[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
PROPOSALS CERTIFIED TO SAVE SOCIAL SECURITY
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
FIRST SESSION
__________
JUNE 9 AND 10, 1999
__________
Serial 106-27
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
62-789 CC WASHINGTON : 2000
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
WES WATKINS, Oklahoma LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
SCOTT McINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
version. Because electronic submissions are used to prepare both
printed and electronic versions of the hearing record, the process of
converting between various electronic formats may introduce
unintentional errors or omissions. Such occurrences are inherent in the
current publication process and should diminish as the process is
further refined.
C O N T E N T S
__________
Page
Advisory of May 26, 1999, announcing the hearing................. 2
WITNESSES
Social Security Administration, Stephen C. Goss, Deputy Chief
Actuary, Office of the Chief Actuary........................... 260
__________
Archer, Hon. Bill, a Representative in Congress from the State of
Texas and Chairman, Committee on Ways and Means, U.S. House of
Representives.................................................. 223
Breaux, Hon. John B., a United States Senator from the State of
Louisiana...................................................... 117
DeFazio, Hon. Peter A., a Representative in Congress from the
State of Oregon................................................ 175
Gramm, Hon. Phil, a United States Senator from the State of Texas 68
Grassley, Hon. Charles E., a United States Senator from the State
of Iowa, and Chairman, Special Committee on Aging.............. 114
Gregg, Hon. Judd, a United States Senator from the State of New
Hampshire...................................................... 94
Kerrey, Hon. J. Robert, a United States Senator from the State of
Nebraska....................................................... 108
Kolbe, Hon. Jim, a Representative in Congress from the State of
Arizona........................................................ 134
Moynihan, Hon. Daniel Patrick, a United States Senator from the
State of New York.............................................. 89
Nadler, Hon. Jerrold, a Representative in Congress from the State
of New York.................................................... 177
Sanford, Hon. Marshall ``Mark'', a Representative in Congress
from the State of South Carolina............................... 185
Shaw, Hon. E. Clay, Jr., a Representative in Congress from the
State of Florida............................................... 226
Smith, Hon. Nick, a Representative in Congress from the State of
Michigan....................................................... 193
Stark, Hon. Fortney Pete, a Representative in Congress from the
State of California............................................ 50
Stenholm, Hon. Charles W., a Representative in Congress from the
State of Texas................................................. 137
SUBMISSIONS FOR THE RECORD
American Farm Bureau Federation, statement....................... 291
Eriksson, Wendell H., Minneapolis, MN, statement................. 292
National Center for Policy Analysis, John C. Goodman, statement
and attachment................................................. 300
Olsen, Darcy Ann, Cato Institute, statement and attachments...... 302
Retired Public Employees Association, Inc., Albany, NY, Cynthia
Wilson, statement.............................................. 311
United Seniors Association, Inc., Fairfax, VA, Hon. Dorcas R.
Hardy, statement............................................... 312
PROPOSALS CERTIFIED TO SAVE SOCIAL SECURITY
----------
WEDNESDAY, JUNE 9, 1999
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 10:06 a.m., in
room 1100, Longworth House Office Building, Hon. Bill Archer
(Chairman of the Committee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
May 26, 1999
No. FC-9
Archer Announces Hearing on Proposals
Certified to Save Social Security
Congressman Bill Archer (R-TX), Chairman of the Committee on Ways
and Means, today announced that the Committee will hold a 2-day hearing
on proposals, offered by Members of Congress to strengthen Social
Security, that would achieve 75-year solvency as estimated by the
Social Security Administration's Office of the Chief Actuary. The first
day of the hearing will take place on Wednesday, June 9, 1999, in the
main Committee hearing room, 1100 Longworth House Office Building,
beginning at 10:00 a.m. The hearing will be continued on Thursday, June
10, 1999, also in 1100 Longworth, beginning at 10:00 a.m.
Oral testimony will be heard from invited witnesses only. Invited
witnesses will include Members of Congress who have introduced
proposals that would restore Social Security's solvency over the next
75 years, as estimated by the Social Security Administration's Office
of the Chief Actuary. Witnesses will also include a representative of
the Social Security Administration's Office of the Chief Actuary. Any
individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.
BACKGROUND:
According to the Social Security Board of Trustees 1999 Annual
Report on the financial status of the Trust Funds, Social Security's
annual spending is projected to exceed its annual income in the year
2014, and the Trust Funds will be depleted by the year 2034. In
anticipation of Social Security's future funding shortfalls, several
Members of the House and Senate have offered proposals that would
strengthen Social Security's finances. Of particular note to the
Committee are proposals that would restore the program's solvency for
the upcoming 75-year period, the standard measure of the program's
long-term solvency, as estimated by the Social Security
Administration's Office of the Chief Actuary.
In announcing the hearing, Chairman Archer stated: ``The Social
Security proposals offered by Members of the House and Senate reveal
many points of agreement regarding the best way to save Social
Security. In order to resolve our differences and move ahead, we must
build on these points of consensus. I am convinced that, if we work
together, we will be able to save Social Security this year.''
FOCUS OF THE HEARING:
The Committee will hear the views of those Members of the House and
Senate who have introduced proposals to strengthen Social Security that
would achieve 75-year solvency as estimated by the Social Security
Administration's Office of the Chief Actuary. The Committee would like
each witness to address: (1) the specific provisions of their plan,
including a full explanation of any effects on taxes and benefits, (2)
the effects of the plan on Social Security Trust Funds and cash flows,
(3) the unified budget effects with financing costs, and (4) the use of
general revenues.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit six (6) single-
spaced copies of their statement, along with an IBM compatible 3.5-inch
diskette in WordPerfect 5.1 format, with their name, address, and
hearing date noted on a label, by the close of business, Thursday, June
24, 1999 , to A.L. Singleton, Chief of Staff, Committee on Ways and
Means, U.S. House of Representatives, Room 1102 Longworth House Office
Building, Washington, D.C. 20515. If those filing written statements
wish to have their statements distributed to the press and interested
public at the hearing, they may deliver 200 additional copies for this
purpose to the Committee office, Room 1102 Longworth House Office
Building, by close of business the day before the hearing.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be submitted on an IBM compatible 3.5-inch diskette in WordPerfect 5.1
format, typed in single space and may not exceed a total of 10 pages
including attachments. Witnesses are advised that the Committee will
rely on electronic submissions for printing the official hearing
record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, company, address, telephone and fax numbers where the witness or
the designated representative may be reached. This supplemental sheet
will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press,
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at ``HTTP://WWW.HOUSE.GOV/WAYS__MEANS/''.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman Archer. The Committee will come to order.
I know we were a little bit late in opening the doors and
letting our visitors and guests and the public enter, but the
Chair would encourage our visitors and guests to take seats as
quickly as possible so we can commence the hearings. We are
going to have a long day of hearings.
Good morning. As Social Security Subcommittee Chairman Clay
Shaw likes to say, ``If you say you are for saving Social
Security, now is the time to get out of the bleachers and onto
the playingfield.''
He is right. And that is precisely why we are here today.
We need to move past posturing, partisanship, and politics and
work together to get the job done. Indeed, the American people
want Congress and the President to act now to save Social
Security.
Speaker Hastert is committed to finding a bipartisan
solution for Social Security, and without objection, I enter
into the record a letter I received this morning from the
Speaker. Among other things, the letter states the following,
and I quote: ``As Speaker, I truly believe that, through hard
work and a strong commitment on both sides of the aisle and at
both ends of Pennsylvania Avenue, consensus is possible.
Today's hearing takes a step beyond the retirement security
safe deposit box and another step closer to finding a credible
proposal that saves and strengthens Social Security for 75
years and beyond.''
This and other recent developments make me optimistic that
we can save Social Security this year. I have personally met
with President Clinton, and he has assured me that he is
committed to finding a bipartisan solution. Likewise, my talks
with our friends on the Minority side have offered hope.
Everyone I believe does want to save Social Security. The
question, of course, is: How and when?
There are several plans that would save Social Security for
the requisite 75 years, and I congratulate every Senator and
Member of the House with the courage and conviction to touch
the so-called third rail of politics by introducing a plan.
Now, our challenge is to assess each of these plans and find
common ground among them, in hopes of building a bipartisan
consensus to save Social Security. This cannot be done by one
party. It is too important and touches the lives of every
single American.
What is encouraging to me is that most of the plans we
discuss today and tomorrow are a change from the past in that
they offer new and innovative solutions to Social Security's
problems. That is a welcomed change because history has shown
that simply raising taxes and/or cutting benefits only delays
the date of bankruptcy and will not save Social Security. I
served on the 1982-83 commission and voted against the ultimate
agreement for one primary reason: that it would not save Social
Security for 75 years. And I made that point within the
commission and in the debate on the floor of House.
Unfortunately, I was right. And we are back today.
Today, we must save Social Security, predictably and
objectively on a 75-year basis, and, yes, beyond for the next
century. We owe it not only to current seniors and retirees, we
owe it to those who have just been born--to my 13 grandchildren
and to your grandchildren, whether they are here today or
whether they will be coming sometime soon in the future.
Today's proposals offer a new direction. For example,
almost all of the plans seek to increase Social Security's rate
of return by taking advantage of the higher yields available in
the private equity and bond markets. In addition, there is
consensus that Social Security benefits should be at least
partially funded in advance to take pressure off of future
generations. There is not magic to how we solve the problem of
the baby-boomer retirement, when we will have only two workers
for every retiree instead of three for every retiree today. It
can be done only by two basic changes: presaving in advance;
prefunding in advance and increases in productivity. Otherwise,
our children and their children will be unable to bear the load
of taking care of their elderly while, at the same time,
improving their own standard of living. Unfortunately, we have
not faced up to this in past years, but we are doing it today.
And finally, because we are projecting surpluses in the
future, all of the plans before us rely on general revenues to
varying degrees. So, there's common ground among the plans, and
I encourage each of us here today to keep an open mind and a
cooperative spirit as we discuss each plan in detail. If we
continue to put principle before politics and ideas before
ambition, we can save Social Security this year. As the
President said, we have a once-in-a-blue-moon opportunity. The
longer we wait, the tougher it will be.
Yes, Social Security will survive for 35 years under
current projections. So why bother to work on it now? Why take
on this difficult challenge? And the answer is very simple: if
we do not, each Congress in succession will have a heavier load
and a more difficult burden. We do need to prove that a
democracy can plan in advance and not wait until it gets to the
edge of a cliff.
Finally, I would announce that, for the first time since
Chairman Rostenkowski did it in 1990, I will relinquish the
gavel tomorrow and take the witness stand to testify on the
Archer-Shaw Social Security Guarantee Plan. In my opinion, it
is only fair to subject myself to the same joy and delight that
all of the witnesses before us today will experience, and I am
greatly looking forward to that opportunity.
[The following was subsequently received:]
[GRAPHIC] [TIFF OMITTED] T2789.001
Chairman Archer. And I now recognize Mr. Rangel for any
statement that he might like to make in behalf of the Minority,
and without objection, every Member will be able to enter into
the record any written statement that they wish to make.
Mr. Rangel.
Mr. Rangel. Thank you, Mr. Chairman. I ask unanimous
consent that my full statement be placed in the record.
Chairman Archer. Without objection, so ordered.
Mr. Rangel. And I volunteer to take the gavel while you
testify. [Laughter.]
For whatever time, you know, you would be away.
Chairman Archer. Well, I know that the gentleman served
during the Korean Conflict, and I am sure he is well prepared.
Mr. Rangel. I want to thank you, Chairman Archer, for
taking this courageous step forward in having the President and
the Minority express their views on the sensitive, but
important, issue of saving of Social Security, as well as for
allowing us to have a better understanding as to exactly what
the Shaw-Archer talking points are and would soon become. I
look forward to your recommendations.
I do think that having these hearings and listening to
Members that have their exciting plans is a good educational
vehicle. I think the American people for the first time
understand that, even though we do not have a program that is
in immediate danger, the best time to deal with it is while we
have a surplus. As other people have said, when the sun is
shining is when you fix the roof.
All of the plans that we have to come up with have to have
some fiscal pain because none of us want to raise taxes or to
reduce benefits. I fail to understand why we have this
obsession with 75-year solvency. Being 69 years old, I cannot
really think that far ahead as to why this magic number was
selected. I know we want to be responsible to our
grandchildren, but there comes a time when we should be able to
pick a year that is closer to our understanding.
If, in 1924, Congress had been looking 75 years into the
future and had attempted to protect Social Security, with the
same vigor, energy, and dedication as some people are today,
Congress could not have predicted the Great Depression, World
War II, Vietnam, the Persian Gulf, or Korea. So it just seems
to me that, while we should do the best that we can, we should
not get locked into just a 75-year goal. The only thing we
would be doing then is committing ourselves to using general
revenue to say that the fund would be there. I think that
Social Security is already sensitive enough for future
Congresses.
In any event, as we listen to all of these plans, I do
hope, at some point, either at our hearings or at meetings that
you would be inclined to call, that we can develop a process
that could lead us toward bipartisanship, because I know that
you agree that the only way that we can tackle this is in a
bipartisan manner. It is not going to be done on C-SPAN, and it
is not going to done with these mikes in front of us. We have
to find out what areas of agreement and disagreement we have.
We have had the opportunity to pick apart the President's
plan, which will be put into legislative form this week. I
suspect that we will also be able to find some flaws in the
Archer-Shaw plan, but while we are doing this, I do hope that
the membership will keep a positive view in mind, because,
after we have found the flaws, we have the responsibility to
pick up the pieces and to move forward.
Now, I know that certain people believe that the second
worst thing after being in the Minority is being in the
Majority with six votes. Some people further believe that it
would be to our benefit if we just ignored Social Security and
asked the leadership to provide the votes on this and other key
issues. I know that most Democrats do not feel this way. We
truly believe that, if we can work together and show the
American people that Social Security is above partisanship, it
would help us in the elections as well as help Republicans by
getting people to come out and to understand that we can
disagree, but that we all have the national interest at heart.
And so, Mr. Chairman, I do hope that as we have these
public hearings and as Members share with us their views, there
will be some vehicle where we can actually work together as
Members of Congress, rather than Republicans and Democrats, to
see what it is that we agree on, what are the differences and
how we can work that out.
In any event, I want to thank you for calling these
hearings and giving me this opportunity to speak on behalf of
the Minority Democrats.
[The opening statements follow:]
Statement of Hon. Charles B. Rangel, a Representative in Congress from
the State of New York
Today we will hear from a number of Members of Congress
about the Social Security plans they have proposed. While I
look forward to hearing the views of all Members present, I am
particularly pleased to have the opportunity to examine the
plan that the Chairman of this Committee and the Chairman of
our Social Security Subcommittee announced over a month ago.
Since this is the first opportunity we have had to examine
the Archer-Shaw plan as a Committee, I hope that we will be
able to give the plan its full due today. Just as we subjected
the President's plan to rigorous critical analysis earlier this
year, we should direct our full attention to both the merits
and shortcomings of the Archer-Shaw plan.
We should not allow ourselves to be distracted today by the
politics surrounding Social Security reform. This is a time,
not to make political points, but to make history. We can make
history only by working together to craft a common solution,
not by dividing ourselves into certain camps for political
gain.
One possible area of common ground has been identified in
the proposal offered today by Representative Pete Stark. There
are many differences between the Archer Shaw proposal and the
Stark plan to preserve Social Security. However, both direct a
portion of the general revenue surplus (equivalent to 2% of the
taxable payroll) into the Social Security system in order to
achieve 75-year solvency. This similarity between Stark and
Archer-Shaw may be just the starting point we need to start the
process of negotiating bipartisan legislation that can become
law this year.
That process needs to begin soon. While these hearings are
better than nothing, action would be better than hearings. I
applaud Chairman Archer for calling these hearings after his
meeting with the President last month, but I would be surprised
if new information came out of them. All of the proposals
before us have been around for some time. My senior Senator
(Moynihan) introduced a version of his plan in March of last
year.
Soon, we will have to stop talking about all the various
plans and start the negotiating process. Chairman Archer and
Mr. Shaw have done much to push this process forward. They have
shown much courage by putting forth their proposal even while
their own Republican leadership preferred to avoid the issue.
They have gone out of their way to meet with me and Mr. Matsui
to discuss their plan and talk about places where we might find
common ground.
Unfortunately, the hard work of this Committee will be in
vain if the Republican leadership continues to sidestep the
Social Security issue. We cannot come together in a bipartisan
solution until each party's leadership is willing to put itself
behind a plan. On the Democrats' side, the President has put
forth a plan and we will introduce his plan as a bill in the
coming weeks. On the Republican side, the Chairman and Mr. Shaw
have their plan. However, the Republican leaders in both the
House and Senate have distanced themselves from the Archer-Shaw
proposal or any of the alternative proposals that will be
discussed in these hearings.
The Republican leadership's priorities are apparent from
the schedule for the next few months. According to the budget
resolution the Republicans passed, this Committee is to report
out, by July 16, a large tax bill that would consume a vast
chunk of the budget surplus that we may need to save Social
Security and Medicare. Democrats want to secure Social Security
and Medicare first before we spend any of the surplus.
While we have a date set for tax breaks, we do not have a
deadline for reporting Social Security reform out of this
Committee nor do we have deadline for reporting Medicare
reform. We do not have deadlines for action on these crucial
issues because the Republican leadership would rather squander
the budget surpluses on tax breaks, rather than reserving them
until we have strengthened Social Security and Medicare.
When we have budget surpluses is our best chance to meet
the challenges faced by the Social Security and Medicare
systems. If we act now, we can strengthen Social Security and
Medicare, extending their solvency while securing the same or
better level of service. If we procrastinate too long, our job
only gets tougher.
The time to fix the roof is when the sun is shining.
Democrats and many Republicans in this room stand ready, tools
in hand, to start work on fixing the roof. But the Republican
leadership seems to prefer heading to the beach on sunny days
and hoping the work mysteriously gets done anyway. Hopefully,
Mr. Chairman, these hearings will serve not just to reiterate
what has already been said, but also will sound a new call to
action to strengthen and secure Social Security.
Statement of Hon. William J. Coyne, a Representative in Congress from
the State of Pennsylvania
We are here today to discuss ways to strengthen one of our
most important and successful government programs: Social
Security. As we all know, the Social Security program, which
has served millions of Americans over the last 60 years, will
face a financial crisis in the coming decades. Because Social
Security is so critical to American workers, our Committee has
an obligation to save it first, before considering other
priorities.
Social Security has made life better for millions of
Americans. Before the Social Security program was established,
half of Americans over the age of 65 lived in poverty. Today,
only 10 percent of senior citizens live in poverty. In my
Congressional district, half of all retirees get all of their
income from Social Security.
Social Security also provides peace of mind for millions of
workers, who are secure in the knowledge that Social Security
will take care of them and their loved ones if they should die
or become disabled. Over sixteen million people under 65
receive disability and survivor benefits from Social Security.
For our hearing today, Chairman Archer has set one
important measure for all the plans we consider. A complete
plan must extend Social Security's solvency to 75 years.
However, I believe there are a number of other standards that
must be met by a complete plan.
A complete plan will maintain Social Security's guaranteed
benefit structure. It will not expose workers to the kind of
risk Social Security was designed to prevent.
A complete plan will preserve Social Security's survivor
and disability benefit for all workers and their families.
A complete plan will also provide for Medicare's future.
Medicare is a critical part of the safety net for elderly
people. Even with Medicare coverage, elderly people spend about
a third of their income on health care.
I look forward to hearing the testimony today. I hope that
our Committee will work together to report out a bipartisan
plan which meets the standards I have outlined.
Statement of Hon. Jim Ramstad, a Representative in Congress from the
State of Minnesota
Mr. Chairman, thank you for calling this important hearing
to review the proposals that our colleagues have introduced to
save Social Security.
As one who has always believed that we need to approach the
issue of securing the long-term financial solvency of this
vital program in a bipartisan, pragmatic way, I greatly
appreciate the opportunity to thoroughly review each proposal
that has been certified to keep Social Security solvent for
another 75 years. Certainly, with a program this complex, yet
this important, we need to review all options.
My constituents have told me at town meetings, and through
calls and letters, that they want real improvements to be made
so Social Security is operating as promised for current and
future beneficiaries. They also do not want taxes raised or
benefits cut. Most importantly, they believe financial
soundness is paramount in the design of any new system. These
are some of the basic elements I will be looking for in each
proposal reviewed today.
I also want to take a moment to thank the authors of all of
these proposals for having the courage to introduce them.
Knowing how sensitive the topic of Social Security is, I can
only imagine how long it took for the Members to study all of
the details, consult with experts, interest groups and
constituents in designing their plans.
While we may not agree on which approaches are best, I know
we are all committed to saving this important program. I look
forward to learning more today from our witnesses about the
elements of their proposals.
Chairman Archer. I thank the gentleman.
Before recognizing our first witness, I should alert the
Committee and the witnesses that, whereas our standard rule is
a 5-minute presentation by a witness, inasmuch as these plans
are, to some degree, complex and certainly comprehensive, the
Chair will permit a 10-minute presentation by each of the
witnesses verbally, and, of course, their written statement,
without objection, will be included in the record. But the
Chair intends to strictly enforce that 10-minute rule, and I am
reluctant to say that in the presence of some of our Senate
colleagues, who are used to speaking without limitation, but I
hope that they will be able to comply with that extension of
the House rule.
And without objection, I would like to place into the
record at this point copies of all the letters from the Social
Security actuaries on the various plans that we are considering
today in this hearing.
[The information follows:]
Social Security Administration
April 29, 1999
Harry C. Ballantyne
Chief Actuary
MEMORANDUM
Refer To: TCC
Subject: Long-Range OASDI Financial Effects of the Social Security
Guarantee Plan--INFORMATION
This memorandum provides long-range estimates of the financial
effects on the Social Security (OASDI) program for enactment of the
Social Security Guarantee (SSG) Plan proposed by Representatives Archer
and Shaw. This plan would provide for an annual contribution from the
General Fund of the Treasury to SSG individual accounts equal to 2
percent of each worker's OASDI taxable earnings beginning with earnings
in 1999.
Proceeds from these accounts would, commencing at the worker's
retirement (or disability), be transferred entirely to the OASDI trust
funds on a gradual basis. For workers who die before OASDI benefit
entitlement without potentially eligible survivors, the account balance
would go to the worker's estate, tax free. Benefits paid by the OASDI
program would be the higher of benefits scheduled under current law or
the scheduled SSG withdrawal rate based on a life-annuity calculation.
The combined OASDI payroll tax of 12.4 percent (6.2 percent for
employees and employers, each) is assumed to be reduced in future years
under the intermediate assumptions of the 1999 Trustees Report and
expected investment yields. The proposal would also include the gradual
elimination of the Social Security retirement earnings test between
2001 and 2006.
Enactment of this proposal, as specified, would be expected to
eliminate the estimated long-range OASDI actuarial deficit (2.07
percent of taxable payroll under present law). Under assumptions
described below, revenue transferred from the SSG accounts to the trust
funds would be sufficient to allow reductions in the combined OASDI
payroll tax rate of 2.5 percentage points in 2050 (from 12.4 to 9.9
percent) and 1 percentage point in 2060 (to 8.9 percent).
Estimates are provided for the SSG plan with and without the
specified payroll tax reductions. Estimates are also provided to
illustrate the sensitivity of the plan to possible variation in the
yield on SSG accounts.
All estimates assume elimination of the OASDI retirement earnings
test for ages 62 and older, gradually between 2001 and 2006. (This
change has a very small effect on the long-range financial status of
the OASDI program.) All estimates in this memorandum are based on the
intermediate assumptions of the 1999 Trustees Report, except as
indicated below.
The Proposal
Contributions and Investment Up To Benefit Entitlement
The proposal would provide Social Security covered workers
with refundable tax credits equivalent to 2 percent of their
OASDI taxable earnings for calendar years starting 1999.
Credits would be increased with interest from July 1 of the
year of taxable earnings, at the market yield on publicly-held
Federal debt, until paid. Credits would be paid from the
General Fund of the Treasury on October 15 (December 1 for
self-employment earnings) in the following calendar year for
the sole purpose of deposit in a SSG account. Credits for
earnings in 1999 would be delayed one additional year and paid
in 2001.
Accounts would be managed by mutual funds, qualified and
supervised by the Social Security Guarantee (SSG) Board. The
Board would consist of the six individuals appointed by the
Social Security (OASDI) Trustees.
Individuals would be required to hold all SSG assets in a
single fund and could change funds at most once per year.
Annual SSG credits would be pooled and transmitted to the
mutual fund managers by a central agency. Account holders would
receive annual notice of assets in their Social Security
Personal Earnings and Benefit Statements.
The proposal requires that all account balances be invested
in qualified mutual funds maintained with a portfolio
allocation of 60 percent stock index funds and 40 percent
corporate bonds. The charge for annual administrative expenses
would be limited to 25 basis points (excess expense, if any
would be made up from the General Fund of the Treasury).
Withdrawals prior to reaching retirement (or disability) would
not be permitted.
Earnings Test Elimination at Age 62+
The Social Security retirement earnings test annual exempt
amounts would be raised according to a specified schedule
through 2005, and the test would be eliminated starting 2006,
for all beneficiaries age 62 or older. For beneficiaries under
age 62, the current test would remain unchanged. The exempt
amounts would be specified for the test applicable at ages NRA
through 69 as $35,000 for 2003, $40,000 for 2004, and $45,000
for 2005. For the test applicable at ages 62 up to NRA, the
exempt amounts for years 2001 through 2005 would be set at
$15,000, $20,000, $25,000, $30,000, and $35,000, respectively.
This provision alone would have a negligible effect (between
0.005 and -0.005 percent of taxable payroll) on the OASDI
actuarial balance.
SSG Account Distributions
Under the plan, the SSG account balance of workers who
become entitled to OASDI retirement or disability benefits
would ultimately be transferred entirely to the OASDI trust
funds. Upon entitlement for Social Security retirement or
disability benefits, the Social Security Administration would
compute the monthly payment that could be provided from a life
annuity purchased with the holdings in the SSG account. The
annuity calculation would reflect the anticipated yield on the
SSG account (60 percent stock and 40 percent corporate bonds,
less 25 basis points for administration) and indexing of
annuity payments for price inflation (as for the Social
Security COLA). The annuity calculation would also reflect the
expected payment of aged spouse and aged survivor benefits if
the worker has a current spouse and/or a qualifying divorced
spouse (marriage lasted 10 years or longer).
If the computed monthly annuity amount exceeds the level of
current law scheduled OASDI benefits, then the Social Security
Administration would guarantee payment from the trust funds of
the computed annuity amount for life. If the computed annuity
amount is less than the level of the OASDI benefit, then the
OASDI benefit would be payable for life. Each month after
benefit entitlement the computed annuity amount based on
entitlement of the worker and any aged spouse(s) would be
transferred from the SSG account to the OASDI trust funds.
Because the computed annuity amount is based on a life
annuity calculation, the SSG account would be expected to be
depleted at the point where the beneficiary(ies) reach their
life expectancy, as estimated at the time of benefit
entitlement. Thus, for about half of the SSG accounts, benefits
will be payable after exhaustion of the SSG account entirely at
the expense of the OASDI trust funds. For the other half, death
before life expectancy will leave remaining SSG balances for
the payment of benefits to those who lived beyond life
expectancy. For workers who die prior to exhausting their SSG
account, but after becoming entitled to OASDI retirement or
disability benefits, the remaining balance in the SSG account
will be transferred to the account of any surviving spouse
potentially eligible for benefits payable by OASDI (as a
surviving spouse or surviving divorced spouse). At the point at
which a worker has died, and each spouse or qualifying divorced
spouse has also died, any remaining SSG account balance will be
transferred to the OASDI trust funds.
For workers who die before becoming entitled to OASDI
retirement or disability benefits, the balance in the SSG
account will be transferred to the account of any surviving
spouse potentially eligible for benefits payable by OASDI (as a
surviving spouse or surviving divorced spouse). If children of
the worker who are eligible for survivor benefits survive the
worker and any spouse, the SSG account will be maintained to
cover these benefits. At the point at which a worker has died
(prior to entitlement to any OASDI benefit), and each spouse or
qualifying divorced spouse has also died (prior to entitlement
to any OASDI benefit), and there are no eligible children, any
remaining SSG account balance will go to the estate of the
deceased, tax free.
OASDI Payroll Tax Rate Reduction
The plan calls for a reduction in the OASDI combined
payroll tax rate from 12.4 percent to 9.9 percent in 2050 and
to 8.9 percent in 2060. These reductions reflect the specified
SSG portfolio allocation with the assumed asset yields
described below. Payroll tax rate reductions are assumed to be
implemented if transfers from the SSG accounts to the trust
funds are large enough to raise the OASDI trust fund ratio
above 200 percent, with continued increase thereafter.
Assumptions
SSG Account Accumulation
SSG account portfolios are required to be invested, both prior to
retirement (or disability) benefit entitlement and after benefit
entitlement in qualified SSG funds that are must be maintained at 60
percent stock and 40 percent corporate bonds, with an annual
administrative expense charge of 25 basis points. The long-term
ultimate average real yield on stocks is assumed to be 7 percent, as
assumed by the 1994-96 Advisory Council. (It should be noted that while
the real yield on stocks has averaged 7 percent so far this century,
many speculate that future yield may average less.) The ultimate real
yield on long-term corporate bonds is assumed to average 3.5 percent,
or 0.5 percentage point higher than the 3.0 percent real yield for U.S.
Government long-term securities, as assumed for the 1999 Trustees
Report. This spread between corporate and U.S. Government bond yields
is consistent with the spread experienced over the past 40 or 70 years,
on average. It should be noted, however, the spread has been much
smaller over the past 20 years. The expected ultimate real portfolio
yield for the base projection (alternative 1) would thus be 5.35
percent, net of administrative expense,
(0.6 * 7% + 0.4 * 3.5% - 0.25% = 5.35).
A range of administrative expense factors was assumed for
individual accounts proposed by the 1994-96 Advisory Council on Social
Security. For the Individual Account (IA) plan, individual
contributions were assumed to be collected and recorded by central
institution, invested in large blocks with financial institutions, and
invested in a limited number of indexed funds. Based on experience of
TIAA and the Federal Employee Thrift Savings Plan (TSP) it was assumed
that the IA plan could be administered with an expense of 10.5 basis
points per year. For the Personal Security Accounts (PSAs), individual
accounts were assumed to be invested on an individual basis, resulting
in an annual administrative expense of 100 basis points. Because the
description of SSG individual accounts is far closer to the individual
accounts for the IA plan than to the individual accounts for the PSA
plan, the specified administrative expense factor of 25 basis points
for SSG accounts appears to be reasonable.
Distribution of SSG Accounts
Life annuity calculations for the purpose of determining the size
of monthly transfers from SSG balances to the OASDI trust funds assume
a real yield equal to the net expected real yield on SSG accounts, as
specified. Mortality estimates for these calculations are based on the
intermediate projections of the 1999 trustees report.
Annuity calculations are assumed to be made on a unisex basis for
workers with no spouse or qualified divorced spouse (marriage lasting
at least 10 years). For those with a spouse, annuity calculations would
be on a joint and survivor basis intended to roughly match the expected
payment of OASDI benefits. For the purpose of these calculations, a
joint and 2/3 survivor annuity is assumed. Thus, the amounts
transferred to OASDI from the SSG account of a married beneficiary
would be reduced by 1/3 upon the death of either the worker or the
spouse.
Under the SSG account yields assumed for these estimates, expected
transfers from SSG accounts after benefit entitlement would be less
than expected OASDI benefits for virtually all future beneficiaries.
However, single workers with very high earnings, close to or above the
OASDI maximum taxable amount throughout their careers would have
transfers from their SSG accounts greater than current law benefits if
the investment return during their working years exceeded the assumed
long-range average return used for these estimates. High-earning
married workers would be far less likely to have transfers that exceed
current-law benefits because the joint-and-survivor annuity calculation
would provide lower transfers than for single workers, and current law
OASDI benefits for married workers would tend to be higher.
Estimated Effect On OASDI Financing
The table below provides the estimated OASDI actuarial
balance, the change in the actuarial balance, and the estimated
year of combined OASDI trust fund exhaustion for the SSG Plan
as described above. To illustrate the full extent of the
expected value of transfers from the SSG accounts to the OASDI
trust funds, the estimated financial effects of the SSG Plan
without the specified reductions in the OASDI payroll tax rate
are also included in the table below.
Under the SSG Plan, the OASDI actuarial balance would be
improved by 2.15 percent of effective taxable payroll, from a
balance of -2.07 percent under current law to a positive
balance of 0.09 percent of payroll under the plan. The OASDI
trust fund as a percent of annual OASDI outgo (the trust fund
ratio) would be expected to remain positive throughout the
long-range 75-year projection period, thus allowing timely
payment of benefits in full through 2073, and beyond. The trust
fund ratio would be expected to decline to about 132 percent at
the beginning of 2041, and to increase thereafter. The combined
OASDI payroll tax rate would be reduced from 12.4 percent to
9.9 percent for the period 2050 through 2059 and to 8.9 percent
for 2060 and later. Even with these reductions in the payroll
tax rate, the trust fund ratio would be expected to be stable
at about 240 percent of annual outgo at the end of the long-
range 75-year projection period. See table 1a attached for
details.
Estimated Effects on OASDI Financial Status of the Social Security
Guarantee (SSG) Plan
(percent of taxable payroll)
------------------------------------------------------------------------
Estimated
Estimated Change in Year
OASDI OASDI Exhaust
Actuarial Actuarial OASDI Trust
Balance Balance Funds
------------------------------------------------------------------------
Present Law (No SSG)............. -2.07 -- 2034
SSG Plan \1\
60% Stock, 40% Corp Bond
Assess only .25% Admin Cost...... +0.09 2.15 NA
Illustration of SSG Plan Without
Reduced Payroll Tax
60% Stock, 40% Corp Bond
Assess only .25% Admin Cost...... +0.65 2.71 NA
------------------------------------------------------------------------
\1\ Payroll tax rate would be reduced from 12.4 to 9.9 in 2050 and 8.9
in 2060.
Based on intermediate assumptions of the 1999 Trustees Report and other
assumptions described in the text.
The table above also includes an illustration of the
potential financial effect of the SSG Plan on Social Security
if the specified reductions in the OASDI payroll tax rate were
not included. This provides an indication of the full effect on
OASDI of the expected transfers from SSG accounts to OASDI
trust funds under the plan. Without the specified payroll tax
rate reduction, the OASDI actuarial balance would be improved
by 2.71 percent of taxable payroll, from a balance of -2.07
percent under current law to a positive balance of 0.65 percent
of payroll under the plan without specified payroll tax rate
reduction. Without the payroll tax rate reduction, the OASDI
trust fund ratio would be expected to rise to over 10 times
annual outgo by the end of the long-range period due to the
magnitude of transfers from the SSG accounts.
Sensitivity to SSG Account Investment Yields
The effect of the SSG Plan on the financial status of the
OASDI program depends greatly on the actual yield that is
achieved for investments in the SSG accounts. Returns on all
investments are uncertain, and returns on stocks are
particularly variable over time. For this reason it is
important to consider the sensitivity of the financial status
of the OASDI program to possible variation in expected
investment yield. Note that the 1999 Trustees Report provides
this sensitivity analysis for the OASDI program under current
law on page 138.
The table below provides the estimated OASDI actuarial
balance, the change in the actuarial balance, and the estimated
year of combined OASDI trust fund exhaustion for the SSG Plan
with two different SSG yield assumptions in order to illustrate
the sensitivity of the proposal to possible variation in the
ultimate average returns on stock and corporate bonds.
Under sensitivity illustration 2, the average yield on SSG
accounts is assumed to be 1 percentage point higher than
expected for the accounts invested in 60 percent stock and 40
percent corporate bonds. Under this illustration, the OASDI
trust fund ratio would be expected to decline to about 215
percent at the beginning of 2036, and to increase thereafter.
The actuarial deficit would be eliminated under the SSG plan,
and the combined OASDI payroll tax rate could be reduced from
12.4 percent to 9.4 percent for 2040 to2049, 6.4 percent for
2050 to 2059, and 4.4 percent for 2060 and later. Even with
these reductions in the payroll tax rate, the trust fund ratio
would be expected to be stable at about 300 percent at the end
of the long-range 75-year projection period and the actuarial
balance would be estimate positive 0.07 percent of payroll.
Without the reduced payroll tax rate, illustration 2A, the
OASDI trust fund ratio would be expected to rise to more than
50 times annual OASDI net cost (net of SSG transfers) by the
end of the long-range period and the actuarial balance would be
a positive 1.69 percent of payroll.
Sensitivity Analysis: Effect of Variation in Expected SSG Investment
Yield Rates on OASDI Financial Status
(percent of taxable payroll)
------------------------------------------------------------------------
Estimated
Estimated Change in Year
OASDI OASDI Exhaust
Actuarial Actuarial OASDI Trust
Balance Balance Funds
------------------------------------------------------------------------
Present Law (No SSG)............. -2.07 -- 2034
2: SSG Plan with 1% Higher Than
Expected Yield \2\
6.35% average net yield.......... +0.07 2.13 NA
2A: SSG Plan with 1% Higher Than
Expected Yield Without Reduced
Payroll Tax
6.35% average net yield.......... +1.69 3.76 NA
3A: SSG Plan with 1% Lower Than
Expected Yield \3\
4.35% average net yield.......... -0.08 1.98 2048
------------------------------------------------------------------------
\1\ Payroll tax rate reduced to 9.4 in 2040, 6.4 in 2050, and 4.4 in
2060.
\2\ No payroll tax rate reduction.
Based on intermediate assumptions of the 1999 Trustees Report and other
assumptions described in the text.
Under sensitivity illustration 3A, the average yield on SSG
accounts is assumed to be 1 percentage point lower than
expected for the accounts invested in 60 percent stock and 40
percent corporate bonds. Under this illustration, the OASDI
trust fund ratio would be expected to become exhausted in 2048.
However, the OASDI actuarial balance would be improved by about
1.98 percent of taxable payroll under this assumption, leaving
an actuarial deficit of only 0.08 percent of payroll.
Annual Estimates of SSG Fund Operations and Estimated Effects on the
Unified Budget Balance
Tables 1b, attached, provides estimates of aggregate SSG
account balances, total contributions to and transfers from SSG
accounts, and rough estimates of the effects of other changes
to the OASDI program (earnings test elimination). A very rough
estimate of the effects of the SSG Plan on the annual Federal
unified budget balance for calendar years 2000 and later is
also provided.
These estimates are based completely on the intermediate
assumptions of the 1999 Trustees Report, including the trust-
fund interest assumption, and thus are not consistent with
projections made by CBO and OMB (which use different
assumptions. However, differences in payroll and benefit
estimates are not large during the first 10 projection years so
these values can be viewed as very rough approximations of the
magnitude of effects on the unified budget balances through
this period.
Under the SSG plan with the expected yield on the specified account
portfolio, amounts transferred from the SSG accounts to the OASDI trust
funds would at first be small, but would exceed credits to the SSG
accounts from the General Fund of the Treasury by about 2031. Including
the relatively small effects of the elimination of the earnings test at
ages 62 and above, the estimated change in the unified budget ``cash
flow'' (excluding interest effects) would also be negative until 2031.
Including the cumulative effects of interest and the change in the
OASDI payroll tax rate, the year in which the effect of the SSG plan on
the unified budget annual balance would be expected to become
permanently positive is 2054.
Stephen C. Goss
Deputy Chief Actuary
Attachments
[GRAPHIC] [TIFF OMITTED] T2789.002
[GRAPHIC] [TIFF OMITTED] T2789.003
Social Security Administration
June 6, 1999
Harry Ballantyne
Chief Actuary
MEMORANDUM
Refer To: TCC
Subject: Estimated Long-Range OASDI Financial Effect of the Draft
Social Security Financial Solvency Act of 1999--INFORMATION
This memorandum provides the estimated effect on long-range OASDI
financial status of the draft Social Security Financial Solvency Act of
1999. This proposal was provided in draft by Sandy Wise and Al Davis,
minority staff for the House Ways and Means Subcommittee on Social
Security. Estimates are based on the intermediate assumptions of the
1999 Trustees Report.
The proposal would provide for transfers from the General Fund of
the Treasury, for each year starting 1999. Transfers each year would be
in an amount equal to 2.07 percent of taxable Social Security payroll
(TSSP). TSSP is defined as the sum of wages and self-employment income,
as defined in the Social Security Act. TSSP, or taxable earnings, is
thus equal to the total amount of earned income subject to any of the
payroll tax on wages and self-employment income.
The TSSP amount is slightly higher than the OASDI effective taxable
payroll (ETP). These values differ in two ways. First, ETP includes
deemed military wage credits, which are excluded from taxable earnings
(TSSP). Second, ETP includes only one half of wage earnings that are
subject to employer tax only (these are referred to as multi-employer
excess earnings). For an employee with more than one employer during a
year, the employee's total taxable earnings from all employers for the
year is limited to the taxable maximum. Each employer's taxable amount
reflects only the wages that that employer paid to the employee.
This proposal would increase the income rate for the OASDI program
by 2.076 percent of effective taxable payroll, improving the OASDI
actuarial balance by the same amount. The long-range OASDI actuarial
deficit of 2.07 percent of effective taxable payroll, under present
law, would thus become a positive actuarial balance of 0.01 percent of
effective taxable payroll under this proposal.
The projected OASDI combined trust fund assets, as a percent of
annual cost, would be expected to rise to a peak of 648 percent in
2018, and would decline thereafter reaching an expected level of 108
percent at the end of the 75-year long-range period. At the end of the
period, the combined trust fund would be declining as a percent of
annual cost by about 20 percentage points per year. The attached table
provides year-by-year projections of the expected long-range financial
status of the OASDI program.
Stephen C. Goss
Deputy Chief Actuary
Attachment
[GRAPHIC] [TIFF OMITTED] T2789.004
Social Security Administration
April 16, 1999
Senator Phil Gramm
MEMORANDUM
Refer To: TCC
Subject: Preliminary Analysis of the Effects of The Social Security
Preservation Act on OASDI Program Financing--INFORMATION
The attached tables provide a preliminary analysis of the plan
reflecting the provisions outlined below. All estimates are based on
the intermediate assumptions of the 1999 Trustees Report.
As described below, the plan would eliminate the long-range OASDI
actuarial deficit, estimated at 2.07 percent of taxable payroll under
present law. The OASDI trust fund would be substantial and rising at
the end of the long-range 75-year period.
The Plan
The plan would establish SAFE Accounts beginning in the
year 2000 with contributions equal to 3 percent of each
worker's OASDI covered taxable earnings from the OASDI trust
funds. An additional 2 percent of taxable earnings would be
contributed from the OASDI trust funds for all workers who are
age 35, 36, . . , 55 at the beginning of 2000. The OASDI trust
funds would be reimbursed from General Fund of the Treasury,
making use of the General Budget surplus that is currently
projected.
SAFE Accounts would be established under regulation of a
Board, with a maximum administrative expense of 0.3 percent of
assets each year. It is not clear what discretion individuals
would be allowed in selecting their portfolio allocation.
At retirement, SAFER-Annuity payments would be made from
accounts that would continue to be invested as prior to
retirement. Monthly payments from the SAFER Annuities would be
determined at the time of OASDI benefit entitlement based on a
CPI-indexed life-annuity calculation reflecting the account
balance at that time, the existence of an eligible spouse or
divorced spouse and any other family members who might
potentially receive OASDI benefits in the future, and the
``expected'' future yield on the assets in the SAFER Annuity.
Separate payments would be determined based on the accumulation
of the 3-percent contributions and the accumulation of
supplemental contributions of 2 percent for those ages 35-55 in
2000. The SAFER Annuity would make these payments, with
adjustment for price inflation, for all individuals with
potential OASDI benefits from the workers earnings. SAFER
Annuities would also be limited to an administrative expense
factor of 0.3 percent.
If an individual dies before retiring, with no potential
survivor beneficiaries, the balance in the SAFE Annuity goes
entirely to the worker's estate. Because SAFER Annuity payments
are treated like life annuities, any remaining balance in the
SAFER Annuity of an individual who dies prematurely remains in
the SAFER fund to cover the expense of those who live longer
than expected.
The Social Security program would offset (reduce) benefits
by 80 percent of the amount paid from the 3-percent SAFER
accumulation (and by 100 percent of the 2-percent SAFE Account
accumulation), and guarantees that individual will receive
lifetime payments from the SAFER Annuities and OASDI combined,
that are at least equal to present law OASDI monthly benefits
plus 20 percent of the calculated annuity-like payment from the
3-percent SAFER Annuity. Because the Social Security trust
funds are the ultimate guarantee of benefit payments, it is
critical that expected yields on SAFER Annuities not be
overestimated.
The ``recapture of corporate tax'' on individual account
yield would be directed to the OASDI trust funds. This
recapture would be specified in law, intending to reflect the
additional corporate taxes resulting from the additional
domestic corporate investment from account assets. The plan
would specify that the recapture would be assumed to equal 23.9
percent of the real, before tax, corporate return on
investments. Because reported real yield on accounts would be
after corporate tax, and the 23.9 percent rate is intended to
apply to corporate income before tax, the actual rate applied
to after tax income would be 31.4% = 23.9%/(1 - .239). This
provision would provide a substantial and growing source of
income to the OASDI program.
The reimbursement of the OASDI trust funds for the cost of
SAFE Account investments would be permanently reduced in any
year by as much as possible so that future expected OASDI tax
income (including corporate tax recapture) would never fall
below expected OASDI cost (reduced by benefit offset from the
SAFER payments).
Results
Table 1.0 illustrates the expected financing of OASDI
assuming the SAFE Accounts and SAFER Annuities yield a real
return of 5.5 percent on average, with an administrative
expense of 0.3 percent. Under this assumption, an immediate
reduction in the amount of reimbursement to the OASDI trust
funds of 0.4 percentage point would be made in 2000. Additional
reductions in reimbursements to the trust funds would commence
in 2026, as the payroll tax required for OASDI would fall to
5.8 percent by 2066. By 2040, the payroll tax required for
OASDI would be reduced by 3.5 percent, from 12.4 to 8.9
percent. With the full 12.4 percent payroll tax still in
effect, the portion not needed for OASDI would effectively pay
for the entire SAFE-Account contributions from that point
forward. Further reductions in the payroll tax required for
OASDI could be used to increase the size of the SAFE
contribution after 2040.
Achieving the 5.5 percent real yield in the example above
would require investment in 63 percent stock, with a real yield
of 7 percent and 37 percent in long-term U.S. Government bonds
with a real yield of 3 percent. Assuring that the average
investor put this high a portion of the account in stock might
require restriction on investment choice. Currently 401-K
investments are invested only about 50 percent in stock, based
on information obtained by the 1994-96 Advisory Council.
However, because the Federal government would effectively share
the risk of investing in SAFE Accounts and SAFER Annuities,
many workers may opt for a more aggressive investment portfolio
that in 401-K's.
If accounts were invested about 50 percent in stock, and 50
percent in U.S. Government bonds, the expected average real
yield would be 5 percent, or 4.7 percent after administrative
expense. Under this assumption the reimbursement to OASDI could
be permanently reduced in 2000, but reductions would begin in
2028. reductions would total 3.1 percent by 2044, so that the
cost of SAFE contributions would be covered by the payroll tax
not credited to OASDI from that point forward. By 2060, the
amount of the payroll tax rate required for OASDI would be
expected to be 8.0 percent.
Table 3.0 illustrates that even if individual accounts were
to achieve a real yield of only 3 percent (the expected real
yield on U.S. Government bonds), 2.7 percent after
administrative expense, the OASDI trust Funds would still be
solvent for the long-range period, and the trust fund ratio
would be relatively stable at the end of the period. However,
the entire 12.4 percent payroll tax would continue to be
required for the OASDI program.
Stephen C. Goss
Deputy Chief Actuary
Attachments 02
[GRAPHIC] [TIFF OMITTED] T2789.005
[GRAPHIC] [TIFF OMITTED] T2789.006
[GRAPHIC] [TIFF OMITTED] T2789.007
Social Security Administration
January 13, 1999
Harry C. Ballantyne
Chief Actuary
MEMORANDUM
Refer To: TCC
Subject: Estimates of Long-Range OASDI Financial Effect of a Possible
Modification of The Social Security Solvency Act of 1998,
Proposed by Senator Moynihan--INFORMATION
This memorandum provides long-range estimates, based on the
intermediate assumptions of the 1998 Trustees Report, for a possible
modification under consideration for The Social Security Solvency Act
of 1998 (S.1792), proposed by Senators Moynihan and Kerrey. This
analysis has been produced at the request of David Podoff of Senator
Moynihan's staff. An earlier memorandum, dated March 4, 1998, provides
long-range estimates of S.1792, based on the intermediate assumptions
of the 1997 Trustees Report.
The possible modification of the comprehensive proposal is
described in Table A, attached. For each individual provision and for
the total proposed package, Table A provides the following estimates:
The change, from present law, in the long-range OASDI
actuarial balance.
The change, from present law, in the OASDI annual income
rate in 2070.
The change, from present law, in the OASDI annual cost
rate in 2070.
The change, from present law, in the OASDI annual balance
in 2070.
If all modifications are implemented and tax rates are changed as
shown in Table A (including the 1 percentage point reduction in COLA),
the resulting long-range actuarial balance for the 75-year period
(1998-2072) is estimated to be +0.03 percent of taxable payroll. The
trust fund ratio (ratio of trust fund assets to annual outgo) would
increase from 171 percent as of the beginning of 1998 to 286 percent as
of the beginning of 2014. The trust fund ratio would then decrease to
130 percent as of the beginning of 2035. For the remaining period of
the long-range projection period (2036-2072), the fund ratio would stay
relatively stable (between 128 and 135).
Table A. Estimated Long-Range OASDI Financial Effect of Possible Modification to S.1792 (Moynihan/Kerrey)
Estimated Change in Annual Measures: 2070
----------------------------------------------------------------------------------------------------------------
Actuarial
Provision Balance (75- Income Rate Cost Rate Annual
year) Balance
----------------------------------------------------------------------------------------------------------------
1 For 1999 and later, reduce the OASDI automatic cost of 1.44 -0.12 -2.43 2.31
living adjustment (COLA) by 1.0 percentage point...........
2 Subject OASDI benefits to income tax in a manner similar 0.40 0.22 0.00 0.22
to that prescribed for benefits received from private and
government employee defined benefit pension plans, with all
current thresholds levels for taxing OASDI benefits
eliminated. This provision is phased in over the period
2000-2004..................................................
3 Extend OASDI coverage to all State and local government 0.21 0.00 -0.02 0.02
employees hired after 2001.................................
4 Increase maximum computation period from 35 years to 38 0.25 -0.02 -0.44 0.41
years for retirement, survivor, and disability (death or
disability entitlement at age 62 or higher). The
computation period would increase to 36 years for those
first eligible in 2002, 37 years for those first eligible
in 2003, and 38 years for those first eligible after 2003..
5 Retain the normal retirement age (NRA) at age 65. 0.70 -0.12 -1.81 1.69
Multiply all benefit formula factors (90, 32, and 15) by
0.988 for 2000-2017 and by 0.997 for 2018-2065. The
resulting factors for beneficiaries age 62 in 2065 are
62.70, 22.29, and 10.45. Disability and young survivor
beneficiaries maintain the current formula factors.
(Details concerning the calculation of benefits for the
disabled and aged widows are being developed.).............
6 Effective 1/1/2003, eliminate the retirement earnings 0.01 -0.01 -0.28 0.27
test for beneficiaries age 62 and older....................
7 Raise the OASDI contribution and benefit base to $87,000 0.24 -0.01 -0.25 0.24
in 2002, $94,000 in 2003, and $99,900 in 2004. After 2004,
resume indexing the contribution and benefit base using the
average wage index.........................................
---------------------------------------------------
Total for Provisions 1 through 7 (adjusted to take account 2.95 -0.11 -4.68 4.57
of interactions)...........................................
===================================================
8 Change the OASI and DI payroll tax beginning in 2000 as -0.73 1.30 0.00 1.30
follows (adjusted to take account of interactions): 11.4%
for years 2000-2001; 10.4% for years 2002-2029; 12.4% for
years 2030-2034; 12.9% for years 2035-2049; 13.3% for years
2050-2059; 13.7% for years 2060+...........................
---------------------------------------------------
Total for Provisions 1 through 8 (adjusted to take account 2.22 1.19 -4.68 5.87
of interactions)...........................................
----------------------------------------------------------------------------------------------------------------
Based on the intermediate assumptions of the 1998 Trustees Report under present law, the long-range actuarial
balance for the 75-year period (1998-2072) is estimated to be -2.19 percent of taxable payroll. For 2070, the
annual income rate, annual cost rate, and annual balance are 13.34, 19.54, and -6.20 respectively.
\1\ The indicated effect on the Actuarial Balance is for a legislative change that would reduce the COLA by this
amount. If instead, the COLA is reduced by this amount, on average, as a result of technical changes in the
CPI by the BLS, the effect on the Actuarial Balance may be smaller because of potential related changes in
other economic parameters.
\2\ This provision is assumed to achieve the same cost effect as gradually increasing the normal retirement age
(NRA) to age 70 as in S.1792.
Office of the Actuary, Social Security Administration, January 13, 1999
Social Security Administration
June 3, 1999
Harry C. Ballantyne
Chief Actuary
MEMORANDUM
Refer To: TCC
Subject: Estimated Long-Range OASDI Financial Effects of a Bipartisan
Social Security Proposal--INFORMATION
This memorandum provides estimates of the effect on the financial
status of the OASDI program of a plan developed by Senators Gregg,
Breaux, Kerrey (B), and Grassley. All estimates are based on the
intermediate assumptions of the 1999 Trustees Report.
Long-Range Financial Effects
The plan would improve the OASDI actuarial balance by an
estimated 2.35 percent of taxable payroll, eliminating the
actuarial deficit of 2.07 percent of taxable payroll under
present law and resulting in a positive actuarial balance of
about 0.28 percent of taxable payroll. The level of OASDI trust
fund assets as a percentage of annual OASDI cost (the trust
fund ratio) would be expected to decline after reaching 252
percent in 2014, to a low point of 104 percent at the beginning
of 2041. The trust fund ratio would rise after 2041, reaching a
level of 505 percent at the end of the long-range (75-year)
period, at which point the trust fund ratio would be rising by
about 20 percentage points each year. Table 2, attached,
provides estimated annual cost rates, annual income rates,
annual balances, as well as annual trust fund ratios.
Description of Provisions
As shown in the attached Table 1, the plan consists of 13
provisions.
Provision 1 would create a new PIA bend point between the
current two bend points, splitting the PIA bracket where the
32-percent PIA factor currently applies in two. Rather than 32
percent, PIA factors of 70 and 20 would apply above and below
the new bend point within this bracket. The PIA factor of 15
percent would be replaced with 10 percent above the top bend
point. This provision would be phased in gradually between 2006
and 2015, and is designed to have no net effect on the long-
range cost of the OASDI program.
Provision 2a would eliminate the 11-year hiatus between the
increase in the normal retirement age (NRA) from 65 to 66
(2000-05) and the increase from 66 to 67 (2017-22). The NRA
would thus be increased by 2 months per year beginning 2000
until the NRA of 67 is reached for individuals attaining age 62
in 2011 and later.
Provision 2b would change the early retirement factors and
delayed retirement credits in an attempt to reflect the fact
that the marginal increase in the full (PIA) benefit level for
earnings after reaching retirement age is, generally,
relatively small. (Reduction and increment factors provided
under current law are intended to provide actuarially
equivalent lifetime benefits payable at different starting ages
for a fixed earnings history.) This relatively small marginal
increase results from the weighted PIA benefit formula, which
provides a larger marginal amount of benefit per dollar of AIME
for low, or early-in-career, earnings. This provision is
intended to eliminate the marginal disincentive to work past
EEA that is provided by the weighting in the PIA formula.
Because the extent of this marginal effect depends upon the
level of earnings a worker has had in earlier years, no
absolute adjustment can be provided that would be appropriate
for all workers. Rough estimates of adjustments to the
reduction and increment factors have thus been used.
The chart below displays the proposed monthly early
retirement reductions that are applicable for retired worker
beneficiaries for the first 36 months for which benefits are
received prior to NRA under both current law and the provision.
(Different factors apply to aged spouse beneficiaries and aged
widow beneficiaries.)
Similar increases for aged spouse beneficiaries would be
applied, increasing the monthly reduction for the first 36
months of entitlement before NRA from 25/36 percent under
present law to 30/36 percent under the provision.
Monthly Reduction in Benefits for Each of First 36 Months of Retirement Before NRA
----------------------------------------------------------------------------------------------------------------
Age 62 in: 2001 2002 2003 2004 2005 2006+
----------------------------------------------------------------------------------------------------------------
Present Law................................... 20/36% 20/36% 20/36% 20/36% 20/36% 20/36%
Proposal...................................... 20/36% 21/36% 22/36% 23/36% 24/36% 25/36%
----------------------------------------------------------------------------------------------------------------
The reductions that are proposed for the fourth and fifth
year before NRA are 12/24% per month (current law reductions
are 10/24% per month) for both retired worker and aged spouse
beneficiaries. The reductions for the fourth and fifth year
before NRA are applicable to all new eligibles who reach age 62
after 1999.
The delayed retirement credit (DRC) under present law is
scheduled to increase to 8% per year for workers attaining age
65 after 2007. The DRC would continue to increase at the rate
of 0.5 percentage point every two years, with the first
increase applied to those attaining age 65 in 2010. An ultimate
factor of 10 percentage points per year is reached for workers
reaching 65 after 2015. The delayed retirement credit applies
for months for which retired worker benefits are not received
between NRA and age 70.
The ultimate percentages of PIA payable for retired workers
by age at initial benefit entitlement are shown below.
Ultimate Percent of PIA Payable for Retired Worker Beneficiaries by Age at Initial Entitlement to Benefits
----------------------------------------------------------------------------------------------------------------
Age at Initial Entitlement: NRA-5 NRA-4 NRA-3 NRA-2 NRA-1 NRA
----------------------------------------------------------------------------------------------------------------
Present Law................................... 70% 75% 80% 86.7% 93.3% 100%
Proposal...................................... 63% 69% 75% 83.3% 91.7% 100%
----------------------------------------------------------------------------------------------------------------
The percentage of PIA payable for non-disabled aged widow
beneficiaries newly eligible at age 60 would remain at 71.5
percent. The percentages payable for those newly eligible at
ages between 60 and the NRA would scale linearly between 71.5
and 100 percent, as under present law.
Provision 3 would gradually reduce the size of all of the
PIA factors in a manner that would roughly approximate the
effect of continuing the increase in the NRA at 2 months per
year to age 68, with indexing thereafter to an NRA of 70 by
2065. Rather than modifying the NRA, the provision would reduce
each of the PIA factors (90, 32, 15 under current law, and 90,
70, 20, 10 after provision 1) by 1.2 percent (multiply by
0.988) each year 2012-17, and by 0.03 percent (multiply by
0.997) each year 2018 through 2065.
The PIA factors would ultimately be reduced by about 19.5
percent under this provision, from levels of 90, 32, 15 to
levels of 72.47, 25.77, 12.08, under current law, or from 90,
70, 20, 10 to levels of 72.47, 56.36, 16.10, 8.05 after
provision 1. The modified PIA would apply to benefits payable
for most retired worker, aged spouse, and aged surviving spouse
beneficiaries. The current-law, unmodified PIA formula would
apply for disabled worker beneficiaries, and to retirement
benefits payable to disabled workers converted to retirement
status at NRA (and their dependents).
Provision 4 would gradually increase the PIA benefit
computation period for retired workers from 35 to 40 years,
except for the lower earner of a married couple. The provision
would also allow the inclusion of earnings of all years in the
numerator of the AIME, even if the number of years with
earnings exceeds 40.
This provision would apply in determining benefits for
retired worker and their dependents and for survivors of
deceased workers. This provision does not apply in determining
benefits for disabled workers and their dependents.
In calculating the AIME for a retired worker under present
law, the highest 35 years of indexed earnings are used in
determining the numerator of the AIME and a benefit computation
period of 35 years is used in determining the denominator.
Under this provision, the following changes are made in the
calculation of the AIME for someone newly eligible for
retirement benefits after 2001.
The number of years of earnings, used in
calculating the numerator of the AIME, is gradually increased,
reaching all years of earnings in 2010.
The benefit computation period, used in
determining the denominator of the AIME, is gradually
increased, reaching 40 years (5 additional years), except for
the lower earner of a married couple. In the case of a two-
earner couple, the benefit computation period for the earner
with the lower PIA is 35 years.
The chart below indicates the phase in schedule of the
above changes.
Change in Calculation of AIME for Retired Worker
(assumes the retired worker is not the lower earner of a married couple)
----------------------------------------------------------------------------------------------------------------
2002- 2004- 2006- 2008-
Newly Eligible in Years: 2003 2005 2007 2009 2010+
----------------------------------------------------------------------------------------------------------------
Present Law
Years in Numerator.................................... 35 35 35 35 35
Denominator (in years................................. 35 35 35 35 35
Proposal
Years in Numerator.................................... 37 39 41 43 all
Denominator (in years................................. 36 37 38 39 40
----------------------------------------------------------------------------------------------------------------
\1\ Years in Numerator: Refers to the number of years of earnings used in calculating the numerator of the AIME.
\2\ Denominator (in years): Refers to the benefit computation period (in years) used in calculating the
denominator of the AIME.
Under this provision alone, the number of benefit
computation years used for the denominator of the AIME for a
retired worker turning age 62 after 2009 would be 40. Under
current law, the number of benefit computation years is
determined by subtracting 5 dropout years from the number of
elapsed years (years age 22 through the year prior to reaching
EEA). Under this proposed provision, the increase in the number
of benefit computation years would be accomplished by reducing
the number of dropout years, ultimately to zero. In addition,
each year, except for 2010, that the number of dropout years is
reduced by one year, the number of years of earnings, used in
calculating the numerator of the AIME, is increased an
additional two years. In 2010, all years of earnings are used
in calculating the numerator of the AIME for someone newly
eligible for retirement or survivor benefits.
Provision 5 would redirect to the OASDI trust funds the
revenue from taxation of OASDI benefits that is currently
transferred to the Medicare HI trust fund. Revenue collected by
the IRS from Federal income taxes payable on OASDI benefits, in
excess of the tax on 50 percent of such benefits, would be
redirected from the Medicare HI trust fund to the OASDI trust
funds. The provision would redirect 10 percent of this revenue
for 2005, 20 percent for 2006, ... , and 100 percent for 2014
and later.
Provision 6 would eliminate the retirement earnings test
for beneficiaries age 62 and above, effective in 2003.
Provision 7 would increase the indexing of the OASDI
benefit and contribution base (the taxable maximum) to keep the
percent of OASDI covered earnings that is taxable at 86
percent. Under current indexing, the percent taxable is
projected to fall below 85 percent for 2008 and later.
Provision 8 would reduce the OASDI cost-of-living
adjustment (COLA) to the measured increase in the CPI-W less
0.5 percentage point for December 2000 and later. The reduced
COLA would apply only to beneficiaries newly eligible for OASDI
benefits after 1999.
Provision 9 would gradually implement an option for the
surviving spouse of a married couple to receive up to 75
percent of the benefit that would be payable to the couple if
they were still both alive. The percentage of the couple
benefit payable under the option would be 51 percent for
surviving spouses newly eligible in 2002 or 2003, 52 percent
for those newly eligible in 2004 or 2005, ..., and 75 percent
for those newly eligible in 2050 and later. eligibility for the
option occurs when the survivor and the deceased spouse, if
still alive, would both be eligible for a retired worker or
aged spouse benefit. The benefit under the option would be
limited to the retired worker benefit that would be payable to
the survivor if he/she had had earnings at the level of the
OASDI contribution and benefit base from age 22 through 61,
with the retired worker benefit reduced as of the age at first
actual entitlement to either retired worker, aged spouse, or
aged surviving spouse benefit (but not less than 62).
Provision 10 would redirect 2 percentage points of the
OASDI payroll tax to individual accounts for all covered
workers beginning 2000. OASDI retirement (including converted
disabled workers after reaching NRA) and aged survivor benefits
payable on the accounts of individuals with redirected taxes
would be reduced in the future.
The benefit reduction would be based on a hypothetical
accumulation of the amount of taxes redirected to the
individual account, using the yield rates on special government
bonds held by the trust funds, up to the point of entitlement
to retirement benefits. At that point, the ratio of the value
of the hypothetical accumulated account to the present value of
all benefits expected to be paid on the worker's account would
be calculated. Future OASDI benefits paid on the workers
account would then be reduced by this ratio.
Income tax on the amount of the reduction in OASDI benefits
from this provision would be assessed against the accumulated
account of the worker. No other assessment (clawback) against
the individual account would be made for the benefit of the
OASDI trust funds at death.
Provision 11 provides a transfer to the OASDI trust funds
from the General Fund of the Treasury increasing from 0.6
percent of OASDI effective taxable payroll in 2000, to 0.8
percent in 2020, 1.0 percent in 2040, and 1.2 percent in 2060.
This transfer is intended to ``recapture'' the gains from
lowering the CPI-indexing of income tax brackets by 0.5
percentage point in 2000 and later.
Provision 12 would add a General Revenue contribution to
the individual accounts of workers with low earnings. However
the additional contributions would not be included in the
calculation of the OASDI benefit reduction in provision 10.
Provision 13 would provide for a $1,000 contribution at
birth to the individual accounts of each person born in the
United States in 2000 and later. An additional $500 would be
deposited into accounts at attainment of each age 1 through 5.
These amounts would be indexed by the SSA average wage indexing
series after 2000. Contributions would be made from the General
Fund of the Treasury. One half of the contributions at ages 0
through 5 would be included in the calculation of OASDI benefit
reduction in provision 10.
Stephen C. Goss
Deputy Chief Actuary
Alice H. Wade
Actuary
Attachments
Table 1. Estimated Long-Range OASDI Financial Effect of Reform Proposal
------------------------------------------------------------------------
Estimated
Change in
Long-range
OASDI
Provision Actuarial
Balance
(percent of
taxable
payroll)
------------------------------------------------------------------------
1 Establish a new bend point in the PIA formula 1
equal to 197.5% of the present law first bend
point. PIA formula factors would be initially
set at 0.90, 0.32, 0.32, and 0.15 (yielding
the same benefit as current law). Beginning
with new eligibles in 2006, the second
formula factor would be increased each year
by .038, the third formula factor would be
decreased each year by .012, and the fourth
formula factor would be decreased each year
by 0.005, until reaching factors of 0.90,
0.70, 0.20, and 0.10 for newly eligibles in
2015 and later...............................
2a Eliminate the NRA hiatus between 66 and 67. 0.15
NRA reaches 67 for those attain 62 in 2011...
2b Increase the size of early retirement factors 0.33
between 2002 and 2006 and delayed retirement
credits between 2010 and 2016. This provision
reflects interaction with provision 2a.......
3 Multiply all benefit formula factors (90, 32, 0.74
and 15) by 0.988 for 2012-2017 and by 0.997
for 2018-2065. The resulting factors for
beneficiaries age 62 in 2065 are 72.47,
25.77, and 12.08. The present law formula
factors are maintained in determining
benefits for disability beneficiaries and
retired worker beneficiaries who convert from
disability...................................
4 Increase the benefit computation period by up 0.19
to 5 additional years for new eligibles (by
one additional year for new eligibles in each
year 2002, 04, 06, 08, 10). For two-earner
couples, however, cap the benefit computation
period for the earner with the lower PIA at
35 years. In conjunction with increasing the
benefit period, phase in including earnings
for all years in calculating the AIME........
5 Credit all revenue from taxation of OASDI 0.32
benefits to the OASDI trust funds by 2014
(phase revenue from HI to OASDI during the
period 2005-2014)............................
6 Effective 1/1/2003, eliminate the retirement ...........
earnings test for individuals who are 62 or
older........................................
7 Maintain the benefit and contribution base at 0.18
a level so that 86 percent of covered
earnings are taxable.........................
8 Reduce the OASDI COLA by 0.5 percent for 0.65
beneficiaries newly eligible in 2000 and
later........................................
9 Beginning with newly eligible aged surviving
spouses in 2002, gradually (over a 49-year
phase in period) provide a minimum benefit
equal to 75-percent of the combined benefits
payable if both were still alive. -0.10......
-------------------------------------------------
Total for Provisions 1 through 9 (including 2.18
interactions among provisions)...............
=================================================
10 Beginning in 2000, redirect 2 percentage -.62
points of the OASDI payroll tax to individual
accounts. Reduce OASDI benefits based on the
accumulation of these accounts at the
interest rate earned by the OASDI Trust
Funds. No ``clawback'' of account balance at
death........................................
11 Transfer from General Revenue to the OASDI 0.78
Trust Fund the following amounts, expressed
as a percent of taxable payroll: 0.6% each
year 2000-2019, 0.8% each year 2020-2039,
1.0% each year 2040-2059, and 1.2% each year
after 2059...................................
12 Additional General Revenue contribution to the ...........
individual account of low income workers.....
13 For every individual born after 1999, deposit 0.01
money during the first five years of life
into individual accounts from General
Revenue. The amount of money for the year
2000 would be $1000 during the first year of
life and $500 in each of the next five years.
After 2000, the dollar amounts would be
increased by the increase in wages. Half of
the accumulated value of these deposits (at
the trust fund interest rate) would be used
to offset OASDI benefits.....................
-------------------------------------------------
Total for Provisions 1 through 13 (including 2.35
interactions among provisions)...............
------------------------------------------------------------------------
\1\ Negligible (between -0.005 and .005 percent of payroll) change in
the OASDI long-range actuarial balance.
Based on the intermediate assumptions of the 1999 Trustees Report under
present law, the long-range actuarial balance for the 75-year period
(1999-2073) is -2.07 percent of taxable payroll.
June 3, 1999 Social Security Administration Office of the Chief Actuary
[GRAPHIC] [TIFF OMITTED] T2789.008
Social Security Administration
May 25, 1999
Harry C. Ballantyne, Chief Actuary
Memorandum
Refer To: TCC
Subject: Estimated Long-Range OASDI Financial Effects of the 21st
Century Retirement Security Act
This memorandum provides long-range estimates of the financial
status of the OASDI program of the 21st Century Retirement Security Act
(H.R. 1793), proposed by Representatives Kolbe and Stenholm. The
principal staff contacts are Ed Lorenzen and Joan Hay from
Representative Stenholm's staff. All estimates are based on the
intermediate assumptions of the 1999 Trustees Report. This memorandum
supersedes the memorandum dated May 12, 1999, and reflects minor
modifications made after May 12 in the specification of provisions 7
and 9.
The provisions described in this memorandum reflect the intent of
legislation as described by Representative Stenholm's staff. The stated
intent of several provisions differs from the legislative language in
the bill. These discrepancies are indicated in the attached table, and
are described in the provision descriptions below. Discrepancies are
indicated for provisions 1, 2, 6, and 7a. Representative Stenholm's
staff indicates that technical amendments to the bill to conform with
the stated intent will be forthcoming.
The comprehensive proposal detailed in the 21st Century Retirement
Security Act reduces OASDI benefits from the levels provided under
present law so that the program can be adequately financed with a
combined payroll tax rate of 10.4 percent. The other 2.0 percentage
points of the 12.4 percent combined Social Security payroll tax rate is
redirected to mandatory individual accounts, collected, held and
managed by the Federal Government. Individuals will have a choice of
different investment options for their individual accounts, which
includes a stock index fund, a bond index fund, and a Treasury
securities index fund. The changes to the OASDI program are designed to
achieve long-range actuarial balance, and to result in a combined OASDI
trust fund ratio (ratio of trust fund assets to annual outgo) that is
stable or rising at the end of the long-range 75-year period.
The proposal would improve the long-range OASDI actuarial balance
by an estimated 2.14 percent of taxable payroll, replacing the present-
law actuarial deficit of 2.07 percent with an actuarial balance of
+0.07 percent of taxable payroll. The OASDI annual balance for the year
2070 would improve by 6.63 percent of payroll, to a level of +0.34
percent of payroll. The trust fund ratio for the combined OASDI program
would increase to a peak of 244 percent in 2010, then decline to 8
percent in 2044. After 2044, the trust fund ratio would begin to rise,
reaching 194 percent at the end of the long-range period, at which time
the ratio would be rising by about 6 percentage points per year.
Table 1 provides a brief listing of the individual provisions of
the proposal, including the effect of each provision, separately, on
the long-range OASDI actuarial balance. A more detailed description of
the provisions for which these estimates have been developed is given
below.
Provision 1: Reduce the COLA by 0.33 Percentage Point
This provision is intended to reduce the present-law OASDI
cost-of-living adjustment (COLA) for monthly OASDI benefits by
0.33 percentage point from the level currently anticipated
under the assumptions of the 1999 Trustees Report. The
reduction would start with the COLA scheduled for December 2000
and continue indefinitely thereafter. Specifically, the
provision would provide for two reductions in the COLA. First,
the COLA would be reduced by the amount of upper-level
substitution bias that would be alleviated by using a
superlative formula, as estimated by the Bureau of Labor
Statistics (BLS). This bias is generally assumed to be an
average of 0.15 percentage point per year. Second, the COLA
would be reduced by 0.33 percentage point less the sum of (a)
the estimated upper-level substitution bias described above and
(b) the achieved substitution bias correction, i.e., the
estimated net effect of changes to the CPI-W instituted by the
BLS after January 31, 1999.
A technical amendment to H.R. 1793 is anticipated to
clarify this provision. The definition currently in the bill
for achieved substitution bias correction would include changes
instituted after December 31, 1998, thus including the
geometric means provision instituted in January 1999 to address
lower-level substitution bias in the CPI-W. Because the
geometric means change was intended to be excluded from the
definition of achieved substitution bias correction, the
technical amendment will change the definition to include
changes instituted after January 31, 1999.
Provision 2: Increase NRA and EEA; Modify Actuarial Reduction and
Increment Factors
Increase NRA and EEA
Increase the normal retirement age (NRA) and the earliest
eligibility age (EEA) allowed for retired worker and aged
spouse benefits. NRA increases under current law from 65 by two
months a year beginning with individuals attaining age 62 in
the year 2000, until it reaches 66 for individuals attaining
age 62 in the year 2005. While current law then leaves the NRA
at 66 for several years, this provision would continue to phase
the NRA upwards by two months a year until it reaches 67 for
individuals reaching age 62 in 2011. After 2011, the NRA would
increase by one month every two years. Based on current
mortality projections, this scheduled increase would maintain
the ratio of expected retirement years at NRA to potential work
years (from age 20 to NRA) constant at the level for 2011.
This provision would also increase the earliest eligibility
age (EEA) for retired worker and aged spouse benefits after
2011 at the same rate by which the NRA is increase after 2011.
This would maintain the five-year differential between NRA and
EEA that is achieved for those eligible for benefits in 2011,
when the NRA is 67 and the EEA is still 62. It should be noted
that the description of the increase in EEA currently in H.R.
1793 would not achieve the intended result described above. A
technical amendment to H.R. 1793 that will eliminate this
discrepancy is anticipated.
The NRA and EEA, for individuals turning age 62 in 2035,
would be 68 and 63, respectively.
The earliest eligibility age for receiving aged widow/
widower's benefits remains unchanged at 60. For disabled widow/
widowers, the earliest eligibility age is also retained, at 50.
Each time the EEA is increased by a full year, the number
of elapsed years for retired workers is also extended one year.
This would result in an increase in the benefit computation
period of one year.
Furthermore, the age up to which earnings are indexed in
computing the AIME for the PIA benefit formula would be
increased by one year. Because the applicable PIA formula is
the formula in effect for the year of initial benefit
eligibility, the PIA formula would also be advanced one year.
Modify Actuarial Reduction and Increment Factors
In addition, the early retirement factors and delayed
retirement credits would be changed in an attempt to reflect
the fact that the marginal increase in the full (PIA) benefit
level for earnings after reaching retirement age is, generally,
relatively small. (Reduction and increment factors provided
under current law are intended to provide actuarially
equivalent lifetime benefits payable at different starting ages
for a fixed earnings history.) This relatively small marginal
increase results from the weighted PIA benefit formula, which
provides a larger marginal amount of benefit per dollar of AIME
for low, or early-in-career, earnings. This provision is
intended to eliminate the marginal disincentive to work past
EEA that is provided by the weighting in the PIA formula.
Because the extent of this marginal effect depends upon the
level of earnings a worker has had in earlier years, no
absolute adjustment can be provided that would be appropriate
for all workers. Rough estimates of adjustments to the
reduction and increment factors have thus been used.
The chart below displays the proposed monthly early
retirement reductions that are applicable for retired worker
beneficiaries for the first 36 months for which benefits are
received prior to NRA under both current law and the provision.
(Different factors apply to aged spouse beneficiaries and aged
widow beneficiaries.)
Monthly Reduction in Benefits for Each of First 36 Months of Retirement Before NRA
----------------------------------------------------------------------------------------------------------------
Age 62 in: 2001 2002 2003 2004 2005 2006+
----------------------------------------------------------------------------------------------------------------
Present Law.................................. 20/36% 20/36% 20/36% 20/36% 20/36% 20/36%
Proposal..................................... 20/36% 21/36% 22/36% 23/36% 24/36% 25/36%
----------------------------------------------------------------------------------------------------------------
Similar increases for aged spouse beneficiaries would be
applied, increasing the monthly reduction for the first 36
months of entitlement before NRA from 25/36 percent under
present law to 30/36 percent under the provision.
The reductions that are proposed for the fourth and fifth
year before NRA are 12/24% per month (current law reductions
are 10/24% per month) for both retired worker and aged spouse
beneficiaries. The reductions for the fourth and fifth year
before NRA are applicable to all new eligibles who reach age 62
after 1999.
The delayed retirement credit (DRC) under present law is
scheduled to increase to 8% per year for workers attaining age
65 after 2007. The DRC would continue to increase at the rate
of 0.5 percentage point every two years, with the first
increase applied to those attaining age 65 in 2010. An ultimate
factor of 10 percentage points per year is reached for workers
reaching 65 after 2015. The delayed retirement credit applies
for months for which retired worker benefits are not received
between NRA and age 70.
The ultimate percentages of PIA payable for retired workers
by age at initial benefit entitlement are shown in the table
below.
Ultimate Percent of PIA Payable for Retired Worker Beneficiaries by Age at Initial Entitlement to Benefits
----------------------------------------------------------------------------------------------------------------
Age at Initial Entitlement: NRA-5 NRA-4 NRA-3 NRA-2 NRA-1 NRA
----------------------------------------------------------------------------------------------------------------
Present Law................................... 70% 75% 80% 86.7% 93.3% 100%
Proposal...................................... 63% 69% 75% 83.3% 91.7% 100%
----------------------------------------------------------------------------------------------------------------
The percentage of PIA payable for non-disabled aged widow
beneficiaries newly eligible at age 60 would remain at 71.5
percent. The percentages payable for those newly eligible at
ages between 60 and the NRA would scale linearly between 71.5
and 100 percent, as under present law.
Provision 3: Change in calculation of AIME
This provision would apply in determining benefits for
retired worker and their dependents and for survivors of
deceased workers. This provision does not apply in determining
benefits for disabled workers and their dependents.
In calculating the AIME for a retired worker under present
law, the highest 35 years of indexed earnings are used in
determining the numerator of the AIME and a benefit computation
period of 35 years is used in determining the denominator.
Under this provision, the following changes are made in the
calculation of the AIME for someone newly eligible for
retirement benefits after 2001.
The number of years of earnings, used in
calculating the numerator of the AIME, is gradually increased,
reaching all years of earnings in 2010.
The benefit computation period, used in
determining the denominator of the AIME, is gradually
increased, reaching 40 years (5 additional years), except for
the lower earner of a married couple. In the case of a two-
earner couple, the benefit computation period for the earner
with the lower PIA is 35 years.
The chart below indicates the phase in schedule of the
above changes.
Change in Calculation of AIME for Retired Worker
(assumes the retired worker is not the lower earner of a married couple)
----------------------------------------------------------------------------------------------------------------
2002- 2004- 2006- 2008-
Newly Eligible in Years: 2003 2005 2007 2009 2010+
----------------------------------------------------------------------------------------------------------------
Present Law
Years in Numerator \1\................................ 35 35 35 35 35
Denominator (in years) \2\............................ 35 35 35 35 35
Proposal
Years in Numerator \1\................................ 37 39 41 43 all
Denominator (in years) \2\............................ 36 37 38 39 40
----------------------------------------------------------------------------------------------------------------
\1\ Years in Numerator: Refers to the number of years of earnings used in calculating the numerator of the AIME.
\2\ Denominator (in years): Refers to the benefit computation period (in years) used in calculating the
denominator of the AIME.
Under this provision alone, the number of benefit
computation years used for the denominator of the AIME for a
retired worker turning age 62 after 2009 would be 40. Under
current law, the number of benefit computation years is
determined by subtracting 5 dropout years from the number of
elasped years (years age 22 through the year prior to reaching
EEA). Under this proposed provision, the increase in the number
of benefit computation years would be accomplished by reducing
the number of dropout years, ultimately to zero. In addition,
each year, except for 2010, that the number of dropout years is
reduced by one year, the number of years of earnings, used in
calculating the numerator of the AIME, is increased an
additional two years. In 2010, all years of earnings are used
in calculating the numerator of the AIME for someone newly
eligible for retirement or survivor benefits.
Provision 4: Eliminate the Earnings Test at the Normal Retirement Age
(NRA)
Effective 1/1/2000, this provision would eliminate the
earnings test at NRA, which requires a reduction in the monthly
benefit payable to individuals at or above NRA by $1 for every
$3 that their earnings exceed a specified exempt amount. The
long-range cost of this provision is negligible because months
for which benefits are withheld result in later recomputation
of the percent of PIA payable. Thus, the earnings test does not
reduce expected lifetime benefits, but defers benefits until
substantial earnings have ceased.
Provision 5: Credit All Revenue from Taxation of OASDI Benefits to
OASDI by 2019
This provision redirects revenue collected by the IRS from
Federal income taxes payable on OASDI benefits, in excess of
the tax on 50 percent of such benefits, from the Medicare HI
trust fund to the OASDI trust funds. The provision would
redirect 10 percent of this revenue for 2010, 20 percent for
2011, ... , and 100 percent for 2019 and later.
Provision 6: Establish a minimum PIA level
For beneficiaries newly eligible in 2010 and later,
establish a minimum PIA amount as described below:
For Retired Workers:
The minimum PIA would apply to retired workers with at
least 80 quarters of coverage. It would equal 60% of the
Monthly Applicable Poverty Level (see below for definition) for
individuals with 80 quarters of coverage and 100% of the
Monthly Applicable Poverty Level for individuals with at least
160 quarters of coverage. The percentage of the Monthly
Applicable Poverty Level defining the minimum PIA for an
individual with more than 80 quarters and less than 160
quarters of coverage would be prorated between 60% and 100%,
based on their number of quarters of coverage.
For Disabled Workers:
A minimum PIA for disability beneficiaries would be
similar, equaling 60% of the Monthly Applicable Poverty Level
for individuals whose quarters of coverage equal to twice the
number of their elasped years (years between attaining age 22
disability benefit entitlement) and 100% of the Monthly
Applicable Poverty Level for individuals whose quarters of
coverage equal four times their number of elasped years.
The minimum PIA is phased in during the years 2006 through
2009. For new eligibles in 2006, the percentage of the Monthly
Applicable Poverty Level is one-fifth of the fully phased in
percentage in 2010. This fraction increases by one-fifth for
each year during the phase in period, reaching four-fifths for
2009.
The Annual Applicable Poverty Level for 1998 is $7,818
(Monthly Applicable Poverty Level would equal \1/12\ of this
amount). It should be noted that the current bill language of
H.R. 1793 would establish this level as $7,992 for 1996. A
technical amendment to H.R. 1793 that will eliminate this
discrepancy is anticipated. The Annual Applicable Poverty Level
that applies to an individual in their year of initial
eligibility is determined by increasing the 1998 level by:
1. the COLA for 1998 through the earlier of (1) the year
prior to the year of initial benefit eligibility and (2) 2009;
and
2. increases in the average wage index between 2008 and the
second year prior to initial benefit eligibility.
Minimum PIA levels would increase by the COLA after benefit
eligibility in all cases.
Provision 7: Modification of PIA Formula
Provision 7a reduces the primary insurance amount (PIA) of
those who become eligible for benefits after 2011 by
multiplying the PIA successively by a factor of 0.995. The
number of times the PIA is multiplied by the factor of 0.995 is
equal to the number of years beginning with 2012 through the
earlier of the year in which the beneficiary reaches initial
benefit eligibility (or death) and 2044. A technical amendment
to H.R. 1793 is anticipated to clarify that 2044 is the last
year for which the factor of 0.995 would apply to the PIA (the
current bill indicates that 2045 is the last year). The
ultimate reduction in the PIA level for beneficiaries newly
eligible in 2044 and later would be 15.2 percent.
Provision 7b reduces the upper two factors of the PIA
benefit formula (32 and 15) by 1.5 percent per year (multiply
by 0.985) for 2006 through 2010 and by 2 percent per year
(multiply by 0.98) for 2011 through 2030. The upper two PIA
benefit factors applicable for beneficiaries newly eligible in
2030 and later would be 19.8 and 9.3 percent, respectively.
Provision 8: Redirect 2 Percentage Points of Payroll Tax
This provision would redirect 2 percentage points of the
employee's share of the FICA payroll tax for the funding of an
individual savings account, for OASDI taxable earnings after
1999 of workers who were under age 55 at the beginning of the
year 2000. A similar redirection would occur for taxable self-
employment earnings, with 2 percentage points of taxable self-
employment income redirected to individual accounts. All
earnings would be collected by the Federal Government in the
same manner that payroll taxes are collected currently.
Accounts would be managed and invested, under the direction of
the worker, centrally, as suggested by the Advisory Council
Individual Account proposal.
Provision 9: Transfer money from General Revenue to the OASI Trust Fund
This provision provides a transfer to the OASI Trust Fund
from the General Fund of the Treasury. The amounts to be
transferred are specified as an increasing percentage of OASDI
taxable payroll and are as follows:
----------------------------------------------------------------------------------------------------------------
Percent of Taxable Percent of Taxable Percent of Taxable
Calendar Year Payroll Calendar Year Payroll Calendar Year Payroll
----------------------------------------------------------------------------------------------------------------
2000 0.03 2005 0.24 2010-2015 0.47
2001 0.07 2006 0.28 2016-2039 0.55
2002 0.13 2007 0.32 2040-2059 0.66
2003 0.15 2008 .035 2060+ 0.80
2004 0.20 2009 .038
----------------------------------------------------------------------------------------------------------------
Stephen C. Goss
Deputy Chief Actuary
Alice H. Wade
Actuary
Attachment
Table 1. Estimated Long-Range OASDI Financial Effect of the 21st Century
Retirement Security Act (Kolbe/Stenholm)
------------------------------------------------------------------------
Estimated
Change in
Long-range
OASDI
Provision Actuarial
Balance
(percent of
taxable
payroll)
------------------------------------------------------------------------
1 Reduce the COLA for OASDI benefits by 0.33 0.50
percentage point beginning Dec. 2000.........
2 Eliminate the hiatus in the currently 0.80
scheduled increase in NRA and increase the
NRA beyond 67 by indexing to maintain the
ratio of expected retirement years to
expected work years constant (one month
increase every two years under current
mortality assumptions). In addition, increase
the EEA to maintain a five-year differential
between NRA and EEA. Increase early
retirement factors and delayed retirement
credits (to reflect marginal gain in benefit
for work after retirement age)...............
3 Increase the benefit computation period by up 0.19
to 5 additional years for new eligibles (by
one additional year for new eligibles in each
year 2002, 2004, 2006, 2008, 2010). For two-
earner couples, however, cap the benefit
computation period for the earner with the
lower PIA at 35 years. In conjunction with
increasing the benefit period, phase in
including earnings for all years in
calculating the AIME. This provision does not
apply to disabled worker beneficiaries.......
4 Effective 1/1/2000, eliminate the retirement 1
earnings test for individuals who are at or
past NRA.....................................
5 Credit all revenue from taxation of OASDI 0.30
benefits to the OASDI trust funds by 2019
(phase revenue from HI to OASDI during the
period 2010-2019)............................
6 Beginning in 2006, establish a minimum PIA -0.15
level for newly eligible beneficiaries with
quarters of coverage equal to twice their
number of elasped years. The minimum PIA
level will be fully phased in 2010, equaling
100% of the applicable poverty level for
newly eligible beneficiaries with quarters of
coverage equal to four times their number of
elasped years (60% of the applicable poverty
level for beneficiaries with quarters of
coverage equal to twice elapsed years).......
7a Reduce PIA levels by 0.5 percent (multiply by 0.83
0.995) for each year 2012-2044...............
7b Reduce the 32 and 15 PIA-formula factors by 1.66
1.5 percent for each year 2006-2010 and by 2
percent for each year 2011-2030. Factors for
2030 are 19.8 and 9.3, respectively (not
interacted with 7a)..........................
8 For workers under age 55 in 2000, redirect 2 -1.90
percentage points of the OASDI payroll tax to
individual accounts..........................
9 Transfer amounts (specified as percentages of 0.50
taxable payroll) to the OASI Trust Fund from
the General Fund of the Treasury.............
------------
Total for Provisions 1 through 9 (including 2.14
interaction among provisions)................
------------------------------------------------------------------------
\1\ Negligible (between -0.005 and .005 percent of payroll) change in
the OASDI long-range actuarial balance.
\2\ Technical amendments to H.R. 1793 that reflect this description are
to follow, see text for details.
Based on the intermediate assumptions of the 1999 Trustees Report under
present law, the long-range actuarial balance for the 75-year period
(1999-2073) is -2.07 percent of taxable payroll.
May 25, 1999 Office of the Chief Actuary Social Security Administration
Social Security Administration
June 8, 1999
Harry C. Ballantyne, Chief Actuary
Memorandum
Refer To: TCC
Subject: Estimates of Long-Range OASDI Financial Effect of Proposal for
Representative Peter DeFazio--INFORMATION
This memorandum provides long-range estimates of the effect on the
financial status of the OASDI program of a proposed plan to change
several provisions of the program. This analysis has been produced at
the request of Aaron Deas of Representative DeFazio's staff. All
estimates are based on the intermediate assumptions of the 1999
Trustees Report.
The comprehensive proposal is described in Table A, attached. Table
Aprovides estimates of the change in the long-range OASDI actuarial
balance that would result from the enactment of the total proposed
package, as well as from each individual provision of the proposed
package.
If all modifications are implemented, the resulting long-range
actuarial balance for the 75-year period (1999-2073) is estimated to be
+0.07 percent of taxable payroll. This is a change of +2.14 from the
long-range actuarial balance under present law of -2.07 percent of
taxable payroll. The combined OASDI Trust Fund would rise to a peak of
579 percent of annual cost for 2021, declining thereafter, and reaching
a level of 217 percent of annual cost at the end of the long-range
period.
Stephen C. Goss
Deputy Chief Actuary
Alice H. Wade
Actuary
Table A. Estimated Long-Range OASDI Financial Effect of Reform Proposal
(Rep. DeFazio)
------------------------------------------------------------------------
Estimated
Change in
Long-range
OASDI
Provision Actuarial
Balance
(percent of
taxable
payroll
------------------------------------------------------------------------
1 Invest a portion of the OASDI Trust Funds in 1.01
stocks beginning in 2000, reaching 40 percent
of assets in stocks for 2014 and later.......
2 For earnings in years after 1999, change the 2.02
OASDI contribution and benefit base to be a
benefit base only. Subject all covered
earnings to OASDI payroll taxes, but use the
base to establish the maximum annual amount
of earnings that is credited for the purpose
of benefit computation.......................
3 Beginning in 2000, establish an exempt amount -1.03
for a worker's annual taxable earnings. The
exempt amount would be set at $4,000 in 2000,
and would serve to exempt the first $4,000 of
each worker's annual taxable earnings from
the 6.2 percent employee's tax. For self-
employed individuals, the provision would
exempt the first $4,000 of self-employment
income from one half of the 12.4 percent self-
employed tax rate. The $4,000 would be
included in determining benefit amounts. For
years after 2000, the exempt amount would be
indexed by growth in the SSA average wage
index........................................
4 In 2020, increase the level of benefits for -0.05
all beneficiaries who are age 85 or older by
5 percent. This increase is phased in
beginning in 2001. Benefit payments for
beneficiaries meeting this age requirement
would increase by 0.25 percent for 2001, 0.5
percent for 2002, etc., reaching 0.5 percent
for 2020 and later...........................
5a Increase the benefit computation period by up 0.35
to 5 additional years for new eligibles (by
one additional year for new eligibles in each
year 2005, 2007, 2009, 2011, 2013)...........
5b Provide up to 5 child-care drop-out years. -0.15
These years will be granted to a parent who
has $0 earnings during the year and is
providing care to his/her child under the age
of 12 or to his/her disabled child. Drop-out
years are phased in by one additional year
for new eligibles in each year 2005, 2007,
2009, 2011, 2013. (This provision reflects
interaction with provision 5a.)..............
------------
Total for Provisions 1 through 5 (including 2.14
interaction among provisions)................
------------------------------------------------------------------------
Based on the intermediate assumptions of the 1999 Trustees Report under
present law, the long-range actuarial balance for the 75-year period
(1999-2073) is -2.07 percent of taxable payroll.
June 8, 1999 Social Security Administration Office of the Chief Actuary
Social Security Administration
June 3, 1999
Harry C. Ballantyne, Chief Actuary
Memorandum
Refer To: TCC
Subject: Long-Range OASDI Financial Effects of a Proposal for
Representative Nadler--INFORMATION
This memorandum updates estimates provided for this proposal on
February 25, 1999, based on the intermediate assumptions of the 1998
Trustees Report and the ultimate yield on stock assumed for the
President's plan under 1998 Trustees assumptions. Updated estimates
reflect the intermediate assumptions of the 1999 Trustees Report and
the ultimate real yield on stock assumed by the 1994-96 Advisory
Council on Social security.
This proposal would eliminate the long-range OASDI actuarial
deficit estimated under the intermediate assumptions of the 1999
Trustees Report by enacting two provisions. First, the OASDI benefit
and contribution base would be increased to $99,600 for the year 2000,
$117,900 for 2001, with increases thereafter sufficient to have 90
percent of estimated OASDI covered earnings subject to the payroll tax.
This provision alone would reduce the long-range OASDI actuarial
deficit by an estimated 0.61 percent of taxable payroll.
The second provision would call for transfers to be made from the
General Fund of the Treasury of the United States to the Old-Age,
Survivors, and Disability Insurance (OASDI) trust funds for each year
2000 through 2014. The amount of transfer for each year would be
specified in law as a percentage of the OASDI effective taxable
payroll. In each year 2000 through 2014, 40 percent of the transfer
would be used to purchase stock and 60 percent would be used to
purchase special interest-bearing obligations of the Treasury. All
dividends would be reinvested in stock until the market value of all
stock held by the OASDI trust funds reached 30 percent of total OASDI
trust fund assets. Thereafter, the percentage of total trust fund
assets that is held in stocks would be maintained at 30 percent. This
provision would reduce the OASDI actuarial deficit by an additional
1.94 percent of payroll.
Enactment of these two provisions would result in benefits being
payable throughout the long-range period under the intermediate
assumptions of the 1999 Trustees Report. Trust fund assets as a
percentage of OASDI outgo (the trust fund ratio) would rise, reaching a
peak of 923 percent for the year 2017. The trust fund ratio would
generally decline thereafter, reaching 793 percent at the end of the
long-range period (at the end of 2073), at which point the trust fund
ratio would be estimated to be declining at about 7 percentage points
per year. These provisions would improve the long-range OASDI actuarial
balance by an estimated 2.55 percent of payroll, replacing the
actuarial deficit of 2.07 percent under present law with an estimated
positive actuarial balance of 0.48 percent of payroll. These estimates
are based on the intermediate assumptions of the 1999 Trustees Report
and other assumptions described below.
Transfers from the General Fund of the Treasury would be made each
year 2000 through 2014 in amounts equal to the then-current estimates
of OASDI effective taxable payroll, multiplied by the percentages in
the table below. Revisions in amounts transferred each year would be
made as estimates of taxable payroll for the year are finalized.
Amount To Be Transferred to the OASDI Trust Funds: Specified Percentage of OASDI Effective Taxable Payroll
----------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
2000 2.20% 2005 2.55% 2010 4.32%
2001 1.75% 2006 3.07% 2011 4.49%
2002 2.20% 2007 3.43% 2012 4.58%
2003 2.08% 2008 3.79% 2013 4.61%
2004 2.41% 2009 4.12% 2014 4.51%
----------------------------------------------------------------------------------------------------------------
The percentages of payroll to be transferred are consistent with
the amounts that would have been transferred under the President's plan
(announced in the January 19, 1999 State of the Union speech) using the
intermediate estimates of the 1998 Trustees Report, as shown in our
memorandum dated February 12, 1999.
Actual transfers for each year would be specified as the product of
(a) the specified percentage of OASDI effective taxable payroll
(indicated above, consistent with the President's plan), and (b) the
then-current estimated taxable payroll at the beginning of each year of
transfer. As estimates of taxable payroll for each year are revised
with increasingly complete data, adjustments to transfers for the year
would be made.
Table 1, attached, provides annual estimates of the OASDI income
rate, cost rate, annual balance and trust fund ratio.
OASDI Trust Fund Assets in Stock
Estimates for this proposal are based on an assumption that
the average ultimate total annual real yield on stock will
average 7 percent in the future, consistent with the assumption
used for the 1994-6 Advisory Council on Social Security. The
four-percentage-point difference between this assumed ultimate
real stock yield and the Trustees' 3-percent assumed ultimate
real yield on government bonds held by the trust funds is
assumed to be maintained throughout the 75-year projection
period.
The percentage of the OASDI combined trust funds that is
held in stock is estimated to reach 30 percent in the year
2021. If the average yield on stocks is greater or less than
assumed over the period 2000-21, the year in which the
specified level of 30 percent of assets in stock is reached
would be sooner or later than 2021.
The portion of the total value of publicly-traded stock in
the United States that is held by the OASDI trust funds will
depend not only on the yield achieved in the market, but also
on the rate of growth in the total market value of all stock.
The total value of stock represented in the Wilshire 5000 index
(a fair representation of all publicly-traded stock for
corporations based in the United States) was $9.3 trillion at
the beginning of 1998. Assuming that the total market value of
publicly-traded stock will rise generally by the rate of growth
in GDP after 1998, the trust funds would hold about 12.5
percent of the total market value, on average, over the next 50
years.
Average Percentage of Total Stock Market Value Held by
OASDI
2001-14 3.9%
2001-20 6.4%
2001-30 9.6%
2001-40 11.4%
2001-50 12.5%
Stephen C. Goss
Deputy Chief Actuary
Alice H. Wade
Actuary
Attachment
[GRAPHIC] [TIFF OMITTED] T2789.009
Social Security Administration
June 8, 1999
Harry C. Ballantyne, Chief Actuary
Memorandum
Refer To: TCC
Subject: Estimated Long-Range OASDI Financial Effect of Proposal by
Representative Mark Sanford--INFORMATION
This memorandum provides the estimated effect on long-range OASDI
financial status of a proposal developed for Representative Mark
Sanford. Specifications for this proposal have been provided by Joel
Mowbray and Scott English of Representative Sanford's staff.
This proposal would:
(1) modify OASDI benefits,
(2) provide transfers from the Treasury to the DI trust fund, to
maintain benefit payments,
(3) make contributions from the U.S. Treasury (from the OASI trust
fund in part after 2043) equal to the amount of any excess of OASI
income over cost, each year (up to 5 percent of taxable earnings), to
workers for investment in Individual Accounts (IAs), and
(4) reduce each worker's OASI benefits, by an amount equal to the
value of IA contributions accumulated at the yield on OASI trust fund
assets. Include all proceeds of the IAs with OASDI benefits for income
taxation, with the revenue transferred to the OASI and HI trust funds
as under present law.
The balance of this memorandum provides a description of the
proposal and estimates of the long-range financial effects of the
proposal on the OASDI program. All estimates are based on the
intermediate assumptions of the 1999 Trustees Report.
Summary of Proposal Provisions
(1a) Raise the normal retirement age (NRA) at the rate of
2 months per year beginning in the year 2000, until
reaching an NRA of 67 for persons attaining age 62 in 2011
(eliminate the hiatus in current law).
(1b) Change the early retirement factors and delayed
retirement credits in an attempt to reflect the fact that the
marginal increase in the full (PIA) benefit level for earnings
after reaching retirement age is, generally, relatively small.
(Reduction and increment factors provided under current law are
intended to provide actuarially equivalent lifetime benefits
payable at different starting ages for a fixed earnings
history.) This relatively small marginal increase results from
the weighted PIA benefit formula, which provides a larger
marginal amount of benefit per dollar of AIME for low, or
early-in-career, earnings. This provision is intended to
eliminate the marginal disincentive to work past EEA that is
provided by the weighting in the PIA formula. Because the
extent of this marginal effect depends upon the level of
earnings a worker has had in earlier years, no absolute
adjustment can be provided that would be appropriate for all
workers. Rough estimates of adjustments to the reduction and
increment factors have thus been used.
The chart below displays the proposed monthly early
retirement reductions that are applicable for retired worker
beneficiaries for the first 36 months for which benefits are
received prior to NRA under both current law and the provision.
(Different factors apply to aged spouse beneficiaries and aged
widow beneficiaries.)
Monthly Reduction in Benefits for Each of First 36 Months of Retirement Before NRA
----------------------------------------------------------------------------------------------------------------
Age 62 in: 2009 2010 2011 2012 2013 2014+
----------------------------------------------------------------------------------------------------------------
Present Law................................... 20/36% 20/36% 20/36% 20/36% 20/36% 20/36%
Proposal...................................... 20/36% 21/36% 22/36% 23/36% 24/36% 25/36%
----------------------------------------------------------------------------------------------------------------
Similar increases for aged spouse beneficiaries would be
applied, increasing the monthly reduction for the first 36
months of entitlement before NRA from 25/36 percent under
present law to 30/36 percent under the provision.
The reductions that are proposed for the fourth and fifth
year before NRA are 12/24% per month (current law reductions
are 10/24% per month) for both retired worker and aged spouse
beneficiaries. The reductions for the fourth and fifth year
before NRA are applicable to all new eligibles who reach age 62
after 1999.
The ultimate percentages of PIA payable for retired workers
by age at initial benefit entitlement are shown in the table
below.
Ultimate Percent of PIA Payable for Retired Worker Beneficiaries by Age at Initial Entitlement to Benefits
----------------------------------------------------------------------------------------------------------------
Age at Initial Entitlement: NRA-5 NRA-4 NRA-3 NRA-2 NRA-1 NRA
----------------------------------------------------------------------------------------------------------------
Present Law................................... 70% 75% 80% 86.7% 93.3% 100%
Proposal...................................... 63% 69% 75% 83.3% 91.7% 100%
----------------------------------------------------------------------------------------------------------------
The delayed retirement credit (DRC) under present law is
scheduled to increase to 8% per year for workers attaining age
65 after 2007. The DRC would continue to increase at the rate
of 0.5 percentage point every two years, with the first
increase applied to those attaining age 65 in 2010. An ultimate
factor of 10 percentage points per year is reached for workers
reaching 65 after 2015. The delayed retirement credit applies
for months for which retired worker benefits are not received
between NRA and age 70.
The percentage of PIA payable for non-disabled aged widow
beneficiaries newly eligible at age 60 would remain at 71.5
percent. The percentages payable for those newly eligible at
ages between 60 and the NRA would scale linearly between 71.5
and 100 percent, as under present law.
(1c) For years 2009 through 2028, reduce the 15-percent PIA
factor by 2 percent per year (multiply by 0.98 each year). For
years 2028 and later, the factor would be 10 percent.
(1d) Effective 2001, eliminate the retirement earnings test
applicable to earnings of beneficiaries who have reached the
normal retirement age (NRA).
(2) Transfer from the General Fund of the Treasury to the
Disability Insurance (DI) trust fund, each year, any amount
needed to permit full payment of DI benefits.
(3) Make contributions from the General Fund of the
Treasury each year starting with 2001, to individual accounts
of workers with OASDI taxable earnings in the prior year. Total
IA contributions are equal to the net income for OASI for the
prior year (i.e., the increase in the OASI Trust Fund assets
from the beginning to the end of the prior year). However,
aggregate contributions would be limited to 5 percent of the
OASDI taxable payroll.
Aggregate contributions would be divided by the OASDI
taxable payroll for the prior year, and this percentage of
prior year taxable earnings will be credited to each worker's
account. If OASDI net income for the prior year is zero or
negative, no IA contributions will be credited.
Beginning in 2044 (or whenever, after 2040, the OASI annual
balance becomes positive), redirect any excess of OASI tax
income over OASI cost to finance a portion of the IA
contributions. The balance of specified IA contributions will
continue to be provided from the General Fund of the Treasury.
Accumulations in the IAs would be required to be
distributed as a CPI-indexed annuity at initial entitlement to
OASI retirement, aged spouse, or aged surviving spouse benefit.
(4) For workers who have had contributions to an IA during
their working lifetime, expected lifetime OASI retirement and
aged survivor benefits would be reduced by the amount of their
IA contributions, accumulated at the rate provided by long-term
U.S. Bonds held by the trust funds.
The percentage reduction for benefits paid based on a
worker's earnings would be determined at the time of initial
entitlement for retired worker or aged surviving spouse
benefits based on the worker's earnings. All OASI benefits paid
based on the worker's earnings after this point would be
reduced by the ratio of the hypothetical accumulation of PRSA
contributions to the present value of expected future benefits
at the time of initial entitlement (discounted for present
value at the yield for special bonds held by the OASDI trust
funds).
This IA provision is intended to provide a financial
advantage to workers who will have the opportunity to invest
the IA in equities and corporate bonds, as well as Government
bonds, thus having the possibility of achieving a higher
average interest rate than realized by the OASI and DI Trust
Funds. Whether workers realize an advantage from the PRSA
accounts will depend upon whether they achieve yields on their
PRSAs, both before and after retirement, that are at least the
level specified for the benefit reduction provision, i.e., the
yield on special-issue United Stated bonds held by the trust
funds.
Include the entire proceeds of the annuitization of the IA
(required as a CPI-indexed annuity at initial entitlement to
OASI retirement, aged spouse, or aged surviving spouse benefit)
in the amount subject to personal income tax as OASDI benefits.
Revenue from personal income tax on the distributions would be
transferred to the OASDI and HI trust funds in the same manner
as for revenue from taxes on OASDI benefits under current law.
For workers with AIME below $1,150 (this is a 1998 level
and would be indexed by the SSA average wage indexing series,
AWI, from 1998 to year of initial benefit eligibility) the
benefit offset is reduced depending on AIME level. No offset
would apply to those with AIME of $650 (1998 level) or less
(indexed by AWI). The cost of reducing or eliminating the
benefit offset for lower-earning workers would be born by the
General fund of the Treasury.
Long-Range OASDI Financial Effects
The combined effect of enacting the basic provisions to
modify OASDI benefits, provisions 1a through 1d, would increase
(improve) the long-range OASDI actuarial balance by an
estimated 0.61 percent of OASDI effective taxable payroll. The
complete proposal, including provisions 2 through 4, along with
provisions 1a through 1d, would be expected to improve the
OASDI actuarial balance by 2.72 percent of taxable payroll. The
resulting OASDI actuarial balance would be estimated at 0.65
percent of payroll, and the level of OASDI trust fund assets
would generally rise as a percentage of annual cost, reaching
an expected 900 percent of annual cost by around 2072. See
table 1 details.
The additional revenue required to assure full payment of
DI program benefits would increase from 0.22 percent of OASDI
taxable payroll for 2014 to 0.63 percent for 2015, and then
generally increase to 0.73 percent by around 2072. Amounts
equal to these percentages of OASDI taxable payroll would be
transferred from the General Fund of the Treasury to the DI
program. See table 1.
The total contribution to the IAs would start at about 3
percent of OASDI taxable earnings in 2001, reflecting the
excess of total OASI income (including interest) over cost for
the prior year. The total contribution would be adjusted as the
relationship between OASI income and cost changes over time,
reaching a low point of 2.01 percent for 2034. After 2034, the
total contribution is expected to rise, reaching
the maximum level of 5 percent by about 2058. The portion
of the total IA contribution that would be financed by
redirecting a part of the OASI payroll tax rate of 10.6 percent
would be expected to start at 0.06 percent for 2044, and would
be expected to be increased gradually, reaching 1.53 percent by
2073.
It should be noted that the column in table 1 labeled
``Total OASDI Contrib Rate'' includes the value of General fund
transfers to the DI program and excludes the part of the
payroll tax that would be redirected to the IAs. The actual
OASDI payroll tax rate realized by workers would continue to
12.40 percent (6.20 percent for employees and employers, each).
Stephen C. Goss
Deputy Chief Actuary
Alice H. Wade
Actuary
Attachment
[GRAPHIC] [TIFF OMITTED] T2789.010
Social Security Administration
June 5, 1999
Harry C. Ballantyne, Chief Actuary
Memorandum
Refer To: TCC
Subject: Estimated Long-Range OASDI Financial Effect of Proposal by
Representative Nick Smith--INFORMATION
This memorandum provides the estimated effect on long-range OASDI
financial status of an update of the ``Social Security Solvency Act of
1995.'' Specifications for the update have been provided by Kurt
Schmautz of Representative Smith's staff.
This proposal would (1) modify OASDI benefits, (2) distribute any
excess of OASDI income over cost, each year, to workers for investment
in Personal Retirement Savings Accounts (PRSAs), (3) transfer specified
amounts from the Treasury to OASDI for years 2001-2009, and (4) reduce
each worker's OASI benefits, by an amount equal to the value of PRSA
contributions accumulated at a specified interest rate.
The balance of this memorandum provides a description of the
proposals and estimates of the long-range financial effects of the
proposal on the OASDI program. All estimates are based on the
intermediate assumptions of the 1999 Trustees Report.
Summary of Proposal Provisions
(201) Raise the normal retirement age (NRA) at the rate of
2 months per year beginning in the year 2000, until reaching an
NRA of 67 for persons attaining age 62 in 2011 (eliminate the
hiatus in current law). After 2011, index the NRA to maintain
the ratio of expected retirement years (life expectancy at NRA)
to potential work years (NRA minus 20) at the level for 2011.
(202) Modify the PIA benefit formula by adding a new, third
bend point in 2000 equal to $3,720. Set the PIA factor to be
applied above the new third bend point at 15 percent for 2000,
13 percent for 2001, 11 percent for 2002, 9 percent for 2003, 7
percent for 2004, and 5 percent for 2005. Index the second and
third bend points by the increase in the CPI after 2000 (rather
than by the increase in the average wage). Gradually reduce the
32 percent PIA factor by 2 percent per year (multiply by 0.98
each year) after 2000, the 15 percent factor by 2.5 percent per
year (multiply by 0.975 each year) after 2000, and the 5
percent factor by 2.5 percent per year (multiply by 0.975 each
year) after 2005.
The combined effect of the declining PIA factors and the
reduced indexing of the upper two bend points, would be to
gradually move toward a PIA formula that would ultimately, in
1999 dollars, pay 90 percent of AIME up to $505 and nothing
above that AIME level. This would ultimately be very nearly a
flat benefit formula, providing a PIA of about $454 per month,
in 1999 dollars, for the large majority of beneficiaries.
(203) Send annual statements to each worker and beneficiary
over age 18 indicating the total amount of employee and
employer contributions made to date, with interest, and the
total amount of benefits received to date, with interest.
(205) Cover all State and local government employees
(except full-time students) newly hired in 2001 or later.
(206) Increase the level of benefit paid to all aged
surviving spouses by 10 percent beginning in 2001. This
provision would for the purpose of retired worker or aged
surviving spouse benefits payable to the surviving spouse of a
married couple, increase the PIA upon which the benefit is paid
by 10 percent. This increase would apply to all qualifying
widow(er)s receiving benefits in 2001 and later.
(207) Require the Social Security Administration to study
the feasibility of making participation optional.
(101) Starting in 2001, provide for contributions to
Personal Retirement Savings Accounts (PRSAs) for each OASDI
covered worker who is under age 65 on January 1, 2001. Access
to the accumulations in the PRSA would not be allowed until the
worker, or surviving spouse reaches retirement age and begins
receiving retired worker of aged surviving spouse benefits.
(102) Contributions to PRSAs would be made by redirecting a
portion of the OASDI payroll tax from the trust funds to the
PRSAs. For years 2001-36, 2.6 percent of each workers taxable
earnings would be redirected. After 2036 the portion of total
payroll tax contributions to be redirected would be set
annually based on the amount of OASDI total income that would
not be needed in order to maintain solvency of the OASDI
program on a pay-as-you-go basis with a trust fund ratio of
about 50 percent of annual cost.
Transfers from the General Fund of the U.S. Treasury would
be required for years 2001 through 2009, with the amounts
specified in law as $11 billion for 2001, $59 billion for 2002,
$51 billion for 2003, $68 billion for 2004, $79 billion for
2005, $116 billion for 2006, $134 billion for 2007, $146
billion for 2008, and $165 billion for 2009. These amounts are
based on current estimates by the Congressional Budget Office
of the amount of on-budget surplus for these years.
(103) For workers who have had contributions to a PRSA
during their working lifetime, expected lifetime OASI
retirement and aged survivor benefits would be reduced by the
amount of their PRSA contributions, accumulated at a specified
rate. Benefits for disabled workers would not be reduced prior
to retirement age because access to the PRSA would not be
allowed until retirement age. This hypothetical accumulation
would reflect amounts contributed to the PRSA, plus interest as
if the PRSA had been invested at the specified interest rate.
The specified interest rate would be the rate provided by long-
term U.S. Bonds held by the trust funds plus 0.7 percentage
point.
The percentage reduction for benefits paid based on a
worker's earnings would be determined at the time of initial
entitlement for retired worker or aged surviving spouse
benefits based on the worker's earnings. All OASI benefits paid
based on the worker's earnings after this point would be
reduced by the ratio of the hypothetical accumulation of PRSA
contributions to the present value of expected future benefits
at the time of initial entitlement (discounted for present
value at the yield for special bonds held by the OASDI trust
funds plus 0.7 percentage point).
This PRSA provision is intended to provide a financial
advantage to workers who will have the opportunity to invest
the PRSA in equities and corporate bonds, as well as Government
bonds, thus having the possibility of achieving a higher
average interest rate than realized by the OASI and DI Trust
Funds. Whether workers realize an advantage from the PRSA
accounts will depend upon whether they achieve yields on their
PRSAs, both before and after retirement, that are at least the
level specified for the benefit reduction provision, i.e., the
yield on special-issue United Stated bonds held by the trust
funds plus 0.7 percentage point.
All distributions from PRSAs would be taxed like current
OASDI benefits. Revenue from personal income tax on the
distributions would be transferred to the OASDI and HI trust
funds in the same manner as for revenue from taxes on OASDI
benefits under current law.
Long-Range OASDI Financial Effects
The combined effect of enacting the basic provisions to
modify OASDI benefits and coverage, sections 201 through 207,
would increase (improve) the long-range OASDI actuarial balance
by an estimated 3.21 percent of OASDI effective taxable
payroll. The complete proposal, including sections 101 through
103, along with sections 201 through 207, would, by design,
bring down and then limit the size of the OASI and DI combined
Trust Funds to the level of a very minimal contingency reserve
(about 50 percent of annual cost), thus reducing the actuarial
balance to about zero. See tables 1 and 2 for details.
The portion of the total OASDI payroll tax rate of 12.4
percent that is redirected from the trust funds each year to
the Personal Retirement Savings Accounts (PRSAs) of current
workers is determined so that the OASDI combined Trust Funds
would be expected to decline as a percent of annual program
cost through 2036, and would be maintained at a minimal
contingency reserve level after 2036. PRSA contributions for
each year result in subsequent benefit reductions for those who
were working in the current year. These reductions decrease the
cost of the program below the level indicated for provisions
201 through 207 alone, thus permitting increasing PRSA
contributions for workers in later years.
By 2073, payments of benefits from the OASI fund would be
largely eliminated through the PRSA offset, because the career
PRSA contributions, accumulated at the long-term U.S. bond rate
plus 0.7 percentage point, would exceed the present value of
expected benefits (discounted at the same rate) for most
retirees and survivors. It should be noted that benefits to
disabled workers would be reduced by the modified benefit
formula, but would not be offset because the PRSA account would
not available until retirement age is achieved.
Stephen C. Goss
Deputy Chief Actuary
Attachments
[GRAPHIC] [TIFF OMITTED] T2789.011
Table 2. Estimated Long-Range OASDI Financial Effect of Proposal of
Representative Nick Smith
------------------------------------------------------------------------
Estimated
Change in
Long-Range
OASDI
Section Actuarial
Balance \1\
(percent of
payroll)
------------------------------------------------------------------------
201. Raise the NRA by 2 months per year for those 0.50
age 62 in 2000 to 2011, then index to
maintain a constant ratio of expected
retirement years to potential work years.....
202. Provide a third PIA bend point in 2000 with a 2.89
5 percent factor; index the second and third
bend points by the CPI and gradually phase
down the 32, 15 and 5 percent factors after
2000.........................................
203. Annual statements for workers and (\2\)
beneficiaries................................
205. Cover under OASDI all State and local 0.21
government employees hired after 2000........
206. Increase benefit payable to all surviving -0.30
spouses by 10 percent beginning 2001.........
207. SSA study the feasibility of optional (\2\)
participation................................
------------
Subtotal for sections 201,202,203,205,206,207. 3.21
============
101. Set up PRSA accounts starting 2001............
102. Redirect 2.6 percentage points of OASDI
payroll tax to PRSAs for 2001-2036. After
2036, redirect to PRSAs any OASDI income in
excess of the amount needed to cover annual
program costs and maintain a minimal
contingency reserve trust fund. Transfer
specified amounts from the Treasury to OASDI
for years 2001-9 (based on current CBO
surplus est).................................
103. Reduce OASI benefit levels by the amount of -1.15
lifetime PRSA contributions, accumulated at
the yield on trust fund assets plus 0.7
percent......................................
------------
Total for proposal............................ 2.06
------------------------------------------------------------------------
\1\ Estimates for individual provisions exclude interaction.
\2\ Negligible, i.e., less than 0.005 percent of payroll. Based on the
intermediate assumptions of the 1999 Annual Trustees Report.
June 5, 1999 Office of the Chief Actuary Social Security Administration
Chairman Archer. Our first witness is a Member of the
Committee, the gentleman from California, Mr. Stark. And we are
happy to hear from you as to your plan. And under the 10-minute
rule that I have just stated, you are recognized, and we are
pleased to have you out there in the witness stand.
STATEMENT OF HON. FORTNEY PETE STARK, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF CALIFORNIA
Mr. Stark. Well, thank you, Mr. Chairman. I was wondering
if we could make a deal about questions, anticipating that you
and I will be reversing seats here later on in this hearing,
and I do appreciate your calling the hearing. And I certainly
appreciate your generosity in the time limit.
I have, as usual, my concise 2-minute statement, which will
take me at least 10 minutes to deliver. And so your forbearance
is appreciated.
I introduced what should become the baseline of these
hearings--legislation to preserve and protect the Social
Security system for current and future generations. Today's
young people want to be able to rely on Social Security the way
their parents and grandparents have. My plan would accomplish
this goal without reducing Social Security benefits, without
increasing taxes, and it has been scored by the actuaries as
achieving the 75-year, long-range solvency.
It would fully protect the Social Security cost of living
adjustment, guarantee full benefits for current and future
retirees and for women and children and people with
disabilities. It is a very simple plan. It would transfer an
amount equal to 2.07 percent of the taxable payroll, the size
of the current shortfall in Social Security, from the general
revenues into the Social Security Trust Fund. It is actually
identical to the Archer-Shaw plan, except that it strips away
the veneer: it gets rid of the quasi-individual accounts
created and instead gets right to the basics. It drops the
provisions creating nearly 150 million individual accounts to
invest in the stock market. It does away with that ruse, there
is no pretense of private accounts for people. It does not
mislead the public into thinking they own a new private
account. It does not create individual accounts, which would
later have to be confiscated at retirement in order to fund a
benefit no larger than the Social Security benefit the
individual would have received under the current program.
Further, this plan does not tell the American worker they
own their own account, but then mandate that 60 percent of this
virtual account be invested in stocks.
Why bother with creating virtual individual accounts? Why
set up a Federal bureaucracy to create more than 150 million
accounts? Why run the money through Wall Street so brokers can
siphon off their share? Why reduce the accounts by excessive
administrative costs?
My plan does not dig the Social Security financing hole
deeper by adding extra benefits for the highest income people.
Most people, under the Archer-Shaw plan, would receive benefits
only as much as under current law. A few high-income people
could benefit greatly from the private accounts if they got
very lucky in the market.
My plan makes the point that designing a Social Security
plan to achieve 75-year solvency is easy. One can reach the 75-
year solvency by simply transferring enough funds from general
revenue to meet the shortfall in Social Security. That is all
there is to it. It achieves the solvency and has a much smaller
general fund transfer than one of the Senate plans, for
example. Mr. Gramm's plan demonstrates that if you want more
funding for Social Security, all you have to do is transfer
money.
Unfortunately, our current budget surpluses may not last
forever. After the surpluses disappear, it is not clear from
whence the money will come. Will there be an increase in taxes?
Will there be cuts in Medicare? Will there be increased
borrowing from the public?
This bill strips away that complexity, and it is very
simple. It is a straightforward way of achieving the 75-year
solvency for the Social Security Program. I am looking for
cosponsors, and, as I say, it is a bedrock plan. You could
amend it. You could cut benefits, and then not have to take so
much money out of general revenues. You could, rather than
invest in the stock market, lift the taxable payroll cap, and
it would give you an alternative. If we wanted to match this,
all we would have to do is increase the interest that we set on
the borrowing so the Social Security Trust Fund from 6.5
percent to 11 percent. That money, of course, would come out of
general revenues, as it does now. But there just is not any
other way. It is a teeter-totter. You can put this end in the
air, and that one comes down, or vice versa.
But this plan, to repeat, solves the problems we are
talking about without reducing benefits or increasing taxes,
and a 75-year solvency. It takes 2.07 percent of the taxable
payroll, transferred from general revenues into the Social
Security Trust Fund. Now, you can do that any kind of which way
you want. You could cut benefits, of course. I am not so sure
that I would want to vote for that, but it is a possibility.
But there are not any other ways, Mr. Chairman. And I just
thought that we ought to set the standard of what we are
talking about and the dollars we are concerned about--we have
charts that show each year's contribution and some cost a
little more in some years, and some cost a little less, but
basically, this is what we are talking about in most every
plan, and those that cut the benefits would not transfer quite
so much money. That is a choice that we have and I suspect we
could vote on later.
And I appreciate the opportunity to testify with you this
morning. Thank you.
[The prepared statement follows:]
Statement of Hon. Fortney Pete Stark, a Representative in Congress from
the State of California
This week I introduced legislation, H.R. 2039, to preserve
and protect the Social Security system for current and future
generations. The Social Security system has been the bedrock of
retirement income for millions of Americans. Today's young
people want to be able to rely on Social Security the way that
their parents and grandparents have.
My plan would accomplish this goal without reducing Social
Security benefits or increasing taxes. It has been scored by
the actuaries as achieving 75-year long range solvency. It
would fully protect the Social Security cost-of-living
adjustment and guarantee full benefits for current and future
retirees--and for women, children and people with disabilities.
It is a simple plan. It would transfer an amount equal to
2.07% of taxable payroll--the size of the current shortfall in
Social Security--from the general revenues into the Social
Security Trust Fund.
My plan is identical to the Archer-Shaw plan, except that
it strips away the veneer. It gets rid of the phony individual
accounts created by that plan and instead gets down to the
basics.
It drops the provisions creating nearly 150
million accounts to invest in the stock market.
It strips away the ruse of individual accounts.
There is no pretense of private accounts for people. My plan
does not mislead people into thinking that they own new private
accounts. My plan does not create individual accounts only to
confiscate them at retirement in order to fund a benefit no
larger than the Social Security benefit the individual would
have received under the current Social Security program.
Furthermore, my plan does not tell the American worker they own
their own account, but then mandate that 60% of this
``virtual'' account be invested in stocks.
Why bother with creating ``virtual'' individual
accounts? Why set up a federal bureaucracy to create more than
150 million accounts? Why run the money through Wall Street so
that brokers can siphon off their share? Why reduce the
accounts by excessive administrative costs?
My plan doesn't dig the Social Security financing
hole deeper by adding benefits for high-income people. Although
most people, under the Archer-Shaw plan would receive benefits
only as much as under current law, some high income people
could benefit greatly from the private accounts.
My plan makes the point that designing a Social Security
plan to achieve 75-year solvency is easy. One can reach 75-year
solvency for Social Security by simply transferring enough
funds from the general revenue to meet the shortfall in the
Social Security program.
My plan achieves 75-year solvency and has much smaller
general fund transfers than the Gramm plan, for example. As the
Gramm plan demonstrates if you want more funding for Social
Security, all you have to do is transfer money.
Unfortunately, our current budget surpluses don't last
forever. After the surpluses have disappeared, it is not clear
from where the money will come. Will there be an increase in
taxes? Will there be cuts in Medicare? Will there be increased
borrowing from the public?
My bill strips away the pretense, complexity and deception
in other plans. My plan is a simple, straightforward way of
achieving 75-year solvency for the Social Security program.
Chairman Archer. I thank the gentleman for his testimony,
and it certainly is a very straightforward approach to a
solution of the Social Security problem. And it certainly is
not overly complex, I do not think. I think the way you
presented it, it is easy to understand.
I have one question and then I am going to, of course,
recognize other Members. Do you have a projection as to what
this does to the unified budget surplus over the 75-year
period?
Mr. Stark. I--Mr. Chairman, I would presume it would do the
same thing as your plan or any others. It takes about the same
amount of money out of general revenues, and it would not make
much difference one way or the other.
Chairman Archer. I would think it would be significantly
different than the Archer-Shaw plan because it takes enough out
of general revenue in order to finance the Social Security fund
for the next 75 years, but it does not buildup any surpluses in
the fund, as ours does, which would permit a reduction in the
payroll tax of over 4 percent over the long term. And I would
guess from the way you have described it that it--that it has a
negative impact of some significant consequences on the unified
budget surplus. Whereas ours increases the unified budget
surplus by over $120 trillion over 75 years; and that is a
rather significant difference. But if you do not have that from
either CBO or SSA, we can, of course, gain that later and make
the comparisons.
Mr. Stark. Mr. Chairman, I am going to keep this as simple
as I can. In the transfers from general revenues, this takes a
little less money than your bill. It does not have the 25 basis
points a year for administration that your bill would require.
The idea that you might gain a lot of benefits through a higher
return is one of faith, but I have, and I would submit for the
record, the list. In the early years, yours starts with 157,
and then runs 82, 85, 100. This one runs 78, 80, 89, 100, 106.
Some years it is a little higher. Some years, it is a little
lower, but what I am about to suggest to you is that the
transfers are very, very close in all years, and if you want to
transfer money from the general revenues into the stock market
and back into the trust fund, you could do it. But I do not
know what you achieve.
Chairman Archer. Well, I would say to the gentleman, and I
am just told by staff that the actuaries at Social Security
have been so swamped trying to meet the demands that they did
not have time to compute the impact on the unified budget
surplus on your plan, but that it will be available to us
shortly. And then we have got to go by whatever the official
estimates are, not simply by our desires, and we will be able
to make that comparison. Thank you.
Any other Member wish to inquire?
Mr. Rangel. Yes, I would like to----
Chairman Archer. Mr. Rangel.
Mr. Rangel. You know, Mr. Stark, you passed over the
innovative part of the Archer-Shaw plan by not giving the
beneficiary the opportunity to participate in individual
investment accounts. This is important----
Chairman Archer. Will the gentleman suspend for just a
minute? If we could, because I will be out there tomorrow and
will be happy to respond to any detailed comments relative to
the Archer-Shaw plan, if we could concentrate today on trying
to develop information on the plans of the Members who are
presenting their plans, I think it would expedite our hearings.
Would that be acceptable to the gentleman? The gentleman will
be able to quiz me tomorrow to the fullest extent.
Mr. Rangel. Well, there must have been some reason why he
would have omitted this, Mr. Chairman, and I respect his
opinion, because he has tracked your plan except that he has
left out the key, challenging, important part, and that is the
high-yield investments. Knowing that Peter studied your plan, I
wondered whether or not he could share with us why he omitted
that?
Mr. Stark. Well, Mr. Rangel, there are no assumptions in
this bill in terms of earnings or dollar amounts. The Social
Security actuaries indicated that the Archer-Shaw bill if it
only earned a real rate of 4.35 percent, it would fail to close
the long-range gap. The 5.35 percent figure, assuming that
future stocks will earn a rate of return around 7 percent, Mr.
Gramm, like the Federal Reserve Board Governor, and the source
of the original individual account plan during the 1994-96
Advisory Council, said that that was way too high. So, we did
not want you to get into the stock market. We get into guessing
which way the wind is going to blow a week from Sunday. And
those are projections that I am not sure that your and my and
the Chairman's grandchildren want to rely on.
Mr. Rangel. But still, Archer-Shaw, if there are not these
high returns in the stock market, they go back to general
revenue, which takes us back to your bill.
Mr. Stark. Precisely. Precisely.
Mr. Rangel. Thank you, Mr. Chairman.
Chairman Archer. The Chair would like to alert the Members
that the Chair intends to continue the hearing through the
votes, and Members should take advantage of a time to go vote,
and then come back. But we want to proceed on a seamless basis.
Mr. Thomas.
Mr. Thomas. Pete, what I am trying to do in a rough
comparison, notwithstanding the various pieces that folk
present, is to look at the Social Security actuaries' 75-year
program. Part of my concern is that all of us are familiar with
the House's 5-year and the Senate's 10-year budget window, in
which we look at 5 or 10 years and then what happens after that
is off the chart. In part, I think in some of these plans we
are dealing with the 75-year window, and what happens after
that is off the chart.
Now, as you and I know in trying to deal with Medicare, 75
years out is an interesting game to play, anyway. But what
concerns me--and I need some response so that you could help me
understand--what concerns me about the actuaries' 75-year
outlook on your plan in terms of annual balance is that, more
so than any other, except I guess the Nadler plan, you start
out in 1999 with a 3.98 percent positive, and then it goes to
3.94, 3.82, and it basically is a direct reduction until in the
year 2020, you are at 0.04 deficit. But then in 2021, you are
0.37 deficit, 0.67, 0.98, 1.26 deficit. Through the decade of
the 2030s, you're in the twos, then you're in the threes, and
when you get to the 2060s and into the 2070s--for example,
2070, it is 4.21, 4.26, minus 4.31, minus 4.36, minus 4.0. The
assumption is that if you got into the 76th, 77th, 80th year,
you continue to go downhill in a minus at fairly significant
amounts--$41 trillion in the last year alone.
How do you propose to make up that kind of a profile of a
roller coaster going downhill? At the 75-year date that we cut
it off, my assumption is that roller coaster is going to go
right below zero and keep on going.
Mr. Stark. Well, if I had the foggiest idea of what was
going to happen in 2075, I would be concerned. But I would hate
to deny our grandchildren, who might run for these positions
and be here 50 years from now, the chance to solve that problem
all by themselves.
I share with you and with Mr. Rangel the idea that
projecting 75 years into the future is an interesting exercise,
and certainly an art, not a science. But I merely chose to show
that through the 2075s, we could meet that goal. If we changed
the goal, we would change the numbers. So if you want to keep
it through 2175, we would have to go back and calculate another
number. But I submit that that is not the issue. A new number
could change.
Mr. Thomas. Well, I understand the 75-year window, but
partly our job might be, I would think, to take a look at what
occurs during that period. Granted, it may be an art and not a
science, but if we are comparing, as the actuary does, the
different plans, a proposal that runs a kind of a flat line or
a very modest downhill slope would produce a decision far
easier for our children or grandchildren to make when they sit
in these seats at the time they need to make the decision.
A significantly declining slope produces a far more
difficult decision. If we are at the point of attempting to
create a structure that does get us there over 75 years, I am
wondering why, just at the outset, we would not chose a plan
that shows us, as best projections do, a flat outcome after
2075, or only a slight decline versus one that would be a
pretty thrilling roller coaster ride if it were, in fact, a
roller coaster ride rather than the Social Security Trust Fund.
Mr. Stark. Well, the basic difference is that thinking in
an annual percentage gives you a definitive and predictable
amount, and basically I suspect that that is what the
Chairman's does. It just interjects the stock market activity
in between, because if the stock does not do well enough, the
funds will still come out of general revenues, the extra
amount, to meet the benefit. So really the same thing could
happen to the Chairman's plan or it could be worse if we happen
to hit several major downturns in the market between now and
then.
Somehow, it seems to me, that dealing with a certainty in
this is a better program, or as much certainty as we can. It
still seems to me that it is beyond actuarial science to talk
about employment, rates of wages, rates of productivity, birth
rates--issues that are not necessarily actuarial decisions when
we are projecting that far ahead.
Mr. Thomas. Well, I appreciate the gentlemen's comments,
but when we look at charts that compare, it is going to be
difficult for us to pick these significant down sides in a
clear direction. It may not be accurate, but I think the
direction is the one that I would be concerned about, and I
thank the gentleman for his plans.
Chairman Archer. Mr. Matsui.
Mr. Matsui. Thank you, Mr. Chairman. We only have 7 minutes
left, and I do not know if I will be able to really develop my
point in this time, but I will try.
Chairman Archer. The gentleman has 5 minutes.
Mr. Matsui. Right. Two minutes left, though, if I get to
the floor.
First of all, your proposal does not cut benefits nor does
it increase payroll taxes?
Mr. Stark. Not at all.
Mr. Matsui. And Mr. Thomas raised the issue about long-term
stability, and he compared it, to some extent, and perhaps you
did too with the Archer-Shaw legislation. And yours does take
money from the general fund for that entire 70-year period.
Mr. Stark. That is correct.
Mr. Matsui. And it is my understanding that it would come
to somewhere in the range of $43 trillion.
Mr. Stark. That is correct.
Mr. Matsui. And I want to make a comparison here, because
that is what the discussion is all about between your plan and
Archer-Shaw. The problem I think with what Mr. Thomas was
suggesting, and I know he has left, so I am little reluctant to
mention his name, but is the fact that Archer-Shaw does not
really achieve, assuming everything goes right, long-term
stability until 2050, another 51 years from now. And, as you
suggest, anything can happen in the interim period. So
comparing the two, maybe yours does not achieve stability until
2075, if at all. But theirs has that same problem, at least
two-thirds of the way into it. Is that my understanding? Can
you elaborate on that?
Mr. Stark. That would be my understanding is that we are
dealing in my bill with a fixed amount, and a fixed rate that
could be changed or adjusted.
Mr. Matsui. Right. And the reason the Archer-Shaw plan
begins to achieve some stability in 2050 and beyond is because
essentially what you do is you either eliminate the
individual's Social Security benefits, because they have the
individual accounts, up to the amount of the individual
accounts, or one could argue the other way that it basically
confiscates the amount of money in the individual account up to
the point where it matches the current level of benefits, is
that correct?
Mr. Stark. That is correct, and a few people might get a
bonus. But it would be presumed that a lot would get the Social
Security benefit, because their investment account would not
equal the benefits.
Mr. Matsui. And so what you are suggesting is maybe a more
direct way of dealing with this issue?
Mr. Stark. It is just----
Mr. Matsui. Everybody uses general revenues.
Mr. Stark [continuing]. It is just trying to simplify the
amounts that are going in and not complicate or obfuscate this
whole idea of somehow thinking that there's a private account
that somebody owns when they do not.
Mr. Matsui. Right.
Mr. Stark. And it creates a lot of illusions about
investing in private securities--in private accounts--but they
do not really exist.
Mr. Matsui. Right. Thank you very much.
Mr. Stark. Thank you.
Mr. Weller [presiding]. The Chair recognizes Mr. McCrery.
Mr. McCrery. Thank you. Just for a quick followup. Mr.
Matsui is leaving. But the point Mr. Thomas was making was
precisely the opposite of the point that Mr. Matsui attempted
to make. There is no stability in your plan in the out years.
That's the point Mr. Thomas was trying to make.
While you solve by simply infusing the trust fund with
general funds to the tune of 2.07 percent per year, starting
next year, at the end of the 75-year period, according to the
actuary at the Social Security Administration, you will be--the
combined Trust Fund will be declining at a rate of 20 percent
per year compared to the costs of the program. So Mr. Thomas
was trying to illustrate that under your plan, with no further
changes, there is actually a pretty big cliff at the end of the
75-year period which necessitates fairly drastic actions----
Mr. Stark. Sort of like cutting gains tax.
Mr. McCrery. And increase taxes. No, it is not like that at
all. So, I just wanted to clear that up, lest anyone mistake
the Stark plan for being one that establishes stability. It
does not do anything of the sort.
Mr. Stark. It just. If the gentleman would yield.
Mr. McCrery. Of course.
Mr. Stark. It just does exactly what the Archer-Shaw plan
does. It only does not presume any returns from gambling in the
market. It just sets a rate that is a reliable rate, and
because we state it, it has to be paid. You could argue--you
could change the timeframe. That is all right with me. Then you
just have to make it 100 years, and then the 2.07 would change
to some amount, as would the contribution under the Archer-Shaw
plan. So, I mean, it is----
Mr McCrery. Yes, but therein lies the difference. In order
to assure stability, as Mr. Matsui used the term, and under
your plan you would have to, in fact, infuse a much higher
percentage of general revenues into this Trust Fund; whereas,
the Archer-Shaw plan does not do that. In fact, we are able to
reduce payroll tax rates under the Archer-Shaw plan in the out
years, because we do achieve stability on that plan.
Mr. Stark. Only on the assumption that the market will go
up.
Mr. McCrery. That is correct. The gentleman makes a
legitimate point. However, if history is any guide, we do not
have to worry about the market in this country.
Mr. Stark. But if the market goes down.
Mr. McCrery. Achieving less than what is being predicted by
the actuaries. So, if you have faith in the market in this
country, and I do and I think most of us do, then I think we
can safely assume that, over time, it will produce a higher
rate of return than government bonds of Treasuries.
Mr. Stark. I do not intend to gamble with my
grandchildren's retirement in the stock market.
Mr. McCrery. Well, we are--I mean, life is gambling, Mr.
Stark. But I think if we are, in fact, dedicated to a free
market economy, as I think we are, we--if the stock market goes
south, we all go south. But, again, if history is any guide,
the stock market is not going south. We are going to continue
to be a vibrant economy over time, and it will produce the
higher rate of return.
So, you know, you make a legitimate point, but I do not
think that it is a compelling one.
Mr. Stark. It would be a historical first, and I have----
Mr. McCrery. It would be, yes. I thank the gentleman.
Mr. Weller. OK, Mr. Collins.
Mr. Collins. Mr. Stark, I was delayed upon arriving here
for the beginning of this hearing. Can you just kind of walk
through again your presentation proposal for the benefit of
this one straggling Member?
Mr. Stark. Very simple. It just takes 2.07 percent of the
payroll; it transfers it from general revenues into the Social
Security Trust Fund. That holds the Social Security Trust Fund
solvent for 75 years; does not reduce benefits; and does not
increase taxes. Just that.
Mr. Collins. Are you talking about an additional add-on two
point, or are you talking about a carve out?
Mr. Stark. I'm not. No more tax. I am just talking about
taking from general revenues, as the Archer-Shaw plan does,
only I put it right in the Social Security Trust Fund--2.07
percent of the payroll, gross payroll.
Mr. Collins. But I am confused here, which is not out of
the ordinary. You are talking about 2 percent add-on, or 2
percent of the existing FICA tax, or Social Security tax?
Mr. Stark. I am not talking about FICA tax at all. I am
talking about taking 2.07 percent of the taxable payroll, the
same payroll that we now take about 12 percent and change, take
that amount from general revenues, from the Treasury, put it
into the Social Security Trust Fund.
Mr. Collins. OK, you are talking about an add-on then?
Mr. Stark. Add on to what?
Mr. Collins. That is an add-on. Yes. An add-on to the
existing FICA tax?
Mr. Stark. No.
Mr. Collins. It is not an add-on?
Mr. Stark. No. No. The government----
Mr. Collins. Well, I am not----
Mr. Stark. It is transferred by the Treasury.
Mr. Collins. You are not adding on to the tax, but you are
taking general revenues and adding to them----
Mr. Stark. No, I am not adding it to the tax. The tax, the
FICA tax, will remain the same.
Mr. Collins. Yes.
Mr. Stark. The Treasury will transfer the money in one lump
sum from the general revenues to the trust fund.
Mr. Collins. OK. So, you are just putting money into the
Social Insurance Fund?
Mr. Stark. Just adding money into the trust fund, right.
Just like Archer-Shaw does.
Mr. Collins. I am sorry.
Mr. Stark. Just like Archer-Shaw does. It just goes through
several hoops. They give it to you for a while. They pretend
you hold it, then they take it away from you when you retire
and dump it back in the trust fund, so mine just gets there
more directly without confusing our beneficiaries.
Mr. Collins. Then, basically, what you are doing is you are
transferring from other taxpayers, through general fund
contribution, to payments to the Social Security Insurance
Fund?
Mr. Stark. Precisely.
Mr. Collins. Well, in effect, though, is that not 2 percent
of current taxation that people are paying it, and no way in--
will they ever get relief from? It is like adding 2 more
percent to the tax?
Mr. Stark. Not to the payroll tax. It is adding 2 percent--
it is taking 2 percent from general revenues. If there is a
surplus, it does not add anything. If there is not a surplus,
you would either increase the deficit or have to raise income
taxes.
Mr. Collins. But general revenues are taxes. Those are tax
dollars.
Mr. Stark. Right. They are the benefit tax----
Mr. Collins. So if you take and you freeze 2 percent of
those tax dollars, then that is 2 percent that are frozen from
now on----
Mr. Stark. Precisely.
Mr. Collins. That no one would ever have an opportunity for
relief from.
Mr. Stark. That is right. There is a guarantee, just like
we guarantee paying interest on the Federal debt. And we are
guaranteeing it in this case to the seniors and future
generations; that we are saying we guarantee, as the other
plans do. Chairman Archer, Mr. Shaw guarantee they are going to
spend the money. They would just route it differently. All the
other plans suggest they will use money if need be. So, I am
just trying to say this is what it will be without all the
bells and whistles, which may make the other plans better for
some people, but I am just saying this shows exactly what it
is.
Mr. Collins. Or supposing the individual did not have a tax
liability?
Mr. Stark. No, no.
Mr. Collins. This takes that 2 percent----
Mr. Stark. This takes the entire--of the entire amount, Mr.
Collins. It does not deal with the individuals at all. It takes
a lump sum in the entirety to keep the trust fund solvent.
Mr. Collins. So you are not setting up the individual
accounts?
Mr. Stark. No, absolutely not.
Mr. Collins. You are just continuing this current pace with
those same----
Mr. Stark. Continuing the same Social Security Program we
have today, and funding it, funding the solvency of the trust
fund by making this transfer.
Mr. Collins. You are just a--a dollar--money infusion into
it?
Mr. Stark. That is correct.
Mr. Collins. Putting it on a money IV?
Mr. Stark. That is right, and it is why I say it is the
base bill. You could then change it if you chose. You could
create anything, but it shows you what we are going to do--how
much we are going to spend. You want to cut benefits? We will
take a little less money. You want to take a little more money
and increase the benefits? if you think that the earnings of
the stock market will be higher, we would spend less.
Chairman Archer [presiding]. The gentleman's time has
expired.
Mr. Stark. But that is--OK.
Mr. Collins. OK. Thank you. Thank you, Mr. Stark.
Mr. Stark. Thank you.
Chairman Archer. The gentleman's time has expired.
Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman. Mr. Stark, in your
oral testimony, you cited one of the other plans and the
individual accounts created in that plan, and I think the word
you used was a quasi-individual account.
In your written testimony, which was part of the record,
you use another word to describe those individual accounts. Do
you wish to amend your written testimony, or do you stand by
it?
Mr. Stark. Let us see if I can--can you tell me the precise
wording? I am happy----
Mr. Hulshof. In the fourth paragraph, you indicate--you
describe the individual accounts----
Mr. Stark. Phoney.
Mr. Hulshof. As phoney.
Mr. Stark. No, I say they are phoney.
Mr. Hulshof. Would you use that same terminology, for
instance, to describe the Universal Savings Account plan as
proposed by the President of the United States? Would that, in
your estimation, be phoney?
Mr. Stark. No, the Universal Savings Account is something
that you would keep. These accounts, you would not keep, and
they are interesting, but they are not yours. They are virtual
accounts, but they would not insure the benefits of the
individuals. They would be donated back to the Treasury, and
then they would get the Social Security benefits.
Mr. Hulshof. Well, let me follow up on that point, because
I think you concede, do you not, at the bottom of your first
page that there are American taxpayers and workers who would
receive more benefits under the Archer-Shaw plan than they
would under the present system, is that true?
Mr. Stark. There are a few, possibly but not conceivably,
that would.
Mr. Hulshof. And would you also concede the point that
under the Archer-Shaw quasi-individual accounts that workers
would have at least some ability to direct how those accounts
would be invested?
Mr. Stark. I don't think so.
Mr. Hulshof. Would you----
Mr. Stark [continuing]. I think under the--but I would let
the author correct me--I believe those are managed by the
government, and that is what raises the cost and it costs 25
basis points a year to do it. So----
Mr. Hulshof. Would you concede the point that the quasi,
or, in your words, the phoney individual accounts created by
Archer-Shaw, would allow workers who die before retirement to
pass those personal savings on to their heirs? Do you
acknowledge that point?
Mr. Stark. Yes, but they would not get any more benefit. I
mean, again, if that did not equal the Social Security benefit,
or could not pay it, it would, again, revert to the Treasury.
Mr. Hulshof. Does your plan have any of those options or
features that I have just described? That is, add retirement
benefit, higher benefit, than the current system----
Mr. Stark. It has exactly, Mr. Hulshof, the benefits that
exist today, indexed for inflation. It provides for the COLAs.
It provides for disability. Everything--all this plan does is
show you that it takes 2.07 percent each year to make the
current plan, with the current benefits, solvent for 75 years.
There is no hidden agenda in it. There is nothing fancy--I
mean, that is all it does, and I can understand that people
might like to add on to it or subtract from it, to make less
money come out of the Treasury, or to give bigger benefits
perhaps. I just tried to attempt to keep the current plan. How
much would it cost, out of general revenues. That is it.
Mr. Hulshof. Thank you, Mr. Stark.
Mr. Stark. Thank you, sir.
Mr. Hulshof. Thank you, Mr. Chairman.
Chairman Archer. Mr. Ramstad.
Mr. Ramstad. Thank you, Mr. Chairman.
Mr. Stark, let me ask you this: In transferring, as I
understand that 2.07 percent of taxable payroll from general
revenues into the Social Security Trust Fund--that is what you
are doing--you are investing all those dollars in government
bonds, which have about a 3 percent return rate, is that
correct?
Mr. Stark. Well, I guess I am. But, I do not want to mix
apples and oranges. They have about a 6 or 6.5-percent rate.
The real rate, depending on inflation, may be 3. I do not care
which--you use whichever number you want. But, I mean----
Mr. Ramstad. But the point is that all of those dollars go
into government bonds, as opposed to private investments?
Mr. Stark. Under the current system, that is correct, yes,
sir.
Mr. Ramstad. Most of the other proposals that I have seen
look at investing funds in ways that have better rates of
return, and I am curious as to why you chose to keep the funds
in the option with the lowest rate of return?
Mr. Stark. I think there are a large number of Americans
who have a concern. Rightly or wrongly, they were gambling with
their money. You have heard the same concern in your town
meetings that we are spending the trust fund that is not there.
The government bonds--and so I am just suggesting that this is
the way to determine the exact amount that we will have to
anticipate coming out of general revenues to meet the 75-year
target, maintaining current benefits as we know them today.
Now, you could pay a higher interest rate by law. We
could--we would have to kick it up to 11 percent, and then we
would not have to take anything out of general revenues
directly. We would just have to take it out to pay the interest
on the bonds.
Mr. Ramstad. Well, I understand that, but it just seems to
me when, over the last decade, or the last 12 years, the
average rate of return for investments in private stocks has
been in double digits, and we are getting 2 to 3 percent from
government bonds. That is a huge amount of money, a huge
discrepancy, and a lot of----
Mr. Stark. I hear that from Merrill Lynch and Dean Witter
every day, Mr. Ramstad. They may be right.
Mr. Ramstad. It sounds like, Mr. Stark, as a good friend
and colleague, for this the first time, you have probably been
criticized for being too conservative.
Mr. Stark. Thank you. Yes.
Mr. Ramstad. One general theme I hear at hometown meetings
that I have had on this important topic--and I think this theme
pervades the body politic--is that most people do not want
their Social Security taxes raised or benefits cut. I certainly
support that line of thought, share that goal.
Now, your bill would transfer what amounts to 2.07 percent
of taxable payroll from general revenues into the trust fund
each year, annually, right?
Mr. Stark. That is correct.
Mr. Ramstad. Does that actually mean you are raising taxes
on Social Security, from 12.4 percent to about 14.5 percent?
Mr. Stark. No, no. It just means that it is a commitment to
pay from the Treasury directly to the Social Security Trust
Fund. It does not run through the payroll tax system at all.
And it is just a commitment to transfer revenues----
Mr. Ramstad. But is that not, in essence, a tax increase?
Mr. Stark. It depends on whether or not we are running a
surplus or not. It could necessitate a tax increase to keep a
balanced budget, if for some other reason--we had a war or
something. So, there is no question that it puts a strain on
the budget, but all the other bills do as well. They just take
money out of the general revenue and give it to individuals or
give it to the stock market plans. And I am just circumventing
some of those in between steps.
Mr. Shaw. Would the gentleman yield on that? I have just
one quick question.
Mr. Ramstad. I certainly will.
Mr. Shaw. Would this be subject to annual appropriations?
Mr. Stark. No.
Mr. Shaw. How would it be done?
Mr. Stark. It would just be transferred from the Treasury--
the same way, for example, under the same rules that we
transfer now some of the--I think it is Medicare tax.
Mr. Shaw. With a refundable tax credit, that goes on
forever, but I think perhaps we had better check that and see
if that would be subject to annual appropriations, which would
be a concern----
Mr. Stark. I doubt it very much.
Mr. Shaw [continuing]. I think to all of us.
Mr. Ramstad. Reclaiming my time----
Mr. Shaw. Thank you.
Mr. Ramstad. Before the light goes out, let me just ask one
final question. What happens in those years when there are not
surpluses in the general revenues?
Mr. Stark. That depends on Congress. It would either
increase the deficit, if they chose not to raise tax revenues
to cover the deficit. The same thing that happens if we fight a
war or do anything else.
Mr. Ramstad. Thank you, Mr. Stark; Mr. Chairman.
Chairman Archer. Mr. Doggett.
Mr. Doggett. Thank you, Mr. Chairman.
You indicate that your plan will provide for solvency for
75 years. I am wondering why you did not do it for 175 years,
and why the 75-year bar is the appropriate one to set here.
Mr. Stark. Well, I think, Mr. Doggett, that this plan is a
lot better than the Chairman's, but I am not prepared to battle
the Chairman with both arms tied behind my back. If he only has
to do his for 75 years, I am not so confident that I can win
what I want to do for 150 years, thank you very much. Fair is
fair.
Mr. Doggett. Well, is it correct that the further you get
out, whether it is to 74 years or 174 years, the more
speculative it becomes?
Mr. Stark. The more speculative all plans become,
basically.
Mr. Doggett. Right.
Mr. Stark. Not so much in terms of whether it is the stock
market versus fixed income, but the demographics of the world
are debatable and not all that predictable.
Mr. Doggett. Right.
Mr. Stark. And by that, I mean the wage rates, the number
of people working--those issues become pretty fuzzy when you
put out that far.
Mr. Doggett. I understand you want your plan judged by the
same standard as all other plans that are being submitted, but
what is your personal view of the wisdom of picking 75 years as
the standard by which all plans should be considered?
Mr. Stark. Well, personally, I would not be inclined to go
out that far, but it does not--if that is what we are judging
all plans by, it is all right. My sense is that somebody will
be back here in the next 25 or 30 years making some adjustment,
which is the glory I think of the Social Security system and
Medicare; is that we do not make it a static system. We do not
bury our head in the sand once we have declared solvency. We
adjust to the changes in the world, and to the changes in the
economy, and to the changes in demographics, and try to provide
for our seniors a stable retirement safety net that they can
depend upon.
And I think that the Congress is to be credited for having
done that reliably since 1935. And I would like to think that,
even without you and me, Mr. Doggett, the Congress will be able
to go on ahead and provide a security for the elderly in this
country for a long time to come.
Mr. Doggett. Thank you.
Chairman Archer. Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman, and still good
morning, Mr. Stark. You know, this House has made some
decisions so far this year, and, you know, the President, when
he did his State of the Union speech, he proposed setting aside
62 percent of the Social Security surplus for Social Security
and spending the rest on other things. And this House has made
a decision. In fact, there was a bipartisan vote this past week
to lock away 100 percent--Social Security surplus--for Social
Security and Medicare, and I think that is the right step. And
you are referring to town meetings, what we are hearing back
home. And I know that has been applauded by the folks back
home.
But when the President, in his proposal, talked about 62
percent of Social Security for Social Security, and he also
said we should take one-fourth of that surplus and invest it--
by the--have the government invest it in the stock market.
Would your plan allow for government-controlled investment
in the stock market?
Mr. Stark. It does not provide for that, no.
Mr. Weller. Is that an approach that you support?
Mr. Stark. I do not support having the basic Social
Security plan invested in the stock market. I have no problem
if we decide we have the funds to create on top of Social
Security additional IRAs or Savings Plans, and I would be
particularly happy to see low-income people get some assistance
in doing that. But I just feel that the base plan should be--
let us call it a fixed-income plan and a fixed-benefit plan, as
it is now. My own philosophy is that we should guarantee that.
Then, if you chose to find other ways to help people save,
I would be willing to participate in that.
Mr. Weller. I am confused a little bit. In the statements
that you made so far, it appears that you have been opposed to
the idea of personal accounts. And you have just stated that--
--
Mr. Stark. Yes, I----
Mr. Weller. It is an account----
Mr. Stark. For the base Social Security----
Mr. Weller. Yes.
Mr. Stark. For the base Social Security system, I do not
think you should. If you want to create additional IRAs or
Keoghs or those sorts of things, you know, on top that is OK.
Mr. Weller. Now, as I understand the Archer-Shaw proposal,
and, of course, the Chairman is going to present that tomorrow.
But as I understand that, that is exactly what his plan does.
Is it takes traditional accounts----
Mr. Stark. Well, with some exceptions. You do not own the
account.
Mr. Weller [continuing]. On top of existing Social
Security.
Mr. Stark. No, it is a kind of almost account. It is yours
if it beats Social Security, but it ain't yours if it does not.
Then you get the Social Security. I mean, there is a lot of
convolution to get to the basic Social Security benefit for
those--for whom their individual account does not provide
enough resources to give them their retirement income at the
same level it would be under Social Security.
Mr. Weller. Well, is not that where there is a lot of
similarity between the Archer-Shaw plan and the President's USA
plan, because they are both additional, essentially, personal
accounts in addition to Social Security? Are not they fairly
similar in that approach?
Mr. Stark. You know, Mr. Weller, that may be, but I am not
here pushing the President's plan. That may surprise you. But I
am just trying to present a plan that I think is fairly simple
and does the job that we would all like to tell our seniors we
have done. And that is protect their benefits and guarantee
them--for 75 years, because that has been raised as the mark.
And that is what this bill does. It is different. It does not
cut benefits, and it does not invest in the stock market. It
does not do a lot of things, but it is a--it is kind of what I
like to call the baseline bill, and you can then judge what
rates of return you would have to get otherwise to match it.
You can adjust it any way you want.
Mr. Weller. Well, focusing specifically on your proposal,
and I know my friend, Mr. Collins and Mr. Ramstad, have both
raised this issue here. You propose adding additional funds out
of the surplus, essentially 2.07-percent increase above the
current 12.4 percent that currently goes in there. How much is
that in dollar figures?
Mr. Stark. It is approximately the same that the
Chairman's--I am going to guess $80 billion running up to $100
billion per year.
Mr. Weller. A hundred billion a year, so over----
Mr. Stark. Well, not right now, it is $70 billion, $80
billion.
Mr. Weller. Now, the projected Social Security surplus over
the next 10 years is $1.8 trillion.
Mr. Stark. Just a minute. It runs $78 billion, $81 billion,
$85 billion, $89 billion, $92 billion, for the next 5 years.
Mr. Weller. Thanks. So if the surplus runs out, does that
mean we will have to have a tax increase to continue that or
have to reduce benefits? What do you--what will occur?
Mr. Stark. We would either have to have a tax increase or
run a deficit, which is not unknown. Certainly, we did that
under Reagan and Bush for years.
Mr. Weller. Under Clinton and Carter. But, of course, this
Congress has put a stop to that. We want a balanced budget. So,
if we want to continue with a balanced budget, what do you
believe would have to occur when the surplus runs out?
Mr. Stark. Might probably cut defense. That would be my
vote. Cut defense.
Mr. Weller. All righty. I see my time has expired. Thank
you, Mr. Chairman.
Chairman Archer. Mr. Shaw.
Mr. Shaw. I will be brief, Mr. Chairman, because I know we
have a lot of people that want to testify and we want to give
them our time.
Mr. Stark, I compliment you as well as the other people
coming forth with a plan, and even if we do not like it, at
least it gives us a source of comparison. And so I think all
these plans should be thought through and considered by the
Committee.
The big problem that I have with your plan is that by the
end of the 75-year period, the funding shortfall in the plan is
4.4 percent of the taxable payroll, which amounts to
approximately $41 trillion in 2074. The cumulative cash
shortfall between 2020 and 2074 is $72 trillion. And I am
looking at the actuary tables, which I assume the Members on
both sides of the aisle have. And when you start comparing that
plan with all the other plans--I see Senator Breaux out there
and Senator Gramm and others; our other colleagues who will be
coming in this afternoon--the ones that go into the private
sector run positive at a certain point, by frontloading them
now in preparing for the future; where yours, continuing on
with the present investment plan, it starts off with a just a
huge shortfall, and we are simply just passing this off to the
next generation.
And when you start talking about the shortfall that is in
this plan, that is going to have to be made up with tax
dollars. Where these other plans, according to the actuaries,
not according to us, but according to the actuaries, by getting
into the private sector, whether you do it through direct
government investing or whether you do it through individual
retirement accounts, it goes positive after a while, and then I
think you can say that you are saving Social Security for all
time. And you are building up surpluses rather than dragging
them down. Would you like to comment on that?
Mr. Stark. Yes. Because the plan you are talking about,
your plan, Mr. Shaw, assumes that in the future the stocks are
going to earn an average real rate of return of 7 percent, and
that is a rosy assumption. That is not an actuarial decision.
The actuaries base their----
Mr. Shaw. I do not.
Mr. Stark [continuing]. Base their decision on this 5.35
assumption on earnings, which would take about 7 percent. And I
hope that happens. That would be wonderful. But it is not
certain. In my bill, it is certain, that is all.
Mr. Shaw. But in the plan that we have before us, that you
have presented to us, there is no assumption. We know that this
thing is going to go negative. So that is the problem that we
have. We rely as far as the actuaries, they rely upon
historical data, and carry that forward into the future, and
quite frankly, I think that their figures are very
conservative.
Mr. Stark. Yes. I do not, Mr. Shaw, and I am not willing to
gamble with the future of Social Security on the basis that we
are going to pretend the stock market will go up for all time.
It never has, and I am just one who thinks that history might
repeat itself.
Mr. Shaw. But, Pete, you have to assume, even though we see
that your plan does definitely go negative, we have to assume
certain interest rates. And perhaps, you know, you can make
that same argument that you have to make certain assumption
that these rates are going to be there, too. So, all we can do
is rely upon exact figures----
Mr. Stark. We set the interest rates, Clay, in law. We do
not set the stock market returns, and I just tried to present a
plan which is certain. It may not do everything that people
want in the out years, but it is certain.
Now, when you introduce an element of chance into the plan,
it is there. I mean, that may be a reasonable, prudent risk.
But it is a risk. It is not a certainty, and I just tried to
establish this plan to do what I think all agree we want to do:
maintain the benefits; keep the plan solvent. And, say, if you
are going to do that, this is the base cost. Your plan would
require this much money if the market did not hit your
projections.
Now, if it hit more, maybe it would require less money. I
will spot that. But this plan merely says, here is what it is--
bottom line, no ifs or buts. And that is the difference.
Mr. Shaw. And the shortfall is certain?
Mr. Stark. The shortfall is certain, as is the requirement
to keep it solvent for 75 years.
Mr. Shaw. And the shortfall in many of these other plans,
and I am just not touting the Archer-Shaw plan, there are other
plans that are out there. But those do not have the certainty
of a shortfall, as yours does.
Mr. Stark. My only feeling is that the rules were set down
that we make it work for 75 years. If we would change that to
100 years, that is OK with me--or a 150 years, as Mr. Doggett
suggested. Let us do that, and then we will have different
rates and different actuarial projections. But 75 years seems
an adequate time line to me.
Chairman Archer. The gentleman's time has expired. Mr.
Stark, thank you for your presentation and for your
contribution to this debate.
Mr. Stark. Thank you, Mr. Chairman.
Mr. Herger. Mr. Chairman.
Chairman Archer. Oh, Mr. Herger.
Mr. Herger. Just to make a point that there has been a lot
made about the 75 years. And just looking in the 1999 annual
report that was brought out by the Board of trustees for the
Social Security. On page 9, it indicates their reason for using
75 years. In summary, at the end of the paragraph, thus a 75-
year projection period will include the entire working or
retired lifespan of the great majority of workers now
contributing to the program, as well as those now receiving the
benefits. So I think there is a reason why the Board of
trustees used 75 years. This is not something that we have just
pulled out of the air. It is something that they decided to
use. Thank you, Mr. Chairman.
Chairman Archer. I thank the gentleman for his comments,
and, of course, that is true. And for those of us who have been
around for a number of years, we know that the actuaries have
always been charged with the responsibility of projecting for
75 years to determine if the fund is viable, stable, and sound.
It might be that number should be increased now that longevity
has increased. Perhaps it should go to 80 or 85. But there is a
very, very cogent reason for the use of 75, if not more.
The Chair would also observe that this is virtually a zero
sum game that we are in. And you can get something apparently
and be giving up something that is not apparent. And it is
very, very important that all of these plans ultimately, side
by side, also have the standard of judgement as to what the
impact is on the unified budget surplus. And, unfortunately, we
do not have that now for all of the plans from Social Security
actuaries. But before too long, we will, and they will need to
be put side by side.
Now, let me also say that as a basis for our consideration,
all of us may disagree with what the actuaries project. I have
done plenty of that myself in the past. We may disagree with
what the estimators project when we get into tax relief. I have
done plenty of that myself. But in the end, there has to be a
``supreme court'' by which all of us live and by which our
plans are compared. And that ``supreme court,'' in this
instance, is the actuaries' projections which they make and
which they have the expertise to make. And each plan needs to
be compared, side by side, with that.
Now, Senator Gramm, thank you for your patience in waiting
through all of the questioning. I know you have done a awful
lot of work on Social Security. You are not new to this game,
and we are pleased to have you before us. And we are pleased to
hear your presentation about your plan.
STATEMENT OF HON. PHIL GRAMM, A U.S. SENATOR FROM THE STATE OF
TEXAS
Senator Gramm. Well----
Chairman Archer. Welcome.
Senator Gramm. Thank you, Mr. Chairman. I want to say that
there is no more important subject that anybody in America
could talk about, if you are talking about the future of our
country, than Social Security. So it was well worth the wait,
and I want to thank you for inviting me.
I also want to congratulate you and Mr. Shaw for
courageously coming forward with a program. I think when
history writes its important chapter on this subject, it is
going to deal very kindly with you. It is going to deal very
unkindly with President Clinton, in my opinion.
Let me just read from the actuary about the plan I want to
talk about, and then I will try to go through some important
points on it.
The actuary in scoring the plan that I want to talk about
today, says the plan would eliminate the long-range OASDI
actuarial deficit. The OASDI Trust Fund would be substantial
and rising at the end of the long-term, 75-year period. In
other words, the plan I am talking about today solves the
problem forever, not just 75 years.
In addition, the trust fund rises every year during this--
while this plan is in implementation.
Now, let me first try to just show you a couple of things.
I want everybody to look at this chart. The idea of this chart
is that we can forget all this silly business about raising
taxes and cutting spending to deal with these problems. Now,
this first chart deals with Medicare and Social Security. We
face both of them. They are the greatest single perils that
face the American economy, and the only two really dark clouds
on the horizon. But they are really dark and they are really
big. And I presented them as a sort of a gap and a bridge that
we have got to fill at two dates: 2020 and 2040.
First of all, if we cut--eliminated defense in 2020, and
this is projecting defense as the same share of GDP, we could
not fill the gap created by these two entitlement programs. If
we eliminated all domestic programs, we could not fill this
gap.
By 2040, if you double income taxes, you could not fill
this gap. So the idea that there is some little gimmick of
transferring revenues from general revenue to a payroll tax
trust fund is going to solve that kind of problem is laughable.
Now, what is the solution to the problem? Well, the
solution to the problem is very simple. It is powerful, but it
is simple. And Einstein said it, the most powerful force in the
universe, according to Albert Einstein, is not gravity; is not
atomic energy. It is the power of compound interest. It is
interesting that Einstein would recognize the power of compound
interest as being the most powerful force in the universe for a
man who invented the formula E = MC\2\.
Now, what I want to show is the simple point, and it is
important to Chairman Archer and Mr. Shaw's plan. It is
important to my plan. First of all, get it out of your head
that somehow that there is a rate of return on the Social
Security Trust Fund as it now exists. There is no Trust Fund,
and there is no rate of return. And think about it this way:
when you borrow from yourself is there a rate of return on that
loan? No. When the Social Security Administration lends to the
Treasury does the Federal Government get a rate of return on
that loan? No. There is no rate of return on the Social
Security Trust Fund, because there is not real investment made.
The power of the Archer-Shaw plan, the power of the plan I am
talking about, is it makes a real investment.
Now, if you today take a worker making $30,000 a year
paying into the current Social Security system, we are going to
be about 30 percent short of paying promised benefits, and they
would get $9,061 a year at the end of a working life under the
current system.
If you simply took the same money they are going to pay
into Social Security, and you invested it conservatively--60
percent in stocks, 40 percent in bonds--at the rate of return
we have achieved over the last 75 years, including two World
Wars and a Great Depression, you could get an annual payment of
$64,060. Now that is the power of compound interest.
It is the only force that gives us any opportunity to deal
with this problem. You do not take advantage of that, and you
are going to be committed to constantly pitting our children
against our parents. If you cut benefits, you hurt the
retirement security of your parents. If you raise taxes,
whether it is income taxes or payroll taxes, you are
diminishing the future of your children. And every year, as
this thing goes on, you are going to be forced into this
excruciatingly painful choice where America is the loser.
Now, what is the alternative? The alternative is to take
advantage of this godsent surplus we have now. If we do not do
something about it, we are not going to have it when you need
it to pay for these Social Security deficits. But we have it
right now. So what can you do with it?
Well, Chairman Archer and Mr. Shaw invest 2 percent of it,
and they achieve something extraordinary, and that is, they
make the system permanently solvent. But that means that during
this interim, we are going to have to redeem the existing Trust
Fund. And what does that mean?
That means we are going to have to come up with about $2.5
trillion to pay back the Social Security Trust Fund for all the
money we borrowed before the system begins to pay for itself.
Now, if we did this, it would go down as one of the
greatest legislative successes in American history, and people
would sing songs about this Congress. But please remember that,
even if you adopt this plan that we are talking about, we've
still got to pay back all this money borrowed from Social
Security. It is at least $2.5 trillion.
Now, to get to the point that I want to make, and there is
nothing magic about my plan. But it proves something. First of
all, what I do is claim the Social Security surplus belongs to
Social Security. How dare the CBO say if you take the Social
Security surplus and use it for Social Security, then you are
changing current services, and you are hurting the general
budget. Well, it never was the general budget's money to begin
with. It is Social Security's money. So what I say is this: as
long as you have got a surplus, whatever amount of it belongs
to Social Security, use it for Social Security. And, when your
surplus is not as big as Social Security surplus, take the
whole surplus for Social Security. It is a simple formula.
Now, here is what you can do doing that. You can let every
working American chose, through a professional money manager
that would be regulated by a new Social Security Investment
Board, to invest 3 percent of their current payroll. So I go 1
percent point higher, and in doing so, I take more of the
Social Security surplus.
In addition, in working with the actuaries at Social
Security, I determined that 3 percent does not use up the whole
Social Security surplus. So, in working with Steve Goss, he
kind of came up with the idea what about taking people in the
age group 35 to 55, and for those people in that age group do
an additional 2 percent that would be dedicated solely to
funding their benefits. Doing that, you use up the entire
Social Security surplus, which we have and which we are in the
process of stealing and squandering every single day. We stole
$21 billion of it last year. We have already stolen for next
year $7 billion in the emergency supplemental. It will soon be
gone if we do not use it.
The point is by doing that, you can achieve the following
things. One, you can make Social Security solvent forever.
Number two, you do not have to pay the trust fund back so
that you do not have a hidden $2.5 trillion cost in here that
kicks in in 2013, and does not go away until about 2060. By
making the investments we are talking about, you make the
system totally self-financing by 2039.
Now, what I am proposing is an investment-based system that
combines the best of both worlds. From private investment, you
get things similar to IRAs and 401(k)s that people know. You
get the power of compound interest. You get professional money
managers. You get strict financial standards, and you get
worker ownership and private property.
From the government system that we know and also love, we
get government backing. We get inflation protection. We get
guaranteed lifetime benefits. We get family and survivor
benefits. And we get progressive benefits.
Final point, and I will quit. There is on my side of the
Capitol a sort of a macho that you have got to cut Social
Security benefits. Now, I can support cutting them. I can
support not cutting them. But the point is the cuts, relative
to the power of compound interest, are insignificant. Once you
get into the investment system, and the sooner you get into it,
and the heavier you get into it, the better it works. Cuts and
tax increases become irrelevant. So, my view is we can do it by
whacking the cost of living increase. We can do it by means
testing. We can do it--you know, any of these cuts you want to
do, but do not deceive yourself into thinking that they really
solve the problem. They make you feel good--no pain, no gain
kind of business. But the point is if you take the resources we
have, you have them invested, you solve the problem.
[The prepared statement follows:]
Supplemental Material to Accompany the Statement of Hon. Phil Gramm, a
U.S. Senator from the State of Texas
The attached summary provides a section-by-section analysis
of the Social Security Preservation Act, an Investment-based
Social Security reform plan authored by Senator Phil Gramm.
According to estimates prepared by the Social Security
Administration, ``the plan would eliminate the long-range OASDI
actuarial deficit, estimated at 2.07 percent of taxable payroll
under present law. The OASDI trust fund would be substantial
and rising at the end of the long-range 75-year period.'' In
addition to providing permanent solvency, the plan guarantees
each worker 100 percent of the benefits promised by the current
system, plus a bonus equal to 20 percent of the benefits funded
by their investments.
The Social Security Preservation Act allows each worker to
set aside 3 percent of their 12.4 percent Social Security
payroll tax, which will be owned by the worker and invested in
stocks and bonds by a professional money manager in a ``Social
Security Savings Account for Employees'' or ``SAFE Account.''
The worker can choose from any privately-managed SAFE Account
fund certified for safety and soundness by a federal board.
Upon retirement, any worker can opt out of the investment-
based system and receive 100 percent of the Social Security
benefits guaranteed to them under current law. However, it is
expected that most workers will choose to remain in investment-
based Social Security and will use the funds in their SAFE
Account to purchase a ``Savings Annuity For Eligible Retirees''
or ``SAFER Annuity.'' The SAFER Annuity will be guaranteed for
life and supplemented by the Social Security system if it does
not produce a retirement benefit at least equal to 100 percent
of the benefits promised under the current system, plus a bonus
equal to 20 percent of the payments funded by the SAFER
Annuity.
Private companies offering SAFE Accounts and SAFER
Annuities will charge all participants a single uniform
investment fee, not to exceed 0.3 percent of assets. SAFER
Annuities will provide workers of the same age the same monthly
benefit relative to the size of their SAFE Account, regardless
of sex, race, health status, etc.
Over the next ten years, the Congressional Budget Office
projects a Social Security surplus of about $1.78 trillion,
while SAFE Accounts funded at 3 percent of OASDI wages would
cost about $1.35 trillion, leaving $430 billion in Social
Security surpluses. The Social Security Preservation Act uses
these remaining surpluses to target additional investment for
those age 35-55 in the year 2000, allowing these workers to
invest an extra 2 percent of their wages. These extra
investments will begin to fund Social Security benefits at the
height of the baby boom retirement, providing additional
resources in the critical years of the transition. The extra 2
percent will not be counted in calculating the worker's 20
percent bonus, but will be used entirely to fund the benefits
they receive from the existing Social Security system.
THE SOCIAL SECURITY PRESERVATION ACT
Section by Section Analysis
SEC. 1--SHORT TITLE and TABLE OF CONTENTS
SEC. 2--FINDINGS
SEC. 3--ESTABLISHMENT OF INVESTMENT-BASED OPTION FOR SOCIAL SECURITY
BENEFITS
Amends the Social Security Act to preserve all existing
Social Security provisions (OASDI) in a new Part A and creates
a new Part B providing an Investment-Based Social Security
option for those workers who voluntarily choose to participate
in the investment-based alternative.
Sec. 250 GUARANTEE OF PROMISED BENEFITS
Those opting into the Investment-Based system are
guaranteed never to have a benefit less than that promised
under the current system, plus a bonus of 20 percent of the
benefits paid by their Part B investments.
Sec. 251 DEFINITIONS
Sec. 252 SOCIAL SECURITY SAVINGS ACCOUNTS FOR EMPLOYEES (SAFE
ACCOUNTS)
Each current worker may choose to establish a Social
Security Savings Account for Employees or SAFE Account. All
individuals who will join the workforce in 2000 or later will
enter the investment-based system. The worker shall choose the
investment fund to professionally manage his SAFE Account from
among those investment funds qualified by high standards of
safety and soundness, and may change funds once every year. The
Account will be the property of the investing worker.
Sec. 253 SAFE INVESTMENT FUNDS
SAFE Accounts will be managed by qualified SAFE Investment
Funds, which will be certified and regulated for safety and
soundness by the new Social Security Investment Board. Under
the parameters set by the Board, the Funds will invest the
assets of the SAFE Accounts in stocks, bonds, bank deposits,
insurance instruments, annuities and other earnings assets. The
Funds will provide an annual report to each participant showing
the dollar value of investments over the last quarter, the last
year and the life of the SAFE Account. The report shall also
project how much each worker will have at retirement if
contributions and earnings continue at the same rate during the
remainder of his or her working life. Each Fund shall accept
all eligible workers requesting to join such Fund. The Fund
shall charge all participants a single uniform investment fee
as a percent of the investment, not to exceed 0.3% of assets.
Sec. 254 SOCIAL SECURITY INVESTMENT BOARD
Establishes a Social Security Investment Board which will
set the general safety and soundness parameters of investments
held as part of SAFE Accounts but will be prohibited from
requiring or denying the purchase of any specific stock, or in
any way dictating which individual investments are made. The
Board will protect the safety and soundness of SAFE Investment
Funds with the power to order compliance and, where
appropriate, decertify and shut down any Fund found to be in
violation of Board standards. The Board shall annually provide
information on all qualified Funds to workers. The annual
report shall include data on the rate of return achieved by
each SAFE Investment Fund.
The Board will be comprised of the Secretary of the
Treasury, the Chairman of the Federal Reserve Board, the
Chairman of the Securities and Exchange Commission and two
outside experts with substantial experience in financial
matters, who will be appointed by the President and confirmed
by the Senate. One of the outside Members will be nominated and
confirmed as Chairman.
Sec. 255 SAFE ACCOUNT CONTRIBUTIONS
Workers participating in the investment-based system will
initially invest 3 percent of their wages into their individual
SAFE Account. The remaining 9.4 percent of the current 12.4
percent paid in Social Security taxes would continue to be used
to pay benefits under the current Social Security system. The 3
percent investment rate will automatically increase in the
future as Investment-based Social Security becomes self-
financing. In addition, workers age 35-55 in the year 2000 will
invest an extra 2 percent of their wages to provide additional
resources in the critical years of the transition. The extra 2
percent will not be counted in calculating the worker's 20
percent bonus, but will be used entirely to fund the benefits
they receive from the existing Social Security system.
An entry on participating workers' paycheck stubs will show
exactly how much money was invested in their SAFE Accounts for
that pay period. The payment into the workers' designated
account will be made directly from the Social Security
Administration at least once a quarter. The Board is empowered
to require that investments are made on a more timely basis if
more frequent investment is deemed to be feasible.
Sec. 256 SOCIAL SECURITY SAVINGS ANNUITIES FOR ELIGIBLE
RETIREES (SAFER ANNUITIES)
Upon retirement, a worker participating in investment-based
Social Security will use the funds in his SAFE Account to
purchase a Savings Annuity For Eligible Retirees or SAFER
Annuity. Under the investment-based system, the SAFER Annuity
will be guaranteed for life and supplemented by the Social
Security system if it does not produce a retirement benefit at
least equal to a) 100 percent of the benefits promised under
the current system plus b) a bonus equal to 20 percent of the
payments from the SAFER Annuity. This benefit will be fully
protected against inflation. Each SAFER Annuity Fund must
accept all eligible retirees requesting to join such Fund.
SAFER Annuity Funds shall charge all participants a single
uniform investment fee, not to exceed 0.3 percent, and shall
provide each worker of a particular age the same monthly
benefit relative to the size of their SAFE Account, regardless
of sex, race, health status, etc.
Early Retirement Option.--Workers can retire at any age and
draw their Investment-Based Social Security benefits once they
have built up a SAFE Account large enough to fund a SAFER
Annuity equal to at least 120 percent of the Social Security
benefit promised at the early retirement age and fund any
survivor, spousal or other benefits that might be triggered by
their retirement.
Unrestricted Right to Use Remaining SAFE Account Assets.--
Workers who have built up enough funds in their SAFE Account to
finance more than 120 percent of the benefits promised under
Social Security and fund any other benefits their family might
receive under the current Social Security system may use any
remaining SAFE Account funds as they see fit.
Bequests.--If a worker dies prior to retirement, the
worker's SAFE Account, minus the present value of benefits
promised to the surviving family members under the current
Social Security system, will become part of the worker's
estate.
Sec. 257 MONEY BACK GUARANTEE
Upon retirement, any worker may choose to opt out of the
Investment-Based system and instead receive 100 percent of the
benefits he would have received had he stayed in the current
Social Security system. Those opting for this money back
guarantee will receive monthly benefit checks directly from
Social Security. Workers who opt upon retirement to return to
the existing Social Security system will forfeit all their SAFE
Account assets directly to the Social Security Administration
to be deposited into the Social Security Trust Fund.
Sec. 258 GUARANTEE OF PROMISED BENEFITS
A worker whose SAFE Account is not sufficient to purchase a
SAFER Annuity which will pay a monthly benefit equal to that
promised under the current system plus a bonus of 20 percent of
any payments from their SAFER Annuity will receive a
supplemental payment from the Social Security Administration.
Because this guarantee is based on the inflation-adjusted
benefit a worker is promised under the current system, the
guarantee fully covers the effects of inflation.
Sec. 259 INVESTMENT RATE INCREASES
Social Security Surplus Investment.--In any year the Social
Security Investment Board certifies that the annual Social
Security surplus is greater than the amount needed to finance
the 3 percent investment rate (and the temporary 2 percent
additional investment to help cover the transition), the Board
shall automatically increase the investment rate in increments
of \1/10\ of 1 percent, up to a maximum of 8 percent. If, in
any year, the annual Social Security surplus is less than the
amount needed to fund the 3 percent investment rate, the Social
Security Commissioner shall redeem assets of the Trust Fund to
ensure that benefits are fully paid and that the investment
rate shall never drop below 3 percent.
Social Security Reserve.--The Social Security Investment
Board shall ensure that a suitable reserve is maintained in the
OASDI Trust Funds.
Sec. 260 TAX TREATMENT OF INVESTMENT BASED SOCIAL SECURITY
SAFE Accounts and SAFER Annuities will build up tax-free
until withdrawal. At retirement, payments from a SAFER Annuity
up to 120 percent of benefits promised by the current system
will be taxed in the same manner as Social Security benefits.
Any additional payment, or any lump sum withdrawal, would be
taxed as any annuity payment would be taxed under the Internal
Revenue Code. The amount of SAFE Account contributions must be
shown on a worker's W-2 as well as the worker's payroll
receipt.
SEC. 4--PAYROLL TAX REDUCTION RESULTING FROM INVESTMENT-BASED SOCIAL
SECURITY
After the investment rate has risen to 8 percent and the
necessary portion of the remaining payroll tax is dedicated to
fully fund disability insurance, the payroll tax rate shall
drop from 12.4 percent to 8 percent plus the rate required to
fund disability insurance.
SEC. 5--FINANCING OF INVESTMENT-BASED SOCIAL SECURITY
Recapture of Federal Corporate Income Taxes Arising from SAFE
Account and SAFER Annuity Investments.--The Secretary of Treasury, in
consultation with the Social Security Investment Board, will annually
estimate the amount of corporate income tax revenues that can be
attributed to the contributions and accumulated capital buildup in the
SAFE Accounts and SAFER Annuities. Within 3 months after the end of
each fiscal year, the Secretary of Treasury shall transfer to the OASDI
Trust Funds the amount of federal corporate income taxes attributable
to the assets held in SAFE Accounts or SAFER Annuities.
In calculating the recapture rate during 2000 and 2001, the
Secretary of Treasury shall assume that 80 percent of the total SAFE
Account and SAFER Annuity assets are net additions to national
investment, that 10 percent of that amount will be invested abroad and
not subject to federal taxes, and that 5 percent will be invested
domestically but outside the corporate sector. Thus 68.4% of the
profits from SAFE Account and SAFER Annuity assets shall be assumed to
be net additions to taxable corporate income, resulting in an effective
tax rate of 23.9% which will be credited to Social Security.
Dedication of Part B Savings to Social Security Trust Fund.--Any
other savings resulting from Investment-Based Social Security that flow
to the federal government, including increased revenues resulting from
federal taxation of SAFER Annuity bonuses and excess SAFE Account
distributions, shall be credited to the OASDI Trust Funds.
Dedication of Budget Surplus to Saving Social Security.--Each
quarter beginning in the year 2000, the Secretary of Treasury shall
reimburse the OASDI Trust Funds from the unified budget surplus an
amount equal to the actual investments made in SAFE Accounts in that
quarter. This reimbursement will be permanently reduced in any year
that a reduction can be made without creating a future cash shortfall
in OASDI, until the reimbursement is eventually eliminated. To ensure
that these budget surpluses materialize, the discretionary spending
caps in place under current law are extended through 2009.
[GRAPHIC] [TIFF OMITTED] T2789.013
[GRAPHIC] [TIFF OMITTED] T2789.014
[GRAPHIC] [TIFF OMITTED] T2789.015
Chairman Archer. Thank you, Senator.
Mr. Shaw.
Mr. Shaw. Senator Gramm, thank you for a very fine
presentation and a plan that I think is definitely worthy of
this Committee's consideration. Interestingly enough, it was
only about an hour and a half ago that I asked Kim, our Staff
Director on the Social Security Subcommittee, to look into the
possibility of what effect it would be of putting different
percentages into different age groups in order to try to
eliminate or certainly lessen the tax burden which I think all
of these plans are going to call for in about the year 2015 to
about 2030. And I think you could almost all but eliminate it,
and it would certainly increase the amount of the Social
Security surplus that we would be using for exactly what it
should be used for and that is investment into the Social
Security accounts that would be individually held by the
American workers.
I also want to compliment you for very much for--and I
believe your plan, similar to the Archer-Shaw plan, also has an
inheritable feature----
Senator Gramm. Yes, it does.
Mr. Shaw [continuing]. For workers that don't retire, and I
think that is one of the great things about your plan, our
plan, and several of the other plans that use the individual
retirement accounts. So many of the American workers today--
particularly minorities who go into the work force earlier, die
younger, and so many of them really never get to enjoy the
moneys that have been put aside for them--can't leave it to
their family, and they simply lose it. When Social Security was
first put into law some 60 plus years ago, the average age
span, I think, was 62 years, and retirement was at 65, and you
had so many workers for each retiree, far exceeding what it is
today, so the plan worked very well as a pyramid scheme, but
that pyramid has certainly narrowed now, and I don't think that
anybody would come up with the blueprint we have today for what
we have as to workers per retiree. We are enjoying longer life,
and we have got to have greater return on our investment and
continue to receive the benefits.
I also think that it is never going to happen that this
Congress is going to decrease the benefits. I certainly
wouldn't support that, and I think particularly when you have a
plan, such as yours and such as ours, that doesn't do that. Why
do that? I can remember back in the years when I was mayor of
Ft. Lauderdale. You summarily think, ``Well, we are going to
have to just raise our water bill a lot.'' But when you have
people coming in and talking about ``That is a loaf of bread
for me,'' at that time you really think, ``Geez, there are
really people out there that they have got every dime of this
spent,'' and the idea of saying that we are going to take away
from our mothers and fathers, even a dime, that is a very
significant cut to a great deal of our population. And when we
can come up with a plan, too, that will give the disadvantaged
in our country an opportunity to accumulate some wealth; that
they can look at something that is theirs; that they can
participate in ownership and the great capitalistic system that
we have today, it would be a shame to walk away from that
opportunity.
Senator Gramm. Well, Mr. Shaw, let me say this: that Social
Security is probably the only program in America that
redistributes wealth from minorities to whites, and it does it
really for two reasons. Number one, minorities tend to start
working sooner and since, under our system, nothing you pay
into the system until you are 30 years old counts toward your
benefit, all of that early work is for all practical purposes
lost for them. Whereas, under your plan with the Chairman,
under my plan, and under every other investment plan, early
work pays big dividends, because you get the compound interest.
The second thing is, is the expected lifespan, and by having a
death benefit, under my plan and under yours, if you die before
you draw out your account, it goes to your survivor, so it
becomes a wealth source.
The final point I would like to make is we currently are
projecting a $1.78 billion surplus in Social Security. The only
way you can convert that money we have now into money we will
need later to pay Social Security benefits is to invest it.
Now, having one part of government lend it to another part of
government in no way makes it available when we need it,
because the part of government that borrows it has got to raise
taxes or cut spending to pay it back, and so you are just as
well off without it than you are with it, but if you can make a
real investment, that is how working people every day, through
IRAs and 401(k)s, solve this problem. They have got income when
they are working; they are not going to have as much income
when they retire, so they put money into IRAs, they put money
into 401(k)s, and they convert current income into wealth which
pays them in retirement--same principle.
Chairman Archer. The gentleman's time has expired.
Mr. Matsui.
Mr. Matsui. Thank you, Mr. Chairman.
Thank you very much, Senator. I appreciate the fact that
you have waited about an hour and a half; I know your time is
valuable, as well.
You ultimately divert about 5 percent of the payroll taxes
to the safe accounts, the individual accounts. Is that my
understanding? Once you get beyond 2000----
Senator Gramm. Well, what we do is the following thing: we
take the surplus that belongs to Social Security, and we give
it to Social Security, and we allow individuals to make the
decision as to which money manager to go with and to make the
money. So, what we do, everybody gets the chance to do 3
percent. Anybody can stay in the current system; nobody is
forced----
Mr. Matsui. I understand that, but you are diverting the
money to individual accounts or safe accounts.
Senator Gramm. Yes.
Mr. Matsui. And knowing that there is an unfunded part of
the Social Security system given the 12.4 percent, 14.4 percent
differential, you make up the unfunded part of this over the 75
years by putting more general revenues into the fund in order
to make up for the loss of revenues because of the 5 percent.
Senator Gramm. We have a simple formula and it is the
Social Security surplus belongs to Social Security. If there is
not a general surplus--in other words, if our actual budget
surplus is less than the Social Security surplus, then all of
the budget surplus belongs to Social Security. But using our
current projections under that formula, we can fund the plan
because it becomes self-sustaining by 2039, and in fact when
the first baby boomer retires, the investments they will have
made fund 10 percent of their Social Security benefits. The
last baby boomer, when he retires 20 years later, it funds 50
percent of his benefits.
Mr. Matsui. You will recall in 1981 when we had Dave
Stockman testify before this Committee--you were on the Budget
Committee at that time in the House--he talked about a rosy
scenario, and it is my understanding that you do make a
projection of increased revenues into the Treasury based upon
the fact that this system will generate additional revenues. In
other words, it kind of generates on its own. Is that correct?
Senator Gramm. No, that is not right.
Mr. Matsui. Because that is the understanding I have. Now,
we will have to look at the actuarial report----
Senator Gramm. All of this has been scored by the actuaries
as working, and let me explain what we do. Currently, the----
Mr. Matsui. What happens when the surplus is dissipated,
the general fund surplus? Because, obviously, you are going
into the general fund surplus in order to deal with the
unfunded part of this program, particularly if you take the 5
percent and put it in individual investments. I am not
suggesting it is being squandered; it is just going someplace
else. How do you make up that additional unfunded part of the
system?
Senator Gramm. Well, there isn't an additional unfunded
part of the system. If you take the entire $1.780 billion that
currently is being projected in our budget and you make these
investments so that by the end of that period 10 percent of all
Social Security benefits for people retiring in that year are
being funded by the investments they made and 20 years later
that is grown to 50 percent. What we are currently showing is
this huge deficit in Social Security we are able over time to
turn around, and I think the point I am making, which is a
fairly substantial point, and that is if you are willing to
take now the surplus that belongs to Social Security and invest
it in Social Security, we can make the system permanently
solvent.
Mr. Matsui. Well, I still don't follow. We were told by
Secretary Rubin a few months ago that there is an $8.5 trillion
unfunded part of the Social Security system, because it is a
PAY-GO system rather than a funded----
Senator Gramm. I think that is about a correct estimate.
Mr. Matsui. I believe that, as well. Now, obviously, you
don't take the entire $8.5 trillion; it is 5 percent of 12.4
percent. Now, how do you make that up? It is about $3 trillion.
Senator Gramm. Let me explain. Here is exactly how we make
it up. When I make investments during this transition period,
those investments belong to me, but in making up for what I
would have gotten had I stayed in the old system, in essence,
about 80 percent of the benefits of private investment during
the transition period go not to the investor but go to fill up
the hole in the current system. That is where the money comes
from.
So, what are the benefits? The benefit is to my children.
They don't cut their papa's Social Security. Two, we don't
raise their payroll tax. They are 20 percent better off than
they would have been instead of 7 times better off than they
would have been, but their grandchildren--my grandchildren,
their children, will get the full benefit of the investment
system.
Mr. Matsui. Well, I will have to do a little more review of
this, because I still haven't been able to follow how you make
this system work.
Senator Gramm. Well, the way we--let me try it one more
time, because it is a very important question. What we do,
every dollar that I pay for my Social Security benefits out of
my investments, the Social Security system saves 80 cents.
Mr. Matsui. Well, I am not too sure. Let me look at it. I
am sorry, my time has run out. I really want to----
Chairman Archer. I am too. The gentleman's probe is a very
constructive one, and the Chair, if you can complete it in
another minute or two----
Mr. Matsui. I appreciate that. I think we have probably
reached a point where we might not be able to, and I will,
perhaps, talk to the Senator. I appreciate this, Mr. Chairman;
you were kind to offer me that time.
Chairman Archer. OK, Mrs. Johnson.
Mrs. Johnson of Connecticut. My questions go to the same
issue.
Right now, more money is coming into Social Security than
it costs to support current retirees. So, every year, we have a
surplus in our FICA tax fund. Now, discounting past surpluses,
which are already invested in Treasury bonds, and, as you say,
there is sort of nothing there. I mean, if we pay back those
bonds, it is from current spending or new tax revenues or
surplus revenues. But, each year, there is this new money that
comes in, and so what I hear you saying is that the surplus
income the first year of this plan would be part of what would
help substitute for the 2 percent that people are diverting.
Senator Gramm. Yes, what I am saying is, next year, the
Social Security surplus is going to be $138 billion. We are
projecting----
Mrs. Johnson of Connecticut. Now, is that over and above
the----
Senator Gramm. That is over and above the cost of paying
benefits.
Mrs. Johnson of Connecticut. OK.
Senator Gramm. Now, a 2 percent investment would cost in
that first year--remember, we are on a calendar year and not a
fiscal year, so it is only 9 months the first year--would cost
$57 billion; a 3 percent investment would cost $85 billion, and
if you did the 2 percent kicker for this age between 35 and 55,
these are the people that are going to retire right in the
middle of the baby boom generation----
Mrs. Johnson of Connecticut. So, basically, in the early
years, the surplus funds are able to pay for the diversion.
Senator Gramm. That is right.
Mrs. Johnson of Connecticut. Now, at what point are the
surplus funds no longer able to pay for the diversion? At what
point does the retired population grow to such a point that we
can't fund that?
Senator Gramm. Well, it depends on your level of
investment. What I think is interesting about the proposal that
I am talking about here today--and I have got it all written
out, and you can look at it--but what is interesting about it
is by doing the 3 percent for everybody and the 2 percent as
long as the money is available with the surplus for these
people that are between 35 and 55, we change Social Security so
much by the investments paying benefits that Social Security
never goes broke.
Mrs. Johnson of Connecticut. So, in other words, the amount
of money being drawn out for future retirees declines because
of the benefits from the investments.
Senator Gramm. Exactly. And the numbers I used were the
first baby boomer--if we could implement the plan I am talking
about--the first baby boomer that retired in 2013 would get 10
percent of their benefits from the investments they made--and
that is permanent funding--so the government would only have to
pay 90 percent of it, but by the time the last baby boomer
retires 20 years later, that baby boomer would be getting 50
percent, on average, of their benefits from their investments,
so we would only have to be paying half of it out of Social
Security. Hence, this projected deficit in Social Security goes
away.
Mrs. Johnson of Connecticut. That is very helpful. Now,
just two questions. Is this voluntary?
Senator Gramm. Yes. Under this plan, you would have an
opportunity to join the new system or not join the new system.
Mrs. Johnson of Connecticut. OK. Now, second----
Senator Gramm. Now, the truth is everybody would join the
new system.
Mrs. Johnson of Connecticut. Now, do people over 55 have
the same options?
Senator Gramm. Yes. The people over 65 don't.
Mrs. Johnson of Connecticut. Don't. And if you join this
and your fund creates--I mean, there will come a time when the
combination of the old Social Security system and these new
funds will create actually a higher benefit.
Senator Gramm. That is right.
Mrs. Johnson of Connecticut. Now, I assume that your plan
does not speak to whether that would go to lower taxes or
higher benefits, but at some point in the future, we would make
that decision or does your plan make that decision?
Senator Gramm. No, it is made--basically, a 22-year old
could expect upon retirement, based on the historic rates of
return we have had, about 22 percent more than they would get
under the current system, but they are guaranteed never to get
less than they get under the current system.
Mrs. Johnson of Connecticut. So, under your plan, any
increase in benefits provided by the dual system would
automatically go to the recipient and the expectation is that
the benefits would be higher.
Senator Gramm. That is right.
Mrs. Johnson of Connecticut. Thank you.
Senator Gramm. But they always have the guarantee of the
current system.
Mrs. Johnson of Connecticut. So, it is voluntary. They have
the guarantee of the current system, but they have the
possibility of really higher returns, and we have the
possibility of eliminating an extraordinary unfunded liability
through something we are capable of currently funding. Thank
you very much.
Senator Gramm. Well, we have the ability to take this $1.78
trillion that we have now--no one disputes that it exists--and
turn it into an investment that can solve the Social Security
problem. That is a lot of money; it is a tremendous investment,
but I think it--the money belongs to Social Security and when
you look at the alternatives, it is obviously the thing we
should do.
Mrs. Johnson of Connecticut. Impressive. Thank you very
much, Senator.
Chairman Archer. Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Senator, many other countries that have gone to individual
accounts have had trouble with fraud and very, very high
administrative costs with individual accounts. Do you have any
advice of how we could avoid that, if you go to individual
accounts to avoid the fraud and the administrative costs?
Senator Gramm. Yes, it is something that we have looked at
very closely, and let me just make two points. First of all,
none of the countries that have gone to an investment system,
even the ones that I believe have made a mistake by allowing
direct selling and other things, would choose to go back. In
other words, even with what are being called excessively high
loads, as an investment broker would call it, but fees, as we
call it, it still turns out to be a remarkable improvement over
the current system.
Now, here is how we deal with it. We don't want people
going door-to-door or using the telephone trying to sell, so we
set a cap on the fee at 30 basis points, so no one can charge
higher than that, and we have looked at this; we have talked to
TIAA-CREF; we have looked at Thrift Savings Plans--TIAA-CREF is
a college teacher retirement. We have looked at a lot of plans,
and, basically, what that will do is produce intensive
competition, but, basically, competition where during this once
a year when you have the chance to change plans, that you will
get in the mail your options. Nobody for that fee would be able
to hire somebody to come knock on your door. And in Britain,
basically what happened is by not setting a cap on the fee,
they created the incentive for people to churn people, to get
them to move from one plan to another, and I think it was
wasteful, and it was unnecessary, and I think we have learned
from it, but it is important to remember even with the churning
that the average worker in Great Britain is better off, but
they could have been much better off had they set a cap on it
to try to eliminate direct selling, which is basically what we
have done.
Mr. Coyne. Thank you.
Chairman Archer. Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman.
Senator Gramm, I want to commend you for coming up with
what appears to be a very solid plan for saving and improving
Social Security.
I have read the letter from the chief actuary, and I don't
find in his letter--perhaps, you can tell me--what rate of
participation in the voluntary plan does he assume in making
his projection?
Senator Gramm. He assumes 100 percent. Now, in the early
years, it would actually be easier if fewer people
participated, but you have got to remember, we guarantee that
you can never be worse off than you were under the old plan. We
don't take any benefit away, and so it is all upside, no
downside. So, the assumption is that within 2 years, that for
all practical purposes, everybody will opt-in to the new
system.
Now, what will happen is that you don't go into the new
system unless you choose a money manager to manage your funds
from those that are licensed based on meeting the highest
standards. So, what will happen is you will get one person who
doesn't know how to choose; they will go home to visit their
mamma; their brother is there who is a know-it-all, and he will
say, ``Well, how are you doing on your investments?'' And he
will get his thing from Prudential and show how he is doing,
and you will say ``Well, I haven't decided who I am going to go
with yet,'' and you won't say so at the time, but you will go
back home and sign up with Prudential. But over a 2-year
period, it is our assumption that everybody will opt-in to the
new system.
Mr. McCrery. Well, I think that is a flaw in your plan,
frankly. I think that is a very optimistic assumption, but----
Senator Gramm. Well, they don't stand to lose anything.
They have got the same government guaranteeing the benefit, so
we assume over time that they will make that option. If they
don't, it is much cheaper on the front end; it doesn't save
quite as much on the back end.
Mr. McCrery. I know it is not a direct analogy but a 401(k)
plan is very attractive too, and we have a miserably low rate
of participation in 401(k) plans. It is a lot better now than
it was 5 years ago, but it is taking a long time for it to sink
in to many, many workers in this country that it is to their
advantage to invest in a 401(k). Even with their employer
matching, we still have a low rate of participation.
Senator Gramm. Well, but, remember, imagine if you had a
mandatory government 401(k) where the government invested it in
government bonds and you had the option to opt-out of it. That
is the comparable comparison.
Mr. McCrery. If everyone were educated in the facts
surrounding that, I agree with you, but that is not the case in
our society today, and I just think that is an overly
optimistic assumption. So, I would like to see, Mr. Chairman,
the actuaries give us some projections based on lower rates of
participation, so we could get----
Senator Gramm. They could certainly do that.
Mr. McCrery. Yes. Your proposal includes a recapture of
corporate tax, and I have to admit I have not read your plan,
and so I don't understand that. Can you explain that?
Senator Gramm. OK, let me explain it. For the last 75 years
in America, the rate of return on 60 percent stocks and 40
percent bonds has been 8.5 percent, but no investor ever saw
that rate of return, because the Federal Government took 2
percentage points off the top in corporate income taxes; State
and local government took 1 percentage point in State corporate
income taxes and State and local property taxes. So, that the
rate of return we are using here is an after tax rate return of
5.5 percent, and then we take off the load reducing that down--
that is the management fee--reducing that down further. All we
are doing here is simply setting up a procedure whereby at the
end of the tax year when all corporate incomes taxes have been
collected, that we have the Treasury remit to the Social
Security system the amount of taxes they have collected on the
investments that have been made in Social Security investments.
So, this is not a new tax; it is simply revenues that the
government is getting because of these investments being made.
No one could ever earn 5.5 percent if 8.5 percent weren't being
paid pretaxes. So, it is confusing, but that is where it comes
from.
Mr. McCrery. Well, is that then deposited into the Social
Security Trust Fund?
Senator Gramm. That goes to the Social Security system to
help pay for benefits.
Mr. McCrery. Yes, which is then used to either pay benefits
or finance the accounts.
Senator Gramm. Well, no, it doesn't go--it goes to pay
benefits. It goes to pay--we raise the minimum benefit in the
plan, and it is one of the things that funds it. We would like
to make these investments tax-free, because there is no reason
that we should be taxing Social Security investments, but we
don't know how to do that, so the best we could come up with
that would end up being scored is to try to recapture it based
on an estimate when you have already collected the taxes; you
know what the total level of investment in the economy was; you
know how much Social Security is invested, and you just use a
simple formula assuming a certain amount of leakage and a
certain amount being invested abroad, and that has to rise over
time, because if you actually make these investments for the
first 30 years, they don't make that much difference, but after
that, they get big enough that they start meaning that either
the rate of return is going to decline or you are going to
invest more abroad or both, and we assume both those things.
Mr. McCrery. Have you, yet, had your plan scored with
respect to the unified--the effect on the unified budget
surplus?
Senator Gramm. The effect on what?
Mr. McCrery. The unified budget surplus.
Senator Gramm. Yes, it has been scored based on the unified
budget surplus, yes.
Mr. McCrery. No, I mean, do you have a table showing us the
outyear effects on the unified budget surplus?
Senator Gramm. The actuaries at Social Security have shown
the Social Security surplus, the non-Social Security surplus,
so you can calculate the two. I can get that to you.
Mr. McCrery. OK, thank you.
Chairman Archer. Mr. Doggett.
Mr. Doggett. Thank you. I wanted to focus in on the
disability aspect of your plan. I noticed that you have people
going into a new cooperative disability insurance system. How
will that work?
Senator Gramm. Well, I don't do it in the first bill,
Lloyd. What I do is simply set aside 2 percentage points for
disability. So, we would continue to fund the current system
under the bill that I have introduced. What I would like to do
over time is to set up a self-contained disability program that
would be funded the way we would fund Social Security, and it
would basically be you would set up a board that would have the
Secretary of Labor, the Secretary of the Treasury; you would
have three outside members, one of whom would be chairman, and
you have them enter into contracts with private companies to do
it. You wouldn't have to do it; it is not essential to plan,
but part of our problem in disability, which is an excruciating
painful problem, is that while mortality and morbidity rates
have fallen, while on-the-job injuries have fallen, disability
rates have skyrocketed.
Mr. Doggett. So, your goal is to have a disability
insurance plan that is basically managed by private companies
on contract?
Senator Gramm. Well, it would be managed by the government,
but we would, in essence, buy private insurance that the
government would guarantee. In the long run, I would like to do
that, and the reason is to get the definition of disability out
of the hands of politicians, because what we have done on a
bipartisan basis, I might add, for the last 30 years, is we
have constantly lowered the threshold for disability, and so
while all outward measures of disability in the economy have
gone down, our number of people who are, quote, ``disabled''
has gone through the ceiling, and in Europe, 60 percent of
people over 60 are disabled.
Mr. Doggett. So, the goal would be to let the private
companies define disability----
Senator Gramm. Well, the goal would be to define it once
and to quit changing it, so people would know what they are
buying into. It is not essential to the plan. The way the plan
is written you still have got 2 percentage points going to pay
for disability. You could fund the current disability program.
Mr. Doggett. As you are well aware, I think you got some
attention in today's National Journal of Congress Daily on it.
There is a plan up this year to try to reduce those Social
Security disability roles by encouraging people to return to
work so they can maintain their health insurance, and you are
credited with stopping that plan in the Senate. As I
understand, you support the plan; it is the way it is funded
that you question?
Senator Gramm. Yes, basically, we have a proposal in the
Senate that would allow people to go back to work and keep
Medicare and Medicaid. I think it is a well-drafted proposal.
We have made a lot of changes in it. The problem is rather than
coming up with a savings to pay for it, we have, in essence,
raised taxes to pay for it, and I am afraid in the midst of
busting the budget caps on discretionary spending, if we set
the precedent for raising taxes to expand a benefit, any
benefit, create a new entitlement program, any entitlement
program, that we are just opening the flood gates. So, what we
are trying to do in the Finance Committee is to come up with a
savings to pay for it, and I think we will do it. I think it
will become law.
Mr. Doggett. I hope you are able to accomplish that. Thank
you.
Senator Gramm. Thank you, Lloyd.
Chairman Archer. Senator, we do have a couple of other
questioners, but I want to alert the Members of the Committee
that it is the Chair's intention to not break for lunch, and
any Members who wish to go out and grab a sandwich on their own
should do so and then return as quickly as they want to
participate in the hearings.
Mr. Herger.
Mr. Herger. Thank you, Mr. Chairman.
Senator, I want to thank you. This is very exciting. We
have, for so many years and certainly months, recently, all we
hear about is how Social Security is going bankrupt; how we are
not going to have enough money; how we are basically mortgaging
the lives of our children and grandchildren. So, to hear
something exciting, particularly this concept of compound
interest and, as you mentioned, Einstein saying the most
powerful concept in your graph, is really very intriguing.
I would like to understand a bit, if I could, maybe talk a
little bit about the individual accounts and how they relate
with some of the other plans, and I would like to, if I could,
maybe ask several questions. I think you have already mentioned
this, but with comparison with others, is your account
voluntary or mandatory? I believe you mentioned it is
voluntary.
Senator Gramm. Yes. Let me just do the accounts, and then--
I will forget them by the time you get to the bottom of your
list.
Mr. Herger. Well, I will ask them one at a time.
Senator Gramm. How basically it works is, is that we allow
people to opt-in to the system. Companies that want to manage
funds submit their credentials to a new Social Security
Investment Board that would be made up of the Chairman of the
Federal Reserve Bank, the Secretary of the Treasury, the head
of the SEC, and two outside members that are financial experts,
one of whom would be chairman. They would be appointed--the
outside members would be appointed by the President and
confirmed by the Senate. They will look at all these groups
that want to manage Social Security money, and based on the
highest standards of safety and soundness, they will certify or
qualify plans. Then any worker can choose from among the
qualified plans to manage their money. Once they have chosen a
plan, they don't exercise any decisionmaking over the
investment, itself. By choosing the plan, they, in essence,
choose the investment strategy.
Now, we also set, by law, for safety and soundness, for the
first 3 years, no more than 60 percent in stock; no more than 3
percent in any one stock, but this would be chosen by the money
manager. After 3 years, we let the Board, subject to safety and
soundness, set these parameters for workers. That is basically
how it would work.
The second question was what? I knew I would forget, and I
did.
Mr. Herger. Well, how would these accounts be used to
support Social Security benefits and retirement?
Senator Gramm. OK, how they would be used is, when you
retire, you take your safe accounts, as we call them, and you
convert those into a variable annuity, and the variable annuity
pays you an amount per month, and then if that is less than you
would have gotten under Social Security, the Social Security
Administration makes up the difference. If it is more than you
would have gotten under Social Security, it all belongs to you,
and during the transition, it will be less, and we structure it
so during the transition you will always get to keep 20 percent
of the investment value above the amount that Social Security
would have replaced. So, during the transition, you always are
at least 20 percent better off based on the investment you
made. Once we are fully into the system, the investments belong
to you.
Mr. Herger. They belong to you. Would there be something
you could leave to your heirs, say, if you died somewhere along
the line?
Senator Gramm. Yes, if you die before you convert to the
variable annuity--because, remember, an annuity is a
combination of insurance and investment, and part of what the
company is betting on--you are betting you are going to live;
they are betting you are not going to live, in essence, and
some people are going to live longer than they expect; some, a
shorter period of time--but before you retire, if you die, your
entire investment goes to your family.
Mr. Herger. Somewhat of a built-in life insurance policy,
if you will. And did you also mention that--let us say we do
have a downturn in the economy, which we have had; you have
mentioned we have went through a depression even though we have
averaged 8.5 percent, there are those downtimes--you mentioned
that there would be minimum amount that would be guaranteed to
these people----
Senator Gramm. We guarantee the amount that Social Security
would have paid anyway. Let me give you a numerical example. I
think that we are assuming by 2020 that we would have $7
trillion invested in these accounts. But let us say that we had
the equivalent of the Great Depression, and we had only $5
trillion in these accounts. Are we better off with $5 trillion
or zero? Under the current system, we got nothing. Under this
system, you would have $5 trillion under the worst of
circumstances; $7 trillion under what we expect to be the norm;
maybe $9 trillion under the best of circumstances, but the
point is you would have had nothing under the old system, and
you still got $5 trillion, so the government would have to make
up the difference, but they would have had to pay the entire
benefit under the old system.
Mr. Herger. But, again--I understand, but, again, just to
make it clearer, those who are retiring are, at minimum,
guaranteed what they would have been receiving anyway under
Social Security. Is that not----
Senator Gramm. Yes, no one would ever get less under this
plan than they would have gotten under the old system.
Mr. Herger. So, it would almost seem--anyway, it sounds
very positive. I thank you very much, Senator.
Senator Gramm. Thank you.
Chairman Archer. Mr. Foley.
Mr. Foley. Thank you very much, and, Senator, thank you for
joining us today and for any Member willing to talk about
Social Security, I applaud them.
The concern I get, though, when we talk about these plans,
there is a lot of conversation about guarantees. We will
guarantee you at least current recipients will have the same as
they would have had they stayed in the system. There doesn't
seem to be an investment on Earth, though, that I can find that
makes that promise, because everything has speculative risk. If
you bought Amazon.com at $3, today, you are thrilled. If you
bought it at $247, you may not be as happy today, and you are
going to have those ups and downs. What is the mechanism by
which we ensure these accounts in the event you have a hedge
fund that collapses where you had significant investment? I
know of stories of friends who had all their eggs in one
basket, ESOP plans where they bought the company stock as their
collateral or their equity, and the company went out of
business and left them stranded. How do we, as a U.S.
Government, ensure these projections go forward; that we have
the kind of returns you anticipate, but also backdrop that with
this ironclad guarantee that you will never get less than what
you were promised today? It seems to be----
Senator Gramm. Let me explain how it can work. First of
all, you are guaranteed today based on no assets whatsoever.
You have got an ironclad guarantee that we are going to pay
benefits in the future, and we have no investments; we are
getting no rate of return; we are just simply committing that
some future generation is going to pay that money. So, to the
extent that we substitute real wealth--we really have a system
today based on debt, the debt of future taxpayers. We are
beginning the process here in a 39-year transition to
substitute for that a system of wealth. But we maintain the
guarantee which is that if something does go wrong you are no
worse off than you would have been under the old system. The
government is no worse off financially than it would have been
under the old system. In fact, it is always better off, because
you have got some investments.
Also, the examples you used were examples where people
concentrate their investment. We are not going to let people
invest this money with their brother-in-law, because we are
guaranteeing the result. We are going to have an investment
board that is going to set parameters, and it is going to
oversee just as the SEC does the regular market, but with much
higher standards, the investments that are made, and if a
company begins to perform poorly, the board has the ability to
force them to change policies or to come in and shut them
down--they never take ownership of the stocks and bonds--and
transfer those accounts to another firm. In fact, in Australia
and in Chile, that has happened on several occasions, and
nobody lost any money in the process.
But the reason you can guarantee it is that we are
guaranteeing it now with no assets with an ironclad guarantee
to the extent that government guarantees are ironclad. We are
going to be supplementing, over time, more and more wealth to
take the place of debt, so it is much easier for us to
guarantee what I am guaranteeing in this plan as compared to
what we are guaranteeing under current law. That is the point.
Mr. Foley. At what age does this plan actually take effect
for a recipient? Is there a guarantee today, currently, that
they all stay in the system?
Senator Gramm. Yes, you would begin to exercise the choice
on January 1, 2000, and it is a good point I think to end on.
Every day we wait, we are guaranteeing that we are going to cut
benefits and we are going to raise taxes. If we don't get into
this--no matter whether you choose Chairman Archer's plan or my
plan or whoever's plan, time is critical for this money to
grow, and if we don't get into it in the next couple of years,
there is no way that we can deal with this problem that will
not entail tax increases and benefit cuts. So, timing is
critically important, and when the President, in essence, did
this cop-out with the plan he came forward with after having
spent 2 years first saying save Social Security now or first
and then save Social Security now, it really was a major step
toward tax increases and benefit cuts. You can't wait 4 or 5
years and make this work, anybody's plan work. Now, you will be
better off doing it 5 years from now than never doing it or
better off doing it 5 rather than 10, but if you want to avoid
cutting benefits or raising taxes, you have got to do it next
year.
Mr. Foley. Thank you, Senator.
Chairman Archer. Senator, thank you for a very cogent
presentation. We appreciate your coming and appearing before
us.
Senator Moynihan, my apologies for keeping you waiting, and
thank you for your patience and your perseverance, and I would
like to add an even additional amount to that in saying that
you have been a great public servant over the years; made an
enormous contribution to your country. You have asserted an
independence in your beliefs which I think is an enormous
credit, and I personally am pleased to count you as a friend,
and I have enjoyed working with you over the years, and I
welcome you to the Ways and Means Committee.
The rule that we are operating under is that we are asking
each witness to limit their testimony to 10 minutes, and the
entire written testimony, without objection, will be inserted
in the record, and welcome to the Committee. You may proceed.
STATEMENT OF HON. DANIEL PATRICK MOYNIHAN, A U.S. SENATOR FROM
THE STATE OF NEW YORK
Senator Moynihan. Thank you, Mr. Chairman. I could not be
more grateful for your gracious remarks. I hope you understand
how much I reciprocate them. We have been at this together a
long while and have seen some successes, and I think we may
yet, too.
A number of my colleagues on the Senate side will be
speaking later, as has my friend, Senator Gramm, about a larger
use of Social Security bringing into the idea of accumulating
wealth, a matter that Senator Kerrey very much feels strongly
about, about providing annuities or providing an estate for
people who work all their lives; profoundly important ideas,
new and appropriate I think to the new century. I am going to
speak to a more traditional Social Security arrangement which
simply ensures that the existing benefits are paid for the next
75 years.
Sir, I have four points and four points only. On the more
than one occasion when a senior member of the President's staff
has said we are going to have to get to work on Social
Security, I have taken the liberty of producing a 500-page
notebook, which I sent to the White House, with 1 page of text
and these four points. At this moment, I should say to Mr.
Herger--who has had to leave for the moment--the feeling that
Social Security is going bankrupt, no, sir. Social Security is
not going bankrupt. In the next 10 years, we have a surplus in
Social Security of more than $1.7 trillion. Now, there will
come a time, but let us be clear about that dimension.
The reason we have that surplus goes back to the
legislation we adopted in 1977, a long time ago. If I had said
1777, it would not have been much difference in the perspective
of Senator Roth and I who are the only two Members of the
Conference Committee still in the Senate. I don't know if there
are any still from the House. But, at that point, we took
Social Security from the pay-as-you-go basis that was
established in 1935 in the midst of the Depression to a
partially funded basis. That profound change attracted almost
no attention. I was a member of the Conference, a very serious
member. It was my first conference ever. I had no idea we had
done that. If the New York Times reporting on the event knew
it, they chose not to mention it. You will find a few lines
about it in the Conference Committee report, not many. It was
basically a decision by the Social Security professionals. And
that continues to be.
We have had that surplus all through the eighties and much
of the nineties. We are now thinking about putting a lockbox
that the House has just proposed--and a very sensible one, if I
may say, particularly if an escape for recession is added--but
Social Security has a surplus.
Chairman Archer. Senator, I apologize, but I have got to go
vote, and Congressman Shaw will preside until I can return.
Senator Moynihan. What a pleasure that will be, sir. You do
your duty.
Mr. Shaw [presiding]. Yes, sir. Please proceed.
Senator Moynihan. Thank you, Mr. Chairman.
The four points, which I mentioned, do provide a Social
Security solvency for 75 years, and this is the situation. As
presently constructed, we have a 75-year deficit of 2.07. These
four points would reduce the deficit by about 2.2 so that in
fact you would have a small surplus over 75 years. The first
point is to reduce the cost of living adjustment by 1
percentage point. This has aroused a lot of opposition, but I
should say to you, sir, it is a bit presumptuous, but I don't
know of a prestigious economist in the Nation who does not
think, believe, can demonstrate that the cost of living
adjustment overstates inflation. The U.S. Department of Labor,
Bureau of Labor Statistics says so. They have a little pamphlet
they put out called Understanding the Consumer Price Index, and
there is a number of questions, and question number three: Is
the CPI, Consumer Price Index, a cost of living index? And they
say, ``No, although it frequently and mistakenly is called a
cost of living index,'' and they go on to explain the number of
reasons for this, and if you want to go into them, I can do
that for you.
The commission headed by Professor Boskin at Stanford,
which was appointed jointly by Senator Packwood and I about 4
years ago addressed this question, and very seriously people
have been working with it for 30 years, said that the CPI
overstates inflation by something of between 0.8 and 1.6
percent, and in that range you will find most such estimates.
Alice Rivlin, when she was Director of the Office of Management
and Budget, gave about the same estimate in an internal
document that made its way into the public domain. Reduce cost
of living adjustments. Still use the CPI as we now do, but just
take 1.0 percent off that number.
Second, tax Social Security benefits in the same way as
private pensions, which is to say any part of the benefit that
you haven't previously paid taxes on, you now pay taxes on. It
is just treating it as a pension, which it is.
Third, extend coverage to all newly hired State and local
government employees. This is a real anachronism. Back in 1935
when for the longest while it wasn't clear that Social Security
was constitutional, the Federal Government could not tax a
State government or a subdivision of a State government. So,
State and local employees are not required to be covered under
the statute. Three-quarters have opted to do so, because it
makes sense, but there are five million persons who don't pay
now. Most of them get Social Security by working on the side
and so forth. Just make it a universal payment.
And, fourth, a technical point, Mr. Chairman, increase the
computation period from 35 to 38 years. That just reflects the
fact that since people live longer, their working lives are
longer.
Do those four things, and take up the subject 75 years from
now.
Mr. Shaw. Well, you have another minute, but I think it
shows the uniqueness of Senator Moynihan in being able to stop
a minute short, as a Senator, in the amount of time allotted
you.
I want to personally congratulate you on your long
distinguished career. We have worked together on welfare
reform----
Senator Moynihan. We have, sir.
Mr. Shaw [continuing]. And I know that you sounded the
alarm bell on that back there in the Nixon administration, and
you were so right.
Senator Moynihan. Johnson, sir.
Mr. Shaw. Johnson? Well, you came up with some figures
during the Nixon administration also with regard to out-of-
wedlock births and some of the things that were happening, but
you certainly are putting yourself in the forefront of making
some very tough stands with regard to Social Security, and I
want to congratulate you for your involvement.
I would also tell the Members that I know you have another
commitment, and I will have to shorten the time for
questioning.
Senator Moynihan. Well, I am at your disposal, but you have
so many other witnesses.
Mr. Shaw. OK, thank you.
Mr. Coyne.
Mr. Coyne. Thank you, Mr. Chairman.
Senator, thank you for your testimony. I have always been
wondering why we have this cap, $68,000, in paying into Social
Security. People earn up to $68,000 and then they are taxed for
it, and it is matched by the employer. Is there any good reason
why that should continue to stay on in a time when we are
looking to resolve the problem with Social Security?
Senator Moynihan. If you look to the formulas by which we
pay out benefits eventually, there is a reason for that, sir.
You could argue to expand it. We do extend it from time to
time. May I say that is an issue I would wish we would be
careful about, because we want Social Security to seem an
equitable return to everyone, and if you get to the point where
people in the high-income brackets are paying so much more than
they are ever going to get back, you start losing the universal
quality which has produced the extraordinary support for this
program, although it is a fact and it bedevils, which is that a
majority of nonretired adults in this country do not think they
will get Social Security.
Mr. Coyne. Thank you.
Senator Moynihan. Thank you, sir.
Mr. Shaw. Thank you.
Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman.
Senator Moynihan, welcome. It is nice to have you here as
always. I tell everybody here that you are as good a dinner
companion as you are a witness.
Let me ask you a question. We have had testimony,
substantial testimony, all morning about actuarial tables,
about projected growth rates; and about 2 percent here and 4
percent there. But based upon your long and distinguished
career here and based on the universal acclaim that Social
Security has won, could you speak for a moment of the
importance of community in Social Security; how we are all
linked together by this New Deal Program?
Senator Moynihan. Well, exactly so, and that was my
response to Mr. Coyne, that we understand that this is an
insurance program into which everyone pays and everyone gets a
return, and there is no large difference in that return. We do
tilt the benefits to low-income persons, and that has been from
the beginning, and we understand why, but in the main, it is a
shared enterprise. I think we did get a little too confident
about it. And the administrators for a long period there had--
they knew the system was in good shape, and that was enough for
them to know, and it took me, oh, 15 years to get the Social
Security Administration to start sending out on an annual basis
the personal earnings and benefit statement so that from the
time you are 18 and have your first job, you know that Social
Security knows your name, your number, and is recording your
contributions. They just didn't want to do that, and it wasn't
necessary, they thought. The next thing, they looked up, and
there was this lack of confidence in the system.
We also had to restore the Social Security Administration
to its independent status. It began as such, then got jumbled
up in New Deal agencies and then the Hoover Commission, and the
next thing you know in the 1994 Congressional Directory, there
were more than 200 names between the Secretary of Health and
Human Services and the Commissioner of Social Security; it was
way down there. We passed a bill which recreated an independent
agency with a fixed 6-year term for the Commissioner.
But, yes, I think the more we let people know, ``We know
you are there; your money is safe; you are going to get it,''
that sense of community will return. It has in fact eroded
somewhat.
Mr. Neal. Thank you. And based upon your long career, would
you deem Social Security to be the great legislative
accomplishment of this century?
Senator Moynihan. Yes, yes. I mean, it took life from being
perilous and solitary, nasty, brutish, and short for all too
many people into making us a community in which we could live
together, live longer, be better--I think we are better. I knew
Francis Perkins, and let me tell you, that was a great woman.
Mr. Neal. Thank you, and Hobbs would like your quote. Thank
you.
Mr. Shaw. I would like to add to that on what you just
said, Senator, that it is not only one of the great legislative
accomplishments, it is also the greatest antipoverty program
ever devised by Congress, and it certainly must be preserved.
Senator Moynihan. You get money, you get income, if you
work.
Mr. Shaw. All for the right reasons; yes, sir.
One further question that I have and then I will yield to
Mr. Rangel. In your plan, you have a component, a voluntary
component, as to individual savings accounts. Do you think that
this would be possible to pass the House and the Senate, and,
if so, do you think it is something that the President could
sign?
Senator Moynihan. Yes, sir. I would have to say that if we
take that 2 percentage points, above what we need for pay-as-
you-go and turn that into a personal savings account system,
rather like the Federal Thrift Savings Plan, it would be a
logical extension of the big social programs of the 20th
century. First of all, unemployment insurance. That was the
great trauma of industrialism. You are suddenly out of work and
you have no money. It was a new thing, and nobody could explain
it, because, you know, you are never out of work on the farm;
you may be half starved, but you are not out of work. And this
came along--insure unemployment. Then provide for retirement
benefits for people who no longer, again, are living on the
farm where you can have something. Then health care and now,
finally, to a lifetime savings. It is a paradigm that you can
hardly resist in its logic.
Yes, you could do this. I do not think it has to be
complicated. I think the more complicated, the worse. I think
that just going to the Federal Thrift Savings Plan with
individual accounts--if I could interrupt myself here for one
moment, there is talk, and it comes from downtown, of taking
some of this money that we are going to save and put aside and
investing it in the stock market. Sir, don't do that. I mean,
it just--don't put that temptation in front of us. It could be
ruinous, and let us do this in a way that doesn't end up
manipulating the economy which is what would happen.
Mr. Shaw. Mr. Rangel.
Mr. Rangel. Thank you. Senator, I know that you have many
days and months before your term expires and many legislative
accomplishments yet to achieve, but I just wanted to take this
moment as the Dean of the New York State delegation and a long-
time Member of this House to sincerely thank you for making us
so proud to be Members of Congress, so proud to come from the
great State of New York, and so proud to work with you over the
years. I do hope that your contribution here today will allow
all of us to have the political courage to come together in a
bipartisan way in working with the White House, not for
political gain, but to see how we all collectively can say we
met the challenge and that we have done the right thing. You
have been a great friend and an even greater legislator, and I
just wanted to take this moment to say thank you.
Senator Moynihan. Well, thank you, my dear friend and my
leader of the delegation. Might I just say that in 1983--well,
earlier than that, 1981, President Reagan having been told
there was a crisis in Social Security, and indeed there was a
short-term crisis, in the late seventies, for the first time in
the history of our statistics, prices increased faster than
wages, and the trust fund was getting very low, appointed the
National Commission on Social Security Reform. We worked in
public for 2 years, and we ended up failed utterly. Then
Senator Dole asked me if we could talk a bit--this was after we
were finished and failed. From January 3, the day we swore in
the new Congress, he brought over our very good friend from the
House side----
Mr. Rangel. Barber Conable?
Senator Moynihan. Sir? Yes, yes. And a day later, we were
in Secretary Baker's basement, sort of rec room, and 2 days
later, we were in Blair House which is being fixed up, and in I
think a total of 12 days, from beginning to end, we worked this
all out; President Reagan watching it very carefully and
agreeing. When you are working together, this is not an
impossible job. Revenues are much up right now, because
unemployment is so low. But I would say this to you, sir, that
let us do it before we get to a crisis. It is a lot easier.
Mr. Rangel. Thank you, sir.
Mr. Shaw. Are any other Members seeking recognition? Yes,
sir. The gentleman from Ohio.
Mr. Portman. Senator, I echo the comments that were made by
others to thank you for your service and your courage to step
out a couple of years ago when others weren't talking about it
to discuss ways in which we could begin to adjust Social
Security so that we wouldn't be acting in a crisis situation
but rather be prepared.
I like a number of the provisions that are in the Moynihan-
Kerrey proposal. The one I don't like is that newly hired State
and local workers would be included, and we could talk about
that, but I think that the State program in Ohio and other
States are probably programs that we should begin to look at
emulating in that they are prefunded and working and not in an
insolvent position.
But if I could ask you about KidSave. This is an intriguing
idea to me, and I wondered how it was integrated into the
Social Security Program or is it along the lines of the Thrift
Savings Plan that, in essence, is outside of Social Security
but would supplement Social Security through private savings
after retirement?
Senator Moynihan. You are entirely right, Mr. Portman. This
has to do with the tax system of the Internal Revenue Code and
the use of general revenues. It is Senator Kerrey's idea, and
it is a wonderful one, but it is not a Social Security Program.
Mr. Portman. OK. He has now arrived behind you, so you have
to be careful what you say.
Senator Moynihan. Oh, it is a wonderful----
Mr. Portman. Wonderful is a good adjective.
Senator Moynihan. Did I say that with enough emphasis.
Mr. Portman. Again, thank you for taking the time to be
here today and for your pioneering work on this issue.
Senator Moynihan. Thank you, sir.
Mr. Shaw. Mr. English. No questions. Any other Members seek
recognition? If not, Senator Moynihan, it is a pleasure as
always to have you and see you over on the other side of the
House.
Senator Moynihan. Honor to appear before you, Mr. Chairman,
Mr. Rangel, Mr. Houghton----
Mr. Shaw. I am delighted, too, to see that you got over
your surgery satisfactorily. That is high-risk surgery, I can
tell you that.
Our next panel, I see Senator Kerrey and Senator Gregg are
here. If they would sit at the witness table, they will be
accompanied by Senator Grassley and Senator Breaux when they
come in.
Senator Gregg, you are up to bat. Nice to see you back.
STATEMENT OF HON. JUDD GREGG, A U.S. SENATOR FROM THE STATE OF
NEW HAMPSHIRE
Senator Gregg. It is great to be here. It is a wonderful
Committee, and I had the great privilege of serving here.
Mr. Shaw. Your microphone is----
Senator Gregg. I had the great privilege of serving on this
Committee for a number of years, and it was a wonderful
experience.
Senator Kerrey and myself, Senator Breaux, and Senator
Grassley are here to talk a little bit about the plan that we
have proposed and any other Social Security issues which are
floating around, and we certainly appreciate this Committee's
patience, because you have been taking testimony for a long
time, and you are probably Social Security's out.
Let me highlight some of the ideas within our plan. First,
and I think very, very significantly, this is a bipartisan
proposal. It is a proposal that was pulled together across the
aisles in a constructive way, and it took a lot of negotiation
to reach agreement, but we did reach agreement. And it is
supported by a pretty good spectrum of Members from both sides
of the aisle. We are the primary sponsors here today, but we
have a fair number of cosponsors on both sides who have joined
us.
Second, it is a plan which accomplishes what must be the
true goal of Social Security reform, which is that it makes the
Social Security system solvent for the next 100 years, and that
is a scoring that was done by the Social Security actuaries,
and that is a threshold issue in my opinion.
Third, it addresses what I think is a critical issue, which
is that we not end up creating a huge tax burden on the general
accounts of this government as we try to address the Social
Security system problems in the outyears. As we all know, in
the transition period, from about the year 2015 through about
the year 2045, we are going to have a tremendous amount of
pressure to figure out how to get over those years as the huge
baby boom generation retires and as the defined benefit exists
and must be paid for, and the question is, is that defined
benefit going to be paid for out of prefunded liabilities,
which is a prefunded activity, which is I think the best
approach? Is it going to be paid for out of new taxes on wage
earners? Is it going to be paid for out of raising the Social
Security tax? Is it going to be paid for out of benefit cuts?
In our proposal, we do not raise taxes. We think that that is a
critical element.
Third--or, fourth, our proposal addresses what I think is
very important also which is that we try to mute the
intergenerational disparities within the Social Security system
as we move into the next generation receiving benefits from the
Social Security system. As we all know, a young worker today,
coming into the labor force, is going to get a very poor return
on their Social Security taxes. We attempt to address that
issue. We address it through making the system progressive,
more progressive than it presently is, and by making the system
spousal-friendly, so that especially women who are today at a
disadvantage under the system are addressed more fairly, and
Senator Grassley will, I think, talk about that.
Fifth, we do have as our core element in our proposal the
idea which has been discussed at length this morning of giving
people ownership over part of their Social Security taxes
through a personal savings account. Our personal savings
accounts vary in size depending on a person's income, with low-
income people having the ability to get a personal savings
account of up to 4 percent and high-income people having
personal savings accounts of 2 percent, and it is done by
cutting the payroll tax and refunding that and allowing people
to invest that personal savings account under a system which is
designed and based on the Thrift Savings Plan which is
presently--many of us in the Congress take part in, so you are
familiar with it. So, we do have that element of trying to
prefund the liability of the system by giving people ownership
over an asset which will grow.
Also, I think it should be noted that we do not have that
asset forfeited when people get to obtain their retirement
benefit. That asset is owned or the savings account is owned.
If a person dies before they reach retirement, their estate
receives that asset that has been built up in the savings
account, and when a person retires, we do require that for
some, a portion of the benefit be annuitized, but we also
reward them. Whatever they are able to earn over the basic rate
of return which would occur on bonds is theirs, and there is no
clawback of those funds, and they do not have to offset them
against their benefit, which is, we think, a very--creates a
great deal of incentive for people to stay in the system and to
feel that the system is going to be there and benefit them when
they retire.
I want to stress again that our system is structured to be
more progressive. We have a higher minimum benefit under our
proposal than under the present Social Security system. That is
without taking into consideration the personal savings account,
and, of course, as I mentioned, the personal savings account is
the asset of the retiree, and, as a result, especially low-
income situations, it is likely that that asset is going to
accrue at a rate that is fairly significant as we allow up to a
4 percent contribution to it.
I think that touches on the main themes of our proposal.
Let me talk just quickly about--and, as I mentioned, our
proposal works. It has been scored; it is substantive; it is a
combination of a lot of different ideas that are out there.
Senator Kerrey had some ideas; Senator Breaux and I had some
ideas; Congressmen Stenholm and Kolbe have ideas. We have taken
a lot of these ideas, and we have merged them. Senator Grassley
has got some strong ideas in the area of widows' benefits. So,
we have taken them all, and we have merged them, and we have
produced this package, which we think is a very strong proposal
and which, if it were adopted today, it would correct the
problems of the system and create a system where we would have
beneficiaries who, not only today but for the foreseeable
future, the next 100 years, would be able to be assured of a
good Social Security benefit. I would note that our system does
not impact in any way people who are retired today or are about
to retire, so we don't impact their benefits.
I wanted to talk just quickly here, though, about a concept
which I think is absolutely critical to understanding this
problem, and I know many of you are familiar with it, but I
just want to stress it again if for nothing else than the
presses, and that is this whole issue of the fact that as we
move into the outyears and the postwar baby boom generation
retires and there are so many retirees taking from the system,
that under a system that is a defined benefit system which says
that those retirees are going to get a certain benefit, the
trust fund is irrelevant unless the trust fund is owned and
prefunded by the retirees. If the trust fund is filled with
notes, obligations of the Federal Government, then it simply
becomes a tax burden on the next generation to pay the defined
benefit. The notes are essentially irrelevant. If the defined
benefit is there, you are going to have to raise taxes to pay
for them. The President's proposal, for example, is simply a
massive shift of the obligations of the trust fund to the
general funds of the Federal Government and, therefore, to the
taxpayers. And what I think we have to look at very
aggressively as we move forward in Social Security reform is
not seeing--is looking at the overall picture and not missing
the fact that the total tax burden, not just the Social
Security, but the total tax burden to support the system is
what must be addressed, and if you are going to have a dramatic
increase in the total tax burden to address the system because
you have got to use huge amounts of general funds to support
the system, then you really haven't done anything other than to
shift the burden of paying for the system to the younger
generation, and the younger generation is already getting a
very bad deal under the present Social Security system, as we
all know. And, so to just increase the negative effect of that
deal by simply filling the trust fund up with notes or some
other obligation which has no tangential asset behind it, which
is owned by the retiree, is inevitably going to make the new
retirees' return even worse, and, therefore, make the system
less supportable and less defensible to people who are in their
twenties and thirties and are coming into the system.
And I do think that as we move forward and discuss all
these different proposals that have been put before you, that
you need to look very hard at what is the overall tax liability
that is being generated here, and are we really doing anything
for the younger generation if we dramatically increase the
general fund obligation to support the Social Security system?
Thank you, Mr. Chairman. I appreciate your attention.
[The prepared statement follows:]
Statement of Hon. Judd Gregg, a U.S. Senator from the State of New
Hampshire
Thank you, Mr. Chairman, for this opportunity to testify
before your Committee. I want to compliment you for your
leadership on this important issue--not only for holding these
hearings, but also for offering a reform proposal of your own.
The proposal that I will discuss was negotiated over
several months between a bipartisan group of committed
reformers in the Senate. It already has more cosponsors than
any other competing proposal. Those cosponsors include myself,
Senator Bob Kerrey, Senator John Breaux, Senator Chuck
Grassley, Senator Fred Thompson, Senator Chuck Robb, and
Senator Craig Thomas.
What I want to do in my remarks is to describe what our
proposal would achieve, and then to provide some details as to
how it achieves these goals. It would:
--Make Social Security solvent. Not simply for 75 years,
but perpetually, as far as the Trustees can estimate. Our
proposal would leave the system on a permanently sustainable
path.
--Increase Social Security benefits beyond what the current
system can fund. I will follow up with some details as to why
and how.
--It would drastically reduce taxes below current-law
levels. Again, I will provide details as to why and how it does
this.
--It will make the system far less costly than current law,
and also less costly than competing reform proposals.
--It will not touch the benefits of current retirees.
--It will strengthen the ``safety net'' against poverty and
provide additional protections for the disabled, for widows,
and for other vulnerable sectors of the population.
--It will vastly reduce the federal government's unfunded
liabilities.
--It would use the best ideas provided by reformers across
the political spectrum, and thus offers a practical opportunity
for a larger bipartisan agreement.
--It will improve the system in many respects. It will
provide for fairer treatment across generations, across
demographic groups. It would improve the work incentives of the
current system.
I would like now to explain how our proposal achieves all
of these objectives:
ACHIEVING SYSTEM SOLVENCY
Our system would make the system solvent for as far as the
Social Security Actuaries are able to estimate.
How does it do this? Above all else, it accomplishes this
through advance funding.
As the members of this Committee know, our population is
aging rapidly. Currently we have a little more than 3 workers
paying into the system for every 1 retiree taking out of it.
Within a generation, that ratio will be down to 2:1.
As a consequence, if we did nothing, future generations
would be assessed skyrocketing tax rates in order to meet
benefit promises. The projected cost (tax) rate of the Social
Security system, according to the Actuaries, will be almost 18%
by 2030.
The Trust Fund is not currently scheduled to become
insolvent until 2034, but as most acknowledge, the existence of
the Trust Fund has nothing to do with the government's ability
to pay benefits. President Clinton's submitted budget for this
year made the point as well as I possibly could:
``These balances are available to finance future benefit
payments and other trust fund expenditures--but only in a
bookkeeping sense. . . They do not consist of real economic
assets that can be drawn down in the future to fund benefits.
Instead, they are claims on the Treasury that, when redeemed,
will have to be financed by raising taxes, borrowing from the
public, or reducing benefits or other expenditures. The
existence of large Trust Fund balances, therefore, does not, by
itself, have any impact on the Government's ability to pay
benefits.''
In other words, we have a problem that arises in 2014, not
in 2034, and it quickly becomes an enormous one unless we find
a way to put aside savings today. This does not mean simply
adding a series of credits to the Social Security Trust Fund,
which would have no positive impact, as the quote from the
President's budget clearly shows.
What we have to do is begin to advance fund the current
system, and that means taking some of that surplus Social
Security money today out of the federal coffers and into a
place where it can be saved, invested--owned by individual
beneficiaries. That money would belong to them immediately,
even though they could not withdraw it before retirement. But
it would be a real asset in their name.
By doing this, we can reduce the amount of the benefit that
needs to be funded in the future by raising taxes on future
generations. This is the critical objective, but it allows for
flippant political attacks. If you give someone a part of their
benefit today, in their personal account, and less of it later
on, some will say that it is a ``cut'' in benefits. It is no
such thing. Only in Washington can giving people ownership
rights and real funding for a portion of their benefits, and
increasing their total real value, be construed as a cut.
Accepting such terminology can only lead to one conclusion--
that we can't advance fund, because we simply have to be sure
that every penny of future benefits comes from taxing future
workers. So we need to get out of that rhetorical trap.
Our proposal has been certified by the actuaries as
attaining actuarial solvency, and in fact it goes so far as to
slightly overshoot. We are ``overbalanced'' in the years after
2050, and have some room to modify the proposal in some
respects and yet still stay in balance.
I would note the consensus that has developed for some form
of advance funding. This was one of the few recommendations
that united an otherwise divided Social Security Advisory
Council in 1996. The major disagreements today among
policymakers consist only in the area of who should control and
direct the investment opportunities created within Social
Security. I believe strongly, and I believe a Congressional
majority agrees, that this investment should be directed by
individual beneficiaries, not by the federal government or any
other public board.
WHY BENEFITS ARE HIGHER UNDER OUR PLAN
We have worked with the Social Security actuaries and the
Congressional Research Service to estimate the levels of
benefits provided under our plan.
There are certain bottom-line points that should be
recognized about our plan. Among them:
1) Low-wage earners in every birth cohort measured would
experience higher benefits under our plan than current law can
sustain, even without including the proceeds from personal
accounts.
2) Average earners in every birth cohort measured would
experience higher benefits under our plan than current law can
sustain, even if their personal accounts only grew at the
projected bond rate of 3.0%.
3) Maximum earners in some birth cohorts would need either
to achieve the historical rate of return on stocks, or to put
in additional voluntary contributions, in order to exceed
benefit levels of current law. However, the tax savings to
high-income earners, which I will outline in the next section,
will be so great that on balance they would also benefit
appreciably from our reform plan.
Under current law, a low-wage individual retiring in the
year 2040 at the age of 65 would be promised a monthly benefit
of $752. However, due to the pending insolvency of the system,
only $536 of that can be funded. We cannot know in advance how
future generations would distribute the program changes between
benefit cuts and tax increases. But we do know that our plan,
thanks to advance funding, would offer a higher benefit to that
individual, from a fully solvent system that would eliminate
the need for those choices.
I will provide tables that are based on the research of the
Congressional Research Service that make clear all of the above
points. The CRS makes projections that assume that under
current law, benefits would be paid in full until 2034, and
then suddenly cut by more than 25% when the system becomes
insolvent. CRS can make no other presumption in the absence of
advance knowledge of how Congress would distribute the pain of
benefit reductions among birth cohorts. In order to translate
the CRS figures into a more plausible outcome, we added a
column showing the effects that would come from the benefit
reductions under current law being shared equally by all birth
cohorts.
Benefit Table #1: The Bipartisan Plan's Benefits Would Be Higher for Low-Income Workers Even Without Counting
Personal Accounts
(Assumes Steady Low-Wage Worker) (Monthly Benefit, 1999 Dollars) (Assumes Retirement at Age 65)
----------------------------------------------------------------------------------------------------------------
Current Law Bipartisan Plan Bipartisan Plan Bipartisan Plan (w/
Yr (Benefit Cuts Current Law (Bond Rate No (w/o Account 1% Voluntary
Begin in 2034) Sustainable* Vol. Contrib.) Benefits) Contributions)
----------------------------------------------------------------------------------------------------------------
2000 626 517 615 606 627
2005 624 515 620 601 645
2010 652 539 698 667 738
2015 673 556 733 687 790
2020 660 545 754 691 832
2030 690 570 776 694 877
2035 512 595 798 693 926
2040 536 621 821 689 981
2050 582 678 869 710 1051
2060 611 739 920 749 1107
----------------------------------------------------------------------------------------------------------------
*The Congressional Research Service, in the left-hand column, assumes that all of the burden of benefit changes
under current law will commence in 2034. In order to produce a more realistic prediction of how the changes
required under current law would be spread, the ``current law sustainable'' column assumes that they have been
spread equally among birth cohorts throughout the valuation period.
Benefit Table #2: The Bipartisan Plan's Benefits Would Be Higher for Average-Income Workers Even if Accounts
Earn Only a Bond Rate of Return (3.0%)
(Assumes Steady Average-Wage Worker) (Monthly Benefit, 1999 Dollars) (Assumes Retirement at Age 65)
----------------------------------------------------------------------------------------------------------------
Bipartisan Plan (w/
Current Law Current Law Bipartisan Plan Bipartisan Plan 1% Vol.
Yr (Benefit Cuts Sustainable* (Bond Rate, No (Stock Rate) Contributions, Bond
Begin in 2034) Voluntary) Rate)
----------------------------------------------------------------------------------------------------------------
2000 1032 852 1014 1016 1029
2005 1031 852 973 982 1006
2010 1076 889 991 1014 1046
2015 1111 918 977 1024 1057
2020 1090 900 1005 1092 1115
2030 1139 941 1083 1183 1179
2035 845 982 1063 1307 1250
2040 884 1026 1093 1476 1329
2050 961 1119 1157 1672 1442
2060 1007 1221 1225 1778 1531
----------------------------------------------------------------------------------------------------------------
*The Congressional Research Service, in the left-hand column, assumes that all of the burden of benefit changes
under current law will commence in 2034. In order to produce a more realistic prediction of how the changes
required under current law would be spread, the ``current law sustainable'' column assumes that they have been
spread equally among birth cohorts throughout the valuation period.
The alternative course is that current benefit promises
would be met in full by raising taxes, both under current law
and under proposals to simply transfer credits to the Social
Security Trust Fund. I have also provided a table that shows
the size of these tax costs, and will comment further upon them
in the next portion of my statement.
I would like to point out that these figures apply to
individuals retiring at the age of 65. Thus, even with the
increased actuarial adjustment for early retirement under our
plan, and even though our plan would accelerate the pace at
which the normal retirement age would reach its current-law
target of 67, benefits under our proposal for individuals
retiring at 65 would still be higher.
Our tables also show that the progressive match program for
low-income individuals will also add enormously to the
projected benefits that they will receive.
WHY TAXES WILL BE MUCH LOWER UNDER OUR PLAN
If there is a single most obvious and important benefit of
enacting this reform, it is in the tax reductions that will
result from it.
I am not referring to the most immediate tax reduction, the
payroll tax cut that will be given to individuals in the form
of a refund into a personal account.
The greatest reduction in taxes would come in the years
from 2015 on beyond. At that time, under current law--and under
many reform plans--enormous outlays from general revenues would
be needed to redeem the Social Security Trust Fund, or to fund
personal accounts. The net cost of the system would begin to
climb. The federal government would have to collect almost 18%
of national taxable payroll in the year 2030, more than 5
points of that coming from general revenues.
The hidden cost of the current Social Security system is
not the payroll tax increases that everyone knows would be
required after 2034, but the general tax increases that few
will admit would be required starting in 2014.
With my statement, I include a table showing the effective
tax rate costs of current law as well as the various
actuarially sound reform proposals that have been placed before
the Congress. These figures come directly from the Social
Security actuaries. They include the sum of the costs of paying
OASDI benefits, plus any mandatory contributions to personal
accounts. (Under our proposal, additional voluntary
contributions would also be permitted. But any federal
``matches'' of voluntary contributions from general revenues
would be contingent upon new savings being generated.)
Let me return to our individual who is working in the year
2025 under current law. In that year, a tax increase equal to
3.61% of payroll would effectively need to be assessed through
general revenues in order to pay promised benefits. As a low-
income individual, his share of that burden would be less than
if it were assessed through the payroll tax, but it would still
be real. Under current law, his income tax burden comes to
about $241 annually.
Comparison of Cost Rates of Current Law and Alternative Plans
(As a percentage of taxable payroll)
------------------------------------------------------------------------
Current Archer/ Senate Kolbe/
Yr Law Shaw Bipartisan Stenholm Gramm Nadler
------------------------------------------------------------------------
2000 10.8 12.8 12.7 12.9 15.0 10.4*
2005 11.2 13.3 13.2 13.0 15.2 10.6
2010 11.9 13.9 13.4 13.4 15.6 11.2
2015 13.3 15.0 14.0 14.0 16.4 12.5
2020 15.0 16.4 14.7 14.8 17.3 12.8 (14.2)
2025 16.6 17.4 15.4 15.6 17.6 14.4 (15.8)
2030 17.7 17.8 15.7 15.7 17.1 15.5 (16.9)
2035 18.2 17.3 15.5 15.2 16.4 15.9 (17.4)
2040 18.2 16.2 14.8 14.5 15.2 16.0 (17.5)
2045 18.2 14.9 14.3 13.8 14.1 16.1 (17.5)
2050 18.3 13.8 13.9 13.3 13.4 16.3 (17.7)
2055 18.6 13.1 13.7 13.2 13.0 16.6 (18.0)
2060 19.1 12.6 13.7 13.1 12.8 16.9 (18.5)
2065 19.4 12.3 13.6 13.4 12.5 17.1 (18.8)
2070 19.6 12.1 13.5 13.7 12.4 17.3 (19.0)
------------------------------------------------------------------------
(Annual cost includes OASDI outlays plus contributions to personal
accounts.) Peak cost year in bold
(Figures come from analyses completed of each plan by Social Security
actuaries. Archer/Shaw plan memo of April 29, 1999. Senate bipartisan
plan (Gregg/Kerrey/Breaux/Grassley et al) memo of June 3, 1999. Kolbe/
Stenholm plan memo of May 25, 1999. Gramm plan memo of April 16, 1999.
Nadler plan memo of June 3, 1999. Nadler plan total cost given in
parentheses, cost estimate given on assumption that stock sales reduce
amount of bonds that must be redeemed from tax revenue. Due to
construction of plans, cost rates for the Archer/Shaw, Gramm, and
Nadler plans would vary according to rate of return received on stock
investments.)
*Tax rate of Nadler plan is lower than current law not because total
costs are less but because amount of national income subject to tax is
greater. In order to compare total costs of Nadler plan to other
plans, cost rate given in Nadler column must be multiplied by a factor
that varies through time. This factor would be close to 1.06 in the
beginning of the valuation period, and would gradually decline to 1.03
at the end. For example, the tax rate given as 11.2% in 2010 under the
Nadler column would equate to the same total tax cost as the 11.9%
figure in the current law column.
Part II: Comparison of Cost Rates of Current Law and Alternative Plans
(As a percentage of taxable payroll)
------------------------------------------------------------------------
Yr Current Law Moynihan/Kerrey
------------------------------------------------------------------------
2000............................ 10.8.............. 11.1 (13.1)*
2005............................ 11.2.............. 11.0 (13.0)
2010............................ 11.9.............. 10.9 (12.9)
2015............................ 13.3.............. 11.5 (13.5)
2020............................ 15.0.............. 12.2 (14.2)
2025............................ 16.6.............. 13.2 (15.2)
2030............................ 17.7.............. 13.8 (15.8)
2035............................ 18.2.............. 14.0 (16.0)
2040............................ 18.2.............. 14.0 (16.0)
2045............................ 18.2.............. 14.0 (16.0)
2050............................ 18.3.............. 14.2 (16.2)
2055............................ 18.6.............. 14.5 (16.5)
2060............................ 19.1.............. 14.7 (16.7)
2065............................ 19.4.............. 14.8 (16.8)
2070............................ 19.6.............. 14.9 (16.9)
------------------------------------------------------------------------
(Annual cost includes OASDI outlays plus contributions to personal
accounts.) Peak cost year in bold
(Analysis of Moynihan/Kerrey plan is based on SSA actuaries' memo of
January 11, 1999, and is listed separately because it is the only
projection provided here based on the 1998 Trustees' Report. 1999 re-
estimates would vary. Unlike the other personal account proposals, the
accounts in the Moynihan/Kerrey plan are voluntary. The figure without
parentheses assumes no contributions to, and thus no income from,
personal accounts. The figure inside parentheses assumes universal
participation in 2% personal accounts, for comparison with other
personal account plans.)
*Like the Nadler plan, the Moynihan/Kerrey plan would increase the share
of national income subject to Social Security taxation, but to a
lesser degree. Thus, tax rates will appear lower than would an
equivalent amount of tax revenue collected under the Archer/Shaw,
Gramm, or Kolbe/Stenholm plans. The correction factor required to
translate one cost rate into another would be between 1.03-1.06 for
the Nadler proposal, 1.01-1.02 for the Senate bipartisan proposal, and
1.01-1.04 for the Moynihan/Kerrey proposal.
Under our proposal, that tax burden would drop by roughly
37%, from $241 to $153.
Middle and high-income workers would not experience benefit
increases as generous as those provided to low-income
individuals under our plan. But we have determined that by the
year 2034, an average wage earner would save the equivalent of
$650 a year (1999 dollars) in income taxes, and a maximum-wage
earner, $2350 a year. I want to stress that these savings are
net of any effects of re-indexing CPI upon the income tax
rates. These are net tax reductions, even including our CPI
reforms.
I would also stress that 2025 is not a particularly
favorable example to select. Our relative tax savings get much
larger after that point, growing steadily henceforth.
A look at our chart showing total costs reveals how quickly
our proposal, as well as the Kolbe-Stenholm proposal, begins to
reduce tax burdens.
A plan as comprehensive as ours can be picked apart by
critics, provision by provision. It is easy to criticize a
plan's parts in isolation from the whole, and to say that one
of them is disadvantageous, heedless of the other benefits and
gains provided. One reason for the specific choices that we
made is revealed in this important table. The result of not
making them is simply that, by the year 2030, the effective tax
rate of the system will surpass 17%, an unfortunate legacy to
leave to posterity.
OUR PLAN PROTECTS THE BENEFITS OF CURRENT RETIREES
How would current retirees be affected by our proposal?
Only in one way. Their benefits would come from a solvent
system, and therefore, political pressure to cut their benefits
will be reduced. Our proposal would not affect their benefits
in any way. Even the required methodological corrections to the
Consumer Price Index would not affect the benefits of current
retirees.
Under current law, there is no way of knowing what future
generations will do when the tax levels required to support
this system begin to rise in the year 2014. We do not know
whether future generations will be able to afford to increase
the tax costs of the system to 18% of the national tax base by
the year 2030, or whether other pressing national needs, such
as a recession or an international conflict will make this
untenable. Current law may therefore contain the seeds of
political pressure to cut benefits. Moreover, as general
revenues required to sustain the system grow to the levels of
hundreds of billions each year, there is the risk that upper-
income individuals will correctly diagnose that the system has
become an irretrievably bad deal for them, and that they will
walk away from this important program.
By eliminating the factors that might lead to pressure to
cut benefits, our proposal would keep the benefits of seniors
far more secure.
STRENGTHENING THE SAFETY NET AGAINST POVERTY
Poverty would be reduced under our proposal, even if the
personal accounts do not grow at an aggressive rate. The reason
for this is that our proposal would increase the progressivity
of the basic defined, guaranteed Social Security benefit. It
would also gradually phase in increased benefits for widows.
Moreover, our plan would protect the disabled. They would
be unaffected by the changes made to build new saving into the
system. Their benefits would not be impacted by the benefit
offsets proportional to personal account contributions. If an
individual becomes disabled prior to retirement age, they would
receive their current-law benefit.
It is important to recognize that we do not face a choice
between maintaining Social Security as a ``social insurance''
system and as an ``earned benefit.'' It has always served both
functions, and it must continue to do so in order to sustain
political support. The system must retain some features of
being an ``earned benefit'' so as not be reduced to a welfare
program only. This is why proposals to simply bail out the
system through general revenue transfusions alone--to turn it
into, effectively, another welfare program in which
contributions and benefits are not related--are misguided and
undermine the system's ethic.
Again, I would repeat that our proposal contains important
benefits for all individuals. Guaranteed benefits on the low-
income end would be increased. High income earners would be
spared the large current-law tax increases that would otherwise
be necessary. If we act responsibly and soon, we can accomplish
a reform that serves the interests of all Americans.
OUR PROPOSAL WOULD REDUCE UNFUNDED LIABILITIES
By putting aside some funding today, and reducing the
proportion of benefits that are financed solely by taxing
future workers, our proposal would vastly reduce the system's
unfunded liabilities.
Consider such a year as 2034. Under current law, the
government would have a liability from general revenues to the
Trust Fund equal to an approximately 5 point payroll tax
increase. By advance funding benefits, our plan would reduce
the cost of OASDI outlays in that year from more than 18% to
less than 14%. The pressure on general revenue outlays would be
reduced by more than half.
The Social Security system would be left on a sustainable
course. The share of benefits each year that are unfunded
liabilities would begin to go down partway through the
retirement of the baby boom generation. By the end of the
valuation period, the actuaries tell us, the system would have
a rising amount of assets in the Trust Fund.
OUR PLAN COMBINES THE BEST FEATURES OF MANY REFORM PLANS
Mr. Chairman, I would stress to you that our plan is not
the work of any one single legislator. It is the product of
painstaking negotiations conducted over several months. The
seven names that you see on the proposal are not the only ones
who contributed to it. We took the best ideas that we could
find from serious reform plans presented across the political
spectrum. Each of us had to make concessions that we did not
like. But we did this in the interest of reaching a bipartisan
accord.
We believe that our plan is indicative of the product that
would result from a larger bipartisan negotiation in the
Congress. Accordingly, we believe that it provides the best
available vehicle for negotiations with the President if he
chooses to become substantively involved. It was our hope to
put forth a proposal on a bipartisan basis, so that the
President would not have to choose between negotiating with a
``Republican plan'' or a ``Democratic plan.'' Stalemate will
not save our Social Security system.
OTHER REFORMS IN THE BIPARTISAN PLAN
The changes effected in our bipartisan bill do not, all of
them, relate solely to fixing system solvency.
One area of reforms includes improved work incentives. Our
proposal would eliminate the earnings limit for retirees. It
would also correct the actuarial adjustments for early and late
retirement so that beneficiaries who continue to work would
receive back in benefits the value of the extra payroll taxes
they contributed. The proposal would also change the AIME
formula so that the number of earnings years in the numerator
would no longer be tied to the number of years in the
denominator. In other words, every year of earnings, no matter
how small, would have the effect of increasing overall benefits
(Under current law, only the earnings in the top earnings years
are counted towards benefits, and the more earnings years that
are counted, the lower are is the resulting benefit formula.)
We also included several provisions designed to address the
needs of specific sectors of the population who are threatened
under current law. For example, we gradually would increase the
benefits provided to widows, so that they would ultimately be
at least 75% of the combined value of the benefits that husband
and wife would have been entitled to on their own.
We also recognized the poor treatment of two-earner couples
relative to one-earner couples under the current system. Our
proposal includes five ``dropout years'' in the benefit formula
pertaining to two earner couples, in recognition of the time
that a spouse may have had to take out of the work force.
WHAT OUR PROPOSAL DOES NOT DO
Unveiling a proposal as comprehensive as ours invariably
creates misunderstanding as to the effect of its various
provisions.
First, let me address the impact of our reforms on the
Consumer Price Index. Most economists agree that further
reforms are necessary to correct measures of the Consumer Price
Index, and our proposal would instruct BLS to make them.
Correcting the CPI would have an effect on government outlays
as well as revenues. This is not a ``benefit cut'' or a ``tax
increase,'' it is a correction. We would take what was
incorrectly computed before and compute it correctly from now
on. No one whose income stays steady in real terms would see a
tax increase. No one's benefits would grow more slowly than the
best available measure of inflation.
However, we wanted to be doubly certain that any effects of
the CPI change upon federal revenues not become a license for
the government to spend these revenues on new ventures.
Accordingly, we included a ``CPI recapture'' provision to
ensure that any revenues generated by this reform be returned
to taxpayers as Social Security benefits, rather than being
used to finance new government spending. This is the reason for
the ``CPI recapture'' provision in the legislation.
Our proposal would not increase taxes in any form. The sum
total of the effects of all provisions in the legislation that
might increase revenues are greatly exceeded by the effects of
the legislation that would cut tax levels. The chart showing
total cost rates makes this clear.
Our provision to re-index the wage cap is an important
compromise between competing concerns. Fiscal conservatives are
opposed to arbitrarily raising the cap on taxable wages. The
case made from the left is that, left unchanged, the proportion
of national wages subject to Social Security taxation would
actually drop.
Our proposal found a neat bipartisan compromise between
these competing concerns. It would maintain the current level
of benefit taxation of 86% of total national wages. This would
only have an effect on total revenues if the current-law
formulation would have actually caused a decrease in tax
levels. If total wages outside the wage cap grow in proportion
to national wages currently subject to taxation, there would be
no substantive effect. This proposal basically asks competing
concerns in this debate to ``put their money where their mouth
is.'' If the concern is that we would otherwise have an
indexing problem, this proposal would resolve it. If the
concern is that we should not increase the proportion of total
wages subject to taxation, this proposal meets that, too. I
would further add that the figure we choose--86%--is the
current-law level. Some proposals would raise this to 90%,
citing the fact that at one point in history it did rise to
90%. The historical average has actually been closer to 84%,
and we did not find the case for raising it to 90% to be
persuasive. Keeping it at its current level of 86% is a
reasonable bipartisan resolution of this issue.
CONCLUSION
Mr. Chairman, I thank you once again for using your
position of leadership to advance debate on this important
issue. I appreciate your courtesies in inviting us to testify.
I do hope that you and the rest of this Committee will look at
the total effects of our plan in evaluating what it would
achieve. I am confident that in doing so, you will find that it
is a reasonable basis for hope that we can achieve a bipartisan
agreement. I thank you again and would be pleased to answer any
questions that you may have.
[GRAPHIC] [TIFF OMITTED] T2789.016
[GRAPHIC] [TIFF OMITTED] T2789.017
[GRAPHIC] [TIFF OMITTED] T2789.018
[GRAPHIC] [TIFF OMITTED] T2789.019
[GRAPHIC] [TIFF OMITTED] T2789.020
[GRAPHIC] [TIFF OMITTED] T2789.021
[GRAPHIC] [TIFF OMITTED] T2789.022
[GRAPHIC] [TIFF OMITTED] T2789.023
Mr. Shaw. I would ask the witnesses, would it be better to
go to Senator Grassley now, since he was part of your bill?
Senator Gregg. We are all together on the same bill.
Mr. Shaw. Oh, Senator Kerrey is, too? Fine, then I will
recognize Senator Kerrey, excuse me.
STATEMENT OF HON. J. ROBERT KERREY, A U.S. SENATOR FROM THE
STATE OF NEBRASKA
Senator Kerrey. Thank you very much, Mr. Chairman and
Members of the Committee. I have a statement that I would just
ask to be included in the record as well as a copy of an
evaluation the Chief Actuaries of the Social Security
Administration have made.
Mr. Shaw. Chairman Archer announced at the early part of
this hearing that the full statements of all the witnesses will
be made a part of the hearing and invited all the witnesses to
proceed as they see fit.
Senator Kerrey. I thank the Chair for that.
Let me make a couple of points in addition to what Senator
Gregg has already done. First of all, there are two forks in
the road that we have to take as Members of Congress. Fork
number one is: Do we act today or do we delay reform? Do we
wait until tomorrow, defined as some other odd-numbered year,
or should we wait until 2034 when the system runs completely
out of money? Everybody who has evaluated this problem, whether
they are on the left or on the right, reaches the conclusion
that the sooner we address the problem, the smaller the problem
is. The longer you delay, the worse either the cuts in benefits
are going to be or the higher the increases in taxes are going
to be. And unlike Medicare, this is a fairly simple problem to
solve. This is not one where any staff member would have a
great deal of difficulty presenting reform options to a Member.
There is not a complicated set of facts to deal with here.
The question really is, are you willing to go to your
citizens in your congressional district or in your State and
tell them the truth: If you are under the age of 45, we have a
promise on the table that we can't keep. All discussions of
Social Security options--we have one that we have introduced--
need to be debated in the context of the actuaries' statement
that if you are under the age of 35, there will either be a 25-
or a 33-percent reduction in benefits awaiting you or a similar
increase in payroll taxes to accommodate the benefits that we
currently promised to people who are under the age of 45. These
are really the facts that we are dealing with here.
There really aren't an awful lot of options here to choose
from. We either take action now or we delay action and increase
the size of the problem in the future. No matter when you enact
reforms, it is going to be difficult to do. Whether you propose
reforms behind the shield of a Commission's recommendation or
you do it in an odd-numbered year when it is more favorable for
electoral reasons, there will always be plenty of reasons not
to enact reforms because when you look at the options, none of
them are very politically attractive--whether it is a tax
increase or a benefit reduction or some combination. Our
proposal does not favor a tax increase. I note the President
doesn't either. He doesn't think we should increase payroll
taxes. There may be some in Congress who favor a tax increase.
Let them put their proposal on the table. I think delay is the
worst option of all. Those who are arguing ``Well, let us wait
until next year or the year after,'' are arguing for steeper
cuts in benefits or steeper increases in taxes. Those are the
only two choices available to you.
The second fork in the road is a key one for me, especially
as a Democrat, and that fork is: Do you want Americans, when
they are eligible for an old-age benefit or a survivor or a
disability benefit--in our proposal, we leave the survivor and
the disability benefit just as it is. About 20 percent of all
beneficiaries use the survivor and disability benefit; we leave
that alone. We are talking in our proposal only about an old-
age benefit, and 1.1 million of 1.4 million Americans who took
that benefit in 1997 took it at age 62, 63 or 64 so it is an
old-age benefit that we are talking about here.
No matter when you take that benefit, the question that
creates another fork in the road is ``Do you want people to be
more dependent upon the government for their retirement and
their old-age needs, or do you want them to be less dependent
on the government?'' Our proposal takes the fork that says we
want them to be less dependent based upon the belief that in
addition to a defined benefit, which we retain, that the source
of real independence that comes in old age comes from ownership
of financial assets. We believe it is a mathematical certainty
that if you start at an early enough age, that regardless of
what your wage is, whether you are making $7 an hour or $700 an
hour, that it is possible for you, indeed, I would argue,
desirable, for you over the course of your working life to
accumulate ownership of financial assets and wealth.
Oftentimes, you will hear people say, ``The rich are
richer, and poor are getting poorer'' and then propose to
increase the minimum wage. Well, income and wealth are not the
same things, and so this proposal says in addition to making
certain that all beneficiaries are covered, we will give them
the opportunity to create wealth. Under current law, what we do
is we run the trust funds balance up to a very high amount and
in 2014 and over the next 20 years we draw the trust funds
down. To draw them down means you have to redeem the IOUs by
using incomes taxes and corporate incomes taxes; that is how it
is done. You are not going to replace the IOUs with additional
debt; you are going to redeem them by using income from
corporate income and individual income taxes over the next 20
years until the trust funds are insolvent. Under our proposal,
the trust fund ratio never drops down below 100 percent of a
single year's benefits. It starts at 193 percent; by 2074, the
trust fund ratio is over 500 percent. So, all beneficiaries
will get the promise that we already have on the table. The
second fork in the road, and you can design it any way you
want, is whether or not you want Americans to have more
financial security as a consequence of owning financial assets.
This proposal answers that question emphatically. Yes.
There are a number of specific changes in our proposal, Mr.
Chairman and Members of the Committee, that I would like to
identify, and I will try to identify them quickly. They are
included in my more lengthy statement that I have already, Mr.
Chairman, introduced into the record. Let me deal, first of
all, with the benefit cuts. Again, as I said, we have opted not
to increase payroll taxes. Some Members may. Some Members may
honestly say, ``No, let us raise payroll taxes.'' We say, ``No,
we don't want to increase payroll taxes.'' We achieve security
in the future for beneficiaries by making a number of changes
in the benefit structure. We increase the benefit computation
period for up to 5 additional years for newly eligible
retirees. Lower earning or two-earning couples will get 5-year
extra dropout years in anticipation that one spouse may have
taken time out of his or her career for child rearing. We
maintain the taxable wage base at 86 percent. We credit all
revenue from the taxation of OASDI benefits to the OASDI Trust
Fund. We reward work by increasing the size of early retirement
factors and delayed retirement credits.
Next, we use a more accurate cost of living adjustment for
all programs affected by the consumer price index; that is a
0.5 percent change in the consumer price index calculation. In
addition, any revenues generated as a result of the COLA
adjustment will be recaptured for the OASDI Trust Fund.
Last, we eliminate the hiatus years in increasing the
retirement age to 67, and we index the benefits. We do not move
eligibility age beyond 67. We keep the eligibility age exactly
as it is, but by eliminating the earnings test, it becomes a
true old-age benefit, no longer a retirement benefit. You don't
have to retire to get this benefit. It is an old-age benefit.
You can take it at 62; you can take it at 65. It is adjusted
under current law to 67. We eliminate the hiatus period, and we
adjust the benefits according to life expectancy increases
thereafter.
Mr. Chairman and Members of the Committee, again, as I
said, there are a limited number of reform options. We have
made the choice to make reductions in outyear liabilities.
There are no changes in benefits for people over the age of 62.
No one should go out and interview somebody over the age of 62
and ask them ``What do you think about the reduction in
benefits that Senator Kerrey is proposing?'' No reduction in
benefits will occur for any currently eligible beneficiary.
All of these changes, Mr. Chairman and Members of the
Committee, enable us to do two things. One, as I said, keep the
promise that we have on the table to all beneficiaries, whether
you are eligible today or whether you are going to be eligible
in the future. According to the actuaries of the Social
Security Administration, our reform proposal restores solvency
to the program; it is an actuarial balance for as far as the
eye can see beyond 2074. To every beneficiary that is alive
today, whether you are 1 year of age or 62 years of age, we can
keep the promise that we have on the table.
The second thing we do is we establish an opportunity for
individual beneficiaries to accumulate wealth over the course
of their life. I emphasize this, Mr. Chairman. The goal is not
to create savings accounts; that is a means to the end. The end
is to increase financial independence, to provide people with
real financial security by allowing them, through the Social
Security system, to accumulate wealth. Our plan offers a 2
percent payroll tax contribution, which is an effective
reduction in payroll taxes. Our plan also includes a government
savings match that allows wage earners of $36,000 or less to
contribute at least $726 a year. We believe that is necessary
in order to take advantage of compounding interest rates.
Our plan opens an account of $1,000 at birth and
contributes $500 for each of the first 5 years of life. The
most important variable in accumulating wealth is the length of
time over which you save the money. We believe, therefore, that
it is necessary to open those accounts at as early an age as
possible, and we make it possible for individuals to contribute
an additional unmatched, aftertax $2,000 to their account every
single year.
Mr. Chairman, Members of the Committee, I emphasize what I
said at the beginning: there are two choices that we have as
Members of Congress. One, we can take action now or we can
delay. Many people are saying, ``Let us delay.'' Mr. Chairman,
I appreciate more than I can say your leadership in saying that
we have got to act now, because if you don't, the problem gets
worse.
Second, the next fork in the road is do you want Social
Security to become a source of wealth and financial security? I
believe we are better off having people who are in the work
force saying that at some point when they become eligible, they
are going to be less dependent on the government, not more
dependent on the government for their postwork needs, and that
is what our proposal does.
Mr. Chairman and Members of the Committee, I would like to
make one further comment. Lots of people are saying, in both
the Republican and the Democratic party, that we ought to have
a lockbox proposal. I have got great respect for both Democrats
and Republicans that have their versions of the lockbox, but,
as all of us know who have looked at this thing, it is going to
be similar to when Geraldo Rivera opened Al Capone's safe on
national television. They are going to open the thing up 30
years from now, and there is not going to be anything in it.
This lockbox is a way for us to postpone action. It is a way
for us to say, ``Well, we want to get beyond this next
election, and then we will deal with it when we are more secure
politically in some way, shape, or form.''
So, again, I appreciate very much, Mr. Chairman, your
leadership in this in saying that we cannot delay; that we
should take action sooner rather than later, and I hope that
our proposal or some proposal like it becomes the law of the
land rather soon.
[The prepared statement follows:]
Statement of Hon. J. Robert Kerrey, a U.S. Senator from the State of
Nebraska
Thank you, Mr. Chairman, for giving me the opportunity to
come before the Committee to talk about the Bipartisan Social
Security Reform proposal. I appreciate your ongoing interest in
and commitment to reforming the Social Security program. This
hearing provides an important opportunity to outline the major
differences between different approaches to Social Security
reform.
I am delighted to be here today with Senators Breaux,
Gregg, and Grassley to talk about our bipartisan plan to reform
Social Security. Our goal was to put together a bill that would
achieve actuarial solvency and reduce programmatic liabilities
in a way that improved the retirement security of women and low
income workers and did not affect current retirees. The
proposal we are here to discuss today is the fruit of these
discussions.
Mr. Chairman, I would like to begin my remarks by making a
comparison between seismologists and politicians. In
seismology, scientists look at a calm, stable surface and know
that massive tectonic plates are moving slowly below the
surface in directions that portend the inevitable arrival of an
earthquake. Seismologists are trained to examine the small
shifts underneath our ordinary lives. Through these
examinations, they predict when the extraordinary moments will
arrive.
Thus are seismologists and elected politicians separated by
the habits of our ways. For in our lives as politicians, we are
encouraged to give priority attention to the details of life on
the surface. The tectonic plates are rarely our concern until
and unless they produce an earthquake.
Social Security insolvency is one example of a slowly-
building public policy earthquake shifting beneath the surface
of our every day lives--waiting to create a fiscal crisis in
2034. The actuaries at the Social Security Administration--the
political equivalent of seismologists--have the technical
capability to warn us years in advance about the extraordinary
demographic events that will cause earthquakes of the ``public
policy crisis'' variety. Most recently, the actuaries have
predicted that massive demographic movements will begin to
occur in ten years and last for the next 20 years. During that
time period, the number of Americans eligible for an old-age
Social Security benefit will increase from 37 million to 77
million, while the number of working Americans whose wages will
be taxed to pay these benefits will only increase from 137
million to 145 million.
Barring a sudden and large increase in productivity, the
actuaries tell us this massive demographic shift will produce
an unavoidable conflict between eligible beneficiaries and
those whose wages are taxed to pay the benefits. In 2034, some
future Congress will be forced to choose between reducing
benefits or increasing taxes by 25 to 33 percent. The longer
Congress waits before changing the law, the more painful these
tax increases and benefit cuts will be.
There are at least two more demographic shifts quietly
taking place which affect the programmatic costs of the Social
Security program. First, Americans are living longer. When the
Social Security program was created in 1935, life expectancy
was 60 for men and 65 for women. Today, the average male will
live to 73 and the average female to 80. In 2030, men and women
will live to 77 and 82.4, respectively. Life expectancy for
those who live to age 65 is even longer. Life expectancy for
these healthy American men and women is 80 and 84 today, and
will be 84 and 86 in 2030.
A second trend is that beneficiaries are taking their old
age benefit earlier in life. In 1997, 1.1 million of the 1.4
million new beneficiaries opted to take reduced benefits under
the early eligibility program. Most people take early, reduced
benefits because they know that if they live to age 72, they
will earn back all of the benefits they lost through the
reduction.
Let me mention some of the other trends that add to the
urgency for Congress to act. First, there is a growing gap
between the wealthiest and the poorest Americans. Secondly, the
number of Americans for whom Social Security is 90% or more of
their old age income is growing. This means that a large number
of workers--including the vast majority of low income workers--
are depending on Social Security for their sole source of
income at retirement. This trend is particularly disturbing in
light of the fact that the household savings rate among low and
middle income and younger workers is so low.
The urgent need for reform only becomes more obvious if we
look at the impact of our inaction on future workers and
retirees. The reason we are trying to keep Social Security
solvent for 75 years, is to keep the Social Security promise to
all beneficiaries--current and future--who are alive today.
Simply keeping the system solvent for 35 years--and letting the
Trust Funds become insolvent--means trouble for workers who are
45 years of age or younger. Failure to act soon will have dire
consequences for these current workers.
Recently, seven members of the Senate--three Democrats and
four Republicans--announced a proposal that would restore
solvency to the Social Security program. This proposal
preserves the current disability and survivors benefit
programs--currently used by 13.7 million Americans. In
addition, this proposal will impose no benefit reduction on any
beneficiary age 62 or over, eliminates the earnings test for
retirees who continue to work, and does not increase the
payroll tax. The proposal will close the wealth gap and give
low income workers a substantial boost in creating and
accumulating wealth. Not only will our proposal boost the
account contributions of low income workers, but our plan also
increases the traditional defined benefits of lower income
workers by increasing their replacement rate. Furthermore, our
proposal will improve the Social Security benefits of widows.
Individual Accounts: The Centerpiece of the Bipartisan Social Security
Reform Plan
New individual savings accounts owned by the beneficiary
are the most important and least understood portion of our
proposal. These accounts are not an end in themselves. They are
a means to an end. The purpose of these accounts is threefold:
1) to close the wealth gap; 2) to decrease dependency on the
Federal government for financial security in retirement through
increased ownership of financial assets; and 3) to reduce
future unfunded liabilities by prefunding a portion of a
worker's Social Security benefit. The individual accounts
portion of our proposal has four components:
1. Starting in 2000, workers will divert 2 percentage
points of their payroll (FICA) tax contributions into an
individual savings account. Workers will choose from among
several broad-based investment funds administered like the
Federal employees' Thrift Savings Plan (TSP).
2. Low income workers will have the opportunity to boost
their account contributions by participating in a government
match program. The match works as follows:
For the first dollar of savings, qualified workers
will get an automatic government contribution of $100.
Beyond the first dollar of personal savings, each
qualified worker will get an additional dollar-for-dollar match
from the government.
Qualified workers include all workers whose 2% contribution
is less than 1% of the taxable wage base ($726 in 1999)--this
would allow all workers earning less than $36,300 in 1999 to
participate in the savings match program. The sum total of the
2% contribution, the $100 grant, and the dollar-for-dollar
match may not exceed 1% of the taxable wage base ($726).
3. All workers will have the opportunity to add an
additional $2,000 of after-tax savings to their individual
accounts each year.
4. KidSave accounts will be opened for all children at
birth with a $1,000 contribution. An additional $500 will be
added to the KidSave account for each of the first five years
of life. The goal of the KidSave accounts is to maximize
retirement savings accumulations by allowing all workers to
save over a longer period of time.
The impact of these wealth accounts for lower and middle
income workers will be dramatic. Regardless of their hourly
wages, workers will be able to create substantial amounts of
wealth and establish financial independence by taking advantage
of the magic of compounding interest over a long period of
time. If our proposal became law this year, fifty years from
today a new generation of Americans would be heading towards
their retirement years with more wealth, security, and
independence.
Consider the impact on a male baby born in 1999 who grows
up, graduates in high school in 2017, enters the work force
after graduation at an inflation adjusted $7 per hour, and
remains there for forty five years. Under current law that
individual would be eligible for a defined benefit only; under
the proposed change that individual would be eligible for a
defined benefit plus a private annuity from their wealth
account.
At $7 per hour, this individual's annual salary would be
approximately $13,500. If Congress cuts benefits in 2034, this
future retiree would receive a monthly benefit check worth
$428.
Under our proposal, this individual (taking early
retirement) would receive a monthly benefit check worth at
least $644 if he invested at the low-risk, low-return bond
rate. If he took advantage of a higher rate of return, he could
expect to see a monthly benefit of $775. If he chooses to
participate in the government savings match program and uses
his KidSave account to supplement his monthly income, this low-
income individual will have an even higher monthly benefit.
Programmatic Adjustments in the Bipartisan Social Security Reform Plan
Our proposal also calls for making several programmatic
changes that will improve widows benefits, increase the defined
benefit for low-income individuals, and contain programmatic
costs. These changes include:
1. Establishing a new bend point in the PIA formula factor
which will boost benefits and increase the replacement rate for
low income workers.
2. Increasing the widow(er)'s benefit formula so that
widow(er)s will eventually receive 75% of the combined benefit
of both spouses.
3. Eliminating the retirement earnings test for all
individuals age 62 and older.
4. Increasing the benefit computation period for up to 5
additional years for newly-eligible retirees. However, the
lower earning of a two-earner couple will get five extra
``drop-out'' years, in anticipation that one spouse may have
taken time out of his or her career for child-rearing.
5. Maintaining the taxable wage base at 86%--the current
percentage of wages subject to the Social Security payroll
(FICA) tax. Rather than letting the taxable wage base float
with the annual percentage growth in wages, this new
formulation will permanently keep the taxable wage base at 86%
of wages.
6. Crediting all revenue from the taxation of OASDI
benefits to the OASDI trust funds by 2014. Currently, retirees
earnings over $34,000 ($44,000 for couples) must pay taxes on
85% of their benefits. The income from the taxes on the first
50% of their benefits goes to the OASDI funds, while the
remaining tax revenue flows into the HI Fund. This provision
ensures that all Social Security tax dollars stay in the Social
Security program.
7. Rewarding work by increasing the size of early
retirement factors and delayed retirement credits.
8. Using a more accurate cost-of-living adjustment (COLA)
for all programs affected by the Consumer Price Index (CPI).
This COLA adjustment (.5%) will not be applied to the benefits
of any workers or retirees currently age 62 and older. In
addition, any revenues generated as a result of the COLA
adjustment will be ``recaptured'' for the OASDI Trust Funds.
9. Creating a life expectancy index. To reflect both past
and future increases in life expectancy, our proposal would
eliminate the hiatus years in increasing the retirement age to
67 and would index benefits to life expectancy thereafter.
This proposal boosts benefits, reduces taxes, and ensures
that large portions of our discretionary budget will not be
needed to pay Social Security benefits. The sponsors of this
proposal believe that time is not on our side. Delay will hurt
those who rely on Social Security the most. Delay will only
allow the problem to become larger--and the solution more
difficult. Delay is especially devastating for Americans who
would benefit if the law made it possible for all workers to
share in the American dream of financial independence through
ownership of financial assets.
What we are not willing to accept is political inaction--
inaction despite the full knowledge that the tectonic plates
are shifting dangerously below us. These shifts will cause an
earthquake in the not too distant future, an earthquake which
will destabilize the financial security of tens of millions of
American working families. Unlike the destruction of a geologic
earthquake we have the power to prevent this one. The sponsors
of the Bipartisan Social Security Reform Plan intend to do all
we can to see that this Congress acts sooner rather than later.
We welcome helpful suggestions on how to improve our
proposal. I look forward to answering any questions that the
Committee may have.
Chairman Archer [presiding]. Senator, thank you. Thank you
for your presentation, and thank you for your being out front
on this issue. I certainly do agree with you. We need to act,
and we need to act this year, and I am just hopeful that we can
find a way to do that, but my same compliments extend to all
four of you, because all four of you have been willing to get
out front and to design a plan that does save Social Security
for 75 years. Some say, ``Oh, well, that is not necessary,''
but, frankly, we ought to be extending that with the life
expectancy going up to where we are projecting for 80 or 85
years instead of the 75 that has been traditional. But for
right now, we will work with the 75, and I do compliment all of
you.
Senator Grassley.
STATEMENT OF HON. CHARLES E. GRASSLEY, A U.S. SENATOR FROM THE
STATE OF IOWA, AND CHAIRMAN, SPECIAL COMMITTEE ON AGING
Senator Grassley. Well, I need to compliment you, because
your legislation moved the ball forward quite a bit on this
side of the hill, and each of us Senators in our respective
forums have had an opportunity to do that. Senator Breaux and I
have worked together as Chairman and Ranking Member of the
Aging Committee. We have had six hearings on Social Security
reform. I have had an opportunity to serve with Senator
Moynihan as Cochair of the Americans Discuss Social Security.
I want to concentrate on that area that Senator Gregg has
suggested that I have been having my main interest in and that
is economic justice for women. I believe that the bipartisan
plan which we support addresses women's needs, and so I would
explain it this way: Women are more likely to move in and out
of the work force to care for children or elderly parents. They
should not be punished for the time that they dedicate to
dependents. Our proposal provides five drop-out years to the
spouse with lower earnings in every two-earner couple.
Women, on average, earn less than men. Our proposal
provides all workers with an opportunity to contribute to their
individual accounts an amount equal to 1 percent of the taxable
wage base. For this year, that would be $726. Workers with
combined 2 percent contributions of less than 1 percent of the
taxable wage base would receive $100 from the U.S. Treasury.
Furthermore, they will receive a dollar-for-dollar match by the
government on voluntary contributions up to 1 percent of the
wage base. Also, our proposal creates an additional bend point
to the benefit formula to boost the replacement rate for low-
income workers.
Women live longer than men. At age 65, men are expected to
live 15 more years, whereas, women are expected to live almost
20 years. Our proposal addresses that reality by allowing money
accumulated in the individual accounts to be passed on to
surviving spouses and children. Furthermore, our proposal would
increase a widow's benefit to 75 percent of combined benefits
that a husband and wife would be entitled to based on their own
earnings.
As many older Americans lives longer, healthier lives, as
well, they are eager to remain in the work force in various
capacities. Others remain in the work force out of necessity.
We would eliminate the earnings test for beneficiaries age 62
and older so that retirees may continue to contribute to the
economy without being penalized. Currently, benefits are
reduced for over 1 million beneficiaries, because their wages
exceed earnings limits.
Our proposal would also correct the actuarial adjustment
for early and late retirement. As you know, individuals do not
receive back the value of payroll taxes contributed if they
delay their retirement. This proposal increases both the early
and delayed retirement adjustments to levels appropriate to
recognize additional tax contributions. Retirees who remain in
the work force could also contribute to their individual
accounts.
The first step on the road to reforming Social Security was
to engage the American public in a policy debate. No action
could take place without Americans being able to make informed
decisions about how to design a Social Security Program which
would meet the needs of the next century. Now, America is ready
for reform. According to a recent poll brought about by the
Americans Discuss Social Security, 58 percent of those sampled
feel that reform should take place before the year 2000
election.
The second step in saving Social Security, is the funding
problem that the system faces. Several proposals have been put
forward to save Social Security. Now we must work together in
that next step and that is enacting legislation that restores
the long-term solvency of Social Security.
I must stress the importance of saving Social Security
sooner rather than later. Do we work now to prepare for the
retirement of the baby boomers and subsequent generations or do
we just sit back and end up, as we have been, seemingly
unprepared for the long term? According to Social Security
actuaries, in 2075, the last year of the 75-year evaluation
period, income to the Social Security Program will be $14
trillion, but we will owe $21 trillion in benefits, and,
obviously, you can't take more hay out of the barn than you put
into that barn. Plain and simple, that translates into stiffer
reforms that will need to be made for each year that we don't
enact legislation to protect the program so many Americans rely
upon.
So, I thank you for this opportunity and for your
leadership, Chairman Archer, on this proposal and for having
this hearing. I would be happy to entertain any questions after
Senator Breaux.
[The prepared statement follows:]
Statement of Hon. Charles E. Grassley, a U.S. Senator from the State of
Iowa; and Chairman, Senate Special Committee on Aging
Thank you Chairman Archer. I am pleased to have the
opportunity to be here today with my colleagues from the Senate
to discuss our bipartisan proposal to save Social Security. I
want to commend you and your colleagues on the Committee for
holding this hearing. It is an important step on the road to
reforming Social Security.
My colleagues have thoroughly outlined the proposal we have
put together. I think it is worth restating some of its
positive points. Our proposal does not raise the payroll tax.
It gives middle and low income workers the opportunity to
create wealth. It works to protect the members of our society
who are most vulnerable and dependent on the Social Security
system. And, most importantly it restores the long-term
solvency of the program that millions of retired and working
Americans and their families rely on to provide the basis for
their retirement income security.
There are a few specific aspects that I would like to
highlight. In putting together this proposal, this group has
been very conscientious of how changes to the Social Security
system would affect different populations. As we have moved
forward in the process to reform Social Security, one group
that I have been particularly concerned about is women. In
February, the Aging Committee, which I chair and of which
Senator Breaux is the ranking member, held a hearing examining
how women would be affected by an individual account component.
One of the things that came out of that hearing was that, while
women's needs from the Social Security system are magnified
compared to men's because of their longer life spans and
different work patterns, those issues can be addressed as part
of a reformed system. I believe the bipartisan plan which my
colleagues and I support addresses the needs of women. Let me
explain how:
Women are more likely to move in and out of the workforce
to care for children or elderly parents. We recognize that
there is a high likelihood that a spouse may take time away
from work to raise children or care for elderly parents. They
should not be punished for the time that they dedicate to
dependent family members. Under our proposal, five ``drop out''
years would be provided to the spouse with lower earnings in
every two-earner couple.
Women, on average, earn less than men. Our proposal
provides all workers with an opportunity to contribute to their
individual accounts, at a minimum, an amount equal to one
percent of the taxable wage base. One percent of this year's
taxable wage base, which is $72,600, would be $726. Wage
earners whose combined two percent contribution is less than
one percent of the taxable wage base will receive a $100
contribution by the federal government when they make their
first voluntary contribution of $1. Furthermore, they will
receive a dollar-for-dollar match by the government on
voluntary contributions up to a total equal to one percent of
the wage base.
In addition, our proposal creates an additional bend point
to the Social Security formula to boost the traditional Social
Security replacement rate for low-income workers. Under current
law, beneficiaries receive 90 percent of the first $505 of
their average indexed monthly earnings, plus 32 percent of
their average indexed monthly earnings over $505 through
$3,043, plus 15 percent of their average indexed monthly
earnings over $3,034. Our proposal would create a new bend
point so that there would be a 90 percent bend point, a 70
percent bend point, a 32 percent bend point and a 15 percent
bend point. This would enhance the traditional Social Security
benefit for low and middle income workers.
Women live longer than men. At age 65, men are expected to
live another 15 years, whereas women are expected to live
almost 20 more years. One way in which our proposal addresses
that reality is by allowing money accumulated in the individual
accounts to be passed on to surviving spouses and children.
Furthermore, our proposal would increase the widow's benefit to
75 percent of the value of the combined benefits that a husband
and wife would be entitled to based on their own earnings.
Developments in modern science allow many older Americans
to live longer, healthier lives. Their minds are sharp and they
are eager to remain in the workforce in various capacities.
Others remain in the workforce out of necessity. Our proposal
would eliminate the earnings test for all beneficiaries age 62
and older so that retirees may continue to contribute to the
American economy without being penalized. Under the current
earnings test, benefits are reduced for over one million
beneficiaries because their wages exceed the earnings limit.
Our proposal would also correct the actuarial adjustment
for early and late retirement. As you are already aware, under
current law, individuals do not receive back the value of extra
payroll taxes contributed if they delay retirement. This
proposal increases both the early and delayed retirement
adjustments to the level appropriate to recognize additional
tax contributions. Of course, retirees who remain in the
workforce will also be able to continue to contribute to their
individual account.
The first step on the road to reforming Social Security was
to engage the American public in the policy debate. No action
could take place without the citizens of the country being able
to make informed decisions about how to design a Social
Security program which would meet their needs in the 21st
Century. We dedicated last year to a year of debate about
Social Security reform. The Administration, members of Congress
and many organizations held forums, roundtables, and seminars
on Social Security reform in an effort to engage the American
public in this critical debate. Now, the American public is
ready for reform. According to poll results released by
Americans Discuss Social Security last month, 58 percent of
those sampled feel that Social Security reform should take
place before the 2000 elections.
The second step in saving Social Security was to develop
proposals which address the future funding problems our Social
Security system will face. As is evident today by the witnesses
at this hearing, several proposals have been put forward to
save Social Security. Now we must work toward the next, and
possibly most difficult, step: enacting legislation which will
restore the long-term solvency of the Social Security program.
I want to stress the importance of saving Social Security
sooner rather than later. There is a famous fable about an ant
and a grasshopper. The ant worked tirelessly during the warm
summer to prepare for the long winter. The grasshopper did
nothing to prepare. We are at a point where we as Congress and
a nation must decide whether we are going to be ants or
grasshoppers: whether we are going to work now to prepare for
the retirement of the baby boom generation and subsequent
generations, or whether we are going to sit back and end up
being unprepared.
Just eight years from now, the first year of the baby boom
generation will be eligible to collect early retirement
benefits. Seven years after that, when those retirees are just
69 years old, the Social Security program will run a deficit of
$49 billion and the federal government will be forced to start
calling in those IOU's. According to the actuaries at the
Social Security Administration, in the year 2075--the last year
of the 75-year actuarial time horizon--income to the Social
Security program will be $14 trillion, however, we will be
obligated to pay $21 trillion in benefits. Plain and simple,
that translates into stiffer reforms that will need to be made
for each year that goes by and we don't enact legislation to
protect the program that so many older Americans rely on.
Chairman Archer. Thank you, Senator Grassley.
Senator Breaux.
STATEMENT OF HON. JOHN B. BREAUX, A U.S. SENATOR FROM THE STATE
OF LOUISIANA
Senator Breaux. Thank you, Mr. Chairman and Members of the
Committee. I am delighted to be here. I will tell you that I
have been to the Ways and Means Committee more times this
morning than I did in the 14 years that I was in the House of
Representatives. This is my third visit over here, but I am
delighted to have the opportunity to share some thoughts with
you, and I congratulate you all for doing this. I can't think
of anything more difficult than sitting and listening to a
bunch of other Members of Congress talk about Social Security
and what our plans are to reform it. So, I congratulate all of
you for taking the time to do it. This is not an easy exercise,
and we have all sat on that side and listened to ourselves
talk, and it is very, very difficult.
The conventional wisdom is that you can't fix Social
Security this year, because next year is an election year, and,
obviously, if you follow that line of thinking, you can't fix
it next year, because it is an election year. So, with that
line of thinking, we will never do anything to fix a problem
that affects not just the 40 million Americans who are on the
program, but their children, their grandchildren, and
generations to come. So, I congratulate all of you for taking
the time and for listening to those who have plans and ideas
about what to do.
And I will start off by saying that I happen to believe
that this can be a win political process for everybody. I mean,
good policy is good politics, and if we are not smart enough to
sell good policy to our constituents as being good politics,
then we are all in the wrong business. What we cannot continue
to sell is failure, and what I think that we as a Congress--
both sides are guilty of this in Medicare and Social Security,
alike--we blame each other for failures. ``It is their fault we
didn't pass anything.'' ``No, it is their fault we didn't do
anything.'' ``No, it is your fault, because you didn't run the
program properly.'' ``No, it is your fault, because you want to
gut the problem.'' So, we have been arguing for several years
now about whose fault it is that nothing has been done. And I
would suggest that the American people are really getting
pretty tired of that argument. They are starting to say that
all of you people up there can't get anything done, because you
are worried about who is going to get the credit and who is
going to get the blame.
So, I think that we have a unique opportunity, Mr. Chairman
and Members of the Committee, that this year will be a little
bit different in that we can come together. You are not going
to write a program that only Democrats can vote for that is
ever going to become law, and you are not going to write a
Republican plan that is ever going to become law as long as you
have a Democratic President who says, ``I can't accept some of
the things that you have in it.'' I mean, the need is obvious
that we are going to have to come together and work on things
that we don't totally agree with but is good public policy, and
then we can go back and say, ``Look what we did.'' And we can
argue about who is going to get credit for it, but that is a
much better argument arguing about success than arguing about
blaming the other side for failure. It is better to argue about
success than it is to argue about failure and whose fault it
is.
What we have today--and I am not going to get into details,
because I think my colleagues probably did it much better than
I am capable of doing it--but we have the only bipartisan plan,
Republicans and Democrats. We have the only bicameral plan. We
have got Jim Kolbe and Charlie Stenholm who are going to follow
I think, and they are going to present the same thing that we
are presenting. It has got some things in it that Democrats are
not going to like, and it has got some things in it that
Republicans are not going to like, but it does represent the
House and the Senate, Republicans and Democrats offering
something that I think makes sense.
And I congratulate you, Mr. Chairman. You have put
something out on the table. I mean, you have been willing to
say, ``OK, we are going to have something out there,'' and we
have done the same thing. We have all been willing to say,
``OK, we are going to go first. Here it is, take a shot at it,
but do something with it. Just don't say we are not going to do
anything.''
I think that one of the real features of our plan is the 2
percent in individual retirement accounts that we mandate
people establish, and it is not a novel approach. It is what
every one of you have. It is what everyone behind you has in
the Federal Thrift Savings Plan. They put money in the Thrift
Savings Plan. They can pick a low option, a low risk, a high
risk, or a medium risk. It is managed by a private investment
group, and they pick the investments. A low risk is government
bonds; a medium risk is a combination of bonds and also the
stock market, and a high risk is the stock market, S&P 500
market. And they pick and choose, and it has been very
successful.
It is, I think, impossible to totally privatize the system.
I would oppose it. Some people think it is the right thing to
do. It is not going to happen. It is not going to happen in
this political atmosphere. Others argue, ``Well, don't do
anything, and we will just wait it out and hope that it cures
itself,'' and that it is irresponsible. So, there is something
in between making it all private and doing nothing with regard
to private investment that I think is acceptable, and that is
what we have recommended, and we say 2 percent is invested in
individual retirement accounts. They can own it; they can
inherit it, and one of the big differences is they keep what
they make.
I think your plan, Mr. Chairman, suggests that, well, if
you have a private investment account and that what you get you
reduce your Social Security benefits as a result of what you
got from your private account. We reduce it by the amount that
you would have gotten had you kept it in the Social Security
system at 3 percent return, but you get the extra, so there is
an incentive to save. You want to put it in the individual
account, because you know that you will actually make more
money from your account if you invest it appropriately and
properly. It is not the government investing, but is also the
individuals doing it through a professional group that would
manage the money just like we have in the Thrift Savings Plan
for the Federal employees.
We have a CPI correction. That is how we partially finance
it, and I think that is important to make it be reflective of
what the real consumer price index gets, and I think that is
the right way to go.
So, anyway, I just would say, I mean, thank you for
listening to us, and thank you for listening to all the other
Members; that has got to be brutal. I know we have done it on
our side, and it is brutal. But thank you all for being here,
and I just think that we ought to maybe this year try and do
something differently from what we have been doing and get a
plan that makes sense that is not perfect from a Democratic
perspective, and it is not perfect from the Republican
perspective, but it is a heck of a lot better than we have
right now, and I would suggest that what we have offered I
think meets that criteria. Thank you very much.
[The prepared statement follows:]
Statement of Hon. John B. Breaux, a U.S. Senator from the State of
Louisiana
We will all soon face the formidable task of revamping the
cornerstone of American social policy--Social Security. I
believe the proposal our bipartisan group has put forth is a
step in the right direction. In 1935, Social Security began as
part of the bold vision of President Franklin D. Roosevelt. He
argued that this country demands ``bold, persistent
experimentation,'' challenging future improvements for Social
Security. As we face reform, the question is whether to just
restate this sacred contract or seize an opportunity to
``persist'' with the vision and experiment of Social Security.
It is time for both. President Roosevelt viewed Social
Security as ``development towards that goal, rather than a
finished product...we should be constantly seeking to perfect
and strengthen it in the light of our accumulating experience
and growing appreciation of social needs.'' After 63 years of
Social Security, the task falls to us all to ask: Is this the
best we can do to provide Americans with economic security?
The driving force propelling the Social Security debate is
that comprehensive reform must happen in 1999. For both
economic and political reasons, everyone agrees that next year
will present a rare and limited window for reform. If this time
frame is viewed in earnest--as it should be--there is no time
for partisan bickering, rhetorical battles or demagoguery. We
must immediately move to build a consensus through realistic,
centrist solutions.
It is my belief that there are four corners of Social
Security reform: Individual Accounts; Increased Progressivity;
Strengthening the Disability Program; and Fiscal
Responsibility. Within these four corners, consensus can be
found between Democrats, Republicans and the American people.
Our plan was guided by these four corners.
Individual Accounts
If we are not careful, we will run recklessly into massive
gridlock between individual accounts versus collective
investment. This will make reform in 1999 impossible, and we
will have failed in our responsibility to reform Social
Security.
Gridlock is avoidable. The concept of creating
opportunities for equity investment through individual
accounts--if done properly--can achieve a middle ground by
combining the best of both worlds.
Experts agree that equity investment has a proper role in a
long-term, prudent retirement strategy. This fundamental
economic advice is true at every income level. Equity
investment and the magic of compound interest should be
available to every American. If not, these individuals will
only be pushed further into the fringe of the economy. We are
supposed to bring to an individual's doorstep opportunities
that our capitalist markets alone will not provide.
The goal of Social Security is to provide economic security
to those at the bottom of the economic pyramid. In 1935, during
an era of economic hardship, we chose to do that through a
system that redistributes wealth. This foundation of social
insurance must be maintained, but Social Security should emerge
from reform ready for the post-industrial, global economy. We
should accept Roosevelt's challenge not to look at Social
Security as a finished product, but as development of the goal.
Shouldn't we do more than simply sustain those on the fringe of
economy? Shouldn't we help bring these Americans into the
economic mainstream?
While an objective of individual accounts is to expand
investment options, there is more at stake. If we offer the
opportunity for equity investment to the government, not
individuals, we miss an opportunity to evolve the Social
Security system. Adding individual accounts to Social Security
builds upon the social insurance by providing individuals with
a direct link to economic advancement. This is the policy that
will reaffirm and reconnect the American people's faith in
Social Security.
Increased Progressivity
Our individual accounts do not lessen Social Security's
progressivity. In our reform proposal, we increase
progressivity through several provisions, including bend points
changes and matching contributions for low and middle income
workers. A low-income worker's individual account would be
purely a bonus above their traditional benefit.
As we rush to protect economic security in old age, we can
not ignore that the most effective way to provide economic
security is to provide economic development throughout a
lifetime.
Strengthening the Disability Program
One-third of Social Security beneficiaries are not
retirees, but disabled Americans. The disability program is
essential to the safety net and it is in the worst financial
shape. It, too, must be strengthened and modernized.
The disability program must be examined in the context of
overall reform, yet its policy issues are not necessarily
linked with retirement policy. The retirement aspect of Social
Security actually lends itself to a broader look at pension and
personal savings policies that the Congress must address.
The disability program is part of a complex web of federal
and state programs. Issues spilling over into Medicare,
Medicaid, SSI and vocational rehabilitation will all need
thoughtful examination. We should move to establish the
appropriate forum to debate and discuss disability issues.
Fiscal Responsibility
There are several components to real, honest fiscal
responsibility. First, we must not depend on projected budget
surpluses to fix Social Security or to fund ``no pain''
solutions. Let's be clear, we have no budget surpluses.
Projected budget surpluses remain a largely unrealized victory.
A recession could wipe out more than half the projected
surpluses.
There is a danger in our message on Social Security--the
public may believe ``save the surplus for Social Security'' is
the equivalent of saying ``the surpluses will save Social
Security.'' Worst yet, some policy makers may actually start to
believe this. The next century will bring varying economic
scenarios and Social Security will have to withstand them all.
Real Social Security reform requires tough choices. Sending
any other message to the American people is wrong. If we spend
one dime of an unrealized surplus to avoid making a politically
tough, but necessary choice--it will be nothing short of a lie
to the American people.
We also must look beyond solvency. Even if Social
Security's books were balanced, an unrestructured program would
absorb nearly 18 percent of income subject to payroll taxes, up
from the current 12.4 percent. The unfunded liabilities of
Social Security nears $3 trillion and will have to be paid with
taxes not yet collected. We must protect future generations and
tomorrow's economy from this daunting tax burden.
Finally, it is irresponsible to jeopardize other priorities
because we do not have the political will to make difficult
decisions. Continued economic growth depends upon increased
productivity. Increased productivity depends upon a growing
labor force and greater worker output. But, labor force growth
has slowed dramatically with little chance of reversing, so we
must rely on greater productivity.
Increasing a worker's productivity means investing in
training, education, health and nutrition as well as
technologies and infrastructure. These investments are even
more critical as America's workforce becomes more racially and
ethnically diverse, because historically minorities have not
had the same access to health, education and training.
We will soon face a momentous collision of financial
pressures. Entitlement spending is bearing down on the federal
budget. This crowds out dollars for other discretionary
investments, just when these investments will be needed to
counter changes in the labor market and continue economic
growth. We must properly prepare for this collision by
balancing all policy priorities, not by simply increasing
revenues to entitlement programs.
I am confident that within these four corners of reform, we
can find a centrist, bi-partisan solution to live up to our
responsibility to reform Social Security in this Congress.
Senator Gregg. Mr. Chairman. I apologize, I am going to
leave. I am marking up my appropriations bill, which has a
minor item called the census amendment that I know there is
some interest in on your side.
Chairman Archer. Senator, you are excused, and I am sure
you will be adequately represented by the three remaining
colleagues of yours.
Senator Gregg. Very much so. So, I thank you for your
courtesy.
Chairman Archer. Thank you for coming.
Senator Breaux, it is not difficult to listen on a subject
that is as important as this is and particularly where there
are people who are genuinely interested in trying to find
solutions and not just some sort of a political niche. I think
more of us have got to join in that frame of mind in that
approach.
Having said that, all plans are subject to some criticism
and some reservations and some ways of saying, ``Oh, but what
about this and what about that?'' But there are some things
about your plan that are different that I would like to be able
to inquire about. You do cut benefits, which distinguishes you
a little bit, probably significantly, from a lot of other
plans. At least based on AARP's evaluation of what is a benefit
cut, you cut benefits, and perhaps that is the direction to go,
but it is nevertheless an essential part of your plan to make
it work. When you reduce the CPI, Consumer Price Index, you do
it only for new retirees, as I understand it.
Senator Breaux. We do it for anybody who is adjusted for
CPI, including the income tax indexing is adjusted, as well,
and it doesn't affect anyone 62 and over.
Chairman Archer. I understand. So, that would be only----
Senator Breaux. But it is not just retirees. It is also
other parts of the Federal Government that uses the CPI.
Chairman Archer. Right. I was going to get to that. But
when you reduce the CPI, for my first line of inquiry, you
reduce it only for new retirees, not for those who are
currently retired.
Senator Breaux. That is correct.
Chairman Archer. And I remember having lived through 1977
and Sunday morning and referred to what we did then. And I was
terribly troubled about the notch problem that was going to be
created, and I argued against what the Congress did and voted
against that bill. We have suffered ever since then from the
notch problem, much of which is misunderstood but nevertheless
has been a big, big item in our town meetings, and I know you
have run into the same thing over the years. Are you not
creating another notch problem?
Senator Breaux. By accurately reflecting the inflation
index?
Chairman Archer. No, no. By leaving the current CPI in
place for current retirees and then in 1 year using a different
CPI for people who retire thereafter. You are going to end up
with two different benefit levels, I believe, unless I am
misreading this, for people with the same earnings record, and
I worry about another Dear Abby column which will once again
unleash a new notch group on the Congress of the United States.
Senator Breaux. Well, I think the rationale for doing it
the way we did it, Mr. Chairman and Members, would be to say
that those who are already receiving retirement benefits would
be receiving their increases based on what it was when they got
into the system. Whereas, new people who are not yet into the
system but know that when they get there that the CPI
adjustment would have taken place for them, it is also a
political recognition that I don't want all the seniors who are
now on it being reduced and take political heat that is
unnecessary. I mean, there is a little bit of political reality
as well as saying that if you are there now you are going to
stay with this, but when you come into the system in the future
you will know that you will come in a more accurate CPI cost of
living index. I mean, that is just the reason.
Senator Kerrey. Excuse me, if I could--do you mind me
adding to the----
Chairman Archer. No, go ahead.
Senator Kerrey. First of all, you are quite right. For
future benefits, we are making reductions, but two additional
points need to be made. First of all, under current law, there
is a 25 to 33 percent cut in benefits. So, one of the things
that is in our favor is the tax increase. They would prefer
just to increase current taxes by 2 percent, which is $80
billion a year. So, fine, let them make that point; they favor
a tax increase. Anybody that does not want current law
reduction of benefits to occur out in 2034 has to propose an
alternative, and if they don't want to reduce the benefits in
2034, they have got to produce a tax increase.
Those are the only two choices that you have got, it seems
to me, unless you use a different way of funding of Social
Security, as I believe both you and Congressman Shaw have done
with your proposal. There are different ways of funding Social
Security. To keep only the defined benefit program, you have a
reduction in benefits that occurs under current law.
The second thing is, by changing the bend points for a
lower wage individual as our plan does, low-income workers will
have an increase in benefits $1,000 to roughly $2,000 a month,
as a consequence of adding that additional bend point. I urge
you, especially for consideration to Democratic Members who
very often talk about their concern for low-income people, the
current Social Security Program is not very generous for a low-
income individual. It is not very generous at all, and one of
the reasons there is an urgency to change the system to
increase the capacity of the low-income person to own assets in
this country is that it is a pretty cruel hoax to say to
somebody ``Don't worry about your old-age years, you are going
to have Social Security there for you.'' Because all Social
Security does is replace 90 percent of the first $505, and
after that, it replaces 32 percent of the next $2,500. Now,
that means if you are making $1,000 a month, average indexed
monthly earnings, you are going to have about $600 a month in
benefits. That hardly allows you to live in the lap of luxury.
So, our plan adds an additional bend point, so for
significant numbers of Americans with low- to middle-income
wages, they will have not a cut in benefits in the future; it
will be an increase in their benefits, in their defined benefit
that they get from the Social Security Trust.
Chairman Archer. Senator, I understand that, but listening
to both of you is deja vu to me to what I listened to in 1977.
Almost identically--particularly what Senator Breaux said--
almost identical to what I listened to in 1977, and I said,
``Wait a minute. Irrespective of all of that logic, all of that
reasoning, you are going to end up with beneficiaries who have
the same earnings record who are going to be retired at the
same time, who are going to be getting different benefits.''
Senator Kerrey. Mr. Chairman, I respectfully disagree. I
was answering the first part of your question, and in the
interest of time, not trying to answer the second. But I
respectfully disagree. I do not believe that this proposal
creates a notch. In 1977, what we were doing is unwinding two
COLAs, and we phased one of them out, and that unquestionably
created a notch. In this proposal, we are saying that we are
going to make this CPI adjustment out in the future.
Chairman Archer. But the result will be the same, Senator,
because for those people who are currently retired, they will
get a CPI under current law. For those who retire in the
future, they will get, as they continue their retirement, a
lower CPI increase every year, and they will end up having a
lower benefit on the same earnings record as people who were
already retired, and I can guarantee you, you are going to get
deluged with a notch problem again.
Senator Kerrey. But, Mr. Chairman, under that logic, we
have a huge notch in 2034, because everybody is going to have a
25 to 33-percent reduction in benefits.
Chairman Archer. Well, of course, the reason we are here is
to try to solve that problem, but----
Senator Kerrey. Well, look, I think you can make
modifications in our proposal so that you don't end up with a
notch.
Chairman Archer. But I just want to make you aware that
that will come back and bite future Congresses, because the
Congress in 1977 did not accept what I urged them to do, which
was to freeze the COLA on the retirees that had gotten the
unintended benefit until they were where they should be, and
there would have been no notch.
Senator Kerrey. Mr. Chairman, we made this change and to
get rid of this proposal in this fashion, I guess you could
apply it and say, ``Gee, let us apply the CPI change to current
beneficiaries.'' We just----
Chairman Archer. Well, I am not suggesting you do that. I
am just pointing out----
Senator Kerrey. Well, that is the only way to solve it.
Chairman Archer. Well, no, there are--in our bill, we don't
change it for any retiree. So, there are other ways to solve
it. I just point that out, and I know all these programs can be
adjusted, and as we work through this, hopefully we will find
common ground, but Senator Breaux, you were also about to say
that this change in the CPI does not affect just future Social
Security retirees. It affects the tax rates; it affects----
Senator Breaux. It affects everything that uses CPIs.
Chairman Archer [continuing]. The food stamps; it affects
everything that we do.
Senator Breaux. Yes, it all should be accurate.
Chairman Archer. But it is a legislated fix in the CPI.
Senator Breaux. Right.
Chairman Archer. And it would also involve a significant
tax increase on low- and middle-income people who get hit the
hardest by not getting the full indexation that the current law
provides.
Senator Breaux. It merely says they should be indexed
correctly.
Chairman Archer. Well, but whose judgment is right? If it
is legislated, then it is an arbitrary decision as to what it
should be.
Senator Breaux. Mr. Chairman, every expert that testified
before the Finance Committee has said that they currently
overestimated, and 0.5 percent is sort of a middle type of
adjustment. I mean, I can't go defend that somebody should be
getting an index benefit more than what it should be.
Senator Kerrey. And I would add that if Boskin had come
back and said we were underestimating by a point, there would
have been 535 votes for it.
Senator Breaux. No question about it.
Chairman Archer. Well, gentlemen, there are many, many
other questions that can be asked, because you have a
comprehensive program. I am going to----
Senator Kerrey. Do you still welcome us here in front of
the Committee, Mr. Chairman?
Chairman Archer. I am going to quit--[Laughter.]--but I am
going to recognize other Members who might have questions.
Mr. Thomas.
Mr. Thomas. Thank you, Mr. Chairman. I think I am the
appropriate one to ask this because of the past history that is
on the record and of the various provisions that you have in
your package. At least, Senator Breaux and Senator Kerrey, we
spent a lot of time wrestling with the Medicare question, and
you have a provision in here which in fact takes an amount of
money. I don't want to go into the history of whether that was
ever appropriate or not; we have to deal with where we are
today and that is a transfer of OASDI funds to the Medicare
Trust Fund, and you propose a phase-out of that money, and it
is about $100 billion over 10 years.
And, by the way, Mr. Chairman, if we haven't already
thanked them, I would love to thank again the SSA actuaries for
providing us with materials which allow, not only an
understanding of each plan but an ability to walk across plans
in a way that makes this very difficult job, if I could say so,
easier, if not more enjoyable, in this, in the way they broke
it down in terms of the actuarial balance or impact on the
payroll tax of a 0.32 percent of taxable payroll over the 75
years.
So, that is all a lead-up to the obvious question: Have you
abandoned our effort on fixing Medicare? Where are we going to
go with the need to deal with this revenue that otherwise would
be in place? Or am I not so excited about your Social Security
plan because we have got a $100 billion hole in Medicare if we
go with that one? So, what is your response?
Senator Breaux. I think the short answer, Congressman
Thomas, is the fact that Social Security tax benefits are
intended for Social Security, and what is happening now we are
shifting a little bit over into the HI Trust Fund part A, and
it is about $6.7 billion or $6.9 billion out of $400 billion.
That is not an insignificant portion, but it is relatively
small compared to the total amount of Medicare, and our
argument is that Social Security taxes should be used to fund
Social Security.
Mr. Thomas. Philosophically, I agree with you. Do we have
any response to $100 billion hole over the 10 years?
Senator Breaux. Yes. I will pass the Breaux-Thomas Medicare
reform bill.
Mr. Thomas. Thank the gentleman for understanding the
direction I was looking for him to go--[Laughter.]
And, Mr. Chairman, I have no further questions.
Chairman Archer. Mr. Shaw.
Mr. Shaw. Mr. Chairman, I won't take my full 5 minutes. I
want to congratulate this panel on some of the innovative work
that they have done in helping to bring this process forward in
a bipartisan way in the Senate. I think that I have problems,
whether you call it a notch or whether you just call it using a
different cost of living index, I can see problems of somebody
who is 75 years comparing his check with somebody who is 65
years old somewhere or 67-year-olds down the line. I also think
that one of the problems that we have to address is the
question that we know each generation pays in more than the
generation before it into the Social Security Trust Fund, and I
think that we have got to be sure that there is also
opportunity for greater return for greater investment.
So, I think that is something that we have to look at very
carefully, whether it be modifications to your plan or the
acceptance of the Archer-Shaw plan. However, I think that we
have to be very careful in working through this process that we
don't let the perfect be the enemy of the good, because we have
got to--I mean, this thing is a disaster. I think Senator
Kerrey, you were absolutely correct when you were talking about
the ultimate notch is doing nothing. I mean, it is just like
taking a hand grenade, pulling the pin, and giving it to our
grandkids. It is a horrible, horrible thing.
Senator, you and Senator Gregg also made mention of the
question of exactly what is in the trust fund, and I think it
is one of the things that all of us have to be very careful to
carefully analyze and see through. The problem is that the
trust fund is certainly full of the most secure assets that you
can possibly own in the world today being government Treasury
bills; nevertheless, when they are owned by the government,
itself, they are ``I owe me's,'' which really mean that the
taxpayer is on the hook, and we have got to keep our eye on the
year 2014 or 2015 when that trust fund starts to have to cash
in those Treasury bills in order to continue its obligations.
It is very obvious that the effect would be the same with or
without those Treasury bills being in there except that the
Treasury bills are a very strong commitment of the government
to the people who have paid into the accounts. The effect on
the taxpayer is exactly the same, and the effect on the
beneficiary is exactly the same as if they were not there.
So, I think we have to be very, very careful to keep our
eye on that and quit talking about 2035, because 2015 is the
date where this whole thing turns south on us, and we have the
crisis. So, the crisis is 15 years out there; it is not 35
years out there as some people would have us believe, and I
think you have certainly correctly recognized the problem, and
I compliment the four of you for moving ahead boldly as you
have.
Senator Kerrey. Congressman, I could not agree more with
you, and one of the reasons I objected to the President's
proposal with Social Security is that he takes a problem that
we currently have right now and makes it a virtue. By that, I
mean, what happens from 2012 to 2034 is that the Treasury--
unlike what is happening right now which is that payroll taxes
are higher than necessary to pay beneficiaries--from 2014 to
2034, in order to write monthly checks, Treasury will have to
redeem those special issue Treasury bonds. The redemption
transaction will occur by using individual income taxes and
corporate income taxes to pay Social Security bills; that is
the transaction. That is what will happen when those bonds get
converted into cash. For 20 years, we are going to be funding
more and more and more Social Security checks with individual
and corporate income taxes. That means less money for defense
and nondefense spending. It means a growing share of the
individual and corporate tax resources are going to be
transfered to old-age survivor and disability beneficiaries.
What the President proposed to do is dramatically increase
those general revenues, not only over that 20-year period but
for an additional 15 years beyond it.
Mr. Shaw. So, the urgency----
Senator Kerrey. So, you are quite right. There is a huge
problem, and when we cross over and we start to have to redeem
those bonds, the light bulb is going to come on and they will
say, ``My God, now I understand why this is a problem, because
I have got to pay those benefits with individual and corporate
income taxes.''
Mr. Shaw. And we have got 15 years in which to frontload
these things and solve the problem so that our kids can look
forward to at least, if not a better retirement than we have
today, and I----
Senator Kerrey. Just to extend this a bit longer, one of
the reasons I held up the actuaries analysis--and I believe
your and the Chairman's proposal does a very similar thing--is
that our proposal funds it in perpetuity. You don't have this
buildup and then drawdown as current law does. You eliminate
that problem, though we do it somewhat differently than you do.
But the net effect is the same, and I quite agree, as well--let
us not let the perfect be the enemy of the good. We ought to be
able to say jointly that we insist that we take action sooner
rather than later. We may have a difference of opinion on how
it ought to be done, but the sooner we get a bill--a markup
opportunity so they can start moving something to the floor,
the better off we are going to be.
Mr. Shaw. Yes, sir. Thank you.
Senator Kerrey. Thank you, Mr. Chairman.
Chairman Archer. Senator, and what you have just pointed
out is definitely true and a massive difference between your
plan and Congressman Stark's plan, which he presented earlier--
I think Senator Breaux was here when he did--which shows a
massive decline, bigger and bigger and bigger, year by year, as
you go out, even though it is certified for 75 years to be OK
because it is front end loaded, and it seems to me that we
should be seeking something that will provide stability and
security that people can count on that begins to get better as
time goes on.
I have to interject one comment, because on behalf of, I
think, honesty in reporting, the Social Security Trust Fund has
never been the cause of debt. I think all of us understand
that. The Social Security Trust Fund has never required
borrowing on the part of the Federal Government. What is
required borrowing has been the deficit in the general
Treasury. If the Social Security Trust Fund did not own these
bonds--which are characterized by some as ``I owe me'' and
really something we shouldn't consider, because they have got
to be paid off by the same people, and so forth--if the Social
Security Trust Fund did not own those bonds, they would be
owned by the general public, because the debt would have to be
financed. The debt from the general Treasury has to be
financed, and it would still have to be paid off by future
taxpayers.
So, I just think--I know it is good to say, ``Oh, there is
nothing in the trust fund and all that, and a lot of people
believe that and, therefore, let us go on and present ourselves
to the way people believe instead of facing the reality,'' and
in the end, we have to face that reality, and I compliment you
for the fact that I think you are facing reality.
And I also agree that I really hope we can mark up a bill
this year, because it will not get easier; it will get tougher,
and Congressman Shaw and I do not have a magic answer to the
problem, and what we have presented certainly can be adjusted
in certain ways provided that we do the long-term job and that
we do it with a regard for the unified budget surplus so that
we do not destroy that and that we do it with regard,
hopefully, to having reduction in taxes over the long term, and
if we do it, hopefully, without cutting any benefits.
But I thank you. Does any other Member wish to inquire?
Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman.
I am a little confused right now on the COLA adjustment. In
reading the testimony of one of you--and I can't remember which
one it was--I got the impression that your plan does not make
an explicit reduction in the COLA but only mandates that the
Bureau of Labor make an adjustment to reflect the actual rate
of increase in the cost of living. But then I read in some
other documents where you have an explicit 0.5-percent
reduction. Which is it?
Senator Breaux. It instructs them, Jim, to come back with
an adjustment in the CPI of 0.5 percent.
Mr. McCrery. OK, so your legislation assumes that the
inaccuracy in the current COLA is 0.5 percent----
Senator Breaux. That is correct.
Mr. McCrery [continuing]. And you mandate that BLS make
that change.
Senator Breaux. That is correct.
Mr. McCrery. OK. Are your individual accounts connected to
Social Security? Do they reduce Social Security benefits?
Senator Breaux. It is a good question. I think it is
important to understand what we have done with the individual
accounts, because it is a 2 percent set aside for an individual
retirement account, and they pick, like we do in the Thrift
Savings Plan, where they want to put it. When they retire, that
is their account. They can inherit it; they can pass it on to
their children; it belongs to them. Their Social Security
benefits would be reduced only to the extent that 2 percent
stayed in the regular Social Security retirement plan at about
a 3-percent rate of interest. It would be reduced by that
amount, but you would get everything extra that you got in your
Thrift Savings Plan.
Mr. McCrery. OK.
Senator Breaux. If you had gotten a 15-percent return, you
would have it reduced by 3 percent, but you would get the extra
11 percent.
Mr. McCrery. So, there is a so-called clawback to the
extent of----
Senator Breaux. Only to the extent----
Mr. McCrery [continuing]. What it would have earned in
Treasury.
Senator Breaux. That is correct. It doesn't wipe it out,
for instance, which I think is very important. If you have
people encouraging them to save, you want to make sure they can
keep the benefits of what they save.
Senator Kerrey. If I could add, Congressman, in addition
CRS and the Social Security actuaries have told us that low-
wage earners in every birth cohort measured would experience
higher benefits under this plan. Average earners in every birth
cohort measured would experience higher benefits under the plan
than current law can sustain even if their personal account
only grew at the projected rate of 3 percent. It is only when
you get up into maximum earners you begin to see a future
reduction in benefits.
Senator Breaux. But their individual accounts would offset
that.
Senator Kerrey. That is exactly right. It is anticipated
their--at that rate, it is anticipated the individual accounts
would offset that.
Senator Breaux. More than offset it.
Mr. McCrery. What about the KidSave accounts? Are they
connected in any way to the Social Security benefits?
Senator Breaux. I am going to defer to the author of this.
Senator Kerrey. Well, the answer is yes. They are not
funded with the payroll tax, but the answer is yes, and the
idea here is that these accounts need to be opened sooner
rather than later, because if you wait and somebody actually
goes into the work force, you have given up 14, 15, 16 years of
compounding interest rates. So, they are funded with general
revenues, but they are part of the personal savings account and
run by the Social Security Administration.
Mr. McCrery. So, there would be a clawback on these, as
well?
Senator Kerrey. Oh, I see what you are saying, yes, on half
of that amount.
Mr. McCrery. OK, thank you very much, and I commend all of
you, particularly my colleague from Louisiana for your courage
and your scholarly work on this.
Senator Breaux. Kamikaze mentality. [Laughter.]
Chairman Archer. Mr. Tanner.
Mr. Tanner. Thank you, Mr. Chairman. I will be very brief.
I want to also thank you for holding this hearing and also our
witnesses. I am encouraged. We have finally gotten people to
acknowledge the fact that in reality whatever is or isn't in
the Social Security lockbox is fairly immaterial, that in 2030
or 2040, we the people are going to owe whoever is alive at
that time that's 65 or older whatever benefits the law says
they are entitled to receive.
We owe no more and we owe no less. And I think that is
fairly--I have heard agreement on that point. So I think we
have made some progress this morning.
I want to commend you all for what I think is and has been
accorded this plaudit by others, namely the Concord Coalition,
as the most fiscally sound approach to fixing this problem. I
have been one of the ones as has Charlie Stenholm, who is going
to testify in a minute, concerned about the Nation's debt.
There is a debt from the Treasury to the Social
SecurityTrust Fund. There is also an outside debt of about $3.5
trillion. The rhetoric around here has been, well, let's take
this projected surplus and let's either dump it in the Social
Security lockbox, which will create, I suppose, more debt from
the Treasury to Social Security. Or, let's take it and cut
taxes with it.
There has been very little rhetoric around here about let's
take that and redeem that non-Social Security debt of $3.5
trillion, a third of which is owned by other countries, or
nationals of other countries.
I say that only to say that in your plan, you financed your
changes basically by a carve-out. Is that correct? Is that a
fair characterization? A carve-out within the present Social
Security tax structure.
Senator Kerrey. We make--the principal changes that fund
our proposal, that make--and by fund I mean restore the
solvency in perpetuity so that you can keep the promise to all
270 million beneficiaries as well as reduce the payroll tax 2
points.
The principal changes are--there is recapturing the honest
CPI calculation, where recalculating benefits as life
expectancy increases as well as eliminating that hiatus. And we
have a number of other proposals that change the benefits in
the future that fund the proposal.
Senator Breaux. The other one that I would mention too is
the restoration of the Social Security taxes that are now being
shifted off into Medicare, bringing that back into the program
as well.
That's the principal way it is funded.
Mr. Tanner. Some of these other programs, the old phrase no
pain, no gain comes to mind, and I--you all are to be commended
for your courage in saying that in order to make this system
better we are going to have to make some structural changes.
Senator Breaux. Let me just make a comment on that, Mr.
Tanner. I think that you are absolutely, and I think the people
are ahead of us on this. I think the American people know that
this program and Medicare, for example, are in serious
problems. And there is no magic wand, and we got to quit saying
there is.
And I think people are more realistic about making changes
for their children and the grandchildren now then they have
ever been before.
Senator Kerrey. I also stress the point, Congressman, I
made earlier, is that--and that is that in addition to the fork
in the road that we take at the beginning, whether or not you
want to take action now or postpone it and do it manana.
The second one is, do you want people in their old-age
years to be more dependent or less dependent on the government?
And if you want them to be less dependent, then you have to
have a mechanism that allows them accumulate wealth over the
course of their lifetime.
And there is no question it is possible to do it. And even
if you take the most conservative investment, and that is
essentially the common ground between what the Chairman has
proposed and Congressman Shaw has proposed. I mean, the idea is
to increase people's self-sufficiency by giving them their own
source of wealth.
Mr. Tanner. Thank you, Mr. Chairman.
Chairman Archer. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. And I want to
congratulate the two of you and Senators Gregg and Grassley for
cobbling together a bipartisan and, as we will hear in a moment
I think, bicameral proposal. I know that is not easy. And that
is going to be the only way we are going to be able to move
forward.
Senator Kerrey, in your testimony you talked about the
individual accounts being the centerpiece of the proposal, and
I wanted to follow on with some questions along the lines of
Jim McCrery's and commend you for that. I mean, what you have
done is you have harnessed the power of compound interest that
Senator Gramm focused on in his testimony. But you have also
given people independence and dignity and security in
retirement, which you focus on.
And that, it seems to me, although not a magic solution, it
is about as close as you can come to helping solve this problem
without some of the difficult benefit cuts that go beyond those
adjustments you make or increasing taxes.
Two percent diverted, and then there is a government match
for low-wage workers. You have a Thrift Savings Plan kind of
option: government will regulate thus where you can invest. You
can't invest in your brother-in-law's real estate venture in
Florida. You have got to keep it within the account.
In order to get your SSA actuary, did you have the 60
percent equity investment in that?
Did you make an assumption as to how that would be
invested? I notice in your material, you talk about investing
in treasuries.
Senator Kerrey. No.
Senator Breaux. No. It is not dependent.
Mr. Portman. OK. You don't need to do that because people
keep their accounts. You don't use that necessarily to fund the
Social Security system long term?
Senator Breaux. No.
Mr. Portman. So people would be able to go into treasuries
if they chose to?
Senator Breaux. Yes. Now they would be, Congressman, in the
same situation we have and all of us have in our Thrift Savings
Plan. I mean, you could put it all in the low-risk, which would
probably be government bonds, or you could put in a mixture of
the two, or you could put it all in the stock market.
Mr. Portman. That's a significant difference from some of
the other plans that have to make certain assumptions in order
to meet the actuarial requirements. People can add up to $2,000
a year. There is no cap on that, on income?
Senator Breaux. There is none.
Senator Kerrey. No. No cap on any----
Mr. Portman. So anybody can put $2,000 a year in, unlike an
IRA now, where it is capped.
Senator Breaux. I mean, you could refine it further. And if
someone wanted to refine it, we put caps on it, but we do not.
Senator Kerrey. Indeed, I would say in response to that
too, I think it is important for me to restate at least, that
the savings accounts are a means to an end. And the end is
financial security that comes through wealth. And the reason I
say that to start is because if you buy into that as the goal,
then I think you would want to combine Social Security reform
with pension reform and tax reform that currently penalizes all
savings.
It seems to me, if you buy into the goal that you want to
help that low- or medium-wage individual accumulate wealth over
the course of their life and the security that comes with that
and decrease dependency on the government in those years, I
think you would want to look at doing more than just changing
the Social Security system.
Mr. Portman. Thank you for saying that. That way, I don't
have to say it with regard to pension reform. And I don't want
to bend the Chairman's ear again on that, but I agree with you.
And I think this is complementary to the kind of things we are
talking about in the pension area, to give people more security
through reducing regulation, allowing them to save more. Just
letting the government help rather than get in the way.
Two quick questions on the individual accounts. First, on
the clawback--and one addition in the account would be the
KidSave. That goes into the account as well?
Senator Kerrey. Yes.
Mr. Portman. So it is one lump sum of one aggregate
account. With KidSave, you have a clawback, but it can't be
based on the 3 percent that would otherwise have been in the
Social Security fund because this is additional money coming
from general revenues. How do you determine what out of KidSave
is used for the clawback?
Senator Kerrey. Are you looking at staff? You should be.
[Laughter.]
Mr. Portman. Senator, as you know, I come from the IRS
where sometimes they have the advantage. Anyway, I assume you
have some formula you have worked out there.
Senator Kerrey. The answer is yes. It is roughly half----
Mr. Portman. My point is, I guess the KidSave doesn't come
from Social Security payroll taxes. It really comes out of
general revenues.
Senator Kerrey. That is correct.
Mr. Portman. And it starts right away. And I understand why
you want to do it.
Senator Kerrey. That's correct.
Mr. Portman. The second question, if you die prior to
taking the benefit, whether you died before your retirement age
or if you choose not to take your Social Security benefit at
age 62, if you die after that, what happens to the account?
Senator Breaux. It is your asset. It is inheritable.
Mr. Portman. So survivor benefit is first taken out?
Senator Kerrey. No. The survivor benefit----
Mr. Portman. No. It is yours. Survivor benefit is taken
care of through the regular Social Security system?
Senator Kerrey. That's correct. There is no reduction in
either survivor or disability or the old-age benefit.
Mr. Portman. OK. When you turn 62 and you choose, as most
people do now, to take your Social Security, do you get a lump
sum of this individual account or do you have to buy an annuity
or do a variable annuity or something else?
It is your account, so you just----
Senator Breaux. It's coming to a theater near you.
[Laughter and pause.]
Mr. Portman. I know you know the answer if you just----
Senator Kerrey. I used to like you, you know, before you
asked me this question I couldn't answer. [Laughter.]
Mr. Portman. No. The question is, if you want at age 62 to
take your retirement, as most people do, do you get this
individual account as a lump sum. Do you get the total amount
you built up over the years, or do you get a monthly payment,
having purchased an annuity?
Senator Kerrey. I just don't know under the final
legislation whether we mandated this be converted into an
annuity. I personally would prefer that it not. But I think it
needs--the thing that I would object to is a provision that
would allow an early withdrawal. It needs to be a part of
retirement planning, and I believe--do we require it to be
converted into an annuity?
OK. So only up to the poverty level is the requirement that
an annuity conversion occur.
Mr. Portman. OK. So up to the poverty level, you would have
to purchase an annuity through a government, again, regulated
group of companies that offer an annuity?
Senator Kerrey. That's correct.
Mr. Portman. But above that amount you can take as a lump
sum at age 62.
Senator Kerrey. That's correct.
Mr. Portman. So you could use it to buy a boat or do
something else.
Senator Kerrey. Right. That's correct.
Mr. Portman. OK. Thank you very much. And again, I commend
you all for your hard work in moving the ball forward and
putting all these people together.
Chairman Archer. Are there any other questions?
Gentlemen, thank you.
Senator Breaux. Thank you, Mr. Chairman.
Senator Kerrey. Thank you.
Chairman Archer. You make a very constructive contribution
to this exercise.
Senator Kerrey. It has been a pleasure to be with you.
Chairman Archer. Our next witnesses are our two colleagues
from the House, Congressman Kolbe and Congressman Stenholm.
Gentlemen, welcome. I assume from the previous testimony
that your plan is identical. If not, I would like----
Mr. Stenholm. No.
Chairman Archer. If not, then perhaps you might concentrate
on explaining the differences between your plan and the plan
that the Senators presented to us.
Congressman Kolbe.
STATEMENT OF HON. JIM KOLBE, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF ARIZONA
Mr. Kolbe. Thank you, Mr. Chairman. We will certainly talk
about a few of those differences, but I think it is incumbent
upon us to highlight some of the important features of the
bill. And this may be the second time at bat with this. But we
appreciate very much the opportunity to be here today and your
Committee's attention to this.
This is such an important issue, I am really pleased that
your Committee is having this hearing and the amount of
interest that is in this.
As I think you know, Congressman Stenholm and I have been
working together on this issue for some time, and we are
delighted that the Committee really recognizes the need for
comprehensive Social Security reform.
We think we can do it in this Congress this year. In fact,
I think we have to do it this year.
Although the window of opportunity is closing fast, we
would suggest that the legislation, though not perfect, can
serve as a foundation--that is, the legislation we are
proposing--can serve as a foundation document for a bipartisan
negotiation. My full statement I would trust, I would ask to be
placed in the record. And I will just simply summarize.
Chairman Archer. Without objection, the full statement of
every witness will be inserted in the record.
Mr. Kolbe. Thank you. I would just like to hit on four
specific issues that I think are critical to this debate. One,
how our plan, the Kolbe-Stenholm, also Breaux-Gregg-Kerrey
plan, reduces Social Security's program cost to a sustainable
level.
Second, why the plan is better for women than current
Social Security law. Third, the property rights and
opportunities for wealth creation that exist under our bill.
And, fourth, why a carve-out is necessary.
First, while restoring actuarial balance to the Social
Security Trust Fund, that is an important step, it is only one
measure of the financial stability of Social Security, of any
Social Security reform plan. A truly responsible Social
Security plan has to control the costs of the Social Security
Program over the long term and address the cash shortfalls that
begin in the year 2014.
So if we think the budget caps are tight now, imagine the
boondoggle, the budget boondoggle when the growth of Social
Security and Medicare Programs forces Congress to cut funding
for NIH or Pell grants, Meals on Wheels, other important
programs by more than 15 percent.
So we need to act now. In fact, I would point out, Mr.
Chairman, that the legislation we passed last week, lockbox
legislation, is precisely the key to this whole thing as to why
this is so critical. That legislation says, if we solve Social
Security, if we reform Social Security, we have opened the
lockbox. That money then becomes available to us for tax
relief, for spending that we deem is necessary. And that is why
the key to a successful legislative session this year on all
the other things that I know our conference and the Minority
conference have been focusing on is in getting a reform to
Social Security done this year.
According to the actuaries of the Social Security
Administration, our plan would restore the costs of the Social
Security system to sustainable levels. Now you have in your
chart, in your packet a chart that shows--that is hard to see
from there, so it is in the packet of information that has been
given to you.
The costs under our plan, the cost of the Social Security
system will average 14 percent of payroll over the 75-year
period compared to 16.4 percent under current law. The cost of
the Social Security system under our proposal will never exceed
15.7 percent of payroll. And under current law, those costs of
Social Security system would reach 19.6 percent of payroll by
2075 and, from all projections, just continue on growing.
Our proposal and the Senate bipartisan proposal will do
more to control the costs of the Social Security system than
any other proposal, and that is illustrated by the second table
that is in your packet. The average cost rate of your proposal,
Mr. Chairman, is 14.6 percent, the maximum rate 17.8. Ours is
14.0; the maximum rate if 15.7, and the others, Gramm is 14.9,
the maximum rate 17.6. And we don't have data to analyze the
others, the Stark-DeFazio legislation that was introduced
fairly recently.
The second point I want to mention is the impact on women.
We think it--we know that it will be more beneficial,
beneficial to more women than is currently the law. And the
main reason for that is the minimum benefit provision that is
in our legislation. That, the benefit for 40 years of work
equaling 100 percent of poverty, that provision alone mean 50
percent of women would end up with a better payment--we are
talking about now the defined payment--better than they have
under the current law. And that is before you have any of the
other provisions of savings and the other provisions.
We also allow for voluntary contributions, which women
could use. They could put an additional $2,000 a year into
their personal account. Those that take time off to raise
children can catch up by making the contributions later.
And for women who earn under $30,000, ours has a savings
subsidy program. For the first dollar voluntary contribution,
an eligible worker would receive $150 from the Federal
Government. And then each additional dollar is matched 50
percent up to a cap of $600 per year.
This is, in a sense, we have captured this concept from the
President's USA savings plans, his proposal.
One of the reasons for the Kolbe-Stenholm bill will be a
better deal for women, and this has not been focused on very
much, is the changing nature of divorce. Current law stipulates
that if a marriage lasts 10 years or more, a woman is entitled
to 50 percent of her ex-spouse's Social Security benefit.
Unfortunately, not only has the divorce rate skyrocketed,
but the marriages are not lasting as long as they once were.
Two or more decades ago, divorces were few and occurred 15 to
20 years after marriage. Today, they are more likely to occur
in the fourth to the seventh year of marriage. And more and
more women are not remarrying.
So consequently many women are heading into retirement
alone without the benefit of a spouse's Social Security income.
And what ours does is to supplement that with the provisions
that I just mentioned to you.
The third point I'd like to make is about property rights
and opportunities for wealth creation. Our legislation
establishes the opportunity for all Americans to create wealth
and benefit from the power of compound interest.
Several of the people testifying today have, of course,
talked about that. The high-income workers have those now with
401(k) plans, Keogh plans, IRA's, mutual funds. We would extend
that to moderate, to low- and moderate-income workers. The
personal accounts in our plan are wholly the personal property
of the worker, in contrast to some of the reform plans. Whether
the worker dies before or after drawing on the account, the
account remains in their possession and may be bequeathed to
their heirs.
Moreover, under our plan, every worker has the right to
choose their own risk profile, including the freedom to invest
in safe, risk-free treasury securities, just as we do now with
the Thrift Savings Plan. As you have that option, that would
exist under our plan, which is modeled after the Thrift Savings
Plan.
We force no one to invest in the stock market if they
choose not do so. The individual accounts in our plan are based
on one very simple principle: It is your money, and it ought to
be your choice about how you invest it.
Last, let me mention why a carve-out is necessary. It is my
fear that policymakers both here and in Congress--both here in
Congress and in the White House, believe that reformers will
accept personal accounts in any form, including as an add-on to
the current system. But I think this is a misjudgment, Mr.
Chairman.
I think a carve-out is essential to any fiscally
responsible plan that seeks to address the $7.4 trillion
unfunded liability in Social Security. Opponents to personal
accounts argue the carve-out is destabilizing to Social
Security, but that is simply not true.
As long as a carve-out is used to prefund out-year
liabilities, a carve-out actually enhances the long-term
viability of Social Security by preventing enormous buildup of
IOUs in the Social Security Trust Fund. IOUs somehow have to
be, eventually, at some point, translated into cash benefits.
So we shouldn't fool ourselves. IOUs are merely first claims on
future Federal revenues.
Mr. Chairman, you have been very clear in saying that
yourself. Voters know that they can fund it only through
increased taxes, reducing the benefits, additional debt,
redirecting spending from other programs. And under current
law, the Social Security Administration estimates that at its
peak, the trust fund would contain over $4.4 trillion of IOUs
that somehow have to get eventually translated into cash
benefits.
So carve-out uses payroll taxes collected today to prepay a
portion of retirement income of future retirees rather than
leave the entire burden of funding this obligation to our
children and grandchildren.
In conclusion, Mr. Chairman, let me say the Congress should
not, cannot, should not shirk from its responsibilities in
favor of political expediency. We ought to be ashamed if we
can't, as a Congress, set aside our political differences to
save a program that is as important as Social Security. If we
can't do this now, if we can't exert some leadership on this,
this year as you have done, Mr. Shaw has done, and others have
done, how could we justify asking the voters to return us to
office?
Charlie Stenholm and I, along with our colleagues in the
Senate plan you just heard about, put together what we believe
is the most progressive and the most fiscally responsible--a
centrist plan. It is a plan that enjoys broad-based support
both on and off the Hill. And as far as I know, is the only
plan that has bipartisan sponsorship.
So I challenge the leaders of both political parties, of
our political parties, and the President to take the fruits of
our effort and begin bipartisan negotiations immediately.
Everyday that passes, every month that we delay, we lose
credibility and respect in the eyes of the American people.
The heart of America aches, and it aches for leadership
that you can provide, Mr. Chairman. And I know you will not
disappoint them, and this Congress should not disappoint them.
Thank you.
Chairman Archer. Thank you, Congressman Kolbe.
Congressman Stenholm, we will be pleased to receive your
comments, your testimony. And as usual, your entire statement
in print will be inserted in the record. And you may proceed.
STATEMENT OF HON. CHARLES W. STENHOLM, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF TEXAS
Mr. Stenholm. Thank you, Mr. Chairman, and thank all
Members of the Committee for this hearing and for allowing us
the privilege of appearing before you.
I want to emphasize two points of the bill that Jim has
talked about. One is the fiscal responsibility side of our
bill, and two is the strengthening of the safety-net issue.
Just in repeating one thing, this is a bipartisan proposal.
I had a goal this year of doubling the number of Democratic
cosponsors of our bill. We exceeded that by 100 percent. We
have now have three cosponsors on our side instead of just the
two, the goal. And we have high hopes.
But it is also bicameral, bipartisan, and I think everyone
agrees that if we are going to do that which you, Mr. Chairman,
Mr. Shaw and others have suggested doing, it is going to have
to be a bipartisan effort and bicameral effort.
And we think we have the broad outline of doing just that.
The hallmark of our plan is honestly addressing the financial
problems facing Social Security and tackling the tough choices
that are necessary.
Restoring solvency is important, but simply restoring
solvency over the 75-year period is not enough. Basic questions
that need to be asked of any plan. Does the plan put the Social
Security system on a permanent, sustainable course that will
continue to remain strong at the end of whatever period we
choose to use for estimates? Or does it leave the trust fund in
a deteriorating condition at the end of the period?
Does the plan deal with the liabilities on general revenues
that will put tremendous pressure on the rest of the budget
beginning in 2014, as Mr. Shaw emphasized a moment ago? Does
the plan control the costs of the Social Security system to
ensure that we have the resources to deal with the other
priorities of our budgets?
The growth in the cost of the Social Security Program will
crowd out other programs. Between now and 2032, the percentage
of our national income consumed by Social Security will
increase by 50 percent. According to CBO's long-term budget
projections, spending on Social Security consumed slightly less
than 20 percent of total Federal revenues today. It will grow
to 23.5 percent of total revenues by 2015 and nearly 30 percent
of total revenues by 2030.
There will be no room in any domestic initiatives. And we
will have to cut back on existing programs if we don't take
action now. Under the CBO baseline, Social Security will
consume an ever-growing portion of the budget.
There is no free lunch. The promised benefits under Social
Security will cost $20 trillion more than we can afford over
the next 75 years. That money will have to come from somewhere.
Now, here, comparing the benefits of any reform plan to the
benefits promised under current law, is unfair because current
law makes promises we cannot keep.
Plans which suggest we can save Social Security without any
tough choices depend on taking funds away from other government
priorities in order to provide promised Social Security
benefits. Our plan makes some tough choices today that will
require some sacrifices.
We can either make some tough choices today to honestly
deal with the financial challenges facing Social Security, or
we can leave a fiscal time bomb for future generations to deal
with. Our plan reduces the liability that Social Security will
place on general revenues, reduces the liability between 2014
and 2034 by more than 50 percent, reducing a 7.4 trillion
liability by more than 3.8 trillion.
This chart shows you the numbers very dramatically of what
our plan does for those liabilities. Reducing these liabilities
will preserve the flexibility of the future to deal with other
problems in addition to providing Social Security.
The area in red on the chart is money that will be
available for other programs, whether it be money for
education, agriculture, health care, defense, tax cuts, or any
other priorities that we may have in the future.
We are able to reduce these liabilities because we use a
portion of current payroll taxes to advance-fund future
benefits. Creating individual accounts within the existing
payroll taxes is much more responsible from a budgetary
perspective than the so-called add-on accounts funded above
current payroll taxes.
Funding individual accounts above current payroll taxes
will create new general-fund liabilities which will increase
our national debt and take resources away from other programs.
Our plan doesn't have any of the double counting or cost shifts
that some free-lunch plans rely on to make Social Security
appear balanced on paper.
Our plan does not rely on projected surpluses. All of the
general-revenue transfers in our bill are completely offset by
the CPI recapture provision. Our plan works whether or not
surpluses actually materialize. Plans which rely on projected
surpluses either place the solvency of the Social Security
Trust Fund in jeopardy or create problems in the non-Social
Security budget if the surpluses are not as large as currently
projected.
Now, strengthening the safety net. There has been a lot of
rhetoric about how Social Security reform would hurt or could
hurt vulnerable populations. We ask you to sincerely look at
what our plan actually does. Our plan restores the solvency of
the Social Security Trust Fund in a way that not only protects
low-income workers from any reduction in guaranteed benefits.
It actually strengthens the safety net provided by the Social
Security Program.
The benefit changes in our plan primarily affect middle-
and upper-income workers who we believe will benefit from the
individual accounts. The new minimum benefit provisions will
enable Social Security to lift more of the elderly out of
poverty than current law.
Fifty percent of women and 10 percent of all men would
receive higher guaranteed Social Security benefits as a result
of the minimum benefit provision. A low-wage earner defined by
the Social Security Administration is a worker with earnings
equal to 45 percent of the national average would have a 10-
percent increase in guaranteed benefits from our minimum
benefit provision.
Any income from individual accounts would be an added bonus
above the poverty protection from the minimum benefit for low-
income workers. Under our proposal, no individual who works a
full career will have to retire in poverty.
Currently, nearly 8 million seniors receive benefits that
are less than the poverty level. We say to all Americans, if
you work all of your life and play by the rules, you will not
retire into poverty.
We also incorporate the concept from the President's USA
proposal of helping low-income workers to save for their
retirement by providing subsidies for workers who make
voluntary contributions to their individual accounts. The
subsidy for low-income workers will increase the retirement
income of workers earning less than $30,000 and encourage
increased savings among income groups who have very little
savings today.
Mr. Chairman, in conclusion, let me say, members on both
sides of the aisle can pick out individual items in the plan to
criticize us because we didn't go far enough in one area or we
went too far in another. We acknowledge that. All we ask is
that you look at the entire package and judge the entire plan
on its merits instead of picking out individual provisions.
We have never claimed our plan is perfect. We recognize
that there may be places where our bill can be improved. We are
willing to work with anyone who has constructive suggestions so
long as they are willing to be fiscally responsible.
As we tackle the tough choices that will be necessary to
enact credible Social Security reforms, we must look beyond
current polls and think about how our children will look back
at the decision we make today.
Now there are many that have asked why Charlie Stenholm
from the House Agriculture Committee, not normally would be
associated with Social Security, how and why I have been as
active and why I have been as privileged and pleased to have
worked with Jim Kolbe over the last three or 4 years and coming
to this point. Well I have two reasons, Mr. Chairman, for being
as active as I am in this question and in urging this Committee
to act this year.
And their names are Chase and Cole, Cindy's and my 3\1/2\-
year-old and 1\1/2\-year-old grandsons. I have resolved that I
do not wish them to look back 65 years from today and say, if
only my granddad would have done what in his heart he knew he
should have done when he was in the Congress, we wouldn't be in
the mess we are in today.
And everyone of us knows in our hearts that unless we act
sooner not later, our grandchildren will look back 65 years
from today and say that what we should have done.
And that is why we are here, and why again I commend you,
Mr. Chairman, Mr. Shaw, Mr. Rangel and others for bringing this
to this point and look forward to rolling up our sleeves and
working with this Committee in a bipartisan way in order to
bring about a solution this year, 1999.
Chairman Archer. Thank you, Mr. Stenholm.
[The prepared statement and attachments follow:]
Joint Statement of Hon. Jim Kolbe, a Representative in Congress from
the State of Arizona; and Hon. Charles W. Stenholm, a Representative in
Congress from the State of Texas
Chairman Archer, Congressman Rangel and Members of the Ways
and Means Committee, we appreciate the opportunity to appear
here today to discuss Social Security reform and present our
legislation for your consideration. We've spent several years
working together on this issue and we are delighted that the
Committee recognizes the need to address the financial and
demographics problems that threaten our nation's most
successful anti-poverty program.
In particular, we commend Chairman Archer for setting the
bar for this debate at 75-year solvency. Groups on and off the
Hill have suggested that this goal may be too ambitious, and
that incremental reform may be a better solution. We disagree.
It is for good reason current law mandates that the Social
Security Trustees evaluate the health of the Trust Fund over a
75-year horizon. This period encompasses the entire future life
span of all current workers and beneficiaries, including
newborn babies--the beneficiaries of tomorrow. Also, the
projection period is sufficient to evaluate the full effect of
changes to the Social Security program.
In fact, we would like to see the committee set the bar
even higher. We believe the Members should also consider the
impact of reform proposals on the annual operating cash flow of
the federal government, and on the Trust Fund balance at the
end of the 75-year forecast horizon. Solvency alone is an
incomplete standard for determining whether legislation truly
strengthens Social Security. Solvency is not sufficient if we
leave the Social Security system in a deteriorating condition
at the end of the period, or if the federal budget incurs
massive cash deficits in the interim years.
The difference between a plan that leaves in place a strong
and growing Trust Fund at the end of seventy-five years, and a
plan that extends solvency for a finite period of time but
leaves the system with a depleted Trust Fund, is fundamental
and significant. The issue should not be fifty years versus
seventy five years, it should be whether a reform plan offers a
complete solution that puts the Social Security system on a
permanent, sustainable fiscal course.
A ``partial'' solution will only exacerbate the cynicism
among young people that Social Security won't be there for
them. A ``partial'' solution will require continuous
``tinkering'' and adjustment, impeding the ability of Americans
to plan for retirement with a degree of certainty. Any credible
reform plan must put the Trust Fund on a permanent, sustainable
fiscal path that will ensure the system remains fiscally sound
throughout the valuation period and beyond. Genuine solvency is
achieved only if the cash flow is balanced, and the Trust Fund
is stable and getting stronger at the end of the forecast
period.
We Were Country When Country Wasn't Cool
To paraphrase the country and western song, we were Social
Security reformers before Social Security reform was cool.
Three years ago, we came together to form the Public Pension
Reform Caucus and begin a discussion in Congress. Today, the
PPRC has a bipartisan membership of 75 members. Our goal was to
educate ourselves and our colleagues about the issues and
challenges facing Social Security. Perhaps just as importantly,
we sought to demonstrate the type of centrist, bipartisan
approach to the substance and politics of Social Security
reform necessary to resolve the impending crisis..
Two years ago, we joined Senators Judd Gregg and John
Breaux to serve as Congressional co-chairmen of the CSIS
National Commission on Retirement Policy (NCRP). The NCRP was a
24-member commission comprised of leaders from the business
community and experts on retirement policy. Our goal was to
develop a plan to strengthen America's retirement programs,
including employer-provided pensions, personal savings and,
finally, Social Security. Fifteen months after the panel's
creation, we disproved the notion that all commissions must end
in disagreement or irrelevance. In a unanimous vote, our
commission agreed on the 21st Century Retirement Security Act.
We introduced legislation last Congress (HR 4824, 105th
Congress) based on the NCRP report. That legislation generated
considerable interest and praise for representing a fiscally
responsible approach to strengthen the Social Security program.
Since then, we have talked with many of our colleagues on both
sides of the aisle, met with Administration's staff to discuss
our proposal and listened to constructive criticisms of our
plan. The legislation we bring before you today is a revised
version of the NCRP plan--a ``new and improved'' plan that we
believe addresses many of the concerns that have been brought
to our attention over the last year.
HR 1793: The 21st Century Retirement Security Act
We still adhere to the same guiding principles as our
previous legislation: a balanced, actuarially sound plan that
reduces the $7.4 trillion unfunded liability, improves rates of
return and strengthens the safety net. We accomplish this by
using personal accounts to advance-fund future obligations and
by implementing much needed structural reforms. We've softened
some of the tough choices in last year's bill and included some
new provisions aimed at improving the retirement income of the
working poor. What we don't do, however, is rely on double
counting, cost-shifting, uncertain budget surpluses and
accounting gimmickry to hide the true costs of reform--unlike
some ``free lunch'' plans that have been offered by the right
and left.
Our legislation, The 21st Century Retirement Security Act,
provides a payroll tax cut for all working individuals under
the age of 55 by diverting two percent of FICA taxes into
personal Individual Security Accounts. Workers also would be
allowed to make additional voluntary contributions of up to
$2,000 a year to their individual account. The legislation also
provides a savings match for voluntary contributions to help
low-income workers build their individual accounts.
The individual accounts in our plan would be modeled on the
federal government's Thrift Savings Plan. In the TSP,
individuals personally choose investment options, including a
stock index fund, a bond index fund and a Treasury securities
index fund. Unlike other proposals, our plan would provide
individuals with ownership and control over their retirement
assets, including the freedom to invest in safe, risk-free
Treasury securities. We don't force anyone to invest their
Social Security monies in the stock market--it's your money,
your choice.
Our bill also strengthens traditional Social Security's
safety net by creating a more substantial guaranteed minimum
benefit that ensures stronger poverty protections than
currently provided for low-income workers. Moreover, this
benefit is given regardless of any other factors. Consequently,
any income from the individual accounts would supplement the
enhanced guaranteed Social Security benefit for low-income
workers.
Our plan makes changes in the defined benefit program, but
in a progressive manner that insulates vulnerable populations.
Changes to the defined benefit largely affect mid-to-high
income individuals who will benefit disproportionately from the
individual accounts. We implement additional reforms that
reduce the cost of the Social Security program. For example,
our plan makes changes to reflect the increases in life
expectancy and longer working lives, provides for a more
accurate inflation adjustment, and rewards work. While these
provisions involve some pain, it is necessary to make tough
choices to ensure that future governments will have resources
to deal with other problems in addition to Social Security.
We have never claimed that our plan is perfect. Every one
of you could go through our plan and select individual items in
the plan to criticize--either we went too far or not far
enough. We remain open to constructive suggestions about how
our plan can be improved. However, we encourage you to look at
the plan ``holistically''--to examine what the proposal
accomplishes in it's entirety, rahter than focus on one or two
provisions. If everyone determines the acceptibility or
unacceptability of various proposals based ona single element,
we'll never achieve the bipartisan consensus necessary to pass
a bill and save Social Security.
Kolbe-Stenholm is a Foundation Plan
We respectfully suggest to this committee that the
bipartisan work embodied by this legislation offers a
foundation for you to commence negotiations and create
meaningful, comprehensive reform that can be enacted in to law
this year. There are several elements in our proposal that we
believe are essential to reaching a bipartisan consensus on
Social Security reform:
1) Bipartisan. Our proposal is a truly bipartisan solution
that balances the objectives of different political
perspectives.
2) Solvent. The legislation we introduced has been scored
by the actuaries of the Social Security Administration as
restoring solvency to the Social Security program for the next
seventy five years and beyond.
3) Fiscally responsible. Our legislation tackles the tough
choices that are necessary to control cost and reduce the
pressures on future general revenues. It does not use cost
shifts or other accounting gimmickry and does not rely on
projected surpluses to create new general fund liabilities.
4) Empowers all Americans. The legislation establishes
individual accounts that provide all Americans the opportunity
to create wealth, and provides individuals with ownership of
and control over their retirement assets.
5) Enhances the safety net. Our legislation contains
several provisions in both the defined benefit program and
individual accounts that provide stronger poverty protections
and greater assistance to low-income workers than are contained
in current law.
6) Rewards work. The legislation makes several reforms to
enhance the work incentives in the current system.
7) Improves Social Security for all Americans. Our proposal
provides all future retirees with a better rate of return than
the current system can afford, and protects all taxpayers from
the increased tax burden created by the existing general fund
obligations to the Social Security system.
The Kolbe-Stenholm Plan is Bipartisan
An agreement on legislation to strengthen Social Security
will require bipartisan cooperation. We must put party
affiliations aside and think about the future generations who
will be affected by the decisions we make today.
The Kolbe-Stenholm plan is a model for building this
bridge. The Social Security reform debate has been
characterized as an either-or choice between two ideological
poles--``status'' or ``full privatization.'' Defenders of the
status quo argue that any reform that includes a market-based
component will undermine the current safety net features and
expose workers to dangerous risks. Advocates of full
privatization suggest that the creation of privately managed
personal accounts will painlessly solve every challenge while,
in fact, they ignore existing long-term liabilities and the
needs of special populations. Both extremes make for good,
albeit myopic, rhetoric and fail to acknowledge the virtue of
hybridization. The complete solution to the Social Security
problem can and must combine the best of the traditional
program with new market-based options.
Our plan attempts to balance three competing objectives we
think are necessary to achieve a responsible consensus that can
win the support of the left, right and middle of the Social
Security debate. It establishes individual accounts to improve
rates of return for all retirees--the key objective of most
Republicans. At the same time, it maintains and strengthens the
important protections that the Social Security system provides
for low-income retirees, survivors and the disabled--the key
objective of most Democrats. Last, but definitely not least, it
honestly deals with the financial challenges of Social
Security, the key concern of those of us in the radical center.
The Kolbe-Stenholm Plan is Fiscally Responsible--or ``Show Me the
Money!''
Our plan sets the standard for a credible, responsible
solution to Social Security. The 21st Century Retirement Act
ensures the Social Security program will operate on a solid,
sustainable fiscal path well into the next millennium. It does
this by honestly and responsibly addressing the unfunded
liabilities of the program.
Three distinguishing characteristics separate this plan
from other prominent proposals. First, unlike the President's
proposal, our plan restores the Social Security Trust Fund to
75-year actuarial balance. Second, unlike several ``free
lunch'' proposals, our plan addresses the cash deficits that
begin in 2014 (when benefit costs exceed payroll tax revenues),
by reducing the pressure on general revenues and preserving the
flexibility of future governments to meet other critical budget
needs. Third, the 21st Century Retirement Security Act does not
depend on projected budget surpluses, cost shifts or accounting
gimmicks to balance the Social Security program.
The 21st Century Retirement Security Act restores solvency
of the Social Security Trust Fund by eliminating the entire
projected cash shortfall in the Trust Fund over the next 75
years. Moreover, it does so using conservative economic
assumptions. Just as importantly, the 21st Century Retirement
Security Act makes structural reforms to the Social Security
system that help restore the traditional program to a path of
long-term solvency that does not deteriorate over time. The
Kolbe-Stenholm plan puts Social Security revenues and outlays
on a sustainable course over the entire 75-year period. The
Trust Fund ratio--the amount of cash reserves in the Trust Fund
relative to projected benefits--is rising at the end of the 75-
year period. Thus, there is no ``cliff effect.''
While restoring actuarial balance to the Social Security
Trust Fund is an important step, it is only one measure of the
financial stability of a Social Security reform plan. A truly
responsible Social Security plan must control the costs of the
Social Security program over the long term and address the cash
shortfalls that will create tremendous liabilities on general
revenues beginning in 2014. Controlling the costs of the Social
Security system is essential to the fiscal health of our
government. If we do not address the pressures on the rest of
the budget caused by the growth in the costs of Social
Security, future Congresses will be forced to cut other
important government programs or raise additional taxes to meet
the obligations to our senior citizens. Not only will there be
no room for any domestic initiatives; we will have to cut back
on existing programs to make room for growth in spending on
Social Security
According to the Congressional Budget Office long-term
budget projections, which assume that we will use 100% of
projected surpluses to reduce our national debt, Social
Security will consume an ever growing portion of the federal
budget, creating tremendous budgetary pressures. Between now
and 2030, the percentage of our national income consumed by
Social Security will increase by 50%. Spending on Social
Security consumes slightly less than 20% of total federal
revenues today. CBO projects that Social Security will grow to
23.5% of total revenues by 2015 and nearly 30% of total
revenues by 2030.
The tough choices we struggle with in the current
appropriations cycle are mild compared to the problems we will
leave for future Congresses if we do not take action now to
control the costs of the Social Security program. By 2025,
spending on programs other than Social Security and Medicare
will have to be reduced by nearly 9% below current levels if we
do not take action. By 2030, spending on programs other than
Social Security and Medicare will have to be reduced by 16%
below current levels.
Under current law, the U.S. Treasury must find $7.4
trillion in cash from general revenues between 2014 and 2034 to
convert the IOUs in the Social Security Trust Fund into cash
benefits for Social Security recipients. These general fund
liabilities will be more than $200 billion a year by 2020 and
more than $800 billion in 2030 alone. After adjusting for
inflation, the amount of general revenues that will need to be
provided to the Social Security system in 2030 to provide
promised benefits will be greater than total non-defense
discretionary spending last year.
The 21st Century Retirement Security Act restores the costs
of the Social Security system to sustainable levels. According
the Social Security Administration actuaries, the costs of the
Social Security system will average 14.0% of payroll over the
75-year period under our plan, compared to 16.4% under current
law. The costs of the Social Security system will never exceed
15.7% of payroll under our plan. Under current law, the costs
of the Social Security system will reach 19.6% of payroll by
2075 and will continue growing. Our proposal and the Senate
bipartisan proposal will do more to control the costs of the
Social Security system than any other proposal. In fact,
several prominent proposals that have been put forward would
actually result in higher costs for the Social Security system
than the projected costs under current law (see Table 1).\1\
---------------------------------------------------------------------------
\1\ Source: Office of the Actury, Social Security Administration.
Archer-Shaw plan memo dated April 29, 1999; Senate Bipartisan plan memo
dated June 3, 1999; Kolbe-Stenholm plan memo dated May 25, 1999; and
Gramm plan memo dated April 16, 1999. Nadler plan memo unavailable on
date of publication.
Table 1. Comparison of Cost Rates of Current Law and Alternative Plans
(as a percent of Taxable Payroll)
------------------------------------------------------------------------
Current Archer- Senate Kolbe-
Year Law Shaw Bipartisan Stenholm Gramm Nadler
------------------------------------------------------------------------
2000 10.8 12.8 12.7 12.9 15.0
2005 11.2 13.3 13.2 13.0 15.2
2010 11.9 13.9 13.4 13.4 15.6
2015 13.3 15.0 14.0 14.0 16.4
2015 13.3 15.0 14.0 14.0 16.4
2020 15.0 16.4 14.7 14.8 17.3
2025 16.6 17.4 15.4 15.6 17.6
2030 17.7 17.8 15.7 15.7 17.1
2030 17.7 17.8 15.7 15.7 17.1
2030 17.7 17.8 15.7 15.7 17.1
2035 18.2 17.3 15.5 15.2 16.4
2040 18.2 16.2 14.8 14.5 15.2
2045 18.2 14.9 14.3 13.8 14.1
2050 18.3 13.8 13.9 13.3 13.4
2055 18.6 13.1 13.7 13.2 13.0
2060 19.1 12.6 13.7 13.2 12.8
2065 19.4 12.3 13.6 13.4 12.5
2070 19.6 12.1 13.5 13.7 12.4
Min 10.8 12.1 12.7 12.9 12.4 NA
Max 19.6 17.8 15.7 15.7 17.6 NA
Avg 16.4 14.6 14.1 14.0 14.9 NA
------------------------------------------------------------------------
Because our plan advance-funds future liabilities and
addresses tough choices, it will dramatically reduce the
general fund liabilities that exist under current law. By
contrast, the leading plans proposed from the left and the
right leave this liability in place and actually increase these
general fund liabilities for the next fifty years. According to
estimates prepared by the Social Security administration
actuaries, the 21st Century Retirement Security Act would
reduce the $7.4 trillion liability facing general revenues
between 2014 and 2034 by approximately $3.8 trillion, a
reduction of more than 50%. It would reduce the amount that the
federal government will have to come up with from general
revenues in 2025 from $420 billion to $217 billion. In 2030,
our plan would reduce the burden on general revenues by more
than half a trillion dollars, reducing a $814 billion liability
to just $272 billion.
These reductions represent resources that will be available
for other priorities, including programs for education,
training, health care, debt reduction or tax cuts. The tough
choices that are contained in our plan to control program costs
must be viewed in context of the resources that would be freed
for other priorities. Likewise, any evaluation of ``free
lunch'' plans that claim to save Social Security without
tackling tough choices must consider the problems these plans
shunt onto the rest of the budget--problems that will be left
for future Congresses. We can responsibly tackle some tough
choices today or we can leave a fiscal time bomb for future
generations. A plan that restores the Social Security Trust
Fund to 75-year actuarial balance, but does not address the
budgetary pressures created by these growing costs and general
fund liabilities, does no favors for future generations.
Unlike other Social Security reform plans that are
dependent upon funding from projected surpluses, the 21st
Century Retirement Security Act is entirely self-financed and
will achieve its goals whether or not current surplus
projections are accurate. Although our plan relies on general
revenue transfers, all of the general revenue transfers in our
plan are paid for by savings in the non-Social Security budget
from the CPI recapture provision. Plans which rely on general
revenue transfers financed by projected surpluses either place
the solvency of the Social Security Trust Fund in jeopardy, or
create problems in the non-Social Security budget if the
surpluses are not as large as currently projected. Under our
plan, if the surpluses do materialize, they would remain
available for debt reduction, strengthening Medicare, tax cuts,
or spending on other priorities.
The 21st Century Retirement Security Act does not rely on
double-counting, optimistic assumptions or other gimmicks to
make the plan appear balanced on paper. The plan does not mask
the costs of the program by shifting costs to other areas of
the budget or the private economy. All payroll taxes are used
only once, either to fund current benefits, fund individual
accounts, or credit the Trust Fund. Unlike other plans, the
Kolbe-Stenholm plan does not use Social Security surpluses
already credited to the Social Security Trust Fund to justify a
second round of credits to the Trust Fund. Nor does the plan
pay for individual accounts with funds that already have been
credited to the Trust Fund, like some ``free lunch'' plans do.
We learned a long time ago that if something sounds too
good to be true, it probably is. There is no free lunch. We
cannot afford to meet all of the promises in current law
without finding additional resources elsewhere. Proponents of
plans that claim to preserve benefits at levels promised under
current law, or even suggest that benefits will be increased
above current law, must answer the call ``Show me the money!''
Where does the money come from to fund these promises? These
so-called ``free lunch'' plans which suggest it is possible to
save Social Security without any pain actually have tremendous
hidden costs that will require very real pain. They will drain
the federal budget and U.S. economy of resources that are
needed for other government programs. They will result in
higher tax burdens and lower national savings. Congress and the
President must honestly address the fiscal challenges posed by
the Social Security system, instead of ignoring hidden costs
and pretending that we can meet these challenges without tough
choices.
H.R. 1793 Empowers All Americans with Freedom and Control over their
Retirement Assets
H.R. 1793 creates individual accounts based on the federal
employees' Thrift Savings Plan. This model combines the
benefits of individual ownership with the protections offered
by a quasi-private board governing fund managers. The TSP model
offers a straight-forward, low-cost retirement savings
mechanism safeguarded against fraud and abuse. The Thrift
Savings Plan has been an extremely successful program for all
federal employees, including Members of Congress. The burden of
record-keeping for each individual account would be assumed by
the Board. Employer burdens and administrative costs would be
kept to a minimum. The administrative costs would be spread
across accounts proportionally based on account balances to
limit the impact of administrative charges on small accounts.
Under our legislation, every worker would be able to choose
from among a number of investment options selected by a quasi-
private Board based on a competitive bidding process. Workers
would have the opportunity to choose between options with
higher risk and the potential of a commensurate higher return
and those that are safer, with lower rates of return. The
options would include a stock index fund, a bond index fund,
and a government securities fund. No worker would be forced to
put his or her retirement funds in the stock market. Workers
would have the opportunity to select their own risk profile,
including the freedom to invest in safe, risk free Treasury
securities. Conversely, workers who want to take advantage of
stock market returns could place all or most of their account
in stock funds. The individual accounts under our plan are
based on a simple philosophy: it's your money, your choice.
Opponents of individual accounts highlight examples of
poorly implemented individual account systems in other
countries that resulted in high administrative costs. There are
legitimate administrative cost concerns about purely privatized
individual account plans involving dozens of private account
managers. However, these concerns can be addressed without
eliminating individual control and turning investment decisions
over to the government. Our legislation demonstrates that it is
possible to give individuals control over their retirement
income while also providing government safeguards that address
legitimate risk concerns.
Federal Reserve Board Chairman Alan Greenspan and others
have made a persuasive case about the risks of social
investing, government interference in the market and conflicts
of interest inherent in having the Trust Fund invested by the
government in the stock market. Most significantly, though, the
collective investment approach doesn't address the central
impetus behind calls for individual accounts: taxpayers want
their own stake in the economy and more control over their
retirement benefits.
Critics argue that individual accounts are too risky for
lower-income individuals. We believe that it is more risky, and
certainly unfair, not to give lower-income individuals the
opportunity to realize the benefits of accumulating assets. It
is precisely this lack of investment opportunity that has left
too many Americans on the fringe of the economy. Our
legislation gives low-income workers the same opportunities to
have savings for their retirement and reap the benefits of
investment earnings that are already available to higher
earning workers who benefit from 401(k) plans and other private
savings vehicles. For low-income people, the individual
security accounts are a pure bonus above and beyond the
strengthened safety net provided by the guaranteed minimum
benefit provision included in our legislation.
Why a Carve-Out is Necessary
H.R. 1793 creates individual accounts within the existing
payroll tax structure instead of creating individual accounts
above the current 12.4% payroll taxes. Some plans ``add on''
personal accounts through explicit or implicit tax increases or
by diverting revenues from other programs. Diverting a portion
of payroll taxes to create individual accounts--sometimes
referred to as a ``carve-out''--has been criticized as
weakening the financial status of the Social Security system
and requiring deeper benefit cuts than otherwise would be
necessary. This argument completely ignores the benefits of
using individual accounts funded with current payroll taxes to
replace a portion of future unfunded liabilities instead of
building up Trust Fund assets.
By placing a portion of current payroll taxes into
individual accounts that will be available to provide
retirement income for future retirees, our legislation would
significantly reduce future unfunded benefit promises without
reducing retirement income for these retirees. Under our plan,
a portion of retirement income for future retirees will come
from payroll taxes collected today and placed in individual
accounts, instead of leaving the entire burden of funding
retirement income to future taxpayers. The reductions in future
liabilities on general revenues that we outlined earlier in our
statement are possible because of the prefunding through
individual accounts created with existing payroll taxes.
While there has been a lot of discussion about the
transition costs of creating individual accounts, the
transition costs resulting from advance funding future benefits
must be viewed in context of the reductions in future
liabilities that are achieved by this advance funding.
Proposals which rely on increasing the balances of the Social
Security trust fund to meet future benefit promises instead of
creating individual accounts effectively leave the financial
burden of providing retirement income for future retirees to
future taxpayers. The transition costs of creating individual
accounts out of existing payroll taxes are much smaller than
the liabilities that future taxpayers will face in redeeming
trust fund balances under current law. Those who criticize
plans to advance fund future benefits with individual accounts
because of the transition costs resulting from diverting a
portion of current payroll taxes should be asked to explain how
they plan to meet the general fund liabilities that would be
reduced under our plan. Our legislation takes responsibility
for itself and preserves the flexibility of future Americans to
address other national needs.
There have been some suggestions that creating individual
accounts outside of the existing payroll taxes--sometimes
referred to as an ``add-on''--would represent a compromise on
the issue of individual accounts. We strongly disagree with
that suggestion. In fact, creating individual accounts above
the existing payroll tax would actually exacerbate the concerns
that we have outlined about the budgetary pressures that will
be created by retirement programs under current law. That would
represent a major step backwards from current law, not a
compromise.
Since there is very little willingness to explicitly
require additional contributions above the current 12.4%
payroll tax rate to fund individual accounts, most proposals
that create individual accounts outside of the current payroll
tax are funded with general revenues from projected surpluses.
This approach presents some very serious problems in terms of
fiscal responsibility, future tax burdens and resources
available for other needs. Even if projected surpluses
materialize as currently estimated--an uncertain prospect at
best--they will not last indefinitely. However, the obligation
to fund individual accounts from general revenues would be
permanent.
A Congressional Budget Office analysis of one such plan to
create individual accounts with general revenues warned that
this approach would result in higher implicit tax burdens,
increased budgetary pressures and a higher national debt. The
Social Security Actuaries have found that creating individual
accounts of 2% funded with general revenues could increase the
national debt by more than $10 trillion above current
projections over the next thirty years. Creating individual
accounts outside of the existing 12.4% payroll tax means higher
tax burdens on future generations, less resources available for
all other government priorities, and higher debt. We cannot
afford to ignore the very serious fiscal consequences that this
approach would have in the future in order to meet political
needs of today.
The real question isn't whether or not a plan has
individual accounts, it is whether the plan uses the individual
accounts to address future liabilities to taxpayers. Unlike
plans which use current payroll taxes to prefund future
benefits instead of building IOUs in the Trust Fund, individual
accounts funded outside of the current payroll tax would allow
the Trust Fund to continue to accumulate IOUs. These IOUs are
merely claims against future general revenues. Using current
payroll taxes to create individual accounts and advance fund
future benefits will substantially reduce the liabilities on
future general revenues. By contrast, individual accounts added
on top of the current system take funds from general revenues
today and leave in place the future liabilities on general
revenues. This is a fundamental difference from a fiscal
perspective that must not be brushed aside to reach a political
compromise.
The Kolbe-Stenholm Plan Strengthens the Government Safety Net
The 21st Century Retirement Security Act restores the
solvency of the Social Security Trust Fund in a way that not
only protects low-income workers from any reduction in
benefits, it actually strengthens the safety net provided by
the Social Security program. It contains a new minimum benefit
provision that offers stronger poverty protection than provided
under current law. The plan also provides a subsidy to
supplement the individual accounts of low-income workers.
Finally, by addressing the unfunded liabilities of the Social
Security without shifting new obligations onto general
revenues, our plan reduces the pressure to cut funding for
other government programs that benefit low-income populations.
One of the innovative features of our bill is a minimum
benefit provision that provides a much stronger safety net for
low and moderate-income workers when they retire than is
contained in current law. An individual who has worked for 40
years and qualified for 40 years of coverage will be guaranteed
a Social Security benefit equal to 100% of the poverty level.
Workers would be eligible for a minimum benefit equal to 60% of
poverty after 20 years of work, and the minimum benefit would
increase by 2% of the poverty level for each additional year of
work. This minimum benefit level is calculated without regard
to any other change in the benefit formula under our
legislation. Any income from the individual accounts would
supplement this guaranteed benefit. Widows would be covered by
the minimum benefit guarantee based on his or her spouse's work
history.
The new minimum benefit provision will enable Social
Security to lift more of the elderly out of poverty than
current law. Currently, nearly 8 million seniors receive
benefits that are less than the poverty level. According to the
Social Security Administration actuaries, 50% of women and 10%
of men would receive higher guaranteed Social Security benefits
as a result of the minimum benefit provision in H.R. 1793. For
a low-wage worker, defined by the Social Security
Administration as a worker with lifetime earnings equal to 45%
of the national median, the minimum benefit provision increases
retirement income by more than 10% (see Table 2)--not including
any balances that would accrue in the worker's personal
account. We say to all Americans--if you work all your life and
play by the rules, you won't retire into poverty.
Table 2. Impact of the Minimum Benefit Provision on a Low Wage Worker
------------------------------------------------------------------------
------------------------------------------------------------------------
Low wage worker earning 45% of the .............. $12,600 / yr
National Average Wage..................
Current Law Social Security benefit.....
Social Security Benefit at Normal $568
Retirement Age:........................
Plus: Spousal Benefit (if applicable):.. $284
----------------
Equals: Total Monthly Social Security $852
Benefit:...............................
================
Social Security Benefit under Kolbe-
Stenholm...............................
Poverty Level for a single-person .............. $7,525
household over age 65..................
Translated into a monthly benefit $627
(divide by 12).........................
Plus: Spousal Benefit (if applicable)... $314
----------------
Equals: Total Monthly Social Security $941
benefit................................
================
Note: this amount does not include any
balances that accrue in the workers
personal account. Consequently, total
benefits will be higher................
Kolbe-Stenholm increase over current law $89 /month
benefits:.............................. 10.4%
------------------------------------------------------------------------
The Kolbe-Stenholm plan also incorporates the concept from
the President's USA proposal of helping low-income workers save
for their retirement by providing subsidies for workers. The
individual accounts in the 21st Century Retirement Security Act
will give low and moderate income workers the opportunity to
benefit from investment opportunities that higher income
workers already have with 401(k) plans, IRAs and mutual funds.
To help low-income workers take advantage of this new savings
vehicle the Kolbe-Stenholm plan provides a savings subsidy, or
``match'' for low-income workers who make voluntary
contributions to their individual account. A maximum of $600
per individual is allowed per year. To qualify for the subsidy
in any given year, an individual must earn less than $30,000
per year and make at least $1 in voluntary contributions to
their personal account. The subsidy for low income workers will
help increase retirement savings for lower income workers who
do not have access to private pensions and have little or no
other savings for retirement.
We've discussed in detail the reduction in the unfunded
liabilities of the Social Security system under our proposal.
This effect is substantial for low-income individuals as well,
because the budgetary pressures that will occur under current
law threaten deep cuts in other safety net programs that
benefit low-income populations. By honestly addressing the
budgetary pressures created by the unfunded liabilities of the
Social Security system, our plan ensures that future
governments will have resources available to preserve funding
for discretionary spending and other programs that benefit low-
income families in addition to providing Social Security
benefits.
Instead of focusing on rhetoric about what Social Security
reform could do to vulnerable populations, we encourage you to
look closely at what our plan actually does. The 21st Century
Retirement Security Act demonstrates that a fiscally
responsible plan to strengthen the Social Security system and
create individual accounts with existing payroll taxes can
actually preserve and strengthen the safety net provided by
Social Security.
The Kolbe-Stenholm Plan Increases National Savings
It is a basic rule of economics that increasing national
savings is vital to maintaining a strong and growing economy.
Comprehensive Social Security reform, done properly, could be
the most significant action the government could take to
increase national savings. Estelle James, a World Bank
Economist who has studied retirement systems and across the
world and served on the NCRP, wrote in a study of public
pension reforms around the world that:
``... a change from the old traditional pay-as-you-go,
defined-benefit type of social security system to a system that
includes more funding, more individual accounts, and a closer
link between benefits and contributions is good for the overall
economy...It helps all countries develop their long-term
saving, which seems to be linked to economic growth.''
The 21st Century Retirement Security Act contains several
features that will help increase national savings. By advance
funding a portion of future benefits and tackling the tough
choices necessary to control the cots of the Social Security
system, our plan dramatically reduces the unfunded liabilities
that will place a tremendous drain on national savings in the
future. The individual accounts in our plan create a new
vehicle for increased retirement savings by allowing workers to
make voluntary contributions of up to $2000 a year to their
individual accounts. The savings match for low-income workers
will provide low-income workers with an incentive and
assistance to save for their own retirement. The reductions in
the defined benefits for the middle and upper income workers
who have the means to save for their own retirement will
encourage these workers to increase their private retirement
savings. The Congressional Budget Office and several economic
studies have found that the existence of high guaranteed
benefit levels for higher income workers has the effect of
reducing private savings among these workers.
The Kolbe-Stenholm Plan is a Better Deal for All Americans
When all of the provisions of the 21st Century Retirement
Security Act are taken into consideration, it offers a much
better deal for all Americans than current law. Our plan will
put into place a Social Security system that will remain
financially strong for the next 75 years and beyond, and
reduces the tax burdens that will be necessary to support the
system. At the same time, the legislation we have introduced
will provide a better rate of return than can be provided under
current law and strengthens the safety net for low-income
workers. The individual accounts in our plan will allow all
workers to create wealth and benefit from market forces.
Perhaps most importantly, our plan will help restore public
confidence in the future of the Social Security system.
Our legislation increases the rate of return for all
workers compared to what current law can fund. Comparing the
benefits under our plan to the benefits promised under current
law is extremely misleading, because we cannot afford the
benefits promised under current law. Today, the Social Security
system faces a funding gap that must be closed if beneficiaries
are to be protected. Eliminating the funding shortfall under
current law through a traditional package of benefit reductions
or tax increases would exacerbate the bad deal that Americans
receive from Social Security.
Under current law, benefits will have to be cut by more
than 25 percent after 2034 unless we raise payroll taxes. If
the burden of closing this funding gap were spread evenly among
all generations, benefit levels would be cut by nearly 16%
beginning immediately. To accurately compare our plan to the
benefits promised under current law, it is necessary to
consider the substantially higher tax burdens that will be
necessary to fund the benefits promised under current law. To
the extent that current law promises higher benefit levels than
our plan can deliver for some middle and upper income retirees,
it can only meet those promises by imposing much higher taxes
on those workers. When the benefits promised under current law
are viewed in context of the taxes that must be raised to fund
those benefit promises, the deal offered by current law is not
nearly as attractive for today's workers. When all of the
benefits under 21st Century Retirement Security Act are
compared to what current law can actually deliver, future
retirees will get a much better deal under our legislation than
they would under current law.
Our legislation establishes the opportunity for all
Americans to create wealth and benefit from the market forces
to increase their retirement income. Individual accounts will
extend to low and moderate income workers the investment
opportunities that higher income workers with 401(k) plans and
mutual funds already enjoy. Unlike the current system and some
other individual account plans, H.R. 1793 will provide
individuals with ownership of and control over their retirement
assets.
Finally, The 21st Century Retirement Security Act will
improve public confidence in the future of the Social Security
system. The Social Security system has a well-deserved
reputation as one of the most successful government programs in
history, and has enjoyed strong public support. However, the
financial problems facing the system and the low-rate of return
that current workers can expect to receive on their payroll
taxes threatens to undermine this support. The plan we have
introduced offers a message of reassurance to seniors and a
message of hope to younger generations.
Our plan reassures seniors that the long-term challenges
facing Social Security can be addressed without threatening the
benefits they have been promised. Our bill restores the
solvency of the Social Security system while preserving
existing benefit promises for current and near-retirees.
Current retirees would continue to receive their existing
benefits, with full increases for inflation, accurately
measured. By putting the Social Security system on a
sustainable fiscal path, our plan protects current retirees
from the threat of benefit changes that may be necessary if the
Social Security system continues to face financial problems.
While it is important that Social Security reform protect
the interests of current retirees, it is just as important that
we address the concerns of younger generations that doubt that
the Social Security system will be there for them. The Social
Security system has always been based on an implicit
generational contract that workers will pay taxes to fund
benefits for current retirees in the expectation that they will
receive similar benefits when they retire. This generational
contract is threatened by the growing skepticism among younger
workers about the future of the Social Security system.
Requiring workers to pay taxes to support a system that they do
not expect to benefit from will create discord that can only
jeopardize the political legitimacy of the Social Security
program.
The 21st Century Retirement Security Act will give younger
generations much greater confidence in the Social Security
system. Our plan reassures younger generations that the Social
Security program will be there for them when they retire by
putting the system on a long-term, sustainable fiscal path. In
addition, our legislation will give younger workers ownership
of and control over a portion of their retirement income,
providing them with concrete assurance that the Social Security
system will provide them with retirement income. Our
legislation will modernize the Social Security system to ensure
that it can earn the support of younger generations that will
be necessary to preserve the program.
Congress Must Not Shirk it's Responsibilities for Political Expediency
We realize that reaching agreement on an honest solution to
the long-term challenges facing Social Security will be
difficult, but the difficulty of the task must not prevent us
from confronting it. Social Security reform will require us to
tackle tough choices. We were elected to make tough choices,
and our constituents deserve no less from us.
We hope that the suggestions contained in the legislation
we have presented to you will help create a foundation to build
a bipartisan agreement on Social Security reform. While our
legislation may not be perfect, it does offer all of the
elements that will be necessary for a responsible bipartisan
deal to strengthen the Social Security system.
We do not agree with those who say that the issue of Social
Security reform is dead. These hearings are evidence that the
issue remains very much alive. More importantly, those of us
who have the honor of serving in public office have an
obligation to keep this issue alive for the sake of future
generations that are counting on this system. As we tackle the
tough choices that will be necessary to enact credible Social
Security reforms, we must look beyond current polls and think
about how our children and grandchildren will look back at the
decisions we make today. We look forward to working with this
Committee to create a future for the Social Security system
that will make future generations grateful for the decisions we
make today.
The Twenty-First Century Retirement Security Act: A Response to Issues
and Concerns
Q. How is this bill different than last year's legislation?
A. We still adhere to the same guiding principles as
before, a balanced, actuarially sound plan that reduces the
$7.4 trillion unfunded liability in Social Security, and we
create personal accounts that will advance-fund future
obligations and implement much needed structural reforms. We've
softened some of the painful elements of last year's bill and
included some new provisions aimed at improving the retirement
income of the working poor. Specifically, the plan:
Eliminates the proposed mandatory coverage for
state and local government employees.
Eliminates the proposed reduction in spousal
benefits.
Eliminates the proposed increase in the normal
retirement age to age 70. Under the Kolbe-Stenholm plan, the
age at which an individual may begin receiving traditional
benefits remains at 67 as with current law (although HR 1793
plan gets to age 67 faster than current law).
Eliminates the proposed increase in the early
eligibility age to age 65.
Incorporates a version of the President's
Universal Savings Accounts (USAs) by including a savings
subsidy for low-income workers.
Uses general revenues to help finance the
transition to a partially-funded system. Uniquely, the Kolbe-
Stenholm plan contains a self-financing revenue source. Ergo,
the plan does not depend on uncertain, unproven budget
surpluses.
Implements more moderate changes in the bend
points.
Q. What is the impact of the Kolbe-Stenholm reform proposal on
the federal budget?
A. The 21st Century Retirement Act ensures that the Social
Security program will operate on a solid, sustainable fiscal
path well into the next millennium. It does this by honestly
and responsibly addressing the unfunded liabilities of the
program.
The legislation will result in a decrease in unified budget
surplus totals in the near term since the plan uses a portion
of current Social Security surpluses to advance fund future
benefits through individual accounts. This short-term reduction
in unified budget surpluses is more than offset by the long-
term reductions in the unfunded liabilities under current law.
The legislation will substantially reduce the budgetary
pressures that begin in 2014 by reducing general fund
liabilities by more than half, and placing the costs of the
Social Security system on sustainable path. The plan would not
affect the projected on-budget surpluses at all because it
offsets the general revenue transfers to the Social Security
trust fund with equal savings elsewhere in the non-Social
Security budget, and does not double-count the Social Security
surplus.
Three distinguishing characteristics separate this plan
from other prominent proposals. First, unlike the President's
proposal, the Kolbe-Stenholm plan restores the Social Security
trust fund to 75-year actuarial balance. Second, unlike several
``free lunch'' proposals, the Kolbe-Stenholm plan addresses the
cash deficits that begin in 2014, when benefit costs exceed
payroll tax revenues. The plan reduces by more than 50% the
existing $7.4 trillion general fund liability between 2014 and
2034, preserving the flexibility of future governments to meet
other critical budget needs. Third, the 21st Century Retirement
Act does not depend on projected budget surpluses, cost shifts
or accounting gimmicks to balance the Social Security program.
Q. Isn't a ``carve-out'' further destabilizing to the Social
Security program?
A. To the contrary, a carve-out enhances the long-term
viability of Social Security and preserves other federal
programs by preventing the enormous build-up of IOUs in the
Social Security Trust Fund--IOUs that somehow must be
translated into cash benefits. These IOUs are first claims on
future federal revenue and can be funded only by increased
taxes, reduced benefits, additional debt, or redirected
spending from other programs (education, defense, environment,
etc.). Under current law, the Social Security Administration
estimates that at its peak, the Trust Fund will contain over
$4.4 trillion in IOUs.
Rather than simply shift future Social Security liabilities
to the operating budget in the form of Treasury bills held by
the Trust Fund, the 21st Century Retirement Act draws down
current surpluses to advance fund future benefits. Under the
Kolbe-Stenholm plan, a portion of retirement income for future
retirees will come from payroll taxes collected today and
placed in individual accounts, instead of leaving the entire
burden of funding retirement income to future taxpayers. In
other words, our plan uses the current Social Security surplus
to create individual accounts that will provide benefits for
future retirees. These accounts are used to reduce the
liabilities to the general budget beyond the actuarial deficit.
This is done in lieu of investing the surplus in Treasury
securities which merely creates a liability to the general
government. By using the annual Trust Fund surplus to cover the
transition costs of creating individual accounts, the plan is
able to restore long-term solvency of the Social Security
system and reduce the liabilities on future general revenues
while preserving retirement security for future retirees.
Q. What is the impact of the Kolbe-Stenholm reform plan on
national savings?
A. The 21st Century Retirement Security Act will increase
private savings by encouraging individuals to save for their
own retirement. In particular, the plan will enhance the
ability of low-income workers to save by providing a federal
match for voluntary contributions. In addition, the Kolbe-
Stenholm plan strengthens public savings by using current
surpluses to reduce future unfunded liabilities through the
creation of personal retirement accounts, rather than spend the
surplus on current consumption.
Q. What is the impact of the Kolbe-Stenholm plan on retirement
benefits?
A. The 21st Century Retirement Act places the Social
Security system on sound financial footing through a balanced,
progressive package of adjustments to the defined benefit of
Social Security, complemented by personal retirement accounts.
The benefit adjustments are timed such that given a
conservative rate of return, the balances that accrue in a
personal account will at least compensate for the reductions in
the defined benefit of Social Security. Vulnerable populations
are insulated from the reductions in the defined benefit via a
minimum benefit guarantee for low-income retirees and a savings
subsidy for the working poor. Moreover, individuals who leave
the work force to care for children, or for other reasons, may
continue to contribute to their personal account, enhancing
their retirement income. Current and near-retirees are
unaffected by the changes proposed by the Kolbe-Stenholm bill.
When all of the provisions of the 21st Century Retirement Act
are taken into account, most future retirees will get a better
deal under this plan than if we balanced the system solely by
tax increases or benefit cuts.
Note: comparing the benefits afforded under Kolbe-Stenholm
to the benefits promised under current law is extremely
misleading. Current law makes promises that cannot be met
without substantially raising payroll taxes. If Congress and
the President do not act, current law benefits will be cut by
25-28% across-the-board in 2034.
Q. How does this plan benefit low-income retirees?
A. The Kolbe-Stenholm plan creates a protection from
poverty within Social Security by establishing a minimum
benefit provision. Anyone who has worked 40 years would receive
a guaranteed defined benefit from Social Security equal to 100%
of the poverty level, regardless of their earnings history.
Retirees are eligible for the minimum benefit provisions if
they have worked for at least 20 years. The minimum benefit
provision guarantees a benefit of at least 60% of poverty for
individuals who have worked for 20 years, and an additional 2%
for each year worked, up to 40 years. If a retiree's regularly
computed benefit is higher, they would receive the higher
benefit. Individuals would be entitled to the minimum benefit
regardless of the balance in their personal account. Moreover,
the minimum benefit would be calculated without regard to any
benefit changes, thereby shielding low-income workers from the
reductions in the defined Social Security benefit.
The minimum benefit provision in the Kolbe-Stenholm bill
will provide a stronger poverty protection than contained in
current law. The provision is so strong as to effectively make
the personal accounts a ``bonus'' for low-income people.
Traditional benefits for the working poor under the Kolbe-
Stenholm bill will be at least as strong as under the old
system with no personal accounts, consequently, the personal
accounts are merely an added bonus.
Q. How does the Kolbe-Stenholm plan benefit women?
A. The Kolbe-Stenholm bill contains several provisions that
would be beneficial to women. Most notable is the minimum
benefit provision (summarized above) that would provide a more
robust benefit than what is afforded by current law. As a
result of this provision alone, 50% of women and 10% of men
will do better under the Kolbe-Stenholm plan than under current
law.
This plan also allows for voluntary contributions. Workers
are permitted to contribute an additional $2,000 per year to
their personal account. Women who expect to take time off to
raise children can make voluntary contributions both before and
after their hiatus to ``catch up.'' For women who earn less
than $30,000, the Kolbe-Stenholm plan provides a savings
subsidy. For the first $1 voluntary contribution, an eligible
worker will receive a $150 match from the federal government.
Each additional dollar is matched 50% up to a cap of $600 per
year. For eligible workers who are unable to contribute
voluntarily, the plan allows them to redirect a portion of
their Earned Income Tax Credit (EITC) into their personal
account to qualify for the savings match.
One of the reasons the Kolbe-Stenholm bill will be a better
deal for women is the changing nature of divorce. Current law
stipulates that if a marriage lasts 10 years or more, a woman
is entitled to 50% of her ex-spouse's Social Security benefit.
Unfortunately, not only has the divorce rate skyrocketed since
1935 when Social Security was first adopted, but marriages also
are not lasting as long. Two or more decades ago, divorces were
fewer and occurred after 15-20 years of marriage. Today,
divorces are more likely to occur in the fourth or seventh year
of marriage. Moreover, more and more women are not re-marrying.
As such, many women are heading into retirement alone and
without the benefit of a spouse's Social Security income. As
more and more women are raising children alone and working in
lower-paying jobs, the minimum benefit provision and the
savings subsidy will do much to lift these women out of
poverty.
Q. Does this legislation cut disability benefits?
A. No, the Kolbe-Stenholm plan leaves that issue to be
decided elsewhere. The legislation sets up a mechanism under
which Congress will have to vote before 2006 (when the bend
point changes that affect disability would otherwise go into
effect) on changes to bring the disability program into
balance.
The bill provides for recommendations on disability to be
made by the Trustees, in consultation with the National Council
on Disability, to be acted on by Congress before our
legislation affects disability in any way. Nothing in this bill
affects the disabled unless the Council and Trustees agree that
it should. Since none of our changes that could impact
disability take effect until 2006, and we have required
alternate recommendations before then, we leave plenty of time
to deal with the disability issue.
Q. Why is it better to allow individuals to invest in the stock
market? Why not, let the government invest the Social Security
trust fund in the market?
A. Government investment does not address the national cry
for personal ownership and control. Polls demonstrate very
clearly that Americans want their own stake in the US economy
and more control over their retirement benefits. The current
system provides only a statutory right to benefits that
Congress may adjust at any time. Only personal accounts offer
workers ownership of constitutionally protected property.
Moreover, investing the Trust Fund in equities would cause
risk to permeate the entire system. This is because the
system's solvency--and the ability to provide basic Social
Security benefits--will rise and fall depending on the
performance of the stock market. If the market suffers a
downturn in a year in which the trust fund ratio already is
low, the ability of the Social Security system to provide
benefits would be jeopardized. Under the 21st Century
Retirement Act, the ability of the Social Security Trust
Once the federal government's balance sheet depends on the
performance of the equities market, influencing the market up
will become an unavoidable aspect of day-to-day economic
decision-making in Washington. Political influences will be
brought to bear on the choice of Social Security investments.
There are significant consequences of the Social Security trust
funds' acquiring significant ownership stakes in a large number
of corporations. Moreover, government investment in private
companies would conflict directly with the federal government's
role as a regulator of industry.
Lastly, simply moving the Trust Fund into equities to duck
tough choices would not add to national savings. If Social
Security did get a higher rate of return, it would be at the
cost of lower rates of return in the private savings system. In
other words, it would just be a hidden tax on other investment,
to fund current benefit promises of the federal government.
Q. How would the Individual Security Accounts be administered?
A. To reduce administrative cost and risks of fraud, the
individual accounts in The 21st Century Retirement Security Act
are modeled after the federal employee's Thrift Savings Plan.
Investors would choose among broad-based funds including, for
example: stock index funds based on the Wilshire 5000 or the
S&P 500, a bond index fund, a blended index fund including both
stocks and bonds, and a government securities fund. Accounts
may be invested in any combination of the funds. Moreover, for
those who cannot make an investment decision for themselves
(due to incapacitation or other reason), there is a default
option. The default portfolio would invest an individual's
personal account 50% in the stock fund and 50% in the
government securities fund.
Unlike government investment plans, this plan provides
individuals with control over their retirement assets,
including the freedom to invest is safe, risk-free Treasury
securities. This plan does not force anyone to invest in the
stock market.
Q. How will the funds that accumulate in an individual security
account be distributed?
A. Individuals would have a variety of options for
distribution of the funds in their personal account.
Individuals would not be required to annuitize their ISA
balance upon retirement unless they wanted to receive a lump-
sum distribution from their account. To receive a lump-sum
benefit, an individual must first annuitize a portion of their
account such that when this annuitized benefit is added to
their traditional defined benefit from Social Security, the
total amount would provide a monthly income at least equal to
the poverty level. Individuals are not required to withdraw
non-annuitized balances upon retirement.
Individuals will be able to choose between a number of
annuity plans that reflect the life needs of the individual.
Concerns about shorter life expectancies among the poor can be
addressed by requiring either a life annuity, period certain
annuity or a refund annuity.
Q. Does the plan permit rollovers into individual retirement
accounts (IRAs)?
A. Rollovers would not be permitted immediately. Once the
system has matured to a point where administrative costs are
predictable and manageable, rollover contributions from these
personal accounts into individual retirement accounts would be
allowed. The rollover accounts would have the same withdrawal
rules as the ISAs, provided that these accounts are invested in
broadly diversified low-administrative-cost funds.
Q: Does the plan allow early withdrawals?
A. No, the 21st Century Retirement Act prohibits pre-
retirement withdrawals, other than for death or disability. The
authors of the legislation are concerned that early withdrawal
rules, such as pre-retirement or lump-sum distributions, would
expose individual beneficiaries to increased risk of poverty,
relative to protections that would have existed had ISAs not
been established. Like Social Security, these benefits are
strictly for retirement purposes. Other vehicles are available
for individuals to access for non-retirement purposes. For
example: workers may access IRAs for a first home, children's
education or catastrophic health care costs.
Q. How does the CPI provision work?
A. The Consumer Price Index is used to index government
revenue and spending programs for inflation, including Social
Security benefits, Medicare premiums and elements of the tax
code. The Kolbe-Stenholm plan assumes a temporary 0.33%
reduction in the CPI below the estimates in the 1999 Trustees
report. This adjustment is intended to correct for the bias in
the CPI that most economists agree overstates inflation.
The legislation contains three basic provisions to achieve
a more accurate CPI. First, it provides BLS with the resources
and authority necessary to continue to improve the CPI. Second,
it provides for the implementation of a time-lagged superlative
index that will be used to compensate for upper level
substitution bias that cannot be addressed in the existing CPI
on a contemporaneous basis. Finally, the legislation contains
Act contains a temporary legislated reduction in indexation of
Social Security benefits that will be phased out as the bias in
the CPI is corrected.
The correction in our plan is applied to all government
programs indexed to the CPI. The net savings generated from
reduced spending and accelerated revenue collections are then
redirected to the Social Security program. In this way, the
Kolbe-Stenholm bill avoids relying on uncertain projected
budget surpluses, accounting gimmicks, and cost-shifting to
infuse new revenue into the program.
The 21st Century Retirement Security Act
A Comprehensive, Bipartisan Plan to Save Social Security
Summary of Legislation
Create Individual Security Accounts
Cut payroll taxes. Provides a payroll tax cut for
all working individuals under the age of 55, by diverting 2% of
payroll taxes into personal Individual Security Accounts.
Enhance the progressivity of Individual Security
Accounts by providing an additional tax credit for low-income
workers. Workers who make voluntary contributions would receive
a tax credit--to be deposited into their personal account--
equal to $150 plus 50% of all voluntary contributions up to a
cap of $600 per individual per year. This credit is phased out
for wages between $22,500 and $30,000 a year.
Since the working poor largely are unable to save out of
disposable income, this legislation would allow workers to
divert a portion of their Earned Income Tax Credit (EITC) into
an individual account and qualify for the additional tax
credit.
Allow voluntary contributions. Individuals would
be permitted to save up to an additional $2,000 per year
through voluntary contributions to individual accounts. As with
the mandatory contributions above, there would be a tax credit
equal to 50% of voluntary contributions of workers with taxable
wages of less than $20,000 a year, to be deposited into their
Individual Security Account.
Since the working poor largely are unable to save out of
disposable income, this legislation would allow workers to
divert a portion of their Earned Income Tax Credit (EITC) into
an individual account and qualify for the additional tax
credit.
Use the Thrift Saving Plan model for administering
individual accounts. To minimize employer burdens and
administration costs, the individual accounts would be modeled
on the federal government Thrift Savings Plan. Initially,
investment options would include a stock index fund, a bond
index fund and a Treasury securities index fund. Individual
accounts could be invested in any combination of the three
funds.
Phase-in reductions of unfunded government liabilities
Impose progressive changes in the current benefit
formula. Slowly phase in bend point changes to reduce initial
guaranteed benefit levels for middle and upper income workers.
It is expected that these workers will generate balances in
their individual accounts that will at least compensate for the
reduction in guaranteed benefit. Because general revenues
offset a portion of the transition costs, the changes in the
bend points are more modest in the early years of the plan than
they were in the 1998 legislation.
Strengthen the government safety net
Establish a new minimum benefit provision. Create a
guaranteed minimum benefit for low-income workers more robust than
current law. Social Security beneficiaries with at least 20 years of
covered earnings would receive a benefit equal to 60% of the poverty
level. This benefit would increase by 2% of poverty for each year of
covered earnings, until the guaranteed minimum benefit reaches 100% of
the poverty level for individuals who worked 40 years.
The minimum benefit would be calculated without regard to
any other benefit changes, thereby shielding low-income recipients from
adverse effects of other measures taken to restore the Social Security
system to solvency. Any income from the individual accounts would
supplement this guaranteed benefit.
Other changes to reflect increases in life expectancy
Gradually increase in eligibility age for full benefits.
Eliminate the hiatus in the scheduled increase the normal eligibility
age, allowing the Normal Retirement Age (NRA) to reach age 67 by 2011.
Both the Normal Retirement Age and Early Eligibility Age would be
indexed thereafter to keep pace with longevity.
Modify benefit formula to reflect increases in longevity.
Create an additional actuarial adjustment based on increases in
longevity. This adjustment would reflect the increased number of years
individuals will live after reaching the Normal Retirement Age.
Change the benefit formula to reflect the longer working
lives. Gradually increase the number of computation years in
determining benefit levels from 35 years to 40 years. For two-earner
couples, however, this legislation would cap the benefit computation
period for the lower wage earner at 35 years. This will benefit spouses
who leave the workforce for child rearing or other purposes.
Improve the actuarial adjustment. Currently, the delayed
retirement credit does not compensate workers for the years of
additional payroll taxes individuals pay while working past the Normal
Retirement Age. This legislation would revise the actuarial adjustment
for early/late retirement to reflect this.
Reward work
Eliminate the earnings test. Allow seniors who have
reached the Normal Retirement Age to earn income without suffering a
loss in their Social Security benefits.
Count all years of earnings in calculating benefits.
Include all years of earnings in the benefit formula in order to reward
individuals for all income that they earn even if not among their
highest 40 years of lifetime earnings.
Other provisions to achieve and preserve solvency
Provide for a more accurate Consumer Price Index. Provide
the Bureau of Labor Statistics with the additional resources and
authority necessary to continue to improve the Consumer Price Index.
Use the superlative index that BLS will begin publishing in 2002 to
adjust indexation based on CPI.
This legislation also would make a temporary change in the CPI to
compensate for the remaining CPI bias until BLS is able to eliminate
it. The legislated adjustment in CPI would be phased out as BLS
implements changes to eliminate the bias. The total reduction in CPI
would be 0.33% below the 1999 trustees report.
The impact of this provision would be to reduce the rate of growth
in cost-of-living adjustments and income tax-related parameters of the
federal budget. This would create net savings in the non-Social
Security budget and accelerate non-Social Security revenue collections.
These funds will be used to offset part of the transition costs to a
new, partially funded system.
Recapture lost revenues. Credit all revenue from taxation
of benefits to Social Security. The 1993 budget reconciliation bill
diverted a portion of the tax revenue levied on Social Security income
to the Hospital Insurance Trust Fund. Between 2010 and 2019, this
legislation would slowly phase in the redirection of these taxes back
to the Social Security Trust Fund where they belong.
``Fail-safe'' mechanism. Protect the program from once
again falling out of balance by requiring Congress and the President to
consider changes to the program on a timely basis whenever projections
show deteriorating fiscal health for the trust fund.
Description of the Savings Subsidy for Low Income Workers
The 21st Century Retirement Act provides low-income workers
an incentive to save beyond their mandatory contribution by
providing a savings subsidy, or ``match.'' A maximum of $600
per individual is allowed per year. To qualify for the subsidy
in any given year, an individual must earn less than $30,000
per year and make at least $1 in voluntary contributions to
their personal account. The amount of the subsidy is determined
by (1) the amount of the individual's mandatory contribution,
and (2) the amount of the worker's voluntary contributions.
Any worker earning less than $30,000 who makes a $1
voluntary contribution receives a savings match of $150. After
that, all voluntary contributions are matched 50 cents on every
dollar up to the maximum allowable match. In Example 1 below,
the worker receives $150 for the first $1 of voluntary
contributions. After the initial $1 infusion, additional
voluntary contributions by the worker are matched 50% up to the
maximum allowable match. The maximum match for the worker in
Example 1 is $360 ($600 less the individual's mandatory
contribution of $240). To receive the entire $360 match,
however, the worker must voluntarily contribute at least $420.
Contributions below this amount receive proportionately smaller
matches (see the table below). All workers are permitted to
contribute voluntarily up to $2,000 per year, however, the
savings match for the worker in Example I would remain capped
at $360 for any contribution over $420.
------------------------------------------------------------------------
Example 1 Example 2
------------------------------------------------------------------------
...................................
------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Earnings:............................ $12,000................ Earnings:.............. $18,000
Cap:................................. $600................... Cap:................... $600
Max Match:........................... =$600 -(2% x $12,000).. Max Match:............. =$600 -(2% x $18,000)
................................... =$360.................. ..................... =$240
Mandatory Contribution: =$12,000 x 2% Mandatory Contribution: =$240.................. =$360
= $18,000 x 2%.
----------------------------------------------------------------------------------------------------------------
Voluntary Total Voluntary Total
Contribution Federal Match Contributions Contribution Federal Match Contributions
----------------------------------------------------------------------------------------------------------------
$1 $150 $391 $1 $150 $511
$100 $200 $540 $100 $200 $660
$200 $250 $690 $200 $240 $800
$300 $300 $840 $300 $240 $900
$400 $350 $990 $400 $240 $1,000
$500 $360 $1,100 $500 $240 $1,100
----------------------------------------------------------------------------------------------------------------
Total contributions = Mandatory Contribution + Voluntary Contribution + Federal Match. In Example 1, if the
worker voluntarily contributes $200, Total Contributions = $240 + $200 + $250 = $690.
Since many low-income workers cannot afford to save out of
their monthly paychecks, the Twenty-first Century Retirement
Act allows workers to divert a portion of their Earned Income
Tax Credit (EITC) to qualify for the savings match.
The savings subsidy of a worker who earns $18,000 is
illustrated in Example 2.
Benefits of the savings match:
Increases the retirement income of workers earning
less than $30,000
Encourages increased savings among income groups
historically predisposed to dissaving
Actually provides a mechanism for low income
workers to save (the redirection of the EITC), rather than just
providing an incentive to save
Requires individuals to contribute to qualify--
there is no ``free lunch''
Makes the personal retirement accounts more
progressive
Strengthening Retirement Security for Low Income Workers
The 21st Century Retirement Security Act restores the
solvency of the Social Security trust fund in a way that not
only protects low-income workers from any reduction in
benefits, it actually strengthens the safety net provided by
the Social Security program. The Kolbe-Stenholm plan contains a
new minimum benefit provision that offers stronger poverty
protection than provided under current law. The plan also
provides a subsidy to supplement the individual accounts of
low-income workers. Finally, by addressing the unfunded
liabilities of the Social Security without shifting new
obligations onto general revenues, the Kolbe-Stenholm plan
reduces the pressure to reduce funding for other government
programs that benefit low-income populations.
Strengthens the safety net through a new minimum
benefit provision
The 21st Century Retirement Security Act contains a minimum
benefit provision that provides a much stronger safety net for
low and moderate-income workers when they retire than is
contained in current law. An individual who has worked for 40
years and qualified for 40 years of coverage will be guaranteed
a Social Security benefit equal to 100% of the poverty level.
Moreover, any income from the individual accounts would
supplement this guaranteed benefit. Widows would be covered by
the minimum benefit guarantee based on his or her spouse's work
history.
The new minimum benefit provision will enable Social
Security to lift more of the elderly out of poverty than
current law:
--50% of women and 10% of men would receive higher
guaranteed Social Security benefits as a result of the minimum
benefit provision in the Kolbe-Stenholm bill.
--Under Kolbe-Stenholm, no individual who works a full
career will have to retire in poverty. Currently, nearly 8
million seniors receive benefits that are less than the poverty
level.
The example on the following page illustrates the power and
effectiveness of the improved government safety net. For a low-
wage worker, the minimum benefit provision increases retirement
income by more than 10%--not including any balances that would
accrue in the worker's personal account.
Expanded savings opportunity for low income
workers
The individual accounts in the 21st Century Retirement
Security Act will give low and moderate income workers the
opportunity to benefit from investment opportunities that
higher income workers already have with 401(k) plans, IRAs and
mutual funds. To help low-income workers take advantage of this
new savings vehicle the Kolbe-Stenholm plan provides a savings
subsidy, or ``match'' for low-income workers who make voluntary
contributions to their individual account. A maximum of $600
per individual is allowed per year. To qualify for the subsidy
in any given year, an individual must earn less than $30,000
per year and make at least $1 in voluntary contributions to
their personal account.
Reducing pressure on other budget priorities.
The Kolbe-Stenholm plan will put the costs of the Social
Security system on a more sustainable level that will protect
other programs that benefit low-income families and prevent
them from being squeezed out by the growing costs of the Social
Security system. The plan makes the Social Security system
financially sound without shifting costs to general revenues.
Moreover, the 21st Century Retirement Security Act eliminates
more then half of the liability to the general fund that will
occur under current law when the system is projected to face
annual cash shortfalls after 2014. By honestly addressing the
budgetary pressures created by the unfunded liabilities of the
Social Security system, the Kolbe-Stenholm plan ensures that
future governments will have resources available to preserve
funding for discretionary spending and other programs that
benefit low-income families in addition to providing Social
Security benefits.
Example: Impact of the Minimum Benefit Provision on a Low Wage Worker
------------------------------------------------------------------------
------------------------------------------------------------------------
Low wage worker earning 45% of the National Average $12,600 / yr
Wage...............................................
Current Law Social Security benefit
Social Security Benefit at Normal Retirement Age: $568
\1\................................................
Plus: Spousal Benefit (if applicable):.............. $284
-------------------
Equals: Total Monthly Social Security Benefit:...... $852
===================
Social Security Benefit under Kolbe-Stenholm
Poverty Level for a single-person household over age $7,525
65 \2\.............................................
Translated into a monthly benefit (divide by 12).... $627
Plus: Spousal Benefit (if applicable)............... $314
-------------------
Equals: Total Monthly Social Security benefit....... $941
===================
Note: this amount does not include any balances that
accrue in the workers personal account.
Consequently, total benefits will be higher
Kolbe-Stenholm increase over current law benefits:.. $89 /month
10.4%
------------------------------------------------------------------------
\1\ Source: Social Security Administration, Office of the Actuaries Web
Page http://www.ssa.gov/OACT/COLA/IllusLow.html
\2\ Source: September 1997 data from the Bureau of the Census.
Why a Carve-Out is Necessary
Proponents and opponents of Social Security reform
distinguish between the methods of financing a personal account
with the terms ``carve-out'' and ``add-on.'' The Kolbe-
Stenholrn proposal is an example of a carve-out: the personal
accounts are funded by redirecting an existing portion of an
individual's payroll taxes. An add-on uses new, additional
taxes to f und the personal account. The diagram below
illustrates the difference between a 2% carve-out and a 2% add-
on account.
[GRAPHIC] [TIFF OMITTED] T2789.024
Because a carve-out would consume the Social Security
surplus, it prevents the enormous build-up of IOUs in the
Social Security Trust Fund--IOUs that somehow must be
translated into cash benefits. An add-on, however, would allow
the IOUs to accumulate. These IOUs are first claims on future
federal revenue and can only be funded by increased taxes,
reduced benefits, additional debt, or redirected spending from
other programs (education, defense, environment, etc.).
In other words, a carve-out uses Social Security revenues
to create personal accounts that will provide benefits for
future retirees. These accounts can be used to reduce the
liabilities to the general budget beyond the actuarial deficit,
instead of investing the surplus in Treasury bills that create
a liability to the general government. Most other plans focus
on the actuarial deficit, which begins in 2034, without regard
for the general budget liabilities that begin in 2014 (when
Social Security begins to run a cash flow deficit). Under
current law, the Social Security Administration estimates that
at its peak, the Trust Fund--the general budget liability to
Social Security--will contain over $4.4 trillion in IOUs.
An add-on consumes valuable federal dollars that otherwise
could be used to implement structural reforms. Not only do the
Trust Fund liabilities remain in place as described above, but
an add-on uses general revenues that could be used to pay for
the transition costs to a partially funded system. A carve-out,
however, does not.
Moreover, by committing additional revenue to Social
Security, an add-on only exacerbates the poor rate of return
offered by the current system. By keeping the costs of Social
Security within the current level, a carveout actually enhances
an individual's rate of return.
Lastly, an add-on that is not used to offset future defined
benefits (e.g. the President's Universal Savings Accounts) only
aggravates Social Security's cash crunch by promising more than
current low benefits. Without an explicit offset or advance
funding of the system, future taxpayers will have to pick up
the tab for both the add-on and the unfunded benefit promises.
A Fiscally Responsible Solution for Social Security
The 21st Century Retirement Act ensures the Social Security
program will operate on a solid, sustainable fiscal path well
into the next millennium. It does this by honestly and
responsibly addressing the unfunded liabilities of the program.
Three distinguishing characteristics separate this plan from
other prominent proposals. First, unlike the President's
proposal, the Kolbe-Stenholm plan restores the Social Security
trust fund to 75-year actuarial balance. Second, unlike several
``free lunch'' proposals, the Kolbe-Stenholm plan addresses the
cash deficits that begin in 2014, when benefit costs exceed
payroll tax revenues. The plan reduces by more than 50% the
existing $7.4 trillion general fund liability between 2014 and
2034, preserving the flexibility of future governments to meet
other critical budget needs. Third, the 21st Century Retirement
Act does not depend on projected budget surpluses, cost shifts
or accounting gimmicks to balance the Social Security program.
Restores the long-term financial security of the
Social Security system
The 21st Century Retirement Act restores solvency of the
Social Security Trust Fund by eliminating the entire projected
cash shortfall in the trust fund over the next 75 years.
Moreover, it does so using only the most conservative
assumptions. Just as importantly, the 21st Century Retirement
Act makes structural reforms to the Social Security system that
help restore the traditional program to a path of long-term
solvency that does not deteriorate over time. The Kolbe-
Stenholm plan puts Social Security revenues and outlays on a
sustainable course over the entire 75-year period. Lastly, the
trust fund ratio--the amount of cash reserves in the trust fund
relative to projected benefits--is rising at the end of the 75-
year period. Thus, there is no ``cliff effect.''
Protects the Treasury from the pressure of trust
fund liabilities
Actuarial balance is only one measure of the financial
stability of a Social Security reform plan. Just as important
is the impact of a plan on the accumulation of IOUs in the
Trust Fund, and the plan's reliance on these IOUs to pay
benefits after 2014. Under current law, the U.S. Treasury must
find $7.4 trillion in cash between 2014 and 2034 to finance
Social Security benefits. These funds will allow Treasury to
convert the IOUs in the Social Security Trust Fund into cash
benefits for Social Security recipients. The 21st Century
Retirement Act would reduce this liability by more than half.
This feature is essential to the fiscal health of our
government. Otherwise, future Congresses will be forced to cut
other important government programs (e.g. education, defense,
health care), or raise additional taxes to meet the obligations
to our senior citizens. By contrast, plans proposed by
President Clinton and others leave this liability in place and
actually increase these general fund liabilities for the next
fifty years.
Does not rely on projected surpluses that may not
materialize
Unlike other Social Security reform plans that are
dependent upon funding from projected surpluses, the 21st
Century Retirement Act is entirely self-financed and will
achieve its goals whether or not current surplus projections
are accurate. If surpluses do materialize, they would remain
available for debt reduction, strengthening Medicare, tax cuts,
or spending on other priorities. Plans which rely on projected
surpluses either place the solvency of the Social Security
trust fund in jeopardy or create problems in the non-Social
Security budget if the surpluses are not as large as currently
projected.
Does not rely on accounting gimmicks
The 21st Century Retirement Act does not rely on double-
counting, optimistic assumptions or other gimmicks to make the
plan appear balanced on paper. Nor does the plan mask cost-
shifts. All payroll taxes are used only once, either to fund
current benefits, fund individual accounts, or credit the trust
fund. Unlike other plans, the Kolbe-Stenholm plan does not use
Social Security surpluses already credited to the Social
Security trust fund to justify a second round of credits to the
trust fund. Nor does the plan pay for individual accounts with
funds that already have been credited to the trust fund, like
some ``free lunch'' plans do.
This bill:
Has been scored by the actuaries of the Social
Security Administration as restoring 75-year solvency to the
Social Security program
Has bipartisan, bicameral support
Preserves the existing benefit promises for
current and near-retirees
Increases the rate of return for all workers
Enhances the government safety net
Reduces Social Security's $7.4 trillion unfunded
liability between 2014-2034 by more than 50 percent
Does not rely on accounting gimmickry
Does not rely on projected surpluses to create new
general fund liabilities
Establishes the opportunity for all Americans to
create wealth
Provides individuals with ownership of and control
over their retirement assets--including the freedom to invest
in safe, risk-free Treasury securities
Rewards work
Chairman Archer. I have a couple of questions that I would
like to inquire about. Do you guarantee the current Social
Security benefits under the current law for all future
beneficiaries?
Mr. Kolbe. We guarantee them for everybody. There is no
change for anybody over the age of 55, and as is mentioned, the
major change that we would make for those who are going to be
the beneficiaries of the savings, the new personal accounts,
would be the change in the bend points that affect benefits for
those in the upper-income levels. Our view is that they get the
benefit of the 2-percent accounts. They will see more benefit
from that from the compounding effect of that.
There is actually, Charlie mentioned, an increase in the
benefits for the low-income people. So we have actually made it
somewhat----
Chairman Archer. No, I understood that, but I am asking a
question that is applicable to all beneficiaries.
In the current law benefits under your program, are they
retained for all future beneficiaries? I don't want it
segmented, I just want an answer yes or no. Do you retain
current law benefits for all future beneficiaries?
Mr. Kolbe. I think--if I understand what you are driving
at--I think the answer is yes.
Chairman Archer. I don't see how you can, number one, but
if you can, I would like to know how you do it based on the
details that you have presented.
Mr. Stenholm. Mr. Chairman, let me try you here and say the
bend-point changes in our bill would reduce guaranteed
benefits, if this is what you are asking, by 16 percent for
average workers, 20 percent for high-wage workers, and 22
percent for maximum-wage earners. And the theory behind this is
that those in that income category will benefit more from the 2
percent.
Chairman Archer. No, I understand the theory, I am just
trying to understand the impact. So the average worker under
your plan would receive 16 percent less in benefits than they
would under current law.
Mr. Kolbe. In defined benefits.
Chairman Archer. Yes.
Mr. Kolbe. Correct.
Chairman Archer. In the Social Security benefits structure.
Mr. Kolbe. Correct.
Mr. Stenholm. But, Mr. Chairman, the point is, we can't
afford current law. So comparing it to current law----
Chairman Archer. I understand----
Mr. Kolbe. We get to 2035 before we have a reduction in
benefits for everybody.
Chairman Archer. I understand we have got a problem in the
program, that's why we are here today, and we are going to have
to change the way we are handling the program. But the way you
would change it would reduce benefits 16 percent for average
workers.
All right, now, do you have the clawback that was talked
about by the Senators to where the return on the carve-out
would reduce the Social Security benefit?
Mr. Kolbe. With the return on the--no, we----
Chairman Archer. So your plan is different than theirs in
that regard? I see your staffperson nodding. So I accept that
as an----
Mr. Kolbe. It is different. That is one of the differences
that I was going----
Chairman Archer. Well, I really had hoped that you all
would highlight the differences in your testimony----
Mr. Kolbe. I could do that in just four quick--in less than
30 seconds.
Chairman Archer. OK. That's great. Go ahead.
Mr. Kolbe. The key differences between our bill and the
Senate is that their benefit adjustments, the Senate benefit
adjustments, are tied to contributions to the personal
accounts. Ours are not. The minimum benefit is expressed
through the creation of a fourth bend point.
We changed the bend points, they add a fourth bend point.
They have KidSave, we don't have that. They will, we believe at
a later introduction of their bill, will make an adjustment in
the widow's benefit that we were talking about here so that the
value for women would be the same as ours. But at the moment,
as it has been introduced, it doesn't have that.
Their CPI change is greater. Theirs is half a percent, ours
is 0.33 of a percent. And their--this is an answer I think to
your question, Mr. Chairman, about creating another notch
group. Theirs exempts current retirees, ours does not. So
everybody, it would apply to everybody, the 0.33 adjustment.
Chairman Archer. All right, but you did not address the
clawback. The Social Security benefit under your plan in
contrast to theirs would not be reduced by the interest
returned on the 2-percent carve-out.
Mr. Kolbe. That is correct.
Chairman Archer. So that is also another significant
difference between your plans.
Mr. Kolbe. That is a significant difference. You are right.
Chairman Archer. All right, what are the dollar amounts of
the benefit cuts in your plan over the 75-year period?
Mr. Kolbe. I don't think there is any way we can know that.
Chairman Archer. Yes, well that would be very helpful to us
as we evaluate these plans and make comparisons. But it has got
to be significant. The 0.33 percent CPI legislated adjustment
is significant. In fact, it is major trillions of dollars over
the 75-year period, and the 16-percent cut in benefits for the
average worker has got to be significant.
Mr. Stenholm. Mr. Chairman, your categories in that, that's
the guaranteed benefit. And if you assume, which your question
assumes a 100-percent loss of the 2-percent Thrift Savings
Plan, then you are correct. That is a 16-percent loss. We don't
assume that the Thrift Savings Plan is going to be----
Chairman Archer. No, I understand that.
Mr. Stenholm. But your question is inferring that that is a
16-percent loss.
Chairman Archer. No. All that we can base our ultimate
projections for Social Security on is the benefits structure
for Social Security. And if the outside accounts produce more,
that is wonderful, and that is a bonus. What is the impact of
your program on the unified budget surplus over the 75 years?
Mr. Kolbe. There is, as we mentioned earlier, we do not
take any of the funds from--we do not require any surplus funds
in order to make ours work. There is no general revenue funds
placed into it.
I'm not sure if that is entirely responsive to your
question.
Chairman Archer. No, it isn't because whether we like or
not, we do operate under a unified budget, and the impact on
the unified surplus, which is the combination of the general
Treasury and the Social Security fund is a very important
barometer as we compare these various plans.
Mr. Kolbe. But I don't think there is--is there any CBO
estimate for surpluses over 75 years anyhow? How would you do
that over 75 years?
Chairman Archer. Well, all I can tell you is that the
Archer-Shaw plan has a unified budget surplus increase of $122
trillion over 75 years. And I just want to compare the various
plans as to their impact on the unified budget surplus. You may
not have that yet because SSA has been under a lot of pressure
to get all of these projections and estimates out. And that may
be forthcoming in the future.
If you don't have it, I understand that.
Mr. Kolbe. One of the things, Mr. Chairman, that I think it
is important to keep in mind is that the CPI adjustment of
which there have been several questions about here today, is a
critical component of ours. It is really a self-generating
revenue source.
Chairman Archer. No, I understand that. But it also is a
tax increase on middle- and low-income workers, which is
another undesirable aspect.
Mr. Kolbe. Except that we would tie everything to the CPI,
including your Medicare premiums would not be adjusted as much.
Chairman Archer. I understand, but there would be
additional revenue taken out of the taxpayers of this country,
particularly more heavily on middle-income tax payers as a
result of not getting the CPI as provided under current law.
That would be a tax increase on middle-income workers in
this country and would further fuel, of course, the moneys
coming into the General Treasury. That's an unfortunate
byproduct of changing the CPI.
Mr. Shaw.
Mr. Shaw. Just very, very briefly, Mr. Chairman, just to
explore further what you are talking about. When you look at
this as 1 year, it doesn't really amount to a whole lot, but
when you take this over a 10-, 20-year period, you are really
talking about some real money as far as the bracket creep.
And as far as one of the things I am really concerned about
is the creation of a new notch, where future retirees--yours is
not in there as in the Senate bill?
Mr. Kolbe. Yes, we would not create that notch in ours.
Mr. Shaw. All right, then I congratulate you for that
because that has created major heartburns for all of us. Before
I was Chairman of the Social Security Subcommittee, I used to
forward those letters to the Chairman. Now I have no one to
forward them to.
But that was a terrible political mistake that was made
back in the seventies, and I am glad to know that our Chairman
voted against it at the time.
Thank you, Mr. Chairman, I yield back.
Chairman Archer. Mr. Matsui.
Mr. Matsui. Thank you, Chairman, I want to try to
understand this. I want to commend both of you, I know how
difficult it is to come up with a plan like you came up with,
and obviously the four Senators before you, because you make
the tough decisions. And I think some of the dialog that we
have heard with respect to your plan would be the kind we would
hear in the 2000 campaign if, in fact, Members got involved
with adjustments in benefit levels.
But what I see in your plan is an attempt to integrate your
proposal and try to deal with this issue in the overall Federal
budget over the next 75 years, and what is troubling to me
about Mr. Gramm's plan and the plan that Chairman Archer and
Mr. Shaw have, which I believe is credible--both are credible--
is the fact there are significant risks to the economy and,
obviously, to the Federal budget if those plans are implemented
because they take significant sums of money in the first 30,
40, 50 years. Payback occurs in the last 20 years, but the
first 50 years it is trillions of dollars that go from the
general fund, if there is a general fund surplus, into the
Social Security fund.
And if we do not witness a surplus, if we have a deep
recession, much deeper than anyone projects, it could be
catastrophic to the budget but particularly to the economy.
Your proposal, I believe, somewhat ensures that if you do have
a deep recession, that would not necessarily happen, and I
would like you to discuss a little bit about programs that
don't have any cuts in benefits and don't have any payroll tax
increases and how we make up the 2 percent payroll problem over
the next 75 years. I mean, help me with this, because I
understand what you are trying to do. Maybe, politically, it is
very difficult to do what you are trying to do right now, but
there is a lot of merit in what you are talking about, and you
are the first two, and, obviously, the four Senators were the
first four to come up with a plan that at least tried to deal
with the next 75 years, not just in terms of the Social
Security problem but also in terms of the overall budget, and
certainly the overall U.S. and perhaps international economy.
Mr. Stenholm. I will refer you back to our chart to show
the difference between current law and our bill and what it
frees up; the unified budget, the question the Chairman was
talking about. These are real dollars that have real effects on
the surplus. Also, our plan, as you correctly have stated, we
do not rely on the economy and projections of the economy. We
have had a little bit of concern--you remember it hadn't been
too long ago that we were basing our projections for budget
purposes on 1 and 2 years, and then we went to 5, and then we
discovered that we got real good at backloading. In other
words, you would take a proposal and it would spend low or if
it was tax cut, it would have less effect for the 5-year, but
then the sixth, seventh, and eighth, it would literally
explode. And we said, ``Let us learn by that, and let us make
sure.'' as I said in my statement, the 75-year solvency is
important, but it is not the most important. What do you have
at the end of the 75 years is critical.
And, therefore, in our proposal, we do make some tough
choices, and it is easy to criticize, and it is rather amazing
to me having spent a good part of the time with many of my
folks here saying that unless we really--you know, if you get a
dollar this year and you get a dollar and a dime next year, you
have got an increase. Now, all of a sudden we are arguing that
unless you get a dollar and a dime we are cutting. That is
difficult for me to understand, and I think the American people
to understand that, and, therefore, what we are saying is let
us take a 75-year honest projection; let us make some
adjustments; let us hold harmless anyone 55 years of age and
older from any significant changes in this, significant, but
let us recognize that what we have to do is solve the problem
for the 20-year-olds simultaneously and do it--and, again, I
refer, Bob, to this chart right here. It shows what CBO has
scored what we do as far as the specific question of fiscal
responsibility that you asked, and a picture is worth a
thousand words.
Mr. Matsui. Jim.
Mr. Kolbe. I would just concur that I think the key that is
a key difference, there are differences between ours and
Chairman Archer and Mr. Shaw's proposals, and that is certainly
a key one that we don't rely on presumptions about what the
economy does. If you have zero return on your personal
accounts, you would still have a solvent plan under what we
have proposed, but, again, I want to say that I think all of
these proposals have merit in that they are at least going in
the direction I think we need to be looking at.
Mr. Matsui. I thank both of you.
Chairman Archer. Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman, and let me begin by
commending my two friends, Mr. Kolbe and Mr. Stenholm, for
going about it the right way by working together in a
bipartisan way. As we look at Social Security, I think we all
agree that when it comes to bipartisanship, this is one of the
areas we should begin with bipartisanship and finish up with
bipartisanship. So, I commend you, and, of course, I also
acknowledge from my experience with town meetings, particularly
with senior citizens, you chose the more painful path in
putting together your plan and your solution that you are
offering today.
You know, one of the attractions of the concept of the
personal accounts that I hear as I travel throughout the south
side of Chicago and the south suburbs is the thought that if
you have personal account as part of your Social Security
portfolio, that if for some reason you don't live long enough
to collect it, that it becomes part of your estate and is
passed on. How do you treat your accounts? Do they become part
of someone's estate that they are passed on or is it lost?
Mr. Kolbe. No, it is not lost. It is included in your
estate. When you retire, you can take your pay out from your
account in at least two different ways. One, you could
annuitize it. You could annuitize only the amount necessary to
guarantee you a poverty level payment, and the rest you could
take as a lump sum if you want to travel around the world. You
could buy an annuity, which, of course, would guarantee
benefits over a set number of years, in which case if you died
the next year----
Mr. Weller. So, you are saying you could buy a second
annuity with the amounts above the----
Mr. Kolbe. You can take--there are two basic ways. You can
either annuitize all or part of it or you could take it as
payouts from cash payouts from the Social Security Fund over
the life expectancy, in which case, the amount in your account
goes to your heirs. If you annuitize it, it depends on what
kind of annuity you buy. Say you bought an annuity that
guarantees payments for 20 years; you died the first year;
those payments continue to your heirs for the next 19 years
over that. So, it just depends--and you could annuitize an
amount only necessary to get the minimum benefit, the poverty
benefit, and you could take the rest of the cash lump sum. You
could take all the rest. Let us say you had $400,000 in there
with earnings in your personal savings account. You could take
an amount necessary that would--let us say it is $200,000
necessary to buy an annuity that would guarantee a minimum
poverty level benefit. Then you could take the other $200,000
as cash; start a new business; go off around the world; buy a
houseboat; do whatever you wanted.
Mr. Weller. How would it be distributed? If you passed on,
how would it be distributed to your heirs? Is there an
automatic assignment? Automatically, it would go to your spouse
or, automatically, it would go to the children? Do you have to
designate, make a choice yourself, at sometime in your life?
Mr. Kolbe. In our legislation, this has not been so
specific as to define the exact mechanism by which you go about
doing that, but it would be as it would be in any current law
with anything that is in your estate. I mean, you would be able
to assign it in the same way.
Mr. Weller. OK.
Mr. Stenholm. I would assume it would become part of most
wills in the direction of that. That would be my assumption,
but we have not dealt with that specific as this.
Mr. Weller. I know you use the Thrift Savings Plan as one
of the models you have been looking at. Of course, there is
probably a formula for that, I believe for the treatment of
that as part of someone's estate.
You also make some changes in some areas regarding the
retirement age, and can you just review again how you adjust
the retirement age as your proposal? I was born in 1957. I
believe the change that is currently in place for retirement
age for those born after 1960, I believe, are the ones who it
is adjusted currently to when they become eligible at 67. I was
just wondering if you can kind of walk us through that?
Mr. Stenholm. We don't change current law, the 67. Last
year's bill, we proposed going to 70, and paid dearly for that
from folks that disagreed with that. So, this year, we said,
``No, let us keep it at 67,'' but we increased our shortened
period of time. I believe today it is 2021. We speed it up to
reach the retirement age at 2011, 2 months per year beginning
in 2000 or whenever the bill should become law; 2 months per
year. So, if you were 65 in 2001, you would have to be 65 years
and 2 months. Or if you are 64, you can do your own computation
as to that.
But, now, you can retire at any time you wish. One of the
misnomers that gets in that we are saying when you can retire.
You can retire at age 52. It is when you are eligible to draw
your guaranteed benefit that is affected by that, as everyone
here knows, but a lot of the general public tend to listen to
the rhetoric that says we are changing the retirement age.
Mr. Weller. Just a quick follow up on that. To access the
personal account, do you have to be 67 or can you----
Mr. Kolbe. No.
Mr. Weller. You can access that when you are 50 if you
choose to retire.
Mr. Kolbe. Fifty-one if you want, as long as you have
enough in that personal account that there is an annuity equal
to the poverty level benefit.
Mr. Weller. Thank you.
Chairman Archer. Does any other Member wish to inquire?
Mr. Rangel. Yes.
Chairman Archer. Oh, Mr. Rangel.
Mr. Rangel. I want to thank both of you for the leadership
that you have demonstrated over here and especially now in a
bipartisan way in getting real attention to your program.
You said Charlie Stenholm, that with any plan, wherever
there is any controversy or reduction in benefits or cost, it
appears as though hearings like this would highlight that. The
unique thing about your presentation is that as both of you
know, if we were to pick this thing apart, there would be
enough controversy to talk about, and that is going to be true
of any package that is put together, whether we were talking
about Mr. Shaw's package or the President's package or your
package.
The only way to get this done this year is for us to have
to admit that whatever pain there is in there, it is for the
good of the solvency of the program in the long run. As I told
Senator Moynihan that even with some of the things that he was
talking about with the CPI, if he had an opportunity to talk
about a package rather than an item, it doesn't take that much
political courage to pick the program up off the ground. But it
just seems to me that if each person was to talk about their
own package without us coming together to talk about which
things we can work with and which things we can't, we are not
going to get out of this this year, and we certainly won't even
think about touching it with a 10-foot pole next year.
Senator Moynihan had suggested that when this issue came up
before--I think he said 1983--that Senator Dole just picked a
certain number of people from the Finance Committee, put them
together, and in 12 days they came up with something to resolve
what was a crisis, and he further suggested to us that we not
wait until there is a crisis.
My question is: We can continue to have these hearings, but
could you give any suggestions or recommendations to this
Committee as to how we can come forward in a bipartisan way,
which certainly would include the President's people, to come
up with a package that we can take to the floor? The reason I
ask is that there is not a witness that can come before us who
will not be asked about some type of problems with his package
if that is what we are looking for.
Jim.
Mr. Kolbe. That is wonderful question; it is hard. It is
the most difficult question of all, Mr. Rangel, and I wish I
had an easy answer for you. I think, however, what has to
happen is two things. One, I think the pressure to do something
is going to grow and for the reasons that I mentioned at the
outset of my remarks--I am not sure that you were here--and
that is, in a few weeks, I think it is going to begin to dawn
on people in this body that the only key to solving the budget
problems and the hope to give tax relief to American citizens
is to solve Social Security reform. The lockbox we passed last
week, no matter whether you were for it or against it, is
illustrative of that, because it says once you solve--have a
Social Security reform, you can open the lockbox and you can do
with the surplus what you choose at that point if you have a
reform that works. So, I think that is absolutely the key, and
I think that is going to drive Members of this body toward a
solution.
I think that what has to happen is people from this
Committee, this Ways and Means Committee, have to, as you just
suggested, engage with the President's people quietly to try to
find some ground on which they can do serious reform, and I
think those discussions have to start, and they have to start
now, and I believe the President has to stand up to the plate
and take a position of leadership on this and publicly on this
issue.
Mr. Stenholm. You have asked the tough question and one of
which, while we haven't gotten to that point as yet, Mr.
Rangel, but if there is some way that we can put together the
skeleton of a proposal that deals with the fiscal
responsibility of the solvency as well as the long-term
concerns of all of us who have concerns about Social Security,
then it must take Presidential leadership, which, I have to
say, I was rather disappointed that we have not received that
kind of leadership as yet from the White House, and I say that
publicly and privately. I understand why, for the same reason
that anybody proposes anything--you get shot at. I went through
that in the campaign last November. I was shot at severely
because of the support for this program, but you will hear from
Mark Sanford and Nick Smith and Jim Kolbe, and I had friends on
the other side of the aisle that came to my defense against
colleagues on the other side of the aisle that attacked me for
this of which I will be eternally grateful, and it is that kind
of spirit, Charlie, that I think has to go into this question.
We have to be willing to bend a little; be willing to
compromise in some very strongly held positions; find the
leadership simultaneously with the leadership of this Committee
and the administration, and then find some followership, and
Jim and I are here on behalf of our bill. It is bipartisan, it
is bicameral, and we are willing to be followers. We don't
pretend we have got all of the answers, but we do think we have
given you a framework under which you can work. But that is up
to you and this Committee to decide how that will be done. All
I guess I would say to you is we are willing to help in any way
in which you believe will be constructive.
Mr. Rangel. Well, we have got one tall partisan wall to
jump over if we are going to come up with a bill. The President
didn't ask any Republicans for their ideas about Social
Security, and the Republicans on this Committee certainly
didn't ask any Democrats for their ideas. So here we are
listening to everybody's proposal, which is educational, but if
we are going to come up with a bill we have to decide that we
are going to break some eggs and move forward together with
everyone there--the White House, Republicans, and Democrats--so
that we don't have any losers, because at least we were trying.
No matter what is in each bill, we don't have to adopt anything
until we adopt it all. Please don't give up on us, and keep
encouraging us and, why, me and the Chairman, why, we talk
almost every day now, so that is movement.
Mr. Kolbe. And if I might just say, that is what I think
what commends our proposal is that it is the only one that is
House and Senate and has Republicans and Democrats on board, so
we have been talking to each other.
Chairman Archer. The gentleman's time has expired.
Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman. Mr. Stenholm, I am
going to accept your invitation not to nit-pick certain
elements here, but I do want just some general clarification on
a couple of things, and I have got the piece that your staff
has put together and specifically some of the changes in your
legislation this year as opposed to last year, and I want to
applaud, by the way, as I understand, under your first bullet
point, that this year's version of the Kolbe-Stenholm bill
eliminates the proposed coverage for State and local government
employees.
Mr. Kolbe. Correct.
Mr. Hulshof. And, certainly, Mr. Stenholm, you are aware
that in your home State, we have heard on the Social Security
Subcommittee from representatives of a retirement system that
has opted out in Texas that has been very successful. What went
into the thinking to make this change? I mean, I applaud the
change, but I mean----
Mr. Stenholm. Well, in my case, I had about all the hide I
could give up from the country on this one----[Laughter]
And decided that----
Mr. Kolbe. It was clear that several delegations from
several major States were going to have a real heartburn with
this provision. We had to find a way to make a change in it,
and we did.
Mr. Stenholm. You know, I would say, I continue to engage
in dialog with my Texas concerns with this, and I will forever
believe that there is a way in which it can be done and done to
the benefit of the Texas employees, and so forth, but I have
not been successful in convincing them; therefore, we changed
our mind.
Mr. Hulshof. Let me ask this clarification regarding the
disability benefits. I am hopeful and I am confident that
probably in the near future that the Social Security
Subcommittee and hopefully this Full Committee will be
considering some changes in our Federal structure to remove
disincentives for those with disabilities that return to the
work force. Obviously, the Senate has been moving. I think in
Congress Daily today it talks about the progress on that side,
and there are several Members on this Committee on the Ticket
to Work provisions and trying to really help those individuals
with disabilities rejoin the work force. It is my
understanding, in your legislation, that disabled workers are
exempted from some of the provisions but not all, and I was
hoping to get some clarification as to are we talking about a
cut in disability benefits or what are we talking about as far
as the disability community is concerned?
Mr. Kolbe. The answer to that is both yes and no. We have
no immediate cuts to disability. We will freely concede, we do
not address the disability issue here. It obviously has to be
addressed. The legislation sets up a mechanism that Congress
would have to vote before 2006, which is the year that the
change in the bend point would begin to affect disability
payments, so that by the year 2006, we would have to do
something to bring the disability program into balance. It also
further provides for recommendations to be made by the trustees
of the Social Security Trust Fund in consultation with the
National Council on Disability to be acted on by Congress to do
that. But we do not solve the disability problem here.
Mr. Hulshof. OK. Mr. Stenholm, anything else you wanted to
add to Mr. Kolbe's answer?
Mr. Stenholm. No, the National Council on Disability is the
proper vehicle to give the advice and counsel in making those
changes and for proposals to the Congress for specific action
in answering your question.
Mr. Hulshof. OK. Thank you, gentlemen. Thank you, Mr.
Chairman. I yield back.
Chairman Archer. Mr. English.
Mr. English. Thank you, Mr. Chairman. Briefly, I want to
join everyone else in thanking the gentlemen for testifying,
having putting so much effort into putting together a balanced
plan.
One of the objections that we hear raised to individual
accounts, such as the ones in your plan, is that they will
increase administrative costs relative to the current system. I
would like you to comment on that generally and also comment on
the advantage relative to other plans of the very narrow menu
of investment options that you allow. You essentially allow
three different accounts and permit people to portion their
resources between those three investment systems. Can you
comment on the administrative cost question and also what is
the appropriate number of investment funds to make a system
like this work and be competitive?
Mr. Kolbe. I will take the first part; maybe Charlie would
like to answer the second. The cost of the Thrift Savings Plan,
which we have modeled it after, is one-tenth of 1 percent in
the administrative cost. It is extraordinarily low, because it
does invest in index funds, not in picking and choosing
particular stocks. You don't have that kind of management cost.
It is like Social Security; it is strictly the administrative
cost of the accounts.
As far as the numbers, Charlie, do you know? Go ahead.
Mr. Stenholm. Well, you know, first a little background.
When I first entered into this, I was rather opposed to
individual accounts and privatization. Jim was much more
ardently supportive of this, but we listened to a lot of
experts, and we had a lot of help. The Center for International
Studies and a private commission of some of the experts in this
business have given us the advice and counsel to put together
both the Senate plan and our plan that we have ultimately
cosponsored. In doing that, it ultimately came around to the
Thrift Savings Plan as a pretty darn good example. If it is
good enough for Federal employees and Members of Congress, what
is wrong with having that available for every citizen of the
United States? You look at the cost of that--the administrative
cost of our Thrift Savings Plan is very, very low. It is true
it has narrow opportunities for investment today, perhaps, by
some standards, but keep in mind, it is intended that will grow
over the years, too, as the Thrift Savings Plan continues to
grow and to flourish. So, that is kind of the background. I
have forgotten your specific question on the----
Mr. English. Do you generally feel that administrative cost
is a serious argument against individual accounts?
Mr. Stenholm. It is a very serious argument against some
proposals for individual accounts particularly for those small
accounts, because you can literally have administrative costs
being a substantial part of individual small accounts. But, on
the whole, if we stay--in our opinion--if we stay close to the
concept of the Thrift Savings Plan, it is irrelevant and will
become more so, and those who oppose individual accounts will
gradually come around to believing that it is not the problem
that the more ardent opponents today would say.
Mr. Kolbe. Mr. English, as far as my response on the
different investment opportunities you might have, my answer
might be a slightly more political answer, and that is I would
certainly have no objection to a broader range, but I think we
have a real problem. We have to acknowledge we have a real
problem in this body of getting some of our colleagues over the
hurdle into the idea of any kind of personal retirement
accounts or individual accounts, and limiting it to the kinds
of options or modeled after the Thrift Savings Plan, I think is
something that will give a lot more people more comfort level.
Mr. English. One last question, and I would invite you to
give me a brief answer on this. One of the very difficult
issues you tackle in your plan is to provide for the adjustment
of the normal retirement age, and this is particularly
explosive in a community like mine where you have people who
work on the shop floor, who work in very strenuous jobs, and
who are ready to retire at 62, if not earlier. They are
physically no longer able to exert themselves the way they
previously did. I wonder, as Americans live much longer and we
think that people's ages are going to increase considerably as
medical science improves, is it realistic to continue to adjust
to the normal retirement age if we continue to have a
substantial manufacturing economy? And I invite you to answer
very quickly.
Mr. Stenholm. You know, last year, we proposed the 70-year
normal retirement. This year, we are saying the 67, and we are
not changing the 62. Last year, we proposed changing the 62 to
65 for the reasons you mentioned. But here is a thought for us
to continue to think about in regard to the people that you
represent and others: clearly, there are occupations that do
not lend themselves to continued productive work to 67 and 70.
We are told by people who keep these statistics that that is
somewhere between 10 and 25 percent of the work force. It seems
to me we would be better off dealing with the disability side
of this question and allowing for provisions for those
individuals, and I represent many of them also, that it would
be taking a rifle shot to those individuals and providing for
their unique needs rather than continuing to suggest that
everyone must continue to wait until early retirement or 62 or
67. That is the concept.
Mr. English. Thank you, Mr. Chairman.
Chairman Archer. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman. I will be brief.
I want to start by commending the authors and the others
you have managed to find on both sides of the aisle to help you
on the Social Security front, particularly what you have done
with individual retirement accounts. The Congress, I hope, will
be catching up with you. I think the American people are
starting to catch up to you, but you were out there early on.
I have a number of questions, but I maybe will talk to,
Charlie, you and Jim on the floor about the specifics, but let
me make one comment and then ask for your input on it. With
regard to the individual accounts, the ultimate goal of all of
this is retirement security and to help people to have the kind
of resources they need to have less anxiety and more comfort
and security in their retirement. Our private system is in
trouble today, as well; that is the employer-based system which
is the third leg of the stool, and actually more benefits were
paid out under that last year than Social Security. Only half
of American workers now have any kind of pension.
One of my concerns with USA from the start, the way the
President proposed it, was why should an employer, particularly
a smaller employer who is already under some crunch trying to
administer all the rules and complexities and problems of the
401(k) or even some of the more complex systems of the defined
benefit plan, for instance, want to continue to even offer this
if the government is going to step in and do it?
Now, under yours, you have the ability for people to add
$2,000 a year to their individual account, but you also allow
the government to match, and you start with a pretty healthy
match for low-income workers and then it goes to dollar for
dollar match. Under the private system--and this is really my
comment; just for you to look at this--because of the way the
nondiscrimination rules work, unless you get workers who have
incomes at the lower and middle end into your retirement plan,
you cannot have a qualified retirement plan, and those rules
are put in place for good reason. You don't want just the high-
end management folks to take advantage of the tax deduction and
not spread it out through the work force.
So, my concern is, number one, you are going to have some
employers who are going to say, ``Gee, the government is going
to take care of it; I am not going to worry about it.'' Second,
you are going to have some plans that are going to be
disqualified, because they won't be able to meet their
discrimination testing, because the lower paid workers are
going to say, ``Why should I participate in this plan even if
there is a decent match from the employer,'' and in some cases
there isn't, ``when the government is now taking care of me?''
And I would just ask you to look at that. On the USA side, the
administration is trying to address this by giving companies
some kind of a credit. I haven't seen the specific language,
but they understand that is a problem. I am not sure they have
addressed it, but I would just ask you to, as we go forward,
take a look at that and solicit any comments you have today.
Mr. Kolbe. Yes, I think it is something for the Committee--
it is a good question. I think it is something very much
worthwhile looking at. I don't believe we are creating a
disincentive in here for private pensions. There is no tax
advantage in our accounts, and so I don't think we have created
a disincentive for it, but I need to think about that question
a little bit more.
Mr. Portman. I think there is a way to do both, and,
obviously, the way I feel about it is we ought to also
compliment this proposal with changes in the private side to
make it work better, because if you reduce some of the
regulations and increase limits and make it more attractive,
you can do both. But under our current system, I am afraid it
would be displacing private income, and the reason that is a
problem, in part, is because a lot of that is leveraging
private dollars now. In other words, it is not the taxpayers
paying it; it is matches and people's decision to set money
aside that the government doesn't even subsidize. Some of it is
subsidized through a deduction. It is just a thought as you go
forward.
Mr. Stenholm. It is a valid thought. Just on comment on
that, something that we have discussed many, many times. How
many of us at sometime in a speech have said that Social
Security was never meant to be a retirement program; it was
meant to be a social insurance program and to provide
supplemental. I envision what we have the opportunity of doing
this year is revisiting that and doing it in a way that we take
the other, the private side--the other two legs of the three-
legged stool, as we often refer to it--and encompass those in
one in which it does not become an disincentive. The commission
that worked with us on this talked about this and came to the
conclusion that that is something that is best left out of the
bill at this stage. So, therefore, I concur, I don't believe
that we do create a disincentive in this for anyone, but your
thought is very valid.
Mr. Portman. Thank you. Thank you, Mr. Chairman.
Chairman Archer. Mr. Watkins.
Mr. Watkins. Thank you, Mr. Chairman. Let me begin like all
the other family Members here on the Committee have said thanks
for your efforts and what you are doing, and I salute you for
all the hard work; it is a tremendous amount.
I have just two quick questions, and you probably have
already felt these through; if not, let me simply--what is
the--on withdrawals later on, what it the method of taxation?
As ordinary income or as capital gains?
Mr. Stenholm. It is intended to be the same as
nondeductible hours.
Mr. Watkins. As nondeductible hours.
Mr. Kolbe. Meaning you are taxed on your buildup but not on
your contribution.
Mr. Watkins. Yes. Just dealing with it as kind of a Roth-
IRA or not, and it could make a difference on scoring some
stuff later on as you are going through it. I just kind of
wondered how that might be addressed in your plan.
Mr. Stenholm. Ours has been scored from the standpoint of a
nondeductible hour.
Mr. Watkins. I know there are some variable annuities that
are as ordinary income, and a lot of the IRAs are as capital
gains, of course.
And, then, the other one was what method did you use in
figuring the poverty level--adjusting for the poverty? Is it--
--
Mr. Kolbe. That is Census Department data for the poverty
level. We use the Census Department.
Mr. Watkins. That could make a big difference also when, as
we know right now, a lot of Social Security are in poverty.
Mr. Stenholm. Eight million of today's beneficiaries on
Social Security receive Social Security guaranteed benefits
that put them below the poverty level. Under the bill we
proposed, no one that has worked their lifetime will find
themselves with a guaranteed benefit less than the poverty
level.
Mr. Kolbe. The determination--as I understand it--the
determination of that poverty level, whether it is for senior
citizens or whatever, is made--incomes for a family of four, a
family of three or whatever is made by the Census Department,
their data, collection of data.
Mr. Watkins. That could be a big variable in a lot of the
programs and all along the way right there.
I admire a lot of the senior citizens who are literally
getting by on $350, $400 a month. They stretch that dollar more
than any human being I have ever seen, including my mother who
is on that, and I remember a tough vote here one time where we
were criticized a great deal, and people called her and talked
to her about her son being in Congress and the decision he is
making and said that I should get out of Congress if I couldn't
do certain things. So, I called her the night before one of the
big votes, and I told her, I said, ``Mamma, they are giving me
a lot of criticism; probably have marked that I am not going to
vote.'' I went through a lot of the economic jargon of economic
assumptions and the variables of the budget and all the things
that went into it, and my mom is a lady who had very little
formal education, but she is a woman with a world of wisdom and
getting by just on minimum Social Security, basically. And she
said to me, she said, ``I don't understand a thing you are
talking about. You take care of the poor, the blind, the
disabled, and you do what I have told you, and the rest of us
will get along OK.'' And she never looked at herself as having
any kind of problems. So, I just kind of wondered how that
adjustment is going to be made there on poverty, because it
will make a big difference in the lives of a lot of people.
So, thank you very much for what you have done.
Mr. Stenholm. You have put your finger on one of the
predominant forces in our bill of trying to recognize that
those in the lower income and the poverty level and
retirement--that, to me, is one of the strengths of the bill
that we propose to you today.
Mr. Watkins. It should be looked at very seriously. Thank
you.
Chairman Archer. If I may briefly just follow up on that
last line of inquiry, because I think all of us are sensitive
to trying to be sure that people who are senior citizens are
getting adequately taken care of, particularly in the low-
income levels, but the Concord Coalition has reiterated many,
many times that they thought that we ought to have a means test
on Social Security, and I personally disagree with that, but
the current law provides that the Federal Government has a
poverty program for those who pass a means test to get to the
poverty level through the SSI Program, so that the Social
Security benefit does not equal the poverty level. All they
have to do is show need, and they get an SSI Program that gets
them up to the poverty level.
Now, under your plan, you would be entitled to the poverty
level as a matter of entitlement irrespective of your means.
So, an individual who had a large amount of income or a large
amount of assets would still get a higher benefit than they
would get under the current law as a matter of entitlement, as
I understand it. Is that incorrect?
Mr. Stenholm. That is incorrect, Mr. Chairman. Again, you
make an inference. Only that individual that works 40 years is
entitled to a Social Security guaranteed benefit equal to the
poverty level.
Chairman Archer. All right. OK, but that still would
qualify people who may have received some sort of largesse in
the way----
Mr. Kolbe. Like when you win the lottery?
Chairman Archer. A lottery or someone who had received as a
beneficiary of a will, financial need would not be involved in
that. It would be automatic, and it would be a matter of
entitlement under the law irrespective of the financial worth
of that individual. The current law today takes care of the
people you are talking about through the SSI Program.
Mr. Stenholm. I believe only up to 75 percent of poverty,
though, if you will--I believe I am correct, and you certainly
know more about this than I do, Mr. Chairman----
Chairman Archer. Well, anyhow, that is just a matter of
some thought that you might work through as you continue to
work on your program.
I do thank both of you. I think you have done a tremendous
amount of work, and you are making a very, very constructive
contribution to this entire consideration, and I appreciate
your testimony today.
Mr. Kolbe. Thank you for your attention and for the good
questions, Mr. Chairman. It was a good hearing. Thank you.
Chairman Archer. Mr. Nadler. Oh, it is--I am sorry, Mr.
DeFazio, I did not see you. I apologize. We are going to get
you started in any event while we have got a few minutes left
on this vote.
STATEMENT OF HON. PETER A. DEFAZIO, REPRESENTATIVE IN CONGRESS
FROM THE STATE OF OREGON
Mr. DeFazio. Thank you, Mr. Chairman.
Chairman Archer. Welcome to the Committee. We will be
pleased to receive your testimony.
Mr. DeFazio. Thank you, Mr. Chairman. I have a brief
testimony, which I submitted for the record, and I will just
depart from that a bit in some brief remarks.
Just by way of background, Mr. Chairman, I have a degree in
gerontology and some significant experience more on the OASDI
side of Social Security but have put a lot of time into this,
both my professional career as a congressional staffer and now
as a Member.
So, I looked at the system. I see tremendous merit and
value in trying to extend the current system intact as much as
possible, because I think it works quite well but meet the 75-
year standard of the actuaries. So, I poured through all of the
various proposals the actuaries have put out on some thought
papers; dozens of them on ways to increase revenues, and I came
up with a few standards. I didn't want to decrease benefits. I
didn't want to increase retirement age over what is currently
proposed, and I wanted also, if possible, to see a way to
provide some tax relief, because, as you certainly know as
Chairman, more than 40 percent of the working people in America
pay more in FICA taxes than they do in income taxes to the
Federal Government.
So, the proposal I have submitted does raise taxes, but it
raises taxes only on people who earn over the current earnings
limit of $72,600. I would lift the cap as was done with
Medicare, and that picks up more than enough money to resolve
the problem or almost enough money to resolve the problem, but
what I also do is invest benefits for up to 40 percent of the
surplus on the aggregate basis that has been talked about in
some other plans, all along the model of the TRS Program, not
in the fully individualized account basis. And between those
two things, we would be well above what is needed for 75-year
sufficiency.
But then what I would do to make the tax more progressive
and relieve the burden on 95 percent of working Americans is
exempt the first $4,000 of income on the employee side from
FICA tax, although those benefits--that earnings would be
attributed to their record, but I would pay for that out of the
money we get by lifting the cap, and I would do a couple of
other minor improvements dealing with beneficiaries age 85 and
older. They are predominantly women, and they are in a much
higher rate of poverty. I would boost their benefits as
proposed by the actuaries, and I would provide five additional
drop-out years for child care.
So, in summary, I propose something that would provide tax
relief to 95 percent of wage-earning Americans; would stabilize
Social Security and has been certified by the actuaries over 75
years, the actuaries' window; would also provide for the
additional child care drop-out years and the older workers and
essentially adopt sort of what I would consider to be a fair,
flat-tax approach to Social Security, which is you pay on all
your earnings, and that is my proposal, Mr. Chairman. It is
quite simple, and it would solve the problem.
[The prepared statement follows:]
Statement of Hon. Peter A. DeFazio, a Representative in Congress from
the State of Oregon
Thank you, Mr. Chairman, Mr. Rangel and members of the
committee for giving me the opportunity to testify today on my
proposal to insure the future health of the Social Security
program.
Social Security is one of the most popular and successful
New Deal programs. It was created in 1935 and today provides
essential retirement, survivors and disability benefits to 44
million Americans. Before Social Security was approved by
Congress, more than one-half of America's elderly citizens
lived in poverty.
Thanks to Social Security, fewer than 11 percent of today's
seniors fall below the poverty line. Social Security provides
more than half of the retirement income for two out of every
three people over 65 years of age. Social Security benefits
make up 90 percent or more of the income for about one out of
three seniors.
It is important to understand that the Social Security
Trust Fund is not bankrupt, nor will it be. According to the
1999 Social Security Trustees Report, Social Security is
financially sound until at least 2034--35 years from now. Even
if Congress does nothing to reform the program, Social Security
will continue to provide 75 percent of current benefits for an
additional 40 years--until the year 2073. With the relatively
modest reforms that I am proposing, the Social Security system
should be able to provide promised retirement benefits for many
generations to come.
In fact, my proposal cuts taxes for 94% of working
Americans, increases Social Security benefits for the most
needy, and saves Social Security. My proposal amends the Social
Security Act to restore 75 year solvency by:
Providing a FICA payroll tax exemption for first
$4,000 of income, cutting taxes for 94 percent of all workers.
This exemption would cut Social Security taxes by more than 11
percent for an individual earning $35,000 a year. Approximately
40 percent of American taxpayers pay more in FICA taxes than
they pay in federal income tax!
Investing 40 percent of the future Social Security
surplus in broadly indexed equity funds. Many state retirement
plans already invest a portion of their surplus in the stock
market.
Making all earnings subject to payroll tax for
both employer and employee beginning in 2000. Retain the cap
for benefit calculations. This affects only those who earn more
than $72,600 a year--less than 6 percent of wage earners.
Increasing benefits at age 85 by 5 percent. Women
over the age of 85 are more than twice as likely to live in
poverty than men of the same age. There are more than twice as
many women as men over the age of 85.
Allowing up to 5 child-care drop-out years.
Parents should not have reduced Social Security benefits
because they chose to stay home to raise their children.
The Social Security program is the most successful
government program ever undertaken. With these changes it can
remain so. Thank you, Mr. Chairman, I would welcome questions
from you or other members of the Committee.
Chairman Archer. Well, your explanation is brief and to the
point, and the Chair appreciates that as we move into the
afternoon.
Mr. Cardin, do you have any questions?
I think it is pretty clear what you are suggesting, and I
thank you for going through this process, getting certified by
Social Security, and appearing before us today.
Mr. DeFazio. Thank you, Mr. Chairman. I will look forward
to your support. [Laughter.]
Chairman Archer. Well, we are going to have go through
quite a deliberation before we get to there.
Mr. Nadler, do you want to go vote and then come back?
Mr. Nadler. Yes.
Chairman Archer. Very well. The Committee will stand in
recess for an adequate period of time to vote and immediately--
will you return right away, Mr. Nadler? Great, thank you.
[Recess.]
Mrs. Johnson of Connecticut [presiding]. The hearing will
reconvene.
Mr. Nadler, it is a pleasure to have you.
STATEMENT OF HON. JERROLD NADLER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF NEW YORK
Mr. Nadler. Thank you, Madam Chairperson. Thank you for the
invitation to testify before the Committee.
I introduced H.R. 1043, legislation which has been pending
before this Committee since March 9. This bill would make
Social Security solvent for at least 75 years without raising
the retirement age, without cutting benefits in any way,
without shifting the risk onto individuals through private
accounts funded by FICA taxes, and without raising tax rates.
The plan also does not adjust the CPI; it does not reduce
COLAs; it does not force only State and local government
employees into Social Security; it does not increase the
benefit computation above 35 years; it does not cut benefits by
adjusting the bend points; it does not cut benefits in any way.
The plan does not rely on general fund transfers beyond an
initial 15-year period, unlike the Archer-Shaw plan.
The bill has been scored by the Social Security actuaries
as completely eliminating the long-range OASDI actuarial
deficit. In fact, it would improve the long-range OASDI
actuarial balance by an estimated 2.55 percent of taxable
payroll, replacing the actuarial deficit of 2.07 percent under
present law with a positive actuarial balance of 0.48 percent
of taxable payroll.
In addition, at the end of the 75-year period, Social
Security would remain strong. Some criticisms have been leveled
at some other proposals by saying, ``Yes, they would make the
Social Security for 75 years, and then we would go broke in
year 76.'' That is not the case with this bill. In fact, the
trust fund ratio at the end of 75 years would then be 793
percent compared to its current 194 percent; that is the ratio
of money in the trust fund toward annual payouts would be
almost 8 to 1 at that point compared to a little under 2 to 1
now.
So, it has ongoing strength, and in fact will be as solvent
as far into the future as we can see. The plan maintains Social
Security is a guaranteed, lifelong, cost of living adjusted,
defined benefit plan. That is the heart and soul of Social
Security, and that is why I fought so hard to preserve the
vital program.
So, how does this legislation work? Essentially, the plan
follows and builds on the President's suggestion. The bill
would transfer 62 percent of the projected budget surplus to
the Social Security Trust Fund for a period of 15 years, not
forever. It would provide for the investment of a portion of
the funds in broad stock index funds and would raise but not
eliminate the wage cap. It would raise it above the current
$72,600.
The bill would implement the President's proposal to
authorize the transfer of 62 percent of the projected budget
surplus to the Social Security for 15 years. It expresses this
figure as a percent of taxable payroll and is not dependent on
actual budget surpluses to materialize. If the economy does
better than projected over the 15-year period, more funds would
be allocated to Social Security. If the economy does worse,
less funds would be transferred, and there would be
correspondingly less pressure on other government spending.
The bill would create an independent Social Security
Investment Oversight Board, members of which would have long
staggered terms which would then hire several competing private
managers to invest a portion of the trust fund in broad market
index funds. Some people incorrectly describe this as
government investment in the market. This is somewhat
misleading. There would be no picking and choosing of stocks by
the President, by Congress, or anyone else in government. The
investments would follow a fixed formula and not the whims of
some investment genius. No geniuses need apply for employment
under this plan.
The investment is completely private and fully insulated
from political influence by several layers of protection.
Federal employees currently invest in the market through the
Thrift Savings Plan. I am not aware of anyone who has suggested
that Congress has tampered with the market due to this type of
collective investment. In fact, several of the plans that
include individual accounts have similar restrictions on
investments which would essentially require the same type of
protections to be included in their plans. Individuals would be
severely restricted in their investment decisions and in some
cases only allowed to invest in broad index funds approved by
the government. Here, of course, the private investment
managers would do the investing in the investment funds.
Many State and local governments currently invest up to 60
percent of their assets--of their pension assets in the stock
market. This bill would authorize half of that amount and would
prohibit investing more than 30 percent of total trust funds
assets in the market. In order to extend the projected solvency
of the Social Security system for 75 years, the bill would
invest up to 30 percent of the funds of the trust fund
surpluses in the market.
Keep in mind, under this legislation, most of Social
Security's funding will still come from payroll taxes and
interest on government bonds. The actuaries informed us that
under current law, beginning in 2034, payroll taxes will be
sufficient to cover 75 percent, roughly, of benefit payments.
The other 25 percent of payments would have to come from the
trust fund. A maximum of 30 percent of the trust fund under my
bill would be invested in the market. Thirty percent times 25
percent is 7.5 percent. In others words, funds for only 7.5
percent of benefits could be at any market risk at all. It has
been estimated that if the market collapsed by 50 percent, the
ability of Social Security to pay benefits would be reduced by
less than 2 percent at worst. So, the risk to the system under
this bill is quite small.
The real difference between this approach and the various
private account approaches is twofold. One, this approach is a
lower cost, more efficient, and more prudent way of increasing
the rate of return on Social Security assets. There are
staggering administrative costs for setting up 150 million
individual accounts and tracking them year by year for 40 or 45
years with allowances made for annual adjustments to each
account. This is an incredible burden that is completely
unnecessary and wasteful.
The second difference is that this bill retains Social
Security as a guaranteed benefits plan, whereas the various
market proposals--or most of the various individual account
proposals make part or all of your benefits depending on how
well your individual account did in the market, and even if on
average the market did very well and on average individual
plans did very well, many millions would be below average and
would not do very well, and it would subject millions of
Americans to market risk. This bill would not.
This legislation, starting in fiscal year 2000, would
incrementally increase the cap on taxable wages above the
current $72,600. Currently, 86 percent of all wages are subject
to FICA contributions. This has slipped in recent years from
the historic 90 percent because of the dramatic rise in the
disparity of wage levels in our society.
The Social Security actuaries inform us that 93 percent of
wage earners earn less than the current cap, and, therefore,
pay FICA taxes on all their earnings. About 7 percent of all
wage earners do not pay FICA taxes on all of their income. This
bill would require the wealthiest 7 percent to pay the same
FICA tax rate on a slightly greater portion of their earnings.
It would not eliminate the cap completely, unlike Mr. DeFazio's
plan. To ensure fairness, these individual Social Security
benefits would increase, as well, to reflect the higher cap.
Keep in mind, I would also point out this simply would restore
the percentage of wages subject to the tax to 90 percent and to
do that would only impact on 7 percent of wage earners.
This plan makes the system act solvent even under the
actuaries' extremely pessimistic intermediate assumptions. Many
of their predictions are questionable especially of the fact
they predict economic growth to average 2.0 percent for the
years 2000 to 2007 as they have for the last 5 years, despite
economic growth rates of 3.4 percent in 1996, 3.9 percent in
1997, and 3.9 percent in 1998, and slightly better than 4
percent so far this year. They then predict economic growth to
take a significant downturn to 1.4 percent from 2020 to 2040
and 1.3 percent from 2050 to 2070. The further predict the
economy will do even worse than after that. To put these
numbers in some perspective, we should know the economic growth
rate was 4.6 percent from 1960 to 1964, 5.4 percent in 1976, 7
percent in 1984, and 3.25 percent for the last 37 years. So,
H.R. 1043 restores solvency even in light of these extremely
pessimistic projections. If the actuaries are wrong and the
economy does better than they presume, as I predict it will,
Social Security will be in even better shape, and we will have
plenty of money to increase benefits in various ways or to
reduce the tax rate.
The legislation I have proposed is supported by the Older
Women's League, The 2030 Center, the Americans for Democratic
Action, among others. I would commend it to the consideration
of the Committee. And, again, to summarize, unlike most of the
other proposals, it puts no market risk on any individual
whatsoever, calls for no benefit reductions, no increase in the
retirement age, does not mortgage the budget surpluses forever
as the Archer-Shaw plan would do, calls simply for 62 percent
of the budget surplus for 15 years to be put into the trust
fund, calls for investment by private sector investment
managers of up to 30 percent of trust fund surpluses in the
stock market, and would somewhat raise the wage cap and would
thereby make the system solvent, not only for 75 years but for
as far into the future as we can see and would in fact give us
a ratio, a payout ratio 75 years from now of almost 8 to 1
compared to today's less than 2 to 1.
[The prepared statement follows:]
Statement of Hon. Jerrold Nadler, a Representative in Congress from the
State of New York
Thank you, Mr. Chairman, for your invitation to testify
before this committee.
I have introduced H.R. 1043, legislation which has been
pending before this committee in legislative form since March
9. This bill will make Social Security solvent for at least
seventy five years without raising the retirement age, without
cutting benefits, without shifting the risk onto individuals
through private accounts funded by FICA taxes, and without
raising tax rates.
This plan also does not adjust the CPI, does not force all
new state and local government employees into Social Security,
does not increase the benefit computation period above 35
years, and does not cut benefits by adjusting the bend points.
This plan does not rely on general fund transfers beyond an
initial fifteen year period.
It has been scored by the Social Security Actuaries as
completely eliminating the long-range OASDI actuarial deficit.
In fact, it would improve the long-range OASDI actuarial
balance by an estimated 2.55 percent of taxable payroll,
replacing the actuarial deficit of 2.07 percent under present
law with an positive actuarial balance of 0.48 percent of
taxable payroll.
In addition, at the end of the seventy five year period,
Social Security would remain strong. In fact, the trust fund
ratio would then be 793 percent. The current trust fund ratio
is approximately 194 percent.
This plan maintains Social Security as a guaranteed, life-
long, cost-of-living-adjusted, defined benefit plan. That is
the heart and soul of Social Security, and that is why I have
fought so hard to preserve this vital program.
So, how does this legislation work?
Essentially, the bill would transfer 62 percent of the
projected budget surplus to the Social Security Trust Fund for
a period of 15 years, would provide for the investment of a
portion of the funds in broad stock index funds, and would
raise the wage cap above the current $72,600.
Surplus Transfer.
The bill would implement the President's proposal to
authorize the transfer of 62 percent of the projected budget
surplus to the Social Security Trust Fund for a period of 15
years. It expresses this figure as a percent of taxable
payroll, and is not dependent on actual budget surpluses to
materialize. If the economy does better than predicted over the
fifteen year period, more funds would be allocated to Social
Security. If the economy does worse, less funds would be
transferred, and there would be correspondingly less pressure
on other government spending.
The Independent Social Security Investment Oversight Board.
The bill would create the Independent Social Security
Investment Oversight Board--members of which would have long,
staggered terms--which would then hire several competing
private managers to invest small portions of the Trust Fund in
broad index funds which track the market based on a fixed
formula. Some people incorrectly describe this as ``government
investment in the market.'' This is terribly misleading. There
would be no picking and choosing of stocks by the President,
Congress, or anyone else in government. The investments would
follow a fixed formula and not the whims of some investment
genius. No geniuses need apply under this plan.
The investment is completely private and fully insulated
from political influence by several layers of protection.
Federal employees currently invest in the market through the
Thrift Savings Plan. I am not aware of anyone who has accused
Congress of tampering with the market due to this type of
collective investment. In fact, several of the plans that
include individual accounts have similar restrictions on
investments which would essentially require the same type of
protections to be included in their plans. Individuals would be
severely restricted in their investment decisions and in some
cases only allowed to invest in broad index funds approved by
the government.
Many state and local governments invest up to 60% of their
assets in the stock market. This bill would authorize half of
that amount and would prohibit investing more than 30% of total
Trust Fund assets in the market. In order to extend the
projected solvency of the Social Security system for 75 years,
the bill invests a larger, but still prudent, amount of the
Trust Funds in index funds than the President's proposal which
extends the projected solvency for 56 years.
Keep in mind, under this legislation most of Social
Security's funding will still come from payroll taxes and
interest from government bonds. The Actuaries inform us that
under current law, beginning in 2034, payroll taxes will be
sufficient to cover 75 percent of benefit payments. The other
25% will have to come from the Trust Fund. A maximum of 30% of
the Trust Fund would be invested in the market. 30% of 25% is
7\1/2\%. In other words, funds for only 7\1/2\% of benefits
could be at any market risk at all. It has been estimated that
if the market collapsed by 50 percent, the ability of Social
Security to pay benefits would be reduced by only 2%. So the
risk to the system, under this bill, is quite small.
The real difference between this approach and private
accounts is that this approach is a lower cost, more efficient,
and more prudent way of increasing the rate of return on Social
Security assets. There are staggering administrative costs for
setting up 150 million individual accounts and tracking them
year by year for forty years with allowances made for annual
adjustments to each account. This is an incredible burden that
is completely unnecessary and wasteful.
Increase, and then index, the cap on taxable wages.
This legislation, starting in fiscal year 2000, also
incrementally increases the cap on taxable wages above the
current $72,600. Currently, approximately 86% of all wages are
subject to FICA contributions. This has slipped in recent years
from the historic 90% due to the dramatic rise in disparity of
wages. The Social Security Actuaries inform us that 93% percent
of wage earners earn less than the current cap, and, therefore,
pay FICA taxes on all of their earnings. About 7% of wage
earners do not pay FICA taxes on all of their income. My bill
would require the wealthiest 7% to pay the same FICA tax rate
on a slightly greater portion of their earnings. It would not
eliminate the cap completely. To ensure fairness, these
individuals' Social Security benefit levels would increase as
well.
Keep in mind this plan makes the system solvent even under
the Actuaries extremely pessimistic intermediate assumptions.
Many of their predictions are questionable especially the fact
that they predict economic growth to average 2.0 for the years
2000-2007, despite economic growth of 3.4 percent in 1996, 3.9
percent in 1997, and 3.9 percent in 1998. They then predict
economic growth to take a significant downturn to average 1.4
from 2020-2040 and 1.3 percent in 2050-2070. They further
predict that the economy will do even worse after that. To put
these numbers in some perspective the economic growth rate was
4.6 percent from 1960-64, 5.4 percent in 1976, 7.0 percent in
1984. So H.R. 1043 restores solvency even in light of these
extremely pessimistic predictions. If the Actuaries are wrong,
and the economy does better than predicted, Social Security
will be in even better shape.
The legislation that I have proposed, H.R. 1043, is also
supported by Americans for Democratic Action, OWL (the Older
Women's League), and the 2030 Center. A large national
organization, a women's organization, and an organization
primarily concerned with protecting the interests of young
people.
Mrs. Johnson of Connecticut. Well, thank you very much for
your testimony and for all the thought that you have put into
meeting this challenge.
I do hope that you don't loosely go around describing that
other plans put people at risk of the market.
Mr. Nadler. Some do, and that is what I said.
Mrs. Johnson of Connecticut. For instance, the Archer-Shaw
plan does guarantee the benefit, so the risk is taken by the
government, not by the individuals.
Mr. Nadler. Well, in the Archer--I said some of other
plans; I didn't say all other plans.
Mrs. Johnson of Connecticut. I have not noticed that many
of the plans didn't guarantee the benefit.
Mr. Nadler. Well, most of the privatization proposals--not
the Archer-Shaw plan and I don't think the Kolbe-Stenholm
plan--but most of the privatization plans that have been around
essentially say in one form or another that you are going to
take 2 percent or 4 percent or 6 percent, depending on the
plan, of the 12.4 percent FICA tax; you are going to divert it
into market investments; you will be----
Mrs. Johnson of Connecticut. Well, I think that may have
been the loose idea at the beginning, but I am not aware of a
single plan that has been introduced that actually does expose
people to market rates and doesn't guarantee the benefits that
Social Security currently----
Mr. Nadler. I will look at that again, but I think that
some of those plans, in fact, many of them do.
I would also point out that----
Mrs. Johnson of Connecticut. Well, many of them--don't use
many----
Mr. Nadler. Well, some of them.
Mrs. Johnson of Connecticut. It is very important if we are
ever going to get through this.
Mr. Nadler. I will look at that again, but it is certainly
true of some of them. It is certainly true of the some them.
Mrs. Johnson of Connecticut. Well, we will see if some of
them say that.
Mr. Nadler. And whether it is many or some, I won't quibble
now. My impression was that it was true of----
Mrs. Johnson of Connecticut. Of those that have been
written up and introduced, that is the universe of plans this
Committee is concerned with----
Mr. Nadler. OK.
Mrs. Johnson of Connecticut [continuing]. And that have
been certified to be effective over 75 years, and if some of
those do, then fine, but I am personally not aware, and the
ones I am aware of are very committed. So, I think it is very
important not to get people involved in the fear factor being
subject to the market when in most of these plans, the
government is going to take that risk.
Let me ask you, though, as one who was early very
interested in investing some of the Social Security surplus in
the market, I am interested in your plan, but I don't see that
is accomplishes the level of insulation that would have
concerned Chairman Greenspan.
Mr. Nadler. Well, I think it insulates it as much as it can
be insulated and I think quite effectively in the following
manner: first, an investment board would be created, an
independent board, consisting of Presidential appointments
confirmed by the Senate with overlapping very long terms, 14-
year terms, so as not to be responsible or responsive to any
particular administration; second of all, the only two things
they would do, that is that board would do, is not to pick and
choose stocks; they would simply decide three things. One, how
much in gross dollar terms should be invested in the market
this year and how much next year? Two, how many pieces should
we break that amount into? Let us say we are going to invest $1
billion in the market this year. Should we break into five
portions of $200 million or two portions of $500 million? And,
three, for each of those portions, whom should we hire among
private investment managers to manage that? So, all they will
decide is----
Mrs. Johnson of Connecticut. With all due respect, what
would prevent Congress from passing legislation----
Mr. Nadler. I am sorry?
Mrs. Johnson of Connecticut. What would prevent Congress
from passing legislation like many States prevented past
legislation during earlier decades to since prohibit those fund
managers from investing money in South Africa or whatever is
the thing at the time?
Mr. Nadler. Well, the third thing--you didn't let me come
to the third thing--the third thing is that the legislation
would mandate that the only thing the fund managers could
invest in are market index funds, so they can't invest in any
company, whether it has investments in South Africa or anywhere
else. The index fund that they invest in might have some share,
but they can only invest in index funds, and since they can
only choose index funds, then the legislation also--that track
the market.
Mrs. Johnson of Connecticut. All right. I do appreciate
that. I am not sure that you can bind future Congress' to not
legislate that they can't solicit any index fund that invests
in South Africa.
Mr. Nadler. Well, let me answer that question. I will
answer it twofold. Number one, there is no way that any plan
can prevent a future Congress from doing anything it wants;
that is constitutional.
Mrs. Johnson of Connecticut. Right.
Mr. Nadler. And I would submit that the experience that we
have with the Thrift Savings Plan--this is modeled on the
Thrift Savings Plan as are elements of some of the other bills
in terms of some of their private investments. I don't think we
have had that problem.
But I would submit one other thing. I don't think Congress
is likely to do that. To do that, they would have to upend the
entire statutory scheme here, and I would say one further
thing, and I will be very blunt: if some tremendous social
movement arose in the future--if Hitler were reborn, took over,
the Nazis were running Germany again, and some tremendous moral
movement came up in this country that says don't invest in
Nazis and Congress were to succumb to that, so what?
Mrs. Johnson of Connecticut. Thank you.
Mr. Nadler. I don't think that is so terrible.
Mrs. Johnson of Connecticut. Let me recognize the Chairman.
Chairman Archer [presiding]. I have no questions other than
to compliment you for coming and presenting your plan, and it
is a full plan that does have the certification that it will
save Social Security for 75 years. There are many who think
that is not important. Frankly, I think it ought to be more
than 75 years as life expectancy has gone up to above 80, and
you have given thought to it, and we appreciate your testimony.
I have no questions.
Mr. Nadler. Well, I appreciate your comment. Let me just
mention, you didn't hear--you weren't here--to say that this
bill--the reason I am saying this is to allude to what you said
a moment ago. There has been criticism made of some suggestions
that 75 years is not enough; that if you have 75-year solvency
but the plan goes broke and you are 76, that maybe we ought to
do a little better than that. This plan not only has 75-year
solvency but achieves a ratio of trust fund assets to payout of
793 percent or almost 8 to 1 75 years down the road. So, in
fact, it is solvent as far into the future as we can see.
Chairman Archer. Sure, it gets better and better and
better, and that part of it is, in my opinion, very, very good.
I have no questions.
Mr. Rangel.
Mr. Rangel. Thank you, Mr. Chairman. Jerry, why didn't you
remove the cap altogether?
Mr. Nadler. I chose not to remove the cap altogether for
several reasons. First of all, I made the basic decision--and
let me just say one other thing: this bill was not designed to
pass exactly as is. This bill was introduced several months
ago. It was the plan that got actuarial certification. I
believe it was designed to show that you can in fact achieve
actuarial solvency over the 75 years without subjecting anybody
to individual market risk, without reducing benefits, without
increasing the retirement age, and without increasing tax
rates. That was the purpose of it. There are a lot of different
variants on it. In on sense, Mr. DeFazio's bill is a variant;
it is the same basic approach.
I chose, in this bill, not to eliminate the cap for several
reasons. One, right now, benefits are to a large extent
proportional to contributions. There are different bend points
in the rates, as you know, but, basically, the higher your
contribution, the higher the benefit. If you eliminated the cap
completely, either you would have for a few people very sky
high outrageous benefits which might conceivably lessen the
political support for the system at some future point in time
or maybe increase pressures for calling for means testing the
system.
Alternatively, you could, as Mr. DeFazio would, divorce,
simply say we are raising the cap on contributions but not on
benefits, and then it would make that--I don't think we should
remove the nexus between contributions and benefits. It
becomes, then, a straight tax as opposed to contribution, and
it is a fundamental change in the system, and I think it raises
a lot of political problems in terms of support in the future.
Third, as a straight political judgment, I thought it less
likely that we would ever pass something like that in Congress
than simply raising the cap, and the figure I chose to raise
the cap to is simple. It was based on--it had, not
traditionally, but had often been in the past capturing 90
percent of wages to be FICA taxed, and that was sufficient with
the other things to what we needed to do.
Mr. Rangel. What was your thinking legislatively,
economically, or politically as to attaching the private sector
investment to this bill?
Mr. Nadler. Well, I think it is an excellent idea. I mean,
if anyone has money--if you won the lottery tomorrow and you
got $10 million and you went to an advisor to ask him how to
invest it, anybody would tell you ``Diversify your portfolio.''
That is true of anything, whether it is a State pension fund or
a Social Security fund or a private account or private
portfolio. You always want to diversify your portfolio to
minimize risk and to maximize yield and to get a good balance
of that.
Now, traditionally, Social Security didn't do that for a
very simple reason. When Social Security was conceived and
until 1983 when the system was changed deliberately to build up
the trust fund to anticipate the baby boomers, there rarely
were--there weren't expected to be sizable amounts of money in
the trust fund. There was a float from year to year. There
never was an expectation that we are going to have a lot of
money, so you might as well just put it into the safest
investment--Government bonds, and so forth. But now that you
are building up huge amounts, you should get a higher yield
than on Treasury bonds.
Now, the stock market over long periods of time does
increase faster. Now, there are periods of downturn which tend
to be 20-year periods, but over any long period of time, you do
better with an investment in the stock market than you do in
bonds or in Treasury bonds. So, we should take advantage of
that.
Now, I did not like the private investment system, because
under some--in deference to the gentlelady from Connecticut--
under some private investment plans, you place market risk on
individuals, and you turn Social Security from defined benefit
to a defined contribution program, which I wouldn't want to do,
and, in any event, you get a tremendous--you pay a tremendous
price in terms of efficiency and administrative costs and under
some plans in terms of transition costs. So, we eliminate all
of this. But I think investing a reasonable proportion of the
market is a good thing to do even if you didn't need to do it
to get a big--even if you didn't need to do it, it is an
intelligent thing to do.
Mr. Rangel. Thank you. You have done a very good job with
this bill. We appreciate your efforts.
Mr. Nadler. Thank you.
Chairman Archer. Thank you for your presentation, Mr.
Nadler.
Mr. Nadler. Thank you.
Chairman Archer. And thank you for your patience in waiting
your turn.
Our next witness is scheduled to be Mr. Smith. Is Mr. Smith
available?
If not, our next witness is Mr. Sanford. Is Mr. Sanford
available?
Well, the Committee will stand in recess for 5 minutes. If
Mr. Sanford gets here by then, then we will be pleased to hear
his testimony.
[Recess.]
Chairman Archer. Mr. Sanford, welcome.
STATEMENT OF HON. MARSHALL ``MARK'' SANFORD, A REPRESENTATIVE
IN CONGRESS FROM THE STATE OF SOUTH CAROLINA
Mr. Sanford. Thank you, sir.
Chairman Archer. We are prepared to receive your testimony.
I apologize to you for having kept you waiting for such a long
period of time, but we really don't control that, as you know,
but we are glad to have you before us now, and we would be
pleased to hear from you.
Mr. Sanford. I thank you, sir. First of all, I would say
thank you very much for holding this hearing to you, to Mr.
Foley, to others on the Committee, for actually stepping out
and talking about this issue that has needed a lot of talk for
quite some time.
I would say that we have, as you know, got a number of
different bills related to Social Security, but this latest
bill and the one that you see featured in your write-up is
basically a compromise bill. It is a political bill, and at the
core it is about one thing, and that is about rebating the
entire Social Security balance back to individuals who would
then begin their own personal Social Security account, and it
would begin to create what Greenspan talked about and that is a
real firewall between Social Security balances and political
forces in Washington, DC.
I think that the bill represents a compromise in that it is
an amalgamation of a number of different ideas. It incorporates
what Moynihan had talked about. Moynihan had talked about--I
guess Kerrey and Moynihan--had talked about the idea that the
tax rate right now is more than we need. The FICA tax is more
than we need in Washington, and, therefore, their proposal has
actually cut the tax rate, as we know. We don't do that but
instead rebate that surplus back to the individual.
It incorporates the idea that the President talked about
which was the idea of a refundable tax credit. Instead of
lowering the rate, this bill simply issues to folks a
refundable tax credit that begins to build a Social Security
balance in their personal account.
It incorporates your idea, sir, the Archer-Shaw idea of
using general fund revenue to basically help through a
transition. You know, I think you are absolutely, 100 percent
right in this idea, because if you look around the globe at any
of the different proposals that have worked in transitioning
from a collective system run by the power of the State to a
series of individual accounts, in every case, general fund
revenues have been used.
It uses some of the ideas of Kolbe-Stenholm--and I listened
to some of their testimony earlier--on basically small--we take
a number of their changes and refine--basically, we use just a
few of them--but, nonetheless, structure reform to existing
Social Security, and, most of all, what this simple idea takes
advantage of is the idea of personal accounts, and I think that
is the one common denominator that to a greater or lesser
extent you have heard in all the different reform proposals.
So, it is, again, a small bill. It is a reform bill, not so
much on Social Security as a whole, but simply on trying to
lock down Social Security surpluses so that they stay for
Social Security. I would liken it to a super lockbox, if you
will. As we all know, last year, Washington, through the
unified budget, borrowed $100 billion from Social Security, and
they did so without a lot of fanfare. I mean, when I talk to
folks back home in my district and bring up the $100 billion of
borrowing, most folks don't even know about it, and those that
do didn't exactly march on Washington. I mean, they may have
written a letter to their Congressman or Senator, but that was
about it. And if that same money had been housed in some of
form of personal account across this country and then
Washington reached in and attempted to borrow that same $100
billion, I mean, you would have a revolution on your hands. I
don't know about you, Mr. Chairman, but I know the folks back
in my district, the idea of saying, ``Well, we came up short.
Your pro rata share of this will be $743.27'' would not go over
real well with folks in my district. And, so it really creates
that firewall that I think that we are all looking for. As we
all know, as well, the omnibus bill of last year, over $20
billion borrowed from Social Security. Would that have been
possible with personal accounts? In the supplemental just a
couple of weeks ago, would that have been possible if the money
had been in personal accounts? So, it really, more than
anything else, is a bill about locking down Social Security
surpluses more than it is a bill about reform of Social
Security.
Two, I would say that it relies on the ``bird in the hand''
theory. What the bill really does is it prefunds Social
Security. In other words, since more money is coming in each
year in FICA taxes than is currently needed by Social Security,
what it says is, ``All right, would you like your money now?''
Now, if history is any indicator based on what has happened in
other parts of the globe, people would say, ``Yes,'' and by
doing so--and I think this is where there is something about
this bill that does work--by doing so, since it already had
been prefunded, that piece of their Social Security, that means
it will give up that part of traditional Social Security. And
that voluntary reduction of future reliability I think is one
of the real strong pluses, because--I heard your testimony with
Kolbe-Stenholm--one of the problems we get into politically is
when you begin looking at a lot of reform or cut of current
benefit, even if it is a hypothetical benefit, but nonetheless
it is a stated benefit, if you look at that, you have real
political problems with that. This would be a voluntary
reduction of that benefit, because people would be prepaid that
benefit.
Last thing that I would just touch on for 2 seconds would
be that it allows for real wealth creation. Again, this is a
theme that has been constant to all the different Social
Security proposals that we have talked about. But in these
little accounts--and I am just going to use a 5-percent rate of
return. You could use 3 percent; you could use 2 percent; you
pick the rate, but just to give you an idea of numbers, based
on projected Social Security surpluses, these nominal numbers
by 2014 would amount to basically $6 trillion and $3.8 trillion
of real wealth would be created. Again, if you take it out a
little bit further to 2034, you would be looking at about $40
trillion in nominal, about $10.8 trillion in real by 2034 in
individuals' personal accounts.
I think that that--and, again, to give you an idea of
relative scale, the New York Stock Exchange, as we all probably
know, is about $11.3 trillion in size. The value of all
exchanges globally is right a hair below $30 trillion in size,
so you are talking about a lot of money that would be out there
in the markets, and that goes straight to the point that I
guess Marty Felstein and others have emphasized, which is there
is real value to the economy if you get that money in
individual accounts, in terms of asset allocation or in terms
of where the money would go. It would go to, whether it is a
Corning plant or whether it is a chainsaw plant in my district
or whether it is a sugar factory down in Mark Foley's
district--in other words, it could go to a lot of other places
that are probably a lot more productive in the American economy
than the way that that money might be allocated here in
Washington.
So, that would be at least a thumbnail sketch of sort of
what the bill does, and I would open for questions.
[The prepared statement follows:]
Statement of Hon. Marshall ``Mark'' Sanford, a Representative in
Congress from the State of South Carolina
Thank you Mr. Chairman and members of the committee for
allowing me the chance to talk about my Social Security reform
proposal.
My plan is designed as a compromise approach, borrowing
from provisions of other leading reforms. At its core, it is a
rebate of the entire Social Security surplus each and every
year.
My proposal incorporates a number of the structural reforms
from the Kolbe-Stenholm plan, such as adjusting early
retirement benefits and benefits for higher-income workers.
Like Archer-Shaw, my plan utilizes general revenues to soften
the amount of structural reform necessary to achieve actuarial
solvency. I also include the President's notion of automatic
refundable tax credits from his USA accounts proposal. And from
Sen. Moynihan's approach and the lock box, my proposal is based
on the premise that the government should not be taking in more
than it needs in a given year.
Folks back home tell me that a lock box is great, but
unfortunately, Congress can still dip into Social Security
surpluses. What we need is a ``Super Lock Box'' personal
retirement accounts. Such an approach has the added benefit of
paying down a portion of the program's expected $19 trillion
shortfall of the next 75 years.
First, the plan would provide a system of personal
retirement accounts (PRAs) that, for the first time, would
enable workers to own and control their retirement security.
For years, Americans have mistakenly believed that their Social
Security numbers are the numbers on their retirement accounts.
Under this plan, that actually would be the case.
The bill would allow each working American to receive his
or her share of the Social Security surplus each year, directly
deposited into individuals' PRA. How would this work? Look at
last year.
In 1998, Social Security ran a $100 billion surplus.
Washington spent $30 billion, and the remaining $70 billion
paid down existing federal debt. Not a penny was used to pay
for Social Security reform.
Under my approach, however, Social Security's $100 billion
surplus would have been rebated back to Americans' PRAs. Every
worker would have had about one-fourth of what he paid in
Social Security taxes given back to him by the Treasury
Department.
If last year's Social Security surplus had been deposited
in personal retirement accounts across the nation, there would
have been no way to ``borrow'' that $100 billion. Imagine if we
all had to go to every American and tell them we needed their
pro rata share, paid for out of the PRAs, on the Defense
Supplemental. There would have been a nationwide march on
Washington. And that's the way it should be. We need a
firewall.
The need for a firewall became even more apparent just last
month. During the Defense Supplemental, Congress had a chance
to set aside money by cutting non-defense discretionary
spending by a modest 5% to pay for the additional
appropriations. Only 96 Republicans and 5 Democrats voted for
the amendment offered by Rep. Tom Coburn, Rep. Pat Toomey, and
myself.
Why was there no major protest that we spent $13 billion of
the Social Security surplus? Because people had no real
connection to that money. When Congress and the President spent
$30 billion of the Social Security surplus last year, some
people were angry enough to call or write their Congressmen and
Senators, but that was the extent of it.
But if we rebate the surplus every year, we create the
necessary firewall and we reduce Social Security's unfunded
liability. Money rebated to the accounts would be considered
early payment of future Social Security benefits, which would
reduce the program's future financial obligations. Because the
program is running surpluses now, it is common sense to provide
for future benefits while we can. Folks in general prefer ``a
bird in the hand.'' Even folks in my district who are in their
forties and fifties don't believe they are going to get Social
Security.
Although the Lock Box is a great first step toward
meaningful reform, we cannot stop there. Even if we stay
faithful to the pledge of using all the money in the lock box
for debt reduction--and that's a big if with Washington's
fiscal discipline--we would still have to run the debt held by
the public up by $8.3 trillion by 2034. (see chart) And that
would do nothing to improve the poor rate of return people get
out of Social Security.
But by counting the rebates as early payment of future
benefits, the unfunded liability of Social Security is reduced.
Here's how this works on an individual level. When people
retire, the Social Security Administration will run a few
calculations. First, they will determine how much money a
person has received in government rebates to their accounts,
adjusted to present value figures using the long-term U.S. bond
rate. Second, they calculate the present value of all expected
future benefits from Social Security. Peoples' benefits will be
offset proportionally, the value of the rebates divided by the
value of the expected benefits.
For example, Mary works full-time for $8 per hour over a
40-year career. By retirement, she has had $40,000 (in real
terms) in rebates to her account over the years and the present
value of expected Social Security benefits is $140,000. Her
monthly payments would have been $700 per month in today's
dollars, but that would be offset to $500 per month since she
had already received 28.5% of her benefits in the form of
rebates. The value of her account, assuming a conservative 5.5%
real rate of return, would be $75,000, or enough to purchase a
lifetime annuity worth $375. In other words, the personal
account would increase her benefits by 25% with just a modest
rate of return.
If the accounts earn just 8% nominally or under 5% after
inflation, workers would own a total of $6 trillion, or $3.8
trillion in real terms, in assets by 2014, according to Scott
Hodge of Citizens for a Sound Economy. Mr. Hodge also found
that by 2034, the aggregate value of the accounts will grow
exponentially to $40 trillion, or $10.8 trillion in today's
dollars, and that's not even factoring in any voluntary
additional contributions. Just to put those figures in
perspective, the total market capitalization of the New York
Stock Exchange is $11.3 trillion. The total market
capitalization of all domestic exchanges is $28.8 trillion.
The second main aspect of my approach is the administrative
structure. My philosophy is that we should not reinvent the
wheel. America has the most well-developed capital markets in
the world, and two of the great successes in our marketplace
are 401(k) retirement savings plans and individual retirement
accounts (IRAs).
43% of American workers have 401(k)s. People like them for
many reasons, some of which are individual ownership, money
growth without taxation, monthly statements and the stringent
guidelines on investment.
Personal Social Security accounts would work the same way.
Employees who have 401(k) accounts could establish sister
accounts provided their employer wants to offer the option.
Those who do not have 401(k)s would start an account at a
national financial institution, a nonprofit, a union, or at the
local bank.
Like in 401(k) plans, the worker could not withdraw the
money before retirement or speculate on hot stock tips from a
crazy brother-in-law. The investment choices would be
diversified but limited and managed by a private financial
manager--not a government bureaucrat.
Any group that can get Securities Exchange Commission
approval, which would rest on factors such as capital structure
and liquidity, can become a Social Security plan trustee.
Approved plan trustees could offer multiple plans and would
select 5-15 look-through investment options for each plan.
All plans outside of employer plans would be required to
contain a minimum of these three options: 1) a broad-based
stock index fund, 2) a broad-based bond index fund, and 3)
Treasury securities. So if a worker wants to invest solely in
Treasury securities, he can. This allows that every worker will
have a number of very low-cost investment options available to
him.
Workers would have guidance in making their investment
decisions, since the same education and disclosure requirements
from 401(k)s would apply to Social Security accounts. But in
the electronic age, costs on these provisions will be
relatively low.
The administrative structure of accounts in my approach has
specifically been designed to minimize costs. Using the 401(k)
model affords you efficiency savings by having many uniform
accounts in a particular plan, with the only difference between
accounts being asset allocation. By stripping out the loan and
access provisions common in 401(k)s and having only large
aggregate deposits, the PRAs will be significantly less
expensive than 401(k)s.
The third main component of my proposal is its
progressivity. My plan is quite progressive for 4 main reasons.
1) It lessens the link between longevity and benefits, 2)
people on the low-end economically would come out far better
than under the current system, 3) automatic refundable tax
credits that would supplement Social Security rebates for low-
income workers, and 4) administrative fees for low-wage workers
would be paid for by the government.
Everyone agrees that lower-income folks must be protected
no matter what reform is enacted. Providing PRAs that don't
force the purchase of an annuity automatically makes Social
Security more progressive by decreasing the relationship
between life expectancy and benefits received. According to
``Health, United States, 1998,'' blacks have the shortest life
spans among all racial demographics, and there is a straight-
line correlation between socio-economic status and life
expectancy.
Beyond real wealth creation in PRAs, the best way to
protect lower-earning career workers without distorting their
normal investment incentives is to not offset their monthly
government benefit changes, while still allowing them to keep
all the money in their accounts.
My plan specifies that people with average indexed monthly
earnings of $650 or less, who make up about 20% of the career
work force, would receive no offset in their monthly benefit
checks based on rebates to their accounts. The normal benefit
offset of rebates counting as early payment of future benefits
would be phased in between average indexed monthly earnings of
$650 and $1150. An AIME of $1150 is about the 35th percentile
of the career work force.
The third thing we do for low-income workers is incorporate
the President's USA accounts concept by having an automatic
refundable tax credit to supplement the Social Security rebate.
Each of the first two years that a worker earning less than
$25,000 has a PRA, he or she would receive up to a $300
automatic refundable tax credit. This helps these folks to
build and create real wealth very quickly.
The fourth and final thing we do for low-wage earners is we
use general revenues, stated as a permanent budget line item,
to pay the administrative fees for workers earning less than
$20,000 per year. This way, there is no chance that small
accounts could be eaten up by administrative fees.
My plan also has a special protection for women. At
retirement, the higher earner of a married couple must purchase
a survivor's annuity to ensure that should the higher earner
die first, that the surviving spouse would be in no worse
condition than under current law. In other words, the offsetted
benefit plus the survivor's annuity would have to at least
equal current law survivor's insurance benefits. This provision
ensures that widows will not be in a position to outlive her
assets in her later, and vulnerable, years.
The most important aspect of my proposal, which greatly
benefits lower-income Americans as well as farmers and small
businesses, is the real wealth creation that can be passed on
to one's children and grandchildren. The lowest 40%
economically in our country retire in net debt, not net equity.
Instead of thinking about the inheritance to be handed down,
they are worrying about how to pass on as little debt as
possible. That should not be the case.
Farmers and small businessmen face a similar plight. The
only investments that they make throughout their careers is for
new capital equipment, not stocks and bonds. They are asset
rich and cash poor. Our bill would allow them to retire asset
rich and cash rich. Everyone pays Social Security taxes, so why
not use the one funding vehicle for retirement savings that
everyone can take advantage of?
On the financing of the transition to a partially pre-
funded system, my plan uses a combination of modest structural
reforms and general revenues transfers. My proposal has three
structural reforms: 1) reducing early retirement benefits by
about 1.6% per year of early retirement, 2) gradually reducing
the 15% bend point, which affects the top 30% of lifetime
earners, to 10% between 2009 and 2028, and 3) eliminating the
11-year hiatus during which the retirement age does not
increase by two months per year from age 66 to 67.
Reducing the early retirement benefits in this manner more
accurately reflects the budgetary impact of retiring early.
Under current law, early retirement benefits are actuarially
reduced so that on the whole people who retire early get the
same amount they would have had they retired at the normal age.
However, those calculations do not consider the fact that
people who retire early are not paying Social Security taxes
into the system. The proposed adjustments would account for
that lack of FICA contributions.
Some might complain that my changes in early retirement
benefits harm lower-income workers. But the reason many lower-
income workers claim early retirement is because they have no
net wealth from which to draw to pay for the high costs of
growing old. My bill addresses this problem by allowing people
penalty-free access to their accounts starting at age 62,
without having to declare retirement to do so.
Reducing the 15% bend point down to 10% over a 20-year
period is a reform that results in up to a 7% cut in benefits
for the top 30% of average lifetime income earners. Less than
10% of retirees after 2028 would even lose 7% of benefits.
Everyone else who is affected, but did not earn the maximum
salary subject to FICA taxes, would only see their benefits
reduced between one and 7 percent.
The third structural reform is achieved by having the
retirement age reach 67 years old just a little sooner than it
does under current law, 2016 as opposed to 2027. My plan does
this by adjusting the retirement age table, eliminating the
eleven-year period after the retirement age reaches 66 where
the retirement age does not increase by two months per year.
The general revenues financing comes as a part of the
rebate itself. Because my plan is not a true carve-out, the
trust fund continues to grow at the same time as the accounts
are growing from annual contributions. The accounts receive
rebates totaling the amount of the total operating surplus
(cash plus interest) of Social Security. The trust fund, in
essence, becomes the marker by which we determine how much
general revenues is owed to the personal accounts in order to
make the transition to a partially pre-funded system.
Using general revenues to transition to a pre-funded system
based on real wealth creation for all working Americans that
can be passed on to children and grandchildren is not a new
concept. Every country that has moved from a pay-as-you-go
public structure to a private, pre-funded system has used
general revenues to pay for the unfunded liability that had
already been incurred. Just for the people currently in the
work force, Social Security will lack the tax revenue funding
for $9 trillion worth of promised benefits during their
retirement years. As long as general revenues are used solely
toward the goal of changing the nature of Social Security and
promoting real wealth creation, then such use of general
revenues can be effective and productive.
As for Disability Insurance, it is a program ripe for
reform. However, now is not the time or place to address those
issues. Washington moves in baby steps, and we need to focus on
the retirement side of Social Security this year. By the same
token, we can't just reform the retirement side of Social
Security but allow disability insurance to gobble up more and
more money from retirement funding.
The best approach, I think, is to cap DI at 1.8% of payroll
from FICA taxes and condition that any extra funding come from
cuts in domestic discretionary spending in general revenues.
This will force a future Congress to deal with the issue in a
way that could not possibly be done this year.
Using ideas from both sides of the aisle, I believe that my
plan is a true compromise approach that can appeal to both
Democrats and Republicans. Combining some of the structural
reforms of Kolbe-Stenholm, the idea of general revenues
financing of Archer-Shaw, the automatic refundable tax credits
from the President's USA accounts, and the concept of Social
Security not taking in more than it needs from Sen. Moynihan. I
don't believe my plan is philosophically pure, yet we owe it to
our children and grandchildren to find a solution to the Social
Security crisis.
We have the opportunity to save Social Security and grant
every working American the opportunity to build and create real
wealth that can be passed on to their children and
grandchildren. Let's not waste it.
Thank you, Mr. Chairman.
Chairman Archer. Thank you. Thank you for your
presentation.
Mr. Foley, would you like to inquire?
Mr. Foley. I, first, want to commend Mr. Sanford. Since he
arrived in Congress, he has been working aggressively to talk
about Social Security, and one of my concerns is people shun
and shy away from this discussion, and I don't think they
should. Senator Breaux was here earlier. A number of Members
have not only invited conversation but much like yourself have
worked aggressively on bills that can pave the way for the
future of Social Security.
Your bill, though, treats the current recipients, holds
them safe, correct?
Mr. Sanford. No, not completely. It incorporates three of--
in other words, it is a subset of Kolbe-Stenholm looks at in
terms of current benefit reduction for people that would be
retired. And, if I might, I might name those. One, it reduces
early retirement benefits by about 1.6 percent a year of early
retirement. Now, I would argue that it doesn't really harm a
person, because our accounts are set up so that you can begin
withdrawing from them at age 62, and a lot of the reason that
people end up taking early retirement is, frankly, because they
don't have the cash. Well, if you had your personal account
that had real balances in it and you could withdraw from that,
it might obviate the need to take preretirement or early
retirement.
Second, it reduces the 15 percent bend point, which would
basically effect the top 30 percent of earners to 10 percent
between 2009 and 2028, and what this amounts to, basically, is
a 7-percent reduction for the top 10 percent of earners. We
have tried--you know, in picking--again, because transition
cost is a problem--in picking things, we tried to, frankly,
focus on the folks that would benefit the most through a
personal account.
And then, three, the third thing we do is the same as what
Kolbe-Stenholm does and that it speeds the move from age 66 to
age 67 for retirement age. Basically, there is an 11-year gap,
as you might know, and it moves it up, again, from 2016 to
2027. Basically, it moves it forward.
It does those three things, which are real benefit cuts in
projected Social Security benefit. Now, I would stress the word
``projected,'' because, as we both know, Social Security, as it
is presently configured is about 2 percent short based on the
percentage of payroll in its ability to meet those future
obligations. So, you can argue both sides of the coin. You can
say, ``Well, it is a cut relative to what Social Security might
1 day offer,'' and I would argue, ``Well, it is not really cut,
because Social Security, at least as the numbers point, won't
yield off of those benefits.''
Mr. Foley. Do you still hold a cap on the total earnings
that can be assessed for Social Security purposes.
Mr. Sanford. Yes.
Mr. Foley. Currently 65 I think is the amount.
Mr. Sanford. That remains that by law.
Mr. Foley. You don't do anything to change any of the
structures?
Mr. Sanford. It is a little higher than 70 and change, but
it leaves what is in by law in place. It does nothing to change
that.
Mr. Foley. And it doesn't do anything to expand other than
what is currently prescribed by the law, the retirement age
going to 67 by the year 2000?
Mr. Sanford. Correct. Again, it speeds it, though, but----
Mr. Foley. Right.
Mr. Sanford [continuing]. But, yes.
Mr. Foley. And what would be the impact, though, for a
young person? I guess, the best way to view your formula is the
longer a person has to go into the personal accounts, the more
likely they will buildup a retirement nest egg. Is there a
nexus point between when they really become very, if you will,
rewarded for this new type of vehicle?
Mr. Sanford. We have not been able to get the final numbers
back on what the break-even point is. I am certain there would
be a break-even point. But, again, because we have just sort of
put this bill together, and I guess what we are looking at is
the biggest benefit to a young person would be, is a bird in
the hand worth two in the bush? Most of the young people I talk
to say, ``Absolutely, yes'' when it comes to Social Security
dollars. While they may not be completely certain of what
Social Security can or cannot deliver down the road, what they
would be certain of would be x number of dollars sits in my
personal Social Security account, and I know that it is there.
So, certainty would be one of the primary benefits, and
then, again, the way we have constructed it is that it is very
progressive. The lower you are on the income scale, the more
you would basically get. I mean, for instance, the bottom 20
percent of the work force would not have a carve-out. In other
words, they would get whatever they put into their personal
account and the full value of whatever is promised based on
current law with Social Security, and we would graduate up from
there. So, we have tried to design it progressively, and the
biggest thing, though, that I would say that a young person
would get would be certainty.
Mr. Foley. Thank you.
Mr. Houghton [presiding]. OK, well, any other questions?
Well, thanks very much, Mark. We appreciate you----
Mr. Sanford. I thank you, sir.
Mr. Houghton. OK, great.
Mr. Smith.
STATEMENT OF HON. NICK SMITH, A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF MICHIGAN
Mr. Smith of Michigan. Mr. Chairman, thank you very much. I
would like to give everybody who is left some caffeine. You
have tremendous endurance listening to 7 hours of Social
Security proposals today. So my compliments to the Committee to
consider one more.
When I first came to Congress in 1993, I introduced my
first Social Security bill. In fact, I wrote it while I was
chairing the Senate Tax Committee in Michigan. In the following
session, in the 104th, I introduced a bill that was scored by
the Social Security Administration to keep Social Security
solvent. Likewise, I introduced another scored bill last
session and every time, I would like to think, there have been
some improvements.
What I would like to do is just go through what my
guidelines were for how to structure a Social Security bill and
I have called them the ``Ten Commandments for Social Security
Reform.'' The first commandment that I decided is time is our
enemy and we must move without delay. The bill that I
introduced in 1994 was much less drastic than is required now
because of the time lag and because we have waited.
The second commandment that I have used to guide my bill is
we need to take into account the growing probability of the
significant rise in life expectancy. So what is used by the
actuaries now is probably underestimating the length of time
that individuals are going to live after they reach retirement
age. Both Ken Manton and William Haseltine appeared before my
Budget Committee Task Force on Social Security. I chair the
Task Force, a bipartisan Task Force, that has been holding
meetings every Tuesday to bring in witnesses in this regard.
Third, we must move quickly and boldly but the change
itself must be gradual.
Fourth commandment is the burden of adjustment must fall
equitably. Any change should hold current retirees harmless and
they should receive full cost of living increases. And those
near their retirement years and low-income workers should be
protected. In other words, there has to be a safety net.
The fifth commandment is no tax increases. If I am not
mistaken, my bill may be the only one that would not require a
tax increase, either a FICA tax increase or a general tax
increase for those proposals that use General Fund to
accommodate some of the transition costs.
The sixth commandment is every worker should enjoy the
benefits of savings and investment.
Seven is investments made for retirements must be prudent.
The eighth is money managers should not earn excessive
fees. In our estimates on the fees, the administration charges
are two basis points. So we are estimating for what we call a
first-tier investment and a second-tier investment that gives
the individual owner of those PRSAs some latitude. It would
amount to two basis points or two one-hundredths of a percent
for the cost of administering.
The ninth commandment compels us to redesign Social
Security so that it commands full public confidence.
The tenth commandment is to maintain our lead in a
competitive global economy. How do we have this transition? How
do we make sure that we are not going to go in the direction of
Finland and Germany? Germany right now charges 50 percent of a
worker's earnings to accommodate their retiree program. Let us
not get in that predicament. You can't read that from there,
can you?
Mr. Shaw [presiding]. Nick, we are having a problem with
the sound.
Mr. Smith of Michigan. The workers own and invest a portion
of their Social Security taxes by creating a personal
retirement savings account and are limited to----
Mr. Shaw. I will tell the gentleman that even though this
is a powerful Ways and Means Committee, you do not have to
kneel. [Laughter.]
Mr. Smith of Michigan. You can't fool me. I start at 2.6
percent of payroll for the Personal Retirement Savings
Accounts, or PRSAs. I use the General Fund surpluses for 8
years coming out of the General Fund not to exceed the surplus
coming into Social Security to help make the transition.
I limit the investments to index stocks, index bonds, index
small cap funds, and index global funds. In other words,
roughly the same as the Thrift Savings Plan options now. But in
addition, we allow the Secretary of the Treasury to allow
additional safe investments.
I use the surpluses coming into the Social Security Trust
Fund to finance the PRSAs. There is no increase in taxes or
government borrowing. Adding a bend point gradually slows down
the growth of benefits, by a small amount each year, for high-
income retirees. Now this is how we pay for it to a large
extent. Because the initial 2.6 percent private investment that
eventually gets to 8.4 percent, out of the 12.4 percent Social
Security tax, we add an additional bend point or, in effect, we
slow down the increase in benefits for the high-income retiree.
It saves money and helps allow for the transition costs,
putting more money into PRSAs. And it is reasonable and logical
because the 2.6 percent of $74,000, which is the current
taxable income, gives that individual a lot more opportunity in
savings and accruing the magic of compound interest than a
$20,000 or $30,000 individual. To compensate for that
advantage, we make the fixed benefit part of Social Security
more progressive.
And the next blip down is on how we divide PRSA
contributions. For women, there is a couple of things that we
do. One, is divide the contributions so we take the eligible
investment money that a husband has and that the wife has, we
add them together so each spouse is allowed identical amounts
of money that they can invest in their own PRSA. It sort of
gyps some of the attorneys maybe later on if something happens
to that marriage, but as long as they are married, both of them
would have the opportunity to invest the exact same amount.
The widows and widowers benefits are increased from 100
percent to 110 percent. As we have talked to a lot of widows
and surviving spouses, the cost at 100 percent of maintaining
that house has forced a lot of these individuals into nursing
homes so we up that, at a small cost, to 110 percent, hopefully
to keep them in their homes instead of going into nursing
homes. And then we maintain a trust fund reserve so that there
is always at least a half a year in the trust fund reserve.
Excuse this presentation, and I'll be glad to react to any
questions.
[The prepared statement and attachments follows:]
Statement of Hon. Nick Smith, a Representative in Congress from the
State of Michigan
Chairman Archer and Ranking Democrat Rangel, thank you for
organizing today's hearing. If we want to be able to keep the
promises the government is making to future retirees, we must
enact reforms now that restore solvency to this vital program
As a member of the 104th Congress, I introduced the first
reform plan in the House this decade that provided private
retirements savings accounts and was scored to keep Social
Security solvent. That bill, ``The Social Security Solvency Act
of 1996,'' was updated and re-introduced as ``The Social
Security Solvency Act of 1997.'' Shortly, I will introduce
``The Social Security Solvency Act of 1999.''
As you may know, I was appointed Chairman of the Budget
Committee Task Force on Social Security in January. The Task
Force has met weekly since March, receiving statements from
national experts including Alan Greenspan, Larry Summers, and
actuaries from the Social Security Administration. We have also
heard from top demographers, investment experts, and mutual
fund administrators. Yesterday, the AARP appeared before us. We
anticipate finishing our fact finding at the end of this month
and will distribute a report to all Members.
Today, I would like to present a summary of what the Task
Force has learned and argue in favor of my ``Social Security
Solvency Act of 1999,'' which I will introduce shortly.
Although there are some important refinements, this Act is
patterned on the ``Social Security Solvency Act of 1997'' that
I introduced previously. Like the 1997 bill, it has been scored
by the actuaries as restoring the solvency of America's most
popular public program. The development of my plan follows from
what I consider to be the Ten Commandments of Social Security
reform.
The Ten Commandments For Social Security Reformers
The first commandment is that TIME IS OUR ENEMY AND WE MUST
MOVE WITHOUT DELAY. Alan Greenspan informed us in March that
OASDI has an unfunded open liability of $9 trillion 1999
dollars. This means that an outside party would require an up-
front payment of $9 trillion now, plus the legal right to 12.4%
of 85% of the nation's payroll forever just to honor the
promises we have made to present and future retirees,
survivors, and disabled individuals. This obligation is very
real, and it exceeds by almost three times the size of the
national debt held by the public. Every year we delay, this
unfunded liability goes up by hundreds of billions of dollars
as we grow closer to the day when Social Security's temporary
positive cash flow first halts, then stops forever.
Put another way, to keep Social Security solvent for just
the next 75 years, it would take an across-the-board cut in
Social Security benefits of 14% for current or all future
beneficiaries to make up the shortfall if we act now.
Alternatively, a 16% increase in Social Security taxes would
also eliminate the shortfall. These representative figures will
get larger the longer we delay.
In 1983, the Congress felt an urgent need to act when
Social Security had an unfunded liability of -1.82% of taxable
payroll. The system now has an unfunded liability of -2.07%, a
problem that is 15% larger than the one in 1983! With the
danger so high, we must act with at least the same sense of
urgency. Anyone who says we have the luxury of time to tackle
this difficult subject is committing the nation to wrenching
changes later rather than less dramatic corrections now.
The second commandment is that WE MUST REFORM THE SYSTEM TO
TAKE INTO ACCOUNT THE GROWING PROBABILITY OF A SIGNIFICANT RISE
IN LIFE EXPECTANCY. Dramatic increases in life spans is
wonderful news. Dr. Kenneth Manton, one of America's most
respected demographers, told the Task Force to expect to see
many of our next generation celebrating their 100th birthday.
Dr. William Haseltine, a recognized expert on aging and
regenerative biology and President of a company that expects to
complete mapping the human genome in the next few years, thinks
that science will make even greater advances. He believes that
many of our children will live to 120. As life expectancy
increases, we must create opportunities for our elderly
population to remain productive and active long into that
period of life we now call ``retirement.''
Third, WE SHOULD MOVE PRUDENTLY BUT BOLDLY. Our actions
must equal the scope of the problem before us. Fortunately, it
is now possible to solve our problems by making gradual and
continual Solvency. It took 60 years to create the current
crisis. We can resolve it in steady measured steps over 50
years.
The fourth commandment is that THE BURDEN OF ADJUSTMENT
MUST FALL EQUITABLY. Any change should hold current retirees
harmless. They should receive full cost-of-living increases.
Those near their retirement years and low income workers should
also be protected. Meanwhile, better paid workers should
contribute more than those with moderate incomes.
The fifth commandment states that NO TAX INCREASES should
be adopted to eliminate Social Security's unfunded liability.
Medicare has very difficult problems, and added revenue will be
needed to resolve them. Its unfunded liability is twice that of
Social Security. Social Security reformers who use new tax
revenue to solve their problems complicate efforts to resolve
Medicare's difficulties--where lives, not dollars, are at
stake.
The sixth commandment holds that EVERY WORKER SHOULD ENJOY
THE BENEFITS OF SAVING AND INVESTING. A primary reason why the
rich are outpacing the lower and middle classes is their
ability to invest in thriving corporations that yield returns
that significantly exceed those received by putting funds in
banks. Professor Roger Ibbotson, the nation's foremost
historian on stock and fixed income markets, predicted in 1974
that the Dow would rise from 1,000 to 10,000 by the year 2000.
He now projects that the Dow will reach 100,000 before 2025. A
way must be found so that everyone can get a share of this $140
trillion in new wealth that will be created.
The seventh commandment dictates that INVESTMENTS MADE FOR
RETIRMENT MUST BE PRUDENT. Prudent risk-taking does not require
that every investment turn out brilliantly. It does require
that no matter what happens every retiree have adequate funds
from Social Security to remain above the poverty level.
The eighth commandment declares that professional MONEY
MANAGERS SHOULD NOT EARN EXCESSIVE FEES from carrying out an
essential national mission. The Task Force heard from William
Shipman, a Principal of State Street Global Research, who
presented the firm's detailed administrative cost model.
Workers can have access to broadly diversified stock and bonds
portfolios for only pennies a day. The GAO is confirming these
findings, and will publish its report before the end of the
month.
The ninth commandment compels us to REDESIGN SOCIAL
SECURITY SO THAT IT COMMANDS FULL PUBLIC CONFIDENCE. Currently,
many workers have so little faith in the System that they view
their payroll taxes, not a contributions for their own
retirement but, as sacrifices. While they support helping
seniors, they don't personally expect to receive checks when
they become seniors themselves. Social Security will never be
free from political peril until all workers view participation
as a valuable fringe benefit from going to work.
The tenth commandment requires us to MAINTAIN OUR LEAD IN A
COMPETITIVE GLOBAL ECONOMY. Other nations are modernizing their
national retirement systems. If we fail to improve ours, it
will hurt our national economic performance and our standing in
the world. Countries that have prepared themselves for the
coming demographic changes will have strong economies that
vault them ahead of their global competitors. I want the U.S.
to be among that group of world economy leaders.
If you agree with these principles, you will like my plan.
It is derived from them.
The Most Essential Step: Creating Personal Retirement Savings Accounts
(PRSAs)
The central element of my plan is to provide all workers
with Personal Retirement Savings Accounts (PRSAs) that they own
and are professionally invested solely for their benefit. For
the next 36 years all workers will contribute 2.6% of their
pay, up to the maximum Social Security wage base, into their
accounts. Individuals will choose where to invest these funds
but will be offered attractive low cost, high reward, equity
and fixed income index funds as well as more specialized
programs if they so choose. After 2036, the actuaries say the
contribution rate can rapidly climb, reaching 11% by 2074.
Here are some examples of PRSAs in action. A 20-year old
worker earning $20,000 will deposit $520 the first year.
Assuming a 2.5% inflation rate and she earns a pay raise 3.5%
annually, the annual contributions will grow over time reaching
$3,944 forty-five years from now. Over 45 years, she will place
a total of $62,800 in her account. Assuming her funds were
placed in an equity index fund that earned a 6.5% real rate of
return, this $62,800 will grow to $422,000--4.6 times her final
salary. By converting this sum into an annuity, she can expect
to receive $34,500 a year for 19 years after her retirement. I
choose that time period because it is how long the actuaries
assume in their Social Security projections.
The amount that better-off workers will have in their
accounts is proportionate. A teacher starting at $30,000 will
see her account grow to $633,000, and her annual benefits for
19 years will be $51,750. A young attorney graduating from a
fine law school who lands a job at $60,000 will retire a
millionaire, having $1,266,000 in her account, and see annual
benefits of $103,500 for 19 years.
Here are representative figures for 40 year old workers. A
worker earning $20,000 today will have $59,200 in her PRSA
account at 65. A $30,000 per year bus driver will have $88,800.
The 40 year middle management executive will hold $177,600.
These workers will see their annual retirement incomes
supplemented by $5,000, $7,500, and $15,000 when the PSRAs are
converted into annuities good until the anticipated time of
death.
Finally, here are figures for 55 year old workers. The
grocery clerk earning $20,000 now will acquire a $9,000 PRSA in
ten years. The bank teller earing $30,000 now will have $15,600
while the successful architect earning $60,000 now will have
$27,000 in 2010.
The point of these examples is that PRSAs grow very rapidly
under the magic of compound interest. The biggest beneficiaries
of PSRAs are the young and future generations. It makes sense,
therefore, to take this into account when allocating costs
across generations for restoring the System.
Investment Risk Can Be Managed
Fears about sudden stock market tumbles are overblown. It
will be 20 years or more before the amounts at risk represent
significant sums as a percentage of the resources needed to
ensure a secure retirement. Put another way, even with a 2.6%
``carve out'' of Social Security payroll taxes, it will be far
into the future before the monthly private retirement check
exceeds the check received from Social Security. We will have
time to evaluate investment returns and account for unexpected
events that jeopardize workers retirement security long before
they could happen. These fears should not prevent us from
instituting needed reforms today.
I am exploring ways to reassure workers who may not have
had experience with 401(k) plans or mutual funds. Although the
number of happy investors has reached an all time high along
with the DOW, the process may seem frightening to those who
haven't personally benefitted from the Reagan-Bush-Clinton bull
market. One idea that I would encourage the Committee to
explore is a formal guarantee that anyone 45 or under will be
guaranteed a retirement income equal to current law benefits
provided they invest their PSRAs in equity investments. We know
from 200 years of stock market history that equity returns over
long periods outperform all other prudent investments.
Consequently, the government can offer guarantees to long term
investors with confidence that there is at least a 200 to 1
chance it will never be called upon to honor them. I haven't
had this provision scored by the actuaries. Therefore, I cannot
present it to you in a formal way.
There are other ways cautious investors can avoid risk.
First, they can transfer the risk of market downturns to others
who accept it voluntarily. There are many life insurance and
annuity products that do just that. Insurance companies are
professional risk takers, and are quite successful at it. Many
annuity investors give up the chance for large gains, but they
avoid losses in exchange. Here's another example. Right now, a
large investment house offers the public for a fee a bundle of
equities with the right to sell it back to them at the price
you paid for it five years from now. As Will Rogers once said,
``Sometime the important thing isn't the return on capital.
It's the return of capital.''
Paying For It
An important issue that any reformer must confront is how
to finance the transition to a modern system. We start deep in
the hole with a $9 trillion unfunded liability. The problem
becomes harder when 2.6% or more of taxable payroll is
channeled into PRSAs, and widows benefits expanded by 10% as I
propose.
Fortunately, the problem can be resolved under a policy of
``easy does it'' and ``steady as she goes.'' My answer is to
slow down the growth of benefits by a small amount each year
for a long time. Under currently law, OASDI benefits will
increase by 90%, after inflation, over the next 75 years. If we
agree that real benefits should grow at a slower rate, then we
can solve this problem.
My bill does this by amending the benefit formula. Before
presenting my amendments, I wish to first review how initial
Social Security benefit checks are determined. Under current
law, a worker at normal retirement age earns a monthly benefit
check known as the ``primary insurance amount'' or PIA. The PIA
is calculated in steps. First, a worker's entire earnings
record, from teenage years to retirement, is updated for
inflation. Then, only the highest earning 35 years are
isolated. Next, these best earning years are averaged to get an
average annual earnings level. Finally, this total is divided
by 12 to get ``Average Indexed Monthly Earnings'' or AIME.
Social Security is often described as a progressive
program. The reason for this belief is that the PIA is derived
from AIME in a progressive way. In 1999, anyone with an AIME of
$505 or less, the equivalent of only $6,060 in year, will
receive 90% of this amount annually. Anyone with an AIME of
$3,043 will receive 90% of the first $505 of AIME, then 32% of
the remaining amount. Anyone with an AIME in excess of $3,043
will receive 90% of the first $505 of AIME, 32% of the next
$2,538, and only 15% of any remaining amounts. As you can see,
Social Security provides 90% of the earnings of a very low paid
worker's historic pay while only 42% of workers who averaged
earnings of $36,000. The wage replacement percentage dips lower
for the best off participants. The 1999 dollar thresholds of
$505 and $3,043 where the benefit rates shift are known as
``bend points.'' Under current law, they are annually increased
by changes in average nominal wages.
I propose to make the Social Security system more
progressive by slowing down the growth rate of benefits for
those in the 32% and 15% benefit brackets. I do this first by
phasing in a 5% bracket over five years that only the highest
paid workers would face. It would start at AIME above $3,720 if
fully in effect today. Next, I propose that the 5% and 15%
brackets gradually decline at a 2.5% rate. In the first
adjustment year for example, they would be 4.875 (5 x 0.975)
and 31.2% (32 x 0.975). Five years out they would be 4.41 (5 x
0.985 x 0.985 x 0.985 x 0.985 x 0.985) and 28.2% (32 x 0.985 x
0.985 x 0.985 x 0.985 x 0.985). I propose that the 32% rate
also decline but by only 2% a year, not 2.5%. I want the lowest
paid workers to be unaffected or unambiguously better off from
my changes. Consequently, the 90% rate is not subject to
reduction.
As a further way to slow down the growth rate in real
benefits, I proposed that the 15% and 5% bend points, and their
future derivative rates, be indexed to changes in the CPI, not
nominal wages. The bend point that defines the 90% AIME credit
level will continue to rise with nominal wages.
I believe the mechanism under my bill, which generates a
very gradual change annual change over a long period of time is
a fair way to allocate the costs across generations and income
levels. It's true that high school kids and young workers today
would make the largest contributions to solvency. However, as
we saw earlier, they have the time to benefit from the magic of
compound interest. The two payment streams, one from Social
Security, the other from PRSAs, together will exceed the amount
of benefits projected under current law just from Social
Security.
It's worth remarking that our youngest workers have the
least faith that they will ever receive a Social Security
benefit. In one famous poll, a larger number said they believed
in UFOs than they would collect Social Security. Young workers
will especially like having a binding property right in their
own privately managed PRSA while giving up only some of a
Social Security benefit many never expect to see in the first
place.
Gradually Raising the Retirement Age As Life Expectancy at Age 65
Rapidly Improves
There are two other reforms required to restore Social
Security to long-term health. The first requires thinking
through a pleasant subject, increasing life expectancy during
our retirement years. The actuaries predict that newborn
children today who reach 65 years of age will live 3 years
longer than those who reach that age now. The difference in
life expectancy works out to about \1/2\ additional month of
life for every passing year. This means an infant born today
who reaches his 65th birthday can expect to live until 85.5,
compared to 82.5 today.
I propose that we all share our good fortune of living
longer with the taxpayers. After all, we'll have more time to
prepare for it! I propose eliminating the 11 year hiatus in
current law between 2005-16 where the retirement age remains at
66 before increasing in 2 month increments in 2017 to 2021.
Instead, I recommend raising it to 67 by 2010, then indexing it
to life expectancy. The indexing provision may be the most
important idea in the bill if the Task Force experts prove
prescient and our children and grandchildren are destined to
led much longer lives than we. Reflecting on the age of this
Committee's venerable Chairman and my upcoming 65th birthday, I
think the vast majority of future workers, who can be expected
to be in better shape than we are today, are up to the task.
For those who are not, we should update the disability program.
For those who want to retire early, we should let them do so,
as is now done, with actuarially fair reduced benefits.
Sharing the PRSA Bounty With the Taxpayers
The final reform shares certain features with the reform
plan proposed by Chairman Archer and Subcommittee Chairman
Shaw, Jr. As the size of PRSAs grows, the need for taxpayer
assistance declines. We can ask for an especially large
contribution from that young attorney who will have a PRSA
worth over $1,000,000 for example. I propose that PRSA accounts
be offset by the future value of contributions made into PRSA
assuming a 3.7% real rate of return. In effect, a worker who
gets a 6.5% real rate of return from equity investments will
keep 2.8%. The remaining 3.7% is returned to the Trust Funds so
they balance. A 2.8% real rate of return is much higher than
the 1% or less experts now predict on future OASDI payroll tax
payments if, and it's a big if, Congress finds a way to honor
all benefit promises under current law. I wish it could be
higher. But as Billy Joel sang, ``We didn't start the fire.
It's been burning since the world been turning.'' We have to
eliminate the $9 trillion shortfall we've been handed or leave
a more difficult challenge to future leaders who will lead if
we refuse the challenge.
Actuarial Scoring of the Social Security Solvency Act
Here is the summary table the Social Security actuaries.
Estimated Long-Range OASDI Financial Effect of Proposal of
Representative Nick Smith
------------------------------------------------------------------------
Estimated
Change in
Long-Range
Section OASDI
Actuarial
Balance \1\
------------------------------------------------------------------------
201............................. Raise the NRA by 2 0.50
months per year for
those age 62 in 2000 to
2011, then index to
maintain a constant
ratio of expected
retirement years to
potential work years.
202............................. Provide a third PIA bend 2.89
point in 2000 with a 5%
percent factor; index
the second and third
bend points by the CPI
and gradually phase
down the 32, 15 and 5
percent factors after
2000.
203............................. Annual statement for (\2\)
workers and
beneficiaries.
205............................. Cover under OASDI all 0.21
State and local
government employees
hired after 2000.
206............................. Increase benefit payable -0.30
to all surviving
spouses by 10 percent
beginning 2001.
207............................. SSA study the 2
feasibility of optional
participation.
------------
Subtotal for sections 3.21
201, 202, 203, 205,
206, 207.
============
101............................. Set up PRSA accounts ...........
starting 2001.
102............................. Redirect 2.6 percentage ...........
points of OASDI payroll
tax to PRSAs for 2001-
2036. After 2036,
redirect to PRSAs any
OASDI income in excess
of the amount needed to
cover annual program
costs and maintain a
minimal contingency
reserve trust fund.
Transfer specified
amounts from the
Treasury to OASDI for
years 2001-9 (based on
current CBO surplus
est).
103............................. Reduce OASI benefit -1.15
levels by the smount of
lifetime PRSA
contributions,
accumulated at the
yield on trust fund
assets plus 0.7 percent.
------------
Total for proposal...... 2.06
------------------------------------------------------------------------
\1\ Estimates for individual provisions exclude interaction
\2\ Negligible, i.e., less than 0.005 percent of payroll
Based on the intermediate assumptions of the 1999 Annual Trustees Report
Office of the Chief Actuary Social Security Administration June 5,
1999
The Impact of the Plan on the Unified Budget
The Social Security Solvency Act has a very salutary effect
on the long run unified budget. Under current law, the nation
will experience a dramatic swing in the unified budget over the
next sixty years. Until most of the baby boomers retire around
2020, the nation can expect to run unified budget surpluses.
For the fifty years or longer that follow 2020, the unified
budget will plunge into the red with accelerating speed. My
bill helps to stabilize the unified budget over the long run by
reducing the size of surpluses now and reducing the size of the
deficits that appear after 2020. The bill principally reduces
unified surpluses now by channeling a portion of payroll
receipts into PSRAs. By amending the benefits formula, it
reduces unified budget deficits significantly later on.
Overall, my bill makes the government smaller. Both taxes and
spending as a share of GDP fall significantly in the middle of
the next century.
My bill's primary impact in the early years is to reduce
revenues by 2.6% of taxable payroll, starting in 2001. Table II
F7 of the Social Security 1999 Trustees Report specifies how
much revenue, by year, 12.4% of taxable payroll tax raises for
the several years. By calculating what fraction 2.6 is of 12.4,
then multiplying by projected taxable payroll receipts its
possible to calculate how much the bill reduces revenues. We
estimate these revenue reductions will be offset by $12 billion
annually by 2008 by bringing newly hired state and local
government workers under Social Security.
My bill also provides for a 10% increase in widows/widower
benefits. Short term outlays also will increase because less
federal debt will be retired due to the revenue reductions and
outlays increases, resulting in higher interest expenses.
Gradual reduction in benefits, due to indexing the bend
points to the CPI rather than nominal wages, and gradual
phasing down the 32%, 15%, and 5% benefit factors, will reduce
outlays by growing amounts. Benefits are further reduced
through the 3.7% offset formula described above.
The combined impact of all these changes is shown in the
following table:
Impact of the Major Provisions of the Social Security Solvency Act on
the Unified Budget
($Bil)
------------------------------------------------------------------------
Impact on
Year Debt Widow/ Benefits Total Revenues Unified
Widower Outlays Budget
------------------------------------------------------------------------
2001 +5 +9 -1 +13 -95 -108
2002 +9 +9 -3 +15 -97 -112
2003 +14 +9 -4 +19 -100 -119
2004 +19 +9 -6 +22 -104 -126
2005 +24 +10 -9 +25 -109 -134
2006 +29 +10 -14 +25 -113 -138
2007 +34 +10 -19 +25 -117 -142
2008 +39 +10 -25 +24 -122 -146
....... ........ Totals: +205 -857 -$1,025
------------------------------------------------------------------------
To comply with reconciliation instructions, the Committee
could elect to defer some contributions into PRSA accounts from
2001-4 until 2005-8. Additional revenue would have to be found
since estimated revenue losses total $857 billion from 2000 to
2008 while the instruction limits reductions to $778 billion
from 2000 to 2009. Spending offsets will be needed to pay for
the widow's benefit.
The Act Prevents Dangerous Future Unified Budget Deficits
Percent of Taxable Payroll
------------------------------------------------------------------------
Current Smith Smith
Law Current Annual Bill Bill Annual
Year Income Law Cost Balance Income Cost Balance
Rate Rate Rate Rate
------------------------------------------------------------------------
2010 12.75 11.91 .84 10.13 11.3 -1.18
2020 12.91 15.03 -2.12 10.22 11.86 -1.63
2030 13.09 17.71 -4.62 10.33 11.98 -1.65
2040 13.17 18.18 -5.00 9.62 9.85 -0.23
2050 13.22 18.28 -5.06 7.1 7.26 -0.17
2060 13.29 19.05 -5.77 5.02 5.14 -0.12
2070 13.34 19.63 -6.29 3.09 3.18 -0.09
------------------------------------------------------------------------
After 2015, my bill substantially reduces future unified budget
deficits. The precise amounts are difficult to calculate 15, 25, or 50
years out. However, their magnitude can be suggested from the
actuaries' scoring. Under current law, the 1999 Trustees Report found
that OASDI would run deficits starting in 2015 by growing amounts. By
2040, OASDI will run deficits equal to 5.00% of taxable payroll and
growing. Under my plan, OASDI will run only a minor deficit of 0.23% of
taxable payroll, and it will be falling. Here is a comparison of the
two actuarial projections. It proves that my bill avoids the creation
of massive unified deficits for most of the 21st century. It therefore
stabilizes long-run fiscal policy.
Impact on the Social Security Trust Funds
Instead of exhausting the Trust Funds in 2035, my plan
keeps them in the black.
------------------------------------------------------------------------
Trust Fund Trust Fund Trust Fund
Year Ratio Year Ratio Year Ratio
------------------------------------------------------------------------
2005 241% 2035 54% 2065 49%
2015 267% 2045 45% 2074 68%
2025 159% 2055 45% .......... ..........
------------------------------------------------------------------------
*The Trust Fund Ratio equals the amount of assets on hand divided by
that year's disbursements
Use of General Revenues
I believe solving Social Security's problems is so
important we should apply the proceeds from of on-budget
surpluses from 2000 until 2008 to achieve it. Importantly, the
plan still provides room for tax relief, improving Medicare's
unstable financing, or a reduction in the national debt.
($Billions) The Smith Plan Reduces, but Does Not Eliminate, Short-term Unified Budget Surpluses
----------------------------------------------------------------------------------------------------------------
Year 2001 2002 2003 2004 2005 2006 2007 2008
----------------------------------------------------------------------------------------------------------------
Off-Budget............................. 145 153 161 171 183 193 204 212
On Budget.............................. 6 55 48 63 72 113 130 143
Smith Plan............................. -107 -111 -118 -125 -132 -137 -141 -146
Remaining Surplus...................... +44 +98 +91 +109 +123 +169 +193 +209
----------------------------------------------------------------------------------------------------------------
Every day of delay leaves us with fewer resources to bring
solvency to Social Security. Right now, the system is enjoying
robust surpluses. In fifteen years, these surpluses will be
gone, replaced by deficits that grow larger each year. We must
act now for the baby boomers' retirement.
[GRAPHIC] [TIFF OMITTED] T2789.025
[GRAPHIC] [TIFF OMITTED] T2789.026
[GRAPHIC] [TIFF OMITTED] T2789.027
[GRAPHIC] [TIFF OMITTED] T2789.028
[GRAPHIC] [TIFF OMITTED] T2789.029
[GRAPHIC] [TIFF OMITTED] T2789.030
[GRAPHIC] [TIFF OMITTED] T2789.031
[GRAPHIC] [TIFF OMITTED] T2789.032
[GRAPHIC] [TIFF OMITTED] T2789.033
[GRAPHIC] [TIFF OMITTED] T2789.034
[GRAPHIC] [TIFF OMITTED] T2789.035
[GRAPHIC] [TIFF OMITTED] T2789.036
[GRAPHIC] [TIFF OMITTED] T2789.037
Mr. Shaw. Mr. Houghton.
Mr. Houghton. Yes, Nick, help me on the arithmetic a little
bit. The major differences in the plans are the way they handle
the funding of the gap. And some people, like Kolbe-Stenholm,
they cut benefits. There are other plans that take money out of
general revenues. Now I don't know how you slow down the
benefit increase for high-income retirees and thereby pay for
that gap. It doesn't seem like enough.
Mr. Smith of Michigan. What it does is it adds another bend
point. For those who are familiar with the way Social Security
benefits are calculated, it is progressive because you start at
the first roughly $500 and you get 90 percent back of your
average monthly earning for everything under $500. Between $500
and $2,300, you get 32 percent back. Over $3,200 a month, you
get 15 percent. I add another 5 percent bend point that is
indexed at $3,700. That, over time, dramatically reduces fixed
benefits for that individual that has high earnings. We tried
to set that $3,700 so that it matches what that individual
might earn at about 6-percent return on what they are allowed
to individually invest. The other thing that we do, Amo, is we
take away the indexing of those bend points not for the 90
percent or the 32 percent, but for the 15 percent and the 5
percent, we index them to CPI or inflation rather than the
current indexing based on wage inflation. Now the wage
inflation, of course, is higher than the CPI. So we change that
benefit calculation so that a growing economy actually has a
greater positive result.
That is sort of a long answer.
Mr. Houghton. Well, so what you are saying is that slowing
down the benefit increase for the high-income individuals
really does fill in the money for that gap without doing
anything else?
Mr. Smith of Michigan. That fills in a lot of the money for
the gap. The other thing that we do is we index the ultimate
retirement age to life expectancy. So we don't go over the 67
years that is now in current law, but we do speed it up like
several of the other proposals.
Mr. Houghton. Oh, I see, OK. Thank you very much.
Mr. Shaw. Anybody else seek recognition?
Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman. And, Nick, good to see
you here and I know you have put a tremendous amount of work
into this over the last several years and you have been
tireless and relentless about coming forward with a proposal,
and I want to congratulate you on the result of your work.
Mr. Smith of Michigan. Thank you.
Mr. Weller. One of the goals I think all of us have is the
solutions for strengthening Social Security for next three
generations are a bipartisan effort. Do you have any Democratic
cosponsors?
Mr. Smith of Michigan. No, I had one cosponsor in 1994, two
cosponsors in 1996, six cosponsors in 1997, and I haven't
solicited cosponsors yet this time. But I think it is important
to try to get Democratic cosponsors. What I have learned, as
chairman of the Task Force, Mr. Weller, is there seems to be
some feeling that not moving ahead with a solution for Social
Security might be a political advantage to somebody, sometime,
somehow. I am sure this Committee has experienced some of the
same considerations. But I do think ultimately there has got to
be a bipartisan effort of some kind.
It is interesting researching the records when we started
Social Security in 1934, the Senate on two votes insisted that
there be allowed private investments, that that mandatory
private investment that could be only used in the retirement
should be an option to the fixed system. That lost out in
conference Committee, partially I'm sure because of the
Depression and the arguments of what might happen.
I do have a safety net in my bill that any individual that
would be more conservative in their investments at age 60 on
and invest not more than 60 percent in capital investments and
40 percent in stocks would have the security of a 95-percent
protection.
Mr. Weller. Mr. Smith, I just have a couple of questions
here and I am one of those like you who believes the sooner we
address this problem, the better. And I am anxious that this
Committee and this House and this Congress and this President
act on it, hopefully this year. I think it is important that we
move forward legislation. And, of course, it is going to take a
bipartisan effort.
Just a quick followup on Mr. Houghton's question regarding
gradually slowing down the growth of benefits for high-income
retirees, could someone define that as means testing?
Mr. Smith of Michigan. Well, except, Mr. Weller, it is
offset by the additional earnings that that individual can make
because we started at 2.6 percent, as I mentioned, of taxable
payroll and it will eventually go up to 8.4 percent. But
because that percentage of the $74,000 of taxable payroll is a
lot more significant opportunity to get returns from the stock
market, the means testing or making the formula distribution
for the fixed benefits more progressive, that type of means
testing is well offset by the increased investment opportunity
because of the simple fact that they have more money----
Mr. Weller. But if you are a high-income retiree, you
receive less benefit?
Mr. Smith of Michigan. No, no, actually, you would receive
more benefits and that is with the assumption that you are
going to have a real return above 4 percent interest. Any real
return above 4 percent will give the high-income person more
total benefits, because they have more interest growing their
higher private retirement savings accounts. This is true even
though there would be less in the fixed portion of the benefit
program.
Mr. Weller. The last question I want to ask, Mr. Smith, is
under your proposal, it is my understanding you cover all State
and local government employees hired after I guess beginning in
2001. And I have had kind of a continuous parade of police and
firemen and others through my office concerned about being
included in any Social Security plan. They prefer to be
independent and have their own program. Can you explain why you
believe that all State and local government employees should be
included in the Social Security Program?
Mr. Smith of Michigan. Well, I think part of it is the
survivor and disability insurance portion of the program. The
greater amount that we spread that risk around on the
disability and survivor insurance, probably the better off we
are as a country and the less chance to have something bad
happen in a local community that is just simply buying that
disability retirement insurance.
Mr. Weller. For these police and firemen who have, of
course, expressed opposition to being included, what is the
benefit to them in being included as part of your program?
Mr. Smith of Michigan. If there isn't a significant
increase in disability or survivors benefits, then there would
be no benefit to them. But there is a slight benefit to the
rest of the system. Not too much but a little.
Mr. Weller. All right. Well, thank you, Mr. Chairman. Thank
you, Nick.
Mr. Shaw. Mr. McInnis.
Mr. McInnis. Thank you, Mr. Chairman.
Mr. Smith of Michigan. Can I just add 0.21 percent out of
the unfunded liability of 2.07 percent is satisfied by bringing
the other States and counties in.
Mr. McInnis. May I proceed, Mr. Chairman? Thank you, Mr.
Chairman. Mr. Smith, there are a couple of points. I am slow
here but you talk about high income, but first of all, with due
respect, I disagree with you that there is no tax increase in
there. There is a tax increase in here for high-income people.
If you don't cut their taxes but you cut their benefits, that
is a proportion that has an increase impact on their tax.
Somebody has to pay for this.
As I try to walk my way through your explanation to my good
colleague, Mr. Weller, you said, ``No, it cuts their benefits
but really it is better for them because they get expanded
investment opportunities so they actually make more.'' Who is
paying for it? I mean this thing isn't free. Every time you are
going to pay an additional dollar, that is a transfer.
Somewhere that dollar has been created and to put it into your
program at the amount especially that you suggest, it has got
to come out of somebody's pocket.
Let me go through my questions first and then I will give
you the last part to answer. So I haven't figured out how, I
guess I am just not following your steps. And I don't exactly
consider saying we are going to cut your benefits but we are
going to give you more investment opportunities with your own
money therefore you ought to be happier about it. Clearly, what
it is to me is means testing. So the question I would have, the
concluding question on this portion of my questions, is on the
means test. Number one, what is high income under your
category? What qualifies for that, what numbers? And, number
two, do the people in that high-income bracket get back at
least principal that they have put in under your plan? So if
you would answer those questions, start there.
Mr. Smith of Michigan. OK, I think maybe I am a little weak
on my words when I use the word ``benefit.'' I was applying the
word benefit cut to the fixed portion of Social Security. So as
you take the 12.4 percent, what I do in my bill, I set aside 4
percent for disability and survivor and so I never touch that 4
percent. The actual cost now I think is about 2.4 percent. So I
take what is left starting at 2.6 percent and put it into a
private investment account that is assumed by the actuaries to
earn a real return of 7 percent. Eventually, the private
investment portion is going to be greater, is going to give
more benefits than the fixed portion of Social Security. So
when I say that we are cutting benefits, we are only cutting
the fixed Social Security benefits. For example, assume that
the taxable income a few years from now is $100,000, so at that
time in my bill 5 percent is allowed to go in a personal
retirement savings account, 5 percent or $5,000 a year goes
into that individual's account to invest and compound at 7
percent while their fixed benefits go down.
Since I add another bend point to the calculation of 5
percent, at $3,700 this year, that means anybody that has an
average monthly income of $3,700 would fall into the next bend
point and thus have a reduction in their fixed benefit portion
of Social Security.
Mr. McInnis. So you consider wealth anything below say
$45,000 a year, they are considered high income above that?
Mr. Smith of Michigan. At least higher income. But here
again, consider the total benefits, their personal retirement
investments and their government-paid benefit. If you are
making $20,000 and you are allowed to invest 5 percent of it,
you can invest $1,000 a year.
Mr. McInnis. Let me reclaim my time since we are in the
yellow so very quickly because then it still doesn't--what Mr.
Houghton, my good colleague questioned you about, is that
difference is what you rely on totally to carry the costs of
this plan. And I just cannot picture where you are going to
come up with that kind of block of funds as a result of slowing
down the growth of benefits while giving these people
additional opportunities?
Mr. Smith of Michigan. Well, the actuaries specifically and
you have an actuarial----
Mr. McInnis. Let me point out one other thing and then I
will reclaim my time and then I will yield to you for the
balance and that is that I don't consider $45,000, that is
rounded off, I don't consider $45,000 a year high income. It is
certainly not high income in the area I am in.
Mr. Smith of Michigan. I think I will change my words to
say higher income rather than high income. But the opportunity
of what you are going to gain on your private investment more
than offsets your fixed benefits reductions.
Mr. McInnis. Thank you, Mr. Chairman.
Mr. Shaw. By just being able to put everything in the
record that really should be with regard to your plan, the
Social Security Administration communication dated June 5,
1999, which I assume you probably have received copies of, they
point out that the transfers, this is on page 3 of that
communication: ``The transfers from the General Fund of the
United States Treasury would be required for the years 2001
through 2009 with the amount specified in law as $11 billion
for 2001, $59 billion for 2002, $51 billion for 2003, $68
billion for 2004, $79 billion for 2005, $116 billion for 2006,
$134 billion for 2007, $146 billion for 2008, and $165 billion
for 2009. These amounts are based upon the current estimates by
the Congressional Budget Office of the amount of on-budget
surplus for these years.'' I don't put that out to be critical
because the Archer-Shaw plan also requires some revenue coming
into it in the years commencing about 2015.
Mr. Smith of Michigan. Clay, what we did is I ran into a
lot of brick walls increasing the retirement age to 69. And so
I was looking for a way to do away with that increase in
retirement age and what we did to accommodate that was use the
amount of the Social Security Trust Fund surplus in terms of
not having General Funds support not to exceed the Social
Security Fund surplus for those years that allowed me not to
increase the retirement age.
Mr. Shaw. I think that was a wise decision. It is very
difficult to think about blue-collar people, or at least a
majority of them continuing to work beyond the current
retirement age. I want to compliment you. You have been
involved in this longer than I have, I might say. And I know
you have done a lot of work and you have thoroughly examined
the subject, and I appreciate your being here with us and
testifying this afternoon and outlasting everybody just about.
Mr. Smith of Michigan. Well, anyway, thank you, Mr.
Chairman.
Mr. Shaw. And I know that you also had another obligation
to chair a Committee and that makes it even more special that
you see your obligation here and you certainly have fulfilled
it well. And thank you for testifying.
Mr. Smith of Michigan. Thank you.
Mr. Shaw. And this hearing is now adjourned.
[Whereupon, at 4:28 p.m., the hearing was adjourned.]
PROPOSALS CERTIFIED TO SAVE SOCIAL SECURITY
----------
THURSDAY, JUNE 10, 1999
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice, at 10:07 a.m. in
1100 Longworth House Office Building, Hon. Bill Archer
(Chairman of the Committee) presiding.
Chairman Archer. The Committee will come to order.
Good morning. Now that things have cooled off outside, we
have a good environment to continue to consider Social Security
and to, at least for the time being, complete our hearings.
Today the Committee will continue what we started yesterday
in evaluating and hearing about plans that save Social Security
for the required 75 years. I hope all the Members of the
Committee agree with me that yesterday's hearings were
productive and constructive in helping us to understand what
the various options are.
All of the plans presented yesterday, in my opinion, were
positive and good contributions to the debate. And I again
congratulate those Senators and House Members who participated
in the hearings.
Very soon this morning I will take the witness stand with
Social Security Subcommittee Chairman Clay Shaw to present the
Archer-Shaw Social Security Guarantee Plan to the Committee.
But before I do, I feel constrained to say that I believe I
have upheld my end of the deal.
My friends in the Minority said, present a plan, and I did.
The President asked me, when I met with him, to reach out and
include the Minority, including the Minority Leader, and I
have. The President and many Democrats on the Committee said
that we should hold hearings, and we are.
And I am committed to continuing our bipartisan effort on
Social Security. And this morning I announce that if the
Minority agrees, I will schedule executive sessions for the
Ways and Means Committee to discuss areas of common ground and
a potential legislative outline for markup.
In that same bipartisan spirit, I hope that the President
will meet with the Ways and Means Republicans as soon as
possible, just as he has already met with the Ways and Means
Democrats on the Committee.
I believe that will help to move the process forward.
And clearly, the President's leadership is vital to the
ultimate solution of this problem. Each one of us, each Member
of the Congress of the United States and the President of the
United States, must examine his and her conscience and
determine whether they truly want to solve this problem this
year or whether they are motivated by other reasons. And only
each Member can answer that question.
I hope that each Member will recognize how important it is
to do this job now. Waiting will only make it more difficult in
increasing percentages. The options are before us now, and now
is the time to choose from them and to move forward because now
is the best opportunity that we will ever have to strengthen
and to save Social Security.
As the President said early on, once in a blue moon we have
this opportunity, and it is now ours to reach out and to grasp
and to prove that we can meet the challenge.
The American people expect this of us. They know that it is
vital to all Americans, and they know it needs to be saved and
that the job needs to be done now.
We have the opportunity to prove something that is truly
historic. It is not easy. But we can prove that a democracy can
address a difficult problem far in advance of the drop-dead
date. We can prove that perhaps for the first time that we
don't have to wait until we are at the edge of the cliff.
Because if we wait until we get to the edge of the cliff, the
options will be very limited. They will be to cut benefits or
raise taxes.
I think each of us owes a responsibility to every
generation in this country and to generations to come. Social
Security should be intergenerationally fair.
Now, in my opinion, that means that taxes on our
grandchildren when they are in the prime of their work life
should not be any higher than we are paying today. It also
means that the benefits that they will receive when they
retire, having paid an equal amount of taxes, will be the same
as we are receiving today, those of us who are retired.
That is a great challenge. But every month, as I look on my
13 grandchildren, I know that I care. I will be gone, but they
must be considered.
To do it in any other way is not right. In fact, it is
wrong. Any program that would increase taxes on our
grandchildren and reduce their benefits is wrong. And I hope
all of us will be motivated by that same spirit.
With that, as I said yesterday, I am looking forward to
enjoying the fun that every witness has in being interrogated
by the Members of this Committee. [Laughter.]
I guess I look at this moment very sentimentally on this
Committee. I have served on it since 1973, and next year will
be my last year. And I will miss every one of you, whether you
be Democrat or Republican. This is the greatest Committee in
the greatest legislative body in the world.
And I know that we will shoulder our responsibilities on
the major issue facing all Americans today and during the next
century.
And I yield to my colleague Charlie Rangel for any comments
he might wish to make. [Applause.]
[The opening statement follows:]
Opening Statement of Hon. Bill Archer, a Representative in Congress
from the State of Texas
Good Morning. The Committee will come to order.
Today the Committee will continue the hearing we started
yesterday on plans that save Social Security for 75 years.
I thought yesterday's session was very productive, and I
think it shows specifically the options available to us as we
move forward to save Social Security. All of the plans
presented yesterday were positive contributions to the debate,
and I would again congratulate those Senators and Members of
Congress who participated.
I will soon take the witness stand with Social Security
Subcommittee Chairman Clay Shaw to present the Archer/Shaw
Social Security Guarantee Plan.
But before I do, let me say one thing: I've upheld my end
of the deal.
My friends in the minority said present a plan--I did. The
President asked me to reach out and include the minority,
including the minority leader--I have. Democrats on this
Committee said hold hearings on Social Security--we are.
I am committed to continuing our bipartisan effort on
Social Security, and today I announce that if the minority
agrees, I will schedule executive sessions for the Ways and
Means Committee to discuss areas of common ground and a
potential legislative outline for markup. In that same
bipartisan spirit, I would request that President Clinton meet
with Ways and Means Republicans as soon as possible for the
same purpose. Just as the President has met with Ways and Means
Democrats on Social Security, so too should he meet with
Republicans in order to keep this process moving forward in a
bipartisan fashion.
The options are before us, and now is the time to choose
from them and move forward. This is the best opportunity chance
we'll have to strengthen Social Security for some time. Each
day we put this off the tougher the job becomes. And most
important, the American people expect and deserve for us to act
now.
With that, I greatly look forward to hearing from our next
panel, and I would encourage Committee Members to give an extra
special amount of respect and courtesy to them.
Mr. Rangel. I started to say Mr. Chairman--and I say that
out of respect--but I feel more comfortable saying Bill, that
was a very moving speech because we all share the same love for
this Committee and this great body that we are privileged to
serve in. I have said before, and I truly believe, that as the
next election comes upon us that we don't need Social Security
out there to be what we campaign for or against. There are
enough differences, and I mean honest and serious differences
between our parties in dealing with the problems that we face
as a Nation to have a good contest in November.
I think that it would enhance the respect and support of
both Democrats and Republicans, and the House as a whole, if we
could come together in a bipartisan way and give you and our
President and our Nation, of course, a bipartisan Social
Security bill.
In your very moving remarks, the one thing that I think
deserves particular attention is your suggestion that we go
into executive session, which, in my opinion, is the only way
to see how much we can accomplish as a Committee. Of course, we
would want to do this with the President's people being aware
of the direction in which we are going to make certain that if
we come near a solution that it is going to be acceptable to
the administration.
I think our hearings are good as a beginning and as an
educational vehicle, since I think the American people are not
necessarily aware of the serious nature of the problem in the
out-years.
It is true that, as you take the witness stand, the cloak
of Chairmanship will be removed from you. It is also true that
we intend to give the same scrutiny to the proposal that you
and my friend Clay Shaw have come up with, as you have given to
our President's proposal.
But we are only dealing with proposals at this stage so
that there will be no personal setbacks for anybody because
even the Republican leadership has not embraced your proposal,
just as Democrats have not embraced the President's proposal.
I really am moved by you calling for the President to
provide leadership on this, because on other legislative issues
I have not heard the same request that we have to hear from the
President as we legislate. I think what you mean, but didn't
say, is that we can't get anything accomplished on this issue
unless there is bipartisanship. The President has to be a part
in creating that climate of bipartisanship.
Nonetheless none of us are thinking about giving up our
legislative responsibility to a task force or to the President.
Now, having said that, any critique or analysis of the
proposal which you have drafted should only be taken in the
same spirit in which we have critiqued the President's
proposal, and with the understanding that the serious business
will have to be done by trying to find out, not how far apart
we are, but how close we are that will give us the basis of
going into executive session with experts to see whether or not
those differences can be closed and whether we can bring
something to the floor.
Now, as Charlie Stenholm said yesterday, any proposal can
be picked apart, because somewhere along the line it has to be
paid for. We have a tendency politically just to talk about the
pain in paying for things, but paying for things is not nearly
as painful if we were to create a package which showed that we
protected the integrity of the system for the next 75 years.
I don't know why you have moved me at a time you are going
to be sitting in the witness chair, but as always, I will be
kind and hope it is well respected, Bill.
I want to tell you that I know you are going to miss this
House. There has been no Member that I have known that has been
more dedicated and that has done more to protect the integrity
of this Committee. We don't know who will be sitting in your
chair in the next session, but certainly we know that the
dignity and integrity and respect that you brought to it will
have to be maintained.
Thank you.
Chairman Archer. I thank the gentleman for his comments.
And with that, I turn the gavel over to the Ranking
Republican on the Committee, Mr. Crane.
Mr. Crane [presiding]. Well, let me welcome our witnesses
to the Ways and Means Committee. You have had virtually no
experience sitting where you are.
Mr. Shaw. It is an intimidating view from here, I would
say. [Laughter.]
Mr. Crane. But I would like to welcome the commencement of
the testimony of our first witness. I believe you are from
Texas, aren't you, Chairman Archer?
Chairman Archer. Yes, sir. Proudly.
Mr. Crane. Chairman Archer first. [Laughter.]
STATEMENT OF HON. BILL ARCHER, A REPRESENTATIVE IN CONGRESS
FROM THE STATE OF TEXAS; AND CHAIRMAN, COMMITTEE ON WAYS AND
MEANS, U.S. HOUSE OF REPRESENTATIVES
Chairman Archer. Chairman Shaw, it is a little intimidating
to be down here. And I must say that I feel a little bit like
Pickett at Gettysburg. But we shall proceed.
As I mentioned earlier, I think we have a historic
opportunity this year to save Social Security. And today I
present to the Committee the details of the Social Security
Guarantee Plan, which Social Security Subcommittee Chairman
Clay Shaw and I have unveiled in April.
We followed four basic principles as we crafted this plan.
First, we needed to save Social Security for 75 years. That is
probably not long enough. We should be able to project that the
saving and strengthening will extend beyond the 75 years as
best we can project today, if, in fact, we are going to say to
younger generations, yes, you can have confidence in what we
are doing for your future.
Second, we do not raise taxes, and we do not cut benefits.
Social Security as we know it today will be available to
generations to come in the next century. Third, we maintain the
safety net for workers, and fourth, we provide new options for
younger workers.
First and foremost, our plan saves Social Security for as
far as we can see. And I believe that is a critical benchmark.
I hope all of us on this Committee will not lose the focus
of why we are here today. We would not be here at all today if
we did not project that Social Security would be unable to meet
its obligations in the next century. We would not be here
talking about an awful lot of adjuncts, an awful lot of changes
in the program, which you heard in many of the presentations
yesterday, were it not that Social Security was going to go
into default.
And so I believe our focus should be--and Clay Shaw agrees
and that is one of the major things we thought about as we put
this plan together--and should never be lost, to maintain the
current Social Security system on a realistic basis over the
next 75 years.
The Chief Deputy Actuary for the Social Security
Administration is here today, and I believe he would agree. And
if I might digress momentarily, he and his staff deserve
enormous compliments from all of us because they have worked
untiringly under enormous time pressures over the past couple
of weeks in order to evaluate the programs that were submitted
to them. And I personally want to give the highest commendation
to Steve Goss and all of the people who work with him.
[Applause.]
We all know that it is relatively easy to save Social
Security for 20 or even 30 years. In fact, the current
projections of the Social Security actuaries are that the
benefits will be paid in full through the year 2035. And so why
worry today?
But we know that the demography is going to change so
dramatically in the next century that we better worry today or
the solutions will become virtually impossible. The financial
reality of dealing with the system over the long term is our
greatest challenge. And as I said yesterday, 75 years is the
average life of a worker, or it was. And that is expanding. So
perhaps in the future, actuaries will feel that they need to
extend that to 80 or 85 years to accommodate the advances in
medicine and nutrition and other things we are providing to our
population. But we owe it to be honest with future generations.
Second, our plan fully preserves the current Social
Security system, including COLAs, and fully protects its
benefits. If you don't believe me, let me share with you the
words of Congressman Earl Pomeroy, the cochairman of the
Democratic Task Force on Social Security, who said the
following about our plan, and I quote: ``It would preserve the
Social Security Trust Fund for Social Security. It would
preserve the guarantees represented in the present Social
Security Program. No one would do worse in the next century,
and each would be guaranteed at least as much benefit as they
have under the current existing program,'' end of quote. Now
that is a key difference between our plan and some other plans
that you heard about yesterday, no benefit cuts.
As we discussed yesterday, AARP views COLA cuts and
increases in the retirement age as benefit cuts. And I am glad
to say that the Archer plan has neither. And as I mentioned
yesterday, any legislated reduction in the COLA, in the CPI,
will also be a tax increase heavily distributed on middle-
income Americans.
Again our plan guarantees Social Security benefits for all
workers. It doesn't matter if you are 65 or newborn, our plan
guarantees that you will receive at least the amount promised
to you under current law.
Now here is how it works: In short, our plan modernizes
Social Security's financing to prefund the benefits and gives
workers the opportunity to create real wealth for themselves
and their families. The Archer-Shaw plan would save Social
Security by giving millions of American workers a tax cut equal
to 2 percent of their earnings to create their own Social
Security Guarantee Account.
This is a tax cut that I believe everyone on a bipartisan
basis can support. And the distribution tables are remarkable
because almost two-thirds of the benefit goes to people with
under $50,000 a year of income. That should appeal to people on
both sides of the aisle.
Furthermore, each dollar of tax cut represents one dollar
of personal savings, which this country desperately needs.
Today, our personal savings rate is at the lowest of all time
in the history of this country and threatens the very thriving
economy that can be seen in the future.
Upon retirement, a beneficiary will receive his or her full
Social Security check, or a greater amount, depending on the
balance of their Social Security Guarantee Account. And this
guarantees that each and every American will receive at least
his or her Social Security benefits forever, or at least as far
as we can see.
But our plan does even more. We include an inheritance
feature so that if workers die before they retire, their
accounts could be passed tax free to their heirs, something
which the current system prohibits.
We also completely eliminate the unfair earnings limit that
penalizes working seniors who either have to work or want to
continue to work and risk the loss of their Social Security
benefits. This is a feature that in my opinion has been wrong
in the law. And I am excited that the President has stated his
strong support for eliminating the earnings limit.
Plus, our plan includes, which I don't believe any other
plan presented to us yesterday offers a feature that should
appeal to all small business people and to all employees, all
workers in this country. And that is a reduction in the payroll
tax of 4 percent, while still safeguarding the trust fund.
Finally, the Archer-Shaw Social Security Guarantee Plan
pays for itself. Even under the most conservative estimates,
the Social Security Guarantee Plan will result in a net Federal
budget surplus over the next 75 years.
And before turning to Chairman Shaw, let me point out some
very significant differences between our plan and Mr. Stark's
plan. Not to single you out, Pete, but you were the lead-off
witness.
The Archer-Shaw plan would immediately boost significantly
the personal savings rate in the country, which is currently at
a negative 0.6 percent. Number two, the Archer-Shaw plan would
result in net Federal budget surpluses. Number three, the
Archer-Shaw plan would cut payroll taxes by 2\1/2\ points in
2050, and 1 percentage point in 2060. Number four, the Archer-
Shaw plan would eliminate the senior work penalty on earnings.
And number five, the
Archer-Shaw plan would back Social Security benefits with real
assets, not just IOUs.
The most significant difference though is that our plan has
the backing of the Chairman of the Ways and Means Committee, or
so I have been told. [Laughter.]
And I now yield back my time, if there is any left, Mr.
Chairman.
[The prepared statement follows:]
Statement of Hon. Bill Archer, a Representative in Congress from the
State of Texas; and Chairman, Committee on Ways and Means, U.S. House
of Representatives
We have an historic opportunity this year to save Social
Security. And today, I want to share with you the details of
the Social Security Guarantee Plan, which Social Security
Subcommittee Chairman Clay Shaw and I unveiled in April.
We followed four principles when we crafted our plan.
1) Save Social Security for 75 years.
2) Do not raise taxes or cut benefits.
3) Maintain the safety net for workers.
4) Provide new options for younger workers.
First and foremost, our plan saves Social Security for 75
years, which I believe is a critical benchmark. The Deputy
Chief Actuary of the Social Security Administration is here
today, and I think he would agree. We all know it is relatively
easy to save Social Security for 20 or even 30 years, but the
financial reality of dealing with the program over the long-
term is our greatest challenge. As I said yesterday, 75 years
is the average life of a worker. We owe it to future
generations to be honest with them.
Second, our plan fully preserves the current Social
Security system--including COLAs--and fully protects its
benefits. If you don't believe me, let me share with you the
words of Congressman Earl Pomeroy, the Co-Chairman of the
Democrat Task Force on Social Security, who said the following
about our plan: ``It would preserve the Social Security Trust
Fund for Social Security. It would preserve the guarantees
represented in the present Social Security program. No one
would do worse, you'd be guaranteed at least as much benefit as
you have under the existing program.''
That's a key difference between our plan and some other
plans--no benefit cuts. As we discussed yesterday, AARP views
COLA cuts and increases in the retirement age as benefit cuts.
I'm glad to say the Archer/Shaw plan has neither. Again, our
plan guarantees Social Security benefits for all workers. It
doesn't matter if you are 65 or newborn, our plan guarantees
that you will receive at least the amount promised to you under
current law. Here's how it works:
In short, our plan modernizes Social Security's financing
to pre-fund benefits and gives workers the opportunity to
create real wealth for themselves and their families.
The Archer/Shaw plan would save Social Security by giving
millions of American workers a tax cut equal to 2% of their
earnings to create their own Social Security Guarantee Account.
This is a tax cut that everyone can support.
Workers would then select where to invest their SSGA fund.
The assets in these accounts would grow tax-free. No
withdrawals would be permitted until a worker became eligible
for either retirement or disability benefits.
Upon retirement or disability, a beneficiary would receive
his or her full Social Security check, or a greater amount,
depending on the balance of their Social Security Guarantee
Account. This guarantees that each and every American will
receive at least his or her Social Security benefits--forever.
But our plan does even more. We include an inheritance
feature so that if workers die before they retire, their
accounts could be passed tax-free to their heirs, something the
current system prohibits. We also completely eliminate the
unfair Earnings Limit that penalizes working seniors. Plus, our
plan includes a gradual reduction of payroll taxes so that
government can't grow bigger at Social Security's expense.
Finally, the Archer/Shaw Social Security Guarantee Plan
pays for itself. Under even the most conservative estimates,
the Social Security Guarantee Plan will result in net federal
budget surpluses over the next 75 years.
Before turning to Chairman Shaw, let me point out some very
significant differences between our plan and Mr. Stark's plan:
1. The Archer/Shaw plan would immediately boost the
personal savings rate--currently at negative 0.6%.
2. The Archer/Shaw plan would result in net federal budget
surpluses.
3. The Archer/Shaw plan would cut payroll taxes by 2.5
percentage points in 2050 (from 12.4 to 9.9 percent) and
1percentage point in 2060 (to 8.9 percent).
4. The Archer/Shaw plan would eliminate the senior work
penalty on earnings.
5. The Archer/Shaw plan would back Social Security benefits
with real assets, not IOUs.
Mr. Crane. Thank you, Mr. Witness.
And our next witness is Mr. Shaw.
But may I remind our witnesses to please try to keep your
oral testimony confined to 5 minutes or less, and any
additional material will be made a part of the permanent
record. [Laughter.]
Mr. Rangel. Mr. Chairman. I ask unanimous consent that
these witnesses have as much time as they think is necessary in
order to present their views. [Laughter.]
Mr. Crane. Hearing no objection, so ordered. [Laughter.]
STATEMENT OF HON. E. CLAY SHAW, JR., A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF FLORIDA
Mr. Shaw. Mr. Chairman, I have a full statement that I
would ask to be placed in the record. And I will summarize as I
think Chairman Archer has very adequately described our Social
Security plan to the Committee.
There are just a couple of things that I think that I would
like to underscore, which I think is something that this
Committee should take a close look at. When I was first asked
to take the reins of the Chair of the Social Security
Subcommittee, I made a decision, which I haven't really talked
that much about. But I thought at that point that that would
probably be the end of my career in this Congress in that I
represent a very senior district of south Florida.
I did not realize until I got into the matter and started
really looking at the solutions, not just the problems. The
crisis I always knew about, and I think every Member of this
Committee knows that there is a crisis pending out there that
is going to really nail our kids and our grandkids.
But I didn't realize that we could solve the problem of
Social Security without touching Social Security. And I think
that is what every Member of this Committee should certainly
look at. What we have been able to accomplish, if the Archer-
Shaw Social Security reform bill is passed and becomes law, is
we have preserved Social Security in its existing form for all
times.
FICA taxes will remain, at least for the time being, at
present levels, and they will be invested as they are today,
entirely in Treasury bills. None of the FICA taxes are going
into the stock market. Every benefit that is presently
existing, including today's COLA, is preserved. We don't meddle
with that at all.
So Social Security as it is today is not being touched.
What we have done, instead of going the route of a carve-out,
which would take FICA funds out of the Social Security Trust
Fund, we have established individual retirement accounts for
American workers.
Can you imagine the opportunity that we have as Republicans
and Democrats to come together and give, perhaps, the largest
tax cut to all American taxpayers, including some of those who
don't pay taxes, by a refundable tax credit and for the first
time give millions of low-paid American workers the opportunity
to accumulate personal wealth in the form of an individual
retirement account? This is quite incredible. And it is
something that we can come together as Republicans and
Democrats and accomplish.
For the first time, so many workers in this country who
have been left behind and have never been able to even have a
hope of accumulating something of their own will have that
opportunity. Yes, if they choose to retire, and when they
choose to retire, that individual retirement account will have
to go and be annuitized through the Social Security
Administration.
But so many workers today who die before they retire lose
every penny that they have put into the Social Security system,
particularly minority workers today who go into the work force
at an earlier age and die at an earlier age. Instead of losing
every dime that has been paid to the Social Security system by
themselves and by their employers, they will have something
that they can leave to their heirs.
This is a tremendous, significant, and very, very fair
situation. And we have brought them into being able to enjoy
part of the American dream. I think it is an incredible
program, and I think it is one we should be able to embrace.
I think the Chairman and I are certainly open to any
suggestions that you might have. As was pointed out by Mr.
Rangel, this has not been embraced as the Republican bill. And
I think it is one that has to be done, not as a Republican
bill. I don't think we can pass a Democratic bill either.
I think what we need to do is to come together with a
bipartisan bill. And I think we need to bring along the
leadership of both parties.
Now, Mr. Rangel, you asked the question why the President
isn't called on to provide leadership on other types of
legislation. Other types of legislation have more of a partisan
nature to it than this. This is one for all American workers,
Democrats and Republicans. This isn't rich versus poor. This
isn't spending versus tax cuts. This is something that all of
us need to work together and be able to accomplish.
And I look forward to your questioning.
Thank you.
[The prepared statement follows:]
Statement of Hon. E. Clay Shaw, Jr., a Representative in Congress from
the State of Florida
Today 44 million Americans--one in six--depend on Social
Security retirement, disability, or survivor benefits. But
because Americans are having fewer children, living longer, and
retiring sooner, Social Security's financing system faces
trouble ahead. As Social Security's Trustees told us in their
most recent annual report, this problem will become acute after
2014 when Social Security spends more on benefits than it takes
in through taxes. If we want to keep the budget balanced and
pay all the benefits seniors are promised, other government
spending will have to fall or taxes will have to rise or
government debt will have to increase by no later than 2034--
not just for retirees then, but for their children and
grandchildren as well.
That is, if we fail to act.
That is why Chairman Bill Archer and I have proposed the
Social Security Guarantee Plan to permanently save Social
Security by creating real savings for Americans' retirement
security. As the Social Security Administration's independent
actuaries stated, the Guarantee Plan ``would be expected to
eliminate the estimated long-range OASDI (that is, Social
Security) actuarial deficit...allowing timely payments of
benefits in full through 2073, and beyond.''
We crafted this plan to achieve four key goals: (1) no
payroll tax hikes; (2) no benefit cuts; (3) no direct
government investment in the private financial markets; and (4)
save Social Security for 75 years and beyond.
That is why the Guarantee Plan ensures fairness by
rejecting payroll tax hikes, by rejecting increases in the
retirement age that would unfairly burden our children and
grandchildren, and by rejecting COLA cuts that would harm
seniors and especially women. Our plan also protects workers'
rights by eliminating the Social Security earnings limit and
making sure their Social Security taxes are protected and not
spent on other Washington programs. That's the strongest
lockbox ever. Our plan promotes fiscal responsibility by
backing Social Security benefits with real wealth instead of
IOUs for the first time. For the economy, the benefits are
clear as well: by 2074, this plan will have increased net
national savings by a total of $15 trillion (in 1999 dollars),
spurring economic growth, generating new jobs, and promoting
budget surpluses. And in addition to fully protecting all
current benefits and even creating new benefits for workers and
their families, our plan dramatically reduces payroll tax
burdens on our children and grandchildren in the long run.
As its name implies, the Social Security Guarantee Plan is
designed to guarantee that full uncut Social Security benefits
are provided to all beneficiaries today and in the future. This
proposal does not affect Social Security benefits in any way.
There is no individual risk--everyone is guaranteed their
current Social Security benefits, regardless of the market
returns on their individual accounts.
The U.S. General Accounting Office has told Congress that
to save Social Security, payroll taxes would have to be raised
by 15 percent or benefits cut by 13 percent immediately. (To
put that in perspective, for the average retiree receiving
about $750 per month in benefits, if we relied on benefit cuts
alone to maintain Social Security's soundness we would have to
reduce monthly benefits by about $100, to $650. Obviously, that
must be avoided at all costs.) If we delay, even more drastic
benefit cuts or tax increases would be needed to keep Social
Security up and running. The Social Security Guarantee Plan
answers this challenge of saving Social Security without
raising payroll taxes, without cutting benefits, and without
direct government investment of Social Security Trust Funds in
private financial markets.
Here's how the Social Security Guarantee Plan would work.
Each worker covered by the Social Security program would
receive an annual tax credit equal to 2 percent of his or her
earnings (up to $72,600 this year). So if you make $20,000 you
get a $400 tax credit; if you make $40,000, you get a $800
credit; and the maximum tax credit would be $1,452 (2 percent
of $72,600). This amount would be automatically deposited into
a new Social Security Guarantee Account created for each
worker. The worker could then select from among a broad range
of savings and investment options for his or her Guarantee
Account. Account balances would accumulate tax-free until
retirement or disability. Once workers begin drawing Social
Security benefits, their Guarantee Accounts supplement funds
from the Social Security Trust Fund to provide full Social
Security benefits. If investment returns outperform historical
averages, workers and their families could receive even larger
benefits than promised today. In addition, many survivors may
get higher benefits than current law provides because our
calculation for survivor benefits under the accounts is more
generous than current law. Plus our children and grandchildren
will benefit from payroll tax cuts of up to 3.5 percentage
points--almost 30 percent below today's rate.
If workers die before retiring, Guarantee Accounts pass
tax-free to their children or grandchildren or other heirs,
after making sure that their survivors receive all the benefits
they are owed today. That's in contrast with today's Social
Security in which workers can spend a lifetime paying taxes,
die before retirement, and still not have savings to pass on to
their family or heirs. So in addition to our main goal of
saving Social Security for everyone, this plan for the first
time creates real wealth for all workers they could leave to
their families. Again, that's on top of keeping our commitment
to provide full monthly benefits to workers, their widows and
children.
Even current retirees would benefit by this plan in several
ways. First, Social Security will be financially sound for 75
years and beyond under this plan; as Social Security's Trustees
have stated, that is not the case today. Second, the Guarantee
Plan would maintain Social Security's soundness without
touching Social Security's critical inflation protections (that
is, without cutting cost-of-living adjustments or COLAs); as we
have heard other plans call for COLA cuts. Finally, the
Guarantee Plan increases and ultimately eliminates the current
limit on how much retirees can earn without experiencing cuts
in their Social Security benefits. So anyone who wants or has
to work to supplement their Social Security can do so without
being penalized.
Social Security is one of the greatest things about
America, and we all want to keep it that way. Fortunately, the
Guarantee Plan shows that Social Security can be saved without
cutting benefits or raising payroll taxes. But we have to act
and act soon or the task will get only tougher and the
solutions more painful with each year that we delay.
Mr. Crane. We thank our witnesses for their testimony.
I would now like to yield to our distinguished Ranking
Minority Member, Mr. Rangel.
Mr. Rangel. Clay Shaw, if you knew that this was going to
have to be bipartisan if it was going to be successful, why
were no Democrats asked to participate in this, for lack of a
better word, this proposal that ultimately came from your task
force?
Mr. Shaw. I think both of us in both political parties
stood back for a long period of time, waiting for the others to
take the first step. The President himself at the White House
conference told us specifically. And you were there, I was
there, Chairman Archer was there. He said he didn't expect the
Republican Majority to come forward with a program, that he
wanted to come forward with it.
He did come forward with a partial program in his State of
the Union Address; however, nothing is out there yet from the
White House that saves Social Security for all time. You can
view this as a working document. The Chairman has said that he
wants to have executive sessions, which I assume from your
remarks that you accepted his offer to do that.
This is a proposal that is on the table. This is a working
document. This is work in process. None of us has closed the
door to further suggestions. And if this bill can be improved
upon, both Chairman Archer and I would relish the opportunity
of working with the Minority party in accomplishing that.
Mr. Rangel. In the spirit of just trying to set some
guidelines--because I do welcome executive session on this and
other sensitive issues where we all have to bite the bullet--
and just trying to establish what we would be going into this
session with, we are in the process now of trying to put into
legislative form the President's recommendations. We are
prepared to do it hoping to get the support of the President,
but we feel a responsibility as legislators to introduce a
bill.
Is there any way that we would know before we went into
executive session whether your proposal has any support with
Republicans on this Committee, on the floor, or with the
Republican leadership? Because in order to put all of our cards
on the table, we will be reporting to the Democratic Caucus
what I consider to be progress in that executive session. They
will be asking whether or not our leadership is talking with
the Republican leadership. If you followed the day-to-day
calendar, the legislative calendar, you will see that it's very
partisan.
Of course, we are trying to say we want to make Social
Security different, as you eloquently pointed out, from other
legislation.
What kind of indication have you already received from your
leadership that they are willing to work out a bipartisan
agreement? Have they discussed this with the Democrats at all?
Mr. Shaw. I can't speak as to--I would defer to Chairman
Archer as far as the conversations with leadership. However, I
can tell you that I think the Speaker himself would like to
move some legislation forward. I think that they are anxiously
waiting for some signals from the Minority party that this
legislation should be moved together.
I can tell you, without speaking for each individual Member
of this Committee on the Republican side, I feel that the
consensus certainly favors moving something forward. And I
think the consensus also would favor something in the form of
the Archer-Shaw bill.
Chairman Archer. If I may, let me just jump in briefly. I
introduced into the record yesterday a letter from Speaker
Hastert which supports our ongoing process of trying to find a
solution to Social Security. He has strongly encouraged me to
pursue attempting to find a bipartisan solution to Social
Security. And in the meetings that I had with our leadership,
at least the top part of our leadership, that same
encouragement has existed.
And, like you, you are not ready to jump in and embrace the
Archer-Shaw plan at this moment, although we would be happy to
have that tomorrow, they are not jumping forward and saying
this plan is the ultimate answer to the problem.
We have got to work through this process, but they are
strongly supportive of finding the answer and strongly
encouraging of the process that we are conducting right now.
Mr. Rangel. Well, let me say this: the area that we do
agree on, and unfortunately I haven't gotten to the substantive
questions, is that we are not going to rush into this only to
find out that it is just Clay Shaw and Bob Matsui and me and
you. Most of the Members on this Committee, and Members of the
House from both sides of the aisle, want to make certain that
they have something that they can be proud of. If they are
going to be hit and criticized, they have to feel comfortable
that they have accomplished something for the years ahead.
I agree with you that the President has a responsibility to
create the atmosphere that this not become a campaign issue in
2000. But it also seems to me that our leadership, both the
Speaker and the Minority Leader, have a responsibility to make
sure that this issue isn't so sensitive that they can't come
together to talk about it or that they can't issue a statement
to create an atmosphere where we can go into executive session
knowing that we are not spinning our wheels.
I appreciate the fact that you are talking about executive
session, and I will do all I can on my side to encourage a
reaching out, but I know that you agree, Chairman Archer, that,
if we are going to make history instead of political points, we
have to have everyone onboard, not on the solution, but on the
spirit in which we are working together toward that solution.
While I haven't dealt with the substance of the bill, I think
we have accomplished a lot in terms of the fact that at least
we are talking publicly, even though I was a little
disappointed that C-Span didn't show up this morning.
[Laughter.]
But I look forward to whatever meetings we can have before
the executive meeting so that the executive meeting, even
though not programmed, can go as smoothly as possible.
I thank you. You have made pretty darned good witnesses,
both of you.
Chairman Archer. And, Charlie, I would refer you to the
letter that was entered in the record from the Speaker
yesterday which I think will answer some of your questions. And
if you don't have a copy, we'll get a copy to you.
Mr. Rangel. I don't think there is any substitute, Mr.
Chairman, for talking to each other. I mean, I am certain I can
persuade Minority Leader Gephardt to have a profile in courage
and issue a letter, but I don't think there is any substitute
for our leaders breaking the trend that this session has
started and talking with each other about what they would like
to see us as a Committee do.
Mr. Shaw. Charlie, let me just add one thing to what you
have said. At this point, this is not the Republican bill. And
as a matter of fact, if you care to endorse it at the end of
the day, this would become the bipartisan bill.
So I think that it is not a question----
Mr. Rangel. It is not a Democratic bill either, but my
point is, Clay, is that you have got to talk with people. I
think we are OK. I think we made a giant step forward because I
think a lot of Republicans and Democrats would just as soon
this didn't come up.
What I am saying is that--I am not asking the Minority
Leader and the Speaker to come up with a program. I am just
talking about creating an atmosphere. Sooner or later, you and
Bob Matsui will be talking to each other--sooner or later.
Mr. Shaw. Well, we are, Charlie. We are talking. You are
talking to Bill; I am talking to you; I am talking to Bob
Matsui. We are coming together. We are making progress.
And I think what Chairman Archer has indicated this
morning, that let's expand this to the Full Committee.
Mr. Crane. Mr. Houghton.
Mr. Houghton. No questions.
Mr. Crane. Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman.
Chairman Archer, most, in fact, I guess, if there are no
benefit cuts, all of the magic to your proposal really is in
the individual accounts in allowing people to get a higher rate
of return on 2 percent of their payroll taxes. Is that
essentially correct?
Chairman Archer. Absolutely. And if I may, just very
briefly, tell you that there is no magic to any of these plans
that we heard from yesterday. But if you start with the premise
of a triangle, and on one side of that triangle is that
benefits are not going to be cut, and on the other side taxes
are not going to be increased. And the bottom part of the
triangle would be that you are going to save Social Security
for 75 years. Then you must do two things.
You must rely on General Treasury funds to some degree.
Now, frankly, I have a problem with the infusion of general
Treasury funds directly into the Social Security Trust Fund.
That violates the whole contract concept that has been
established over history. But that is just my own personal
view.
Others share it; some do not.
But recognizing that, what is the least amount of general
Treasury funds that you can consume in order to be able to
accomplish the goal of saving Social Security, which again is
the focus we cannot lose. And second, you have to use the
compounded returns of the private sector, which we heard a lot
about yesterday from both Phil Gramm and Bob Kerrey and others
who testified before us yesterday.
And that is what we do.
Mr. McCrery. Well, my question is, why only 2 percent. If
we get such great returns from investing 2 percent, why not do
3 percent or 4 percent?
Chairman Archer. Well, because, for everything you gain,
you give up something. You give up an additional loss to the
unified budget surplus by taking more money out of the general
Treasury.
And we did it with a minimum amount that would save Social
Security, which again is the focus. Our focus was not to say,
wait a minute, we are going to make every individual wealthy
out of their personal accounts.
Our focus was, how can we get the job done to save Social
Security with the least amount of money coming out of the
general Treasury.
Mr. McCrery. And, you paid attention to the unified budget
agreement as well?
Chairman Archer. Absolutely. And I am sorry that we don't
have unified budget projections for all of the plans.
Mr. McCrery. Could you share with us the effect on the
unified budget of your plan?
Chairman Archer. Right. But I can tell you that our plan
increases the unified budget surplus over 75 years by $122
trillion. And that is what permits us to reduce the payroll tax
by almost 4 percent.
Mr. McCrery. Thank you.
Mr. Crane. Mr. Stark.
Mr. Stark. Thank you, Mr. Chairman.
I keep trying to suggest, and I don't mean to damn you
gentlemen with my faint praise----
Chairman Archer. Any praise will be most appreciated.
Mr. Stark. Well, there is really little difference. What I
tried to show yesterday is that taking a chunk of money from
the Treasury, whether we are in surplus or deficit, and
transferring it to the trust fund is what mostly we are talking
about, assuming you hold benefits. There were some plans, I
understand, that cut benefits.
And so that the difference as I keep looking at it is that
you would take this money and temporarily hold it in accounts
which would be commercial securities, debt in equity.
And the current program, which is what I tried to mimic,
would just invest it in government securities. I would take
exception that under either plan there really isn't any
personal savings increase. That technically is not correct
because the accounts under your plan are not property of the
individual, and to increase savings, it has got to be their
property. It goes back to the government.
Plus, you offset those savings by reducing the purchase of
government bonds, which also could increase savings. So I'm not
sure that that is a selling point either way.
The biggest difference that I can see is that your plan
anticipates the use of a higher return from equity. The 40
percent you put in bonds, I doubt if there is much difference,
unless you are going to buy junk bonds. And I don't think that
is what the investment advisors would do.
So it is the question of the 60 percent that you put in
equity would yield a higher return to the Federal Government.
And we compound now. Senator Gramm's idea of compounding was a
wonderful discussion, but that is exactly what happens to the
funds that are in the trust fund now. They are compounded,
although they are invested in government bonds. That interest
is still compounded. So there is nothing new there.
I just think we need to somehow start with what we are
going to add. Where is the money going to come to add to--
either to your accounts or to the Treasury as, or to the Social
Security Trust Fund, as I would suggest. If it is going to come
from the budget, then in 2027, you start running deficits. If,
in fact, you are going to have a tax cut, as part of the
Republican leadership plan, then you have got a deficit
starting tomorrow, which I don't think any of us want, as would
my plan.
And I guess I am just trying to suggest that as the first
step in this executive session, when it comes, we ought to
decide how much we are going to take from general revenues,
regardless of where it goes, whether it goes into the stock
market or whether it goes into these individual accounts. And
we have to keep an eye on what other Committees are doing with
that general revenue, I might add, because that surplus ain't
all ours just to do with as we choose.
My friend Mr. McCrery says we don't have to worry about
that but--so I guess my question is, wouldn't that be a good
place to start as we view all of the plans is for us to decide
how many dollars we have to take, basically in addition to the
Social Security taxes, whether out of Federal revenue, let's
presume, to shore it up?
Then step two is how are we going to invest it or what are
we going to do with benefits, a whole host of other
alternatives. Are we that close?
Chairman Archer. Well, we are certainly close to the extent
that your plan and our plan both take identically the same
amount of money out of the General Treasury over 75 years.
Mr. Stark. Pretty close, I think.
Chairman Archer. No, exactly.
Mr. Stark. OK.
Chairman Archer. Two percent of payroll you take out of the
General Treasury, and 2 percent of payroll we take out of the
General Treasury.
Now, in the way we budget, as you know, a big part of that
is the unified budget surplus, the Social Security surplus, and
so on. But I don't think we need to get into an arcane
discussion about the budget overall.
But to compare the two, you and the Archer-Shaw plan take
exactly the same amount.
The difference is though that you inject your money
directly into the Social Security Trust Fund, which I have, as
a traditionalist, I have trouble coming to grips with in mixing
General Treasury funds with the Social Security Trust Funds.
But perhaps that is not a big deal. But I just personally have
always tried to stay away from that.
Second, the question of whether it is or is not their
money. We provide specifically in our plan that it stays their
money. It continues to remain their money straight on through
their lives. And a consequence of that is, is that if they do
die before they do reach retirement then they can pass that on
to their heirs.
Certainly that is private-property right that establishes
that it is their money.
But once they retire, and this is true--and a lot of my
conservative right, which has come out against this plan, says,
oh, but wait a minute, there is nothing to leave to their heirs
after they retire.
But under the Chilean plan, which a lot of the conservative
right, CATO, and so forth, really love, you are forced to
convert to an annuity. Once you convert to an annuity, there is
nothing to leave to anybody because it eliminates the risk of
whether you live longer than life expectancy or shorter than
life expectancy.
We say you have got to convert to an annuity. So I would
say it is their money. You might quarrel with that. But
irrespective of whether you believe that it is their money or
not, the result of the savings aspect is there. Because what is
the value of personal savings or private savings, which we are
concerned about in this country? The value is not just having
the money under the mattress. The value is that it is invested
to produce jobs and increase productivity. And every dollar of
this refundable tax credit is invested and put to work for the
benefit of the entire country.
Mr. Stark. OK. Then let me just try this and I will--if the
Chair will indulge me?
I get beat up, as many of us do at town meetings, about the
notch, different retirement benefits. And it is conceivable
that we have a lot of notches out there because of the value of
the account when people retire, which will inure to people who
follow after us. But that is something not to think about.
I'm not asking you to accept this, but I would ask you
this: If we then just said, take part of this--we both agree we
about this 2 percent to save the plan--if we took a portion of
that and invested it in the market in a lump sum and put it in
and had it held by the trust fund and merely adjusted
individual accounts so that everybody shared in the market ups
and downs equally, could we accomplish the same benefit
distribution that your plan does?
In other words, technically, wouldn't it be possible to
almost get the same end result? Perhaps not the same feeling of
independence and some of those things, but by holding the
securities under one manager in one fund, like a mutual fund,
say, for all the beneficiaries?
Chairman Archer. Well, I think you ask a very good
question, and these are the kind of things that we are going to
need to work through in executive session. I would say that if
the government invests the trust funds that you run into the
same problem that the President ran into with Alan Greenspan
when he sat right at this same microphone, number one.
Mr. Stark. Have it done by a management company, like our C
fund is doing.
Chairman Archer. Without trying to get in depth into that
issue, but I, frankly, do not think that will pass the
Congress. Eighty percent of the American people don't trust the
Federal Government to invest the money.
Mr. Stark. I just was trying to see if I was assuming that
we could get to the same benefit distribution and the same
market benefit if we did it that way.
Chairman Archer. Yes. Sure. Sure. Economically you could.
Mr. Stark. All right.
Chairman Archer. However, I must point out that doesn't
have anything to do with the notch problem. [Laughter.]
Mr. Stark. OK. Yes. If you could solve that, then put me on
as a cosponsor, will you? [Laughter.]
Thank you, Mr. Chairman.
Mr. Crane. Mr. Camp.
Mr. Ramstad.
Mr. Ramstad. Thank you, Mr. Chairman and Mr. Chairman and
Mr. Shaw.
I certainly appreciate your leadership in this area and
your advancement of this issue coming forward with this
important plan. I enthusiastically support most of what you are
doing. I certainly like, among other elements, the fact your
plan guarantees a floor of current benefits with the potential
for greater benefits.
Your plan will have a very positive, dramatic and immediate
impact on some current beneficiaries, namely those people who
in the system now between the ages of 62 and 70 who lose part
or all of their current Social Security payments each year
because they earn more than the law allows.
I have not had a town meeting in 9 years where Social
Security beneficiaries haven't complained about the limit on
earnings. Many of these people who are affected live in my
district.
Can you please expand on how your proposal addresses the
earnings limit?
Chairman Archer. It eliminates the earnings limit.
Mr. Ramstad. That is certainly the right answer.
Chairman Archer. At such time--if this program were adopted
by the Committee today, it would eliminate the earnings limit.
Seniors would no longer have to attempt to cope with that. Nor
would the Social Security Administration. It is the single
biggest administrative red tape issue in every Social Security
office.
And we would gain immeasurably in the cost of administering
Social Security, which is not figured at all into any of these
estimates when we eliminate the earnings limit.
Mr. Ramstad. I really think that is a key element of your
bill that needs to be highlighted. It is really an important
part, as I said, of this legislation.
Let me ask a final question. As you can infer from my
question of Mr. Stark yesterday, I am, like you, very
interested in getting a bigger bang with our retirement bucks.
And, unlike some of my colleagues, my constituents are not
afraid of options which yield better rates of return with their
hard-earned tax dollars.
How would your proposal, specifically the Social Security
Guarantee Accounts, help workers get a better rate of return
with their retirement dollars?
Could you just explain that for the record?
Mr. Shaw. That's from compounded interest and how that adds
up. It is also the other factor of getting into investments
that bring back more of a return than just the Treasury bills.
I think this is tremendously important. And when you look
at all of the plans out there, with the exception of the Stark
plan, every one of the plans turns to the private sector in
order to increase the return. When you set forth that triangle
box that Chairman Archer described, that is the only way you
can get there. There is no other way to do it.
And I would say, and one of the speakers on the Democratic
side mentioned the question of--in fact, I think it was Mr.
Stark a few minutes ago--about how can you assume these things
to be. We can assume it only by going back in 75 years of
history. And these assumptions are made over the period of a
couple of World Wars, other wars, the Great Depression. So I
think as far as the estimate is concerned, if anything, it is
overly conservative. I think the return will actually be more
than we are projecting.
Mr. Ramstad. Well, thank you again, both of you, for your
leadership in this critical area. There is no question in my
judgment, the major issue facing this Congress and this country
is the long-term solvency of Social Security. Certainly that is
what my constituents are saying and I believe most Americans
are saying.
And I hope that your approach, your legislation becomes the
vehicle and we can, indeed, get something enacted into law to
deal with this critical problem.
Thank you. Thank you, Mr. Chairman.
Mr. Crane. Mr. Matsui.
Mr. Matsui. I would like to thank you, Mr. Chairman, and
obviously you, Mr. Shaw. You are really making a good-faith
effort in trying to move the ball forward and deal with this
problem. And certainly the proposal is a credible proposal. I
think I have said that a number of times.
One of the problems that I see in this entire debate at
this time is the fact that when we first talked about doing
Social Security first, we were more worried about protecting
the Social Security surplus from the general budget. And now it
appears to me we should be worried about using on-budget
surpluses in terms of the Social Security.
I am starting to almost think that maybe we should try to
deal with the budget first rather than Social Security because
we may lift those caps or have a huge tax increase down the
road. And if we do Social Security first, we might find
ourselves really in a bind.
But we have already made that decision.
Here is what my concern is with respect to your proposal.
And I kind of alluded to this yesterday, when we had both Mr.
Stenholm and Mr. Kolbe appear before us. It is a fact--and I
think Mr. Stark has really pointed this out--it is a fact that
we are using significant general fund moneys. And let me must
throw out a number. In 2034, you will increase the debt--this
is absolutely astonishing when one thinks about it--by $11.7
trillion, $11.7 trillion.
And let me put this in perspective before you answer this.
We are trying to deal with an issue today as if we were back in
1924 looking to 1999, a 75-year issue. Lindbergh hadn't even
gone across the Atlantic Ocean, Babe Ruth hadn't hit 60 home
runs then. And so we are trying to project from 1924 to 1999
essentially.
Look at all the changes that have occurred. And here we are
trying to go from 1999 to 2074. And I know in your proposal,
because you have said this a number of times, that you are
going to have a $27 trillion surplus by the year 2074.
But, in 1924, if we would have made that kind of statement,
people would have said, well maybe, maybe not. After all, we
went through World War II, we went through a deep recession--
depression, actually--and we went through a number of different
major conflicts.
And so just in 34 years, 35 years, you are going to add to
the debt $11.7 trillion. And bear in mind that under the
projections we have by some of the actuaries that in 2034 we
are actually going to have to start accumulating significant
deficits in the on-budget.
And so we put your program in place, you know, which 35
years later, in 2074, we have huge surpluses, but in the
meantime, we are going to have huge deficits and a huge debt.
And I just think the real danger we face here is the risk.
And as we are trying to solve a 2 percent of payroll problem,
which is actually 25 percent of the entire benefits, we may be
creating a huge problem for our national economy, and certainly
for our unified budget.
And I am not being critical because you are trying to do
this in a responsible way, without cutting benefits and,
obviously, without raising payroll taxes and trying to do this
in a fashion that I understand, is consistent with where the
President has gone on this.
But the reality is, we need to really discuss this with a
little more seriousness. I really am sad that we lost the first
6 months of this year, spending all our time on the President's
proposal. We should have been talking about conceptual issues,
about how we were going to really deal with this problem from a
conceptual perspective.
And we are really running out of time right now. And all we
have right now is your proposal and the President's proposal.
We have Stenholm-Kolbe; we have a couple of others that are out
there. But I don't think we have really had the time to think
this through yet in terms of the impact of the overall national
budget, the national economy and where we want to go.
And, again, as I said, I don't want to be critical of your
particular plan because I think you are trying very earnestly
to come up with the solution.
Chairman Archer. Bob, you ask a very, very important
question. And it is one that I have asked all the way through.
And we do need to look at the overall macro aspects that you
have mentioned. The only thing that I would say to that is, we
cannot look at it in a vacuum.
If we don't do anything, what will the debt be to pay the
Social Security benefits?
In other words, it is compared to what? If you compare it
to the President's plan, the President's plan has to increase
the debt more than our plan does. Because the debt to the
Social Security Trust Fund has the full faith and credit of the
U.S. Government behind it, and it has got to be paid off the
same as the public debt.
It is all part of the total debt responsibility. That is
ultimately a levy on the taxpayers. And, I am not maligning the
President's program, I am just making a comparison, that the
debt ceiling has to go up more under his program than it does
under our program.
Mr. Matsui. If I may, Mr. Chairman. I think there is less
risk at this time to the national economy in the President's
program than perhaps in yours, and certainly Mr. Gramm's. At
least in the first 15 years, the President actually reduces the
national debt.
Chairman Archer. No he does not.
Mr. Matsui. He does. I understand what you are saying in
terms of the double accounting and all this, but he does
actually reduce the national debt; whereas you put it out there
in some kind of a quasithrift savings account, which, again, if
all of a sudden those surpluses should disappear, at least the
President hasn't put that money out there by way of tax cuts,
which this basically is, or spending programs. You have got it
out there in terms of a tax cut, essentially.
Chairman Archer. But, Bob, that just isn't--what you said
is just not factually the case.
Mr. Matsui. It is. It is.
Chairman Archer. Because if it were, his program would not
require an increase in the debt ceiling. His program increases
the debt of the country, does not reduce it, and requires an
increase in the debt ceiling. And his own budget shows that.
Our program actually increases the debt less than his does and
requires an increase in the debt ceiling much farther down the
line.
Mr. Shaw. Bob, the Archer-Shaw program reduces the total
cost over 75 years of the Social Security--of Social Security
by $100 trillion. And that is an actuarial figure, an actuary-
proven figure.
And I would say one thing to you: There is no other way.
Are you willing to decrease benefits? Are you willing to
increase payroll taxes?
You can avoid what you just said by doing that, but you
cannot avoid doing--you cannot avoid that unless you are
willing to do those things.
I don't want to do that.
Mr. Matsui. Do you deny what I just said in terms of the
$11.7 trillion increase in the debt?
Mr. Shaw. No. I am not doing that. I am saying to you, over
75 years we save $100 trillion. We are legislating for the next
generation.
Mr. Matsui. No. What I am saying--Clay, what I am saying is
you deny what I just said, that the $11.7 trillion will be
added to the debt in the year 2034, 35 years from now, under
your proposal.
Mr. Shaw. I am not either confirming it or denying it. You
have figures in front of you. If you want to put your source in
the record, you certainly can.
Mr. Matsui. Well, you must have the numbers.
Mr. Shaw. I don't have those figures in front of me. There
is a period----
Mr. Matsui. I think it should be on the record by you. This
is your proposal.
Mr. Shaw. Well, that is your claim that it is $11 trillion.
And you can put your source in the record.
Mr. Matsui. May I ask you this question then: What will the
increase in the debt be in the year 2034 under your proposal?
Mr. Shaw. By the year what?
Mr. Matsui. Pardon me?
Mr. Shaw. Which year?
Mr. Matsui. Twenty thirty-four.
Mr. Shaw. It is about two and half trillion in 1999
dollars. It is about 11.7 trillion in the dollars out there.
Mr. Matsui. No. No. No.
Chairman Archer. That's accurate, Bob, but you are looking
at only a small segment of the entire picture. And you are only
looking at it in a vacuum, not compared to all of the other
possible answers to Social Security.
And it is only when you lay those side by side that you can
make a decision as to which is the best way to go. I would
prefer that any plan not in any way impact on the debt.
I would prefer that. But if we don't do anything, the
numbers are staggering as to what will happen to the debt. And
even under the President's plan, in the last 20 years, from
2055 to the year 2074, he has a shortfall of $76 trillion,
which will be an increase in the national debt--$76 trillion.
The easier part is to get to 2055. The tough part is to get
from there to 2074.
Mr. Matsui. If I may just, and I understand my time has run
out, but as the Ranking Member, if I could just seek a
privilege--I appreciate this and I appreciate what you are
doing. Here is what the problem is. You have a 75-year surplus,
but in the first 67 years of the 75-year surplus, you
accumulate massive debt.
And I understand what you are trying to do, but that is the
reality of the situation. And I also, my last comment, think
that this is much greater risk than what the President has
suggested, even though his only goes 45, 55 years. It is a much
greater risk.
Chairman Archer. But, Bob, to look at risk relative to
debt, which is a valid way of looking at this, the debt to the
Social Security Trust Funds is no less credible than the debt
to the public.
Mr. Matsui. I understand.
Chairman Archer. I don't think you would take that
position. And I don't take that position. It has to be paid
off. The debt service charges have to be paid off. They are all
the same.
They are all included in the debt ceiling. And just to give
you an example, because I don't have all the figures as they
project out, but by the year 2009, the President's plan
increases the debt under the debt ceiling, both public and
government held, by $7.2 trillion. Our plan increases it by
$6.6 trillion. So the risk under our plan on that analysis is
less than under the President's.
Mr. Matsui. My last observation is the fact that we do
start running major deficits after----
Mr. Shaw. I think it is important to point out that under
our plan all that debt is repaid, and then more, as you get
into the out years.
That is how you can reduce the payroll taxes in 2050, and
that is very important to realize. People really do not fully
understand how this Trust Fund works. When you put money in it,
you replace the money with Treasury bills, as you well know.
And the money comes out the other side.
So you still have that money. You can run it through 10 or
12 times if you want to. The critical point that we have to
concentrate on in this Committee in studying the various
proposals, is 2014 because that is when the trust fund has to
start cashing in the Treasury bills.
When the trust fund has to start cashing in the Treasury
bills because there is not enough FICA tax in there to create a
surplus or to even pay off the obligations of the trust fund,
tax dollars have to come in and be injected in order to pay off
those Treasury bills so that the Social Security Administration
can fulfill it responsibilities.
So we can talk about 2035 as to when the trust fund goes
broke, or we can talk about 2055 as to where the President
pushes the drop-dead date on the trust fund. But under the
President's plan as well as under existing law, tax dollars are
going to have to come into play in the year 2014 in order to
start retiring those Treasury bills to take care of the
obligation because the FICA taxes are going to remain steady in
the President's plan as well in the
Archer-Shaw plan.
And that is what is going to create a negative cash flow.
We need to keep our eye on the cash flow when you are talking
about Social Security reform. That is paramount.
And when the Treasury bills are exhausted really is
immaterial when you are talking about the cash that is going to
be necessary to come in and bail out the fund to take care of
its obligations.
That is, if you hold the line on existing benefits, and
that is what we want to do. And you indicated by the shake of
your head that you are not willing to cut benefits and that you
are not willing to increase payroll taxes. And I agree with
you.
So I think we need to work together. And if there is going
to be an alternative to this plan, we need to set that down as
our basic premise.
Chairman Archer. I think, too, for the basis of this very
important discussion, and I apologize for the time, but I think
you are on to a part of things that we need to consider.
But it is important for all of us to understand that the
numbers that we are looking at, that you referred to and that
are put out by CBO are all based on the assumption that every
surplus dollar will be used to pay down the debt.
Now, any one of these plans that uses surplus dollars to
save Social Security is taken away from what CBO projects will
be paying down the debt. Therefore, the debt will not really
increase from where it is today, it will just increase from the
baseline that CBO has assumed, which is not really a valid
assumption because we know that all those dollars are not going
to be used to pay down the debt.
We already spent $21 billion last year in the Omnibus
Spending Bill; we spent another $7 billion this year in the
supplemental bill. And there will be many, many other things
that will come to pass. And that money will not be used to pay
down the debt.
But if we are using the surplus that they assume will be
used to pay down the debt in their baseline to save Social
Security, of course the debt is going to go up.
Mr. Matsui. Thank you, Mr. Chairman; I appreciate it.
Mr. Crane. Folks, rather than proceed further at this time
since we have multiple votes coming up on the floor, the
Committee will stand in recess subject to the call of the
Chair.
[Recess.]
Mr. Crane. Will everyone please take seats, and in the
interest of time, because we have a lot of further inquiries to
be made of our distinguished witnesses, we will proceed. And
the next person to be recognized is Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. I really don't have
any questions at this moment, but what I would like to say is
that it was first referenced that there were no Members of the
other party involved in the preliminary proposal that Chairman
Archer and Mr. Shaw have brought forward, indicating that it
was a Republican position. There are Members of the
Subcommittee, of the Social Security Subcommittee who I know,
speaking for one, was not involved in the drafting or the idea
or concept that has been brought forth by Chairman Archer and
Mr. Shaw.
And the idea that Chairman Archer has put forth this
morning, the executive session of the Committee to discuss this
proposal and other proposals and how we might incorporate
different ideas to come up with a proposal that would be
acceptable by both parties and the White House I think is an
excellent idea and good opportunity for all of us to have input
into solving this problem, this future problem in Social
Security.
So I appreciate the opportunity and look forward to that
opportunity. And I must say I am very honored to be on this
Committee and having served with some very fine people on this
Committee on both sides of the aisle.
Thank you.
Chairman Archer. I thank the gentleman.
Mr. Crane. Mr. English.
Mr. English. Thank you, Mr. Chairman.
I want to congratulate these gentlemen on putting forward a
proposal which I said at the time really set the standard for
any other proposal in this debate. And I still feel that way.
I listened with great interest, Chairman Archer, to your
exchange with Mr. Matsui, and I thought it was a useful
exchange, but I think sometimes we get involved in arguments,
particularly on fiscal policy, that seem to reach right through
the heart of a question to seize upon the superficialities.
I think it is interesting how your proposal may affect the
national debt, but I don't think you can consider that in
isolation from how it also affects the national savings rate,
which puts the debt into a level of significance.
Can you quantify for us how much your proposal is expected
to impact on the national savings rate, and won't the transfers
that go to those participants in individual accounts directly
expand the national savings rate of this country?
Chairman Archer. Yes. I think that is an excellent question
and very, very important. The national savings increases by $44
billion--and these are real dollars, inflation-adjusted
dollars. We have been talking before about nominal dollars.
In real dollars, it increases by $44 billion over 10, $440
billion over 23, and $500 billion over 40, and $15 trillion
over 75 years.
Mr. English. These are changes of a scope that it is fair
to say would actually dramatically increased our national
growth rate.
Chairman Archer. I think there is no question. I think
almost every economist would agree with that. When I have
visited with Alan Greenspan, he has been very, very concerned
about the savings rate. And he is very supportive of the fact
that this will increase private savings and will be put to work
and invested in jobs and productivity. And if we want to be
able to have the answer ultimately in the next century to
Social Security and to maintaining support for our elderly in
general, whether it is Medicare or Social Security or any other
form of support for our retired elderly, we have got to
increase our savings now and we have got to increase
productivity in the next century.
And when we put more invested dollars to work through these
personal accounts, we have added tremendously to the initial
savings and also to the productivity.
Mr. Shaw. Mr. English, as to the first part of your
comment--just a few minutes ago before the break, Mr. Matsui
and I were involved in a dialog regarding the $11.7 trillion of
debt in 2034; it is important to know that that figure is
correct, but it assumes that we start borrowing immediately
even though we have a Social Security surplus for the next 15
years, which is not realistic.
And it is in nominal dollars only. It is about $2.5
trillion in 1999 dollars, and as a percent of the gross
domestic product, it is much less than what the debt is today.
I do think it is very important that that information be
added to the record. And since you brought the question of the
debt up, I thought this was a good time to insert that in the
record.
Mr. English. I thank the gentleman.
One last quick question I would like to pose to both of
you. You have offered a much broader range of investment
options under your plan for participants in individual accounts
than Mr. Kolbe and Mr. Stenholm have. Mr. Stenholm offered this
as a virtue to his claim. Do you feel that it is important to
offer, I believe under your plan, 55 different funds to
potentially invest in? Or do you think a narrower range of
investment options, as in the Kolbe-Stenholm plan, would be as
effective, more effective, and perhaps have lower
administrative costs?
Your comments?
Mr. Shaw. I will comment first. I think that the wide
variety of investment houses would be very wise here because we
are going to have wide-based investments. In other words, we
are not going to have people putting all their money in one
particular stock. Nor, philosophically, do we want the
investment philosophy or method of just a few investment houses
concerned here because it will have a dramatic effect upon
those particular stocks that that investment house is watching.
We need to be sure that the investment house is qualified.
In the Kolbe-Stenholm plan, or it may have been Senator Gramm's
plan, he put forth the qualifications and how that particular
investment house would be qualified by a sitting board composed
of someone from the SEC, the Secretary of the Treasury, and
several other people that he had in there.
It is important that they be qualified because we don't
want every stockbroker in the country going off with these
funds. So it is very important that we have qualified
investment houses.
But I think we need to have quite a few of them.
Chairman Archer. Can I make one correction to my answer on
the savings? The numbers that I gave you were the net national
savings. The great concern today is the dearth of net private
savings. And for net private savings, which is where we are at
an all-time low in the history of this country, the increase
would be $1.3 trillion over 10 years, $12.6 trillion over 30
years, and $138 trillion over 75 years.
Mr. English. That is extraordinary. I thank you, gentlemen.
Mr. Crane. Mr. Cardin.
Mr. Cardin. Thank you, Mr. Chairman.
Well, let me first applaud both of my colleagues for coming
forward with a plan that I think moves the debate forward, and
I agree with you and hope that we will be able to come together
with a plan to deal with Social Security in this Congress.
Let me just make an observation that I think there is a
common thread through many of the proposals that we have heard
both yesterday and, of course, the Archer-Shaw proposal.
Now if I could just quote from Congress Daily talking about
Congressman Stark's plan, and it said, quote, ``it is similar
to the
Archer-Shaw plan,'' end quote.
If others see these similarities, I think it is remarkable
that we don't see a way to bring this together, and I hope that
we will.
Mr. Chairman, I think that the Archer-Shaw proposal points
out the power of market investments over time. As to what we
can do by doing better on the return of the funds that we make
available in one form or another for Social Security, the Stark
proposal points out that there may be a more efficient way to
do it. And I think that is worthy of our Committee's attention.
I applaud Mr. Stark for coming forward with that, with less
risk to our commitment to reduce publicly held debt, which is
also a goal that we would strive for.
Mr. Nadler pointed out that it is easy to modify the
Clinton proposal to get the 75-year solvency if we are willing
to use the market investment strategy similar to what is in the
Archer-Shaw proposal.
And I applaud Kolbe-Stenholm and our U.S. Senators who were
here for pointing out that we do need to have some real private
savings accounts supplement Social Security, that the thrift
savings model is one that could work within Social Security,
that we need to be mindful of low-wage workers and their
ability to accumulate some wealth or some better income
security when they retire.
And that we do need to look at, what Chairman Archer you
keep pointing out, and I agree, the low savings rates in this
country.
Mr. Portman and I have worked on a bill that deals with
private savings and retirement because I do think that is a key
ingredient. Social Security was never meant to be the sole
means of income security. And I do think as we look at dealing
with Social Security that we need to be mindful of increasing
the savings in this nation and particularly with the low-wage
worker.
So let me just make an observation, if I might. First, I
would hope that as we look for solution, I think there are
three basic ingredients that come through many of the plans
that have been suggested.
First is committing the surplus that has been generated
through Social Security to dealing with the solution. The
Archer-Shaw plan does that. Many of the other proposals that
have been brought forward do that.
That we use market investment as a strategy to deal with
the long-term solvency of Social Security, somewhere between 40
and 60 percent of the dollars that are available will bring us
to that goal.
And that we include in the proposal real private accounts
to supplement Social Security in a progressive manner for low-
wage workers.
Mr. Chairman, I just want to make one more observation
because I think it is key if we are going to be able to come
together with the conclusion. And that is that our goal must
be, get 120 Republicans and 110 Democrats who are willing to
support the proposal.
I have a feeling that if we accomplish that, we are going
to get a lot more votes on both sides of the aisle. But if we
start off with the assumption that what have to get as
Democrats consensus within the Democratic Party, or as
Republicans within the Republican conference, that I am not so
sure we will succeed.
And I would just urge us to be willing to work frankly and
openly with each other to come to a proposal that will
accomplish the goals that we have all spelled out.
And, Mr. Chairman, I think that you have offered a
constructive proposal to lead us in that direction, and I would
hope that we would follow through with your recommendations to
have frank discussions to see whether we can't go the extra
yard to reach the conclusion.
And I applaud you for your efforts.
Chairman Archer. Well, I thank the gentleman for his
comments. You didn't ask for a response, but I am constrained
to respond briefly. The gentleman has always been willing to
pitch in and try to work on a bipartisan basis to solve
problems facing the country, and I am greatly appreciative of
that.
I would like to add, if I could, another couple of items
that should be benchmarks for whatever the ultimate solution
is. It should not leave cliffs at the end of whatever the
number of years are that it presumes to save Social Security.
That is truly unfair to the next generation.
I think we have got to have a system that once we have
projected it, and I think 75 years is the right number, if not
longer, but certainly under today's standards, that we don't
then have a projection that it falls off the cliff at the end
of 75 years.
If we were to do it only for 50 years, that it would not
fall off of a cliff at the end of the 50 years. I think that is
exceedingly important or we will not have done our job.
I also believe we need to be concerned about the unified
budget surplus and what impact any of these programs has on the
unified budget surplus because that is the basic macro
barometer that we have always got to keep in mind.
And third, although it may not be necessary, I would hope
that we could design a plan that would ultimately lighten the
burden on the workers of this country by reducing the payroll
tax while we accomplish our efforts.
That may not be essential to an ultimate bipartisan
solution, but I think it is highly desirable.
I thank the gentleman for his comments.
Mr. Cardin. Mr. Chairman, very briefly. Your first two
points I agree with completely. I think it is extremely
important that whatever recommendations we come out with, level
the exposure on Social Security and not create the type of bar
that we have seen that just presents problems in the future. I
think it is a very good point, and I would concur with that.
Mr. Crane. Mr. Portman.
Mr. Portman. Thank you, Mr. Chairman.
And I would like, in the absence of his colleagues being
here, to compliment Ben Cardin for, as the Chairman said, to be
willing to pitch in and having a constructive role to play in
the overall area of retirement savings on the pension bill,
H.R. 1102, but also on Social Security.
I am able to say it, Ben, because many of your colleagues
are not here to know how closely you work with us Republicans.
[Laughter.]
Chairman Archer. That might hurt him. Who knows?
[Laughter.]
Mr. Portman. Also to commend Bill and Clay for the work you
have done. As you know, I am very excited about this proposal.
I think it is the basis for the final plan. I really do.
I go back to what Mr. Stark said, and this is really for
his benefit. He is not here, but he talked about the
similarities, and then said, really, the big difference, as I
read what he said, was the, the efficiency issue, particularly
focused on administrative costs, and that it is more efficient
in essence just to take the general revenue Treasury surplus
and put it right into Social Security.
I would make one comment on that and ask for your response
to it at the end of my comment, which is that when you look at
this proposal, the 5.35 percent is actually inclusive of
administrative costs, and because of the pooling, which is
unique to this proposal, the administrative costs are minimal.
In fact, what Social Security has said, as you know is that
it will be 25 basis points, one quarter of 1 percent. I think
that is a little high because of the pooling.
But as Charlie Stenholm said yesterday, Bob Kerrey said it
in so many words, and Phil Gramm said it also, the
administrative costs and the efficiency issue and all these
questions depend on what kind of plan you have. And there are
various ways to do this, but what you have done is come up with
one where I think that issue is really resolved.
Second, I would say, in response to Mr. Stark, is that the
similarities, although they are great, really are not quite as
he described them, because where this plan is different is that
instead of just taking those general revenues, you are actually
getting not only the higher rate of return, and that is
significant, it is about 2.35 percent higher, and, again, I
think that is conservative, but also you are getting the power
of the compound interest that you don't get with the Treasury
investment.
And finally, the money is being put to work. Now that is
more intangible, but when the Chairman talks about the personal
savings rate, over a trillion dollars in 10 years and $55
billion in the national savings, those are SSA figures that
relate directly to that putting money to work, which is a
significance difference. It is a distinction with a major
difference between those two approaches.
So I would say that this is, again, a plan I would think
most Democrats should be able to embrace. And when you look at
it intellectually, in concept it is similar in terms of its
approach, but it has those benefits and it doesn't have the
negatives that some of the other plans might have.
And I would ask if the Chairman, or the Chairmen, could
respond to the administrative complexity side, and why you
structured the proposal as you did.
Mr. Shaw. Regarding the administrative costs, the way the
plan is structured once a year upon receipt of the earnings
reports through the FICA process the Treasury will make checks
payable to the investment houses as are involved in this.
Early on, when we were talking about individual retirement
accounts, there was a great deal of criticism about,
particularly, small accounts. But we have certainly done away
with that criticism because these will be qualified investors,
which will receive the checks once a year. And so the
administrative costs should be very, very little.
And also I think it is important to realize the
administrative costs on the employer will almost be
nonexistent.
Chairman Archer. Let me just add, too, the comment was made
yesterday that the costs of the Federal Thrift Savings Plan, 10
basis points, I believe, was the comment, which I have been
told in town meetings, well, tell me, what is 10 basis points,
is that 10 percent?
No. That is 10 percent of 1 percent. And, because of the
pooling and the aggregate dollars being so much larger than the
Federal Thrift Savings Plan, certainly it should be no more
than that, and in fact I have already inquired of a number of
investment houses and have been told that it would be roughly
10 basis points.
Mr. Portman. Well, that is exciting news too. And I think
in the last 10 years we have seen remarkable strides on the
private side, with our financial service institutions in
getting those basis points down because it is very competitive
out there. And there will be nothing more competitive than the
trillions of dollars in Social Security to be invested in the
economy.
And, again, the point is, the 5.35 percent is inclusive of
those costs in any case. So you can really truly compare this
to other proposals without worrying about the administrative
costs.
I wish I had more time, I want to ask you more about the
individual accounts, but again to just commend you both for
moving the ball forward and I think, again, putting together a
plan that is not only constructive to move the ball forward but
actually can be the basis for a final compromise.
Mr. Crane. Mr. Weller.
Mr. Weller. Thank you, Mr. Chairman and Mr. Chairman and
Mr. Chairman. I want to thank each of you for your leadership
on essentially what has been a logjam over the last few months
as people have been waiting for the other guy to go first, and
I want to commend you for your leadership.
I have been increasingly convinced that we should act this
year, and that this fall I hope we can move something and get
some legislation and move the process, hopefully, in bipartisan
way. And clearly your leadership, I think, is heading us in
that direction. And that is my hope.
I also want to build on Mr. Portman and Mr. Cardin's
statement regarding increasing the opportunity for retirement
savings. And perhaps, as we look at moving legislation similar
to yours this fall, or later this year, we can also look at
ways to combine with it some increased opportunities for
retirement savings, giving people increased opportunity to
contribute to their 401(k)s and their IRAs and address the need
to create catch-up mechanisms, which will help working moms
make up missed contributions while they are home with the kids
before they return to the work force.
Some ideas that I hope we do look at. But the question that
I want to address, you know, to Chairman Archer is, you know,
yesterday Mr. Stark made a couple of strong statements
regarding your proposal. And he used the term ``phony''
regarding individual accounts. And I was wondering if you would
address that point that he made.
Chairman Archer. Well, clearly, if you listen to the
explanation of the accounts, they are anything but phony. They
provide--it is provided under the law that they remain the
private property of the individual. And because we have
projections that Social Security will be saved forever,
hopefully that will give some degree of certainty to younger
people that there will be something there for them 50 years out
or longer.
But, if worse came to worst, there would still be real
wealth in their personal account that would be theirs. And that
would always be there for them. And I think younger people
could take heart that they are building wealth in these
personal accounts. And as we mentioned, if they are unfortunate
enough to die before retirement, then that is available to be
left to their heirs. I don't call that phony.
Mr. Weller. I remember the conversations I have had with
senior citizens and conversations I have with college students,
and I find the younger taxpayers and workers are, the less
confidence they have in the current Social Security system. And
I find the younger the worker is, the more interested they are
in the personal account idea because they recognize that is one
way that they can get something when it is their turn. And they
find that idea very attractive.
In your proposal, you have--if someone were to pass on
prior to making the decision to retire, you make the account
part of someone's estate to pass on to their heirs. But then if
they retired, it is no longer part of the estate. Can you
explain your decision process and why you took that approach?
Chairman Archer. Yes, because it is a retirement account,
pure and simple. And one of the concerns that a lot of people
have is, having watched our progress with IRAs, that it will be
invaded for other reasons, to buy a new home or for education
or for a lot of other desirable purposes. That should never
happen, cannot be permitted to happen with these accounts,
because they are retirement accounts, solely.
And that means that in order to have the certainty of
retirement, they must be converted into an annuity at the time
of retirement. Now each individual selects the time when they
want to retire. If they don't ever want to retire, and they
don't want to be given the guarantee of the Social Security
benefit, they can take that money and, at the time of their
death, leave it to their heirs.
But once they retire, our plan does require that it be
converted into an annuity with a fixed monthly benefit for the
rest of their lives. Now that means they are not gambling on
whether they will live less than average life expectancy or
more than life expectancy. You give up those rights when you
annuitize.
And, as a result, once you annuitize, there is nothing to
leave to your heirs. And I would relate it again to the Chilean
system, which a lot of right-wing conservatives believe is
better than our plan. In Chile, you have to convert to an
annuity when you retire. And there is nothing to leave to your
heirs once you convert to an annuity.
If you took your IRA plan today and you converted it to an
annuity so you knew you would have a fixed amount for the rest
of your life, no matter how long you live, there is nothing to
leave to your heirs.
But it is still your personal account. So when you get the
benefit of knowing you are going to get a fixed amount for the
rest of your life, you give up any option to be able to leave
anything to your heirs.
Mr. Weller. Quick follow-up on that: Do you have a minimum
age when you can choose to retire?
Chairman Archer. Sixty-two because our focus, again, is to
save Social Security. And we tried to make it as simple as
possible without adding a lot of new bells and whistles and
other things that many of the programs that we heard from
yesterday do. We don't want to lose the focus. And the focus,
being to save Social Security, does place 62 as the minimum
retirement age as the Social Security system does.
Mr. Shaw. I think it is important, too, to add that there
is a flexibility here. If somebody has a large retirement
account and they choose not to retire, period, they don't have
to. So just because somebody goes by these various age groups
doesn't mean they have to annuitize because they do not. You
can continue and hold the account until you die and then will
it to somebody. And it is done estate tax-free. There is no tax
involved in that particular transfer.
Chairman Archer. Yes, I tried to mention that earlier, but
Clay described it a little bit better. But if you decide you do
not want the guarantee of the Social Security benefit, you
don't have to retire. Your money is yours until the time you
die and you can leave it to your heirs.
But once you elect to retire and get the benefit of a
guaranteed Social Security benefit, then you annuitize, and at
that point, under any concept, private or public, you have
nothing left to leave to your heirs.
Mr. Weller. OK. Thank you. I see my time has expired.
Mr. Crane. Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman.
Chairman Archer, you have, on a number of occasions,
referenced the Greenspan Commission and your service. And over
the weeks that we have been debating the future of Social
Security and with all due respect to some of the proponents who
were here yesterday, I think they have forgotten the lessons we
have learned from the Greenspan Commission, and that is, as you
recall and recounted for us, raising the payroll tax and
cutting benefits is not the way for long-term solvency.
And I think, as someone mentioned, I think the American
people are either with us or ahead of us when they recognize
that the private sector, in witnessing the extraordinary
success from the private sector, that we can bring this into
this discussion. And so I also commend the two of you for
stepping up to the plate.
I do have a couple of questions that are similar to what I
posed to some of the witnesses yesterday.
Mr. Shaw, obviously, as the Chairman of the Social Security
Subcommittee and being very active regarding Ticket to Work and
the disability community in trying to move a bill that would
help tear down some of the disincentives for the disabled
community, what, if anything, does your plan do regarding the
disabled community because some of the plans yesterday affected
it.
Chairman Archer. We leave the current disability program
intact.
Mr. Hulshof. OK, with no changes at all? Is that right.
Mr. Hulshof. One of the things, too, that I asked Mr.
Stenholm, the Archer-Shaw plan is mandatory in the sense that
every worker who is paying into Social--who is paying into the
Social Security system, would get the refundable tax credit
that would go into the guaranteed account. What about these
retirement plans such as, Chairman Archer, in your home state
of Texas where groups choose to opt out or have chosen to opt
out of Social Security. Would they be brought back in under the
Archer-Shaw plan?
Chairman Archer. Only those people who have recorded
payroll in excess of $5,000 a year, which is the minimum to
qualify for Social Security today. In other words, the people
who qualify are the ones who currently qualify under Social
Security. And we don't change that.
Mr. Hulshof. Yesterday, one of the Members of our Committee
who presented himself as a witness, and I asked him pointed
questions because I knew that you would be here today. And I
attempted to get the gentleman from California to concede the
point regarding worker choice that your plan proposes. He was
very critical, and I couldn't get him to concede the point.
And so for the record, would you state what the Archer-Shaw
plan does regarding the ability of the worker to make any
direction or at least have any say as to how his or her payroll
taxes or this guaranteed account could be directed.
Chairman Archer. Well, first, every single plan that sets
up personal retirement accounts, everyone of them that you
heard yesterday, will tell you first you can't simply invest
this with your brother-in-law or anything you want to do with
it. But if you want to invest it, it has got to comply with
certain government standards and guidelines.
Now there are different ways to set that up, and that is a
detail that can be worked out. But within those standards and
guidelines set up by the government, the individual has
complete freedom of choice as to which entity he or she wants
to invest their money in.
A much broader range than the Federal Thrift Savings Plan
has. Similar in nature, but a much broader range.
Mr. Hulshof. Final question. Also yesterday, and I just ask
you to comment, because regarding a response again a Member of
the Committee who was a witness yesterday said something to the
effect that high-income people could benefit greatly but that
others would not. And I wanted to know what comment you might
have in response to that allegation that was made at
yesterday's hearing.
Chairman Archer. Well, first, let me say that one of the
benefits of our program is, we protect the progressivity of the
current system, which is very, very important. And we add to it
because the refundable tax credit actually scores as giving 63
percent of the benefit to people under $50,000 a year of
income. So we improve the progressivity, if you look at both
together, which are part of the solution to Social Security, we
improve the progressivity of the current system.
That is number one. That is important to understand. And in
so doing, we don't change in any way that progressivity, which
would be required if you began to tinker with the bend points
and this sort of thing, which is part of some of these plans
that we heard from yesterday.
Now, obviously, people who are at a $50,000 to $70,000
annual income are going to get more into their account than
someone who is making $20,000 a year because the 2 percent
applies across the board. But according to the projections of
the Social Security actuaries, and they picked the 5.3 percent
annual return after administrative costs, as Congressman
Portman said, they picked that number. We did not. They said
that is a realistic number that we can have confidence in over
75 years.
Then no income worker in any category up to the wage limit
will get enough money out of their account to exceed the
promised Social Security benefit.
So it is not possible under their projections to justify
the comment of some of the Minority on this. However, if you
were able to see an average market return of 6\1/2\ percent,
slightly over 1 percent more than what Social Security has
projected, then some of the accounts would get above the Social
Security benefit level. And those accounts would be toward the
higher range.
Again, remember we are only, we are talking about people
who aren't making in excess of $74,000. Now that is above
average for American families, but that is not a rich category.
Mr. Hulshof. Thank you.
Mr. Crane. Mr. Tanner.
Mr. Tanner. Thank you, Mr. Chairman. I would like to ask at
this point unanimous consent to submit a letter that
Representative Kolbe and Stenholm have asked to insert in the
record.
Mr. Crane. Without objection, so ordered.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T2789.038
Mr. Tanner. Thank you. I would like to thank Chairman
Archer and Mr. Shaw for these 2 days. I think that it has been
instructive and constructive. I believe that there is more
public awareness now and really more general agreement about
the nature of the problem and the fact that something has to be
done.
And there has also been testimony and acknowledgements from
all quarters that working together we can come together with
some approach--savings rate, increasing the savings rate,
wealth creation are constructive. They are all part of the
equation, and your plan certainly is strong on that. Some of us
have worried about increasing the Nation's debt with respect to
how we fix this one problem. And it is part of the whole
picture, as we have heard testified here before.
I believe that with further work and consultation, with the
individual retirement accounts certainly being on the table and
part of the solution, that you all have set the stage for
something good to happen here. And I look forward to working
with you to try to make something good happen.
Thank you.
Chairman Archer. I thank the gentleman, and I thank the
gentleman for his continued interest, which has been ongoing
for several years now in trying to realistically solve this
problem and being willing to make tough decisions. And you
stand apart from a lot of our colleagues in that regard.
Mr. Crane. Mr. Lewis.
Mr. Lewis of Kentucky. Mr. Chairman, I would like to thank
you and Mr. Shaw for putting forward this plan. And you have
already answered the question that I had that Mr. Hulshof asked
about the retirement that are outside Social Security. But I
guess the only problem and question that I would have now would
be that this is such a straightforward, simple, commonsense
plan that I wonder how it can possibly be passed. [Laughter.]
Thank you for your hard work and effort on this.
Chairman Archer. Thank you.
Mr. Crane. Mr. Foley.
Mr. Foley. Well thank you very much, Mr. Chairman, and
gentlemen for being here today. I was hoping Mr. Stark from
California would be with us for this session because yesterday
he took some detail and mentioned that the Shaw-Archer plan had
phony accounting and was a ruse. And yet, when asked by Mr.
Weller to describe the President's plan, he said I am not here
to advocate the President's plan or to describe it.
So, I, as a Member, would like, if I could, to request Mr.
Stark to give us an analysis, similar to the one he provided of
yours, of the President' plan that he has laid before Congress,
merely for comparison.
With that being said, and I am not certain if you have
added your responses to that charge yesterday into the record,
but I would like to do so today because I think you fairly
adequately explain where he has raised some, if you will, phony
allegations, ruses in your plan. And I think you have
demonstrated clearly a very, very significant outline of your
plan.
I think there are a number of things that America can look
proudly at in your plan, and I think one of the things that I
want to highlight, and Mr. Shaw brought it up earlier, first
and foremost, the date that we would expect to start seeing
excess going and out and coming into the system. And I believe
you illuminated that to be 2014. Correct?
Mr. Shaw. Right.
Mr. Foley. The other thing I wanted to highlight, which you
clearly do in your plan, is the effects on the national economy
in the out years, the fact that you have not only increased
national savings but you then allow the economy to share in
that benefit, if you will, because people will be spending
more.
The final thing, and if you would highlight that for me,
and also, I think, what you illuminated, which was very, very
significant, the fact that if you are finally capable after
retirement to forgo that annuity, then you have, in essence,
built up a lifelong opportunity for your children and
grandchildren by transferring all those years you have made as
payments.
Sometimes in this capital I find people talking about
Social Security as if it is not the recipient's money, that it
is manna from heaven.
So if you could kind of talk about both the effects on the
national economy and, particularly, the impacts again, where
you can take that asset and give it to your children,
grandchildren, spouse?
Chairman Archer. I think you have adequately articulated
it, and done very well. And I would appreciate it if you would
enter in the record the explanation that responds to Mr.
Stark's comment.
Mr. Foley. I will. And the other thing I want to make
available, which I do not have today but will make available,
there are some very, very significant editorials, if you will,
in newspapers that represent the communities of both Mr. Shaw
and myself, the Palm Beach Post Times and the Sun Sentinel, who
have been glowing in their praise of your report.
Mr. Shaw. The Miami Herald.
Mr. Foley. And the Miami Herald. Those are three newspapers
that we obviously at times come in conflict with based on
editorial philosophy. But in this particular setting, when most
people are afraid to talk about Social Security, the Post, the
Miami Herald, and the Sun Sentinel have praised the initiative,
have given what I think are glowing praise of both the word
product and the ultimate outcome of what will occur.
And so I think that needs to be made a part of the record.
Because it is not just Republicans or Democrats commenting on
the Archer-Shaw plan, it are editorial writers who are looking
for the seniors, particularly in my community, I am the
seventh-oldest senior community in America out of 435
districts. So Social Security matters.
So I guess that wasn't a lot of questions. It was more for
the record. But if Mr. Shaw wants to comment and if agrees to
allow me to submit those editorials to the record.
Mr. Shaw. I think that would be very fine, and I am sure
the Chairman will certainly be favorable toward inclusion of
those editorials.
These are newspapers of very wide editorial opinions, it
runs the full gamut, and I hesitate to try to describe any one
of those editorial philosophies, but they are quite different
from each other in the endorsement of candidates and the
endorsement of ideas.
[The information follows:]
[GRAPHIC] [TIFF OMITTED] T2789.039
[GRAPHIC] [TIFF OMITTED] T2789.040
[GRAPHIC] [TIFF OMITTED] T2789.041
And I think that simply shows that when you go and explain
the common sense of what we are trying to do, that it is very
understandable. And I think the newspapers all across this
country should be looking for positions with regard to the
Social Security disaster, pending disaster, that is out there.
They are quite correct. And we need to continue to look at
that year 2014 because that is where the train wreck starts.
And the entire train falls off of the track and into the river
as you get further down the chain. But it would be a terrible,
terrible mark on this Congress if we walk away from this thing.
Our grandchildren will curse us for it. We have the
opportunity to do this, and to do it with a minimum amount of
pain--actually no pain--to be able to commit some of the
surplus Social Security dollars right now that are coming in to
plan for the future, to front-load this.
And the solution that Chairman Archer and I have proposed
saves it for all time. You know, we keep talking about the 75-
year figure. That 75-year figure is only because that is as far
as the Social Security Administration goes. But in reality, the
Archer-Shaw plan solves Social Security for all time. In fact,
it even solves it to the point that when you get into the later
years, future Congresses will have the ability, if they choose,
to reduce the employment tax.
And that is the toughest tax of all, particularly for the
low-income people. That is a wonderful legacy for us to be
leaving, instead of a pile of bills and a disaster for the
payroll.
When you look at what is happening in Europe and other
countries and the disaster that they have run into, we have the
ability right now to solve the problem. That solution is in our
hands.
I don't criticize anyone who has come forward with a plan.
I think they are all well meaning. There are different
philosophies involved. I think ours is the best, but some of
the other people who have proposed plans believe that theirs is
better.
But, in any event, I think we need to come together, and we
need to be very careful not to criticize each other's plans but
to really celebrate the fact that there are a variety of plans
out there that we can look at.
Chairman Archer and I simply believe that the best way to
go is without cutting benefits or increasing taxes in any way.
We strongly believe that. And we will be in there pitching for
our plan.
But I think both of us have an open mind for change, for
any suggestions that the Minority party might have or any
suggestions that may come forth from the Republican Party.
There is not unanimity in the Republican Party on this, and we
have seen some of the people who usually--these organizations
that are on the conservative side--have taken some potshots at
us. I think unfairly, but they are certainly entitled to do so.
And they have carried with them, I am sure, some negative votes
on the Republican side. Likewise, on the liberal side.
But I think what is going to happen here is, it is going to
take the centrists in both parties to come forward and solve
this thing and get this thing done and get it behind us. And we
need to do it in this Congress.
I thank you for your comments, Mr. Foley.
Mr. Crane. Well, I want to congratulate both of our
witnesses on the outstanding presentation you have made today.
And to just reinforce what you have said, that the solutions to
this problem are not partisan I mean, it has nothing to do with
Republicans saving Republicans or Democrats saving Democrats.
It is trying to save the program in the interest of the
American people, whether they are registered voters or not even
voters.
And in that sense, I think you have done an outstanding
job, and you both deserve enormous commendation. And with that,
I will let you two, as witnesses now, come back up here on the
panel and resume your Chairman titles.
Chairman Archer. Mr. Chairman, before we do that, may I
just briefly close by saying something that I intended to say
earlier and failed to do?
Mr. Crane. Yes, indeed.
Chairman Archer. The President of the United States
deserves to be complimented for making us focus on this issue
and with the concept of saving Social Security now as being
predominant. And we should not be so partisan that we do not
recognize that he has made a contribution to this effort in
that regard.
I believe also that we should never lose the focus as we go
through this deliberation, and that focus should be to save
Social Security. Many see this as an open door to add all kinds
of new things and new concepts and, oh, we do these wonderful
things. But every time you do it, you lose something. And we
should focus entirely on saving Social Security in the best
possible way. And I believe that is what we have done. And I
hope that we can proceed from this model on a bipartisan basis
to see a resolution signed into law.
And I thank the Chairman.
Mr. Crane. Well, I think we can anticipate that, and Jack
Valenti reassured that his next movie is ``Saving Social
Security.'' And you are the featured stars. [Laughter.]
I now would like to invite our next witness to come to the
dais, Steven Goss, Deputy Chief Actuary, Office of the Chief
Actuary, Social Security Administration.
Chairman Archer [presiding]. Mr. Goss, welcome. I have
already publicly complimented you, and I do so again. You and
your staff have done outstanding work to help us along in this
process.
And contrary to what many Members would like to assert,
including myself, by the way, that we know better than the
estimators and that they are really wrong and they haven't
considered this and they haven't considered that. And I have
criticized frequently over the years the estimates of the Joint
Committee on certain tax proposals.
The reality is, we must accept one standard on which we
act, irrespective of what our own subjective discretion might
tell us. And for the purposes of Social Security, you are that
standard. And any plan that is adopted must meet your standard.
And Members might want to argue with it, but we should
establish early on that that is the barometer that all of us
must comply with.
So, I welcome you today and thank you again. And we will be
pleased to hear any testimony that you would like to give us.
STATEMENT OF STEPHEN C. GOSS, DEPUTY CHIEF ACTUARY, OFFICE OF
THE CHIEF ACTUARY, SOCIAL SECURITY ADMINISTRATION
Mr. Goss. Thank you very much, Mr. Chairman and Members of
the Committee. It is truly a pleasure to be here today,
especially following, Chairman Archer. It is truly an honor.
I have some prepared written comments to be submitted to
the record--I would just like to make a couple of brief
comments.
Chairman Archer. Without objection, your entire written
statement will be included in the record.
Mr. Goss. Thank you. I am here today to discuss with you
the nature of the estimates that we make for the status of the
Social Security Program on a financial basis and for proposals,
especially the proposals that you have been discussing for the
last day and a half.
The Social Security Act requires that there be submitted,
the Trustees of the Social Security system submit an annual
report to the Congress providing estimates of the financial
operations of the program over the next 5 fiscal years as well
as provision of the actuarial status of the program.
This actuarial status has been determined over the years to
be interpreted as an assessment of what the financing of the
system appears to be over the next 75-year period, something
that has been discussed to a fair extent already today.
Our purpose at the Office of the Actuary of the Social
Security Administration is to try to provide the most objective
possible analysis we can for the present-law system as well as
the legislative proposals that are put forth by Members of the
Congress, as well as the administration.
I appreciate very much your comments, Chairman Archer, of
appreciation. We are doing our best, and hopefully this will
play some small role in providing the information that
policymakers like all of you need in order to come up with a
very good solution for Social Security for the future.
The current status of the Social Security system, as you
know, leaves us with 44 million beneficiaries currently
receiving benefits that are provided by about 150 million
current workers paying taxes into the system.
As already mentioned, there are generally three dates that
people focus on. Under the current-law financing of the system
and under the current intermediate assumptions of the Social
Security Trustees' Report, the first date is, of course, 2014,
at which time taxes coming into the system will first become
insufficient to pay for the annual cost of the system.
The second date is the year 2022, the year in which the
trust fund dollar amount will reach a peak and will begin to go
back down; you might refer to that as the year in which taxes
plus interest on the trust fund become insufficient to pay for
the current cost.
And the third date is the year 2034, the year in which even
with access to the moneys in the Social Security Trust Fund and
the ability to redeem those bonds, Social Security will not
have sufficient money to pay benefits on a timely basis.
You should keep in mind, of course, by way of getting a
sense of the magnitude of the financial situation of Social
Security as of 2034, that the tax revenue coming into the
system will represent about 71 percent of the cost of the
system under present law.
The measures of the system that have been developed over
many, many decades are currently represented in the Trustees'
Report. First and foremost, and certainly most basic, in terms
of looking at the ability to pay these benefits over a 75-year
period is whether or not the Social Security Trust Funds will
become exhausted. Taxes are insufficient coming into the system
and there is not a trust fund to draw upon, because without
borrowing authority, Social Security would not be able to pay
full benefits on a timely basis.
So the first and foremost measure certainly is the
exhaustion of the trust fund. But the most widely and commonly
looked at measure for the system is the so-called actuarial
balance or the actuarial deficit, as has been discussed earlier
today, which is estimated at 2.07 percent of the taxable
payroll (the expected taxable earnings) over the next 75 years.
One can interpret that as requiring a tax-rate increase of
2.07 percent, or any other change that would have equivalent
value, in order to make benefits payable over the next 75
years.
A third measure which has come into more interest and more
importance I think in very recent years, starting with the
1994-1996 Advisory Council on Social Security, has been a
matter of looking not just at the ability of the trust funds to
pay benefits in full over the full 75-year period, but also
looking at what the financial status of the system is at the
end of that period.
The best measure we have been able to come up with, for
portraying this, is the stability of the trust fund ratio; that
is, whether or not the trust funds are growing at about the
same rate as the outgo of the system. And when that test is
met, as Chairman Archer has mentioned and Chairman Shaw also,
then we are in a situation where the system will be not only
solvent over the 75-year period but will be in such a position
for the indefinite future.
You have been discussing 10 different plans over this past
day and a half. We have done actuarial estimates for all of
those plans, and all of them have been found through the
intermediate assumptions of the 1999 Trustees' Report to meet
solvency over the 75-year period. Although all of them do meet
the solvency criteria as laid out, these plans differ in many,
many ways as you all well know.
And I am very happy to be here today and will be extremely
happy to attempt to answer any questions you have.
Thank you.
[The prepared statement follows:]
Statement of Stephen C. Goss, Deputy Chief Actuary, Office of the Chief
Actuary, Social Security Administration
Mr. Chairman and Members of the Committee, thank you for
the opportunity to describe the work of the Office of the Chief
Actuary in assessing the plans to reform Social Security that
have been developed by Members of Congress.
The Social Security Act requires that the Board of Trustees
report annually to the Congress providing the expected
operations and status of the Old-Age and Survivors Insurance
(OASI) and Disability Insurance (DI) Trust Funds for the next 5
fiscal years and ``a statement of the actuarial status of the
Trust Funds.'' The Office of the Chief Actuary works with the
trustees in the development of this annual report of the
financial status of the program under present law.
In addition, the Office of the Chief Actuary provides to
the Administration and to the Congress estimates of the
financial effects on the Social Security (OASDI) program of
potential or proposed legislation. The mission of the Office of
the Chief Actuary is to provide objective analyses that will
permit policymakers to make informed decisions about the future
of the Social Security program.
Current Financial Status of The Social Security Program
The Social Security program currently provides monthly
benefits to more than 44 million individuals. The primary
source of financing is a payroll tax on the nearly 150 million
workers in covered employment. Tax revenue currently exceeds
the cost of the program, so the trust funds are growing. Trust
funds are currently almost twice the size of the annual cost of
the program, and growing.
Based on the intermediate assumptions of the 1999 Trustees
Report, tax income to the OASDI program is expected to exceed
cost until 2014. The combined OASI and DI trust funds are
expected to continue growing until 2022. The combined trust
funds are then expected to decline until they are exhausted in
2034.
At the point of trust fund exhaustion in 2034, continuing
tax income is expected to be equal to 71 percent of the cost of
the program.
Measures for Evaluating the Long-Range Actuarial Status of Social
Security
The Social Security program is a complex system developed
more than 6 decades ago to provide monthly benefits that offer
what has been referred to as a ``floor of protection'' against
loss of income due to retirement, death, or disability. The
program provides a blend between individual equity and social
adequacy that has evolved through the judgement of several
generations of policymakers.
Both Annual Trustees Reports and estimates by the Office of
the Chief Actuary for legislative proposals focus primarily on
the financial status of the OASDI program. Because current
program financing is expected to be adequate for the full
payment of benefits on a timely basis for over 30 years, I will
describe the criteria used for evaluating the ``actuarial
status'' of Social Security over the long run.
The actuarial status of the OASDI program is evaluated over
a 75-year, long-range projection period. This period provides a
view of the adequacy of financing over the entire lifetime of
virtually all current participants in the program, from the
oldest beneficiaries to the youngest workers. This period also
provides the opportunity to view the full, mature financial
effects of legislative proposals that may take decades to
become fully implemented.
The most fundamental criterion for evaluating the financial
status of the OASDI program is its ability to pay full benefits
in a timely manner. The inability to do so is indicated by
expected exhaustion of the trust funds within the 75-year
period.
Perhaps the most commonly used measure of long-range
solvency of the OASDI program is the actuarial balance. This
measure indicates the size of the difference between expected
financing and cost for the program over the 75-year period, on
a summarized present-value basis. An actuarial balance of zero
indicates that financing over the 75-year period is equal to
the expected cost of the program, with enough left over for a
trust fund balance at the end of the period equal to the annual
cost of the program.
The actuarial balance is expressed as a percentage of
taxable payroll over the 75-year period. Under the intermediate
assumptions of the 1999 Trustees report, the estimated
actuarial balance is -2.07 percent of taxable payroll. Because
this balance is negative, it is referred to as an actuarial
deficit.
An additional important measure for evaluating the
actuarial status of Social Security is the stability of the
financing at the end of the 75-year period. Financial stability
is achieved at the end of the period if total program income is
sufficiently meets the costs of the program and maintains
stable trust fund reserves. Stability of trust fund reserves
means that the trust fund balance expressed as a percentage of
the annual cost of the program (the ``trust fund ratio'') is
essentially constant.
At the request of the Chairman and other Members of
Congress, the Office of the Chief Actuary has assessed a number
of plans to reform Social Security. While many of the plans
would bring the Social Security program into long-range
actuarial balance, the plans are all different to some degree.
The Office of the Chief Actuary will continue to work with the
Administration and the Congress as policymakers develop and
consider these, and any additional plans, for addressing the
long-range financing issues facing the Social Security program.
I will be happy to answer any questions.
Chairman Archer. Thank you, Mr. Goss, and I will inquire
for a few minutes. I apologize that I have got a meeting at 1
o'clock and I will have to leave, and thereafter Mr. Shaw will
preside.
There has been a lot of discussion about why 75 years, and
some Members of the Committee have made light of it and said,
well, let us talk about 150, or why don't we talk about 200, or
maybe only 50 is enough.
Since you have been working with this, and you have the
responsibility, what is the relevance of using 75 years as a
benchmark for Social Security's long-term solvency?
Mr. Goss. The 75-year period is a number that I believe was
introduced into the Trustees' Report around 1972 as the defined
long-range period. The fairly well-known rationales for seeing
this as a very appropriate period are, first of all, this is a
period that is long enough to generally encompass the remaining
lifetime of all current participants of the program, that is,
people not only receiving benefits, but people who have already
contributed to the program.
If you take for example some of our youngest contributors
in their late teens or age 20; most of those people can expect
to live to no longer than about age 95, which would be 75 years
from today.
So, first of all, the 75-year period is long enough to
encompass the remaining lifetime for virtually all of the
current participants in the system.
Another reason why we believe the 75-year period is a very
important period to look at, is that when considering not only
the effects of past legislation, but also the effects of
legislation that we are looking at today and we will be looking
at in the near future, much of this legislation takes a number
of decades to evolve and to mature and to have its full effect
on the system.
One remark I would make about looking beyond the 75-year
period is that there have been estimates made in the past going
into perpetuity. Many of the measures we look at under Social
Security, like the actuarial balance if looking into
perpetuity, would begin to have far less meaning for a
technical reason. This is because the cost of the program rises
at very nearly the same rate as the discount rate which is the
interest rate on the Trust Fund Special Issue bonds.
As a result, if we were to do an actuarial balance
calculation into perpetuity, we would essentially get a measure
of what the balance looks like at about the 75th year alone.
And it would not be a measure that would effectively reflect
what is happening over the course of the next 75 years.
The only other point that I would make is that many people
have remarked that they think 75 years is an extremely long
period of time to look at because of the uncertainty. I think
part of the reason for a compromise of staying at 75 years is
that to go farther becomes even more uncertain in terms of our
ability to really see with any clarity what will happen in the
future; whereas, to look at a shorter period of time would not
leave us in a position to see the remaining lifetime of current
participants and to be able to fully see what the effects of
the proposals would be.
Chairman Archer. But 75 years has been the standard as to
whether Social Security is solvent. That has been used since
1972.
Mr. Goss. That's correct.
Chairman Archer. I remember serving on the commission in
1982, and we were charged with meeting a 75-year responsibility
in 1982. And as I have mentioned before, one of the reasons
that I opposed the ultimate suggested solution, one of the
reasons was because I didn't think it saved the program for 75
years.
And as I have mentioned before, sadly enough, I was
correct. But I hope we can do a better job when we adopt our
solution this time.
I have one other question, and then I am going to yield the
Chair to Congressman Shaw.
During yesterday's hearing, one of the witnesses kept
referring to private market investment. I don't mean a Member
of the Committee, but one of the witnesses kept referring to
private market investment as, quote, ``gambling with Social
Security,'' unquote.
Is it reasonable to expect that private market assets will
continue to yield higher rates of return than Treasury bonds
over a long-term investment horizons? And are you aware of any
model or any economist or any actuary that projects
differently?
Mr. Goss. I am not aware of anybody who would contest the
suggestion that returns on private securities, especially
stocks, will, on average, in the future exceed the rate of
yield that one should expect on government bonds.
I think the appropriate remark that people do make is that,
as in the past, the year-to-year variability in the returns
that one might expect from the stock market will almost
certainly be greater than for bonds. But the expectation that
the yield on stocks will exceed the yield on bonds over long
periods of time I think is not contested.
Chairman Archer. Well we, unfortunately, as a democracy
normally look at a long-term problem as that which lies between
now and the next election, but for Social Security, it is
essential that we project long term.
And you have explained why we need to look at 75 years. And
when you do project long term, then you have to look at
returns, although they might fluctuate in the short term in the
way of averages because it is truly a long-term program.
And I thank you for your comments. Again I thank you for
your good work. And I apologize that I am going to have to
leave.
But it is important that Members ask probing questions and
get your responses on the record so that that will be available
for analysis as we move forward with our effort to solve this
on a bipartisan basis.
And, again, I thank you.
Mr. Shaw, will you preside?
Mr. Shaw [presiding]. Mr. Houghton.
Mr. Houghton. I would like to ask a question. I am looking
at table 1, and if I understand it, that the income rate starts
getting below cost in the year 2015 and then continues to 2030.
And then the income rate increases, starts increasing, and then
it gets over cost in the year 2044.
There is a 5-year period there when the income is over
cost, and then from the year 2050 it goes below. Maybe you can
explain that to me. And it continues ad infinitum, the cost of
over-income for the rest of the period.
Mr. Goss. Thank you very much, Representative Houghton.
Yes, I think I can do that.
When you are referring to table 1, you are referring to
table 1 in the memorandum that we did, I believe, for
Representatives Archer and Shaw's plan.
Mr. Houghton. Yes.
Mr. Goss. The column that you are talking about, this
annual balance, represents in effect what the difference
between tax income and benefit outgo is under the Social
Security system.
Mr. Houghton. Right.
Mr. Goss. Included in this column also is another item
which is the amount of money that would be transferred back to
Social Security as proceeds from the Social Security Guarantee
accounts. And that is actually included in the far left column,
which is referred to as cost rate, and it is the reason why the
cost rate shows up lower than under present law.
Now, the specific point that you make about the fact that
in the year 2044 our tax income reaches the point where it is
exceeding the net cost of Social Security for that period and
then it drops in the year 2050 is due to the fact that the
specification of the proposal is that as of 2050 the FICA
payroll tax rate would be reduced by 2.5 percentage points.
Mr. Houghton. And then another one in 2060?
Mr. Goss. And then another one in 2060. If the FICA tax
rate were retained at the full 12.4 percent, then the positive
values you see for the annual balance, the cash-flow positives,
would continue on into the indefinite future.
Mr. Houghton. But help me on the numbers. If it is going
the wrong way, because you have had a price cut or a cost cut
as far as the FICA taxes, doesn't that ultimately catch up with
you, or is the offset from the trust fund reserves so great
that it makes up the difference?
Mr. Goss. That is exactly correct. What is happening is
that, as you will see in the next column over showing the trust
fund ratio, as has been discussed here so far today, there is a
desire to keep the level of the trust fund growing generally at
about the same rate as the rate of growth of cost of the
system.
Because the cost of the system is growing at a rate that is
in fact slower than the yield or the interest rate on trust
fund assets, in order to maintain the trust funds growing no
faster than the cost of the program, it is in fact necessary,
to utilize some of that interest that the trust funds are
yielding in order to pay the benefits for the program.
If, for example, we were to maintain this annual balance
column at zero or higher, then our Trust Funds would simply be
growing very rapidly in the future because all of the interest
earnings in the trust funds would be retained within the trust
funds and they would continue to compound.
Mr. Houghton. And so in fact that in the year 2050 and in
the year 2060 we have an insurance policy. You don't have to
reduce those, the FICA taxes?
Mr. Goss. The plan would not have to reduce those FICA
taxes as of the year 2050 and 2060. You are correct.
If it did not, then the amount of bonds in the Social
Security Trust Funds would be growing very, very rapidly at
that point under current assumptions.
Mr. Houghton. OK. Now let me just ask you one other more
general question. You know, we have heard all the details, and
we have been going around these things for a day and a half
now. What is the big risk?
Mr. Goss. The big risk? Under what plan?
Mr. Houghton. This.
Mr. Goss. Under this plan?
Let's see, when we talk about risk, I think what you are
probably referring to is the notion that any of the plans, in
fact--I think it has been stated that 9 out of the 10 plans you
have been considering for the last two days--introduce
something really that is new to Social Security. This is the
notion of having advance funding with a portion of that advance
funding invested into the equity market, into stock.
We do know clearly that stocks are more variable in their
return and maybe somewhat less certain in terms of what their
average return will be in the future as compared with some of
the other assumptions that are made by the trustees for the
Trustees' Reports.
I think it is probably----
Mr. Houghton. Are you saying that the biggest risk is the
fluctuation in the market?
Mr. Goss. I would suggest that the biggest risk, given this
proposal put forth as legislation, to failing to meet Social
Security solvency, would be a failure of the markets to achieve
the yields that had been assumed on an expected basis over the
next 75 years.
As you have seen in this memo, we did do a sensitivity
analysis, which suggested that if the market yields are lower
by a full percentage point, then the result would not be as
favorable as of course we would expect.
Mr. Houghton. Well, I would submit, and if I could just
take a minute longer, Mr. Chairman----
Mr. Shaw. Go ahead.
Mr. Houghton. I would submit that the biggest risk is not
that. I would say the biggest risk is that we continue or
accelerate our spending as a government to the point where we
are unable to borrow the type of money which is going to be
needed in the interim. And so the important thing to me is that
we recognize these numbers and recognize that we are going to
be taking a big gamble here in the interim years. But it comes
out all right if we don't exaggerate our spending in other
areas.
Mr. Goss. Very good point.
Mr. Houghton. Thank you very much.
Mr. Shaw. Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman.
Mr. Goss, in looking at the Gramm plan and comparing it to
the Archer-Shaw plan, I would like to know from an actuarial
standpoint and if you feel qualified to speak from a budgetary
standpoint, what is the difference between carving out 3
percent from payroll taxes, as the Gramm proposes, and simply
infusing 2 percent from general revenues into private accounts?
What is the difference between those approaches in terms of
the Federal budget, the unitary budget surplus? Is there an
advantage of one over the other in the short term in so far as
accumulation of national debt is concerned? Can you address
that?
Mr. Goss. First of all, Mr. McCrery, let me suggest that on
the Gramm plan, as we understand it, and we have developed
estimates for it, the plan would not be what we might refer to
as a ``carve-out,'' initially at least. The contributions,
which start out actually at above 3 percent of taxable payroll,
more on the order of 4 percent in the very early years,
dropping down eventually to 3 percent, would be initially paid
for from the general fund.
And I believe the mechanism is that the money would be
provided from the trust funds but with reimbursement from the
general fund of the Treasury.
So the net cost, in fact, is borne out of the general fund.
Under Senator Gramm's plan, however, as seen in our memo, there
is a point in time at which the transfers back from the
individual accounts to the Social Security system result, much
as with Chairman Archer and Shaw's plan, in a point where the
cost to the system is being more than met by current taxes plus
the amount of money being transferred back from the individual
accounts.
And similar to the Archer-Shaw plan, Senator Gramm has
suggested, although I don't know if he has actually locked this
in, that one thing that could be done with the excess tax rate
situation we have is that we could redirect a portion of the
Social Security 12.4 percent FICA tax rate to cover the cost of
the contributions to the individual accounts. In effect,
starting as early as the year 2000, a portion of the individual
accounts contributions would be covered from Social Security
FICA taxes.
And, in fact, there are the intermediate assumptions of the
Trustees' Report where it would be possible, I believe in the
year 2040, to have the entire 3 percent covered from what we
might refer to as a ``carve-out'' from the Social Security
system.
Mr. McCrery. What year was that?
Mr. Goss. The year 2040. And in 2040 we would reach a point
where the cost of the Social Security system would be such that
the FICA tax that is directed to the OASDI Trust Funds could be
reduced by 3 percentage points below the 12.4 percent level,
which would mean that, at that time, that 3.0 percentage points
of the FICA tax rate, if still in effect, could be redirected
to handle the cost of the individual account contribution.
The alternative, of course, is that the 3.0 percent could
be used to lower the FICA tax rate, in which case the entire
burden of paying for the individual contributions would remain
on the general fund.
Mr. McCrery. So, are you saying that there is essentially
no difference in terms of the macroeconomic effect of the two
approaches, at least between now and 2010 or 2020?
Mr. Goss. I think in comparing these plans, I would agree
with you, they appear to be fairly similar in that regard. The
one difference is more quantitative than qualitative and that
is that the Gramm plan has somewhat higher contributions
starting out a little over 4 percent equivalent of payroll,
relative to the 2 percent under the Archer-Shaw plan. It
eventually goes down to 3 percent. But I think that would be
the primary difference initially.
Mr. McCrery. In your calculations, have you taken into
account--well, let me stick with the Gramm plan. Real quickly,
I understand that for purposes of your calculations, you
assumed 100 percent participation in the voluntary private
accounts. Is that correct?
Mr. Goss. That is correct.
Mr. McCrery. Why did you make that assumption?
Mr. Goss. In the case of the Gramm plan, as we understood
it, and I am hoping our understanding is still current, the
nature of the plan was such that, for people who were
participating in the plan and having one of the individual
accounts put forth, these people would be guaranteed to
present-law Social Security benefits plus 20 percent of
whatever the proceeds might be under the individual account
that would be developed.
Therefore, presumably, the worst that a person could do is,
if they somehow managed to lose the entirety of the value of
their individual account, they would still be guaranteed to get
present-law Social Security benefits.
But if they retained the value of the contributions that
went into their individual account and had them increase to any
extent, they would receive, in addition to Social Security
benefits, an amount equal to at least 20 percent.
So in that situation, we would find it difficult to believe
that many people would turn down the option.
Mr. McCrery. Well, would you make any calculations based on
a lower rate of participation?
Mr. Goss. We didn't. Of course, the extreme case would be
if no one chose to participate, in which case we would be
precisely where we are today with present law. And there would
be no improvement in the actuarial status of the program at
all.
In all likelihood, if we were to assume partial
participation, we would move somewhere in between the solvency
that is indicated under the Gramm plan and the situation that
we have currently under present law, where we do not have
sufficient funds to pay for the full 75 years.
Even with participation that is somewhat less than 100
percent, I believe because of the nature of the extent of the
solvency created under the Gramm plan, even if we had 80 or 90
percent, we would very, very likely still be in a situation
where the long-term projection would be the Social Security
system would be solvent under the Gramm plan.
Mr. McCrery. If I may, just one more question. With respect
to the COLA, I know that some of the plans you analyzed have
explicit reductions in the COLA, but for those plans that do
not contain an explicit legislatively derived reduction in the
COLA, did you assume in your calculations any reduction in the
cost-of-living adjustment?
Mr. Goss. No, we did not. I should mention, though, that
the 1999 Trustees' Report incorporates the latest change to the
Consumer Price Index, that was introduced earlier this year by
the Bureau of Labor Statistics which is using the geometric
weighting formula, the 1999 Trustees' Report is the baseline
that we are operating under for the projections that we have
made for all but, unfortunately, one of the plans here--there
is one that we did not get a chance to update, Senator
Moynihan's plan.
So all changes that have, been implemented to this point,
by the Bureau of Labor Statistics are reflected in the baseline
estimates for the 1999 Trustees' Report. We did not make any
assumptions of any further changes except where indicated
within proposals.
Mr. McCrery. Do you have any thought as to the likelihood
of the BLS making further changes to the cost-of-living
adjustment?
Mr. Goss. The only other change really related to the issue
of the CPI that I am aware of, that BLS has been talking about,
is something referred to as the upper level substitution bias,
where there would be the possibility of creating a different
kind of formula, referred to as the superlative formula, which
would eliminate this one remaining kind of bias which exists in
the Consumer Price Index.
I believe that the Bureau of Labor Statistics has announced
that they are planning on developing an alternative index to
the current CPI, and they should be out in the year 2001 or
2002 with that alternative index.
As we understand it though, that alternative index will not
be a modification of the current CPI and therefore will not
automatically become the basis for cost-of-living adjustments
under Social Security. It would require legislation to effect
that change.
Mr. McCrery. Thank you.
Mr. Shaw. Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Shaw.
Mr. Goss, in the Archer-Shaw plan, they are achieving a 75-
year solvency by depositing the general revenue equal to 2
percent of taxable payroll into individual accounts and then
having that invested by 60 percent of such accounts would be
invested in stocks and 40 percent would be invested in bonds.
Could we--then there is the issue of some of the
administrative costs and other things that could happen. Could
we not do the same thing basically to what has been talked
about and achieve this, some of this solvency, by putting this
investment in without having administrative costs and doing
individual accounts?
Mr. Goss. If I understand correctly, what you are
suggesting is accomplishing the same thing by having 2 percent
of taxable payroll transferred from the general fund of the
Treasury, not to individual accounts but directly to the Social
Security Trust Fund?
Mrs. Thurman. Correct.
Mr. Goss. First of all, that is essentially what
Representative Stark's proposal was. And as you have seen,
actually 2.07 percent, to be a little bit more precise, of
taxable payroll over the next 75 years would be sufficient to
meet solvency if it were transferred on a year-by-year basis to
the trust funds.
If I understand you correctly though, your question
involves not only the transfer of those moneys to the Social
Security Trust Funds but also to then invest them in a manner
similar to what is being done for the individual accounts under
the Archer-Shaw plan.
That clearly would result in an even greater extent of
positive actuarial balance than we have under the Stark plan as
we stand now.
And there are really two reasons for that, that putting the
money directly into the trust funds and investing in stocks,
for example, at least a portion of it, would potentially have a
more positive effect than having it go into the individual
accounts over the 75-year period.
First of all is the one you mentioned. The administrative
expenses from the individual accounts.
Mrs. Thurman. Which could be as high as how much of the
investment?
Mr. Goss. Well, as Chairman Archer and Mr. Shaw mentioned,
there is a stipulation in their plan that says there could be a
charge of no more than 25 basis points, or one quarter of 1
percent of assets in individual accounts per year. And on the
basis of assuming that was the charge, we made the estimate.
And as you heard earlier from another Member of the Committee
that would still result in an expectation of more than a 5
percent real yield on the trust funds--actually 5.35 percent
real yield was the expectation.
If, instead, we were to have the trust funds invested 60
percent in stocks and 40 percent in corporate bonds under the
assumptions that had been made, we would expect the yield to be
somewhat higher, and the reason being, really, because of the
cost of maintaining the individual accounts and maintaining the
records.
And this is as indicated, not an enormous cost, and the
situation would result in what would be potentially a 5.6
percent yield dropping to about the 5.35 percent yield.
The other thing that I think is really more important to
focus on in terms of the potential effect over the 75-year
period is the timing of having the money available to the
Social Security system. If the money were put directly into the
system for each of the next 75 years, then at the end of 75
years, the trust fund would hold the entirety of the transfers
of 2 percent made over the 75-year period. In contrast, under
the Archer-Shaw plan, a portion of that money that had been
transferred from the general fund to individual accounts would
still be held in individual accounts and not yet transferred
back to the Social Security Trust Funds although I would hasten
to mention that it is fair to say that while that would not
come within the 75-year valuation period, that is money that
would be standing there in those individual accounts under the
proposal and would represent a commitment of money for the
trust funds into the future.
So I think what we would see in terms of the 75-year
valuation period is that the trust fund status would definitely
look better from the point of view of putting the money
directly into the trust funds.
What we would have to keep in mind is that there would be a
large ``outside-the-trust funds balance'' in the individual
accounts under the Archer-Shaw plan.
Mrs. Thurman. That's all I have. Thank you.
Mr. Shaw. Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman. And if you will
permit me to maybe delve a little bit into a politically
incorrect area--I hope not.
Let me, in anticipation of my question, Mr. Goss, let me
again reiterate what Chairman Archer has already said, you have
done, and your staff, have done yeoman's work in evaluating all
these plans. And for those who may not be aware that the ground
rules, if you will, for these 2 days of hearings have been
anybody who has got an idea or plan that meets the 75-year,
long-term solvency and it had to be submitted by a date
certain. And the last day or say, another Congressman, Mr.
Kasich of Ohio, has talked about a plan, and unfortunately was
not able at least to submit it for our consideration by the
time deadline that we had asked.
Let me ask you, have you been able to do the long-term
solvency question on Mr. Kasich's plan or is that something in
progress?
Mr. Goss. That is something in progress at this point.
Mr. Hulshof. And when might we know from you and your
office as to whether or not it meets that 75-year long-term
solvency test?
Mr. Goss. We are hopeful of completing that analysis by the
end of this week or, by the very latest, early next week.
Mr. Hulshof. OK.
[The following was subsequently received:]
[GRAPHIC] [TIFF OMITTED] T2789.042
[GRAPHIC] [TIFF OMITTED] T2789.043
[GRAPHIC] [TIFF OMITTED] T2789.044
[GRAPHIC] [TIFF OMITTED] T2789.045
[GRAPHIC] [TIFF OMITTED] T2789.046
[GRAPHIC] [TIFF OMITTED] T2789.047
[GRAPHIC] [TIFF OMITTED] T2789.048
[GRAPHIC] [TIFF OMITTED] T2789.049
[GRAPHIC] [TIFF OMITTED] T2789.050
[GRAPHIC] [TIFF OMITTED] T2789.051
[GRAPHIC] [TIFF OMITTED] T2789.052
[GRAPHIC] [TIFF OMITTED] T2789.053
[GRAPHIC] [TIFF OMITTED] T2789.054
[GRAPHIC] [TIFF OMITTED] T2789.055
[GRAPHIC] [TIFF OMITTED] T2789.056
[GRAPHIC] [TIFF OMITTED] T2789.057
[GRAPHIC] [TIFF OMITTED] T2789.058
Following up on what Mr. McCrery asked, the line of
questions he asked, that many of the plans we heard about
yesterday have similar benefit adjustments, there is the
reduction of the cost-of-living adjustments, increasing the
retirement age was mentioned in a couple of the plans, I know
there was some discussion yesterday, if I may be permitted to
say, some mind-numbing discussion about bend points, extending
the period of time over which benefits are calculated, and the
like.
Can you tell me or briefly describe the effects of these
changes on beneficiaries? And where I would like you to go with
this is, are there groups or types of beneficiaries that might
be disproportionately affected by some of these changes, like
the COLAs and raising the retirement age?
Mr. Goss. Let me talk about the cost-of-living adjustment.
I think there are really two ways of looking at changing the
cost-of-living adjustment. I believe that most Members of
Congress who have made proposals for changing the cost-of-
living adjustment have done that from the point of view of an
expectation and a belief that the Consumer Price Index is
overstated in terms of its rate of increase. Therefore, it is
probably fair to say, to the extent that that is true, if the
cost-of-living adjustment is reduced so that it becomes a more
accurate representation of what the true cost of living is,
then one could conclude that, in fact, we are not really
disadvantaging beneficiaries in the future.
However, looked at from the point of view of the present-
law, cost-of-living adjustment versus having a one-third of 1
percent per year or one-half of 1 percent per year reduction in
that cost-of-living adjustment, clearly, the effect of that is
the longer a person has been eligible for benefits, the more
their benefits, relative to present-law levels, will be
reduced.
For instance, a one-half of 1-percent reduction in the
annual cost-of-living adjustment will leave the beneficiary who
has been receiving benefits or who has been eligible to receive
benefits for 10 years with about a 4\1/2\ to 5 percent lower
benefit than they would otherwise get.
On the other hand, a beneficiary who has been receiving
benefits or might have been receiving them for as much as 20
years with that one-half of 1 percent per year reduction would
be receiving benefits that are on the order of 9 to 10 percent
less. And it goes on.
It suggests, obviously, people who have been on the rolls
or who have lived the longest, which tend to be women more than
men, and often times widows, would be ones somewhat
disproportionately affected by cost-of-living adjustments.
Now, on the other item you mentioned, on the retirement
age--retirement-age proposals that have been put forth tend to
have a very similar percentage reduction in benefit levels for
retirement and survivor benefits for all workers, regardless of
their age, regardless of their income level.
For instance, a 1-year increase in the normal retirement
age, from 65, where it is today, to 66, is already scheduled to
occur under current law. People who choose to continue to start
receiving benefits at exactly the same age, 62 for example,
will receive benefits that will be roughly about 6\1/2\ percent
lower than if the retirement age were not increased by 1 year.
Eventually undercurrent law the retirement age will increase to
67.
And that is regardless of the person's income level or
regardless of their benefit level. Everybody would receive
about the same percentage reduction.
But from that point of view, it would be fairly equal. From
the other point of view, which people will oftentimes look at,
from the adequacy of benefit levels, of course you could argue
that that might tend to hurt people at the low-income, low-
benefit levels more.
But the key point, I think, from the point of Social
Security benefits is that the percentage reduction would be the
same for everybody.
The one exception, of course, is that increases in the
retirement age in general would not affect benefits paid to
disabled worker-beneficiaries or their families.
Mr. Hulshof. Thank you, sir.
Mr. Shaw. Mr. Lewis.
Mr. Lewis of Kentucky. I have one question, and I would
like to know the significance of having the high trust fund
balances. Do the trust fund balances represent money that is
available to pay the benefits? And I ask that in reference to
yesterday's hearings, where Representative Nadler emphasized
that at the end of the 75-year period the trust fund ratio
under his plan was 786, which, of course, is very high. But in
the same year, the Social Security Program is running a cash
deficit equal to 5.95 percent of the payroll.
How can the trust fund balances be so high while the cash
shortfalls are so large? As we evaluate reform proposals, what
weight should we give to trust fund ratios versus the cash
flow? The cash flow is something I have been trying to talk
about all morning.
Mr. Goss. Thank you. This really is a very, very important
question. And I think to a certain extent it defines the issue
of the extent to which almost all of these proposals would move
us from the current financing of the Social Security Program,
which is essentially on a pay-as-you-go basis. And under a pure
pay-as-you-go or current-cost basis, you just have to have the
tax income to the program coming in each year equal to the
amount of outgo for that year. You don't have any trust fund to
draw on.
I believe every one of these proposals, with perhaps one
exception, that is, nine out of 10 of these proposals, would
move us toward having substantial advance funding for the
system.
And I think we should understand the advantages of having
advance funding for a system, whether it be Social Security or
a private pension plan. All private pension plans are required
to have advance funding. Any plan that has substantial advance
funding will have exactly this situation where the amount of
contributions into the plan each year will be less, in fact,
than the amount of money that is coming out.
And, of course, with a large amount of advance funding and
with the benefit of the returns that we would realize on the
funds being held, this would allow for more money to be paid
out than the contributions. And that is because of the yield on
those moneys that are in fact invested.
Under Congressman Nadler's plan, we do indeed have a
situation where we would have almost 8 times the annual cost of
the program being held in the trust funds. In his particular
case, I believe it was 30 percent in the form of stocks and 70
percent in the form of bonds. As we discussed earlier, there
would be a very high yield on that large amount of money held
in the trust funds. Very much less than the entirety of that
yield would be needed to be retained in the trust funds to keep
its value rising in the future with the rate of growth and the
cost of the program, for example meeting this objective of
having a constant trust fund ratio.
That would leave, in effect, a lot of the yield on the
trust fund from year to year available to pay the current cost
of the program, which is exactly what private pensions do.
So I think this is really a natural outgrowth. And whether
it is a plan like Congressman Nadler's or any of the plans that
would have individual accounts, if we were to look at the
entirety of what is happening with the individual accounts plus
the Social Security Trust Funds, we would see much the same
situation, that we would have a large fund through its yield
providing a lot of the income that is needed to pay benefits on
a year-to-year basis, thereby lowering the extent to which we
have to have tax-rate increases.
Mr. Shaw. Do any of the Members have any other questions?
Mr. Goss, I want to add my compliments to those paid to you
by the Chairman with regard to--I know you have certainly been
tested for the last few months. And you have certainly come
through beautifully, and we appreciate the hard work you are
doing. And we certainly hope that we can reward you with a plan
that is actuarially sound for 75 years and way beyond.
Thank you.
This hearing is adjourned.
[Whereupon, at 1:29 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of American Farm Bureau Federation
Preserve Integrity of Social Security
Farmers and ranchers support the preservation of the Social
Security system as a safety net to provide workers and their
families retirement income, disability protection or assistance
because of the early death of a family wage earner. Farmers and
ranchers are concerned, however, about the future and financial
soundness of the Social Security system. Farm Bureau believes
that reform is needed to preserve the integrity of Social
Security for retirees and workers paying into the system.
The average age of farmers and ranchers is now 54 years
old. This means that almost half of them are at, or near,
retirement age. They are very concerned about the return they
will receive on a lifetime's worth of Social Security taxes.
The current system is a major portion of their retirement
program. They must be able to rely upon Social Security in
their retirement years.
Ninety-nine percent of farms are operated by sole-
proprietors and or by family partnerships. As self-employed
individuals, agricultural producers pay the full 12.4 percent
payroll tax, usually as one lump sum along with their income
tax payment. They are painfully aware of the high taxes needed
to fund the current system and realize the urgency of saving
the Social Security system.
Choice of Retirement Systems
While Farm Bureau supports preserving the Social Security
system, we believe people should have the option of
contributing to personal retirement systems. For years we have
recognized each individual's right to participate in pension
plans in addition to Social Security. We believe that people
should also be able to invest in private plans within the
Social Security framework using the same deposit percentages
and withdrawal age rules as the regular Social Security
program. People should have the right to choose to stay in the
standard Social Security program or shift their Social Security
taxes into personal retirement accounts.
Program Funding
We oppose an increase in Social Security taxes. Social
Security, either the standard plan or new private retirement
plans, should be funded by payroll taxes. We oppose any
proposal to finance Social Security retirement income benefits
out of general revenue. Social Security taxes should continue
to appear as a separate deduction of Federal Insurance
Contribution Act (FICA) taxes to make them clearly
identifiable.
All employees, both in the private and public sector,
should be included in the Social Security program. Employers
and employees should continue to share equally in the payment
of Social Security taxes. Low-income taxpayers should not be
exempted from paying Social Security taxes because of their
level of incomes.
Social Security Surplus
Social Security taxes collected should be placed in a
restricted interest-bearing fund to be used only for Social
Security. Because we support placing Social Security funds in
interest bearing accounts and private retirement accounts, we
oppose government investment of Social Security Trust Fund
money in stocks of private companies.
Benefits
Benefit levels should be preserved for retirees and those
that are near retirement and, when in need of adjustment,
should be changed based on a percentage of the annual decrease
or increase in average wages. Benefits, both in the standard
plan and in alternative private plans, should be based on an
individual's contribution to the system. We oppose means
testing as a way to limiting Social Security benefits for those
that have contributed to the system. We oppose earned income
restrictions for those receiving Social Security benefits.
Summary
Farm Bureau supports reforms to the Social Security system.
The integrity of the system must be maintained for retirees and
near retirees while giving workers the opportunity to invest
their Social Security taxes in personal retirement accounts. We
oppose tax increases and government investment of Social
Security Trust Funds in equities markets.
Statement of Wendell H. Eriksson, Minneapolis, Minnesota
Mr. Chairman and Members of the Committee, thank you for
the opportunity to submit Testimony regarding plans to reform
Social Security.
In the Senate, Mr. Moynihan and Mr. Kerry last January
introduced legislation in the form of S. 21 with the objective
of reducing Social Security payroll taxes and to assure the
long range solvency of the system. In April of this year
Chairman Archer and Mr. Shaw introduced legislation also with
the intention of remedying the long term solvency of the
system. (Indeed, it is the reason for this hearing.) In
addition, the Clinton Administration's new Budget offers four
options to resolving our Social Security/Medicare dilemmas:
using the budget surplus, increasing fertility--i.e., more
babies, doubling immigration, and shortening Boomer life spans.
That there are varying proposals being laid on the table,
suggests the impending calamity confronting this nation if
nothing is promptly done to alleviate the systemic problems.
Due to time and space limits, my Testimony will often only
indirectly discuss several of these proposals while providing
additional background information regarding population growth
and the funding of Social Security.
I will begin by first presenting my recommendations,
followed by background information on the profound structural
program flaws. I then turn to the proposed remedies centering
on adding additional enrollees and of population growth with
the towering role of immigration in that population growth.
RECOMMENDATIONS
The overarching question is how should Americans provide
for their retirement and what is the appropriate role of the
government? My response is that the current retirement system
should be withdrawn because of its numerous inequities,
unconvincing financial benefits, and fundamentally self-
destructive program design. Regrettably, previous legislative
remedies have only served to postpone the inevitable Social
Security/Medicare collapse. The recommendation is to rapidly
transition the government's retirement system to an all
encompassing private individual retirement account (IRA and/or
ROTH type IRA). Proposals to fund Social Security from rapid
population growth, especially immigration, are counter
productive and ill-advised. Its welfare aspects must be funded
from general revenue sources.
The tremendous opportunity cost of not being able to invest
in an IRA has been noted elsewhere. Here it is sufficient to
say that anyone with an IRA, rather than Social Security, would
have had the means and opportunity to have saved and earned a
substantial retirement nest egg. For example, if all deposits
were to a single comprehensive private individual retirement
account, as little as three to five percent of annual wages
would provide a very pleasant retirement fund. Even a worker
earning as little as $20-$25,000 per year could have at
retirement an inflation adjusted pension of around $75,000 per
year indefinitely and upon death the balance would go to the
family. On the other hand, under the government plan the
payments are dramatically less and any remaining amounts are
frequently lost to the worker's family. Not only is the Social
Security system counterproductive to achieving retirement
security, it eliminates or substantially reduces the ability of
workers and families to fund their own retirement programs.
Every individual must have a private individual retirement
account with deposits from all sources (individual, company,
and government sponsored) flowing into it. The IRA (or ROTH
type IRA, taxable and non-taxable types as today) is an asset
of the individual so the owner has full responsibility for
investment decisions (with limitations, as in current IRA's and
Keogh plans). Because the goal is an individual's retirement,
there should be no age limit for the initial set up nor is an
earned income requirement appropriate. Earned or unearned
income should be acceptable deposit (as now, only earned income
should be tax deductible) and non-owners (i.e., Grandma) should
be able to add a non-deductible $500 per year to any person's
IRA (and be a gift beyond the reach of the gift or death tax).
If under age 35, the maximum annual deposit by the owner should
be the greater of $1,000 or 65 X age (adjusted for inflation)
while those over 35 should be able to deposit to their IRA 100
X age. Similar to current practices, employers should have the
option of matching and depositing 2-3% of an employee's wages
each year.
All current workers and retirees in the Social Security
retirement program should earn a Social Security annuity based
on their past deposits and current rules, and then be removed
from further FICA payments or benefits, thus ending the program
over time. This is where the proposal to use much of the
``budget surplus'' to help fund Social Security comes into
play. Rather than purchasing government bonds (and continuing
the self-destructive cycle only under a different name) those
excess funds should be paid now, directly to an individual to
retire prior contributions into an individual's IRA, including
a return on investment. This ``buy-out'' process removes the
otherwise compounding system liabilities from the system. I
recommend it begin with the young worker and move up the age
ladder (and everyone should have the option). In this way
individuals and associated liabilities are rapidly removed from
the system. Without the onerous FICA tax, the ability to fund
their own retirement program, and if necessary, to pay a
slightly increased income tax rate, is significantly enhanced.
Please note, I am not advocating discarding the government
welfare function of the safety net, only that it no longer be
funded from workers and their families' retirement funds. I
would like to now turn to the profound design flaws of the
system.
IN TWO FUNDAMENTAL WAYS SOCIAL SECURITY IS SELF-DESTRUCTING
First, it is designed as a pyramid ``Ponzi'' scheme, and
second, there is the false notion of a ``trust fund.''
PONZI PYRAMID SCHEME
The first self-destructing flaw is that the funding of the
Social Security system is that it is a classic Ponzi pyramid
scheme. The scheme is named after Charles Ponzi who in the
1920's used the method to defraud investors of millions of
dollars. The term is given to any scam that bilks people by
promising returns for money invested, but can only do so by
using funds received from new participants to pay the earlier
contributors, a ``pay-as-you-go'' system. The scheme is doomed
to fail because its pyramid effect requires ever growing
numbers of new participants and spiraling sums of money. The
Social Security system, like the Ponzi scheme, crumbles from
below when the inevitable numbers of new participants is
insufficient to support those at the top, the retirees in our
case.
The pyramid suggests the necessary demographic shape of a
population requiring rapid and unending population growth in
order to continue the ill-designed program. This was an absurd
assumption then, and in this unsustainabley populated country
today is inexcusable. The truth of the matter is that the more
people in the retirement system, the more unmanageable and
intractable the problems. Any increase in the numbers of people
in the system exacerbates the pyramid scheme nature of the
system and merely postpones and intensifies the inevitable
collapse; the irony of it is that the fewer enrolled in the
program the less harm done and less politically awkward the
ensuing remedy.
The proposals to increase enrollees, promote fertility
increases, and legislation to open a floodgate of immigration
are unseen and little known attempts to remedy the funding
dilemma by rapidly increasing numbers at the bottom of the
pyramid. This matter applies equally to the additions of
workers (e.g., state employees) not now included in the
program. The immigration legislation of the last nearly thirty
years has been a continuing endeavor to force, in a manner
unprecedented in history, population growth in the U.S. to
mirror the excessive population growth in the baby-boom era,
and as policy, to continue rapid and unrestricted population
growth indefinitely.
These proposed and current demographic policies are not
environmentally nor economically sustainable, are terribly
socially disruptive, and will produce absolute chaos in the
Social Security system.
Demographics plays an important role in shielding or
aggravating the self-destructive nature of the program. The
Social Security cash flow (pension) is generally paid by
younger workers (the Ponzi effect) and that an increase in
payments is paid by increasing FICA taxes of current workers is
a symptom of the funding quicksand upon which the system is
based. This observation underlies the motivation to redesign
the cost-of-living (COLA) portion of the system in order to
reduce annual inflation adjustments. Unfortunately, the process
takes advantage of the ignorance of the general public
regarding compounding--unknown to an unsuspecting public, even
numbers as small as one percent overtime become a very big
financial deal!
THE ``TRUST FUND''
The second self-destructing design flaw is the notion of a
trust fund. In contrast to an IRA, employer funded pension
plans, insurance, private annuities, and other pension plans,
the Social Security retirement system is not a funded system;
in reality there is no fund. To the contrary, there is a future
tax increase of unimaginable proportions, a quietly waiting
irreversible financial time bomb. The lack of funding is a
legal inconsistency between the requirements of all other
pension plans and the U.S. government retirement plan for its
citizens.
(When hearing the following description, please bear in
mind there are proposals to use much of the so-called ``budget
surplus'' to purchase Treasury Bonds to shore up the Social
Security Trust Fund. The reality of it is that this proposal is
merely a minor change in name and location only. Thus, the
dollars remain a government liability with the same, even at a
higher rate, compounding interest paid by the taxpayers.)
Let's review the process as simply as possible. The ``trust
fund'' purchases special Congress Treasury Bonds (this helps
balance the current budget deficit) that pay interest. This
interest is not actually paid into a fund, but is penciled into
a ledger as an ``IOU.'' The interest, now IOUs, compound over
time. Compounding is a marvelous road to wealth accumulation
were the fund an IRA and not a Social Security entity. However,
it is circular: increasing interest payments (IOU's) produce
increasing FICA taxes but increasing FICA also produces
increasing interest payments (IOU's); in turn, increasing
taxes, and so on. It is Congress spending now while lending to
itself. In fifty years each $1 in the trust fund will compound
to about $75 (e.g. Kerrey & Trustee Reports!). The wherewithal
necessary to pay those staggering compounding obligations is at
the heart of the dilemma.
If one considers the pyramid (Ponzi) nature of the design
and then combines it with these massively compounding
liabilities one will began to understand the magnitude of the
design mistakes. Increasing the number of enrollees or even
moving out the retirement age multiplies the existing design
errors.
Similar to an IRA, the bulk of the so called ``trust fund''
will be composed of compounding interest (penciled in IOU's).
Unlike an IRA, this interest is paid by raising taxes. It makes
little overall economic difference if tax increases are in FICA
or general income taxes. As the 76 million Boomers retire,
combine many individuals and institutions selling various
securities saved for retirement with trillions of dollars
compounding interest requirements in the mis-named ``Trust
Fund,'' and the result is the prescription for an unstoppable
and frightening national breakdown, literally an American
social Armageddon and economic apocalypse. The future is
rapidly becoming the present.
LEGISLATED REMEDIES
The presumption underlying attempts to overcome the pyramid
(Ponzi) scheme is that of requiring workers to pay more into
the system than they receive in benefits. These Congressional
attempts fall into two general categories: increase current
cash inflows by increasing Social Security/Medicare taxes
(FICA) or increase the number of young in the system. Second,
to reduce cash outlays by recalculating the annual cost-of-
living increases (COLA), decrease the number of eligible
enrollees, and reduce the benefit levels.
Although the system currently predicts raising FICA taxes
(or income taxes), raising taxes are less of a viable option
because of its adverse economic implications and the likelihood
of forcing more individuals into the growing underground
economy. This would further reduce cash flows into Social
Security while leaving the welfare burden intact. The decrease
in eligible retirees is accomplished by pushing out the
retirement age (more will die, and pay in more and longer--a
variant of the proposed ``die earlier'' solution) and,
increasingly, by using an income, ``means,'' test to screen out
individuals. Congress has increased the number in the system by
adding workers not otherwise in the system--government,
farmers, and religious employees for example--and, most
notably, by increasing population growth, chiefly through mass-
immigration.
The plan to remedy the funding dilemma by moving out the
retirement age has been accomplished previously (i.e., removing
people from the retirement program). Further aging continues to
be a proposed remedy. The argument is that people are living
longer. This is true, but avoids two misleading aspects. First,
it is political doublespeak, for it literally means that people
are not leaving the system in a timely fashion, i.e., not dying
early enough--as stated in a proposal. Second, that there is a
funding dilemma and the proposed remedy is to have the Boomers
pay longer and more into the system, while delaying, reducing
or removing the promised payments.
Because the Budget and other proposals emphasize the role
of population growth in salvaging Social Security, the balance
of my remarks will concentrate on population growth and briefly
discuss several ramifications. I begin by briefly discussing
population growth and the role immigration plays in that
growth, then the worker/retiree ratio, attempts to increase
cash inflows, and finally several unintended consequences of
our current high immigration policies. The conclusion will be
that these attempts to mitigate the ills of the program only
serve to exacerbate existing problems and generate additional
concerns as well.
POPULATION GROWTH
When future historians write about U.S. population growth
and the subsequent decline of America, they will write that the
single greatest tragedy in U.S. history was the change in
immigration policy in the mid 1960's.
Without over immigration the U.S. would be on a very
welcome trajectory to achieve a stable population, sustainable
economy, and cohesive society. The consequences of this road to
stabilization is that the U.S. would have had the opportunity
to ameliorate or avoid several extremely serious looming
problems, including Social Security, would be in a much
stronger position to assist the disadvantaged within the U.S.
and to facilitate change in other nations as well.
Although it is an American tragedy of epic proportions, the
solution is not difficult. That Americans want to stop
population growth and reduce immigration is abundantly clear.
Repeated polls show that over 80% of Americans from all walks
of life favor a reduction in immigration and our population to
stabilize by 2050. And nearly 60% want the U.S. population
reduced!
The explanation lies in the numbers:
Were a net zero immigration (equal in and out
migration) policy established in 1965, the U.S. population
would have stabilized around the year 2025 at a probably
sustainable and certainly more comfortable, 225 million (versus
272+ million of today). Our Social Security dilemmas would have
been vastly easier to rectify.
Had appropriate immigration reform been
accomplished in 1970, the US population would have leveled off
in the next century at around 247 million.
If current immigration policy were revised at this
time to a policy of zero net immigration, the U.S. population
would still continue growing to reach about 310 million about
the year 2030.
If immigration were cut to about one-fifth today's
level (mid Census projection), the U.S. population would
continue to grow to approximately 400 million at 2050.
Not seen in the mid Census projection of about 400
million is that the U.S. population juggernaut would continue
growing until it eventually stabilized at a population of about
1.6 billion (Billion!).
Under current population policies, the Census
Bureau projects the U.S. population in only fifty years to
exceed 500 million (and growing rapidly!).
Doubling already high current immigration policies
would indicate, not a population of 400 million nor a
staggering 500 million but, I would think, a population on the
order of 650-700 million or more in fifty years, rapidly
growing, and unlikely to achieve stability! Just how many
hundreds of millions or billions does the Congress have in mind
in order to save Social Security? Even with a cursory reading,
it is clearly ludicrous to even consider such an ill-advised
proposal.
Were a zero net immigration policy implemented in
the mid 1960's then 100% of our population growth above 225
million would have been derived from immigration.
With present immigration policies and trends,
immigrants coming after 1970 will account for at least ninety
percent of all U.S. population growth by the year 2050.
If we consider only the growth from descendants of
1970 residents (just before the huge immigration influx), the
result is that all of our population growth after the year 2035
will be derived from immigrants.
Currently, over sixty percent of U.S. population
growth is from recent immigrants and their offspring.
Population momentum indicates that after
implementation of a population policy designed to achieve a
stable U.S. population, it nevertheless requires over fifty
more years before our population would actually achieve the no
additional population growth mode, possibility doubling again
in that time.
Regrettably, in not providing the above readily available
census and INS information it would appear that those
responsible for preparing the Social Security and demographic
portions of the Budget and various proposals, although 1st rate
professionals and certainly realizing the consequences of their
work, failed to override politics with appropriate standards of
professionalism.
The numbers are already unprecedented in U.S. immigration
history, a further doubling, as proposed, is mind boggling! The
most recent data indicate that over 1,300,000 immigrants
entered the U.S. in 1997 and nearly that many last year. (The
number could be considerably higher due to uncounted and
illegal immigration, estimated at between 250,000 and 500,000
each year.)
Similarly, legislated attempts to promote increased
fertility are equally counterproductive. For example, tax
exemptions, the $500 per child tax credit, and tax credits for
daycare also serve to compound the problems of U.S. population
growth. The government pays to have babies. Significantly, it
also has the regretful effect of reducing parental
responsibility to provide for their own families, creates
additional dependence on the government, and sends an erroneous
message about a sustainable U.S. population.
The problem involving funding Social Security is that
increased fertility aggravates the pyramid nature of the system
while markedly increasing the dependency ratio. The effect is
to actually reduce the wherewithal to fund Social Security.
The impacts of high immigration on our culture, society,
economy, and environment must be addressed. Nevertheless, there
are other compelling arguments against immigration as a remedy
to our Social Security/Medicare predicament.
IMMIGRATION AND SOCIAL SECURITY: A DANGEROUSLY INCORRECT POLICY
In 1985 and again in the 1990's, because of overwhelming
public support, it was widely expected that Congress would take
the position of reducing immigration to traditional levels.
Beginning in 1965, special interests and the retirement fund
lobby mistakenly told Congress that our rate of domestic
population growth was insufficient to maintain the solvency of
the Social Security system. They were joined by an unlikely
alliance--social groups, religious organizations, humanitarians
and allied opportunists and economic and corporate powerhouses
(and some also did with the objective of changing American
society) to lobby Congress to thwart the wishes of the American
citizen to pass this ill-advised legislation. Instead of
reducing, Congress doubled the legal immigration quota and
turned a deaf ear to dealing with the millions of illegal
immigrants. Evidently, the failure was in understanding the
pyramid nature of its design. The legislation to open a
floodgate of immigration became an unseen and little known
Congressional attempt to remedy the alleged funding dilemma
drawing near by rapidly increasing numbers at the bottom of the
worker pyramid. Moreover, advocates assume they are willing to
pay into our Social Security system and are deluded into
believing there are no serious side effects. As described
earlier, it was an inappropriate policy initially; the
situation worsens with each passing day.
For a moment, let's step back to put the apparent
demographic and Social Security complication in perspective. It
is a passing predicament. The population ``Boomers'' are the
well known visual depiction of a large ``population'' lump
passing through a snake. The image also illustrates the
ethereal nature of the demographic concern. At each stage of
their lives, these baby-boomers required the economy and
society to accommodate the necessary, but transient, changes.
The point is that this passing phenomena is just that,
temporary and it is exceedingly unwise to make permanent
government policy based on transitory demographic situations.
The repercussions of any alleged short term remedies are
dreadfully frightening when considering the lasting affects of
population growth.
The current budget and some proposals, like the immigration
legislation of the last nearly thirty years, is a gallant
legislated attempt to continue shielding the public from
realizing the program may require wholesale modifications, if
not total scrapping.
However, there is a more subtle agenda at work as well. It
is a manifestation of the ``die earlier'' notion. These same
immigrants have a life expectancy less than the citizens
approaching retirement. Some proponents may say one thing, but
they plan on a disproportionate number of these new immigrants,
other minorities, and other disadvantaged, dying prior to
receiving a retirement pension. Likewise, they overlook the
millions of illegal aliens because, in addition to limiting
wage demands, they may pay into the Social Security retirement
program yet are precluded from claiming benefits. On the other
hand, the Clinton administration and mass-immigration allies
certainly understand this dilemma. The fact that they
repeatedly grant huge numbers of illegal immigrants amnesty and
health, and other benefits, suggest they realize it. On the
other hand, those that survive to receive a Social Security
benefit reap a windfall at the direct expense of native born
Americans.
Let's now examine how immigration is a perilously flawed
solution to the Social Security/Medicare funding dilemma,
notably the ``worker/retiree'' ratio and to the matter of
increasing cash flows. Following that discussion will be a
brief discussion several unanticipated impacts of excessive
immigration on our culture, society, economy, and environment.
WORKER TO RETIREE RATIO
The alleged problem most frequently heard is that there
won't be sufficient workers to support the retirees, the
worker/retiree ratio, will be inadequate. Simply put, they
argue our population is aging. This is often cited as an excuse
to increase immigration.
Those asserting that population growth through high
immigration is a solution miss the mark in using the simple
relationship of retirees to workers. The more meaningful and
appropriate item to examine is the dependency ratio. This ratio
is the number of young plus the number of old as a percent of
the total population. Thus, the dependency ratio reflects the
ability of workers, the entire labor force, to provide for
total dependents, young and old. (Note, of course underlying
much of this is the extent of government programs.) Recall that
a proposal was for the Boomers to die earlier. From the
standpoint of the dependency ratio and Social Security, the
ratio is enhanced by removing the elderly from the system.
Although this proposal is more of an academic than actual
position, we should also be aware that subtle legislative
changes in the provision of health care would serve the
identical function.
What is seldom acknowledged are the more significant
possibilities at the other extreme, of reducing the number of
young. This is where the greatest enhancement to funding Social
Security lies. With our highly pro-natalist government policies
this action seemingly would be met with some resistance.
However, Americans have had an environmental friendly,
economically sustainable, and socially desirable fertility rate
for many years. Thus, there is little, if any problem
associated with native born Americans. The difficulty remains
with recent immigrants and their excessive birthrates. For the
most part, the problem would be quickly settled by minimizing
immigration. After minimizing immigration, expanded programs
for recent immigrants must be passed to arrange rapid
assimilation--and that process includes family planning
services.
The dependency ratio of a stable population is 39%.
Immigration proponents and their Social Security allies seem to
think that this ratio is something to fear. Really? In 1960
when John F. Kennedy was president, the ratio was 39% and there
did not appear to be any social or economic trauma associated
with that ratio. During the 1970's the ratio was about 38% and
during the 1980's (due to the Boomers) the ratio was around
35%. Currently the ratio is about 33% primarily due to the
relatively few (now elderly) parents and grandparents of the
Boomers and the ``birth dearth'' immediately following the
Boomer generation. This somewhat reduced dependency ratio in
part explains the booming success of the current national
economy. If policy were modified to limit annual immigration to
our traditional 150,000 the ratio would less than 38% in 2050.
This is, as stated previously, is a prudent level and no cause
for alarm.
Several observations can be drawn from this data. First,
the dependency ratio has varied without creating Social
Security unique funding problems, around the mid to upper
thirties percentiles. Second, the effect of the baby-boomers
moving up the demographic ladder temporarily reduced the ratio
below the average range, yet without significantly nor
permanently benefiting the funding of Social Security (again
see ``Trust Fund''). Finally, even under a slow growth or
sustainable population scenario, the ratio does not climb
appreciably, remaining within the historical non-problematic
range. The data clearly indicates that there is no genuine case
for taking action.
To clearly demonstrate how circular and preposterous the
immigration approach is, let's extend their logic further out
in time. To maintain a consistent ratio, the projected 2050
population of over 500 million will require immigrating 2.5-3
million fresh immigrants each year instead of the approximately
1.3 million of today. (Canada? In this short period Canada will
merely become a subdivision of the U.S.!) If one assumes the
worker/retiree ratios we often hear of 4,5, or 6 to 1, the
numbers become obviously irrational--5, 10, 15 million or more
additional immigrants every year! Who will pay their Social
Security? Who will want to?
If there is any legitimacy to the claim that immigrants
will bail out the Social Security/Medicare systems, any further
immigration must be postponed until just prior to the predicted
collapse when those fresh cash inflows will provide funds to
retirees. In the interim, in order to save and preserve Social
Security, the numbers should be minimized and the immediate
burden reduced by revising current immigration policies to be
based on the former policy of U.S. labor needs (that is of only
already educated, skilled workers, certainly no older than 45,
and without regard for ``family unification'').
A corollary to the dependency ratio are the national
economic effects of the combination of the Boomers and
relatively fewer numbers at either extreme. This is as good as
it gets! Our current policy of over immigration provides cheap
labor for a few fast food outlets, food processing and a few
other retail type firms dependent on cheap and unskilled labor,
but by increasing the dependency problem, aggravates funding
Social Security. (There are other compelling negatives as
well.) On the other hand at no time in U.S. history have there
been so many educated and skilled workers, the Boomers, over a
succession of years, continuing to enter their most productive
years and period of highest earnings. They are extremely
productive and well-off, invest, buy SUV's, larger and second
homes, damage the environment, and generally propel the economy
like never before and, as a group, unlikely to repeat. However,
this boom will pass and the economy and society will return to
a balanced and trendline rate of economic growth.
If the increase in life expectancy (forecasted to between
83 and 87 years) is also considered, even a higher dependency
ratio is not cause for alarm. Unlike the young, workforce
veterans are valuable to the productive capability of the
economy. Aging workers can continue to work, retire later (as
Social Security already recognizes) and be productive citizens
over a longer period of time. Finally, because the aging
Boomers are the most educated and experienced labor group in
U.S. history, it would not only increase tax receipts, but
support other social concerns if government were to eliminate
disincentives to their continued employment.
IMMIGRATION AND CASH INFLOWS
Let's now turn to the apparently correct, ``common sense,''
component of their proposal, fresh cash. There are two errors
in this approach. The first is that because recent immigrants
have significantly reduced education and skill levels, their
contributions to the system are minimized even though their
systemic liabilities disproportionately increase. In addition,
the unprecedented numbers compel our communities and state
governments to otherwise unnecessarily raise taxes and spend
vast sums to provide for them--diminishing the wherewithal of
local citizen taxpayers to fund other needs.
Second, is the serious timing factor. This asks the
question, ``why increase immigration beginning in the 1960's,
then open a floodgate, and another (proposed) doubling now,
when the collapse will be forthcoming after the turn of the
century, around the year 2020? Immigration of the last twenty
five years has created additional funding demands on the system
at precisely the wrong time. These millions of recent
immigrants will be retiring and thus create increasing cash
demands on the Social Security system, just when the additional
cash inflow is most needed!
How bad will it be? Data show that fully fifty percent of
immigrants currently in the U.S. will reach retirement age by
the year 2020, in the heart of the feared crunch. Compounding
the error is the income redistribution and trend toward
reliance on further income redistribution using, for example, a
``means'' test for Social Security recipients. The means
(income) test, in addition to unfairness (workers believe it's
their money!), will remove additional ``average'' American's
from the system. The changing definition of ``average'' also
results in ever increasing numbers of Americans being
reconsidered as benefit recipients. On the other hand, the
average income of immigrants is considerably less than that of
the average native born American, thus their funding
contribution to the system is disproportionately less than
their numbers would otherwise suggest. Moreover, because of the
income redistribution aspects, they will have accumulated
significantly greater unfunded system liabilities than the
average American while contributing far less.
Taxation of the Social Security pension when a retiree
earns over some small threshold amount is commonplace, but ill-
advised. More subtly, taxation of non-inflation adjusted
benefits is another example. The point is that by increasing
the number of immigrants, income redistribution aspects, and
further means testing will result in exaggerating the direct
transfer of earned income from native born Americans to
immigrants. Once this mechanism is recognized by the public,
there is very likely to be further erosion of support.
In short, the ill-considered immigration policies of the
last twenty five years, rather than assisting, have actually
magnified the funding problems of the Social Security system.
In other words, although on the surface it appears counter
intuitive, in order to help save Social Security/Medicare,
immigration must cease at this time, with the option of
revisiting the issue in twenty years.
Despite the inclination of Congress to solve U.S. and world
problems, this unprecedented influx of immigrants will further
destabilize American society and economy and provoke ethnic and
intergenerational conflicts. The promise of the Social Security
system to Americans, notably the Boomers, is rapidly becoming a
embellishment due to immigration. These Boomers are the only
group in history to have funded the system throughout their
lives. Now, as they approach retirement, they are in line to be
abused in order maintain a failing Social Security system.
UNANTICIPATED CONSEQUENCES OF RECENT IMMIGRATION LEGISLATION
The magnitude of immigration raises several items
overlooked in the proposals. One must wonder if the Clinton
Administration and Congress are prepared to sacrifice so much
of America for this oversight? The unparalleled influx of
immigrants also creates turbulent social problems such as a
nagging high unemployment rate (only now in the final boom
economic stage, subsiding), reductions in average wage levels,
widening income gaps between the lower skilled and higher
skilled worker-and calls for social legislation to redress this
apparent development, and that many migrants arrive with an
allegiance and purpose of a foreign nation in mind are also
important considerations. Furthermore, the population induced
ecological damage will be massive, expensive to repair, and
sometimes irreparable to the U.S. and world environments. It is
policy not destiny.
Current excess immigration policies has the worrisome
attribute of reducing access to or even diminishes social
programs and economic opportunities for the less well-off
American citizen, most gravely Blacks. Those ``Great Society''
programs, for example, intended to facilitate Blacks and other
disadvantaged Americans transitioning into mainstream America
are increasingly utilized by immigrants. It is quite
disconcerting that proponents disconnect the problems
associated with high immigration with its effects on American
Blacks and disadvantaged. Over immigration directly
disadvantages the poor in U.S. society. Wouldn't it produce a
much more pleasant and well disposed society if our government
policy changed from educating and encouraging immigrants to
educating and building skills for disadvantaged native born
Americans?
These more skilled individuals, I will add, would
increasingly contribute to Social Security without many of the
environmental and social repercussions. Moreover, in reaching
out to the other disadvantaged native born American citizens',
this action would decrease welfare costs and provide additional
cash flow into Social Security, meanwhile reducing income
inequality and increasing overall standards of living.
Furthermore, it is sad to note that when our immigration
laws were changed in the mid 1960's, the standard for
unemployment was three percent and only when the three percent
level was breached did economist and the government become
concerned about rising unemployment. Beginning in the 1960's,
on the other hand, the unemployment standard was raised to an
incredibly high five percent, for the most part, in order to
accommodate the revised immigration legislation. That two
percent (or more) difference represents large numbers
(millions) of American poor and disadvantaged, often Black,
having their futures obstructed by Congress with its ill-
conceived immigration policies. I am certain that our Congress
(and the current Administration) failed to comprehend the
disastrous racial overtones connected with their ill-conceived
effort to rescue Social Security via high immigration.
There is another complication as well. Our mass-immigration
policies since 1965 are inconsistent with traditional American
immigration policies of moderation, preserving the American
culture, and of balance. The dissimilarities can be seen if one
compares our traditional and more recent source nations. The
impact on the demographic structure of America is quite
illuminating, revealing that the United States is quickly
losing its European heritage.
The mis-guided efforts to salvage a self-destructive
retirement system sets up a less than pleasant scenario. Can
the Committee members imagine how these immigrants and their
descendants will react when the system which used them as
instruments to save it, now crashes upon them, in no small
measure because of them? Contemplate the implications as
Boomers retire, 10, 15, 20, 25 years from now and how it will
be acted out by those frustrated and less well off but rapidly
growing masses. Picture in your mind large numbers of
relatively well off whites plus some Blacks and Asians (i.e.,
today's native born Americans), now absolutely and relatively
declining in numbers receiving a Social Security retirement
pension from an enormous and rapidly growing much less well-off
largely immigrant and disadvantaged population highly envious
of the elderly (Boomer) generation and very likely coming to
understand a Social Security (and political) system that has
seduced and coerced them into paying for the Social Security
retirement pensions of the system that is destined to betray
them. The ability of immigrants and their supporters to
influence legislation is being felt today; in coming years,
that influence will be powerfully expressed in a variety of
outcomes.
This observation may help to explain why Americans of all
kinds, feel it in their and the nation's best interest to
return to traditional immigration policies. If the Boomers and
Generation ``X'rs'' of today are skeptical of receiving their
Social Security/Medicare contributions, consider the
impossibility of future generations and that they, unlike
today, will be fully aware that their promised pensions will be
but delusional dreams of a well intentioned but exceedingly
ill-advised Congress.
CONCLUDING COMMENTS
I want to thank you again for an opportunity to present
this Testimony and hope this information will make a useful
contribution to your deliberations.
My remarks began by noting that the fundamental design of
the Social Security/Medicare system was profoundly flawed and
provided illustrations clearly demonstrating that proposals to
increase U.S. population were ill-advised and in great measure
multiplied the existing predicament. I also mentioned that any
increase in enrollees, especially using high immigration is a
dangerously flawed notion. The current and proposed immigration
policies are deleterious to the nation and to its economic,
cultural and social fabric and will result in chaos in Social
Security.
An approach contrary to the current one of unprecedented
population growth is appropriate and necessary: minimizing new
enrollees such as workers currently not enrolled and limiting
further immigration while also assisting recent immigrants to
rapidly assimilate is a critical first step. Protecting our
environmental legacy, increasing national cohesiveness, and
providing a thriving economic platform can only be accomplished
with a population balanced across age groups.
Programs and current proposals undertaken by Congress to
remedy Social Security have often worked in opposition to
achieving these sound national goals while further
destabilizing Social Security.
I will be happy to answer any questions you may have or to
provide additional information.
Statement of Dr. John C. Goodman, President, National Center for Policy
Analysis
The new Social Security Guarantee Plan put forward by Reps.
Bill Archer and Clay Shaw has a worthy aim: to secure future
retirement benefits for today's young people without increasing
taxes on workers or reducing benefits to retirees.
To fully appreciate the importance of the plan, consider
what will happen if we don't do anything. According to the
Social Security Trustees, by the year 2045, when today's 21-
year-olds will be retiring, the payroll tax needed to pay
Social Security benefits will be more than 70 percent higher
than it is today. Whereas the current system takes about 10 per
cent of workers' incomes to pay retirement pensions, in the
future the government will need about 17 cents out of every
dollar. This tax won't be imposed in a vacuum. When the cost of
Medicare and other government health programs for the elderly
are added in, taxes will take almost one-third of everything
workers earn, just to pay benefits under current law. That's
before we build any roads, or pay the salaries of police and
teachers, or do anything else. Will future taxpayers, most of
whom are not yet born, be willing to bear that kind of tax
burden? It's unlikely.
The Social Security Guarantee Plan offers a better way.
Under this plan, workers would continue to pay (with their
employers) 12.4 percent in Social Security payroll taxes.
However, workers would receive an income tax refund equal to 2
percent of wages, which would be invested every year in a
private investment account of stocks and bonds. This would be a
refundable income tax credit, so workers who don't earn enough
to pay taxes would get a ``refund'' from the government to fund
their private accounts. Workers could choose from among 50
private investment firms to manage their accounts. These firms
would be required to invest conservatively in a diversified
portfolio.
Upon retirement, a retiree's benefits would come from two
sources: an annuity based on the private account and the Social
Security system. A government guarantee would insure that
everyone receives a retirement income at least equal to Social
Security's promised benefit. For example, if a retiree's
private investment is only enough to pay 80 per cent of his or
her retirement benefit, the government will pay the other 20
per cent.
A controversial feature of the Social Security Guarantee
Plan is that it requires individuals to turn their account
balances over to the government at retirement. The government
then pays them a monthly annuity. Letting private annuities
handle the job makes more sense.
Can the Social Security Guarantee Plan accomplish its
proclaimed goal of maintaining the Social Security program
without cutting benefits or raising taxes? Can it at the same
time eliminate the massive unfunded liability that now exists?
The Social Security Administration has evaluated the plan and
said yes. However, the Social Security Administration's
analysis treats the IOUs in the OASI Trust Fund as real assets
that can be used to pay those benefits as they come due. In
fact, every asset of the Trust Fund is a liability of the
Treasury. So the only way to redeem the IOUs in the Trust Fund,
unless there is a surplus, is to raise taxes. This will be the
problem at the time of the retirement of the baby boomers.
The National Center for Policy Analysis has analyzed the
plan is a different way. Our analysis assumes that the unified
budget surplus will be used as a source of funding for deposits
to the Social Security Guarantee Accounts (SSGAs), the personal
accounts set up under the plan. It also assumes that the new
revenue made possible by the addition to the nation's capital
stock by the private accounts will be sequestered as needed to
pay benefits in future years. Both these assumptions are
consistent with the spirit of the Social Security Guarantee
Plan.
We have used a simulation model developed by economists at
Texas A&M University for the National Center for Policy
Analysis. Our analysis, like that of the Social Security
Administration, assumes a real rate of return on the private
accounts of 5.35%.
The NCPA analysis finds that the Social Security Guarantee
Plan can provide the benefits promised by current law for
retirees and their families (including future adjustments for
inflation) while eliminating our current massive unfunded
Social Security liability. Furthermore, by the time today's new
workers retire, those just entering the workforce can
anticipate a lower payroll tax than today, rather than the 70
percent increase in the payroll tax that can be expected if we
retain the current Social Security system.
The following table shows the average percentage of new
retirees' benefits that will be funded from personal account
accumulations in various years under the plan.
The Contribution of Personal Account Annuities
------------------------------------------------------------------------
New
Retirees:
Percent of
Monthly
Year Benefit
Funded by
Private
Accounts
------------------------------------------------------------------------
2010....................................................... 4%
2020....................................................... 12%
2030....................................................... 26%
2040....................................................... 42%
2050....................................................... 51%
2060....................................................... 50%
2070....................................................... 49%
2075....................................................... 48%
------------------------------------------------------------------------
It is fairly widely recognized that the specter of
intergenerational conflict looms as a legacy of the Social
Security system in its current form. Too many proposed reforms
would offer solutions that harm the elderly by reducing
benefits or harm the nation's workers by increasing payroll
taxes, or do both. It has long been our contention that the
system can be reformed without either of these drastic
recourses. The Social Security Guarantee Plan is an approach
that can accomplish that kind of reform.
Statement of Darcy Ann Olsen, Entitlements Policy Analyst, Cato
Institute
Cato Briefing Paper No. 47, June 11, 1999, Social Security Reform
Proposals: USAs, Clawbacks, and Other Add-Ons
Executive Summary
Faced with Social Security's impending deficits, some
lawmakers have proposed supplementing the program's benefits
with personal, market-based retirement accounts for all
workers. Those proposals, dubbed ``add-ons'' because they would
be added to the existing Social Security system, do not address
Social Security's financial crisis. They would merely create
another centralized retirement plan requiring a new funding
stream.
Proposed funding sources include voluntary individual
contributions, general tax revenue, and mandatory payroll tax
increases. Depending on which funding mechanism is selected,
the market-based retirement accounts threaten to become tax
shelters for higher-wage earners, become new entitlements, or
increase the payroll tax burden. Although some add-ons are
designed to ``shore up'' Social Security by cutting its
benefits by the amounts accumulated in the accounts, such plans
rely on a vast infusion of government money and offer no
greater retirement income for workers.
Studies show that if workers could invest what is currently
taken from them in the form of Social Security payroll taxes,
they would retire comfortably. Since workers already save
enough to secure a comfortable retirement, it would be more
sensible to let them get a better deal on their current payroll
taxes by putting that money in personal accounts. Those
accounts can be integrated with Social Security and therefore
have the potential to eliminate Social Security's financial
crisis. In addition, the accounts can ensure that all workers,
not just the wealthy, can retire with financial security.
Introduction
In his 1999 State of the Union Address, President Clinton
proposed what he termed Universal Savings Accounts (USAs) as a
way to improve retirement security for workers. His proposal is
one of dozens that recognize that workers should have the
chance to increase their private retirement savings by owning
personal, market-based retirement accounts. Although most
members of Congress seem to agree that workers should own
personal retirement accounts, there is some disagreement about
how the accounts should be funded.
For instance, President Clinton would fund new accounts
through a method called an ``add-on.'' As its name suggests, an
add-on would require workers to pay an additional amount of
money, supplementary to the 12. 4 percent Social Security tax,
to establish new accounts. Proposed resources for add-on
accounts include voluntary contributions by individuals,
mandatory increases in the payroll tax, and general tax
revenue. In the case of USAs, the funding source would be a
combination of general tax revenue and voluntary individual
contributions. In one plan proposed by two members of the 1994-
96 Advisory Council on Social Security, the funding source
would be a mandatory increase in the payroll tax. The common
element of add-on proposals is that they require workers to
contribute money above and beyond what they are currently
forced to pay to Social Security.
The fundamental drawback with most add-ons is that they do
not address Social Security's problems. Add-ons have no more to
do with reforming Social Security than do Roth individual
retirement accounts or any other private retirement plan; they
would simply be one more personal retirement vehicle. If such
accounts are established, Social Security's date of reckoning
will not change by a day: the system will still face a $9.5
trillion unfunded liability requiring estimated benefit cuts of
30 percent or tax increases of more than 5 percentage
points.\1\ And depending on how they are financed, add-ons
could increase the payroll tax burden, become a new
entitlement, or become a tax shelter for higher-wage earners,
while doing little to improve retirement security for workers.
For example, if contributions were voluntary, evidence from
401(k) plans indicates that half of workers earning less than
$35,000 would probably not participate. That would effectively
create a tax shelter for higher-wage earners but would not
improve retirement security for lower-wage workers. Some add-
ons, like the one proposed by House Ways and Means Committee
chairman Bill Archer (R-Tex.) and Social Security Subcommittee
chairman Clay Shaw (R-Fla.), are designed to ``shore up''
Social Security by cutting benefits by the amounts accumulated
in the accounts at retirement, but such plans rely on a vast
infusion of government money and offer no greater income for
workers at retirement.
A better way to fund personal accounts is to allow workers
to use existing payroll taxes that are currently slated for
Social Security. This method of financing personal accounts is
known as a ``carve out.'' The distinctive feature of carve-out
accounts is that they do not require workers to contribute
additional money to what they already pay into Social Security.
Instead, such accounts would be funded by redirecting a portion
of the current payroll tax to new retirement accounts. For that
reason, those accounts avoid the add-on pitfalls: tax hikes,
new entitlements, and de facto advantages for the wealthy.
Furthermore, such accounts are clearly integrated with Social
Security and therefore have the potential to eliminate Social
Security's financial crisis. These accounts will increase the
private savings of all workers, thereby reducing dependence on
Social Security and explicitly reducing Social Security's
liabilities. Carve-outs can ensure that all workers, not just
the wealthy, have the opportunity to save and retire with
financial security.
Universal Savings Accounts and Other Voluntary Accounts
The idea of establishing individual accounts funded by
voluntary contributions is a favorite among politicians because
they can talk about the positive aspects of individual
accounts-worker empowerment, personal ownership, and wealth
creation-while avoiding altogether the unpleasant but central
issue of Social Security reform. In the end, these plans simply
call for greater contributions from working Americans but
ignore Social Security's financial crisis. If Congress
established voluntary accounts, Social Security's unfunded
liability would not change by a penny: the program would still
face a $9.5 trillion liability because the new accounts would
not bring revenue into the system or reduce benefit obligations
to beneficiaries. In addition, as this section illustrates,
those accounts will likely do little, if anything, to improve
retirement security for the low-income workers whom they are
designed to benefit.
The best-known proposal for voluntary accounts is President
Clinton's Universal Savings Accounts. USAs would be funded
through a combination of government deposits and voluntary
individual contributions. In general, workers and nonworking
spouses in low- to moderate-income households would receive an
automatic government contribution of $300.\2\ The automatic
contribution would be phased out as incomes rose-at between
$20,000 and $40,000 for singles, $30,000 and $50,000 for head
of household filers, and $40,000 and $80,000 for joint
filers.\3\ Workers could also make voluntary contributions to
their accounts that would be matched progressively by
government contributions. The matching contribution would be
dollar-for-dollar and would be reduced to 50 percent over the
same income ranges as the automatic contribution. It would then
remain at 50 percent until the income level at which
eligibility ends.\4\ Total contributions to an account,
including government and worker contributions, are capped at
$1,000 per year per person.
Participation in USAs is likely to be anything but
universal. Only low- to moderate-income workers would receive
the automatic $300 government deposit; however, most low- to
moderate-income workers would not benefit from the voluntary
component and corresponding government match, because they
would not be able to afford the requisite contribution. In
fact, as this section documents, experience with 401(k) plans
indicates that low-income workers, who most need additional
retirement income, will be the least likely or able to take
advantage of the voluntary (and largest) portion of USAs.
Low incomes present the most fundamental obstacle to
saving. The truth is that salaries of low-income workers barely
cover basic living expenses.\5\ According to the 1998
Retirement Confidence Survey, conducted by the Employee Benefit
Research Institute, one in three Americans is not saving for
retirement. By far the most common reason given for not saving
is ``too many current financial responsibilities.'' \6\ Some 40
percent of workers said they could not save even an extra $20
per week for retirement.\7\ Opening accounts for workers will
not change that: workers who are either unable or unwilling to
save more will not begin to do so simply because the government
opens an account in their name.\8\
It is no surprise that the more one earns, the more likely
one is to save for retirement. For example, only 6 percent of
households with incomes of less than $10,000 have retirement
accounts compared with 24 percent of households with incomes
ranging from $10,000 to $24,999. Figure 1 shows the percentage
of households (by income) that own retirement accounts.
Similarly, the more one earns, the more likely one is to save
and invest in capital markets. Figure 2 shows the percentage of
households (by income) that own mutual funds and stocks.
One reason there is widespread support for policies that
would encourage individual retirement savings is that so few
low-income households have managed to accumulate retirement
assets, which makes those households dependent on Social
Security for most of their retirement income. The Social
Security Administration reports that 30 percent of retirees
depend on Social Security for more than 90 percent of their
retirement income.\9\ Will USAs, as President Clinton put it,
``make real retirement security universal''? \10\
To answer that question, it is instructive to examine
worker participation rates in 401(k) plans in which employers
match employee contributions. Research on worker participation
in 401(k) plans with employer matches is relevant to the
discussion of USAs because USAs would have important features
of 401(k) plans. USAs would be offered through employers, and
the government would match worker contributions to varying
degrees. Contributions would go into market-based retirement
accounts.\11\ Never-theless, 401(k) plans with matches are not
a perfect analogy with USAs. For instance, several factors that
influence participation rates in 401(k) plans, such as loan
provisions, investment choices, and hardship withdrawal
provisions, have not been examined.\12\ Variation in match
rates, eligibility phaseout ranges, shifts in savings, and
differential tax treatment could also affect participation
data. Furthermore, basing estimates of expected participation
rates in USAs on participation rates in 401(k) plans with an
employer match could lead to overgenerous estimates. That is
because participation rates in those 401(k) plans are
significantly higher than participation rates in similar
savings and retirement plans such as IRAs, regular 401(k)
plans, stocks, and mutual funds. On balance, however,
participation in 401(k) plans is the best available model and
offers a reasonable starting point for figuring out who could
be expected to participate in the voluntary component of USAs
and similar voluntary accounts.
Not surprising, one of the most important determinants of
401(k) participation rates is income level.\13\ Figure 3 shows
rates of participation by income in 401(k) plans with an
employer match. Of workers offered a 401(k) plan with an
employer match, 39 percent of those earning less than $15,000
annually participate, whereas 53 percent of those earning
$15,000 to $25,000 participate. Contribution rates also vary
with income, from a mean rate of 5 percent of salary for
participants with incomes of less than $15,000 to more than 7
percent for participants with incomes of $50,000 or more.\14\
If 401(k) plans with matches give a reasonable indication
of participation in USAs and similar accounts, policymakers can
expect that participation rates will be significantly lower
among low-and moderate-income workers than among higher-income
workers. As Figure 4 shows, at least one of two workers earning
$35,000 or less would not participate, either by choice or
because of financial constraint.\15\ An estimated three of four
workers earning more than $35,000 would participate. Altogether
an estimated 40 percent of workers would not participate-a
number that hardly indicates universal participation.
Proponents of USAs point to experience with Individual
Development Accounts (IDAs) in an attempt to demonstrate that
low-income workers could save at rates equal to those of
higher-income workers, despite the fact that most do not do so
currently. That assumption is based on the theory that savings
rates are driven largely by institutionally structured
incentives rather than by income. Most IDAs, which were a
driving force behind the proposal for USAs, are matched savings
accounts designed to help low-income workers build assets for
such purposes as buying a first home, education, or starting a
new business.\16\ IDAs and USAs share several important
features. Both (1) target lower-income workers, (2) encourage
participation through generous matches, (3) use institutional
savings mechanisms such as the government and employers to make
participation easy, and (4) provide financial education
information.
According to researchers at the Center for Social
Development at Washington University in St. Louis, Missouri,
the first major study of IDAs was the American Dream
Demonstration (ADD), initiated in 1997.\17\ The study involved
13 private organizations that were selected to design,
implement, and administer IDAs in their communities.
Unfortunately, there is little evidence to date that either
demonstrates or disproves the effectiveness of IDAs. Thus far,
the median value of the closing balances in the ADD is $80
(participant savings) or $224 (participant savings, interest,
and matching funds). There are no significant differences in
total IDA account balances by gender, residence, educational
attainment, employment status, marital status, or monthly
income.\18\ Those findings contrast starkly with individual
retirement accounts, savings accounts, and 401(k) plans. As the
researchers put it, ``Standard economic theory would not
predict this uniformity, especially across education,
employment, and income levels.'' They conclude, ``It is far too
early in the ADD evaluation to draw conclusions, but this
pattern of savings and IDA balances . . . may suggest that the
IDA program itself, more than individual characteristics, may
be determining amounts of savings.'' \19\ Given that the ADD
evaluation is in its earliest stages, it would be premature to
draw any lessons from the results.
Although the ADD study was the first major attempt to show
the effectiveness of IDAs, a few small demonstration projects
have also attempted to do so. For example, Brian Grossman of
the Corporation for Enterprise Development writes, ``Data from
the National Federation of Community Development Credit Unions
(NFCDCU) proves that the poor can and do save money.'' \20\
That remains to be seen. In fact, the NFCDCU says its data are
not available to the public. Such a statement prevents
researchers from verifying that claim.\21\ Most other IDA
programs are too new to have been studied or do not plan to
study participants.\22\ Even if a handful of IDA programs has
been successful, it would be difficult to extrapolate the
results to the population at large because participants are
self-selecting.\23\ In sum, a much more thorough investigation
of IDAs would be needed before policymakers could draw any
sound conclusions about IDAs' ability to increase the savings
of and build assets for low-income workers, particularly as a
nationwide program of voluntary add-on accounts.
Although no model is perfect, participation in 401(k) plans
with employer matches gives policymakers a reasonable estimate
of likely participation in USAs and other voluntary accounts.
Experience with private retirement plans shows that
participation rates rise proportionately with income: the
greater one's income, the greater one's likelihood of
participating. That means America's lowest-income workers, who
most need private retirement accounts, are the least likely to
participate in or benefit from voluntary add-on accounts. The
reality is that many low-income workers simply earn too little
or choose not to deposit significant assets in those accounts.
That will not be changed by giving them a place in which to
deposit money they may not have or choose to spend on other
things.
Add-Ons Established with General Tax Revenue
Because many lawmakers suspect that low-income workers will
not participate in voluntary accounts, they have begun to look
for other sources of funding, including general tax revenue.
One such proposal was introduced by Rep. John Kasich (R-Ohio),
House Budget Committee chairman. His legislation, the Personal
Retirement Savings Account Act of 1998, would put 80 percent of
any federal budgetary surplus into Social Security Plus
accounts for all workers. Workers would have a limited number
of options for investing their Social Security Plus money, and
they would own their accounts. The accounts would be
supplementary to the Social Security system, and they would not
affect the program in any way. Kasich's press release puts it
this way: ``These accounts would be in addition to the existing
Social Security System, which would not be affected by Kasich's
legislation.'' \24\
Kasich's proposal and others like it are politically
popular, primarily because the ``spin'' gives them the
appearance of improving Social Security (thus, the name Social
Security Plus accounts), whereas, in truth, they do not touch
the Social Security system.\25\ As Kasich explains, ``It is a
whole new way to help Americans save for retirement while at
the same time setting the stage for a solution to the long-term
problems facing Social Security.'' \26\ In other words, these
accounts would supplement Social Security but would not
directly affect the program in any way.
Proposals that would fund personal accounts by divvying up
budget surpluses are time limited; after all, how will the
government fund the accounts once the surpluses have been
spent? Director of the National Economic Council Gene Sperling
has said that the USAs will cost $38 billion a year once they
are fully established.\27\ Even if low participation rates make
the accounts less costly than the administration has estimated,
when the surpluses dry up, either federal deposits in the
accounts will stop, or, more likely, taxpayers will continue to
bear the cost of an expansive new program.\28\
It is important to note that some policymakers argue that
placing the surplus in personal accounts is not an entitlement
but a tax cut. For example, Clinton calls USA contributions
``tax credits'' and has argued that ``this is the right way to
provide tax relief.'' \29\ A better analysis would argue that
government contributions are not ``tax cuts'' but ``tax
favors"-preferential tax treatment of workers who are willing
to apply the credits to the government's retirement plan. As
Deputy Secretary of the Treasury Larry Summers puts it, ``This
is a tax cut which individuals have no alternative but to
save.'' \30\ The refunds become a transfer or entitlement when
taxpayers receive more from the government than they have paid
in taxes.
Mandatory Add-Ons
Given the limits of voluntary contributions and accounts
funded with general tax revenue, some policymakers hope to
establish mandatory accounts that would be funded with an
increase in the payroll tax. Edward M. Gramlich and Marc M.
Twinney, members of the 1994-96 Advisory Council on Social
Security, proposed the best-known plan of this kind.\31\
Gramlich and Twinney would establish individual accounts by
mandating an increase in the payroll tax of 1.6 percent.\32\
Like most proponents of individual accounts, Gramlich and
Twinney recognize that ``somehow or other there must be some
new saving soon to finance the nation's retirement system into
the 21st century.'' \33\ However, their mandatory add-on
approach is a poor way to achieve that goal.
To be sure, mandating savings avoids some of the problems
associated with voluntary add-ons; namely, that mandatory is
not voluntary-all workers would participate. But funding
individual accounts by raising the payroll tax introduces
problems of its own. In particular, the payroll tax is
extremely regressive, which means that it takes a larger
portion of total income from low-and average-wage workers than
from high-wage workers.\34\ That disproportionate burden is
compounded by the fact that the amount of income subject to the
payroll tax is capped at $72,600.\35\ Therefore, any increase
in the payroll tax necessarily weighs most heavily on low-and
average-wage earners, who can least afford to pay more.
Increasing the payroll tax would also reduce take-home pay,
a situation that would leave workers with less money to pay for
other important items such as education, home mortgages, health
care, and so on. Again, low- and middle-wage workers can least
afford such reductions in pay. In addition, some could actually
fall below the poverty line, particularly since payroll taxes
have no personal exemptions or standard deductions.
It is important to note that, unlike most add-on plans,
Gramlich and Twinney's individual accounts were proposed in
conjunction with other Social Security reforms, including
increasing the retirement age, cutting spousal benefits, and
lengthening the benefit computation period. They designed their
proposal so that the revenue generated by the individual
accounts would offset the benefit cuts. Gramlich and Twinney
explain, ``These [accounts] in effect make up for the benefit
cuts and provide, on average, the same benefits as under
present law.'' \36\ Regardless of whether the combined reforms
could bring Social Security into long-term actuarial balance,
the Gramlich-Twinney plan does nothing to improve a host of
other problems associated with Social Security and actually
makes some of them worse.
For example, increasing the payroll tax without increasing
benefits effectively reduces Social Security's rate of return.
Already, workers born after 1970 will receive less than 1
percent return on their payroll taxes, assuming Social Security
manages to pay all benefits promised under current law.\37\
Laurence Kotlikoff, professor of economics at Boston University
and Social Security expert, reports, ``Today's 18-year-olds in
every economic class will pay more in taxes than they receive
in benefits.'' \38\ If payroll taxes are increased, that rate
of return will worsen further.\39\
In addition, the proposal would not alleviate the high
poverty rates under Social Security. Currently, an estimated 20
percent of widowed women, divorced women, and never-married
women live in poverty while collecting Social Security. Poverty
rates during retirement for African-American and Hispanic-
American women are 28 percent.\40\ Increasing the payroll tax
will simply extract more money from those women during their
working years and give them no more financial security at
retirement. That is an outrageous proposition, considering that
virtually all women (and men) would be better off under a
system of personal retirement accounts funded through the
payroll tax.\41\
Add-Ons with Clawbacks
The most recent proposals for add-on accounts include
``clawbacks''-provisions that would reduce promised Social
Security benefits by the amount of revenue generated by the new
accounts. Like other add-ons, these accounts would require a
new revenue stream.
House Ways and Means Committee chairman Bill Archer (R-
Tex.) and Social Security Subcommittee chairman Clay Shaw (R-
Fla.) recently proposed this approach. Under the Archer-Shaw
plan, the accounts would be funded with general revenue. The
government would place an amount equal to 2 percent of a
worker's earnings, in the form of an income tax credit, in a
personal account. For instance, a worker making $50,000 would
receive a credit worth $1,000. Any revenue generated by the
accounts would be offset at retirement by cutting an equivalent
amount of Social Security benefits.\42\ Because the amount of
money that can be placed in the accounts is capped at $1,452
per year and because the plan requires 40 percent of the funds
to be placed in bonds, even the highest-wage workers would be
extremely unlikely to generate assets in excess of Social
Security's promised benefits.\43\
Consider a person who works 40 years, contributes the
maximum allowable amount per year ($1,452), and earns a 6
percent real rate of return. His account would generate an
annuity worth roughly $865 per month, whereas Social Security
promises to deliver roughly $1,800 per month.\44\ Because the
amount generated in the account is less than Social Security's
promised benefits, that worker's retirement benefits would not
increase. In short, the Archer-Shaw plan would require a vast
infusion of general tax revenue just to make good on Social
Security's promises; the additional revenue would not buy
greater benefits for workers.
Regardless of whether infusing Social Security with general
tax revenue could put the program into long-term actuarial
balance, the clawback approach has a host of other problems.
Like the Gramlich-Twinney plan, the proposal would do nothing
to alleviate the high poverty rates low-wage workers face under
Social Security. And, by requiring workers to pay more money
into the system without increasing benefits, the proposal
reduces Social Security's rate of return. Furthermore, workers
would not own their accounts. If a worker dies before age 65,
he can leave his account to his heirs. However, workers who
retire are forced to surrender their accounts to the government
in exchange for an annuity. Thus, in order to have a property
right in your account, you have to die before age 65. A vast
majority of workers who live to retirement would have no rights
to their accounts.
Finally, workers are already paying more than enough to
retire comfortably. For example, if a worker making $20,000
were able to put his payroll taxes in an account that provided
an annual real return of 6 percent, he would retire with an
account worth more than $380,000 after 40 years of work. Using
a conservative annuity estimate, such an account would be able
to provide a monthly payment of more than $1,450.\45\ Social
Security promises to provide such a worker with a monthly
benefit of roughly $810.\46\ In that light, it seems senseless
to use more taxpayer funds to begin a new retirement program.
Conclusion
The idea of establishing individual retirement accounts
alongside Social Security is a favorite among politicians
because they can talk about the positive aspects of individual
accounts-worker empowerment, personal ownership, and wealth
creation-while avoiding the more unpleasant but central issue
of Social Security reform. Whether funded through voluntary
contributions, general revenue, or payroll tax increases, in
the end those plans simply take more money from working
Americans while ignoring Social Security's financial crisis.
Social Security would still face a $9.5 trillion unfunded
liability. Making Social Security solvent would still require
estimated benefit cuts of 30 percent or tax increases of more
than 5 percentage points.
Proponents of add-on accounts fail to recognize that
workers are contributing enough to provide for a comfortable
retirement. Dozens of studies have shown that if workers were
able to invest their Social Security payroll taxes, they would
retire with substantial sums in their accounts. It is senseless
to force workers to pay above and beyond what is already enough
to secure a comfortable retirement. Congress should simply let
workers get a better deal on their current payroll taxes by
allowing them to redirect that money into personal accounts.
Notes
1. 1999 Annual Report of the Board of Trustees of the Federal Old-
Age and Survivors Insurance and Disability Insurance Trust Funds
(Washington: Government Printing Office, 1999), p. 28.
2. The contribution would be in the form of a tax credit deposited
directly into each worker's account. The credit would be
``refundable,'' meaning a worker's credit could exceed his tax
liability.
3. ``President Clinton Introduces Universal Savings Accounts:
Summary Documents,'' National Economic Council, April 14, 1999, p. 8.
4. Eligibility ends at $50,000 for single filers with pension
coverage, $75,000 for head of household filers with pension coverage,
and $100,000 for joint filers with pension coverage. There is no
eligibility limit for people without pension coverage.
5. Sondra Beverly, ``How Can the Poor Save? Theory and Evidence on
Saving in Low-Income Households,'' Center for Social Development,
Washington University, St. Louis, Missouri, Working Paper no. 97-3,
1997, p. 21, http://gw bweb.wustl.edu/users/csd/workingpapers/wp97-
3.html. Beverly examines demographic variables as they relate to
savings and discusses several theories of saving, including
neoclassical economic, psychological, sociological, behavioral, and
institutional theories.
6. Sixty-six percent of respondents said they had ``too many
current financial responsibilities.'' The second and third most common
reasons were ``I expect to have a pension'' (26 percent) and ``economic
events, such as inflation and unemployment, are too uncertain'' (26
percent). Paul Yakoboski, Pamela Ostuw, and Jennifer Hicks, ``1998
Retirement Confidence Survey,'' Employee Benefits Research Institute,
American Survey Education Council, and Matthew Greenwald and
Associates, Washington, 1998, http://207.152. 182.56/rcs/rcs-
expectations.pdf.
7. Survey participants were asked, ``Could you save $20 per week
more for retirement?'' Forty percent of workers who had saved for
retirement said no, and 41 percent of workers who had not saved for
retirement said no. Paul Yakoboski, Pamela Ostuw, and Jennifer Hicks,
``What Is Your Savings Personality? The 1998 Retirement Confidence
Survey,'' Employee Benefits Research Institute Issue Brief no. 200,
August 1998, p. 11, http://www.ebri.org/rcs/T114.pdf.
8. Some policymakers might argue that the tax benefits of new
retirement accounts would induce workers to save; however, most low-in-
come workers pay little or no income tax, so the new accounts would be
unlikely to alter their propensity to save.
9. Sixty-six percent of retirees depend on Social Security for at
least half of their retirement income. Social Security Administration,
``Fast Facts and Figures about Social Security,'' p. 7.
10. ``Remarks of the President on Universal Savings Accounts,''
White House, Office of the Press Secretary, April 14, 1999.
11. A typical employer match is 50 cents for each $1 contributed by
the worker, with the match ending when worker contributions reach 6
percent of salary. William Bassett, Michael Fleming, and Anthony
Rodrigues, ``How Workers Use 401(k) Plans: The Participation,
Contribution, and Withdrawal Decisions,'' National Tax Journal 11, no.
2 (June 1998): 265.
12. Ibid., p. 284.
13. Ibid., pp. 270, 276. Low-income workers have greater difficulty
participating in 401(k) plans because of their low incomes. In
addition, the authors cite other reasons for lower participation among
low-income workers: low-income workers benefit less from the tax-
deferred nature of 401(k) plans than do high-income workers; they are
more likely to be liquidity constrained and therefore have better uses
for their funds than retirement saving; some are more likely to be
covered by means-tested programs and therefore face high implicit tax
rates on savings; and Social Security income replacement rates are
higher for low-income workers, reducing their incentive to save. Plan
and household characteristics are also important influences on the
decision to participate in 401(k) plans.
14. Ibid., p. 275.
15. The median income of households in 1996 was $35,492. Bureau of
the Census, Statistical Abstract of the United States: 1998
(Washington: Government Printing Office, 1998), p. 471.
16. Virtually all the Individual Development Account proposals have
been guided by work of the Corporation for Enterprise Development in
Washington and the Center for Social Develop-ment at Washington
University in St. Louis. See Michael Sherraden et al., ``Downpayments
on the American Dream Policy Demonstration: A Nation-al Demonstration
of Individual Development Accounts,'' Center for Social Development,
Washington University, St. Louis, Missouri, January 1999, pp. 3-4.
17. Ibid., pp. 1, 6.
18. Ibid., pp. 59-63.
19. Ibid., p. 66.
20. Brian Grossman, ``What We Know about the Success of Individual
Development Accounts,'' Corporation for Economic Development,
Washington, March 1997, p. 5, http://www.cfed. org/idas/documents/
whatweknow.htm.
21. NFCDCU would not release its data to the Cato Institute for
examination after repeated requests.
22. Karen Edwards, ``Individual Development Accounts: Creative
Savings for Families and Communities,'' Center for Social Development,
Washington University, St. Louis, Missouri, Policy Report, 1997, pp. 1-
30.
23. Author's telephone conversation with Michael Sherraden,
professor of social development at Washington University, St. Louis,
Missouri, March 23, 1999.
24. John Kasich, ``Kasich Introduces Bill Return-ing Surpluses to
Americans for Retirement Savings,'' Press release, March 12, 1998.
25. See, for instance, Sen. Bill Roth (R-Del.), ``Personal
Retirement Accounts Act of 1998,'' http://thomas.loc.gov/cgi-bin/query/
z?c105 :S2369. Roth would use a portion of the budget surplus to
establish individual accounts based on a progressive formula.
26. Kasich.
27. Gene Sperling and Larry Summers, White House, Office of the
Press Secretary, Press briefing, April 14, 1999.
28. For further discussion, see David John, senior policy analyst
for Social Security at the Heritage Foundation, ``Testimony before the
House Committee on Commerce, Subcommittee on Finance and Hazardous
Materials,'' February 25, 1999, http://com-notes.house.gov/cchear/hear
ings106.nsf/fhmmain.
29. ``Remarks of the President on Universal Savings Accounts.''
30. Sperling and Summers.
31. Robert M. Ball et al., ``Option II: Publicly-held Individual
Accounts,'' in Report of the 1994-1996 Advisory Council on Social
Security, vol. 1, Findings and Recommendations (Washington: Government
Printing Office, 1997), pp. 28-29.
32. ``Defined contribution individual accounts in the amount of 1.6
percent of covered payroll would be created and funded by employee
contributions. Individuals would have constrained choices on how the
funds were to be invested.'' Ibid., p. 28.
33. Edward Gramlich and Marc Twinney, ``The Individual Accounts
Plan,'' in Report of the 1994-1996 Advisory Council on Social Security,
p. 155.
34. For a discussion of how payroll taxes affect low-wage earners,
see Michael Kremer, ``Restructuring Social Security Taxes,'' Brookings
Institution Policy Brief no. 40, Washington, December 1998, pp. 1-8.
35. The maximum taxable income in 1999 is $72,600. 1999 Annual
Report of the Board of Trustees of the Federal Old-Age and Survivors
Insurance and Disability Insurance Trust Funds, p. 2.
36. Gramlich and Twinney, p. 155.
37. Laurence Kotlikoff, ``Privatizing Social Security,'' National
Center for Policy Analysis Report no. 217, July 1998, p. 15.
38. Ibid., p. 12.
39. Some critics argue that the proposed increase in the payroll
tax is not a ``tax,'' because the money would be put into accounts
owned by the workers. Outside the Beltway, however, most workers would
consider this a tax. It reduces take-home pay, and politicians tell
workers when and how to spend their money. For a detailed discussion,
see Peter Ferrara and Michael Tanner, A New Deal for Social Security
(Washington, Cato Institute, 1998), pp. 122-25.
40. National Economic Council Interagency Working Group on Social
Security, ``Women and Retirement Security,'' October 27, 1998, p. 12-
13.
41. Darcy Olsen, ``Greater Financial Security for Women with
Personal Retirement Accounts,'' Cato Institute Briefing Paper no. 38,
July 20, 1998.
42. The credit would be ``refundable,'' meaning that a worker's
credit could exceed his tax liability. ``Archer Statement on
Introduction of Social Security Guarantee Plan,'' Committee on Ways and
Means, Press release, April 28, 1999.
43. The credit is capped at the Social Security wage base, so no
one would receive a credit in excess of $1,452 in 1999 (2 percent of
$72,600). ``The Social Security Guarantee Plan: Saving and
Strengthening Social Security without Raising Taxes or Cutting
Benefits,'' Committee on Ways and Means, Press release, April 28, 1999.
44. The annuity was calculated by using the 17.3-year life
expectancy provided for a 65-year-old man in the year 2035, given on
page 62 of the 1999 Annual Report of the Board of Trustees of the
Federal Old-Age and Survivors Insurance and Disability Insurance Trust
Funds. Calculations also assume an annuitization charge of 20 percent.
45. ``The Social Security Guarantee Plan.''
46. Calculations by Carrie Lips, Social Security analyst, Cato
Institute.
[GRAPHIC] [TIFF OMITTED] T2789.059
[GRAPHIC] [TIFF OMITTED] T2789.060
Statement of Cynthia Wilson, President, Retired Public Employees
Association, Inc.
As President of the Retired Public Employees Association,
an organization of more than 80,800 New York government
retirees and their spouses, I am writing to commend the
Committee for seeking a consensus on Social Security Reform.
Our Association wishes to go on record in favor of the
establishment, without delay, of a formal process for
evaluating the specific proposals which will protect the
retirement income of minorities, women and low-wage workers.
The implementation of any such proposals should be strictly on
an as-needed basis.
Specifically RPEA urges:
The study of the ``effects of increases in life
expectancy on the expected level of retirement income'' as
proposed in Senate Bill S.21;
The establishment of a process to implement
previously evaluated reform proposals only as developing
economic conditions warrant. This would include:
--identifying those reforms having the fewest adverse
effects on vulnerable populations;
--projecting the amount of income or savings generated by
these reforms and;
--specifying the indicators which would justify their
implementation.
RPEA also urges that:
The Social Security Trust Funds be removed from
the Federal Budget and
Any plan establishing individual investment
accounts remain outside the Social Security system, using only
those budget surpluses over and above the amount attributed to
the Social Security Trust Funds.
Statement of Hon. Dorcas R. Hardy, United Seniors Association; and
former Commissioner, Social Security
Social Security is in serious financial trouble. By no
later than 2014--just 15 years from now--the program will begin
to pay out more than it collects in tax revenue. At that point,
Social Security's financial crisis really begins.
By 2034, the Social Security Trust Fund will be exhausted.
This insolvency date assumes, however, that the Trust Fund will
be repaid the trillions of dollars owed it, which is very
problematic.
According to the 1999 Trustees Report, to keep Social
Security solvent for the next 75 years will require raising the
payroll tax from the current 12.4% to over 18% (a 50%
increase), reducing benefits by at least one-third, or some
combination of the two.
These drastic measures to keep the system afloat are
necessary because the worker/beneficiary ratio has changed
dramatically. It was 17-to-1 in 1950, but will be only 2-to-1
in 2030.
The solution to Social Security's looming fiscal crisis is
not to raise taxes. The Social Security payroll tax has
exploded from 2% in 1937 to 12.4% today--a sixfold increase.
In addition, the wage base the tax rate is applied to has
exploded from $3,000 in 1937 to $72,600 in 1999. As a result,
today over 70% of workers pay more in payroll taxes than they
do in income taxes.
Reducing Social Security benefits is also not the solution
for rescuing the ailing program. With the average Social
Security benefit just $780 per month, reducing benefits would
cause major hardship for millions of seniors. Besides the
economic impact of cutting benefits, it's wrong for the
government to break its promises to seniors. Today's seniors
paid into Social Security their whole lives with the
expectation that they would receive a certain level of support.
To change the rules now would be unfair.
Other indirect ways of cutting benefits, such as means
testing, reducing cost-of-living adjustments, and increased
taxation of benefits, are wrong and won't make a significant
dent in dealing with Social Security's long-term liabilities,
now estimated to be about $9 trillion. What they will do is
hurt current beneficiaries and make Social Security an even
worse deal for their children and grandchildren.
With the current system clearly unsustainable, the time has
come to redesign Social Security and begin the transition to a
new funded pension system based on personal retirement accounts
(PRAs). Workers should be allowed the freedom to take a portion
of their payroll taxes and privately invest them in stocks,
bonds, and other income-producing instruments.
If forced to remain in the current Social Security system,
the children and grandchildren of today's retirees face dim
prospects for their own retirement years. For most young
workers entering the workforce today, the real rate of return
paid by Social Security will be 1% or less.
A new Social Security that incorporates PRAs will provide
far more retirement income and security than the current Social
Security system. Real (inflation-adjusted) returns on Social
Security taxes for today's retirees are a mere 2%. Real returns
on stocks since 1926 have been 7%.
To see the dramatic difference private investments can
make, consider the following example given by Peter Ferrara,
co-author of A New Deal for Social Security. If a husband and
wife entering the workforce in 1985, with both earning the
average income for their gender, invest most of their payroll
taxes in a PRA, at a 6% real rate of return, which is less than
the historical average, the couple would retire with $1.6
million in today's dollars.
Investment income alone would pay them 3 times what Social
Security promises to pay, allowing them to leave the entire
$1.6 million to their children. If the couple used the $1.6
million to buy an annuity, they would receive about 7 times
what Social Security promises but cannot pay.
A number of bills have already been introduced in Congress
by both Democrats and Republicans to redesign Social Security
and establish PRAs. Five of the 13 members of the Clinton
Administration's own Social Security Advisory Council (1994-96)
had a plan which included PRAs.
President Clinton has proposed a plan for redesigning
Social Security. While the President should be commended for
putting Social Security on his agenda and for acknowledging the
value of privately investing program funds to improve returns,
his proposal falls far short of the mark.
One of the major concerns with the Clinton plan is the call
for the government, not individuals, to do the investing. Many
folks, including Federal Reserve Board Chairman Alan Greenspan,
have correctly pointed out the dangers of letting the
government invest workers' money in the stock market.
United Seniors Association (USA) has long advocated that,
if Social Security is to survive and give workers true
retirement security, the system must be redesigned. The longer
Congress and the President wait, the more difficult the changes
will be, especially with 77 million Baby Boomers who will soon
begin collecting benefits.
With our economy strong and surpluses projected as ``far as
the eye can see,'' there is no reason not to begin reforming
Social Security now.
In the battle over redesigning Social Security, USA
believes that, first and foremost, the federal government must
guarantee all benefits promised to current beneficiaries and
those nearing retirement. As was noted earlier, changing the
rules now would not only be unfair, but would cause unnecessary
worry among seniors. We do not need a Social Security version
of the unconscionable ``Mediscare'' campaign that we witnessed
several years ago.
When establishing PRAs, USA strongly supports allowing
workers to divert at least 5 percentage points of their payroll
taxes to their accounts. Lesser amounts, while welcome as a
starting point, are simply not sufficient and will not generate
the retirement income that workers deserve and will need.
USA also believes that saving the existing Social Security
program, or paying for the transition to an improved retirement
system, can and must be accomplished without raising taxes,
which are already too high. If revenue is needed to help
finance the transition, Congress should use most of the budget
surplus, now estimated to be $2.3 trillion over the next ten
years.
Lastly, while some have plans which recognize that Social
Security funds must be invested in the private markets, they
want the federal government to do the investing. USA believes
this would be a serious mistake. The federal government should
not, under any circumstances, be allowed to invest workers'
retirement funds, nor should the government be permitted to
regulate how workers privately invest their own funds beyond
that required to ensure safety and soundness.
USA commends the efforts of all those members of Congress
who have put forth plans to save and improve Social Security by
creating PRAs. USA urges that Congress and the President enact
Social Security reform legislation into law this year. We look
forward to working with you on this critical issue.
Thank you.
-