.
OPENING STATEMENT OF SENATOR JIM DEMINT
Senator DeMint. Mr. Chairman, I really appreciate you
holding this hearing. Obviously, the timing is perfect, as the
President threw out a challenge to us and to the Nation last
night to fix Social Security. The difficulty has been that
there are so many different understandings of Social Security,
how it works, the condition it is in. In groups that I speak
to, it continues to amaze me, even people in Congress who have
a completely different view of things like the trust fund and
how the trust fund is going to pay for the program.
I appreciate the folks who turn the numbers here to talk to
us and I would hope you would speak to us in as clear of terms
as you possibly can and correct me if I am wrong.
My understanding is that within about three years, and
maybe CBO has a little different numbers, but within three
years, this Senate and its 10-year budget forecast will have to
begin to include billions of dollars that go from the general
fund to supplement Social Security benefits, and I think you
need to tell us if that is true. There are so many people here
who seem to think we can still put this off for decades when,
if in 2018 or maybe it is 2020, I think the first year it is
$16 billion, the next year it is $30-something billion, and
within a relatively short period of time, we are talking
hundreds of billions of dollars a year that we have to take
from the general fund to supplement payroll taxes in order to
pay benefits. I hope I am wrong, but if you gentlemen are here
to tell us what the numbers are really like, I hope you will
straighten that out.
I hope you will also explain, again, if I understand it
correctly, that the Social Security Trust Fund is merely a
bookkeeping of how much money that has been borrowed from the
Social Security and spent on other things, that there are no
real assets in the Social Security Trust Fund, that there are
no assets that can actually pay a benefit, that we have to make
up every dollar in the trust fund with an exact replica from
the general fund. It is one pocket to another.
So I think if you can help us clarify the problem, and I
agree with my colleague, Senator Carper, that all ideas should
be on the table for a solution. But Social Security is a
promise we should keep. It is not like another government
program that we make up and start spending something on. This
is money that we have taken from people over the years in
return for the promise of some security in their retirement.
I don't think the problem with Social Security is that the
benefits are too high now. I don't think that the problem is
that the taxes are too low. From the math that I have seen on
this, if we could even save half of what people have been
putting into Social Security, that even the lowest-income
American worker would be a millionaire, if not close to it, if
it was actually saved and invested in a government bond. That
may not be exactly correct, but I know there would be a lot
more money than there is now.
But the first step in solving a problem is realizing we
have one, and if you could help us clarify that today, I think
you would do a great service to us and to the country so that
we then, as colleagues, could sit down and say, we do have a
problem, and when that problem begins is actually in three or
four years. Then, I think we can put our best ideas together
and come up with something that works for the future of this
country.
Thank you, Mr. Chairman. I yield back.
The Chairman. Thank you, Senator DeMint.
Senator Martinez.
OPENING STATEMENT OF SENATOR MEL MARTINEZ
Senator Martinez. Thank you, Mr. Chairman. I wanted to
thank you and Senator Kohl for holding this hearing and I also
wanted to just thank you for allowing me to be a part of this
committee. I am looking forward to serving here with you and to
dealing with the important issues of aging in America, many of
which I have been interested in for some time, particularly
housing as people age.
I also want to say it has been a pleasure in the past to
work with Mr. Walker and I look forward to hearing from you
today, as well.
Mr. Chairman, I believe that the solvency of Social
Security affects all Americans in every walk of life. I do
believe that there is uncertainty regarding the funding for
Social Security and I look forward to hearing the testimony
here today on the issues before us and working with the
committee in a bipartisan fashion to take steps that will
perhaps help guide Social Security toward a solid financial
footing and ensure it be there for the future.
I think it is also vitally important that no matter what
steps we take, as Senator DeMint was just saying, that we keep
the promises made to seniors, those that are currently
collecting Social Security benefits.
I was so pleased last night for President Bush to speak so
clearly to the fact that those that are 55 years of age and
older will see no change and that our sacred trust and sacred
bond to them will be kept, and whatever we do to secure and
ensure the system there for a future generation, that it
doesn't impact them.
Tomorrow, I am going to be in Florida visiting in Sun City
Center, one of our large retirement communities, with my foster
parents, dear people to me who took good care of me at a time
in my life when I was in desperate need of help. For them in
their years of now vulnerability to illness and what not, they
and people like them don't need to worry. It isn't fair to say
that they are threatened or that they are under some sort of a
threat to lose their benefits or have a change that is going to
dramatically impact their lives. That is just not what we are
about to do or we are talking about doing or what the
President's plan, I think, clearly in any way will imply.
I think another thing that I would like to stress as we
delve into this debate is that it doesn't appear to me, as I
have studied the issue, that doing nothing is responsible.
Simply saying there is not a problem, we will deal with it, or
someone else will deal with it another day at another time,
that is not an acceptable or really a responsible track to
follow.
So I would look forward to hearing from the witnesses today
and then with my colleagues on both sides of the aisle, working
toward crafting, as I think Senator Nelson has stressed so
appropriately, in a bipartisan way a solution to this problem
so that we can ensure a safe and strong retirement for the next
generation, as well.
The Chairman. Thank you, Senator Martinez, and we will have
some housing hearings, as well, so we look forward to those.
Ladies and gentlemen, our first panel consists of Douglas
Holtz-Eakin. He is the director of the Congressional Budget
Office here in Washington, DC. He will be followed by David
Walker, comptroller general of the Government Accountability
Office, also here in Washington, DC.
Doug, you are up first.
STATEMENT OF DOUGLAS HOLTZ-EAKIN, DIRECTOR, CONGRESSIONAL
BUDGET OFFICE, WASHINGTON, DC
Mr. Holtz-Eakin. Mr. Chairman, Senator Kohl, members of the
committee, thank you for having the Congressional Budget Office
here today to discuss this important issue.
In my opening remarks, I thought I would focus on three
things. I will spend a few minutes discussing the outlook for
Social Security under current law so that in the interests of
helping Senator DeMint, we can have the same sets of facts at
our disposal, and then set the problem in the larger context of
budgetary pressures facing the United States and economic
policy issues going forward. Finally, I thought I would close
with a few illustrative examples of the relative impacts of
moving sooner versus later in addressing the Social Security
financing problem.
The outlook for Social Security under current law is in the
diagram before you. The dotted line are dedicated receipts into
Social Security. At the moment, those receipts lie above the
outlays for benefits to retirees. Beginning in 2008, the
leading edge of the baby boom generation will be eligible to
retire. Shortly thereafter, the surplus of receipts in excess
of outlays which are currently available to the remainder of
the Federal budget will begin to diminish, and at that point,
the cushion provided by the Social Security program will
diminish thereafter until roughly 2020, at which point the
system will take in approximately as much as it sends out.
Dedicated taxes in will match benefit payments going out.
In the decades to follow, under law, the accounting
mechanism called the trust fund will indicate that benefits may
be paid. The benefits paid will exceed receipts coming in. That
gap will be made up by funds provided from elsewhere in the
overall Federal budget, whether they be lower spending, higher
taxes, or borrowing from the public, until in 2052, under our
estimates, the trust fund will exhaust. There will no longer be
the authority to pay full benefits. There will be an across-
the-board cut of roughly 20, 22 percent in our estimates.
At that point, at least some form of the program is
sustainable indefinitely, where benefits are paid out equal to
dedicated taxes coming in for the remainder of the current law
scenario. That, of course, does not match expectations for
benefits as scheduled under law, if we go to the next chart.
You can see that under current law, outlays for benefits,
benefits scheduled under current law, those that would be
calculated given individuals' working histories and payable
under the program, exceed dedicated revenues for the
foreseeable future. In terms of the magnitude of the problem,
that is in the eye of the beholder. It is inevitably the case
that with the outlays above the revenues, one must somehow add
up that gap, year by year, over longer horizons, and most of
the computations of the size of the Social Security problem are
some variant of that calculation.
In terms of when it hits, that, of course, depends on when
one views the pressures as becoming most pertinent, whether it
was when the surplus begins to diminish, whether it is the case
when cash-flow deficits begin, or whether it is the case when
automatic benefit reductions might come into play.
Finally, there are at least two different notions of
``fixed'' that float around in this discussion. From the broad
budgetary point of view, one notion of fixed would be when
those two lines coincide, so that Social Security as a stand-
alone program for the indefinite future would be able to
finance itself and would require no help from the remainder of
the budget. Alternative measures of fixed look at measures of
trust fund balance, which may or may not also necessitate some
transfers from the remainder of the general fund.
Now, clearly, Social Security is an important policy issue
in its own right. The program has a long and important history
as a part of economic and social policy. But it fits in a
larger budgetary picture which is quite pressing. Indeed, the
rising payments for Social Security, those which coincide with
the retirement of the baby boom generation, pale in magnitude
when compared to the likely outlays for the health programs,
Medicare and Medicaid.
Over this same period, Medicare and Medicaid start at
roughly the same place as Social Security, about four cents on
the national dollar. While Social Security rises to about 6\1/
2\ cents on the national dollar, Medicare and Medicaid under
extrapolations of history could rise to as high as 20 percent
the size of the current Federal budget. No one believes that
anything like that is even plausible, so it is typically the
case that one assumes a more moderate growth rate going
forward. In those scenarios, Medicare and Medicaid typically
rise to 12 percent of GDP, or over half the size of the current
Federal budget.
Needless to say, the Social Security issues evolve in the
context of rising budgetary pressures. To the extent that funds
are necessary from the rest of the budget to sustain Social
Security, they will compete with those funds, for those funds,
with ever-larger demands in other areas.
That suggests that from the point of view of solving this
problem, it may be desirable to move sooner versus later, and
indeed, one way to think about this is that current law is a de
facto wait and reform strategy. Putting the program on
autopilot means that you go until 2052, at which point, by law,
the program is brought into balance through an across-the-board
benefit cut.
Alternatively, one could move proactively and sooner. That
could have effects at the level of both the individual and in
the aggregate. The next chart.
To get a flavor of this, we included in the testimony, and
I would be happy to discuss at greater length, a comparison of
benefits as scheduled under current law with those benefits
that would be payable if one were to take a very mechanistic
approach to the existing Social Security program. I emphasize
that this is for illustrative purposes only. It is a 10-percent
reduction in retirement benefits at the point of retirement and
is done in that mechanistic and simple fashion just to give you
a sense of magnitude, not as a suggestion of a solution.
But one can see that if you move that 10 percent cut up to
2012 and thus affect those individuals who are--instead of
waiting for a sudden benefit cut in 2053 affect those who were
born in the 1950's, it will be possible to pay higher benefits
compared to what would have happened with the cut for those in
the later generations and that is the tradeoff for having lower
benefits for those workers who are older at the moment.
So there is a clear tradeoff at the level of the individual
that has budgetary consequences, but it is also very important
for economy policy. Social Security affects incentives to work.
It affects incentives to save. Both the program and its reform
will have large economic consequences. Those consequences will
be felt in the aggregate, as well.
To the extent that such a mechanistic move earlier approach
were instituted and nothing else changed in the Federal budget,
the advantages of moving in 2012 would manifest themselves as
less pressure to borrow from the public and less cumulative
debt outstanding. The light blue line shows the benefits of
moving in 2012. The darker line, waiting a decade and moving
with the same size cut.
In any event, moving sooner reduces overall borrowing,
leaves less debt in the hands of the public. For the broad
performance of our economy, less Federal borrowing transforms
itself into higher national saving, a greater capacity to
produce goods and services, and a higher standard of living
going forward.
So the tradeoffs involve benefits higher for those later if
lower for those in the present and an economy that can perform
better in the near term than would be otherwise. These are
important issues in thinking about the issue of Social
Security, not only in its totality but when it is best to move
and to put it into long-term sustainability.
I thank you for the chance to be here today.
The Chairman. Thank you very much.
[The prepared statement of Mr. Holtz-Eakin follows:]
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The Chairman. David Walker.
STATEMENT OF DAVID WALKER, COMPTROLLER GENERAL, GOVERNMENT
ACCOUNTABILITY OFFICE, WASHINGTON, DC
Mr. Walker. Thank you, Mr. Chairman. Senators, it is a
pleasure to be here with you to talk about Social Security
again.
In the interest of full and fair disclosure, in addition to
being comptroller general of the United States and head of the
Government Accountability Office and working on this issue
there, I was a public trustee for Social Security and Medicare
from 1990 to 1995. I was appointed to that position by
President George Herbert Walker Bush. I have been on two Social
Security Reform Commissions and I was involved with former
President Clinton and former Vice President Gore in the effort
in 1997 and 1998 to go around the country and help educate the
public as to the nature, extent and magnitude of our challenge
in this area. So I have been involved in this subject for a
number of years and am pretty deep on the subject.
I would respectfully suggest the following. First, I have a
full statement I would like to have entered into the record,
Mr. Chairman, if that is OK with you. There are lots of neat
charts and graphs in there. But I will hit the highlights and
get to the bottom line.
While the Social Security program does not face an
immediate crisis, it does have a serious financing problem that
needs to be fixed and that is growing every day. For example,
Social Security currently has a $3.7 trillion--that is
trillion, not billion--gap between promised and funded benefits
in current dollar terms. Given this gap and the large and
growing fiscal challenges elsewhere in the Federal budget, not
the least of which involve Medicare, which is roughly $27
trillion-plus, up over $10 trillion last year alone, it would
be prudent for the Congress to act sooner rather than later to
address Social Security. Failure to take steps to address our
large growing and structural long-range fiscal imbalance will
have serious adverse consequences over time to our economy, our
quality of life, and ultimately our national security.
There are a number of key points that I highlight in my
testimony. First, solving Social Security's long-range
financing problem is more than making the numbers add up.
Social Security is more than a retirement income program. It is
also a disability program and a survivors income program. It is
critically important to millions of Americans and always will
be.
Second, focusing on trust fund solvency alone is not only
insufficient, it can be very misleading with regard to the
state of the Social Security system. We need to put the program
on a path of sustainable solvency. Candidly, the Social
Security Trust Funds are nothing more and nothing less than a
sub-account in the government's financial records and badger
accounts. They are not real trust funds. If you looked in
Webster's Dictionary, or if you have been a fiduciary for
private pension plans and other arrangements, it is not a trust
fund in the sense that any of us normally would refer to as a
trust fund. It is a sub-account of the general ledger.
The Chairman. David, for the benefit of everyone
listening----
Mr. Walker. Yes?
The Chairman [continuing]. Can you clarify a point? Has the
trust fund, the Social Security Trust Fund that so many seniors
think is there or should be there, has it ever existed as
anything more than just an accounting device?
Mr. Walker. It has always been an accounting device.
The Chairman. Is that true from the days of Franklin
Roosevelt?
Mr. Walker. It has always been an accounting device, to my
knowledge, but that is not important. Let me explain what
happens. Let's take last year, for example.
Last year, the Federal Government took in $151 billion more
in payroll taxes attributable to Social Security than it paid
out in benefits. The Federal Government ended up spending all
of that money on other operating expenses. It replaced it with
an IOU that is a non-readily marketable security. You can't
sell it to anybody. You can't get any money for it. It is
backed by the full faith and credit of the U.S. Government. It
is guaranteed as to principal and interest. It has legal,
political, and moral significance. It has no economic
significance whatsoever.
Ultimately, when you have to start drawing down on those
IOUs, and that is what they are, then you are either going to
have to increase revenues, cut spending, or increase debt held
by the public. The surplus will start to decline in 2008.
Social Security (ie, OASDI) it will go negative cash-flow in
2018. In 2042, all of the IOUs will have been redeemed and it
is at that point when, if Congress does nothing, benefits will
go from everybody being paid a dollar of benefits for every
dollar of promised benefits to 73 cents in benefits for every
dollar and it will get progressively worse over time.
Yes, Congress could wait until 2042, as it did in 1983.
That is where you were in 1983. The trust fund was going to be
exhausted. There was still money coming in. Given where Social
Security stands as compared to our broader fiscal challenges,
it would be imprudent to wait why, because Social Security
should be easy lifting as compared to Medicare, Medicaid, and
some of our other challenges which are likely to take many
years to address and are likely to require a lot tougher
choices.
So Social Security is part of our broader fiscal and
economic challenge. Acting sooner rather than later can help in
many ways, including the fact that by acting sooner, you don't
have to make as dramatic of changes and there is more time for
transition. Furthermore, it is my earnest belief, having been
involved in this issue for many years, that Congress has an
opportunity to exceed the expectations of every generation of
Americans in connection with Social Security reform. By that I
mean every generation can get more money than they think they
are going to get, and I will give you a personal example.
My parents who are retired, they are going to get every
dime of what has been promised to them. My son is 28. My
daughter is 31. They are discounting Social Security to a much
greater extent than they should, because even when the trust
fund goes dry in 2042, there is 73 cents in revenue for every
dollar of promised benefits. But they are discounting it much
more than that.
You have an opportunity to leave current retirees and near-
term retirees alone, give them everything that is promised,
make progressively greater changes the younger a person is, but
you have to do more than just individual accounts and you may
or may not want to do individual accounts. If you do that,
every generation can get more than they think they are going to
get. That is what I would call a win.
What is important about that is right now. Because last
year may have been the worst year, in my opinion, in our fiscal
history. We had huge current year deficits and, we increased
our unfunded obligations by $13 trillion in one year, $8.1
trillion of which was the Medicare prescription drug benefit.
We face serious financial and fiscal challenges. We need to
send a signal to the markets that we are serious about dealing
with these large and growing challenges and we need to send a
signal to the American people that we are willing to deal with
some of these large and growing challenges before we are about
ready to hit the wall.
By hitting the wall, I mean cutting benefits dramatically
and suddenly to a bunch of people when the trust fund runs dry
rather than trying to deal with it more prudently and more
pragmatically over time.
In summary, I note that GAO has been involved in this issue
for a number of years. We have recommended three basic criteria
for evaluating all Social Security reform proposals. First, how
do they stack up against financing, sustainable solvency, not
just solvency over 75 years, solvency in perpetuity, because
even when the changes were made in 1983, it was known from day
one that they were going to be out of balance within a year
because of known demographic trends.
Second, we need to balance adequacy and equity with regard
to all the different stakeholders that rely upon Social
Security in its many forms.
Third, it is important to look at how it will be
implemented, including administrative feasibility, which is
particularly relevant if the Congress decides it is going to
have individual accounts. But if you do have individual
accounts, they are not going to solve the problem. There are
pros and cons to individual accounts. You have to have other
reforms, as well, in order to achieve these objectives.
We stand ready, Mr. Chairman and Senators, to continue to
assist this committee and the Congress in analyzing various
Social Security reform proposals. But let me just say, it is
not an immediate crisis. That is true. It is a large and
growing problem and it would be prudent to act sooner rather
than later because this is easy compared to the real heavy
lifting that is going to have to be done to reconcile our large
and growing fiscal gap, which now is estimated to be $43
trillion in current dollar terms, $350,000 for every full-time
worker, $145,000 for every American.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Walker follows:]
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The Chairman. Gentlemen, a bipartisan group, including
myself, recently were in Europe at a conference. I was in one
meeting in which European demographics and economics were
shared with us. I think to your point, David, if we don't begin
to do something, we will do serious damage to our economy, and
my question is, are some of those European models examples of
the damage that can occur, because what I saw is that their
demographics are worse than ours. Their promises are greater
than ours. They, frankly, make our problem look like a fairly
good time.
I don't know whether you believe that to be true, but I
would be interested in your opinion. But as I look at what you
have just shared with us about the share of the nation's
payrolls that will be required to finance what is current law,
I am wondering what you see for the American economy if we
don't figure this out, because you have used a static economic
projection model, I assume, in what you have shared with us,
and I am wondering what that will do to American
competitiveness if we don't fix this as against China and other
emerging nations that have very different demographics, much
younger workforces, and burgeoning economies. Do you have a
comment?
Mr. Walker. Mr. Chairman, first, it is true that there are
other nations, including in Europe, that have more difficult
demographics to deal with than we do. It is true that there are
certain nations that have larger relative unfunded commitments
to deal with than we do, and in some cases, they are not as
transparent with regard to the nature and magnitude of those
commitments.
But it is also true that some of them have started to deal
with their problems before we have, the U.K. and Norway, just
to name a couple off the top. It is also true that I don't take
a whole lot of comfort in the fact that if we have serious
problems, just because somebody else has more serious problems
than we do, that we should be comforted by that. I don't think
we should be comforted by that.
As I said, ``One can't look at Social Security standing
alone.'' Yes, it is $3.7 trillion, but we face a $43 trillion
problem and it would be nice if we could make a good
downpayment by doing something with this $3.7 trillion, because
ultimately, we are going to have to end up starting to deal
with the balance.
The Chairman. Do you have a comment, Doug?
Mr. Holtz-Eakin. The CBO does examine Social Security
proposals in the context of a model that captures both the
direct and the indirect effects on long-term economic growth.
We have not done formal analyses of payroll tax increases that
look to be on the order of 5.5 percentage points to close the
long-term gap between the benefits promised and the receipts
dedicated to the program.
We have, however, looked in the context of the larger
budgetary pressures, at the run-up in Social Security along
with Medicare, Medicaid, projections for defense. These
estimates were done at the end of December 2003. Qualitatively,
it is the case that the United States' success rests on three
pillars, the reliance on private markets, a relatively small,
contained government as a result, on low and relatively
efficient taxes by international standards, and on flexibility.
A large run-up in Federal spending of the magnitudes in
that report would require much higher taxes and the taxes
imposed, in our estimates, would have lowered capital
accumulation, lowered labor supply, and reduced GDP over the
long term, and that is a numerical result that we can go
through with you. But qualitatively, that kind of spending has
to financed somehow and it will have economic ramifications.
The Chairman. How much of the future growth of Social
Security can be attributed to tying its initial benefits to
wages as opposed to inflation and how much can be attributed to
the aging of the population?
Mr. Holtz-Eakin. In some work we did about two years ago,
it broke about 50-50. Half of the rise in real outlays come
from aging of the population, half from higher real benefits
per recipient.
The Chairman. Senator Kohl.
Senator Kohl. Thank you, Mr. Chairman.
Gentlemen, just to cover some of the ground that you have
talked about in your statements, is Social Security going to be
broke in 2052, as we hear it said so often, or is it true that
after the trust fund is exhausted, then retirees will, in fact,
continue to receive benefits as a result of contributions that
will continue to be made?
Mr. Holtz-Eakin. As I said in my opening remarks, some form
of the program is sustainable indefinitely.
Senator Kohl. Right.
Mr. Holtz-Eakin. I think that the date, whether it is 2052
or 2042, is somewhat uncertain. But any group that has looked
at this, whether it be the GAO, the Social Security actuaries,
the CBO, agrees on the basic trajectory of the program.
Senator Kohl. Your estimate was, I think, something like 78
percent?
Mr. Holtz-Eakin. We see a 22 percent across-the-board cut
necessary. The SSA actuaries have a bigger cut and earlier.
Senator Kohl. Right. Depending on who looks at it, maybe
somewhere between the mid 70's up until the upper 70's of what
people expect will continue to be paid.
Mr. Holtz-Eakin. Yes.
Senator Kohl. So it is not fair, or is it fair to say that
Social Security at some point will be broke or bankrupt or
anything else of that sort in the common vernacular as people
think about it?
Mr. Walker. The program will never go broke.
Senator Kohl. Right.
Mr. Walker. The trust fund will go dry.
Senator Kohl. Right.
Mr. Walker. The program will never go broke.
Senator Kohl. Right.
Mr. Walker. But Senator Kohl, you probably recall the real
controversy about the ``notch baby'' issue back a few years
ago. Imagine a notch baby issue of the magnitude of tens of
millions of persons where on one day, you are receiving a
dollar of benefits for every dollar promised, and the next day,
you are receiving 73 cents in benefits for every dollar
promised. I mean, that is what would happen if Congress does
nothing and waits until the trust fund goes dry.
Senator Kohl. That is true. There is no argument about
that. But I just wanted to get those----
Mr. Walker. You are right.
Senator Kohl [continuing]. Again, very clear, that we are
not talking about a program that at some point is going to be
broke in the sense that people will not get any money out of
it. That is not true.
Mr. Walker. It will never go broke.
Senator Kohl. Right. Is it true that with relatively small
changes, that decisions would have to be made, we could get
Social Security solvent for another 75 years? Maybe not into
perpetuity, if you want to put that as the goal, but in terms
of making relatively small changes in terms of our economy, its
size, we can get this program solvent through the 21st century
into the 22nd century, is that true?
Mr. Holtz-Eakin. Small is in the eye of the beholder. I
would caution you that any fix that involves making the trust
fund last 75 years involves a period where the trust fund is
declining----
Senator Kohl. Sure.
Mr. Holtz-Eakin [continuing]. Each year in which that is
true, those funds are coming from the remainder of the Federal
budget. So it is far from the case that the overall problem is
easy to fix. You could make the Social Security problem and
hold it essentially harmless, but you will have a bigger
problem elsewhere in the budget.
Senator Kohl. Of course, but what we are talking about in
the context, for example, of the President's speech last night
is Social Security. We are not talking about the entirety of
our economy, the entirety of our--we are talking about Social
Security and whether or not there are ways and means to make
that program whole. The question I asked is whether it is true
that we can make that program whole for many more years beyond
2040 or 2050 with relatively small changes in terms of our
national economy. David.
Mr. Walker. Three comments, Senator. Relatively small is in
the eyes of the beholder. Second, clearly, relatively small as
compared to Medicare.
Senator Kohl. Yes.
Mr. Walker. No doubt about that. You are going to have to
take much more dramatic actions there.
Second, I think there are a lot of positive things you can
say about the changes that were made in 1983, but one of the
things I would respectfully recommend to the Congress is that
if you are going to go after Social Security again, you need to
look for sustainable solvency, not just look for 75 years, why,
because in 1983, they knew that the problem was going to
reemerge because of known demographic trends.
Right now, you have a situation that every year, we take a
surplus year that gets lower each year and we add an
increasingly large deficit year. That is due to known
demographics. So if you are going to take it on again, I would
strongly suggest you try to solve it for the long-term.
Last, you could look at Social Security in isolation and
say it is not that difficult, we can solve that for 75 years or
in perpetuity. But I would respectfully suggest that one of the
problems that we have is that we are looking at everything in
isolation and we shouldn't be doing that. We have to recognize
that Social Security is a subset of a much bigger challenge.
Not only do we have to deal with Social Security, we have to
deal with Medicare, we have to deal with Medicaid, we have to
deal with many other issues, and whatever you do with Social
Security is going to have an impact on private pensions,
personal savings, et cetera.
Senator Kohl. But it is true that the President raised the
issue last night and so he is making it front and center, and
so we have to discuss it because he has directed our attention
to a single, what he describes as a catastrophic problem,
Social Security, and that is why we are talking about it and
that is why we are addressing it.
In that context and last, if it is true that we look to
Washington to keep our eye on the ball, to see problems as they
are and as they emerge and to look for ways in which we can
solve those problems, and if it is true, as you have said,
``That Medicare is by far a more serious problem'', then why
are we focusing on Social Security today, other than the fact
that the President has decided that we are going to talk about
Social Security? If Medicare is a much more serious and urgent
problem that needs to be----
Mr. Walker. I think you would have to ask the President. I
would say that one of the reasons that it may be the case is
because Social Security is a problem that is actually solvable.
It is solvable in a way that you can exceed the expectations of
every generation of Americans, and if you can do that, it would
send a positive signal to the markets that we are willing to
get serious about dealing with some of our large and growing
long-term deficits, and second, that it could serve as a
confidence builder among the public and potentially a momentum
builder within the Congress to take on some of the more
difficult challenges.
You do have to deal with Medicare. I would respectfully
suggest, Senator, that may take many years and many
installments----
Senator Kohl. My time is up, but didn't we just, at the
President's urging and request, just add on an enormous
liability to Medicare? Didn't we just do that with our eyes
wide open, understanding then the same facts that we understand
today? I mean, there was just a vote a few months ago.
Mr. Walker. Senator, you are correct in saying that when
the Medicare prescription drug bill was passed, it added $8.1
trillion to our unfunded obligations. It dug the hole much
deeper. Part of the problem is because at the time that that
bill was discussed and debated, Congress did not have access to
its long-term cost. That has got to change. Congress needs----
Senator Kohl. Well, the administration had access to it. We
didn't.
Mr. Walker. I don't know that they had the 75-year costs.
There was a difference----
Senator Kohl. It was very clear that people within the
administration knew that the cost of that was far more than
what we were told what it was. But, and finally, I end, because
I know my time is up, it is ironic and perplexing that now the
President is talking about these unfunded, probably, Social
Security, and we have got to deal with it, got to understand
what it means into the future, and if it is not dealt with,
there are dire things that can occur. But just a few months ago
when we were dealing with the Medicare situation and he and
others were urging that we pass this tremendous unfunded
liability, there was no discussion of it in that context at
all. So if we are mixed up and confused and trying to
understand what is really happening, I hope you, at least, Mr.
Walker, can understand.
Mr. Walker. I have for several years, Senator, said that
the Congress should have at its disposal before it passes
legislation, whether it be tax legislation or spending
legislation, the estimated long-term cost and implications of
that legislation because we have been digging the hole deeper
rather than filling the hole lately.
The Chairman. Thank you, Senator Kohl.
We have been joined by Senator Clinton and Senator Lincoln.
We have each made opening statements, if you would like to make
one, please feel free to do so or we will get to you shortly on
questions.
Senator Nelson, you are next.
Senator Nelson. Could you all address the question that I
had raised in my opening comments? What was changed last night?
Mr. Walker. Do you want to go first?
Mr. Holtz-Eakin. With the stipulation that we are far, far,
far from a lot of detail on what we know was proposed, we have
looked at the transcript of the speech, at the policy book that
has been released, and at the transcript of a briefing which
provided some background, and I think three things stand out in
contrast to Commission Plan 2, which was widely discussed prior
to the State of the Union.
First is in the contributions to the plan itself, as we
understand it, there is a $1,000 cap which is now indexed to
general wage growth and which then also goes up by $100 each
year in addition to whatever wage growth there might be. So
there is a rising cap on the contributions.
Second, there is a series of phase-ins in both when the
program starts and then who is eligible to contribute to
individual accounts.
Then third, in terms of the computations at the end of the
working career, there are accumulations in the individual
accounts that come from contributions. In Commission Plan 2,
each contribution was, for purposes of calculating total
benefits, that contribution was assumed to have a 2-percent
real return. At the end of the working career, all these
fictitious 2 percent earnings were used to calculate offsets to
the traditional benefit. That 2 percent return has now been
changed to 3 percent.
So there have been some, essentially, details on money
going in, timing of eligibility, and calculation of total
benefits at the end that look a little different from
Commission Plan 2, but an enormous amount remains to be
specified in terms of annuitization and many details.
Mr. Walker. Senator, I would say there are still a lot of
issues that have to be addressed to figure out how you are
going to pay for the individual accounts. Commission Plan 2
provides some insights, potentially, as to what the
administration has in mind, but it is not clear that they
intend to necessarily go with Commission Plan 2.
There are several things that I took out of last night's
State of the Union, and I was there as you were and others.
First, I heard the President say that if you are 55 years old
or older, you will not be affected in any way, shape, or form.
Presumably, that means that whatever the benefits people 55 and
older have been promised and in whatever form they will get it.
Second, the language that I heard appeared to say that
individual accounts would be optional. He didn't actually use
the word optional, but that is what I inferred, at least, that
it would be optional for people under 55.
Senator Nelson. He said voluntary.
Mr. Walker. Voluntary. Well, then that is optional. That
tells me it is optional. The question is----
Senator Nelson. What does that mean to you?
Mr. Walker. Well, what it means to me is that you wouldn't
automatically have to take part of your payroll tax and use it
to fund an individual account. You might be able to stick with
the current system, and part of the question would be is if you
did take part of the payroll tax and use it for an individual
account, what would the tradeoff be? How would your defined
benefit promise otherwise be affected? That hasn't been defined
yet, and that is something that obviously would have to be
defined.
There are a number of important details that would have to
be defined before, A, you can really understand it, and second,
before you can cost it and think about what the potential
implications would be for individuals.
Senator Nelson. So we are really reacting to something that
we don't know what the specifics are. We are having an academic
discussion about various things that we might put on the table,
but at this point, we don't know what is on the table by the
President.
Mr. Walker. Senator, I would suggest there is one thing
that is important in addition to getting the details filled
out. As was mentioned by one of the members earlier, you can't
solve a problem until you admit that you have a problem and I
think there is work still to be done in trying to help convince
people, not only here within Washington but outside the
beltway, what is the nature, extent, magnitude, and timing of
the problem and what are the relative pros and cons of acting
sooner rather than later? But you are right, a lot more details
have to come out as to what the potential solution might be and
what the pros and cons of that potential solution might be.
I might mention one more thing, Senator. It is very
important in analyzing reform proposals that, as we have said
at GAO, you have to look at a package. There are pros and cons
of every reform element.
The other thing is to benchmark the reform package against
both promised benefits and funded benefits, because not all
promised benefits are funded. Therefore, if somebody is to say,
``Well, this represents a cut of X percent from promised
benefits.'' Well, if you are under 40, all your promised
benefits aren't funded and if you're under 30 none of your
benefits are fully funded. As a result, you are really
comparing apples and oranges unless you consider both the
funded benefits as well as the promised benefits.
Senator Nelson. You know, you talk about you don't have a
problem unless you recognize there is a problem, and we had a
problem back in the Great Depression and it was addressed. I
know that just on a basic set of values that we have a problem
if we don't, and are not admonished and follow the necessities
put out in the Good Book about honor your father and your
mother and take care of the widows and orphans. I know that
elderly poverty is now 10 percent, and it is down from 35
percent in 1959, and I sure don't want it to go back the other
way where it is increasing. So I am going to look at this with
a very, very careful eye, Mr. Chairman.
The Chairman. Thanks, Senator.
Senator DeMint.
Senator DeMint. Thank you. I believe I heard you say that
it confirmed what I thought that in 2018, or thereabouts--I
know there may be some difference between CBO--the real strain
is going to begin from Social Security on our general fund,
that it is going to require billions of dollars of infusion
from the general fund to supplement the current Social Security
system to meet promised benefits, that the trust fund is an
accounting mechanism that just tells us how much the general
fund owes Social Security.
So there is no money there to pay and we have to come up
with new money to make good on our promises to seniors in 2018,
which I believe, as I said before, that this Congress, this
Senate, and our budget cycle three or four years from now is
going to have to begin to budget for huge amounts of transfers
to Social Security. To me, that is an urgent crisis that we
need to address, particularly if we are going to address it
differently than we have before.
Mr. Walker, you talked about the fix in 1983. What did we
do to fix the program in 1983?
Mr. Walker. Well, there were a number of reforms. I mean,
there was an increase in revenues----
Senator DeMint. How was that----
Mr. Walker [continuing]. In payroll taxes----
Senator DeMint. An increase in payroll taxes.
Mr. Walker. There was an increase in payroll taxes. There
was a gradual increase in the normal retirement age from 65 to
67, phased in over a number of years.
Senator DeMint. So a reduction of benefits.
Mr. Walker. You could look at it that way----
Senator DeMint. Yes, you could.
Mr. Walker [continuing]. As many people probably did, a
modification, at least. Others. Those are two that I recall
right off the top of my head. The taxation of the Social
Security benefits----
Senator DeMint. Right.
Mr. Holtz-Eakin. Expanded coverage for seniors.
Mr. Walker. That is right. There was an expansion of
coverage, as well, as to who would be covered by the Social
Security system.
Senator DeMint. Well, it is my understanding that this
program has been fixed many times that same way, is to increase
the taxes and to somehow, through raising the age or indexing,
as we are talking, as cutting the benefits. My contention is
people are putting enough in the system not to have their
benefits cut. I think what we are struggling for, is there a
way to fix this system, which I think we have established by
any rational basis today that we are in a crisis if we consider
hundreds of billions of dollars, even trillions, of debt that
faces an unfunded liability, is there a better way to fix the
program than cutting benefits again and raising taxes again.
I think we are at the point now where we are taxing labor
at such a high rate, and these payroll taxes are part of it,
that corporations are beginning to wonder, should they locate
their headquarters in America anymore. It is an additional tax
on labor.
We are providing a poverty-level, or just barely above it,
a poverty-level benefit for folks who have paid into this, and
I think the program should be focused on low- and middle-income
workers.
The idea of raising retirement to people who need it the
most are the ones that are most likely to have done manual
labor their whole life and are the least likely to want to
continue to work well into their old age, my hope is that we
won't look at cutting benefits again and we won't look at
raising taxes again.
For my colleagues, I think that is what we have struggled
to look at. The only solution to me appears to be, unless you
are willing for these little adjustments, which these little
adjustments are always cutting benefits and raising taxes, is
to make the money that we are collecting work harder, and I
think that is all the President is talking about.
The average American family now is putting in over $5,000 a
year of taxes into Social Security, if you count the employer
and the employee side. If we can just begin to save and let
compound interest work with a part of that to supplement Social
Security, it is not going to fix the whole problem, but it
could lower the financial strain, and as you said, and I think
the best thing said today is exceed the expectations of every
generation.
We have got to meet our promises to seniors, and I think we
have the opportunity now to make every American a saver and
investor, to begin to actually save Social Security taxes for
the first time, which I think it is interesting when I talk to
groups back home and I explain to them all this money that has
been going into it and I say, ``You know, we haven't saved one
penny of that'', and they smile like I am teasing them because
they think we are doing that.
But I appreciate the presentation today, just the clarity
of the financial strain that we have. I recognize that we have
even a bigger unfunded liability with Medicare, but the
solutions there will be much more abstract. The demand on the
system is much less predictable. I think, as you said, again,
Mr. Walker, this is solvable, but only solvable if we take it
on now before we get right in the middle of these huge
deficits.
So thank you for putting the numbers to an issue we have
been talking about and I think that will help us solve the
problem.
Mr. Chairman, I yield back.
The Chairman. Thank you.
Senator Clinton.
Senator Clinton. Thank you, Mr. Chairman, for holding this
very timely hearing, and I thank our witnesses.
This is an issue that generates as much heat as light, and
there is so much emotion, ideology, that it would be very
welcome to have this debate basically run by the two of you.
Let us look at the facts, let us look at the evidence, and then
let us try to reach the appropriate conclusions.
I must confess that I am disappointed in the President's
decision to pursue this issue in the way that he has chosen to
do so. I do not agree there is a crisis. I agree there are some
long-term challenges, as there are with every aspect of
government. Addressing those challenges requires people to work
in good faith and to arrive at solutions that will hopefully
solve the problems we confront.
I have been asking myself for quite some time, what is the
reason for the President's approach, which does emphasize a lot
of crisis language, a lot of very dramatic rhetoric, and I
conclude, in large measure, because of ideological drivers as
opposed to policy or values that are at stake.
When I look at the unfunded liabilities that we have, we
compare Social Security to $3.7 trillion, Medicare to $8.1
trillion, the tax cuts, if extended, to $11.1 trillion. When I
think about the situation that we were in in 2001, where we had
balanced our budget on a current account basis, where we were
building up a surplus, where we had our financial destiny much
more in our control than we had had previously or that we have
today, when I realize that we are at the beck and call of
foreign lenders to pump in approximately $50 billion, give or
take a month, to buy our debt, it is very discouraging to me
that we would take this issue, put it in isolation, whip up a
lot of scare tactics for ideological reasons, and I hope that
the American people are smarter than that.
There are steps that we could take, depending on our
choices and values, right now to deal with Social Security. We
could do some things that some in this body would call tax
increases, such as rolling back income tax cuts for those above
a certain level of income or retaining the estate tax at some
level, that would make a big contribution.
But what really concerns me is that the average working
American, who has been paying in with a payroll tax into Social
Security, whether you call it a trust fund or you call it an
accounting device, it is an obligation of the U.S. Government.
Those payroll dollars have largely funded the upper-end income
tax cuts and it is, you know, a transfer of wealth. We talk
about building wealth and building ownership for middle-income
and working-class people. This is one of the biggest transfers
of wealth that we have seen in our country, and now we are
sitting here talking about ripping the rug out from under the
existing social insurance system and it is just astonishing to
me that we would be having a conversation on these terms.
What is also troubling to me is that the third of the
people who are in Social Security who receive survivor benefits
and disability payments are basically left out of this
conversation. These are people, especially on disability, for
whom this is, in most instances, their sole income. For
survivors, it is often the difference between being able to
afford some luxuries for a child growing up and going to school
than not. So there is a whole third of our people on Social
Security that are being left out of this conversation.
So I think there is room to have an honest, evidence-based
conversation about what to be done with Social Security, to
raise the issues, to have a mature conversation in the American
public, and to make some tough decisions. You know, it is a
social insurance program. There are other ways we could
incentivize wealth creation and savings.
We could, for example, as some have recommended, make
401(k)s automatic unless you opt out. That would dramatically
increase the participation rate in 401(k)s. We could come up
with different ways of funding add-on accounts that would not
go to the point of carving out payroll tax. There are ways we
could address both the long-term solvency of Social Security
and we could address wealth creation and ownership.
But we are just whistling in the dark if we don't think our
long-term fiscal situation is heading us right off a cliff, and
it just is beyond me how people who call themselves
conservative could have the gall to support economic policies
that are sending the younger generation into the biggest
deficit and debt hole that any generation has ever inherited.
So I respect greatly the purpose of this hearing and am
glad we are having it and particularly these witnesses, but if
we have ever needed an honest debate where people look really
at what is happening and put it into the context of the
Medicare debt and the fiscal debt, our trade account deficit,
and then try to say to ourselves, what are the responsible
positions to take, it is now and I fear that we are going off
on this tangent on Social Security in the wrong direction. It
will make the situation worse and it will break faith with the
social insurance program that Social Security is supposed to
be.
Mr. Chairman, thank you for giving me the opportunity to
vent. [Laughter.]
The Chairman. Senator Lincoln?
Senator Lincoln. Thank you, Mr. Chairman, and I would like
to add my thanks to you and to Senator Kohl for your leadership
and bringing us to a timely hearing on such a very important
issue, allowing us to vent, but also to discuss some of our
options of what we want to do in terms of these long-term
solutions.
I was with both of these gentlemen yesterday. I am
delighted to be with you today. I am not sure if I am going to
see you tomorrow, but---- [Laughter.]
I am hoping that you both will be a very real part of
helping us find the solutions in the long term of how we can
create solvency in a program that truly has meant a tremendous
amount to a lot of the elderly people. Again, I want to
reiterate Senator Clinton, not forgetting the disabled
community as well as the survivors of many recipients.
I have got a couple of questions and I think I will go
straight to those. Mr. Holtz-Eakin, according to an analysis by
your own CBO, future retirees would fare worse under the
Commission's plan than if no action were taken at all in Social
Security. I think the chart under there says the current
benefit which a median wage earner born in the 1990's and
retiring at 65 would receive $23,300 annually. If no action is
taken the trust fund runs out but does not go broke, the system
does not go broke, the worker would receive $18,000. Then under
the Commission's plan, the worker would receive only $14,500.
So it appears from this that retirees would be worse off
under the Commission's plan than even if no action were taken.
Is that accurate?
Mr. Holtz-Eakin. Yes. Those are our estimates for the
middle quintile of the earnings distribution.
Senator Lincoln. So, in essence, we know we have something
to do, but we also know that there is great potential to go in
the wrong direction in terms of making decisions and taking
action that could, in turn, really do more harm than good.
I guess especially concerning our younger workers, because
if the graph is correct, our younger workers would be hit
twice, it appears. First, they will have a reduced benefit, and
then, second, they will be responsible for repaying additional
borrowing, as Senator Clinton mentioned, this enormous pitfall
of debt that we are going to be establishing--that would be
required to set up these private accounts. Is that fair to say?
Mr. Holtz-Eakin. In our estimates in the aggregate, it is
the case that the introduction of the individual accounts early
on have a negative impact on the balance in the program between
receipts and outlays, but past 2065, it switches as the
accounts begin to accumulate.
Senator Lincoln. Sixty-five?
Mr. Holtz-Eakin. Two-thousand-sixty-five, in the aggregate.
Senator Lincoln. Right. So it takes us a little while to
get there, before that turnaround happens.
Mr. Walker, I appreciate your input. I understand that the
Federal spending for Medicare, something we talked about
yesterday, is rising at a much faster rate than the Federal
funding for Social Security, and you have mentioned that here
today. I know as a matter of fact that the Medicare costs we
see will exceed Social Security costs by 2024, twice as much as
Social Security by 2078. In addition, the Medicare Health
Insurance Trust Fund, which alarms me enormously, will be
insolvent by 2019, the year after the general treasury is
supposed to pay back that IOU to the Social Security Trust Fund
that we borrowed in 1983 that Senator DeMint brought up.
So I guess I am not trying to negate the fact that Social
Security is facing a very long-term, real financial challenge
and we need to address that, but if we were to prioritize these
in terms of economics, in terms of crises that we are talking
about, I don't know, but what has been presented almost seems
to me that Medicare and health care costs are a bigger issue.
How do you see it?
Mr. Walker. The Medicare unfunded obligations are over $27
trillion of which $8.1 trillion relates to the new prescription
drug benefit alone, as compared with $3.7 trillion for Social
Security. Arguably, Medicare and Medicaid are a subset of a
much larger challenge, and that is the overall health care
system. There are many who believe that our health care system
is in crisis and that it represents our No. 1 domestic policy
challenge. I would say that other than our large and growing
fiscal imbalance, they're right. So there is absolutely no
question.
But I would also respectfully suggest, Senator, that the
nature, extent, magnitude and emotion associated with health
care is also multiple times greater than Social Security and
that, ultimately, there is going to have to be a comprehensive
reform of the entire system in installments which will require
many years and many tough decisions. While I would encourage
the Congress to get on with it sooner rather than later----
Senator Lincoln. On Social Security?
Mr. Walker. On both.
Senator Lincoln. Both.
Mr. Walker [continuing]. I would encourage Congress to
recognize the totality of the challenge and the need to start
getting on with it sooner rather than later. I do honestly
believe, as I said before, that while the Social Security
challenge in dollar terms is much less, that it is something
where you can exceed the expectation of all generations. You
can gather some momentum. You can gain some credibility. You
can enhance your confidence. There is something to be said for
that.
Senator Lincoln. So if we are looking for legislation,
don't look for a work of art. Let us consider it a work in
progress as we do things incrementally to improve both of these
programs.
Mr. Walker. My personal opinion, Senator, is to deal with
our large and growing fiscal gap, it is going to take a
generation or more to deal with it, and I am just being
straight with you.
Senator Lincoln. All right. Mr. Chairman, just briefly, if
I may, I am also especially concerned about the effects of
privatization on women. We know that women do live longer. They
become more dependent on these programs, both Medicare as well
as Social Security because of various demographic factors, some
of which I have mentioned. But they also have a greater chance
of exhausting sources of income. Social Security's progressive
benefits provide women with some sense of economic security,
and without these benefits, I know from the statistics in
Arkansas that 66 percent of the women in Arkansas would be
poor.
Do you all agree that privatization will put more women at
risk? Is that an agreeable thing to say, that women are at a
far greater risk if we don't do this correctly than if we do--
instead of doing no harm, we do great damage?
Mr. Holtz-Eakin. I think the question is, what is ``this,''
and I would echo what David said earlier about looking
comprehensively at any reform plan. The major risk comes in two
pieces. The first is longevity and the degree to which the plan
includes an annuity that is similar in type to the one that
Social Security offers now, indexed for inflation and lasting
the lifetime of the recipient.
The second is the degree to which those who have adverse
labor market careers are reliant exclusively on the individual
contributions to the account to fund such an annuity.
So to the extent that there are provisions somewhere else
in the plan that make sure the annuity is present and make sure
that it is of sufficient magnitude, that can be addressed.
Senator Lincoln. Definitely, it is a part of the principles
we are espousing. I just would like to echo Senator Clinton,
because in Arkansas, nearly 40 percent--we are way above the
national average of Social Security beneficiaries that are
receiving those benefits as disabled or survivors and we have
not addressed that at all and I hope that we will. I know with
the leadership of these two gentlemen and this committee, we
will.
Thank you, Mr. Chairman. Thank you, gentlemen, for joining
us.
The Chairman. Thank you very much.
Are there Senators with any further questions? If not,
thank you, gentlemen. We appreciate your contribution to this
hearing. We no doubt will be calling on you in this and other
committees in the future, as you certainly described well the
problem we have to resolve.
We will call next our second panel. Our first witness will
be David John, research fellow, Thomas A. Roe Institute for
Economic Policy Studies of the Heritage Foundation, Washington,
DC; Robert L. Bixby, executive director of the Concord
Coalition, Arlington, VA; and John Rother, director of Policy
and Strategy, American Association of Retired Persons, here in
Washington, DC.
Gentlemen, thank you. David John, we will start with you.
Welcome.
STATEMENT OF DAVID C. JOHN, RESEARCH FELLOW, THOMAS A. ROE
INSTITUTE FOR ECONOMIC POLICY STUDIES, THE HERITAGE FOUNDATION,
WASHINGTON, DC
Mr. John. Thanks for having me. Chairman Smith and Senator
Kohl, thank you very much for having me. As mentioned, I am
David John. I am a research fellow at the Heritage Foundation
specializing in Social Security, other retirement, corporate
governance, and other such fun topics.
Social Security has a major place, but it is only one of a
number of significant aging discussions that we need to have as
a people over the next few years. We can't ignore the whole
question of weaknesses in both our defined benefit and defined
contribution pension plans. We can't ignore the whole question
of what is retirement. Currently, it seems to be a bright line.
One minute, you are employed; the next minute, you are retired.
I don't know that as a people we can afford that in the future.
I don't even know that it is desirable for those of us who are
going to be approaching that. Last but not least, of course, we
have medical questions. But for the moment, let us concentrate
on what is doable, which is to save Social Security first.
Social Security, as Senator Kohl mentioned, has been an
incredibly successful program. My grandmother, who actually
lived in Milwaukee, financed all of her retirement based on
Social Security. However, times change and companies and
programs need to change over time, also. In 1935, U.S. Steel
was one of the biggest companies in the United States. It no
longer exists, at least not under that name. AT&T was the
controller of telephones, and now AT&T is changing. In 1935,
the Chicago Cubs were in the World Series. They lost. But times
have shifted over the last 70 years. My grandfather, for
instance, was a master mechanic at Harley-Davidson at that
point.
This is a debate that gets lost, unfortunately. We talk
about billions and trillions and bend points and trust funds
and things and that is really not what this is all about. This
is about people. This is about not necessarily my 85-year-old
father, who lives in retirement. This is about my 18-year-old
daughter, who is a freshman at Villanova studying nursing.
If the current activities continue, if we do nothing,
Meredith faces a future where she will pay 100 percent of her
Social Security taxes throughout her working life. She will pay
100 percent of her share of a total of $5.6 trillion to repay
the bonds in the Social Security Trust Fund. Ten years before
she retires, if you use the Social Security estimate, the same
year she retires if you use the CBO estimate, the Social
Security Trust Fund runs out and essentially she gets 73 cents
on the dollar. That is not exactly the kind of future I want to
leave for my daughter.
This is a real problem. The trust fund is a real problem.
My daughter is thoroughly convinced that her credit card is not
a real problem because she doesn't pay it. However, it is a
major part of the family finances, or at least it can be if she
gets carried away. [Laughter.]
If we do nothing for Social Security at this point, we will
start to run $100 billion annual deficits in 2022. Those will
go up to $200 billion annually in today's dollars 5 years after
that.
According to the Social Security Administration, doing
nothing adds $600 billion a year to the cost of reforming
Social Security. That is about $50 billion a month.
What to do? I happen to be very strongly in favor of a
personal retirement account. The simple fact is that Social
Security, because of an index change that was done during the
Jimmy Carter administration, has offered my daughter
significantly higher benefits than it can afford to pay. We
need a simple structure that is easy to understand with a
default fund which is something similar to a lifestyle fund.
A lifestyle fund has most of your investments in index
funds when you are young and it gradually shifts to bonds when
you are old. What that means is that the difference between
retiring in 1999 and 2000 is taken care of, essentially,
because virtually all of your money is in bonds at that point.
The future Social Security benefits will be paid from a
Social Security Part A, which is the government-paid benefit,
and Social Security Part B, which is a personal retirement
account. There is a fairly simple formula that would determine
how much would be paid from what.
What is key about this is that the sad fact is that only
about 50 percent of the American workers have some sort of a
retirement savings plan outside of Social Security. A personal
retirement account would allow these workers the opportunity to
build assets.
The sad fact is that no matter what, Social Security can't
afford to pay my daughter what it has promised her, but at
least with a personal retirement account, she has the
opportunity to make up all or most of the difference between
what it promises and what it will be able to pay.
There are a lot of other proposals out there. Let me just
address one very quickly. One of them suggests that all we have
to do is raise the payroll tax cap from $90,000 to $150,000 or
$200,000 and we have solved most of the problem. The Social
Security Administration addressed that in an October 2003
scoring memo which found that if you completely got rid of
that, which means that Donald Trump gets to pay payroll taxes
on 100 percent of his earnings, what that does is to move the
date where Social Security starts to spend more than it takes
in from 2018 to 2024. If Donald Trump is allowed, as under the
current system, to receive benefits on all of that money, then
basically the $100 billion deficits in today's dollars begin in
2029, not 2022. That is scarcely saving the system.
If, on the other hand, we make a major shift in the way
Social Security is operated and we start to make Social
Security into some form of a welfare program, meaning that we
are only going to pay Donald Trump benefits on the first
$90,000 of his income, and basically we are going to take all
the taxes on the amount above that and say, ``Thank you,'' then
the $100 billion deficits start in 2031 instead of 2029 or
2022.
Essentially, small thoughts and small solutions aren't
going to work. This is too big a problem. We need to think very
seriously outside of traditional boundaries and come up with a
solution that guarantees people like my daughter a decent
retirement income. Thank you.
The Chairman. Thank you.
[The prepared statement of Mr. John follows:]
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The Chairman. Robert Bixby, welcome.
STATEMENT OF ROBERT L. BIXBY, EXECUTIVE DIRECTOR, THE CONCORD
COALITION, ARLINGTON, VA
Mr. Bixby. Thank you, Mr. Chairman, Senator Kohl. This is
an incredibly well-timed hearing. I congratulate you on your
foresight. Thank you for inviting me to testify.
I am here representing the Concord Coalition, which is a
bipartisan organization that argues for fiscal responsibility.
It is co-chaired by former colleagues of yours, Bob Kerry and
Warren Rudman.
Sitting here, it occurred to me that you get some
interesting experiences working with the Concord Coalition.
Last night, when I was listening to the State of the Union
Address, I agreed with many of the comments that President Bush
made about the future of Social Security and the nature of the
problem. Then this afternoon, hearing some of Senator Clinton's
remarks, I agreed with those, too. If you think about why, it
defines how the Concord Coalition thinks about this problem and
how we suggest you might want to look at it.
If you look at the cost of the system in the out years,
just look at it as it builds over time and ask yourself, how
are we going to pay for it? You see that the cost gradually
increases and that the taxes flowing into the system don't keep
up with that and so a gap opens up in 2018 or 2020. We know it
is coming sometime around that time. It gets bigger and bigger
and wider and wider from that point on.
That is the essential problem with Social Security.
Promised benefits can't be paid under the stream of revenue
that we have dedicated for them, and the trust fund really
doesn't have too much to do with that. It does have legal
significance, but it doesn't have an economic significance. It
doesn't change the equation.
But Social Security is part of a larger picture. It is part
of the retirement security challenge. It is part of the budget.
It is the largest program in the budget. It is part of the
economy. What we do with Social Security has a big effect on
those things.
When I heard Senator Clinton talking about the larger
fiscal challenge, I think she is absolutely right to raise that
issue, as well. You can't really separate them. These things
are intertwined.
I have been looking at some numbers that the Government
Accountability Office did last year. Every year, they do long-
term scenarios and they look at the consequences of current law
over 50 years, 75 years, whatever. If you look at 2042, which
is only significant because it is the year we talk about as the
year of trust fund exhaustion, and people say, ``Well, the
trust fund is solvent until 2042'', so there is no problem.
In 2042, under the so-called baseline extended scenario,
which assumes that all of the tax cuts are allowed to expire on
schedule and that discretionary spending grows no faster than
inflation, Federal spending at that point would be up to 34
percent of GDP and the debt as a percentage of the economy
would be at 164 percent of GDP. It is at 38 percent of GDP
today. Net interest would cost us more than Social Security,
Medicare or Medicaid.
In other words, we are headed toward a fiscal cliff and we
are going to go over that fiscal cliff long before 2042. So--
and by the way, this is not the worst scenario by any means. I
mean, we could run much bigger budget deficits if we don't get
them under control.
So my point here is that we are--our overall fiscal policy
is unsustainable and it is going to be unsustainable sometime
in the 2030's. So if what you are saying is, ``Well, we don't
need to worry because the trust fund is going to be solvent
until 2042'', or if in the case of private accounts you are
saying, ``Well, we can do the borrowing now because we are
going to get big savings in the 2050's or 2060's, my point is
we are going to go over the cliff before that.'' The government
is going to be bankrupt before the trust fund is, and that is
the larger problem that Senator Clinton talked about.
So I will wrap up by saying that as we address Social
Security reform, and I think it is essential that we do so and
it is essential that we do so sooner rather than later, we
can't duck the hard choices here. We can't fund all future
benefits and not raise taxes. You are going to have to make
some hard choices, and this is true regardless of private
accounts. Private accounts don't solve the gap. They may have
some good effects for younger workers. They may be very sound.
The Concord Coalition is perfectly in favor of private
accounts. But we think they should be funded with new
contributions, new savings into the system, and not with
borrowed funds.
But whether you do private accounts or don't do private
accounts, you are going to have to face some hard choices about
can we afford all the future benefits that are promised, and if
we are going to, then you are going to have to raise taxes to
pay for them because the deficits that occur in the rest of the
budget just become unsustainable.
Thank you.
The Chairman. Thank you.
[The prepared statement of Mr. Bixby follows:]
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The Chairman. John Rother, welcome.
STATEMENT OF JOHN ROTHER, DIRECTOR OF POLICY AND STRATEGY,
AMERICAN ASSOCIATION OF RETIRED PERSONS, WASHINGTON, DC
Mr. Rother. Mr. Chairman, thank you, Senator Kohl, Senator
DeMint. It is a privilege to be back in front of the Aging
Committee. I was the staff director here for four years. Today,
I am the policy director for AARP.
I will leave my full testimony with you and just summarize
briefly, given the time.
The Chairman. We will include it in the record.
Mr. Rother. I agree that this debate needs to be about
people just as much as it is about dollars. AARP believes that
Social Security does need to be strengthened for our children
and our grandchildren, but that the solution should not be
worse than the problem. In our view, private accounts that
drain money out of Social Security will only cut its guaranteed
benefits, increase the federal debt, and pass the bill on to
future generations. Private accounts are risky, expensive, and
unnecessary as replacements for Social Security's guaranteed
insurance protections. AARP is working to strengthen Social
Security, not dismantle it.
We believe that all Americans, young and old, have a stake
in this debate. We do not find the generations divided. When it
comes to Social Security, America, we believe, is a house
united. We have done a series of recent surveys, the latest one
we release today, of Americans 18 and older that shows that
people of all incomes and all generations would prefer to
strengthen the existing system with as few changes as possible.
They would not favor radical changes that would undermine its
purposes.
There are sensible and workable solvency options to explore
that could make a real and lasting difference and restore the
program to fiscal stability. My full testimony includes several
of those that we have been using in an educational way around
the country to help people understand the tradeoffs that will
need to be made in order to strengthen this program.
We do believe that we should avoid Social Security changes
that add huge new sums to our nation's debt. I certainly agree
with Bob and the Concord Coalition on this point. Doing so
would burden all taxpayers with additional interest costs and
further increase deficits, which in turn threaten our ability
to finance essential health and service programs for Americans
young and old.
So we think that all generations have a stake in this
debate and we do not believe that seniors are somehow exempt
from it.
Social Security was never intended to be the sole source of
retirement income but a foundation and this foundation must be
strengthened. Social Security replaces, on average, only about
40 percent of pre-retirement income. We support savings and
investment options that are in addition to, not in place of,
Social Security.
Last night, the President mentioned the Federal Thrift
Savings Plan. That is a very good model, but I want to point
out that it is on top of a Social Security benefit and a
defined benefit pension for Federal retirees. So it serves a
very important savings function on top of a guaranteed base of
Social Security and pension benefits. It should not be used as
a model to replace that guaranteed base.
In fact, if there is a crisis in retirement income today,
it is the fact that only half of private sector jobs even offer
a pension and only 70 percent of employees in those firms
participate in one. So we are at eminent risk of the largest
generation in our history, the boomers, being completely
unprepared to finance their own futures beyond Social Security.
AARP is working to ensure retirement security for all
generations. Any agenda to strengthen our nation for the future
in addition to Social Security must also include strong
Medicare benefits, a viable Medicaid program, and opportunities
for meaningful employment for older workers. These are family
issues that demand Americans of all ages be engaged. We
certainly are going to work with the public across the country
and will work with members and Congress on both sides of the
aisle to make sure that Americans can continue to age with
security and dignity and that we can restore confidence in the
single most important domestic social program we have, our
Social Security program.
Thank you.
[The prepared statement of Mr. Rother follows:]
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The Chairman. John, as I have read the AARP literature, it
seems, as you have stated here, that not a lot needs to be done
because there isn't really a problem until 2042, but that is
not really what you are saying.
Mr. Rother. No, not at all.
The Chairman. You are admitting that there is a problem.
Are you saying the sooner we get to it, the better?
Mr. Rother. Yes. It is certainly true, as a defender of the
system, that more modest changes are possible now than if we
wait, and the longer we wait, the more difficult the choices
will be. So I think it makes good sense to act sooner rather
than later.
The Chairman. Your proposals are to raise the wage cap, is
that correct?
Mr. Rother. We have done extensive polling work and
community forums around the country. Consistently, we have
found the single most popular option of all the ones out there
would be to ask those who have benefited the most in recent
years to contribute more, and the way to do that is to raise
the wage base up from its current $90,000 a year to something
more in line with the historical standard, which would probably
take it up to around $140,000.
The Chairman. Some have suggested that we means test Social
Security. I am not, but some have suggested that, so Bill Gates
doesn't get it or Donald Trump--they always pull those names
out of the air. Do you favor such a thing?
Mr. Rother. No, Senator. The current Social Security
benefit formula returns less of a benefit as a percentage of
pre-retirement income to people who have more of an opportunity
to save for themselves. It provides a more generous benefit for
people at the low end who generally have not had an opportunity
to save or be part of a pension plan. We think that is the
appropriate way to structure it, and that is the way the system
works today.
The Chairman. David, as you listened to the President last
night, and we all listened, clearly, there is a funding
obligation here if we are going to be fiscally responsible on
this. Whether it is $800 million or $2 trillion, do you have
any recommendations as to how we would do that if we were to go
to personal accounts?
Mr. John. Essentially, there are going to be four
mechanisms that can be used, whether this is used to repay the
trust fund or to pay general revenue costs of establishing
personal retirement accounts. Those four are fairly simple.
We can borrow the money, which means we are going to pay it
back.
We can raise taxes in some form or another, but we have to
be very careful with that. For one, it is a slippery slope, and
for another thing, it can have a very serious impact on the
economy.
Third we can cut other government spending, which has
always been one of my favorite choices, but as I learned the
hard way, it is a lot easier to talk about than it is to do.
Or last but not least, we can change Social Security
benefits, and any of those four would work.
What I personally would love to see done would be to see
something like a BRAC, Base Realignment and Closure Commission,
type structure that looked over government programs, identified
duplicate programs, programs that might have outlived their
usefulness, and basically close them down or merge them or do
something along that line.
But this is going to be a long-term problem. At some point
or another over the 30 or 40 years that we deal with these, all
four of these methods are going to come into play here.
The Chairman. As to Social Security or all entitlements?
Mr. John. All entitlements, when it comes down to it.
The Chairman. Robert, as I listened to my colleague,
Senator Clinton, I certainly admire her passion. I was only a
Senator for half of the Clinton years. On the surface, a lot of
what she said, I agreed with, except I do remember that when I
came to the U.S. Senate in 1997, the budget--and I was on the
Budget Committee--that President Clinton presented to us showed
deficits for as far as the eye could see. What closed that and
produced the surplus was a stock market bubble and we began to
get tremendous revenues from what eventually exploded in the
last year of his Presidency.
Whether you like the tax cuts or not, the recession was
short and it was shallow and we are seeing increases to
revenues now. I guess as against China, we are certainly not
growing at 11 percent, but we are growing at a rate that is the
envy of the Western world, of the industrialized world. That is
the part that wasn't said.
But clearly, we have got to do something. It does seem to
me that we have got a problem on the spending side and
obviously the revenue side. My hope is that the revenues will
grow with a growing economy.
What does the Concord Coalition, bottom line, what do you
want to see us do with this?
Mr. Bixby. Well, I think there are only two ways to address
the problems here. One is to control the long-term cost growth
and the other is to try to grow the economy, to make the
remaining costs more sustainable. Those are hard choices.
Neither one of them is a free lunch.
One could conceive of a plan that could try to trim the
promised benefits more to a level that would be sustainable
without raising the payroll tax. You would have to do that
gradually and over time and you would have to look at the
adequacy of the benefits. But at the same time, you could
perhaps help the system and increase national savings to help
build the economy with a system of mandatory private savings
accounts that would be part of the Social Security system. But
if you were to do that, in order to result in real savings,
they would have to be funded with new money, so there is no
free lunch in any of this.
Overall, I would strongly urge you to look at whatever
reform you adopt by looking at the year-by-year results for the
budget and for the economy and not to get hung up on
abstractions about the trust fund or the perceived benefits of
private accounts. I think both are important and I think they
have a role, but ultimately from the Concord Coalition's, ``eat
your peas'' point of view on fiscal policy, when we add all of
these things up, you have to ask, ``Is the path that we have
set for ourselves sustainable? '' Right now, it isn't, and so
whether we are talking about Social Security reform or
Medicare, Medicaid, taxes, whatever, we need to get back on--a
sustainable path.
I should say, Mr. Chairman, I am not one that says, repeal
the tax cuts and the problem is solved. I want to be clear
about that. Whatever one thinks of the tax cuts, and at
Concord, we didn't think they were a particularly good idea,
but they didn't cause this problem and repealing them is not
going to be the solution to this problem.
The Chairman. Do you attribute any of the growth we are
seeing now, a short and shallow recession and the growth we now
enjoy, do you attribute any of that to the tax cuts?
Mr. Bixby. Yes. I think short-term tax cuts were a good
idea. Our problem with the tax cuts is more the long-term
effect and whether more was done than needed to be done for
short-term fiscal stimulus, although that is probably the
subject for a different hearing. [Laughter.]
The Chairman. My recollection, and I don't mean to be
partisan, Herb, and you can counter me here in a second, but my
recollection is that when we passed a $1.3 trillion tax cut to
get the economy going, we were also turning back additional
spending of over $2 trillion from our friends on the other
side. So I think there is blame to go around, I suppose, but it
does seem to me that the tax cuts at least have helped to get
us back to growth and reemploying people.
Mr. Bixby. I would just say that I agree with what
Comptroller General Walker said in that I think last year was a
bad year and that cutting taxes while adding a major new
entitlement program, is an inconsistent mix and I would hope
that we go in the opposite direction, anyway, in our future
fiscal policies.
The Chairman. Thank you.
Herb.
Senator Kohl. Thank you, Mr. Chairman.
Mr. John, back in 1935, if you were engaging in that debate
to create Social Security, would you have supported Social
Security back then or would you have opposed it? What I am
asking you is whether you generally support the idea of any
kind of social insurance programs.
Mr. John. I 100 percent support it.
Senator Kohl. You support it?
Mr. John. I do support--if I were living in 1935, I would
have supported Social Security at that point. If I lived today
and the question comes up, social insurance, yes or no, the
answer is yes. This is not a society that is going to let
senior citizens starve in the street, and thank goodness for
it.
Senator Kohl. Good. Mr. Bixby, some argue that borrowing
money to create private accounts would not hurt the economy
since we are taking the borrowed money and investing it.
Therefore, it would have no effect. What is your view on that?
Mr. Bixby. Well, I don't agree with it. I think that there
is a huge amount of borrowing involved although, you would have
to see the details of any plan, obviously. But one of the goals
of Social Security reform should be to improve national savings
and help grow the economy. Private accounts presumably would do
that, but if you are going to borrow the money to do it, you
are just taking money from one pocket, putting it into another,
and national savings wouldn't be improved that way. They would
probably actually decline because people would tend to save
less if they were saving through Social Security and the
government would be stuck with the debt.
But the problem I have with a lot of these so-called carve-
out accounts that require a lot of borrowing is that even if
they promise to pay the money back sometime in the future, the
savings are so distant, that they come after we have already
gone over the cliff that I talked about. If we are already
headed over a cliff by 2040 and we borrow a lot in the interim,
presuming that we are going to get savings back in 2060 and
beyond.
Well, we are never going to get to 2060 on the current
path. That is what we need to worry about. So I would urge not
looking at 75-year summaries of these things, whether we are
looking at private accounts or the trust funds. Again, just
follow the money on a year-by-year path and see if we are on a
sustainable course.
Senator Kohl. I believe you have advocated mandatory
private accounts. Why shouldn't working people have a choice?
Mr. Bixby. Social Security is a social insurance program,
first and foremost, and frankly, I think everybody should have
the same rules. I mean, choice doesn't seem important in a
system that is designed to protect people from bad choices. So
if we are going to do private accounts, I think that they
should be a mandatory part of the system.
The other thing is that if you do voluntary accounts, I
just can't imagine the complexities of that sort of thing.
There would probably be notches and what not and difficulties
with people opting in and then wanting to opt out again. I
don't know how you could control that.
The other thing with voluntary accounts is I think there
would be a tendency, and John probably knows more about this
than I do, having studied savings behavior, but--lower-income
people tend to be more risk averse and they might well opt not
to take the personal accounts. But they are the ones that would
benefit most from it in the sense of building up savings,
because if you also at the same time were doing something to
reduce the defined benefit, the guaranteed benefit, the cut can
get quite substantial over the long term. If they opted not to
take the private account that would help make up for they could
find themselves in much worse conditions. Upper-income people
probably would take the account, but they would probably save
less in some other area, so we wouldn't be increasing savings
that way.
So I really think there are a lot of, while it sounds like
a good idea, I think in practice, voluntary accounts would be
very problematic.
Senator Kohl. Mr. Rother, what role will Social Security
play in the retirement of future retirees and will it be more
or less important than it has been for the prior generation?
Mr. Rother. Today, as you know, about two-thirds of
retirees receive most of their retirement income through Social
Security, and we would like to think as a result of a rising
economy and higher living standards that this would change for
the boomers. However, the studies that we have commissioned
from leading universities show that, in fact, that is not going
to be the case. Part of it is the result of the decline in
offering of defined benefit pension plans from employers. The
rise in defined contribution plans, the 401(k) that replaces
the old plans have not succeeded in offsetting the losses in
plan value that people are not contributing enough, they are
not investing very wisely, and they are pulling their money out
before retirement.
The other part of the problem is that we have a wage
structure in our country that is getting more bifurcated where
we have exaggerated winners and losers. People with lower
educations are not keeping up with rising standards. This is
true for many people in the boomer generation their wages
aren't keeping up.
They no longer have a defined-benefit pension. Their health
costs are going through the roof, and they are responsible for
more of those health care costs. These are the people, and it
is going to be a very substantial number of boomers, who are
going to be in real trouble when they no longer can work. That
is exactly the crisis that I think we should be paying more
attention to rather than just the dollar numbers in the trust
fund.
Senator Kohl. I thank you. Mr. Chairman, thank you very
much. I think it has been a great hearing.
The Chairman. Thank you, Senator Kohl.
One question, Robert. Is the Concord Coalition opposed to
private accounts?
Mr. Bixby. No.
The Chairman. You are not?
Mr. Bixby. No. We have said a lot of very favorable things
about private accounts. Our concern is whether they are funded
or unfunded. Unfunded private accounts don't seem like much of
an advantage over unfunded trust funds.
The Chairman. I thought it was interesting, your comment
that the people at the low end who probably are in jobs with
companies that don't provide them with a pension and therefore
they only have Social Security those individuals are the ones
that would gain the most from the compounding interest of a
personal account.
Mr. Bixby. Yes. I think they have a real advantage, and
particularly for younger workers, the people that don't save
enough now and people that would have a long time to buildup
assets.
My essential point about private accounts is that they are
not a free lunch. They have to----
The Chairman. They have to be paid for.
Mr. Bixby. Right. Exactly.
The Chairman. Do you have any recommendation for that?
Mr. Bixby. The Concord Coalition has not taken a specific
position on reform items, but I would say the funding for
accounts should come from some sort of new mandatory
contribution, which, of course, some people would say is a tax
increase. My argument back on that would be at least it is
going into directly funding a worker's account and it is not
going into the government, which a tax increase would, and so a
Republican should say, ``It may be a higher tax in that sense,
but it is going to fund a private account and it is not going
into creating a bigger government.''
The Chairman. John, would it be fair to say that AARP is
ideologically opposed to personal accounts on any basis?
Mr. Rother. We actually favor private accounts, just so
long as they are on top of the----
The Chairman. So you would favor Social Security Plus?
Mr. Rother. Yes, and as I have emphasized the real problem
today is that half of our workforce doesn't have access to a
payroll deduction mechanism for funding their own savings, so
that is where the solution lies. We favor--and we think you
could do it on a voluntary basis or mandatory basis, but we do
favor a system open to every American worker that would allow
them to save for retirement in addition to their Social
Security.
The Chairman. So hypothetically, if we were in gridlock
here until 2042, but we were able to do Social Security Plus,
you would see the benefit to your members--you and I won't be
here, but--well, maybe not---- [Laughter.]
You look pretty vigorous.
Mr. Rother. Thank you. [Laughter.]
The Chairman. But our children who would have a Social
Security Plus, the quarter-percent cut that they would take,
and they are going to lose roughly 27 percent under current
law, that you think Social Security Plus would more than make
that up?
Mr. Rother. Well, I want to be clear. We favor
strengthening the Social Security system first and foremost.
The Chairman. But say we weren't able to.
Mr. Rother. Well, I----
The Chairman. This system won't allow us to deal with it.
One side wants to increase benefits, the other won't raise
taxes, and you just get to gridlock, hypothetically. In that
instance, the Social Security Plus account would really help
your members, I assume.
Mr. Rother. Well, I don't know if it would help our
members, but it would help our future members, our children,
quite a bit----
The Chairman. Exactly.
Mr. Rother [continuing]. Particularly since the current
defined benefit pension structure is eroding in the private
sector. We need something that is available to all----
The Chairman. Do you think it would make up at least the 27
percent cut they are scheduled to take?
Mr. Rother. Well, only----
The Chairman. Or would it even be more than that?
Mr. Rother. Well, that would depend on how much people put
in. The amounts that are being talked about today, two, three
percent of payroll, are not going to be sufficient to replace
Social Security's guaranteed benefit. I think the amounts serve
well as a savings supplement. They do not serve well as a
replacement.
The Chairman. David, do you think with program cuts or
ending programs, do you think we could find $2 trillion?
Mr. John. Oh, I am pretty sure of it, especially spaced
over a certain period of time, yes.
The Chairman. Do you have any programs you want to
recommend?
Mr. John. I think we actually have a fairly long list that
we could send over, if you would like.
The Chairman. We would be pleased to receive those.
Gentlemen, you have been great. Thank you. We respect your
views and we are charged with weighing them and coming up with
what we hope will not be gridlock, but something that our
country can live with and retire on.
We are adjourned.
[Whereupon, at 4:07 p.m., the committee was adjourned.]
A P P E N D I X
----------
Prepared Statement of Senator Larry Craig
I want to thank and commend the Chairman for holding this
hearing--and this series of hearings--on the future of Social
Security.
These hearings are very much in line with those held by
your predecessor. There are many arguments and
misunderstandings out there, and much information to be
digested and discussed, on the future of Social Security. I
don't think it would be possible to hold too many hearings on
this topic, to help make Members of Congress, the media, and
the public better informed.
The first, critical point to make of course, is this: For
everyone now in, or nearing, retirement, Social Security will
not change. The President said it again last night, our
colleagues have confirmed it, and it bears repeating. We are
looking at the future of the system, because we also want the
best for our children, our grandchildren, and all of today's
younger workers.
The President highlighted the future of Social Security in
his State of the Union address last night. He has been
discussing it and doing good work on it for four years,
including his establishment of the distinguished, bipartisan
Commission to Strengthen Social Security in 2001.
I hope and believe we all share the commitment articulated
by the President last night: ``Social Security was a great
moral success of the 20th Century, and we must honor its great
purposes in this new century.''
Idahoans, of course, have been even farther ahead of this
curve. All the way back in 1996, I held a series of town hall
meetings across Idaho--the ``Seniors to Seniors Meetings''--in
which we tried to bring together everyone from seniors in high
school to senior citizens for this kind of informed discussion.
We've had numerous Idaho events in the following years.
In those gatherings, I have been consistently reassured
that, once all the information is on the table, most folks from
grandparents to grandchildren are ready to take a constructive
part in saving and strengthening Social Security for the 21st
Century.
In choosing the topic for this hearing, Mr. Chairman, you
have asked: ``Do We Have to Act Now?''
Some have said that we do not have to act now. They say,
``There is no Social Security crisis.'' They say Social
Security only has a ``problem'' or faces a ``challenge''. They
say, essentially, ``Let's wait until the long term to fix the
long term,'' or maybe, ``Let's just tinker, for now''.
Waiting for a crisis to happen is never a good strategy.
That's why, Mr. Chairman, I appreciate your holding these
hearings. And I look forward to us asking, ``How should we act?
I also want to join my Chairman in welcoming today's
witnesses. We've all worked together before. These witnesses
and their organizations are facing the issues squarely and are
deeply responsibly involved in the national discussion of
Social Security's future.
In fact, David John (Heritage) even joined us a few years
ago for one of those town meeting tours around the State of
Idaho.
Thank you again, Mr. Chairman. I look forward to continuing
to work with you and the Committee.
Prepared Statement of Senator Hillary Rodham Clinton
Thank you Chairman Smith and Ranking Member Kohl for
holding this hearing today. The debate over the future of
Social Security has significant implications for every American
and it is critical that we bring the facts to light and have a
debate that allows the American public to make an informed
decision about what they think the future of Social Security
should be.
And as we consider this issue, it is important that we
recognize the financial challenges facing Social Security and
commit ourselves to fixing them. But tactics designed to scare
the public into thinking that Social Security is ``in crisis''
or ``about to go broke'' are inaccurate and do a disservice to
the debate.
In fact, Social Security will continue to run annual
surpluses for decades to come. In 2018, Social Security will
have $5.3 trillion in reserves, growing to $6.6 trillion in
2027. In fact, Social Security will not be ``bankrupt'' even in
2042 or 2052 when the Trust Funds are exhausted. This is
because payroll taxes coming in to the Trust Funds will be
enough to finance 70-80 percent of benefits.
Now, there is obviously a problem, and I do think that we
need to act sooner rather than later, but this is not the
crisis that some would have us believe. And it certainly
doesn't mean we should ``throw the baby out with the
bathwater.''
Social Security is the bedrock of our senior's retirement
security and must remain so. Carving private accounts out of
the Social Security system undermines the fundamental nature of
the program, requires substantial benefit cuts, and drives up
the national debt with trillions in new borrowing. The costs
and the risk to the retirement security of millions of
Americans from privatization are too great.
I look forward to hearing from our witnesses today, and I
am hopeful, Mr. Chairman and Mr. Kohl, that your leadership on
this issue and the hearings we will hold over the next weeks
and months will help inform this debate and bring us to a
broadly bipartisan consensus on the future of Social Security.
------
Prepared Statement of Senator Susan Collins
Mr. Chairman, thank you for calling this afternoon's
hearing to examine the long-range financing problems facing
Social Security. I understand that this is the first in a
series of hearings that the Committee will be holding to
discuss the challenges facing this tremendously important
program, and I commend you for giving us the opportunity to
explore these issues thoroughly.
Social Security has been a huge success. It is our nation's
largest and most popular government program. More than forty-
seven million Americans depend on Social Security, and, for
two-thirds of them, it is their major source of income. For
many older Americans, Social Security is the safety net that
makes the difference between poverty and an adequate standard
of living.
And Social Security is not just a retirement program. It is
also a disability insurance program and a life insurance
program that provides families of active workers with
protection worth more than $12 trillion--more than all of the
private life insurance currently in force.
Unfortunately, as successful as Social Security has been,
the system faces serious long-term financing problems and is
not sustainable in its current form. While the system is sound
today, it will not be able to meet its obligations to future
retirees unless it is modernized.
Social Security is currently running a surplus because the
program is taking in more in payroll taxes than it is paying
out in benefits. But before too long, this will no longer be
the case. Our Social Security cash surplus begins to decline in
2008--the first year in which the baby boomers can begin to
collect Social Security. By 2018, payroll taxes will not be
sufficient to pay benefits and we will either have to raise
taxes, cut spending, go further into debt, or use more general
fund money if we are to continue to meet our full obligation to
Social Security beneficiaries. By the year 2042, the trust fund
will be completely exhausted if steps aren't taken to save the
program.
At the root of Social Security's problems is the simple
fact that America is growing older. Today, more than 30 million
Americans are 65 and older. These numbers will rise
dramatically as the ``tidal wave'' of baby boomers--all 76
million of us--sweeps into retirement. Moreover, it is not just
that there will be more older Americans in the next century. It
is that older Americans will be living longer and longer.
And the rapidly increasing number of older persons is only
part of the equation. The ``baby boom'' was followed by a
``baby bust,'' and the inevitable result is that there will be
fewer workers to support each retiree in the future. In 1960,
there were five workers for each beneficiary. Today there are
scarcely three, and by 2030, there will be only two.
Last night, the President laid out his plan to overhaul
Social Security. Other Social Security reform plans have been
proposed by both Republican and Democratic members of Congress,
as well as by a variety of public policy groups. While there is
a consensus that action needs to be taken, there is less
certainly about what should be done, how soon it should be
done, and how quickly a consensus plan can be forged.
Clearly, action must be taken to preserve Social Security
for not just current, but future generations. And the sooner we
begin to deal with Social Security's financing problems, the
less disruptive the solution will be.
Given the universal importance of this program, however, it
is crucial that any changes be carefully thought out,
thoroughly understood, and have a solid basis of bipartisan
support that cuts across all age and income groups.
Mr. Chairman, that is why hearings like this are so
important. They give us the opportunity to discuss the scope
and nature of the problems facing Social Security as well as to
explore the ramifications of the various proposals to modernize
the program.
Again, I thank you for convening this important hearing,
and I look forward to hearing the testimony from our witnesses.
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